The Costs of Carbon Legislation
This is the first of a two-part series on Krugman’s recent climate crusading in the NYT. An excerpt:
[T]he real threat to humanity comes from governments growing ever more powerful in the name of fighting climate change. Paul Krugman’s recent attempts to justify these bold new measures ignore the IPCC itself, and even its “consensus” figures are based on wishful assumptions about the behavior of governments in the real world.
Whether you are a “denier” or whether you think carbon dioxide emissions need to be sharply reduced very quickly, you should be extremely skeptical of the process now unfolding in Washington. This isn’t about saving the planet; it’s about money and power.
EPJ Goes to Red Alert
Robert Wenzel over at EPJ has summoned everyone to battle stations. In a series of recent posts (1, 2, and 3) Wenzel links to some big guns (like Nassim Taleb) who are hunkering down for hyperinflation.
If you’ve been following Wenzel, you know that he has a taste for starting fights, but he doesn’t like to go out on a limb with his actual market predictions. Yet he’s now saying:
The end of the current financial system, as we know it, may be eminent. If you would have asked me even two weeks ago if collapse was imminent, I would have said it was highly unlikely, now I am saying it is possible. Bernanke may be able to patch things up short-term, if he is lucky, but long term the U.S. financial structure is in serious trouble. There is just too much Treasury debt that needs to be raised. An international panic out of Treasury securities, even a slow controlled panic, means the Fed will be the major buyer. This will ultimately mean record inflation.
And keep this in mind, we have never seen a collapse of a currency like the dollar. Even the Wiemar inflation can not serve as an example. Since the dollar is the reserve currency of most of the world, a panic out of the dollar means more dollars will return to the U.S, shores than any country has ever experienced.
Krugman vs. Murphy on Inflation: Two Men Enter, One Man Leaves
I’m not even going to bother linking to a post; any reader for more than a month knows that I am expecting significant price inflation in 2010, and I think we will see it kicking in later this year. (If people want to link to my specific predictions in the comments, feel free.)
For a while I was mad because I thought Paul Krugman would be able to explain away what happened, in case I am right. But in a recent column Krugman leaves no wiggle room at all. After going through the economic analysis of why there’s no inflation risk right now, Krugman says:
All of this raises the question: If inflation isn’t a real risk, why all the claims that it is?
Well, as you may have noticed, economists sometimes disagree. And big disagreements are especially likely in weird times like the present, when many of the normal rules no longer apply.
But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.
So he has no wiggle room at all. If he’s accusing the people who predict inflation of doing so just to discredit Obama, then Krugman EITHER
(a) believes there is no intellectually defensible reason to predict high inflation right now, and hence that’s why they must be saying it,
OR
(b) knows full well there is a risk of inflation–Krugman is a sharp guy after all–and he is himself engaging in political spin.
So if I’m right and large price inflation comes by the end of 2009, this column alone will prove that Krugman either botched his macroecon big time, or he is a character assassin. We’ll let him choose, if and when the time comes.
The Power of Faith
Several years ago–when I was still an atheist–I wrote an article called “Believing Is Seeing.” My point was that even something as apparently “objective” as sensory perceptions can differ, based on the mindset of the person interpreting them. For example, in college I had a t-shirt business with my friend, and one of our first major orders for a fraternity got screwed up. We had made t-shirts for their “Delta Tau Delta Ski Weekend” trip, and when the guys were having a snowball fight a bunch of the ink on the shirts started bleeding.
So obviously we hadn’t properly “cured” the shirts with the heating element, and of course we went to talk to the guy who handled the activities for the Delts. I was mortified, thinking, “Where did we ever get the idea we could start our own business like this?”, and at the end of the conversation I was dead certain the Delt guy said, “We can’t do business again with you guys.”
In the car ride, my partner said, “Well I’m glad they weren’t p*ssed. Assuming we fix all these and there’s no more bleeding, we’ll get the next order.” It soon became clear that he had heard the Delt say, “We CAN do business again with you guys.” (He was right.)
I have had tons of experiences like this, and what’s really amazing is when I see other people misinterpreting something that is “obvious” to me.
So it is clear that even an atheist who is “rational” and “scientific” (in quotation marks because I’m talking about the atheist who proudly trumpets these terms about himself) can acknowledge somewhat corny things like, “You are your biggest critic” or “You can achieve if you believe.”
I’m not going to relay the whole story now, but part of what happened when I went from being a “devout atheist” (the actual term I used) into a born-again Christian, was that at some point when I was still an atheist, I realized just how powerful the power of suggestion was. For the first time, I understood how faith healings “worked.” I didn’t attribute anything supernatural to it, of course; I thought medical doctors could give a perfectly satisfactory explanation (at least in principle), but that the ignorant rubes would view it as “a miracle.”
In particular, at that point I thought the most rational explanation for everything I knew about Jesus of Nazareth–which included the undeniable dedication of his followers–was that he really did heal people, because they actually believed he had that power. (Note that Jesus Himself often acknowledges this when He says, “Your faith has healed you.”)
Think of it like this: There are apparently studies showing that if you want to predict which patients will survive a particular surgery, and which won’t, what you do isn’t to check the medical histories etc. Instead, you ask the people why they are getting the surgery. If someone says, “Because the doctor says I should” or “I want to resolve this one way or the other,” then that person is probably not going to make it. But if the person says, “The doctor says if it works, I can golf again” or “I want to see my daughter get her diploma,” then those people are much more likely to enjoy a full recovery.
Now then, even a perfectly rational atheist can understand why the above is true. Someone’s attitude makes a heck of a lot of difference in what he or she can accomplish. Now: Who is going to be more of an unstoppable force? The person who says, “There is no purpose to evolution, and there is no non-arbitrary sense in which homo sapiens are a ‘higher’ life form than a bacterium,” or the person who says, “The LORD who created the heavens and the earth is about to work a miracle through me”?
Last point: I can imagine all sorts of obvious retorts from my friendly atheist readers. (Remember, I used to think like you, and I would have had a field day with this post too.) But there is a huge difference between someone saying “God told me I needed $6 million in donations or else I was going to die,” versus someone actually believing that God had given him instructions. There are plenty of scientists who have falsified their lab reports etc. too; obviously they don’t pose any problem for the legitimacy of the scientific method.
Just because there are charlatans who take advantage of naive theists, doesn’t (by itself) discredit theism. It is undeniable that some of the most incredible artwork, and even some of the most incredible scientific discoveries, were achieved by people who have been devout believers in God and in fact would attribute their successes to divine inspiration.
Bruce Bartlett Rips Bush, then Turns Turret Towards Ron Paul
Peter Klein notifies us of this Bruce Bartlett column taking libertarians to task for their narrow focus on economic issues. (I note with irony that Bartlett’s two books listed in his bio are Reaganomics: Supply-Side Economics in Action and Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. I haven’t read either of them, but I’m guessing they don’t deal too much with police brutality or childhood literacy.)
Now fine, maybe there are a lot of libertarians who focus too much on low taxes, and don’t worry enough about civil liberties and especially interventionist foreign policy. In fact, I can think of many prominent libertarians who do just this. I won’t name names, but a lot of them work for “small government” think tanks.
Yet instead of going after these groups by name, Bartlett decides to target the Campaign for Liberty, the group spawned by the Ron Paul campaign. Now if you wanted to come up with the one libertarian who couldn’t be accused of selling out on foreign policy in order to “fit in” with hawkish supply-siders, I would think Ron Paul is probably the name that would come to most people’s minds.
For what it’s worth, Bartlett doesn’t have the audacity to actually say, “Ron Paul talks too much about tax cuts and not enough about civil liberties or bombing innocent people.” He focuses his fire on the Campaign for Liberty, linking to their “talking points” for people who call in to talk radio. Here’s Bartlett’s description of their document:
The reason for this is that most self-described libertarians are primarily motivated by economics. In particular, they don’t like paying taxes. They also tend to have an obsession with gold and a distrust of paper money. As a philosophy, their libertarianism doesn’t extent much beyond not wanting to pay taxes, being paid in gold and being able to keep all the guns they want. Many are survivalists at heart and would be perfectly content to live in complete isolation on a mountain somewhere, neither taking anything from society nor giving anything.
An example of this type of libertarian thinking can be found on the Web site of a group called the Campaign for Liberty. It pays lip service to the libertarian philosophy on foreign and social policy, but says little about them. The discussion of economic policy, however, is much greater. But its only major proposal is abolition of the income tax. No ideas on how government spending would be cut to make this possible are put forward except to eliminate the congressional pay raise. Perhaps this group really believes that will be enough to abolish the income tax, but I suspect not. Whoever wrote these talking points is simply pandering to the stupid, the ignorant and the unsophisticated.
Those are some seriously strong words he ends with, no? So when I clicked on the actual Talking Points [.pdf], I was getting ready for some cringeworthy list of bullets, designed to appeal to Sean Hannity listeners. I was thinking my job, in responding to Bartlett, would be to find all kinds of other great stuff on the C4L site, the Editor-of-Chief of which is Anthony Gregory, for crying out loud! (Seriously if you know of Anthony’s work, Bartlett’s charges are even more outrageous.)
But guess what? The list of bullet points that (allegedly) don’t list specific cuts, and instead just panders to the stupid and ignorant and unsophisticated–and above all, focuses on economics and avoids foreign policy–has the following excerpts, taken from a 3-page document:
* Campaign for Liberty’s mission is to promote and defend the great American principles of individual liberty, constitutional government, sound money, free markets, and a noninterventionist foreign policy, by means of educational and political activity….
* In the United States, many citizens seek to use the government to enrich themselves at their neighbors’ expense. This is immoral. We should stop using the government to do things that would be considered morally outrageous if done by a private individual. It is a shame that a Republican administration that was backed by conservatives presided over one of the biggest thefts in history: the bailout of the banks and automotive industry. We have to find our way back to fiscal sanity before we can dream of winning an election.
* Why would we expect a system based on legal theft, as ours is, to be a net benefit to the poor or middle class? Every one of the special benefits that have been enacted by both Republicans and Democrats makes companies less efficient and competitive, and the economy more sluggish. This is exactly what will happen with Bush’s bailouts and Obama’s social spending….
* We can’t expect to have a limited government at home while we have an interventionist foreign policy abroad. The two are intertwined, as the last 8 years have shown us. If we truly want limited government, then we need to stop policing the world.
* Our fighting men and women are stationed on over 700 bases in more than 100 countries. It is time to bring them home to protect our own country instead of focusing on guarding other nations.
* The war on terror has awakened more Americans than ever to the way government exploits fear, and even its own failures, to justify eroding civil liberties. You cannot have limited government at home while having a big-government foreign policy. The Bush Administration and willing conservatives presided over the largest increase in government because they forgot this reality.
* A strong national defense doesn’t mean policing the world, launching preemptive war, or having troops stationed on every continent. Those things weaken our national defense by spreading our resources too thin and bankrupting our government at home.
* Hopefully, conservatives will now recognize that government has limits in foreign policy as well as domestic.
* Obama promises to expand the war in Afghanistan. It has been a nation-building disaster for seven years, and I have little hope he will turn it around. He has already begun to show force against Pakistan. So much for the anti-war candidate.
Seriously, am I on crazy pills here?! You’re telling me that the above talking points (and go look at the actual document if you want to see the relative proportion given to the various issues) shows that the Campaign For Liberty doesn’t list any candidates for how to cut government spending, except congressional pay raises?
Bartlett apparently suffers from the same problem as Andrew Samwick, who demanded that the “Tea Party” protesters come up with specific budget cuts. What Bartlett and Samwick don’t realize, is that when someone says, “I’m against government bailouts,” that person means, “The government should stop doing that.” Or when someone says, “We should bring the troops home,” the person means, “We should bring the troops home.”
Bartlett (and maybe Samwick, I don’t know him that well) is such a policy wonk that I think he expected the C4L talking point to say, “Medicaid expenditure growth should have 0.4 percentage points shaved off for the next three years. This will reduce the expected growth in the national debt by blah blah blah…” Or, “After consultation with the commanders on the ground, the president should begin a gradual, 6-year phase-out of ground troops in Iraq and Afghanistan, freeing up $385 billion through Fiscal Year 2015.”
Zeitgeist Addendum
Recently my cousin contacted me out of the blue (I hadn’t spoken with him in several years) and said that he had stumbled upon Austrian economics and was now voraciously consuming all kinds of material. We discussed the apathy of the average American–maybe I’ll start writing columns about AAA–and how frustrating/depressing/infuriating it was that so much freedom was vanishing with so little fuss.
My cousin asked me to check out Zeitgeist Addendum, since it had some pretty bold claims and he wanted my opinion. (Here it is on Google Videos.) My general reaction is that it was typical of a high-quality leftist critique of modern society: It accurately noted the suffering and injustice of the world–especially endured by the poor–and it understood the depravity of governments, including our own. But unfortunately, it incorrectly generalized and blamed “free trade” and “capitalism” for the evils it correctly linked with the World Bank, IMF, and “right wing” governments.
Before I delve into more specifics, let me offer the following clip that comes in the beginning of the movie. I think it is a perfect summary of what Zeitgeist has to offer:
Money = Debt?
The opening chapter is the movie’s strongest. They go through the mechanics of the Federal Reserve System, and they really do a great job showing how insane and evil it is. Despite my serious misgivings with the rest of the movie, this piece on the Fed might make it on net a positive contribution, since I think it will wake up a lot of leftists on just how corrupt our financial system is.
In particular, I finally understood why so many people harp on the notion that with our system, “money is debt,” and that the system is thus inherently biased towards more inflation, because the Fed needs to print more money in order for borrowers to pay off the last injection (plus interest). Several times on Free Advice (e.g. here) I have borderline ridiculed such a claim, since it overlooked the fact that even with a fixed money supply in gold coins, you can easily have positive interest rates because the money can change hands during the course of the year. (All that really happens is that you perform a flow of services and work off your debt that way.)
Another problem I have with people calling our current money “debt” is that, if anything, it’s the opposite! Under the gold standard, the green pieces of paper issued by the Treasury really were liabilities–they had printed right on them a promise to deliver a certain amount of gold when the bearer turned in the Treasury note:
But under a fiat system, those green pieces of paper mean nothing. As Bill Barnett humorously observed to me on the phone one time, “Bob, on the Fed’s books currency is listed as a liability. But if I turn a $100 bill over to the Fed, what do they owe me in return?” I thought for a second before answering, “Umm, a $100 bill?”
Now Zeitgeist did go too far, in my view, by basically saying that interest on loans was per se a bad thing, since it was “obviously” impossible for people collectively to pay back more than they had borrowed in the first place. The movie featured quotes from people suggesting that this way a very efficient way to enslave people, that it was the source of mortgage defaults, etc.
Yet even though I think the movie (or more accurately, documentary, but I don’t want to keep typing out that high-falutin’ term) painted with too broad a stroke, it did jolt me out of my cynicism to see their point: The way our monetary and banking system is set up right now, when the Fed increases bank reserves through open market operations, the commercial banking system then pyramids much more money creation on top of this through the creation of loans. In other words, in our system, most new money enters not through running the printing press, but rather through private banks deciding to lend money to people that the banks create out of thin air.
It’s odd that it took Zeitgeist to get me to focus on this point, since I “knew” it all along. Yet for some reason–perhaps my rejection of the Fed and all its works–I always focused on the central bank’s “creating money out of thin air,” rather than the much more significant (in terms of the total increase in monetary aggregates like M1) acts of commercial banks doing the same thing.
Creating Money Out of Thin Air
Let me walk through this to make sure we get the point; it’s very subtle and, like I said above, even though I “knew” it and had taught it to undergrads, it never really hit me until my cousin told me about this movie.
When a private corporation, let’s say IBM, buys a financial asset, it writes a check drawn on its bank account. Let’s say IBM buys $1 million in government bonds from the Acme Bond Dealer. So IBM writes a check drawn on its bank, let’s say Chase, and gives it to Acme. IBM’s balance sheet is unchanged in total size: Its liabilities (and shareholder equity) remain the same, while on the asset side, its checking account goes down by $1 million, while the value of its Treasury bonds go up by $1 million. The opposite happens to Acme’s asset-side of the balance sheet.
Of special importance however is that this purchase doesn’t affect the total quantity of money held by the public, and so it is neither inflationary nor deflationary per se. In the most obvious case, suppose Acme is also a customer of Chase Bank. Then when the check hits the bank, Chase simply reduces IBM’s checking account by $1 million, and increases Acme’s by $1 million. Total demand deposits are the same as before the transaction; money has just been swapped for bonds, nothing more.
OK now what happens instead if the Fed decides to buy $1 million in bonds from Acme? Well the Fed writes a check on itself and acquires the bonds. Its balance sheet goes up by $1 million (remember that IBM’s didn’t budge). Rather than one asset going up, while another going down, what happens to the Fed is that its assets go up by $1 million (the market value of the bonds it bought). There is no finite “checking account” balance that the Fed needs to debit; it can write an infinite amount of checks on itself.
In terms of the accounting, the balance sheet still balances, because on the liabilities side, the Fed adds $1 million to the reserves under the account of Chase. This is because when Acme gets the check from the Fed, it deposits it in its own checking account (Chase Bank), who then clears it with the Fed. So from Chase’s point of view, they increase the checking balance of its client, Acme, by $1 million (just as in the IBM scenario), but now, instead of reducing some other client’s account by $1 million, instead Chase increases its own “checking account balance” with the Fed by $1 million.
Thus, even at this stage the economy now has $1 million more in money “held by the public”; Acme has $1 million more in its checking account, and no other private person or company has a smaller amount of currency or checking balance.
But we’re not done. At any given time, a bank must satisfy reserve requirements, meaning that it must have a certain fraction (let’s say 10%) of its outstanding demand deposits, backed up in the form of vault cash or reserves on deposit with the Fed. For example, if Chase’s customers added up all of their checking account balances and the grand total were $50 billion (I have no idea what a realistic number would be for this), then Chase would need to hold (let’s say) $5 billion as reserves, either in the form of actual currency–green pieces of paper–in the vault, or as part of Chase’s own checking account with the Fed itself.
Sooo, now that Chase’s reserve balance at the Fed has instantly jumped up by $1 million, it means that Chase is holding “excess reserves,” and can increase the total amount of checking account balances held by its customers, by $900,000. (This part always stumped me in the past–why couldn’t Chase make new loans of up to $10 million right off the bat? After all, $1 million in reserves can support up to $10 million in expanded checking balances, right? The answer is that when its customers get these new loans, presumably they are going to write checks for much of the principal, which means other banks will “call in” a lot more of this new influx of reserves, than would be true on average for the original situation before the Fed open market operation. In other words, if Chase tried to expand the money supply to the fullest extent in the first step, it would end up being way below its reserve requirements.)
Don’t worry, I’m not going to follow it through the next steps, when each subsequent deposit leads to further and further expansions because of new loans by other banks. I just want to point out that Chase bank officials are here creating new money, in a very real sense, and they are doing it by creating the amount of debt owed by the public. What happens to Chase’s balance sheet at this stage is similar to, but not the same as, what the Fed does when it creates money out of thin air.
Let’s say that Chase exploits its excess reserves by granting a loan to a homebuilder for $900,000, at a 5% annual interest rate. So now on Chase’s balance sheet, its liabilities have increased $900,000–it just bumped up the homebuilder’s checking account by that amount. The homebuilder can now start paying workers, buying lumber, and buying real estate, writing checks up to $900,000 on this account.
On the asset side, Chase has acquired a “bond” issued by the homebuilder. In other words, in order to get the loan from Chase, the homebuilder has promised a stream of $45,000 annual payments, with the principal to be repaid in x years. (I’m translating the homebuilder’s “bond” into something comparable to the Treasury bonds that the Fed buys; you get the idea I hope.)
Now it’s crucial to understand the mechanics (and any experts out there, please correct me if I botched the accounting above), but it’s also important–once you’ve mastered what the heck is actually happening–to step back and see the big picture: Just as the Fed writes checks on itself–“creating money out of thin air”–in order to buy debt, so too private commercial banks can write checks on themselves, and thereby create money out of thin air, in order to buy debt. And in practice, the amount of this being performed by the commercial banks is several multiples of what the Fed itself does.
And here’s the best part: Ever since that “savior of capitalism,” FDR, instituted FDIC, if this house of cards ever collapses, then taxpayers are on the hook to bail out the bankers who mismanaged their portfolios and somehow managed to get wiped out, even though they have the ability to create money out of thin air and lend it on whatever terms they deem safe.
That is breathtaking, when you really comprehend it. Thanks for opening my eyes, Zeitgeist Addendum.
Economic Hitmen, and Then a Bunch of Bunk
The interview with the Confessions of an Economic Hitman guy is also very sobering. I am not bothering to cross-reference his tales with any other “normal” sources, but he tells a very plausible account of how the CIA, IMF, and World Bank muscle financially strapped Third World countries into signing away their lucrative natural resources to multinational companies. When two populist rulers say Go Home Yankee, they coincidentally go down in separate plane crashes.
After those scenes, however, the movie descends into anti-capitalist and anti-religious bunk. I’m not going to bother critiquing it, but let me just give some examples of how silly it is: At one point, the narrator “explains” that Jamaica (I think?) got destroyed by the evil multinational bringing in food that was so cheap it put the locals out of business. Now on the face of it, that’s pretty funny: A leftist complaining that the capitalist nations aren’t charging poor people higher prices for food.
But beyond the absurdity of it, this charge contradicts the claim made later in the movie, when it says that capitalism is based on scarcity, not abundance. In other words, it’s not in the capitalist system’s interest to increase production, because then prices (and “hence” profits) go down. So then, what was the story with the evil free trade and Jamaica?
President Obama: "Bob Murphy is a trusted advisor."
Well, he didn’t actually say that, but it must be what he’s thinking. My argument is bulletproof:
(1) On May 27, EPJ wondered, “What can Geithner say to get China to continue to buy U.S. securities aggressively? Nothing.”
(2) In the comments, I used my extensive training in game theory and Walt Disney to explain how the world works:
Actually, if I were Obama I’d call [Geithner] into my office and say, “Tim, I want you to go over there and assure the Chinese that you are very confident US interest rates will rise, and that in your expert opinion, you advise them to stop buying Treasurys.”
(3) The next day, May 28, EPJ reported that Geithner’s official mission is pretty close:
[Geithner] is also planning to press Beijing to take drastic measures to turn China’s economy into one that depends heavily on sales to domestic consumers and less on sales to the U.S. and other foreign markets, according to a senior Treasury Department official.
That means encouraging Beijing to offer more generous health-care, retirement, welfare, educational and other benefits in order to persuade the average Chinese citizen that spending now doesn’t mean starving later.
“The efforts China could take would be efforts to strengthen the comfort that Chinese households have in spending, which largely involves reducing or addressing the reasons why they feel such a great need to save for precautionary purposes,” said the senior Treasury official, who briefed reporters Thursday in advance of Mr. Geithner’s departure on Saturday.
It is quite obvious that President Obama was notified of my advice, realized its excellence, and–master politician that he is–tweaked it to flatter the Chinese consumer, rather than humiliate the US Treasury. But the actual recommendations are the same.
And hence, if the Chinese rulers are as clever as Obama, they will do the exact opposite of Geithner’s recommendations.
OK that’s enough engineering of geopolitics for the week. I have a lecture on Saturday I need to prepare.
Schadenfreude in Advertising
On the way from the Dallas-Forth Worth airport to the hotel, I saw a billboard saying:
We didn’t.
I couldn’t make out the full name of the bank, because some trees blocked the bottom of the billboard. But I think it started with “Washington.” I was tempted to do a search for “washington bank bailout” but realized that would probably fry Google’s mainframes.
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