Raging Economic Debate

Greg Mankiw has produced a nice understandable summary of Keynesian theory regarding economic downturns. In a nutshell, Keynes thought that economic downturns were the result of insufficient spending. The cure is to induce more spending by having the government incur debt and spend more.

But what triggers “insufficient spending” in the first place?

An alternate view is that “insufficient spending” is the consequence of excessive spending fueled by debt. Debt, as we all know, is an agreement to have less in the future in return for having more now. If aggregate debt gets “too high”, then aggregate spending must decline in the future. Some think that today is the future: after a long period of growing government and consumer debt, we must now reduce our spending until the debt is no longer “too high”.

If the “debt cycle” view is correct, then policy makers are doing exactly the wrong things and the economic downturn will last much longer than most people expect.

This debate is raging in economic circles, blogs, and the editorial pages.

Football Economics

An economist examines college football:

Our selfish interests in having athletes put in their years of indentured servitude so we can watch quality college sports, at a cost to them of half their productive earning years and several million dollars in lost earnings for the few who manage to move into the professional ranks, should be laughed out of courts, stadiums and sports bars.

On the other hand, indentured servitude is common during the learning years. Consider teaching assistants in any university or internships or NGO volunteer organizations. Young people often work for little or no pay to acquire skills and experience that will help them later in life. The only people excluded from this process are poor kids: minimum wage laws make them too expensive to hire, while rich kids can afford to be interns and volunteers, earning much less than the minimum wage.

Dealing with Never Ending Bailouts

The bailouts continue and there are probably many more to come. How will this all end?

It seems to me that there are only two major options:

1. With staggering debt, inflation runs rampant, ultimately forcing painfully high interest rates – painful for debtors, nice for lenders. Result? The poor get poorer, the rich get richer.
2. Huge economic growth makes the debt manageable. This growth benefits everyone, but especially those who have risked their capital. Result? Everyone gets richer, but the rich get much richer.

The right strategy is clearly to become rich. Spend less, invest more. Of course, that’s always been the smart strategy.

Thanksgiving

It’s traditional on this day to be thankful for the food we’ll consume and all the stuff we’ve managed to accumulate. All well and good, but it’s far more important to be thankful for the people in our lives. This means family and friends, of course, but it should also include all those strangers who toil to provide us the things we’re thankful for.

Wasteful Spending

After a mighty struggle, the Democrats in Congress managed to override President Bush’s veto and give taxpayer money to millionaire farmers. Now, P-E Obama has identified that as wasteful spending. Well well well! Who knew that Democrats favored wasteful spending?

But, as Greg Mankiw points out, even sensible sounding changes can have bad consequences unless you think through the economics. I doubt that P-E Obama really wants to raise food prices – which means he didn’t think through the economics. This does not bode well for the future.

But not to worry. Every President vows to cut wasteful spending. Bush had a special commission to identify ineffective programs, grading most government programs on an A through F scale. He scaled back and eliminated a few, but most changes require either explicit or implicit Congressional approval. How much luck did he have? Remember this: every wasteful spending program buys someone’s vote.

So, I wish P-E Obama the best of luck in cutting wasteful spending. I hope he’s a little more careful about it than he’s indicated so far, but mostly I look forward to his battles with Congress. With a little luck, he might expose the inner workings enough that we’ll get some fresh faces in two years.

Financial Crisis for Dummies

OK, it’s not really for dummies, but I couldn’t pass up the opportunity. A lot of people process pictures better than words, so the Visual Guide to the FInancial Crisis is great for spreading understanding.

Unsustainable

It’s no secret that I am a big fan of the Austrian school of economics. The Austrian school isn’t very popular. I think part of the reason is that it requires a great deal of logical thinking, connecting very long chains of logic together. Most people aren’t very good at that. Another reason is that the “founding documents” are dense and a difficult read. A third reason is that competing theories of economics seem much more “scientific” with their emphasis on math and statistics.

Nevertheless, a stalwart band keeps working away at producing more understandable and less challenging descriptions of Austrian principles. I found this one particularly good, addressing the global financial crisis and what should be done.

Here’s my much simplified version: some things governments were doing to produce and preserve prosperity were simply unsustainable. Governments can’t repeal economic laws. There have been a lot of very bad unintended consequences. Now, facing the consequences, governments are trying to prop up their unsustainable actions with new unsustainbable actions. The consequences, of course, will be worse than what we are facing now.

The irony is that no elected politician can advocate doing the right things – people, being uneducated concerning economics, would’t stand for it.

The best we can hope for is some kind of temporary return to false prosperity before the laws of economics grind away at us again. Should that happen, use the opportunity wisely! The “fix” is unsustainable.

Cicero Remembered

Ever since I read Cicero, I’ve loved a good spleen venting rant. This is a fine example. What I particularly admire is the breadth of the rant – anyone can get fired up over a single subject, but a broadside assault on society’s ills is a rare and beautiful thing. I can only marvel.

Gridlock

Lew Rockwell celebrates the coming political gridlock. While I am mostly sympathetic to his views, I’m trying to see the other guys’s point of view. I think Bush’s speech nailed it: much of what is being considered by left leaning thinkers would result in a diminishment of progress, freedom, opportunity, and human dignity. But everything is a trade-off, so what would we get for these important losses? I believe the answer is security. The security agenda consists of bailing out companies and their unions, extending unemployment, reducing the uncertainty of medical expenses, etc. The left wants to build a “warm cocoon” or an expanded social safety net. That’s understandable. The left believes that the sacrifices required to achieve this are worth it; the right believes that the price is too high. No one Hardly anyone is opposed to security, progress, freedom, opportunity, or human dignity. The issues always concern how much of one to sacrifice in order to get more of the other.

Politics Explained

Every now and then I find a blog entry that offers amazingly broad and sound insights. This one by Russ Roberts fills the bill. He makes three points that explain just about everything you need to know about politics:

1. There are no solutions, only trade-offs.
2. The essence of political action is a compromise over who wins and who loses.
3. The essence of politics is pretending that such actions benefit everyone.

It seems to me that people often forget #1, have a foregone conclusion about #2, and are constantly being hoodwinked by #3. It would be great if more analysis existed that described trade-offs rather than advocating positions.