Recently in Economics Category

THE FORMER CHIEF ECONOMIST at the labor deparatment says "I wish I had this book when I stepped into the job."  Morgan Reynolds reviews Gene Epstein's Econospinning.  Looks to me like the book would be useful to just about anyone reading the financial pages.

PRESTOPUNDIT wasn't the only voice warning of the Feds mismanagement of the money supply in the early 2000's.  David Beckworth at Macro Musings was also flagging the Feds failure to understand the housing bubble and the non-threat of "benign deflation", as did Zanny Minton Beddoes, the economics editor of The Economist.  Beckworth recently had a chance to meet Beddoes and complement her dead on analysis of the macroeconomic situation of the early 00's, some of which he reprises here.  I think they both deserve a round of applause.  And here's hoping that those like Beckworth and Beddoes who actually got it right over the past decade are the ones people are listening to as we move into the next decade.

UPDATE:  Randall Parker notes that the 10 year U.S. growth rate in consumption has outpaced the U.S. growth rate in GDP by almost a full percentage point: "That adds up to $3 trillion dollars worth of living beyond our means. I've been writing about this problem for years and now I take no joy out of finding more agree with me. The seriousness of the problem outweighs being right about it."

HERE COMES President Bush's "stimulus" package:  "the stipend of at least $300 would be paid to all workers receiving a paycheck, even those who did not earn enough to pay taxes last year."

Time to speed up the software running this:

The Gross National Debt:

Looks like we're fated to relive the 1970s.  Don't be surprised is by the end of the year George Bush isn't wearing flare pants and a "Whip Inflation Now" button.  The only explanation I can come up for all this is that Bush went through the 70s drunk (semi-confessed) or stoned on cocaine (rumored) and he thinks he's doing this for the first time.

The reason drug use during the 1970s should be a disqualifier for President is because the 1970s was the great period of economic education for the American people,  the golden moment in time when people learned that price controls don't work, Keynesian economics doesn't work, welfare doesn't work -- and the only thing that does work is the American economy when the shackles are taken off, as they were in the late 1970s and early 1980s in the transportation and energy sectors.  The only current candidates we have good reason to believe didn't use drugs during the 1970s are Mitt Romney, Rudy Giuliani and  John McCain.

DONALD BOUDREAUX -- the chairman of the George Mason U. economics department -- weighs in on the foolishness of economic "stimulus".  I particularly liked this quote attributed to Warren Buffett, "It's only when the tide goes out that you learn who's been swimming naked."

And this is even better.  Another George Mason economist -- Russ Roberts -- debunks GOP spin about the magical powers of the Bush "tax cuts" in the face of Bush's massive government spending increases.  Roberts writes,

"Bottom line: [Federal income tax] revenue in 2006 was still below 2000 in real terms ..

[And] Government's share of the pie has grown dramatically under Bush II. You can argue it was worthwhile. You can argue that he had no choice. (I think you'd be wrong on both counts, but never mind.) But you can't argue that Bush has cut our taxes. Our taxes are higher and they've been shifted into the future via debt."

For details, read the whole thing.

YOUR MUST READ of the day --  Amity Shlaes gives Bush and Bernanke a richly deserved spanking.

GREG IP has the behind the scenes story of the Fed's panic cutting of the Fed fund's rate.

Take a look at this picture of intellectual incompetence:

IN THE WAKE OF 9/11 historians have been calling the 1990s America's "vacation from history" in the area of national defense. Now, with the financial industry in trouble and the housing market in collapse, the NY Times is suggesting the end of America's "vacation from history" in the ream of economics, taking direct aim at Fed Chairman Ben Bernanke's theory of a new economic age he calls "The Great Moderation". But as the NY Times points out, "These days .. the great moderation isn't looking quite so great -- or so moderate."

Here's my view.  America has been on an economic "vacation from history".  However, this policy vacation is largely the consequence of the economic profession's vacation from science in the domain of macroeconomics. The problem of bad economic policy begins and often ends with the bad science, taught at all of the top economics departments in the country.  So we get the repetition once again of the fiasco of a Keynes engineered artificial boom - bust cycle, with the economists having no idea what they have wrought, or why their nostrums for "fixing" things only makes things worse.

What I'm saying here is little more than a quick rendering of Nobel economist Friedrich Hayek's famous account of what has gone wrong with economic theory and policy since the time of Keynes.  Readers interested in an accessible account of Hayek's non-Keynesian macro-economics are encouraged to take some time working through the well-written articles found at economist Roger Garrison's web site.

JOHN MCCAIN: "I'm going to be honest: I know a lot less about economics than I do about military and foreign policy issues. I still need to be educated [about economics]".  That was McCain speaking with Stephen Moore in Nov. of 2005, at the Senator's office in Washington, D.C. In the same interview McCain identifies former economics professor and U.S. Senator Phil Gramm as his leading economic adviser on economic issues.  Here's the whole incident as recounted by Moore:

On a broader range of economic issues, though, Mr. McCain readily departs from Reaganomics. His philosophy is best described as a work in progress. He is refreshingly blunt when he tell me: "I'm going to be honest: I know a lot less about economics than I do about military and foreign policy issues. I still need to be educated." OK, so who does he turn to for advice? His answer is reassuring. His foremost economic guru is former Texas Sen. Phil Gramm (who would almost certainly be Treasury secretary in a McCain administration). He's also friendly with the godfather of supply-side economics, Arthur Laffer.

The always reliable "Huffington Post" re-writes history, and transforms this incident into a recent meeting with editorial board of The Wall Street Journal, one in which Sen. McCain is made to say he "doesn't really understand economics."   A pure fabrication, and a rather nasty one at that. Here's the opening paragraph from Sam Stein's article "Short on Economic Understanding, McCain Brings Phil Gramm to Meeting" in the Huffington Post:

At a recent meeting with the Wall Street Journal editorial board, Republican presidential candidate John McCain admitted he "doesn't really understand economics" and then pointed to his adviser and former Senate colleague, Phil Gramm - whom he had brought with him to the meeting - as the expert he turns to on the subject, The Huffington Post has learned.

The incident was confirmed by a source familiar with the proceedings of the meeting.

Perhaps no surprise this -- Paul Krugman has picked up the fabrication and he's spreading it via the New York Times.

John McCain did in fact have a recent meeting with the editorial board of the Wall Street Journal -- but note well that Phil Gramm wasn't present, and John McCain didn't tell anyone that he "doesn't really understand economics".

WE'VE GOT THE HIGHEST INFLATION RATE in 17 year, but the Fed has decided that what we really need is more inflation.  The Fed has cut the Federal Funds Rate to 3 1/2 percent -- here's their announcement and explanation.  It's clear at this point that the Fed has no idea what it is doing -- dropping rates to near zero, then jacking them up again, now dropping them once again below the equilibrium rate.  This is economic malpractice on an enormous scale -- and the intellectual travesty behind it makes the fraud of "intelligent design" theory look like Newtonian mechanics.  The befuddled economists sponsoring such policy chaos need to be called on this.  These folks don't know what they are doing, and it's a grand dishonesty for the Fed and its economic enablers to pretend otherwise.

Those seeking some understanding of how the Fed has managed to create the current boom and bust cycle -- and why most economic discussions of the cycle can be counted as the scientific equivalent of creation science -- let me recommend these interviews and articles by Auburn economist Roger Garrison.   If you'd like to start at the "easy" level look here, here, and here.  Bonus classic:  Friedrich Hayek, "Can We Still Avoid Inflation?"

UPDATE:  It's Helicopter Ben to the rescue!

"STIMULUS", AKA ECONOMIC CRANK
slang, noun. 

"Stimulus" is slang for a sordid economic nostrum administered on the advice of bankers and academics, many of them carrying the title of "Dr.". But don't mistake these "Doctors" for devotees of the Hippocratic Oath.  "Stimulus" or economic crank, like any other economic panacea, is a fake cure that gives its victims a temporary but false sense of well-being, even as it sets about causing long term damage to users and the economic community at large.   The opium of the economists know as "stimulus" acts directly on bread winners and investors by misdirecting them into production plans and consumption levels which cannot be successfully coordinated or sustained across time. As a consequence, the "high" of this political drug lasts for only a few months, often followed by a depressing "crash" period, which cannot be avoided without further and ever increasing quantities of "stimulus".  The drug received its proper name "crank" because it was most often smuggled into policy debates by monetary cranks, the most famous of whom was John Maynard Keynes.

"Stimulus" is taken by fiscal injection, monetarily (directly snorted by banks and borrowers), and through the consumption of pork. A common misconception among politicians and the public is that some administration methods are safer than others, while in reality all act on the economy the same exact way. Economic "crank" damages the coordinative function of prices across the structure of production and consumption, which cause naturally occurring price signals -- e.g. interest rates, stock prices, etc. -- to be ineffective. Because price signals are responsible for facilitating the coordination of production plans and consumption choices, withdrawal from sustained periods of artificial "stimulation" is extremely painful to economic actors and the economy system, with businesses and households thrown back into economic reality after having functioned for a time in a circus mirror, government-altered state without any naturally produced and undistorted relative prices to guide their plans.

"Stimulus" withdrawal is said to be one of the most painful experiences an economy can endure, and users of economic "crank" should consider other safer ways to buy the support of voters.

(Hat tip to the Urban Dictionary.  For more on the topic see Russ Roberts, "The Science of Stimulus".)

Others weigh in on the "stimulus" epidemic:  Andrew Samwick, Amity Shlaes, Michael Shedlock, Bruce Bartlett, George Will, Chris Edwards, Wall Street Journal, Alex Tabarrok, Greg Mankiw, Frank Stephenson, Mike Moffett, Tyler Cowen, Robert Samuelson, and Mark Thoma.

A GREAT LETTER in the WSJ with a great Friedrich Hayek quote:

Edward Ortiz Jr., in his Jan. 12 Letter responding to "Liberty Theology" (op-ed, Dec. 31), has the nature of capitalism backward. He says that "the idea of capitalism...demands that the individual be selfish (i.e., looking to profit)." More accurate is Friedrich Hayek's observation that "Profit is the signal which tells us what we must do in order to serve people we do not know. By pursuing profit, we are as altruistic as we can possibly be, because we extend our concern to people who are beyond our range of personal conception." The fundamental concerns of the church are fully compatible with this more profound understanding of how markets work.

Ted Carman
Jamaica Plain, Mass.

Price Radically Effects "Subjective Use Value" Brain science continues to illuminate the economic world.  New research shows that the subjective "use value" of a good for a consumer varies with the understood price of that good -- call it the "It's Good To Be King Effect".

the researchers found that with the higher priced wines, more blood and oxygen is sent to a part of the brain called the medial orbitofrontal cortex, whose activity reflects pleasure. Brain scanning using a method called functional magnetic resonance imaging (FMRI) showed evidence for the researchers' hypothesis that "changes in the price of a product can influence neural computations associated with experienced pleasantness," they said.

The study, by Hilke Plassmann, John O'Doherty, Baba Shiv, and Antonio Rangel, was published this week in the Proceedings of the National Academy of Sciences.

This chart shows that people ranked taste of a $45 wine higher than the same wine priced at $5, and the same for a different wine marked $90 and $10.

(Credit: CalTech, Stanford)

The research, along with other studies the authors allude to, are putting a serious dent in economists' notions that experienced pleasantness of a product is based on its intrinsic qualities.

Cheer Up Conservatives. Life Is Grand!