Mencken

The requirement that legislators live in the districts they represent results in “the election of a depressing gang of incompetents, mainly petty lawyers and small-town bankers.”

via Forbidden Thoughts from Mencken – Doug French – Mises Institute.

Oh, I had forgotten how much I enjoyed reading H. L. Mencken years ago. His prose wasn’t timeless, but his ideas were and are. But Mencken’s acerbic style isn’t to everyone’s taste and the people who most needed to learn were probably the most offended. Too much political commentary is in the same vein: full of venom and ridicule. President Obama may have aimed too high seeking a bi-partisan consensus. He’d have done better to aim for cordiality and courtesy.

Partnerships

There’s a lot of talk about partnerships in the new administration. Public/private partnerships for green energy, state/Federal partnerships for social services, etc. There’s only one problem with that:

As bankers now realize, when you turn to the government for financial assistance you take on an untrustworthy partner.

via Gerald O’Driscoll Says Congress Would Politicize the Bank-Nationalization Process – WSJ.com.

Why is government an untrustworthy partner? It’s not because there’s anything wrong with the people in government. Governments (at least democracies) are political and respond to whatever political wind is blowing at the time. The wind, to use Bob Dylan’s phrase, is often an idiot wind – and you should never take an idiot as a partner.

We get the government we deserve.

Save The Home “Owners”

Well, they don’t actually own their homes – they have little or no equity. They would be more correctly described as people living in houses they can’t afford, paying below market rents. It’s a great deal if you can get it. Now that the jig is up, President Obama and others want to extend the deal using taxpayer dollars. That’s great for the lucky few, but a bad blow for everyone else. Why would a politician do such a foolish thing? A blog comment has the answer:

It’s actually very simple to understand. Consider People who have shown restraint, control and forethought in how much house they may afford and when best to purchase it. These individuals and families are not very likely to vote for someone just because the politician stayed out their lives and they were allowed to do so.They would regard the political as just doing what is right, commonsense and nothing special.

People who were unable, unwilling or just inpatient and bought a house beyond their means are very likely to vote for whoever ’saves’ them.

via “I Don’t Care”, David Henderson | EconLog | Library of Economics and Liberty.

I hope that prudent people, people with common sense, recognize how they’re being harmed and who is responsible.

Why We Reject Economics

They only see the jobs created to fill the need caused by the destruction. They do not account for the jobs that were destroyed or the jobs that would have been created.

via The Free Market Radical.

Craig is reading and posting blogs as he reads. Nice idea! He’s reading one of the best books on economics ever written: Henry Hazlitt’s Economics in One Lesson. And what is the one lesson?

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Sounds simple enough, no? But Hazlitt pointed out that there are two big barriers to sound economics:

While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.

Those barriers are forever with us.

Another View of Economic Turmoil

Sadly, government policy responses — not only in the U.S. — are plainly wrong. It is not that the free market failed. The mistake was constant interventions in the free market by the Fed and the U.S. Treasury that addressed symptoms and postponed problems instead of solving them.

The bad policy started with the bailout of Mexico following the Tequila crisis in 1994. This prolonged the Asian bubble of the 1990s, because investors became convinced there was no risk in growing current-account deficits and continued to finance Asia’s emerging economies until the bubble burst with the start of the Asian crisis in 1997-98.

via Marc Faber Says the Federal Reserve’s Easy-Money Policy Caused the Global Financial Crisis – WSJ.com.

It started in 1994? Read the article – it’s a credible narrative.

A Short History of the National Debt

There even was a time when the U.S. made it a deliberate policy to pay off the national debt entirely — and succeeded in doing so. It remains to this day the only time in history a major country has been debt free. Ironically, the president who achieved this was the founder of the modern Democratic Party, Andrew Jackson.

via John Steele Gordon Provides a Short History on the National Debt – WSJ.com.

A nice bit of economic history.

Keynes’ Idea

The economic theory behind the nearly $800 billion stimulus package may be cloaked in precise mathematics but is ultimately based on John Maynard Keynes’s speculative conjecture about human nature. Keynes claimed that people cope with uncertainty by assuming the future will be like the present. This predisposition exacerbates economic downturns and should be countered by a sharp fiscal stimulus that reignites the “animal spirits” of consumers and investors.

via Amar Bhide Says the Stimulus Bill Relies on Untested Keynesian Economic Theory – WSJ.com.

The quoted article is chock full of great insights, but the reference to Keyne’s is where I want to focus now. I’ve never seen Keynesian economics explained in terms of this core concept.

The Austrian economists claim that what happens in the economy is the result of economic calculations, particularly those of the entrepreneur. I believe this is true, but observation suggest that most people are not particularly good at economic calculation. That’s why there are so few entrepreneurs and why so many entrepreneurs fail.

Keynes’ speculation is just one of several ways that people can get their economic calculations wrong. Behavioral science is teaching us more ways, more faulty heuristics, almost every day. I have little trouble accepting Keynes’s core assumption.

But Keynes had a second assumption, that being that the government could trick people into having a better outlook by temporarily providing greater employment, i.e. a stimulus package. This second assumption is the source of much debate, as you must certainly know by now.

To me, the interesting question concerns the impact of the stimulus package on economic calculations. It would seem that a change (most any change) in government policy disrupts prior economic calculation and makes good economic calculation more complex and uncertain. It should result in less good economic calculation and more poor calculation. That can’t be good for any of us, since we are all the beneficiaries of good economic calculation and the victims of poor calculations.

Power Laws

Power laws might also be active at even larger scales. In almost every nation, a small fraction of individuals has a large fraction of the wealth, and the distribution follows a simple power law. No one is sure exactly why this should be, but Bouchaud, together with Marc Mézard of the University of Paris South, has produced a model in which 1,000 individuals attempt to make money by trading among themselves or by investing. The researchers found that the percentage return of investments — with the wealthy on average gaining or losing larger amounts than the less wealthy — inevitably leads to the power-law pattern.

via The physics of the trading floor : Article : Nature.

I’ve recently become interested in power laws. Power law shows up everywhere in nature and people are increasingly finding power laws that correctly predict human behavior. This is fascinating. While economists haven’t generally embraced power law analysis, it seems to me that power laws could describe the results of many people making decisions, i.e. the efficacy of decision making is distributed naturally through some power law. If a few people consistently made really good decisions, but most people made a much higher percentage of poor decisions, what kind of society would we have? I suspect that we’d have one pretty much like the one we do have!

Why We Work

The purpose of an economic system isn’t to provide jobs; it’s rather to provide goods that consumers desire. If people want to cut back on their purchases of certain items, the economic system should respond to those changed preferences.

via Cut Taxes for the Right Reasons – Robert P. Murphy – Mises Institute.

Every time the deluge of Keynsian ideas so common in politics and the media starts to seduce me, an Austrian economist publishes something that yanks me back to basic principles and sound thinking.

Poor Bankers

Huffy populism is having it’s day: those damn bankers made too much money and drove us into the ditch. Let’s restrict their pay.

Ahem. The Eurobankers made a lot less money and, as described here, look like they’re taking us all into a deeper ditch. As I’ve often said, greed may be bad, but envy is far far worse. The politics of envy is the worst of all.