Depreciation Rules and Investment Swings
And now for something, completely different. Since there aren’t too many people willing to pay me to spin out the implications of a private legal system, I have been focusing more on research for investors. (In all seriousness, if you are curious about such individualized consultting work, drop me an email.) Tom Landstreet and I have a piece today at Forbes.com summarizing a research paper we are preparing for institutional investing clients. The opening paragraph:
Many analysts have been surprised lately by the strength in certain economic indicators, such as the growth in business investment in the third-quarter GDP report, particularly in equipment & software. The hopes for a general rebound are misplaced, however, because temporary depreciation rules may be driving the apparent upswing. The generous bonus depreciation and small business deduction rules begin to drastically phase out in January 2012, which will likely cause a dramatic reversal in investment and other indicators.
Peter, the Rock
One of the most interesting characters in the Bible is Simon Peter, whom Jesus made the rock of the new Church. (Catholics consider Peter to be the first Pope.)
Peter is interesting because he had a “great attitude” and wanted to do the right thing. However, he was, after all, just a man, and would often slip up either because his zeal would “overshoot” or because of simple (and totally understandable) fear.
For example, when Jesus walked on water and approached the disciples who were in a boat, Peter had the boldness to step out himself onto the water. But after a few moments his “reason” kicked in and he began to sink, calling out to Jesus to save him.
On the mountain when Jesus is transfigured, Peter recognizes the significance of the moment but suggests building a tabernacle to Jesus, Moses, and Elijah, which isn’t really the appropriate thing to say–but it’s sort of cute from our comfortable perspective.
At the Last Supper, when Jesus begins washing the feet of His apostles as an example of how they too must be servants, at first Peter refuses to let Jesus do it. Jesus explains that unless Peter allows Him to wash his feet, then Peter has no part in Jesus. So then Peter overshoots and says, “Lord, not my feet only, but also my hands and my head!” You can almost hear Jesus thinking, “It’s all or nothing with this guy.”
One of the most amusing parts of the entire Bible, at least to me, is this story from Matthew 16: 21-23:
21 From that time Jesus began to show to His disciples that He must go to Jerusalem, and suffer many things from the elders and chief priests and scribes, and be killed, and be raised the third day.
22 Then Peter took Him aside and began to rebuke Him, saying, “Far be it from You, Lord; this shall not happen to You!”
23 But He turned and said to Peter, “Get behind Me, Satan! You are an offense to Me, for you are not mindful of the things of God, but the things of men.”
I love everything about that little tale. What’s particularly funny is that this occurs just a few lines after Jesus declares Peter to be the rock of His Church. Perhaps that’s why Peter was feeling confident enough to actually rebuke the Man he had recently declared to be the Christ, the very Son of God. (I also love that Peter took Jesus aside before rebuking Him. I think Peter was trying to be discreet when he set Jesus straight about what was going to happen.)
Of course, the other incredible thing about this episode is that Jesus doesn’t say, “Actually Peter, you are in error. The whole purpose for my life is to die on the cross.” No, Jesus actually calls him Satan. Yikes! But Peter is the kind of guy that can shake it off and end up winning (while filled with the Spirit) three thousand souls for Christ in a single sermon.
Naturally I’ve saved the most obvious failure of Peter for the end: He denied Jesus three times after Jesus had been delivered by Judas into the hands of His enemies. Those of us familiar with the gospel accounts know them so well, that it’s hard to recreate just how badly the other humans treated Jesus right before His death. It wasn’t simply that Judas literally sold Him out for 30 pieces of silver, and it wasn’t even that the crowds who had recently sung hosannas to Jesus (and who had seen Him heal many of the sick) now called for His brutal murder. No, even Jesus’ closest followers and friends ran for their lives when He was arrested. And even Peter, of all people, who had proclaimed at the Last Supper that he would die with Jesus, would deny that he even knew Him–three times in a row, and (apparently) within earshot of Jesus (though I can’t find that detail right now, it’s not in all the gospels).
It’s hard to grasp that. If you wanted to, you could focus on that (and it is entirely plausible, now that I’m an adult and have witnessed firsthand what we’re all capable of) and walk away thinking humans are really worthless wretches, who deserve to wallow in the misery they impose on themselves. And yet, what turns the whole story around into a “happy ending” is that Jesus doesn’t draw that conclusion, and indeed even after being literally tortured to the point of death, looks to heaven and asks God to forgive everyone. As Napoleon reputedly said, “I know men, and I tell you that Jesus Christ is not a man.”
Last thing to wrap up this post: At the end of the gospel of John, after Jesus has risen from the dead and sporadically appears to the disciples, we read this:
15 So when they had eaten breakfast, Jesus said to Simon Peter, “Simon, son of Jonah,[a] do you love Me more than these?”
He said to Him, “Yes, Lord; You know that I love You.”
He said to him, “Feed My lambs.”
16 He said to him again a second time, “Simon, son of Jonah,[b] do you love Me?”
He said to Him, “Yes, Lord; You know that I love You.”
He said to him, “Tend My sheep.”
17 He said to him the third time, “Simon, son of Jonah,[c] do you love Me?” Peter was grieved because He said to him the third time, “Do you love Me?”
And he said to Him, “Lord, You know all things; You know that I love You.”
Jesus said to him, “Feed My sheep…”
It’s pretty obvious, but I don’t think I heard anybody spell this out: Jesus is here giving Peter a chance to affirm Jesus three times in a row.
I think this is a good metaphor for how God interacts with humans in general. Obviously Jesus isn’t suffering from self-esteem issues here; He has literally just defeated Satan and conquered death itself, so I’m guessing He was in the zone as it were.
No, clearly the reason He keeps asking Peter if he loves Him is to help Peter forgive himself for his awful failure just a short while before. Until Peter totally gets over that, he won’t be able to be the leader that Jesus has been constructing for years.
I don’t have all the details worked out in my mind, but lately I’ve been thinking that this type of consideration explains why God has such an apparently “monstrous” system of justice, whereby an innocent Man has to die, in order for God to forgive everybody else for their sins. I think a large part of the story is that we wouldn’t accept it if God just forgave us directly. But when we see that Jesus suffered and died, it’s easier psychologically for us to say, “OK well Jesus did that, so such a work could overcome the magnitude of all the awful things I’ve done so far in my life.”
When a Referendum Is Seen as Cheating
This FreedomWatch interview of Gerald O’Driscoll hit on something I’d been thinking too:
Near the end of the above clip, Napolitano and O’Driscoll discuss the irony that when it comes to the crisis in Greece–the birthplace of democracy–the one group who will not be consulted is the Greek people themselves.
Even though I think the institution of political democracy is, shall we say, overrated, I was struck by this too as the pundits were shocked at Papandreou’s move to call for a referendum. I am not going to bother finding citations, but I’m pretty sure there were plenty of “progressives” who were disgusted by this obvious ploy to avoid facing the music, making the hard choices, being a statesman, etc. etc. And yet: If “everybody knows” this thing wouldn’t hold up if the Greek people actually voted on it, then how the heck can self-described proponents of democracy (not to mention champions of the unemployed Greeks) so cavalierly assume that these rescue packages need to happen? Of course Papandreou did this for strategic reasons, and not because he didn’t feel right about moving ahead without official approval from his employers, but that doesn’t change the overall situation.
So is this episode of democrats (small “d”) guffawing at democracy just pure paternalism, or is there something else going on here?
The Most Ironic Statement I’ve Heard All Week
“Theoretical macroeconomists love to play with their little toy models, but unfortunately these models don’t actually describe the world we live in.”
If you’ve been reading this blog for at least two months, you know who said it.
Vote for the Most Astounding Statement I Heard This Week
Once again, it’s time for one of the more popular features on Free Advice, where you the reader get to vote on The Most Astounding Statement I Heard This Week.
Our first contestant is documentary maker Ken Burns, who said the following in a Reason interview with libertarian bad boy Nick Gillespie:
[M]y politics are in some ways irrelevant…[We] work with people of different political persuasions to just tell films that are just general…We have lost this ability to have a civil discourse and history is still a table around which we can agree to have that civil conversation. I don’t know anybody that doesn’t like Abraham Lincoln…
In fairness Burns was saying something particular about why every person to his knowledge liked Abraham Lincoln, but Gillespie cut him off with a snide remark. Then a few moments later Burns said:
Well I think history is sometimes used as a kind of propaganda tool, a superficial, sanitized Madison Avenue celebration of, you know, the ‘goodness’ of America and the good old days, and I’m clearly not interested in that.
Clearly not, Mr. Burns.
Our next contestant hails from New Jersey and is here in the studio today with his lovely wife, Robin. Paul likes cats, number puzzles, and science fiction. In a recent blog post defending “technocrats,” Paul said:
The line from people there, including the president, has been that it was too technocratic. But the real technocrats — people like Christy Romer and, well, me — were saying right from the beginning that the stimulus was too small, etc.; people like Geithner who opposed stronger action were basing their position on gut feelings about confidence, not number-crunching.
And by and large, people who did the numbers have gotten it mostly right; it’s precisely because we’re ruled by crats who trust their guts rather than the techno that we’re in such trouble.
Now this one might be over the heads of some of the members of our studio audience, so we’ll give you a hint. You know how in the debate over the Obama stimulus package, the #1 Smoking Gun of the right-wingers–the thing that all “true” Keynesians have had to disown and throw under the bus, claiming that they would never in a million years have endorsed such a thing–was the report prepared by Obama’s economic team, touting the benefits of his stimulus plan? Surely you remember, this was the document that contained the infamous graph showing how unemployment would peak at 8 percent with the stimulus, and 9 percent (the horrors!) if Obama did nothing.
The report begins with this introductory paragraph:
A key goal enunciated by the President-Elect concerning the American Recovery and Reinvestment Plan is that it should save or create at least 3 million jobs by the end of 2010. For this reason, we have undertaken a preliminary analysis of the jobs effects of some of the prototypical recovery packages being discussed. Our analysis will surely evolve as we and other economists work further on this topic. The results will also change as the actual package parameters are determined in cooperation with the Congress. Nevertheless, this report suggests a methodology for ensuring that the package contains enough stimulus that we can have confidence that it will create sufficient jobs to meet the President-Elect’s goals.
Sure, the report nowhere says, “Obama’s proposed stimulus package is the exact right thing. It’s just what the doctor ordered. No more stimulus could conceivably be needed.” But go skim that thing, and tell me if you get the sense that the author was warning the reader that it wasn’t enough, and that guts were overruling Keynesian analysis.
Last point: Who was the head of the Obama economic team at the time, and whose name is on the cover of that document?
Sumner Needs to Watch Some Film and Hit the Gym
I used to say that Scott Sumner would be a far more formidable debating opponent than Paul Krugman, but lately I’m not so sure. I think for our debate, I just may print out 5 of Scott’s posts and ask the judge if I can submit them as exhibits.
For example, here’s Scott’s latest post that is quite clever, but ends up leading him into absurdity. (This is a metaphor for Scott’s entire program.) I reproduce it in full:
RMS Queen Elizabeth 2
“Attention passengers. Due to wind and currents, the ship has been pushed 12o miles north of its expected path.
The captain met with the QE2’s officers (the Frequently Off-course Mariners Committee), and decided that the setting of the steering wheel was still ‘appropriate.’ Thus rather than change our steering, we are changing our forecast. We no longer expect to make our scheduled arrival in New York, and instead expect to reach Boston on Tuesday. Unless we hit an iceberg. Enjoy the rest of your cruise.”
[Memo to Fed: Your job isn’t to change your forecast, it’s to change your policy in such a way that you don’t need to change your forecast.]
Funny stuff, to be sure. (Note the FOMC reference.) But, as is Scott’s wont, he ends up in CrazyVille.
First let’s make sure we understand the context. The Fed today lowered its forecast for economic growth next year, and raised its forecast for unemployment. So Scott is saying, rather than refusing to pump in more money, and resting content with a worsening forecast, the Fed should do what it needs to do, so that it doesn’t have to give the public the bad news about gloomier prospects for next year.
OK, now that we understand what Sumner is doing in his cute analogy, we are ready to get knocked onto the floor by how wrong the analysis is. Even on Sumner’s own terms, his critique of the Fed makes no sense. The Fed folks aren’t revising downward their projections for NGDP (though in fairness that could be backed out of their statement), rather they are revising downward their projections of real GDP growth. And the reason (officially) they give for not doing more, is that they think to do so would push inflation unacceptably high. So on Scott’s own terms, given the Fed’s current view of the world, he is asking them keep pumping in money to raise NGDP even though that might show up (in the Fed’s eyes) largely as an increase in prices, with little impact on real output or a drop in unemployment.
And just to show that the Fed isn’t doing something outrageous with its acknolwedgement that it isn’t omnipotent, look again at Scott’s analogy. He is actually making fun of the idea that people running a ship might announce, “We’re going to be late.” Scott thinks this is a BS invention of central bankers, to admit that we might have to change forecasts, rather than altering the universe to make our previous forecasts correct.
Would you step onto a plane where the pilot adhered to Scott Sumner’s philosophy? “Don’t worry folks, I promise I will do whatever it takes to make sure we land in Boston at 3pm. Let’s just hope there isn’t congestion at Logan when we get there, because I’m not going to adjust my forecast. We are landing in Boston at 3pm, period. You can take that to the bank. And don’t worry about these so-called ‘mid-air collisions’ that the airline bloggers are always talking about. I’m going to ban that phrase from my flights from now on, because any problem allegedly due to a ‘collision’ is really a problem with kinetic energy.”
While I’m on the topic of Sumner’s superficial argumentation ability, look at this response he gives to Greg Ip. Now some of Ip’s arguments are goofy, but at least one of them is pretty good: Ip points out that the Fed hasn’t been inflating more, because it feels constrained by inflation hawks. So Ip is asking, why does Sumner think that switching to targeting NGDP would suddenly give the Fed more backbone to print money?
Scott answers:
Ip’s data shows that Fed policy was disastrously off course in October 2008…. They weren’t even expecting to hit their own policy goals.
Think about the Fed’s dual mandate; low inflation and high employment. In October 2008 they forecast inflation of 1.5%; below their 2% implicit target for “stable prices.” And they forecast a sharp rise in unemployment. The Fed should never make that sort of forecast, as it implies their policy is far too tight….The Fed should always set policy so that either both variables are on target, or if one variable calls for easier money, the other variable calls for tighter money. And yet both the inflation and unemployment forecasts called for easier money….
Check and mate. Scott just proved Ip’s whole point. Look at what’s happening here:
(1) Ip says that Sumner thinks the Fed needs to inflate more, but that Sumner is naively thinking the Fed will suddenly have the will to stand up to the inflation hawks if it changes from its current framework (where it strikes a balance between unemployment and inflation) to one in which it targets NGDP.
(2) Scott says no way Ip, you’re crazy. The Fed isn’t inflating enough even with its current framework. That’s why, if the Fed switched to an NGDP framework, the Fed would begin inflating more in order to satisfy its framework.
Let’s at least put on a show, Sumner. I think you need to watch some more film and hit the gym.
I Like This Guy’s Enthusiasm
…though I’m not sure those are the three takeaways I would have attributed to our book. (Plus I would have given myself 5 stars.)
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