Tuesday, September 29, 2009

Caplan's Libertarian Purity Test

How libertarian are you? Find out by taking this test created by Bryan Caplan (HT Carpe Diem). The questions become more extreme as you advance.

Wonder what my score was? I got 53, slightly less than my wife (she got 60), meaning that ours is a "medium-core libertarian, probably self-consciously so" family.

Monday, September 28, 2009

John Galt on Evasion and Character Creation

Below an interesting visual rendition of a part of John Galt's speech on "Atlas Shrugged" by Ayn Rand (HT Libertarianismo). Enjoy!

Thursday, September 24, 2009

Are Conservatives Closet Keynesians?

I'd like to start by pointing out that I'm not a conservative and I'm not a liberal. I'd like also to point out that my position on Keynes, whose "General Theory" I read, is well summarized by this statement by Greg Mankiw:
Keynes was a creative thinker and keen observer of economic events, but he left us with more hard questions than compelling answers.
Liberals have always had an easy time accepting Keynesian doctrine as one of their main options in policy making. So, it's no surprise that the current administration chose to go the distance.

Nonetheless, the appropriation of Keynes by the left, despite their frequent protestations, has never impeded conservatives from having a heated love affair with the "Cambridge Master," even if sometimes a closet one. Examples abound. Nixon once said that "I'm now a Keynesian in economics." The previous administration was unquestionably conservative, and yet fiscal profligacy Keynesian style was its standard response to every economic downturn. As disciples, they would have made Keynes really proud. Another example is the recent conversion of Posner, a bright Judge and University of Chicago Law School professor and conservative thinker, to Keynesianism:
Baffled by the profession's disarray, I decided I had better read The General Theory. Having done so, I have concluded that, despite its antiquity, it is the best guide we have to the crisis.
It should not be surprising however that both liberals and conservatives, especially when given political power, love Keynes. Both ideologies nurture deep beliefs in the infallibility of government intervention and the fallibility of markets, beliefs however that are at the core of the failures of Keynesianism. That Keynes didn't know much about modern public choice is understandable. That contemporary conservatives and liberals however willingly choose to ignore it is unacceptable, something that can only be explained by modern public choice science itself: these beliefs are simply the result of the self-serving search for power and control in politics (although it could be argued that there are also deeply rooted religious factors behind this fatal attraction for Keynesian ideas).

Besides all that, Keynesianism has never been really discarded when it comes to policy making, despite all the advances in macroeconomics after Keynes. It makes absolutely no sense therefore to say that we should return to Keynesian economic policies, as if we have ever really abandoned them. Politics and Keynesianism is a marriage made in hell.

To conclude, I'll cite this enlightened commentary on Keynes by George Mason University economist Russ Roberts:

Part of Keynes is compelling, the part about animal spirits, the idea that people get worried about the future, that the riskiness of the future is hard to quantify, and that this leads to people reining in plans for consumption and investment, leading to hoarding and reduced demand for all kinds of goods.

What is not so compelling is the conclusion that this can be rectified and improved on by the government taking up the slack, regardless of the reason. What is not so compelling is the idea that consumption creates growth. Consumption might create production (it depends) but consumption is not growth except in the very immediate term.

Government Failure: How to Bankrupt a Country

Does this graph summarize how the current administration will be remembered by future generations?

See other charts here. According to its author, renowned Stanford economist John Taylor, "the charts vividly demonstrate the immensity of the exploding debt problem now faced by the United States. The large expansion of debt in World War II looks like a small blip compared to what's coming if we do not change policy."

Wednesday, September 23, 2009

Miron and Taylor are Blogging

Follow the links for the new blogs of economists Miron and Taylor (HT Mankiw). You'll find some fascinating posts there.

Tuesday, September 22, 2009

Government Failure: The Stimulus Didn't Work (Now Wait for the Bill to Arrive)

Economists Cogan, Taylor and Wieland explain the administration's stimulus fiasco in this WSJ article (HT Escolhas e Consequência). Here's their main point:
Incoming data will reveal more in coming months, but the data available so far tell us that the government transfers and rebates have not stimulated consumption at all, and that the resilience of the private sector following the fall 2008 panic--not the fiscal stimulus program--deserves the lion's share of the credit for the impressive growth improvement from the first to the second quarter. As the economic recovery takes hold, it is important to continue assessing the role played by the stimulus package and other factors. These assessments can be a valuable guide to future policy makers in designing effective policy responses to economic downturns.

The Art of Business & the Business of Art

“Being good in business is the most fascinating kind of art."
"Making money is art... and good business is the best art.”
Who said it? Find the answer here.

Monday, September 21, 2009

Mankiw on Keynes

Every time I hear someone saying that the latest economic crisis has forced us to go back to the economic theories of forty or even eighty years ago, I shake my head in disbelief. The statement is as crazy as to say that the fall of the I-35 bridge in Minneapolis has forced us to go back to the physics theories of ninety years ago.

There's no question that only a madman would believe that Albert Einstein is responsible for every engineering project that went wrong since the development of the relativity theory. Yet, that's exactly what many have been suggesting when it comes to some of the most important developments in macroeconomic theory that took place during the last forty years. Physicists, consider yourselves lucky for not having to deal with the political craziness that we economists are subjected to on a daily basis.

To make matters even worse, many among the "crazies" are economists, or at least have economic degrees (most are too deeply involved into politics to be called scientists).

A good example of my point is given by Mankiw on his WSJ review of a new book on Keynes written by historian Skidelsky. As Mankiw explains:

Most macroeconomists—that is, those who study the ups and downs of the overall economy—fall into one of two broad camps: Keynes admirers or Keynes detractors. When these groups cross paths, the result is the ivory-tower equivalent of a spitball fight. ...

As an ardent fan, Mr. Skidelsky fails to give Keynes's intellectual opponents their due. In academic circles, the most influential macroeconomist of the last quarter of the 20th century was Robert Lucas, of the University of Chicago, who won the Nobel Prize in 1995. His great contribution to the discipline was to analyze how government policies influence the economy in part through their effect on people's expectations—a lesson that Keynes would likely have appreciated but that early followers of Keynes often ignored. ...

Mr. Skidelsky chooses to make Mr. Lucas sound like some kind of idiot savant, more interested in playing with mathematical models than in trying to understand how the world actually works. ...

Which brings us to a third group of macroeconomists: those who fall into neither the pro- nor the anti-Keynes camp. I count myself among the ambivalent. We credit both sides with making legitimate points, yet we watch with incredulity as the combatants take their enthusiasm or detestation too far. Keynes was a creative thinker and keen observer of economic events, but he left us with more hard questions than compelling answers.

Thursday, September 17, 2009

We, Economists

Carden and Horwitz in this Forbes article give us one of the most beautiful defenses of economics and economists that ever came to my attention. After reading it, I couldn't stop wondering about how hard it must be for people that are not well-versed in economic matters to make sense of the world around them, something exemplified by the poorly reasoned Huffington Post article that they analyze. It also came to my mind that, if I were to suddenly lose all my knowledge of economics, this would be as damaging to my functioning as a human being as if I were to suddenly forget how to read.

Notice that I'm not saying that formal education in economics leads to economic knowledge. I've met many people in my life that had economics running in their blood even though they've never taken even one economics class. Meanwhile, I've equally met many people that had degrees in economics and could not even effectively articulate simple economic concepts such as supply and demand. What leads me to the very important conclusion of the Forbes article:
Murray Rothbard once said that "it is no crime to be ignorant of economics," but that it is "totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance." It is tempting, therefore, to dismiss Smiley's article as little more than sound and fury. Yet it does signify something profound and troubling: economists' failure to communicate the essential insights of our discipline. Jane Smiley's contemptuous and uninformed dismissal shows that we really need to redouble our efforts.

The Theory and Evidence Against Big Government

Here are two excellent videos on the economic theory and evidence regarding the ideal size of government by the Center for Freedom and Prosperity (HT Carpe Diem).

Wednesday, September 16, 2009

Boudreaux on the Intellectual Absurdity of Trade Retaliations

This Cafe Hayek post by Boudreaux on trade retaliations is wonderfully written. I partially reproduce it below:

If your neighbor chooses to become utterly self-sufficient, refusing to consume anything produced outside of his own household, you might properly regret (1) that he and his family will likely become much more materially impoverished than your neighbor realizes, and (2) that you and other people in the economy will be deprived of the additions to total output that your neighbor would have added had he chosen not to cut himself off from the larger economy.

But ultimately it’s none of your business. You have no right to insist that, in the interest of a larger GDP, your neighbor must integrate himself more fully with the outside economy.

Now suppose that your self-sufficient neighbor, still refusing to consume anything not produced by his own household, offers to sell to you — say, in exchange only for a friendly smile from you — some tomatoes from his garden. You examine his tomatoes and determine them to be first-rate. Should you refuse to accept your neighbor’s tomatoes in exchange for a quick smile, on grounds that your neighbor will not, in exchange for his tomatoes, really purchase anything from you or from the outside economy? Would you make yourself richer by refusing his offer?

You may legitimately question the wisdom of your neighbor’s policies. But regardless of what you conclude, your best course of action will always be to trade freely with him, and with everyone else.

Tuesday, September 15, 2009

What Will Be the Outcome of Abnormally High Money Growth Rates?

Inflation, naturally.

I hope they can bring them down before it's too late. But everything conspires against keeping inflation down. Money growth rates are high, money stocks are very high, and interest rates are at their historical bottom, meaning that velocity of money can only go up. The state of public finances is disastrous, what for sure will keep economic growth lukewarm, even as we get out of the recession. I wouldn't count on any help coming from the real side of the quantity equation.

So, let's put it all together: high money growth rates, low output growth rates, permanent reductions in aggregate supply due to a lack of government commitment to free markets, free trade and private investments, and heightened expectations of deteriorating public finances and increased taxation. Add to the mix the inevitable rise in the velocity of money as interest rates go up, and the only possible outcome is inflation.

Unless naturally, the administration finally recognizes that it's doing everything wrong and goes into full reverse before it's too late. Any hope that they will do it? How high will real interest rates have to go? Will the Fed be able to pull a hat trick this time and keep inflation low without any help from fiscal authorities? Well, I'm not betting on it - literally, with my own money.

M1 and M2 historical growth rates follow below. Click on the pictures to see how high they're right now.

Monday, September 14, 2009

Government Failure: The Coming Trade War, or How to Shoot Your Own Foot for Dummies

The administration has chosen the path of war. In this case, the worst kind of war, the kind that hurts you as much as it hurts the "enemy": a trade war. Here's a post by Greg Mankiw on the subject, and here's an article from the magazine The Economist, which explains:

Although Barack Obama alarmed free traders last year with protectionist-sounding pronouncements on the campaign trail, such as one about the need to renegotiate NAFTA, optimists among them dismissed this as mere posturing designed to placate restive trade unions. Yet a decision by the White House to impose punitive tariffs (35% for the first year, falling by five percentage points a year, to 25% in the third year) on Chinese-made pneumatic tyres now raises serious doubts about Mr Obama’s commitment to free trade. ...

Poultry and tyres sound like small change in the context of the economic relationship between the two big economies. But Eswar Prasad, a professor of trade policy at Cornell University and a former head of the IMF’s China desk, argues that the American action and Chinese retaliation may presage “more protectionist measures to come from both sides”. He notes that China could retaliate much more broadly than by raising a few tariffs: it could, for example, supplement its implicit export subsidies, including an undervalued exchange rate, with more explicit measures to support its export industries and block imports. This could “easily ratchet up into a broader trade war and inflict economic damage on both countries”.

It's worse than that however. As you can learn from any good macroeconomics textbook (for example, Mankiw's "Brief Principles of Macroeconomics," pg. 314), sectoral anti-trade measures such as the ones being adopted by the current administration are incapable of eliminating trade deficits, since their effects are mostly, well, sectoral (what a surprise). Once the international macro channels finish doing their work, the consequences of such awkward policies can be summarized this way: (1) non-Chinese tire companies (and their unions) increase their gains in the American market (keep in mind that many of these companies and unions are European and Japanese); (2) all other American companies have losses in domestic and foreign markets; (3) Chinese tire companies have losses in the American market; and (4) all non-tire foreign companies, including Chinese companies, increase their gains in American markets. Notice that these self-defeating effects happen even if foreign countries decide to not retaliate!

In other words, the administration favors non-Chinese tire companies and workers at the cost of all other American companies and workers. Talk about shooting your own foot.

Some businesses and unions in America and around the world are probably happy with the new privileges granted by the American government. The rest of us should be angry, really angry. This is one good reason to study economics: at least you'll be able to recognize that when it comes to trade protectionism, even though they say they're shooting the "enemy," the real target is you.

PS: Here's McTeer's post on the same subject.

Friday, September 11, 2009

Howard Wall on Cricket, Baseball and Economic Growth

Here's an entertaining article written by St. Louis Fed economist Howard Wall on the impact of cricket and baseball traditions on a nation's economic development. The article uses hard data to prove that baseball countries enjoy better-than-average economic growth, while cricket countries perform below average.

The article jokingly exploits the "correlation implies causation" fallacy, also known as the post hoc ergo propter hoc fallacy, which is frequently found in ineptly conceived and sometimes morally corrupt research in all branches of sciences. The fallacy is also commonly used to rationalize and hide the self-serving nature of government policies. Here's the article's prankish conclusion, fashioned as the typical junk science daily news produced by our gullible media:
The empirical results speak for themselves. For emerging countries without a history of cricket or baseball, baseball instruction and subsidies should be an immediate priority. With the help of international institutions like the World Bank and the IMF, baseball aid should flow from the baseball powers, the US and Japan. The difficult problem is in devising a plan to eradicate the cricket-induced malaise of the cricket-playing countries. Clearly this is a task of Herculean proportions, rivalled only by the economic reform of formerly-communist countries. Like communism, years of cricket have polluted the very souls of these countries, and we need to measure the pace of reform in decades, not merely in years.

Tuesday, September 8, 2009

Will America Become a Banana Republic?

Kling has an excellent post on the increasing probability of it happening. Mankiw also echoes this intriguing article by Zingales in National Affairs. Will Americans wake up from the current oneiric state before it's too late? Zingales' conclusion is not optimistic:

We thus stand at a crossroads for American capitalism. One path would channel popular rage into political support for some genuinely pro-market reforms, even if they do not serve the interests of large financial firms. By appealing to the best of the populist tradition, we can introduce limits to the power of the financial industry — or any business, for that matter — and restore those fundamental principles that give an ethical dimension to capitalism: freedom, meritocracy, a direct link between reward and effort, and a sense of responsibility that ensures that those who reap the gains also bear the losses. This would mean abandoning the notion that any firm is too big to fail, and putting rules in place that keep large financial firms from manipulating government connections to the detriment of markets. It would mean adopting a pro-market, rather than pro-business, approach to the economy.

The alternative path is to soothe the popular rage with measures like limits on executive bonuses while shoring up the position of the largest financial players, making them dependent on government and making the larger economy dependent on them. Such measures play to the crowd in the moment, but threaten the financial system and the public standing of American capitalism in the long run. They also reinforce the very practices that caused the crisis. This is the path to big-business capitalism: a path that blurs the distinction between pro-market and pro-business policies, and so imperils the unique faith the American people have long displayed in the legitimacy of democratic capitalism.

Unfortunately, it looks for now like the Obama administration has chosen this latter path. It is a choice that threatens to launch us on that vicious spiral of more public resentment and more corporatist crony capitalism so common abroad — trampling in the process the economic exceptionalism that has been so crucial for American prosperity. When the dust has cleared and the panic has abated, this may well turn out to be the most serious and damaging consequence of the financial crisis for American capitalism.

Saturday, September 5, 2009

7th Art: The Simpsons Movie (2007)

Lots of fun. The intro scene below is great.

Springfield by the way is right here: this kind of discourse is really preachy and annoying, particularly when the it's delivered, as is almost always the case, by people who have no moral authority whatsoever to be telling me how to live an economically (and therefore environmentally) parsimonious life.

Thursday, September 3, 2009

Why Does Health Care Spending Increase with Time?

The answer is simple according to Nobel Prize economist Robert Fogel. It's because the richer we become, the largest is the share of our budgets that we want to spend with health care. In other words, as expected, health care expenditures are what economists call a superior good (HT Mankiw). In Fogel's own wise words:

Consequently, there is no need to suppress the demand for healthcare. Expenditures on healthcare are driven by demand, which is spurred by income and by advances in biotechnology that make health interventions increasingly effective. Just as electricity and manufacturing were the industries that stimulated the growth of the rest of the economy at the beginning of the 20th century, healthcare is the growth industry of the 21st century. It is a leading sector, which means that expenditures on healthcare will pull forward a wide array of other industries including manufacturing, education, financial services, communications, and construction.

Tuesday, September 1, 2009

The Ascent of Money

If you want to learn more about the amazing history of money and finance, here's an excellent PBS series on the subject: The Ascent of Money by Harvard Professor Niall Ferguson. Online episodes can be found here. Below, the introductory segment.