O’Driscoll Economizes on My Words
For a while, I think Mario Rizzo and I were the two contributors to the geeconosphere who most succinctly pointed out the micro-coordination problems that macro stimulus would distort. But in a short post, I think Jerry O’Driscoll crystallizes it even more tightly:
Consider the current economic situation. A financial crisis has been brought on by, first positive, and then negative monetary shocks. In the short run, individuals are increasing their demand for money (velocity is declining), and are simultaneously increasing their long-run, desired savings to a more normal rate. These effects combine to place downward pressure on nominal demand in many markets.
But the decline in nominal demand is not evenly spread across all markets. If demand is to be stimulated consistent with the new consumption/savings equilibrium, it would need to be supplied in the precise proportions that correspond to the new pattern of demand across markets (including inter-temporal markets). The information requirements to accomplish that task are nothing short of what would be required for comprehensive economic planning of the economy. Moreover, Public Choice tells us that stimulus will always be applied according to political, not economic, criteria.
If nominal demand is falling at uneven rates, then relative prices are changing. The same self-regulating forces are at work as described in microeconomics. Resources are being re-allocated across markets even as this is being written. A macroeconomic model with one good (output), one price, one interest rate, one wage rate, etc. is incapable of capturing those forces. The rationale for stimulus makes sense only in terms of such models and not in terms of how market economies actually work.
The Difference Between the Market and the Government
When businesspeople try to benefit from technological advances, they end up designing robots that feed humans Ramen (HT2MR).
When government officials realize the new opportunities, they fund the development of robots that feed on human corpses (HT2LRC).*
Any questions?
* Aww shucks, the wusses at Fox News have officially repudiated the original story. Now apparently the Pentagon robots are just supposed to eat plants. Hmm…
Potpourri
* Another favorable review (of my first Politically Incorrect Guide) at FrontPageMag.
* My radio interview with Michael McKay, from the Mises Institute.
* Betsy Hansen was a summer fellow at the Mises Institute this year. Last week (during the conference) we started talking about mark-to-market and it soon became apparent that she had done a lot more research on it than I had. (She was citing specific regulations and such; go figure.) I like her take in this article; she basically says that yes the government screws up financial regulation, but changing accounting rules mid-game isn’t going to solve the crisis.
We’ll Get Through This Depression, Too
Lately I’ve realized how much it bums people out when I calmly explain to them that Bush, Ben, and ‘Bama are doing a great job…if their goal is to re-create the Great Depression. So in the present post, let me explain why I’m not devastated.
First, I have my religious faith. I won’t delve into such matters here, but longtime readers know that on Sundays we bring up the J-word. Needless to say, if you “actually believe that stuff?!”, then it brings a certain degree of peace of mind.
Second, and on purely rational grounds, what we need to remind ourselves is that we are all standing on an unbelievable hunk of natural resources, just waiting to be tapped. In terms of the riches that can be showered upon us from this oblong spheroid on which we circle a star, we have–quite literally–just scratched the surface. With the stroke of a pen, President Obama could change policies regarding offshore and Alaskan oil drilling. That would magically place billions of barrels of new oil in the hands of the free world.
(And by the way, my new term for “the private sector” will be “the free world.” If the enviros are going to start calling it “clean energy,” then I’m calling my special interest group “the free world.”)
It’s not even just a matter of natural resources. The government could legalize all forms of currently heavily regulated commerce. There would be an explosion in productivity and wealth creation from such a movement, which would include drug, prostitution, and gambling legalizations. (And part of the newfound prosperity would be due to the drop in gang violence, mafia revenues, and STDs.)
This is what the government did during the Great Depression. In his first month in office, FDR ended alcohol Prohibition. (As he signed the bill, he reportedly said, “I think this would be a good time for a beer.”)
I get so amused by all these Fox News commentators explaining how Obama’s gonna be another Jimmy Carter. No he won’t; he will legalize marijuana coast to coast if things get really awful. You’re telling me liberals are going to vote for the Republican, and repudiate the administration of the First Black President, after he drives the price of the best pot these people have ever smoked, down to $10 per eighth of an ounce? I think not!
Things are a little creepier with health care. They will install some asinine program this year, and it will indeed make things much worse. Yet when the plan is quite evidently bankrupt, the government can at that point allow people to trade away their bodily organs for “health care credits.” For example, a poor guy who needs a heart transplant can trade in his spare kidney in order to bid on the available (compatible) hearts.
So it’s true, once we are in the throes of Obama Care, at that point it will probably help people to allow them to sell off body parts. In the example above, the poor guy is choosing between life and death; taking away his option would spell his death. And it’s not even a matter of him getting the heart, versus somebody else. Because everybody is selling their organs into circulation, there is a greater supply and more people can get life-saving operations. (Keep in mind people could sign away the right to their organs after they die.)
And yet, this logic breaks down when the government virtually monopolizes health care. Then it might literally adopt policies to allow them to harvest some people’s organs. I am NOT saying that the present administration is planning to do that. What I AM saying is that if you allow the government to take over health care, then you have to hope that you never get some really evil people in office, because they could look at everyone as cattle.
In conclusion, we will get through this depression. The people in power need the society to function at a basic level. There’s no point in running the world if you can’t trust the airplanes to work! During the 1930s, the people in charge realized they had miscalculated; things were worse than they had anticipated. (Remember, these people presumably aren’t experts in classical liberal thought. If you spend your whole life plotting to become senator, you probably haven’t read de Tocqueville in the original French.)
So in the 1930s, they pulled back and repealed Prohibition. They actually had to amend the Constitution, to undo the previous Amendment. Now I suppose a true conspiracy theorist will say that too was all part of the diabolical plan; perhaps the point was to show that the formal amendment process was too annoying, and that the Supreme Court should just interpret the document as a living thing.
In any event, they allowed people to buy and sell liquor again. Can you imagine how great a boost that would have been, had the country not been in the depths of the Great Depression?
Many economists wonder what magic spell FDR spun, since he got the economy to turn around on a dime virtually the moment he was sworn in. A lot of the economists think it was FDR’s decision to take the dollar off gold, giving the green light to the Fed to print money. But maybe, just maybe, it was the legalization of alcohol.
If things get really bad, they can do the same with pot or organ selling. We are incredibly, fantastically wealthy. The government will have no choice but to lift some of the shackles in the coming depression.
Potpourri
* I take on my buddy Brad DeLong at Mises.org. DeLong had tried to use Wicksell to defend Greenspan, and I cracked that Knut. (OK that was awful, sorry.)
* Jeffrey Rogers Hummel says that the U.S. government will default on its debt.
* David Friedman has a very interesting post on responding to climate change. Unfortunately, his numbers were off and it became clear in the comments that he was shooting from the hip (he didn’t even realize there had been a 4th report of the IPCC). Nonetheless, his central point remains: Right now there are successful human societies spanning a large range of average temperature. If the entire globe were to move upward over the course of a century within this range, then adaptation seems rather doable. And his point about our houses etc. already being calibrated to the current temperature distribution is great: Friedman points out that most buildings will be replaced or seriously modified anyway, within the next 100 years, so it’s not that much of a marginal cost to have to install more AC or whatever.
* A young and dynamic pastor here in Nashville has just released a new book on Jesus. I haven’t read it yet but the pastor, Jared Wilson, is a great combination of punk young guy and serious Christian.
* Scott Sumner can’t stop thinking about me.
* Tom Woods gave a really funny talk [.mp3] about his experience in marketing the bestselling Meltdown. This was an especially impressive talk, since the poor guy gave it on Tuesday night at Mises U, following my performance the night before. (I’m still waiting for them to post my talk on LRC’s podcast, because their interface is so much easier than having to download an mp3. As the internet becomes ever cooler, my laziness increases pari passu.)
The Power Brokers Want a Government Monopoly on Health Care
Check out this interesting succession of clips (HT2EPJ):
I’m not sure if he uses it in the above video, but anyway now whenever Obama says, “Let me be clear,” I interpret that as meaning, “The following is false.”
Economists vs. Ron Paul
Here is an article (HT2 Tyler Cowen) about six economists who oppose Ron Paul’s bill to audit the Fed. (Interesting tidbit: The last economist, Mike Feroli, was in my class at NYU. In fact we were the only two Americans, and used to joke that there would be ethnic cleansing after the preliminary exams. Ah when we were young and carefree…)
I actually think most of what these economists are saying, is correct as far as it goes. If anybody could figure out a way to take a punitive measure against Fed recklessness (i.e. the audit bill) and turn it into a way to empower the Fed and give us more inflation, it would be the U.S. Congress. (Come on guys, impress me.)
The thing that really irks me about these critics, though, is that they don’t even give a nod to why so many people are upset. E.g. Kashyap from U of Chicago says, “The spirit of the Paul bill seems to be that having FOMC meetings live on C-SPAN would be best way to make monetary policy. That would be a disaster.”
No, actually the spirit of the bill seems to be that when you give a guy a printing press, and he uses it to literally hand out over $1 trillion to bankers, thereby diluting everybody else’s wealth, then he should at least give you the names of the people getting those checks for billions apiece. Remember kids, Congress asked Bernanke last December to whom he was giving all this money, and he said it would defeat the purpose of the program if he disclosed the names.
So keep this in mind when Michael Woodford of Columbia says, “It is important to remember that the GAO already has the authority to audit the Fed, and does, except that the bill giving the GAO this authority in 1978 specifically excluded certain aspects of the Fed’s activities from GAO audits — essentially, decisions about monetary policy.”
Re-reading Woodford’s statement, I’m not sure if that’s just a little ironic or complete balderdash. Everything the Fed does is a reflection of “monetary policy.” What sorts of things wouldn’t be? E.g. can the GAO right now, without Ron Paul’s bill, make sure that the Fed employees are paying their taxes? Or that employees who use up too much sick leave get their paychecks docked accordingly?
But the silliest statement was from Robert Schiller, whose housing index blew up under Greenspan’s wise conduct of monetary policy:
The GAO audit proposal is from Ron Paul, who has advocated abolishing the Fed and returning to the gold standard. Maybe people think that this is his foot in the door, a first step in the plan. When King Louis 16 called for a meeting of the Estates General in France, it led to a chain of events that resulted in his beheading!
I wonder what Schiller would have said, had James Madison explained the concept of checks and balances to him.
Last point: Another supreme example of the silliness in all this, is that the economists are saying, “Bernanke needs to have the independence to suck all the reserves out when the time is right.” The public is brandishing pitchforks because of the massive injections of reserves! That’s why the rank and file want to see an audit. They’re not mad about a stingy Bernanke, they’re worried about bailouts for billionaires and the threat of hyperinflation.
Arnold Kling Thinks Like Me
On those life expectancy puzzles:
Does anyone know how, if at all, unnatural deaths affect these data? Consider four possibilities–young in the U.S., young in the Netherlands, old in the U.S., old in the Netherlands. I would bet that of these four groups, the rate of unnatural death (murder, car accidents, and so on) is highest for the young in the U.S. If true, and if the life expectancy data are not adjusted to remove unnatural deaths, then this seems to me the most likely explanation for the fact.
On stagflation:
The bottom line is that I think that in 2011 and 2012 we may be experiencing increased inflation while unemployment is high. This would be true whether we tried using monetary policy to stimulate the economy or using the unfortunate delayed-action fiscal policy to stimulate the economy.
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