Category Archives: Economic theory and policy

Hubble bubble toil and trouble

Posted on by
Reply

Really I have no one else to blame for this but it was suggested to me that I reply to an article at The Drum which has now got me looking at the site and reading some of the articles. One has in particular caught my eye, “Our wealth has only grown since the carbon tax”, written by Stephen Koukoulas. Now whatever else might have happened in the world, the notion that introducing a carbon tax has made us a more prosperous community has got to be one of the least plausible possibilities imaginable. But there it is in the title and there it is again in the text. So naturally my curiosity got the better of me and so I looked to see what possible evidence there could be for such a thought, and here it is:

The half a trillion dollar lift in the stock market and house prices reflects a 23 per cent lift in the ASX since 1 July 2012 which had added approximately $275 billion to the value of stocks, while a 5.1 per cent rise in house prices has added approximately $235 billion to the value of housing over the same timeframe.

This is hardly the stuff of an economic wrecking ball or outcomes that are ripping the heart out of businesses and families. On the contrary, it is a stunning boost.

The very ingredients of a bubble economy is being provided as proof that the economy has taken off since the introduction of the carbon tax. Well the Fed is looking for a new Chairman and we will be looking for a new Governor for the RBA in a few months’ time. If quantitative easing and asset inflation are your thing, we have just the name for the shortlist, that is for sure.

Evolutionary economics

Posted on by
Reply

An evolutionary theorist has an answer for economic theory and I especially like his incorporation of history into the theoretical story:

Evolutionists have a conceptual toolkit that can be applied to the study of any aspect of any organism. This includes asking four questions in parallel, concerning the function, history, physical mechanism, and development of the trait. For example, species that live in the desert are typically sandy-coloured. How do we go about explaining this fact? First they are sandy-coloured to avoid detection by their predators and prey (a functional explanation). Second, the sandy colouration is achieved by various physical mechanisms, depending upon the species — fur in mammals, chitin in insects, feathers in birds (a physical explanation). What is more, the particular mechanism is based in part on the lineage of the species (an historical explanation) and develops during the lifetime of the organism by a variety of pathways (a developmental explanation). Answering these four questions results in a fully rounded understanding of colouration in desert species. All branches of biology are unified by this approach. . . .

And yet, evolutionary theory does lead to a viable concept of the invisible hand, albeit one that is different from the received economic version. Indeed, the biological world has its own version of the invisible hand. Cells, multicellular organisms, and social insect colonies are all higher-level social units that function with exquisite precision without the lower-level units having the welfare of the higher-level units in mind. In most cases, the lower-level units don’t even have minds in the human sense of the word. These miracles of spontaneous organisation exist because selection operating on the higher-level units has winnowed down the small fraction of traits in the lower-level units that contribute to the good of the group. If the invisible hand operates in human groups, it is due to a similar history of selection, first at the level of small-scale groups during our genetic evolution, and then at the level of larger-scale groups during our cultural evolution.

All very micro unfortunately. The big questions, however, are about the overall trend of the entire structure which can only be answered in ways that biologists have little to offer.

Sent to The Drum

Posted on by
Reply

Blind to the Damage Caused by Government Spending

The Global Financial Crisis began some time during the second half of 2008 and ended sometime before the middle of 2009. The collapse of Lehman Brothers is seen as the start of the true panic with the implementation of the Troubled Assets Relief Program (TARP) under George Bush Jr more or less the ending of it. You would find hardly a single economy anywhere that was still in a state of rapid decline after the middle of 2009. Were there any?

There was, of course, an immense amount of hysteria. The kinds of over-the-top scaremongering that was common foresaw the world’s economies plunging back into the kinds of depths last experienced during the Great Depression, which would have required unemployment rates of over 20%. Given this “chicken without a head” reaction, the cry went out for a stimulus which duly arrived in one country after another. The fact that unemployment rates, rather than rising by around 15 percentage points rose only around two, is now attributed to the rapid response of Treasuries all over the world.

Kevin Rudd is amongst those who believe we should be grateful to him for saving the Australian economy in the same way, I suppose, that Barack Obama would like the American people to thank him for his own stimulus. And sure enough, all of those economists mis-educated on Keynesian models may feel some kind of vindication since their worst case scenarios never occurred. But then again, neither did recovery.

Because, you see, the problems currently facing our economies has virtually nothing to do with the financial crisis itself but are, instead, due to the effects of the stimulus that came after.

The fact of the matter is that economic theory is in a dreadful state. Keynesian economics has utterly failed to achieve recovery in any single economy anywhere it has been applied. So when I read this, as published by Tim Harcourt on The Drum on Monday, it fills me with that kind of despair because it is pretty obvious that economists are not yet prepared to give away these models whose policy advice has only made things worse. What Tim wrote was this:

In case you missed it, Australia, unlike many other industrialised countries, avoided the worst economic crisis that has bedevilled the global economy since the Great Depression (note the term they use in the USA – ‘the Great Recession’ – rather than the more technical and even benign-sounding ‘GFC’ that we use in Australia).

I’m not sure what missing this crisis means but from the unemployment rate of 4.1% in March 2008 we went to an unemployment rate of 5.8% in June a year later. There was then a drift downwards so that by June 2011 the rate had fallen to 5.0%. But since then it has all gone backwards so that the latest number is 5.7%, it will soon pass the worst number achieved at the height of the GFC and we will be into six-point-something not long after that. And it’s not in spite of the stimulus that this will happen but because of it.

Let me quote myself in an article of mine that was published in Quadrant in March 2009.

There have been few periods in which so many forms of financial and economic uncertainty would have confronted the average business at one and the same moment. That business confidence has evaporated and an economic downturn has gained momentum is a matter of no surprise to anyone. The fact of recession is a certainty; only the depth to which it will descend remains in question.

But just as the causes of this downturn cannot be charted through a Keynesian demand-deficiency model, neither can the solution. The world’s economies are not suffering from a lack of demand, and the right policy response is not a demand stimulus. Increased public sector spending will only add to the market confusions that already exist.

What is potentially catastrophic would be to try to spend our way to recovery. The recession that will follow will be deep, prolonged and potentially take years to overcome.

And that is exactly where we are right now. We have tried to spend our way to recovery and as a result are in the midst of a deteriorating economy, that is we are in the midst of a recession that will be deep, prolonged and potentially take years to overcome. It has certainly not been overcome as yet.

As for the reasons that the downturn here was not as bad as it has been elsewhere, there are four parts to the explanation that I can see.

There is firstly the extraordinary fiscal situation the government inherited. We not only had no deficit, we actually had no debt. Australia was the only country in the world not to have any public debt whatsoever, a situation that it is almost impossible to imagine returning any time soon.

There was then the mining boom built on the back of the Chinese stimulus. That has gone, in large part because the Chinese must now themselves deal with the problems that their own stimulus created in their own economy. But we have added to our own slowdown in mining through a series of policies that have made miners more reluctant to invest in Australia.

Third, our banking system was almost entirely untouched by the financial crisis which spread internationally due to the ownership of various toxic assets generated in the US financial system. Our banks were fine so Australia had no problems of this kind to overcome.

And lastly – but this will make little sense to most people – the RBA kept interest rates up rather than pulling them down. No quantitative easing in these parts with the result that the national savings we generated were used more productively than elsewhere. You can’t stop governments from squandering what they squander, but at least the private sector was kept on the straight and narrow.

My worry remains that even though the evidence that the stimulus did no good continues to mount, the economics profession refuses even to examine the theoretical basis for the policy advice it offers. But there will come a reckoning at some stage since it is the advice of economists which is largely at fault.

In the meantime, the Prime Minister likes to congratulate himself on his rapid fiscal response to the downturn in 2009. What he is doing is taking credit for creating economic conditions which will keep our living standards depressed for a very long time to come.

Rising poverty and modern economic theory

Posted on by
Reply

This is the beginning of a story from the Associated Press which is also discussed here:

Four out of 5 U.S. adults struggle with joblessness, near poverty or reliance on welfare for at least parts of their lives, a sign of deteriorating economic security and an elusive American dream.

Survey data exclusive to The Associated Press points to an increasingly globalized U.S. economy, the widening gap between rich and poor and loss of good-paying manufacturing jobs as reasons for the trend.

These are not “reasons” for the trend, they are evidence of the trend. The reasons for the trend are the galloping socialism of the United States, and indeed of the entire previously free market oriented economies of the West. The continuous undermining of the independent, growth oriented entrepreneurial managed economies that have been the cause of our prosperity in the name of equality and no end of other junk social concerns have created a wreckage that will be very hard to reverse.

And amongst the many reasons it will be hard to reverse is that a large part of the problem is the Keynesian theory that is supposed to be the reason that we are able to withstand economic contraction and maintain strong rates of growth. The more economies are driven by public spending with the supposed intend of keeping them strong and unemployment low the worse the economies will behave and the higher that unemployment will be. Almost as a finger to the eye of common sense, the second of the articles cited ends with this:

This past week, Obama pledged anew to help manufacturers bring jobs back to America and to create jobs in the energy sectors of wind, solar and natural gas.

Well there’s the answer to their problems if ever there was one. Does he pursue these ends because he really believes it or is he intentionally malevolent with the express purpose of doing down the US while pretending he is trying to do it good? And I can only think he is pursuing jobs in “natural” gas because he is unaware that it is a form of carbon-based energy and not a green technology at all.

This is more than prescient – it’s actually spooky

Posted on by
Reply

This is Ayn Rand in Atlas Shrugged published in 1957 quoted by Daniel Hannan:

A few houses still stood within the skeleton of what had once been an industrial town. Everything that could move, had moved away; but some human beings had remained. The empty structures were vertical rubble; they had been eaten, not by time, but by men: boards torn out at random, missing patches of roofs, holes left in gutted cellars. It looked as if blind hands had seized whatever fitted the need of the moment, with no concept of remaining in existence the next morning. The inhabited houses were scattered at random among the ruins; the smoke of their chimneys was the only movement visible in town. A shell of concrete, which had been a schoolhouse, stood on the outskirts; it looked like a skull, with the empty sockets of glassless windows, with a few strands of hair still clinging to it, in the shape of broken wires.

Beyond the town, on a distant hill, stood the factory of the Twentieth Century Motor Company. Its walls, roof lines and smokestacks looked trim, impregnable like a fortress. It would have seemed intact but for a silver water tank: the water tank was tipped sidewise.

They saw no trace of a road to the factory in the tangled miles of trees and hillsides. They drove to the door of the first house in sight that showed a feeble signal of rising smoke. The door was open. An old woman came shuffling out at the sound of the motor. She was bent and swollen, barefooted, dressed in a garment of flour sacking. She looked at the car without astonishment, without curiosity; it was the blank stare of a being who had lost the capacity to feel anything but exhaustion.

“Can you tell me the way to the factory?” asked Rearden.

The woman did not answer at once; she looked as if she would be unable to speak English. “What factory?” she asked.

Rearden pointed. “That one.”

“It’s closed.”

A judicious presentation

Posted on by
Reply

I am at Mark Skousen’s Freedomfest in Las Vegas which brings together all the groupings on the right in the US. With a core that is solidly libertarian, it ranges across most of the various other groupings. Economically it is solidly Austrian. Not being a libertarian and not being an Austrian makes me decidedly on the left so far as present company is concerned but it could not be more congenial. It’s Catallaxy writ large with 2200 attending. Every casual conversation over a cup of morning coffee is a revelation. I tend not to know who’s who here in the States so the pleasures of getting to know such people is ongoing.

Today, however, there was an experience of a different kind. The award for best book of the year was given to George Gilder’s Knowledge and Power which has only just been published. I didn’t even know it existed but thought I would have a word with the author since we have a number of interests in common, one in particular and long standing. So I joined the knot of people around him when he turned to me out of the blue and said, “You’re Steve Kates. Your book is all over the bibliography.” I have now bought his book and while my name is not all over, he did write this in an endnote in relation to the General Glut debate:

A judicious presentation of the debate appears in Steven Kates, Say’s Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way.

Since he has been writing on Say’s Law even longer than I have, I could hardly ask for anything more. I’m only at the start of his book but it ought to surprise no one that he and I see pretty well eye to eye on most of the basic issues of economic theory. The conversation will be continued in the morning.

From Catallaxy 12 July 2013.

There are none blinder than those who will not see

Posted on by
Reply

Now in Washington and have been for the past two days. Yesterday, the Wall Street Journal ran an article by Alan Blinder which led me to write a letter in response. Blinder’s article was titled, “The Economy Needs More Spending Now” which drew this comment from me:

I have a double barreled worry when I read articles such as Alan Blinder’s “The Economy Needs More Spending Now” in The Wall Street Journal. I worry because of the argument which is wrong but I also worry because you have published it which suggests an editorial policy in its support. There are plenty of other places one can go to for arguments supporting a continuation of public spending as a stimulus aimed at encouraging employment. What worries me is that there is virtually nowhere to go if one wishes to hear and understand the other side.

The distinction Blinder makes is between the need to encourage public spending in the short run which will eventually become unnecessary in the long run. The trouble is, he does not address the true nature of the problem which is that public spending – especially on the list of items that are considered as part of a stimulus package – are never value adding. They drain the economy rather than building it up and therefore make employment more tenuous, not less. Blinder is 100% right to note that long-run growth is supply-determined. If he would only recognise that short-run growth is identically supply-determined. All employment is based on entrepreneurial expectations that what employees are producing can be sold at a profit. To think there is some distinction over the nature of employment that makes the short run different from the long run is the very kind of muddled thinking he criticises others for having.

Blinder actually wrote an almost perfect para explaining the nature of economic activity in its relation to employment near the very start of his article:

Long-run growth is supply-determined; it depends on an economy’s ability to produce more goods and services from one year to the next. To accomplish that, you need four basic ingredients: more labor, more capital, better technology, and—if you can manage it—a better-functioning economy that utilizes inputs more efficiently. These four ingredients constitute the essential core of supply-side economics, and deficit reduction helps boost growth via the second: more capital.

Where he goes wrong in a way that every classical economist could see is that the short run is just the same. All production short or long is forward looking. Entrepreneurs will not produce unless they believe the particular goods and services they are producing will be bought so all of the concerns Blinder thinks of as long-run concerns are actually the immediate concern of every business at all moments in time. Anyway, while they didn’t publish my letter, they published the letter of my mate Jimmy Adams, the author of the wonderful Waffle Street. And what he wrote also went right to the point with this the key passage in his letter.

Mr Blinder errs in failing to recognize that demand has one, and only one, source, the production of those goods and services that can be sold at cost-covering prices. . . . This principle – Say’s Law of Markets – was broadly accepted by economists from the mid-19th century until John Maynard Keynes attacked a straw-man version in his General Theory in 1936.

I could not have said it better myself and very nice to have seen it in the WSJ.

From Catallaxy 10 July 2013.

The front page of The Times

Posted on by
Reply

Two stories share the front page of The Times today, that might make the front page anywhere and the other that would be about as noteworthy in Australia as the results of the Stanley Cup Finals. On the less important side, someone in the Labour Party has had to resign because of branch stacking in some constituency.

The other is that shares have soared because the new Governor of the Bank of England has said rates are coming down. And they had to bring someone from Canada to do that. Glenn Stevens would have been a much much better pick but then shares would not have soared as much.

From Catallaxy 5 July 2013.

Plan B on the Carbon Tax

Posted on by
Reply

You will have to forgive me for first mentioning that yesterday I went to a meeting on climate change in the House of Lords chaired by none other than Nigella’s Dad. We even spoke a few words to each other but I doubt he went home and blogged about meeting me.

But it was a serious meeting with a serious proposal that the Coalition should look at seriously given that we already have a carbon tax in place which, given the future state of the Senate, may not be removable in the first instance.

There was a presentation on what the speaker, Ross McKintrick, described as a “Temperature Index Tax”. You start with a carbon tax put in at a very low rate and then you index the tax based on movements in some particular temperature, with the proposal based on the recorded temperatures in the tropical troposphere since they are apparently especially responsive to changing concentrations of CO2. The size of the tax then depends on actual outcomes which could even go down depending on what happened to the actual temperature. There were then three additional features:

1) It is an “instead of” tax and not an “addition to” tax. For carbon taxes to be effective, there must be no other carbon abatement programs. The rest should then be completely repealed and no new programs added in.

2) The tax must be revenue neutral. The revenue raised cannot be used for any other purpose except lowering other taxes. Otherwise the tax becomes a source of regulatory inefficiency.

3) It must always be understood that the carbon tax as described is a price instrument, not a quantity instrument. Major issues if the attempt is made to use it for both.

Since Nigel Lawson has about as much belief in AGW as I do, the aim is to find some mechanism that will allow an each way bet on what temperatures will do. If you think they will go up a lot you get your abatement taxes and everyone is in agreement. If they don’t go up, then no one has to do anything and everyone is content that a contingency plan has been put in place. Various forms of futures markets also become operable which allow for hedging. The suggestion that the superannuation of global warmists be related to the tax revenues raised has an appeal but that was an idea raised from the floor and not part of the proposal.

I’m afraid I cannot link to the report on the primitive machine I am using but I suspect that if you go to http://www.thegwpf.com you will find the paper there under the title, “An Evidence-Based Approach to Pricing CO2 Emissions”.

From Catallaxy on 4 July 2013.

“The Rudd-Gillard government has been a highly statist government”

Posted on by
Reply

You know, I like this not because of what it says about Obama, but because of what it says about Tony Abbott. Abbott is quoted in The Telegraph (The London version) from an interview in The Wall Street Journal.

“The Rudd-Gillard government has been a highly statist government, the Brown government reverted to statism with a vengeance in Britain, and Obama is the most left-of-center government in at least half a century.” (At this, the media minder shifts in his chair.)

“Now I’m not being critical of Obama,” Abbott adds, soft-pedaling his response in a way he probably wouldn’t have a few years ago, when he was a minister in the Howard government. “He’s following a well-trod path. But I think it is a fact that the Obama government is a much more statist government than the Clinton administration.

It warms my heart to hear such things said. Not just that he has characterised them so well but that he appreciates the difference. My strong suspicion is that he does not think running a highly statist government is a good thing.

From Catallaxy 4 July 2013.