Monthly Archives: May 2013

“A more sensible description of what grows the economy”

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Julie Novak, from whose all-seeing eyes nothing remains hidden, came across this article by Martin L. Mazorra with the perfect title, “Goods Buy Goods“. This is, of course, the classical definition of Say’s Law. I reproduce the entire blog post below:

One day last week, on CNBC’s Kudlow and Company, Larry gave his expert guest the last word: she justified her optimism for stocks by the fact that consumer spending appears to be trending higher and that ‘consumer spending is 72% of the economy’. Larry closed the evening’s show by telling her she had it ‘almost right’. That (words to the effect) what this economy needs is more saving, and business investment, as opposed to more consumer spending. I don’t always agree with Mr. Kudlow, but in this instance I believe he was spot on. Although I had no idea where she had it ‘almost right’. She was at least 72% wrong. Of course her assertion that ‘consumer spending is 72% of the economy’ comes straight from the GDP equation, and is an oft-quoted justifier for policies aimed at boosting demand. Once upon a time, I fell prey to the same misconception.

Here, in my (evolved) view, is a more sensible description of what grows the economy: From page 26 of Steven Kates’s Say’s Law and the Keynesian Revolution:

If one takes the annual produce of a country, writes Mill, and divides it into two parts, that which is consumed is gone. On the other hand, that portion which is used in the production process returns in the following year, with a profit. The more of the produce of a country that is devoted to productive uses, the faster that country grows.

And (from page 40) on the cause of recessions:

The basis of the law of markets is that goods buy goods, but only if the right goods are produced. If the wrong goods are produced, then they cannot be converted into the universal equivalent (i.e. money). If a proportion of goods cannot be sold, then their owners cannot buy. If one set of producers cannot buy, then a second cannot sell. The result is a general downturn in the economy and warehouses filled with unsold goods. But the cause of recession is not demand deficiency or over-production but the production of the wrong assortment of goods and services. The adjustment process thus required is the redeployment of capital from areas where there is too little demand into areas where there will be demand for the goods produced. There is no reason that the process of readjustment will be rapid, but there is no reason to believe that the downturn will be permanent.

So, under whose command should we expect the greatest likelihood of producing the right assortment of goods and services; a self-serving producer of goods and services, or a self-serving politician? Certainly the market, all on its own, can, for a time, produce the wrong assortment of goods and services. However, left to its owns devices—and to natural consequences—the market will adjust accordingly and purge its excesses. The politician, on the other hand, has a professional interest in circumventing the suffering of his supporters, and is adept at neutralizing the natural consequences for the producers of the wrong goods by spreading the loss among the entire population. And, alas, he in effect neutralizes the redeployment of capital from areas where there is too little demand into areas where there will be demand for the goods produced. Hence, a very slow recovery…

When one thinks about the last recession, housing comes to mind. Government-(explicitly)-backed mortgages (Ginnie mae), government-sponsored enterprises (Freddie and Fannie) and a variety of tax incentives are the brainchildren of politicians incentivizing the production of a particular good. Plus, the Fed had flooded the financial sector with liquidity enough to fund the manufacture of trillions of dollars worth of derivative securities designed to leverage—many times over—the housing market. In the end we had the definition of resources diverted to the production of the wrong good, and, thus, the greatest recession since The Great Depression…

This is exactly right and a perfect restatement of the classical explanation of the recession we continue to refer to as the Global Financial Crisis. The notion that consumers drive 70-plus percent of the economy is just one of the many Keynesian idiocies bequeathed to us today. When it comes right down to it 100% of the economy is devoted to raising consumption. Why else would anyone produce anything unless it eventually led to higher personal living standards. Retail is, however, less than ten percent of total economic activity if one looks at the value added data rather than at C+I+G. Most people across an economy are in the inputs industry, every one of which is directed towards satisfying consumer demand eventually, but only eventually. In the meantime they are producing iron ore and concrete, lumber and nails, factories and 747s, none of which are bought as consumer items. And this only begins the story of why the focus on consumer demand is absolutely misplaced if you want to understand how an economy actually works.

Why stop at free education?

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This is from Andrew Bolt and on the one hand it is hilarious but on the other it is downright disgusting. We talk about low info voters but the completely skewed ideas these people have is quite a scandal. These kinds of things are the typical province of students but I suspect that the Greens do not go much beyond this in economic sophistication if they go beyond it at all.

http://youtu.be/HiIqk54c7Bs

The corrupt practices of the American media are even worse than the IRS

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The first law of media is that everyone on the left must be protected at all times and to the greatest extent. There is therefore nothing that Obama can do – not a single thing – that will put the mainstream of the American media offside. The IRS scandal goes direct to the White House. The previous Commissioner of Taxation of the United States, Doug Shulman, visited the White House 118 times. Got a good reason for that. He doesn’t nor can there be.

But if they are going to run the protection ring they require, the media need a story that will work, cover enough of the facts on the ground and protect their president from being implicated in this sordid story of political criminality and worse. So here is how it will unfold in the news as orchestrated by the White House, or it will if they are allowed to carry the narrative. From the PJ Media Tatler.

It’s also an indication of just how worried the White House is, and how it intends to contain the scandal. First, get reliably friendly bloggers and columnists on board with a story that focuses attention away from the White House. Then, isolate and target someone who has already become a central figure in the scandal and, more importantly, who does not work directly for the White House. Finally, make it appear as if these reliably friendly bloggers actually take the IRS scandal seriously, so they become voices in the larger media advocating for a strong response — just strong enough to look decisive, while keeping the White House outside the main storyline.

We shall see.

Update from a former presidential adviser: A different president obviously and this is how things really work and why the stories being told by Obama and his enablers are a complete fabrication. The most interesting part of what he wrote:

My personal favorite of all the new revelations from the Obama IRS scandal is that White House Counsel Kathryn Ruemmler told White House Chief of Staff Denis McDonough about the impending IRS inspector general report, but of course the White House chief of staff did not tell the president.

I sat in a White House chief of staff’s office every day for more than two years. The only reason the legal counsel would tell the chief of staff about an impending report or disclosure would be so the chief of staff could tell the president. The legal counsel would assume the chief of staff would know how and when to bring up the matter. The chief of staff would be expected to know if there were additional factors surrounding the issue that needed to be considered before the president was told, or whether or not others needed to be included in the conversation when the information was shared with the president. There are many valid reasons why the chief of staff would tell the president, but I can’t think of a reason why he and the legal counsel would both agree that this news nugget would go no further. It’s very odd.

The legal counsel would never assume that information shared with the chief of staff would not go to the president. In my experience, a legal counsel never would believe that there was information that was appropriate for the chief of staff to know but that was inappropriate for the president to know. Out of all the news that has emerged regarding the Obama IRS scandal, this is the most curious whopper I’ve heard so far. I can’t wait to hear the real story.

Has the Premier of China read my book?

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I have just posted this for my students so why shouldn’t I share it here. For anyone doing a conventional course in economics, specially one which does not include any history of economics, they would find what’s going on in China almost incomprehensible. It is an excerpt from a story in the Australian Financial Review by Angus Grigg published on Wednesday, May 21, 2013. I have added the bolding:

The key for China watchers will be how the new leadership, led by Premier Li Keqiang, plans to allow private enterprise to play a greater role in the economy. In a speech last week Li indicated this would begin by reducing red tape, which he labelled “informal barriers” and “glass doors”.

Li described how one company needed 50 separate administrative approvals across 27 different government departments before being able to begin a project.

“We need to get rid of the controls which are not needed,” he said.

Speculation is mounting that China will abolish one of its five layers of government to help achieve this.

But the market won’t be satisfied with cutting red tape. Economists are looking for reforms that will drive productivity gains over the next decade and allow China to keep growing at elevated levels.

That means the pressure is on the leadership to articulate how it will reduce the role of state-owned enterprises, which control more than one-third of the economy and are given preferential access to the most lucrative areas, such as energy and financial services.

“Private capital has money but nowhere to invest, it can’t invest,” Li said in his speech last week.

This was interpreted as strong support for markets, which the Premier said had a “self-adjusting mechanism”.

“The market is the creator of social wealth, it’s the internal source of economic development,” he said.

While Li’s comments were likened to Adam Smith, they are also perhaps an acknowledgement that China’s system of state-sponsored capitalism has run its course. This can be seen in how the government has been unable to significantly boost the economy in recent months, despite directing state-owned banks to massively increase new loans.

At the end of last year China’s credit to GDP ratio topped 180 per cent – up 60 percentage points in just four years – but it is having less and less impact.

Fitch Ratings estimates that each new yuan of lending between 2009 and 2012 only generated 0.3 yuan of additional GDP. This is less than half the figure achieved between 2005 and 2008. This supports theories that China is like a junkie that needs increasingly larger hits of credit to have the same impact.

And it’s leading to dire warnings on the state of China’s banking system.

The latest to join to throng was famed short-seller Carson Block of Muddy Waters Research, who says China’s financial institutions hold more toxic assets than Western banks did before the 2008 financial crisis.

The road to impeachment

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obama scandal bracket

Meanwhile:

The IRS official in charge of the division accused of improperly targeting conservative groups will invoke her Fifth Amendment rights against compelled self-incrimination at a committee hearing Wednesday, a sign of concern that the political controversy is heading into the criminal arena.

That is, she will refuse to answer questions on the grounds that her answers might tend to incriminate her. A jury is not supposed to take pleading the fifth into account in reaching a verdict during a trial. We, on the other hand, are not on a jury and this is not a trial so we are well within our rights to draw an inference that there is criminality involved. And no doubt there is. The question now is whether the Republicans (and media) will go all out or go quiet.

The Obama doctrine

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It’s satirical but it is also dead on the money. Obama builds his rhetoric around the idea that he is going to protect everyone else from government. From Alan Borowitz at the New Yorker

President Obama used his weekly radio address on Saturday to reassure the American people that he has ‘played no role whatsoever’ in the U.S. government over the past four years.

‘Right now, many of you are angry at the government, and no one is angrier than I am,’ he said. ‘Quite frankly, I am glad that I have had no involvement in such an organization.’

The President’s outrage only increased, he said, when he ‘recently became aware of a part of that government called the Department of Justice.’

‘The more I learn about the activities of these individuals, the more certain I am that I would not want to be associated with them,’ he said. ‘They sound like bad news.’

Mr. Obama closed his address by indicating that beginning next week he would enforce what he called a ‘zero tolerance policy on governing.’

‘If I find that any members of my Administration have had any intimate knowledge of, or involvement in, the workings of the United States government, they will be dealt with accordingly,’ he said.

[Via Powerline]

The CBC solution to the ABC

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journalist bias australia

This is from Andrew Bolt and it is a sensation. How is it that the folks over at the ABC are so completely lacking in self-awareness that they happily answer these questions so that the rest of us can know just how politically naive they are. Who would buy a political opinion from such a bunch as these?

I have over the past few weeks been thinking about a solution to the problem caused by the ABC. And while privatisation might be a nice idea I don’t think it would work out very well. But what would in my view be just as good is for the next Coalition government merely to say to the ABC that within five years, 90% of your funding must be raised through advertising revenue. And having grown up in Canada, there is a precedent. I don’t know what the proportion of its funding must come from its own revenue sources but whatever it might be could be our own target.

I like it because it will still remain “our ABC”. I like it because we can allow the ABC to help the rest of us finance all of the social programs it believes the government ought to finance. And I like it because it should be more commercially oriented so that it is no longer allowed to compete in the market at a zero price.

And I especially like it because this is not the 1930s. We can get cable across the country. There is no one locked out of reception that only the ABC can reach (and if there are such places, the government can provide the subsidy out of the ABC’s new revenue stream).

And then, of course, there is this from Blazing Cat Fur in Toronto who notes how the CBC audience has diminished almost to the vanishing point:

If the share of CBC TV was just over 5% in prime time, it is below 5% on a 24 hour basis; CBC daytime schedules have traditionally performed poorly compared to CBC’s prime time. Making matters worse is that the audience to about half the U.S. TV stations available in Canada are no longer being measured by the ratings company and neither are services such as Netflix or Apple TV, meaning that CBC’s share of all TV viewing is actually lower than the numbers suggest. This is the lowest audience share in CBC’s history and yet there is no hint of the severity of the TV network’s situation in the quarterly report. CBC TV audiences are sold to advertisers and with less audience to sell, 2012-13 revenues, shown in the table above, are almost $40 million less than at the same point the previous year, creating a revenue shortfall that, when added to federal cuts, may be crippling.

There has been some public debate about whether or not CBC is in crisis. The CBC’s latest report confirms that many programs on the main TV service, despite efforts to be more ‘popular,’ have fallen to audience levels not much greater than many specialty channels. Those who deny the crisis fail to realize that Canadians prefer Duck Dynasty to most CBC shows, including the national news. The most important and costly CBC service has an audience crisis and CBC needs to respond to it. Is it time to rethink the role of CBC TV?

Maybe if the ABC were made to think about advertising revenue it might perhaps end up a tad more central to community views than it now is.

Resolved: That Keynesian economics is junk science

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This goes back to 2011 but has re-surfaced. Here is the original letter from Ben Eltham dated 28 August 2011:

Dear Steven

As someone who finds myself in consistent disagreement with your opinion writing on economics, I was wondering if you’d be interested in a public debate on some of the issues you’ve advanced in recent times, for instance concerning the effects of Keynesian stimulus.

I think it might be quite a fun event and I’m sure we could ensure a good attendance from interested parties from both the left and right of the political spectrum.

If you’re interested, let me know and I’ll investigate what venues are available. The Wheeler Centre might be interested.

Sincerely,

Ben Eltham

Leaving out the various emails in between, this was my last response dated 12 October 2011.

Dear Ben

When I had not heard back from you before, I just assumed that you had gone cool on the idea so I am pleased that you would still like to have it on. Seems like a potentially very festive occasion.

So please do go ahead and organise something. I am in Melbourne between now and Christmas aside from a week at the end of November. The Wheeler Centre or anything else would be fine. I do not expect either of us will change a lot of minds but for both of us there are serious issues involved in thinking through what needs to be done in the face of the inevitable downturns in the cycle.

I should also apologise for not writing back immediately when you sent your note. I am in what I not-so-whimsically call ‘marking hell’. I gave a test to my 180 students last week, which was the penultimate week of the course, and now I have been buried marking them so that they can have some feedback before they plunge into the final on Hallowe’en. Just finished an hour ago.

But please do organise something. And many thanks again for your willingness to take this on. BTW, we should also meet for a coffee if you are ever around the CBD.

Kind regards

Steve

From that day to this month I had not heard back. But now this dated 15 May 2013:

Hi Steve

We obviously let the idea of the debate get away for a time, but seeing as you seem keen to renew the discussion, perhaps its time to lay down some guidelines and set an appropriate date?

best

Ben

I am unfortunately more busy now than I was then. The claims on my time have reached crisis proportions, but nevertheless, last night I finally replied but only after five days which has been the time I have been doing the mulling:

Dear Ben

I have mulled over your original letter to me and the time just wandered by. I am not particular averse to debating the Keynesian issue. What has stayed my hand in replying is whether you actually understand enough of what I am trying to get at to make it a fair debate. But then again, not many others would either, specially if they have studied Keynes and take aggregate demand as gospel so why should I worry.

We were going to have this debate at the Grattan Institute or somewhere but it was not going to be at RMIT. I will leave that to you. The only stipulation I would make if you are actually interested in this, that this is the resolution we put to the floor:

That Keynesian economics is junk science.

I would then speak to the resolution and you could reply. After that, we could think about what to do next. One-on-one; two-on-two. Anyway, make a concrete proposal and I would be happy to be in it. Might be fun.

Kind regards

Steve

Which is where matters now stand. Will report when there’s more to report.

The worst political scandal in American history?

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Watching the IRS story unfold in the US gives me the creeps. Right before your eyes the true face of a tyrannical government emerges from behind the curtain in the form of nice Mr Obama and those nice Democrats and their friends in the media and universities. This guy, however, gets it. His title, Is the IRS scandal the worst political scandal in American history? I say ‘yes.’. Here is a large segment outlining why he has come to this conclusion:

Here’s thumbnail sketch of just a few of the other politically-motivated attacks the IRS has made against American citizens. We can expect many more revelations to come:

1. The IRS official who over saw the agency’s effort to stifle political dissent is now in charge of enforcing ObamaCare, which will account for up to one-sixth of the American economy.

2. The IRS gave confidential financial documents from conservative non-profit organizations to a far-Left political activist group.

3. The IRS (which will police ObamaCare) stole 10 million medical records, including the records for all California judges.

4. The IRS blocked applications for or otherwise harassed almost 500 conservative non-profit groups – and there’s every reason to believe that this number will continue to rise.

5. The IRS insisted that, for a pro-Life group to obtain tax-exempt status, it would have to promote abortion.

6. The IRS has been mining Facebook for private data about people who dissent from Obama’s party line.

7. The IRS tried to force a conservative non-profit education group to turn over the names of students (mostly minors) who benefited from its services.

As for those who say that the whole IRS affair becomes irrelevant if no one can prove that Obama is not directly involved, that’s completely wrong. Of course, if the president was involved, it shows that he is the most corrupt, tyrannical leader in American history, and that every branch of the executive division in our government has been tainted and must be cleaned out. And as far as Obama is concerned, if he wasn’t involved, he is a man too incompetent and weak to hold the job of national chief executive.

But think about what it means if Obama wasn’t involved, and the IRS, an agency that has the power to destroy every person in America, did all of this on its own initiative. What we’re seeing in that case is the fall-out of a complete Leftist takeover of American institutions. We will have become a tyranny by bureaucracy (in no small part due to the fact that federal agencies are heavily unionized, and always with a Leftist slant), with the entire federal government irredeemably corrupt.

Retirement is a bad idea

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Nothing new here if I am anything to go by. I never understand the way people willingly retire, even making the choice themselves. A report by the IEA in London reached these conclusions:

In the past 50 years, labour market participation among older people has declined significantly though the trend has been reversed in
recent years. In the EU, about 70 per cent of people aged between 60 and 64 are inactive….

Whilst people have been retiring earlier on average, they have also been living longer. A 61-year-old man in 1960 had the same probability of dying within a year as a 70-year-old man in 2005.
‡
Healthy life expectancy at age 65 has also increased in the UK, although at a somewhat slower pace than regular life expectancy. This would suggest that people have the capability to work longer, though perhaps not to increase their working life on a one-for-one basis as life expectancy increases. Life expectancy at age 65 increased by 4.2 years for men between 1981 and 2006. During the same period, healthy life expectancy at age 65 increased by 2.9 years for men.
‡
Increases in the number of healthy years of life that we can enjoy is the case: people were working longer half a century ago.

If rising pension ages and labour force participation at older ages caused greater ill health then it would be a matter for concern. Most research on the relationship between health and working in old age has produced ambiguous results. Research in this area is difficult because just as the fact that retirement can influence health, health can influence retirement decisions.

To date, research has not generally examined the relationship between the number of years spent in retirement and health. This issue is important. It is possible that health will initially improve when somebody retires and then, after a while, start to deteriorate due to reduced physical activity and social interaction.
‡
New research presented in this paper indicates that being retired decreases physical, mental and self-assessed health. The adverse effects increase as the number of years spent in retirement increases.
‡
The results vary somewhat depending on the model and research strategy employed. By way of example, the following results were obtained:

– Retirement increases the probability of suffering from clinical depression by about 40 per cent
– Retirement increases the probability of having at least one diagnosed physical condition by about 60 per cent
– Retirement increases the probability of taking a drug for such a condition by about 60 per cent.

‡
Higher state pension ages are not only possible (given longer life expectancy) and desirable (given the fiscal cost of state pensions) but later retirement should, in fact, lead to better average health in retirement. As such the government should remove impediments to later retirement that are to be found in state pension systems.

[Via The American Interest who for reasons of their own seem cynical about the motives for producing the report and therefore somewhat sceptical about the results.]