Consulting by RPM || Free Advice Blog

The Downside of Talk Radio

In a previous post, I praised Glenn Beck for getting the word out about what’s going on regarding the open praise for communism by members of the federal government. On the other hand, let me relate a particularly ridiculous statement by Mark Davis–today’s guest-host for Rush Limbaugh–that shows talk radio is only afraid of Democratic Big Brother.

Davis was talking about the recent allegations of interrogator abuse of detainees and said something like, “Give me a break, are these people serious? Now it’s torture just to use the sound of a drill? V-v-v-v-v-v-v-v-v, did I just torture the audience?”

Something I’ve never heard when Limbaugh et al. defend torture–or should I say “enhanced interrogation techniques”–is that the government concedes that some people died during this hardball treatment. Such an admission wouldn’t really play in with their “these ACLU types are a bunch of sissies” refrain.

Rep. Diane Watson (D-Ca) Praises Che Guevara, Fidel Castro, and Cuban Revolution That "Kicked Out the Wealthy"

Despite his flaws, Glenn Beck is doing a great job alerting Americans to the Marxist takeover of the federal government. You say, “Give me a break, Bob, just because someone wants everyone to have access to health care, doesn’t make him a communist.” That’s true, but look at how many people in the federal government are now openly praising actual communism.

Beck played the following clip starting from about the 1:45 mark. This isn’t mere, “Hey let’s reform some of the abuses of naked capitalism.”

Subjective Value Pricing Theory in the NBA

Based on this favorable review (and funny anecdote) by Robert Wenzel, I got David Falk’s The Bald Truth a few months ago. It makes for great bathroom reading.

Falk is a sports agent, whose most famous client was Michael Jordan. (Jordan’s ghostwriter did the foreword for the book.) This book is good because it shows exactly how Falk was able to negotiate such lucrative contracts for his clients; it doesn’t just say, “And so then I went in there, and really drove a hard bargain.” No no, Falk explains the back-and-forth, and how he got the teams to pony up what seemed at the time to be ludicrous sums of money.

Falk actually has a very good intuition about economics and game theory. When I hit the following passage, I knew that I had to stop reading and blog it, since I doubt there will be a better illustration of what I mean:

I was presented with extraordinary opportunities like these starting with James Worthy in 1982…then Patrick Ewing in 1985 and Danny Ferry in 1989. There were unique situations in the marketplace that demanded a unique response. I think the Ewing and Ferry deals, along with Michael’s Nike deal, cemented my reputation not so much for being a hard-driving negotiator, but for being someone with a creative vision, or perspective on the value of players and where those valuations were going. Nobody ever believed Danny would be Larry Bird, and nobody believed Patrick would be Kareem, but Danny and Patrick made more as rookies than either Bird or Kareem was making at the time. And that’s what was demanded in those situations.
…
A talented player on one team may not be worth as much as a less talented player on another team. James Worthy was a good example. He was a great player, one of the fifty greatest of all time, according to the league’s experts. He was the first player selected in the 1982 draft, a remarkable performer in the playoffs, an all-star, a great teammate, and an extremely hard worker. Yet he was the third-best player on his team behind Magic Johnson and Kareem Abdul-Jabbar. James was probably one of the ten best players in the league. Another player, let’s say the twenty-fifth best player in the league, might have been the best player on his team. Even though that player wasn’t as good as James Worthy, without him his team would be in the lottery. On the other hand, the Lakers were going to be a great team with or without Worthy. Worthy’s incremental impact wasn’t as great on the Lakers as that of a lesser player on another team. As a result, the twenty-fifth-best player might have had a greater value to his team than Worthy did to the Lakers. (pp. 120-121)

Another Scott Sumner Money Illusion

I pick on monetary maverick Scott Sumner a lot, but only because I care. (In fact, Scott himself gets this; see the opening paragraph of this post.)

So it is merely in the spirit of loving correction that I bring to your attention a recent profundity from Scott. The context is (a very interesting) discussion of the difference between the quantity theory of money and the equation of exchange, which are often conflated.

The equation of exchange is the familiar MV = PQ, which is just the accounting tautology that the total money stock times the “velocity of circulation” must equal the “average price level” times the quantity of real output. Some people use different letters, and people like Rothbard get mad over the nonsense placeholders like “V” which only serve to complete the equation. But if we put aside such complaints, the equation is an identity and so has to be true.

In contrast, the quantity theory of money is just that, a theory, and so could be falsified in principle. Scott says that different people mean different things by the theory, and he lists four popular contenders:

1. The ratio of P and M is relatively stable.

2. The ratio of P*Y and M is relatively stable.

3. An exogenous, one time, permanent increase in M causes a proportional rise in P*Y

4. In the long run an exogenous, one time, permanent increase in M causes a proportional increase in P.

Does everyone see the difference? Just to give you an example, when Friedman famously said that price “inflation is always and everywhere a monetary phenomenon,” he wasn’t just relying on the equation of exchange. Yes, MV = PQ must always be true–it’s an identity–but it doesn’t mean that increases in M correspond to increases in P, or that a big jump in P must be due to a big increase in M. (For example, many economists right now believe that a big jump in M would cause a big jump in Q–this would also keep the equation in balance.)

So finally we can review Scott’s illustration of the problem:

But I also think the quantity equation can get in the way of clear thinking. For instance, people worried that current Fed policy will lead to much higher future inflation sometimes cite the quantity theory. But this is a misuse of the theory. It does not imply that any increase in the money supply is inflationary, but rather that permanent, exogenous increases are inflationary. For instance, suppose the Fed adopted a policy of targeting the expected inflation rate at 2%. Assuming their policy was efficient, i.e. the errors were unforecastable, then there should be zero correlation between the money supply and inflation. Of course the Fed doesn’t have a precise 2% inflation target, but they certainly have some inflation target in mind. If so, then changes in the money supply are partly endogenous, and the [quantity theory] does not predict much correlation between the money supply and inflation.

I think Scott has here performed the classic economist trick of assuming his conclusion, but doing it in a such a jargon-laden way that few can see where the rabbit gets put into the hat. The easiest way for me to demonstrate is a physics analogy. So suppose a physicist at Bentley College started a blog called The Gassy Illusion and wrote:

We’re all familiar with Boyle’s law of gases, which states that for a gas at a fixed temperature, Pressure and Volume are inversely proportional. Now many people assume that if we started shrinking the size of this airtight room, that the air pressure inside would increase. However, what if Ben Bernanke could perfectly anticipate the rate at which the room’s volume were decreasing, and cooled the room accordingly? Why, then there would be no observed correlation at all between Pressure and Volume. So people worried about the shrinking room need to be more careful when invoking Boyle’s law.

So yes, Scott is right that if the Fed could commit itself to 2% inflation, and could do so without systematic errors, then…we would get on average 2% inflation, regardless of what happened to the money supply. But does that really help us? Note that Scott is NOT merely saying, “If the Fed commits to 2% inflation, then we’ll get it.” Because the Fed could commit and then be horribly wrong, year after year. So the real rabbit is where Scott innocently says, “Assuming their policy was efficient…”

By the same token, assuming central planning could work, then Lange whupped Mises in the socialist calculation debate.

God Can Take Care of His Own Ark

In the comments to this post, “Magnat” reminded me of an episode in the Bible where my initial reaction was ridiculous. In I Samuel 4:1-11 we see that the Israelites have a setback against the Philistines, and so try to raise morale by bringing the Ark of the Covenant to the front lines of the battle. (The Ark housed the stone tablets on which the Ten Commandments were written, as well as other extremely significant items. It was incredibly holy and powerful. You may remember that the Nazis all melted when they opened it up in the first Indiana Jones movie.)

But this petulant move by the Israelites–in effect trying to force victory not by seeking God’s counsel, but by bringing in the Ark–led to disaster:

 ¹ And the word of Samuel came to all Israel.   
Now Israel went out to battle against the Philistines, and encamped beside Ebenezer; and the Philistines encamped in Aphek. ² Then the Philistines put themselves in battle array against Israel. And when they joined battle, Israel was defeated by the Philistines, who killed about four thousand men of the army in the field. ³ And when the people had come into the camp, the elders of Israel said, “Why has the LORD defeated us today before the Philistines? Let us bring the ark of the covenant of the LORD from Shiloh to us, that when it comes among us it may save us from the hand of our enemies.” ⁴ So the people sent to Shiloh, that they might bring from there the ark of the covenant of the LORD of hosts, who dwells between the cherubim. And the two sons of Eli, Hophni and Phinehas, were there with the ark of the covenant of God.
⁵ And when the ark of the covenant of the LORD came into the camp, all Israel shouted so loudly that the earth shook. ⁶ Now when the Philistines heard the noise of the shout, they said, “What does the sound of this great shout in the camp of the Hebrews mean?” Then they understood that the ark of the LORD had come into the camp. ⁷ So the Philistines were afraid, for they said, “God has come into the camp!” And they said, “Woe to us! For such a thing has never happened before. ⁸ Woe to us! Who will deliver us from the hand of these mighty gods? These are the gods who struck the Egyptians with all the plagues in the wilderness. ⁹ Be strong and conduct yourselves like men, you Philistines, that you do not become servants of the Hebrews, as they have been to you. Conduct yourselves like men, and fight!”
¹⁰ So the Philistines fought, and Israel was defeated, and every man fled to his tent. There was a very great slaughter, and there fell of Israel thirty thousand foot soldiers. ¹¹ Also the ark of God was captured; and the two sons of Eli, Hophni and Phinehas, died. (1 Samuel 4:1-11, New King James Version)

Now the first time I read that, I had a ridiculous reaction. I was really worried, thinking “Oh no! How will the Israelites get it back? What if the Philistines desecrate it?”

But as it turns out, the Creator of the universe doesn’t need a bunch of human bodies to protect His sacred objects. Here’s what happened to the Philistines:

 ¹ Then the Philistines took the ark of God and brought it from Ebenezer to Ashdod. ² When the Philistines took the ark of God, they brought it into the house of Dagon and set it by Dagon. ³ And when the people of Ashdod arose early in the morning, there was Dagon, fallen on its face to the earth before the ark of the LORD. So they took Dagon and set it in its place again. ⁴ And when they arose early the next morning, there was Dagon, fallen on its face to the ground before the ark of the LORD. The head of Dagon and both the palms of its hands were broken off on the threshold; only Dagon’s torso was left of it. ⁵ Therefore neither the priests of Dagon nor any who come into Dagon’s house tread on the threshold of Dagon in Ashdod to this day.
⁶ But the hand of the LORD was heavy on the people of Ashdod, and He ravaged them and struck them with tumors,both Ashdod and its territory. ⁷ And when the men of Ashdod saw how it was, they said, “The ark of the God of Israel must not remain with us, for His hand is harsh toward us and Dagon our god.” ⁸ Therefore they sent and gathered to themselves all the lords of the Philistines, and said, “What shall we do with the ark of the God of Israel?”
And they answered, “Let the ark of the God of Israel be carried away to Gath.” So they carried the ark of the God of Israel away. ⁹ So it was, after they had carried it away, that the hand of the LORD was against the city with a very great destruction; and He struck the men of the city, both small and great, and tumors broke out on them.
¹⁰ Therefore they sent the ark of God to Ekron. So it was, as the ark of God came to Ekron, that the Ekronites cried out, saying, “They have brought the ark of the God of Israel to us, to kill us and our people!” ¹¹ So they sent and gathered together all the lords of the Philistines, and said, “Send away the ark of the God of Israel, and let it go back to its own place, so that it does not kill us and our people.” For there was a deadly destruction throughout all the city; the hand of God was very heavy there. ¹² And the men who did not die were stricken with the tumors, and the cry of the city went up to heaven. ¹ Now the ark of the LORD was in the country of the Philistines seven months. ² And the Philistines called for the priests and the diviners, saying, “What shall we do with the ark of the LORD? Tell us how we should send it to its place.”
³ So they said, “If you send away the ark of the God of Israel, do not send it empty; but by all means return it to Him with a trespass offering. Then you will be healed, and it will be known to you why His hand is not removed from you.”
⁴ Then they said, “What is the trespass offering which we shall return to Him?”
They answered, “Five golden tumors and five golden rats, according to the number of the lords of the Philistines. For the same plague was on all of you and on your lords. ⁵ Therefore you shall make images of your tumors and images of your rats that ravage the land, and you shall give glory to the God of Israel; perhaps He will lighten His hand from you, from your gods, and from your land. ⁶ Why then do you harden your hearts as the Egyptians and Pharaoh hardened their hearts? When He did mighty things among them, did they not let the people go, that they might depart? ⁷ Now therefore, make a new cart, take two milk cows which have never been yoked, and hitch the cows to the cart; and take their calves home, away from them. ⁸ Then take the ark of the LORD and set it on the cart; and put the articles of gold which you are returning to Him as a trespass offering in a chest by its side. Then send it away, and let it go. ⁹ And watch: if it goes up the road to its own territory, to Beth Shemesh, then He has done us this great evil. But if not, then we shall know that it is not His hand that struck us—it happened to us by chance.”
¹⁰ Then the men did so; they took two milk cows and hitched them to the cart, and shut up their calves at home. ¹¹ And they set the ark of the LORD on the cart, and the chest with the gold rats and the images of their tumors. ¹² Then the cows headed straight for the road to Beth Shemesh, and went along the highway, lowing as they went, and did not turn aside to the right hand or the left. And the lords of the Philistines went after them to the border of Beth Shemesh.
¹³ Now the people of Beth Shemesh were reaping their wheat harvest in the valley; and they lifted their eyes and saw the ark, and rejoiced to see it. ¹⁴ Then the cart came into the field of Joshua of Beth Shemesh, and stood there; a large stone was there. So they split the wood of the cart and offered the cows as a burnt offering to the LORD. ¹⁵ The Levites took down the ark of the LORD and the chest that was with it, in which were the articles of gold, and put them on the large stone. Then the men of Beth Shemesh offered burnt offerings and made sacrifices the same day to the LORD. ¹⁶ So when the five lords of the Philistines had seen it, they returned to Ekron the same day.
¹⁷ These are the golden tumors which the Philistines returned as a trespass offering to the LORD: one for Ashdod, one for Gaza, one for Ashkelon, one for Gath, one for Ekron; ¹⁸ and the golden rats, according to the number of all the cities of the Philistines belonging to the five lords, both fortified cities and country villages, even as far as the large stone of Abel on which they set the ark of the LORD, which stone remains to this day in the field of Joshua of Beth Shemesh.
(1 Samuel 5-6, New King James Version)

Now for my own take on these things, I actually don’t think the Ark was covered in germs, which is how one might explain these events (if he believed the stories). I think that if a modern doctor had taken the proper measurements and so forth back then, the various forces (such as a growing rat population etc.) would have been in motion in the Philistine population centers to yield such devastation, even before their warriors brought the Ark back from battle. (It’s also possible that the slaughter of thousands of Israelites introduced some new germs on the Philistine fighters who then brought them back to camp.) So to an atheist epidemiologist who had access to all the facts, he would say, “No no, there wasn’t some being in the sky zapping people. I can explain everything with our normal methods. It was just a coincidence that when the Philistines captured this box that had superstitious meaning attached to it, that that was also when the outbreak occurred. It’s not as if all these people just suddenly dropped dead for no reason.”

So for those readers who have grasped my view of God’s design of the universe, the above is just a particular illustration. In the broadest sense, everything that occurs at any time in the universe, is “caused by” events that were set into motion beforehand, and ultimately can be traced back to the very beginning of time. (Even if you think quantum effects make the future indeterminate, it’s still the case that the state of the universe at time t has a huge influence on what the universe can look like at t+1.)

So for me, it’s a meaningless distinction to say, “Oh, did God actually punish the Philistines with His intervention, or was it just a natural outbreak?” (Notice that the Philistines wondered that too, and how much of a non sequitur their “test” was–after all, why couldn’t the cows’ decision of which way to take the cart also just be a coincidence?) Everything in the natural world is in direct accordance with God’s will. Before our sun even existed, God knew precisely when the Philistines would capture the Ark and bring it to their camp. So He had that episode (as well as everything else that would occur in all of human history) in mind, when He designed the physical universe and its laws, and when He designed how cells work, how disease is transmitted, and so forth.

And His design was so incredibly complex and perfect, that it “just so happened” that the Philistine population was decimated when the Ark was in their possession.

Awful Abduction Case in CA

I was waiting for my connecting flight to San Fransisco (for tomorrow’s Mises Circle) when I first heard of the awful Jaycee Dugard 18-year imprisonment story. (Here is an opinion piece with a bunch of new facets, both in the piece and the links on the sidebar. I don’t know if they are accurate; I actually am not even clicking on them because this story really troubles me.)

The thing that I don’t understand in this, though, is how did the guy keep someone prisoner for so long, in a regular neighborhood? I can understand if a fairly young child is taken, that the kid doesn’t really get what’s going on and might grow up thinking the abductor is his/her parent.

But this girl was 11 when she was taken. (I’m not using “alleged” since the guy admits he did it. And incidentally, his self-absorbed “this was really a heartwarming story about how I turned my life around” actually horrifies me almost as much as his behavior; it’s another manifestation of the banality of evil.)

Readers, please don’t freak out; I’m not blaming the girl for not running away. I’m just trying to make sense of this. Wouldn’t she tell her children (presumably fathered by the abductor) what their situation was, and that if they ever had an opportunity, to make a break for it to get help?

So it seems that either this guy must have had a standing threat, like, “If any of you tries anything…” or that over time the original victim just accepted her fate.

But again, that just seems impossible to me, since she was in what, fifth or sixth grade when she was taken? Even though to adults, 11 seems tiny, think back to when you were that age. You certainly knew what a kidnapper was, and that if you were taken you would devote your life to killing the guy / escaping.

Well I just had to get that off my chest. I wonder if other people have wondered that too, but were hesitant to bring it up since, again, it sounds like I’m blaming the girl, when that’s not what I’m doing.

This disgusting story just doesn’t make any sense to me. I don’t understand how this is even possible.

The Scariest Paragraph I’ve Read in a While

This is the first paragraph in a WSJ story–on page A4–from earlier this week:

WASHINGTON — The CIA lacked clear safeguards to prevent abuses in some instances in its network of secret prisons for terror suspects, and some interrogators had inadequate training and oversight, a long-withheld 2004 report found, according to current and former officials who have read the document.

So what does this single paragraph tell us?

(1) The CIA had at least one prison for terror suspects.

(2) The CIA had a network of prisons for terror suspects.

(3) The CIA had a SECRET network of prisons for terror suspects.

(4) The abuses in said network of secret prisons were so rampant that there was actually a report issued on the matter.

(5) The report on abuses in the CIA’s secret network of prisons has been suppressed for five years.

And Matt Yglesias says Hayek’s Road to Serfdom was a “nutty alarmist book.” Hey Yglesias, suppose we were on the road to serfdom? Isn’t this what it would feel like?

Praising Krugman on His Critique of Fama and Cochrane

In response to a reader request (who is probably now horrified), at the Mises blog I addressed an old Krugman post on what he called the “Dark Age” of macroeconomics. Here’s the news you can use:

Krugman is totally right. (!!) Fama and Cochrane are wrong in spinning out what appear to be tautologies above. And I say this, knowing full well that plenty of free marketeers–myself included–critique deficit-spending using the exact same arguments when writing an op ed or getting interviewed on the radio.

To a first approximation, and especially if you’re dealing with somebody who doesn’t know the first thing about scarcity, then yes I think it’s fine to say, “Every dollar the government spends just means one fewer dollar spent in the private sector.” But that’s actually not correct, at least not in the way most people believe. And it’s also not literally true to say, “If the government creates a job in industry X with a subsidy, then there must be an offsetting job destroyed in industry Y because of higher taxes or interest rates.”

This is actually quite simple: Suppose the government imposes a one-shot head tax on Bill Gates of $1 million, and then uses the revenue to hire 50 people at $20,000 each to work for a year scrubbing graffiti off bridges. Do Austrians really want to say that it’s an accounting necessity that this causes Bill Gates to adjust his behavior such that precisely 50 other people lose their jobs, but only for a year? Of course not–it would be a miracle if exactly that happened because of the new tax on Bill Gates. In fact, no matter how many people are initially laid off because of changes in Gates’ spending and investing, if wages adjust quickly enough, then that excess unemployment can be whittled away.

So does my concession to Krugman mean that he is right to champion government deficits as a way to prop up aggregate demand, to get “money circulating,” to create jobs and start using idle resources?

Of course not. In contrast to the all-clearing-all-the-time view of markets held by Fama and other Chicago School believers in the “efficient markets hypothesis,” Austrians know that it takes time for the market to adjust after the bursting of an unsustainable boom. So yes, during a deep recession, it’s possible for the government to reduce the unemployment rate through various means, especially through printing money. But that doesn’t mean it’s a good thing. The idle period of spare capacity (in both capital and labor) serves a definite purpose in a market economy, and the government sabotages the cleansing process by forcing those resources back to work on any old project that’s “shovel ready.”

I elaborate on this point in some detail here, and Arnold Kling (with a nod to the Austrian School) comes to the same conclusion from a different angle here.

In conclusion, free marketeers shouldn’t focus their efforts on trying to prove that the government is incapable of boosting “total spending.” For one thing, that’s a false proposition, so it’s a bad move to try to prove it. But more important, it concedes that boosting “total spending” is a good thing. No, the important thing is for the economy to steer resources to their most efficient uses. If that process requires, say, prices in general to fall–and hence nominal aggregate expenditures–then who cares? You consume goods and services, not a flow of green pieces of paper.

Now what I didn’t say at the Mises blog–for fear that my posting privileges would be revoked–is that Krugman’s post was actually quite impressive. In other words, not only do I agree with almost everything he said, but I enjoy the way he said it (except for the arrogance). In particular, his analogy with international trade was great, and his chart title (“a case of mistaken identity”) was pretty clever as far as econ jokes go.

*sigh* I don’t think I’m turning into a commie, but I really do understand why leftists think they’re so much more clever than their typical opponents: they are. If you doubt me, let me put it this way: Can you possibly imagine any right-wing production zinging its opponents the way Jon Stewart destroys Fox News in the clip below? Inconceivable.

And note that Krugman’s not picking on some associate econ professor from Bob Jones University. No, he and DeLong tackle big guns, some of whom have Nobel prizes. As readers of this blog know, I think Fama and Friends really have said some pretty ridiculous things lately.