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In which I defend Paul Krugman

I think Paul Krugman is the modern day Grand Shaman leading the giant village known as the "USA" to financial ruin. Having said that, I must now defend him. Gonzalo Lira, an excellent commenter on the economy, wrote a blog post taking apart Krugman's fallacious argument that deficits got the US economy out of the Great Depression.

The prosperity the United States experienced in the two decades after World War II had nothing to do with deficit spending, and everything to do with the fact that it was the only industrialized nation still standing after a total world war—so the rest of the world was forced to buy from the U.S. because there was no one else left to buy from.

Deficits had nothing to do with it.

(italics in original)

I agree with Lira that Krugman's arguments are wrong. I just don't think Lira's argument is right.

Suppose that there are only two small neighboring villages in the world. Your village, Twin Peaks, has a grocery store, hardware store and a computer store. The other village, Cicely, has a grocery store, clothing store, and car dealership.

People from Twin Peaks and Cicely generally buy groceries from their villages' own grocery stores. However, if you as a resident of Twin Peaks, want some clothes, you travel to Cicely to buy them. If someone in Cicely wants plywood, they travel to Twin Peaks to buy it.

If by chance Cicely's grocery store blows up due to a gas leak/fire, then an argument can be made Twin Peaks's grocery store will benefit. Its direct competition is out of the picture. Residents of both villages will now have to buy from Twin Peaks's grocery store.

But say the entire village of Cicely burns down. Now where will the people of Twin Peaks get their clothes and cars? Current productive resources will have to be shifted from groceries, hardware, and computers into clothes and cars. This is a net negative because the division of labor has taken a step back.

So, are countries more like directly competing stores or complementary specialized villages? I would argue they are the latter. The rest of the world being blown up during WWII was a net negative for the US as we could no longer trade for a lot of the stuff we used to. That's my argument and I'm open to counter-arguments.

So why do I say I defend Krugman? Because a prior article about Krugman in the New Yorker attributed to him a similar point:

Krugman’s tribe was academic economists, and insofar as he paid any attention to people outside that tribe, his enemy was stupid pseudo-economists who didn’t understand what they were talking about but who, with attention-grabbing titles and simplistic ideas, persuaded lots of powerful people to listen to them. He called these types “policy entrepreneurs”—a term that, by differentiating them from the academic economists he respected, was meant to be horribly biting. He was driven mad by Lester Thurow and Robert Reich in particular, both of whom had written books touting a theory that he believed to be nonsense: that America was competing in a global marketplace with other countries in much the same way that corporations competed with one another. In fact, Krugman argued, in a series of contemptuous articles in Foreign Affairs and elsewhere, countries were not at all like corporations. While another country’s success might injure our pride, it would not likely injure our wallets. Quite the opposite: it would be more likely to provide us with a bigger market for our products and send our consumers cheaper, better-made goods to buy.

In this case, Krugman is correct. Simply put: division of labor and specialization raise the standard of living; blowing up capital lowers it. Post-WWII prosperity was not a result of the rest of the world being blown up.


Ooh ooh call on me, call on me!

In a post below, I linked to Michael Burry's article in the NY Times from this past April entitled, "I Saw the Crisis Coming. Why Didn't the Fed?" He writes,

Since then, I have often wondered why nobody in Washington showed any interest in hearing exactly how I arrived at my conclusions that the housing bubble would burst when it did and that it could cripple the big financial institutions. A week ago I learned the answer when Al Hunt of Bloomberg Television, who had read Michael Lewis’s book, “The Big Short,” which includes the story of my predictions, asked Mr. Greenspan directly. The former Fed chairman responded that my insights had been a “statistical illusion.” Perhaps, he suggested, I was just a supremely lucky flipper of coins.

Mr. Greenspan said that he sat through innumerable meetings at the Fed with crack economists, and not one of them warned of the problems that were to come. By Mr. Greenspan’s logic, anyone who might have foreseen the housing bubble would have been invited into the ivory tower, so if all those who were there did not hear it, then no one could have said it.

I have a pretty simple answer to the question Burry asks in the title of his column. Anyone want to guess what it is?


What do they have in common?

What do Pastor Terry Jones (the guy who proposed International Burn the Koran Day) and Rush Limbaugh have in common?

And what do Terry Jones and Palin have in common?


Cui bono (iam)?

It's hard to decide what to make of a story like this:

(Reuters) - Afghan President Hamid Karzai intends to impose rules restricting international involvement in anti-corruption investigations, The Washington Post reported on Thursday.

The justification by the Afghan government is that the US government has de facto control over this body under current rules. I have no trouble believing that Karzai is absolutely corrupt and wants to shield himself, but I also have no trouble believing that the US government has control of the body and is using it to "influence" Karzai. I'll be interested to see where this story goes.


State secrets vs. you

With the 9th U.S. Circuit Court of Appeals handing out free passes to hide torture under the "state secrets" doctrine, I have to ask statists, what's with the "state secrets" doctrine? I mean, what's the rationale? Where does it arise when we're constructing a just theory of the state (not necessarily the current state that actually obtains, and notwithstanding the fact that I don't believe such construction is possible)?


Malcolm Reynolds finally speaks

Actually, it's his doppleganger Dr. Michael Burry who was one of the first to figure out the toxicity of CDOs from subprime mortgages and make a ton of money betting against them. As chronicled in Michael Lewis's excellent The Big Short, Burry is an interesting character-- a former neurology resident who quit medicine to start a hedge fund which was probably more successful than 99.9% of funds out there. Yet, he felt like his clients never really appreciated him, and the stress of running the fund caused him to shut down the fund.

His sole public statement after closing down the fund in 2008 was a column in the NY Times. That is, until now.

A third video cannot be embedded for some reason, but you can watch it here.

From his investments in farmland and gold, I think it's fair to infer that Burry sees inflation in the future.

What's a little disconcerting to me is the question asked in the video that I couldn't embed: whether shorts are to blame for the financial crisis. I can hardly believe people still think like this. Shorts risk their own assets by taking large bets against the market (usually). They provide liquidity. Most important of all, they provide information. The market will eventually find a new clearing price with that new information, but the new price is a function of the underlying prospects of the business, not the fact that some shorts discovered that information and by their actions, the public at large became aware of it.


The Anarchist Proof From Non-Bigotry

Widespread adoption and consistent application of a social norm of non-bigotry towards the non-native born must logically result in one of two policy options: Anarchy (in the best way) or a single world government. Hayekian knowledge problems make the second option impossible. Therefore, a consistent commitment to functional non-bigotry must lead one to anarchism. Q.E.D.


Jonah Goldberg is a Partisan Douchebag

Jonah Goldberg is a partisan douchebag. I met him for the first time in person a few months ago, and have been reading his columns for over a decade. I can confirm that he is, in fact, a partisan douchebag.

Mr. Goldberg wants to start with some data, but he doesn't cite any recent data about hate crimes against Muslims - or recent public attempts to block the construction of mosques. And not just two blocks away from Ground Zero, i.e. Ground 2.0, but also public attempts to block the construction of mosques in other parts of the country.

The Daily Show With Jon Stewart Mon - Thurs 11p / 10c
Tennessee No Evil
www.thedailyshow.com
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And since there is no justifiable reason to protest the construction of a Muslim community center apart from bigotry towards Muslims, we must conclude that 70% of Americans polled are bigots. This is not very surprising, as I explained earlier:

Can you think of any other time in history when 70% or more of Americans were intolerant bigots? I sure can. Is there any good reason to think that this collectivist impulse was just a passing phase in human history? Or is it more likely that we still have many of the same impulses our human ancestors had before us, including the intellectual ease with which we (including myself) fall into us-versus-them tribal thinking?

Republicans/conservatives/Tea Partiers believe that Muslim-baiting is a smart political tactic to win midterm elections, and perhaps they are right: They have had great success with race-baiting in the past. In fact, the very publication that employs Jonah Goldberg--The National Review--publicly opposed racial integration. Its founder, William F. Buckley, famously wrote within its glorious pages,

the central question that emerges... is whether the White community in the South is entitled to take such measures as are necessary to prevail, politically and culturally, in areas where it does not predominate numerically? The sobering answer is Yes – the White community is so entitled because, for the time being, it is the advanced race.

The new "Southern strategy"--the Islam strategy--may turn out to be politically successful, at least in the short run. It certainly polls well. But a Jew who knows the history of the Jewish people, or anyone who cares at all about civil rights, has no business supporting a politically successful but morally outrageous strategy.

Three of Jonah's paragraphs are particularly noteworthy:

No doubt some American Muslims -- particularly young Muslim men with ties to the Middle East and South Asia -- have been scrutinized at airports more than elderly women of Norwegian extraction, but does that really amount to Islamophobia, given the dangers and complexities of the war on terror?

No doubt some African-Americans-- particularly young black men with ties to a culture conservatives demonize for the glorification of crime and drugs -- have been scrutinized at traffic stops more than elderly women of Norwegian extraction, but does that really amount to racism, given the dangers and complexities of the war on drugs and crime?

The answer, of course, is yes: It does really amount to racism. In case you were wondering.

More Jonah:

It's an odd argument given that Americans have shed a lot of blood for Muslims over the last three decades: to end the slaughter of Muslims in the Balkans, to feed Somalis and to liberate Kuwaitis, Iraqis and Afghans. Millions of Muslims around the world would desperately like to move to the U.S., this supposed land of intolerance.

Jonah seems to be on the very brink of realizing that not all Muslims are the same, but he's just not quite there yet. Many Muslims would like to move to the U.S., and yet many Muslims also view American society as intolerant towards Islam. How could this possible be? Could it be that some Muslims like America and some Muslims do not? Could it even be that the *very same* Muslims who like America and wish to move here ALSO believe that America could be more tolerant towards people of non-Christian faiths, or even no faith at all?

Might it also be possible that some Muslims do not particularly want Americans shedding blood for them, and in fact believe (quite rightly) that Americans have shed a lot of *Muslim blood* over the last three decades? This might be worth investigating, instead of childishly pretending that "they hate us for our freedom." Sure, some Muslims might hate us for our freedom, but I have a feeling a lot more Muslims hate us for our foreign policy - an aggressive foreign policy that publications like National Review publicly support.

Conversely, nowhere is there more open, honest and intentional intolerance -- in words and deeds -- than from certain prominent Muslim leaders around the world. And yet, Americans are the bigots?

Did Jonah Goldberg pass kindergarten? Did he fail to learn that "but he did it too!" is not a valid excuse? That it's possible for both parties to a conflict to be in the wrong? Shit, it doesn't take a bucky in Bava Kamma or a legal expert in joint liability to grok this concept; young children understand it. Pitiful.


Gold Market Manipulation

Back in the late 1990s when I first began learning about gold, I found some conspiracy theorists who argued that the "true" price of gold should be much higher, and would be so if not for the actions of central bankers around the world. Some of these people were simply wackjobs; others dressed up in suits and testified before Congress about their theories. Since I believe that a conspiracy of any more than three people is doomed to failure, I assumed these nuts were just part of the package that comes with believing anything out of fashion. See also: libertarianism.

I also know that manipulating any liquid market is near impossible, and poses significant risks to the would be manipulator. If I tried to keep the DJIA low by selling, I would be the one that lost money when prices went up. Even if I had a billion dollars, there's simply no way I could control the DJIA. Heck, even a trillion wouldn't be enough. Trying to manipulate the market is a set up for severe long term losses.

Since then, I've seen more and more respectable people claiming that there is indeed manipulation in the gold market. It seems to be a given among people familiar with the market. The theoretical reasons why this is even possible have to do with the fact that the gold market is not transparent. Only in 1997 did the world find out the size of the gold market:

Deals involving about 30 million troy ounces, or 930 tonnes, of gold valued at more than $10 billion are cleared every working day in London, the international settlement centre for gold bullion.

This is the first authoritative indication of the size of the global gold market, and was revealed yesterday by the London Bullion Market Association.

With the blessing of the Bank of England, the association overturned years of tradition and secrecy to provide statistics illustrating the size and depth of the London market.

The volume of gold cleared every day in London represented nearly twice the production from South African mines in a year, Mr. Alan Baker, chairman of the association, pointed out.

That much gold was trading hands without the exchange rates being made public. That certainly suggests that the overt market could indeed be massaged a bit by the opaque market players.

Recently, an article was published on Zero Hedge detailing evidence of attempts at price manipulation. Essentially, there is a massive difference in the behavior of the price of gold between day and night. A liquid, free market should ideally trade the same general way at all times. But according to the data, one of the best performing investment strategies over the last decade would have been to short the intraday market and go long overnight. It would have returned a 20-bagger over the last decade, more than the just a shade under 4-bagger earned by being long gold all the time. That certainly sounds fishy to me. I could hypothesize various explanations for this phenomenon, but none of them would hold a candle to the most obvious: someone is trying to manipulate the market and keep the price of gold down.

If this indeed is the case, then the manipulation is simply gunpowder for an eventual future explosion in price.


What's the economic meaning of beer?

John is hosting George for lunch at his apartment.

The available lunch fixings are as follows:

2 plain hot dogs with buns
1 sealed foil pak of mustard, enough for only 1 hot dog
1 small, leaky keg of beer
1 empty 9 ounce plastic cup

Assumptions : As soon as John has drawn beer from the keg to the plastic cup, the rest of the beer in the keg will leak uselessly away down the drain. The cup cannot be shared.

John has no idea what George's food preferences are.

John and George have always been very competitive, and neither would willingly allow the other to get the better of any situation.

John sets two places at the table. Each place has a hot dog with bun.

One of the places has the foil pak of mustard and the other has the plastic cup of beer.

George is allowed to choose where to sit.

What economic fact(s) can be deduced from the outcome of this process? [ed]