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Inflation protected treasury bonds (TIPS) sold today at negative yields for the first time ever. While this is good blog fodder for writers who tend to the apocalyptic, a sober man weighing the probability of immanent monetary apocalypse should note that yields on normal treasury bonds are also quite low (about 1.2% on the 5-year) so modest inflation expectations, say 2%, would be enough to push yields negative.
Still it is strange to see investors paying the Treasury for the privilege of taking their money. For this to happen expected returns on other asset classes have to be quite low, which is a bad sign for any economy.
In American political discourse “European” is used as shorthand for socialism, a pervasive anti-market mentality, and an extensive welfare state. Like most simplifications this stereotype is only part true, as the European policy reaction to the Great Recession has a striking libertarian flavor.
The Economist magazine remarked that there are two competing explanations for the continuing economic malaise:
- Aggregate demand was weakened with the collapse of housing prices and has not yet returned to normal levels
- Overinvestment in housing caused permanent damage to the economy that has no easy fix. Time is needed for resources to be channeled to other uses before economic growth will continue and unemployment will fall
Between these two competing explanations, the second one is clearly more libertarian. The first explanation suggests that government can return the economy to normal by boosting aggregate demand through large increases in spending. This is the policy path that American officials favor while pundits on the left like Paul Krugman berate them for not taking it far enough.
In contrast the second explanation suggests that aggressive government action will be ineffective at restoring growth and employment to normal. At best government spending projects can treat the symptoms of the recession by offering temporary work and assistance. In addition to offering the more laissez faire policy prescriptions, the second explanation recommends itself to libertarians by tracing its genesis to the traditionally libertarian Austrian school of economics.
European policy makers are firmly lined up behind the second explanation. Not only do they eschew large stimulus bills, they are perfectly willing to cut public programs to cover up budget holes caused by lavish spending in boom times and anemic tax receipts.
America has the reputation of the hardcore market fundamentalist of the world. But it is nominally socialist Europe that is trusting the market to heal itself while the American government eagerly takes on ever more debt for emergency programs. In a few years it is not hard to imagine Europe roaring out of the recession with a firm financial footing while the American recovery is dragged down by its own debt crisis.
Because I enjoyed many of the 45 Dumbest Signs at the 9/12 Tea Party Rally.
"Stupid" and "doesn't agree with me" should never be synonyms in the mind of a thinking person.
Treasury Secretary Tim Gheitner believes that extending the Bush tax cuts would be a "$700 billion mistake". Mr. Gheithner supports raising taxes in middle of a recession because "future growth depends on confidence in Americans in bringing [the deficit] down".
I have to chuckle at the boldness of Geithner's argument. It is a mirror image of the case brought by the right wing against the stimulus bill, when tea parties, some republican politicians, and free market economists argued that heaping on new spending to America's massive deficit would shake investor confidence and harm future growth, thereby undermining the already oversold stimulative affects of the bill. Left wing bloggers condescendingly mocked the "tea baggers" and their quaint concerns about deficits at the time. And now one of theirs trots out the same argument.
Coincidentally, the stimulus bill has about the same price tag as the tax cuts, weighing in at a bit under $900 billion. What is going on here is really an ideological battle between two factions. Both sides are concerned about the size of government debt but are willing to tack on about $800 billion to the bill. One side believes that resources are more efficiently used by the private market, and one believes that federal government projects are a better use of those resources.
Open border libertarians like to pretend that the supply of immigrant laborers has no effect on the welfare of existing United States workers. But this is not the case.
Broadly speaking, the welfare of an average Joe who trades his labor for a living depends on two factors. The first is labor productivity which determines how much employers are willing to bid for workers. The second is the supply of labor of similar quality. Increasing the supply of labor with a particular skill set will bid down the wages of workers with substitutable skills.
If we were to follow proposed libertarian policy to throw open the borders and offer amnesty to illegal immigrants, then broad swaths of the lower-middle class dependent on low-skilled jobs will see their incomes decline. At the same time libertarians also propose to cut down government transfer payments, sharpening the blow. And we wonder why we have a hard time proselytizing such an attractive policy package! I doubt the most impassioned and rigorous moral arguments from first principles will ever convince vast hordes of the lower-middle class to support policies against their economic interest.
There is no a priori reason to think that labor markets are immune to economic incentives. Since I have been engrossed by the excellent History of Rome podcast, let's take an example from Roman history. The Republican period of Rome was marked by the era of the freeholding citizen farmer. Most Romans had their own land and lived a good life. But by the time the empire got settled in around 100 A.D., population growth and an influx of slave laborers from the wars of empire had decimated the labor market. Less than 10% of the free citizens of the city of Rome were able to survive without some form of handout, either public welfare or private charity. The average citizen was a squalid beggar and the Gini coefficient approached 1.
So yes, bad things can happen. Conditions can get worse. And bad conditions can last a long time.
The modern world is a very different place than ancient Rome. Capital accumulation and technological progress are much faster and these two forces drive labor productivity ever upwards. Also, globalization of the economy has made capital more mobile. This means the declining wages suffered by workers in a particular country because of an increase in the labor supply will be mitigated by capital moving to take advantage of the lower wages which in turn bids wages back up.
But we are foolish if we believe the price of labor is immune to supply and demand. Open border libertarians preach policies that will worsen the lives of large numbers of people that aren't well off to begin with. In any political system, but especially democracy, large groups command power, and the 74% of poll respondents that support Arizona's aggressive approach to stemming the flow of illegal immigration command a lot of power. This is why neither party is particularly friendly to immigration right now including, unfortunately, the highly-skilled immigration which is most likely to create and attract international capital investment.
A fascinating look at how public sector unions broke the California budget.
California voters, predominantly members of the left-wing political tribe, believe that the only problem with the state's fiscal health is that it is too hard to raise taxes due to a right-wing ballot measure that passed in 1978. Yes, California is a high-tax state.
Bryan Caplan on why Libertarians should be conservative.
Steven Lipstein joins EconTalk for an enlightening examination of the economic forces faced by hospitals. I was shocked to find out how strongly Medicare policies affected the entire medical market.
Dr. Michael Newman joins Science Friday to discuss how Medicare reimbursement rate cuts affect doctors in private practice.
While visiting my parents I had the opportunity to watch a few hours of broadcast television. This ad caught my eye:
That is good television, clever and funny. I suspect that I wouldn't agree with the organizations behind the advertisement on many issues. But I am happy that these people have the right to broadcast their views. Lets hope that the senate Democrats are unsuccessful in their attempts to roll back our new rights with the DISCLOSE Act and that Obama doesn't get a chance to appoint a fifth liberal justice to the Supreme Court.
Tea Parties pop up in Moscow, among other places.
My beliefs often fall outside the mainstream. I say this with a bit of pride; individualism is prized by the American culture. The national psyche cheers the archetype of the lone radical, confident in his eccentricity, who eventually convinces the entire world of his views. Our national mascot is the underdog. It is the inevitable legacy of a country founded by persecuted religious minorities. It is the echo of the omnipresent Jesus myth that lies beneath so much of our culture and shared values - America will remain a Christian nation long after it becomes a secular one.
But the persistant iconoclast must confront one of two uncomfortable possibilities: either all the world is mad or he is. Rebelling against the majority offers no greater assurance of finding truth than following the whims of the masses. There are more trailblazers that die in the dessert than lead their people to a promised land, more Time Cubes than Theories of General Relativity.
But economics offers ample sanctuary for the misfit. In more objective sciences, the weight of accumulated empirical evidence squeezes out non-comformity over time. Economics has long defied attempts to introduce objectivity. Especially in macroeconomics, thought seems driven by the tides of fashion and political convenience as much as it is influenced by fact. Islands of misfits recognize the illegitimacy of the forces deployed against them and hold out until the tide raises their side once again.
That is not to say that Economics does not have its own orthodoxy, defined by the authors of the latest textbooks for college Economics 101 and 102. These are the views that perculate through the financial press. Armed with some minimal knowledge of the principles of free exchange financial journalists are capable of challenging the grossest acts of economic illiteracy committed by the politicians and officials entrusted, foolishly, with the welfare of millions.
It is only after the discourse passes into subjects more complicated than supply and demand curves that we discover the limited imaginations of the interlocutors. Appropriately named for our purposes, the magazine "The Economist" bemoans European governments slowing the growth rates of their public budgets in an attempt to please nervous investors concerned that the governments will not pay back what they have borrowed. We are told that this minor retrenchment from flagrant excess will certainly herald recession, doom, and stagnation. The eventual end of American government stimulus programs is also feared to plunge the world economy into darkness. The Economist does not question the palliative affect on a flagging economy of any marginal increase in the rate of government spending.
Are they aware of the ample empirical evidence that contradicts the standard worldview? Do they know about the many counterexamples of countries that prospered under so-called austerity? I doubt they are so intellectually curious. The orthodoxy is a safe place to be. No writer was ever banished to writing ad copy for the Libertarian Party for the sin of parroting the official lines of the treasury and Fed.
Are they bothered by a twitch of doubt that the politicians responsible for passing massive spending programs might not be objective voices in judging their worth?
Over at the Marginal Revolution blog run by George Mason economists, a commenter writes:
...in 1981 Margaret Thatcher cut UK government spending in the middle of a recession, and against the advice of 391 economists that it would worsen the recession, and UK GDP started its recovery the same quarter. In 1991 Ruth Richardson in NZ cut government spending against the advice of 15 economists, and NZ GDP started its recovery the same quarter. There are a number of other cases of expansionary fiscal consolidations, and there's a causal theory to explain why this can happen - see http://ideas.repec.org/p/cpr/ceprdp/417.html (shortly, it's that cutting government spending improves people's expectations about the future of the economy and taxes, so they start investing more right now). Of course, correlation does not prove causation, and perhaps there is something about the EU countries now that is so different as to the cases I cite as to make those results no longer likely to hold, but Krugman writes as if he has forgotten entirely about the 1980s and 1990s."
("Krugman" is an economist so reliably socialist that he takes three left turns at intersections.) Later on Marginal Revolution, Tyler Cowen points to this must-read David Brooks column, which provides more evidence against the stimulus orthodoxy:
Edward L. Glaeser of Harvard compared the change in employment in each state to the amount of stimulus money it has received. He found a slight relationship between stimulus dollars and job creation, but none at all if you set aside three states: Alaska and the Dakotas.
Alberto Alesina of Harvard has surveyed the history of debt reduction. He’s found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions. Countries that reduced debt viewed the future with more confidence. The political leaders who ordered the painful cuts were often returned to office. As Alesina put it in a recent paper, “in several episodes, spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.”
This was true in Europe and the U.S. in the 1990s, and in many other cases before. In a separate study, Italian economists Francesco Giavazzi and Marco Pagano looked at the way Ireland and Denmark sharply cut debt in the 1980s. Once again, lower deficits led to higher growth.
This is a radical column. It contains a whiff of Austrianism. If David offered this information to a cable news anchor, he would be treated as dangerous and a bit whacky.
I am not an expert on Macroeconomics, just an interested outsider. But I am smart enough to realize that there is debate in academia on the effectiveness on standard policy perscriptions. And the opposition arguments have bite. I can't share The Economist's implicit faith in textbook Keynesianism.
Macroeconomics has a strange orthodoxy because so much of the discipline is outside of it. While media seems unaware that any other position exists, many big names in the field publicly doubt the wisdom of monetary and fiscal stimulus. Many of these big names hold research positions at top universities, a few have Nobel prizes.
It's a shame that the nuances of the debate are hidden from the public consciousness.
Patri is sweeping through Southern California to promote the work of The Seasteading Institute on June 2nd and 3rd. The first stop is TEDx in Del Mar on June 2nd, where Patri will be one of the featured speakers on the theme of "The Big Picture Future". You can catch the live stream of the TEDx conference from 1PM to 9PM at http://www.livestream.com/TEDx
After the TEDx conference, liberty loving coastal residents will convene for the first San Diego Seasteading Social at Yogi's Beach Bar in Cardiff by the Sea at 9PM (or so). You can find event details at this link if you have a facebook account, or just email me if you have any questions.
To complete his tour, Patri will spread his aquatic gospel on UCSD's campus from 6-7PM on June 3rd at the Price Center East Forum before flying back to colder climes. You can RSVP on Facebook here.
Be sure to catch the tidal wave of liberty as it comes to San Diego!
In political circles "privatization" sometimes means that a service previously provided by a government agency is replaced by the services of a private contractor. Let's call this the Bush-Halliburton method of privatization.
There are benefits to contracting out government services. For starters, contractors can go out of business if they do a bad job whereas the half-life of government bureaus rivals that of nuclear waste. Government agencies have the reputation of horribly inefficient places where no worker is ever fired or even given a stern talking to.
But contracting services out to private firms is not always an improvement. The bid process is a golden opportunity for corruption, as this reddit link vividly illustrates.
The worst contractors prosper primarily through the exercise of political influence. In return for campaign contributions and other kickbacks, political leaders are only too happy to shower them with taxpayer money for subpar levels of service.
Skeptics of the free market witness the ignoble cycle created by so-called privatization and are further soured on capitalist ideology. They reason that government agencies can't be more corrupt or inefficient than a contracting process that awards billion dollar no-bid contracts to the Vice President's former employer. At the very least public agencies are bound by the Freedom of Information Act to operate with a degree of transparency. In many cases skeptics' concerns are valid.
For this reason I have never been completely sold on the charter school idea. On the most surface level it does represent the "privatization" of schooling, which I support. But if charters ultimately answer to school district management then they just add another layer of indirection to the existing power structure, providing extra opportunities for rent seeking and graft. Such privatization does not unleash the power of provider competition and consumer choice that free markets claim as their chief virtues. School voucher programs, like the Swedish model, do a much better job of fostering a true educational market.
The private market contains firms that produce great products like General Electric and Google but it also contains firms like Halliburton that grow fat on political favors. Separating the two classes of Capitalists in the public mind is essential to convincing young liberals of the virtues of free markets.
I've been reading a lot of Paul Krugman's columns lately. At first I was skeptical of his ideas, but his inexorable, patient logic slowly wore away my resistance.
In our nation's pathetic state of financial inequality, some people have private yachts while others don't have the necessities of life. Attempts to fix this have time and again been thwarted by corporations and their plutocrat masters. We need change. We need to vote for people that are going to get things done.
There's no easy way to say this so I'll just come out with it: I'm switching to the Democratic Party. And I whole-heartedly support President Obama in his attempts to bring us vital economic reforms. We need to save the world from corporations before it is too late. This will be my last post at the DR, but you can still read new content from me at my new blog at the the Daily Kos.
Edit: That was a joke, of course. I would still prefer to live in a country that is not going bankrupt.
But a human can only be human, in part and in whole, no more or less in the depths of "inhumanity", and always. The depraved man appalls us not only for his deeds but for his irrefutable demonstration of humanity's potential for evil; it must then follow that he demonstrates for each of us our own capacity for evil, because we cannot escape the bond that is our shared humanity. With each transgression the evil expand the Devil's realm, as surely as the the great establish the uppermost boundaries of human achievement. Every iteration of a man is an argument on behalf of and proving itself; lives committed to malice, lives sacrificed selflessly or stupidly, "madmen", lives "wasted" to sloth or obsession; all are competing models of man. No man can escape the assertion that is his life; he lives as he would have everyone live. Each life is the proposition: "this is Man."