Good New, Bad News, Revulsion

I guess I’m naturally an optimist, so I liked this piece by Brad DeLong. No one claims that the economy is in great shape, but given a longer and larger view, what we’re seeing is a medium sized bump in the road. I can testify to that - I’ve experienced some of the big bumps and this isn’t one of them (yet?).

But there is still plenty of work to do. The WSJ, ever mindful of investors, does a nice job of outlining the overall problem. And some parts of the country are committing mistakes on a wholesale level - witness California, Michigan, and New York.

I’m a long term optimist but a short term pessimist. There is growing public support for expanding the size, scope, and role of government. We’ve been there before in the Johnson-Nixon-Ford-Carter years. Thing had to get pretty bad before revulsion set in and we moved in the opposite direction with Reagan-Bush-Clinton. George W. has re-started the growth in government movement and Senator Obama and the Democrats want even greater growth. I fear that they will prevail and we will again have to again wait until revulsion sets in.

If the economy does well, revulsion may take a while. Our economy is amazingly resilient, withstanding the predations of Democrats and Republicans alike. That’s the good news. The bad news is that we would be way so much better off under a better scenario.

Iraq - Beginning of the End

Strategy Page says

The war is basically over in Iraq, but the peace brings with it a return to the corruption and inefficiency that has cursed this part of the world for centuries.

All of which makes me think that a timetable for getting out (mostly) may not be the worst idea in the world. If liberation has brought out the worst in the Iraqi people, the War has brought out the worst and best of the American people. Two thirds of the wars supporters and opponents seem like numbskulls - and very loud numbskulls at that. We’re lucky it’s so few. There have been intelligent and well reasoned arguments for and against this war, but you’ve had to look to find them - and most people seem uninterested. This doesn’t bode well for the next war.

Great Advice!

I’ve written before about how heuristics, instead of thinking things through, can get you in trouble. But heuristics can also be a wonderful boon. Mr. Caplan gives us excellent heuristics for dealing with uncertainty.

Creative Capitalism

Larry Summers has a great “really big picture” view of the Fannie Mae + Freddie Mac mess. There are general lessons to be learned here. I doubt the most important lessons will be learned by politicians or society as a whole, but the individual lesson which you and I can learn is clear: watch your wallet!

Endless Summer

Megan, correctly, calls for a change of course in interest rates. I’m so tired of hearing politicos talk about the delicate balance between inflation and recession. Inflation is a hidden tax, the greatest enemy of the common man. Recessions happen repeatedly. Recessions are just part of the business cycle. Trying to avoid a recession is like trying to avoid winter - it can’t be done. Just as there is no endless summer, there is no endless boom. But politicians want to take credit for an endless summer and we voters do tend to punish whoever’s around when winter shows up. I guess we get what we deserve - and it’s not endless summer.

Adam Smith Weeps

This perfectly captures my general thinking about markets and recent financial events. Hat’s off to Barry! But some folks think that the answer to our problems is better regulation. I view recent events as the result of too much regulation. Regulation must always fail in a changing world and regulations themselves create new problems. I’m not the least surprised when regulations do more harm than good. I’d rather trust the vagaries of the market than the vagaries of the “ne’er do wells, clueless dolts, political hacks” and other inhabitants of any political system, however well intentioned they might be. I’d rather be harmed by enemies than friends.

Don’t Buy Local

The exhortation to “buy local” has always seemed suspect to me - something about the reasoning didn’t sound right. But it’s not that big of a deal, so I never bothered to think it through. Fortunately, Art Carden has thought it through and described the problem well. It turns out that the problem in “buy local” is our old friend, comparative advantage. Here’s the money quote:

“Buy local” is, at its logical limit, a prescription for poverty and starvation.

Market Signals

My, that Arnold Kling is smart! Here’s a great little essay about what’s going on with the economy. The heart of it is this:

The market is sending signals that some industries need to expand and other industries need to contract. However, it takes a long time for these signals to work their way through the economy and get processed to the extent that people get new jobs and so forth. Meanwhile, we get employment and production that are below capacity levels.

I believe that these signals, telling different industries to expand and contract, happen on an ongoing basis. But sometimes the signals come abruptly because something somewhere hits the wall. Recently, this has been the housing/mortgage bubble, which ended abruptly. The market is telling us that we need fewer new homes that require long commutes. But what do we need more of? What’s gotta grow? That’s always the question for investors.

Looking In the Wrong Place

If you’re not already of hearing and reading about Fannie Mae and Freddie Mac, Arnold Kling has the most insightful overview I’ve found.

I find it ironic that the most regulated industry in “the economy” is the source of so much grief. Of course, our political geniuses are calling for more and more regulation. If we do that, I hope we get a new batch of regulators. The current crew hasn’t done such a whiz bang job.

Back before we had so much financial regulation, we routinely had major setbacks such as the Panic of 1857. Headlines then were a lot like headlines now. But everything recovered, without the benefit of government intervention. Markets work, when allowed to. It wasn’t until the 1930’s that people looked to government to solve financial problems. Hoover and Roosevelt tried, leading to the longest economic downturn in American history. It seems like people are still looking to government. You’d think, after 75 years, we’d learn that we’re looking in the wrong place!

Whiners?

As much as I appreciate Phil Gramm, his “nation of whiners” remark sure started an unhelpful firestorm. This is a typical reaction from the right - and this is a more extreme reaction from the left. What to make of all this?

It has always been true that people who do high productivity work get a greater share of society’s tangible rewards. What is new in our time is that the difference between the high productivity workers and low productivity workers is growing. Instead of being (I’m making these numbers up for purposes of illustration) 4 times more productive, high productive workers are now 6 times more productive. As a result, national productivity is growing, meaning that there are more goods and services to go around, but low productivity workers, while improving their lot on an absolute scale, are not keeping pace on a relative scale. This is the chief complaint of the left and the source of discontent among low productivity workers. They don’t like it!

But would they like it more if they were improving less on an absolute scale but more on a relative scale? It doesn’t take much economic analysis to conclude that you can’t have it both ways. I wonder how well this is understood.