New To Me II

It might be old news to you, but it’s new to me:

I had no idea that teacher absence is a huge problem in much of the “developing world”.

There’s interesting new data on income distribution:

Ask almost any Democratic politician the most important economic facts about income distribution in America, and you are almost certain to hear the following three points: (1) incomes have fallen substantially over the past ten years; (2) labor’s share of income has fallen significantly behind the pace of new productivity and innovation; and (3) income distribution has worsened dramatically over the past generation and over the past decade in particular, with people at the top getting a bigger fraction of total personal income.

Many Democrats believe that these three points are the economic equivalent of the “gospel truth.” When politicians see truth, legislation is not far away. Thus, members of Congress have proposed new taxes redistributing income from richer to poorer Americans, new middle-class entitlements such as a public health care program, and the Employee Free Choice Act, which attempts to increase unionization by effectively taking away secret ballots in union elections.

A new economic study reveals that each of the three points of the politicians’ economic “gospel truth” is grossly exaggerated and perhaps entirely wrong.

I have no idea when this was done, but I’ve just discovered The Ten Pillars of Economic Wisdom. If only our politicians could remember these points.

Exceptional

Sometimes, in my Web wanderings, I encounter essays that are exceptionally good. Here are some of my latest finds:

Why Socialism Failed. While this addresses the subject suggested in it’s title, it also describes why capitalism works and deals with many issues raised by those who distrust capitalism.

The United States of America vs. Andrew Hall. While addressing the issue of a highly compensated Wall Street trader, Jeff Harding also offers a concise, clear, and correct explanation of the financial crisis.

HEALTH CARE: WHAT DO WE WANT AND CAN CONGRESS DELIVER IT? This is the most level-headed piece I’ve read on health care reform. Bill Dunkelberg explains that the goals are not at all clear. Without clear goals, we surely can’t get a “solution”.

Things To Ponder

Before you have answers, you must have questions. Here are some interesting things to ponder:

We the Rats, We the Children. Max Borders complains about government paternalism. Half of all Americans have below average intelligence. So, should the government “nudge” them toward good decisions, or does paternalism threaten human dignity? And who decides what are good decisions, good directions, or a good society. Is your view of utopia like mine? Who decides?

Those pesky animal spirits. Russ Roberts reduces the Keynesian argument and it’s rebuttal to their essence. Which view do you think better reflects human nature?

The Great Recalculation, Camels, and Straws

Arnold Kling has been breaking new ground in economics with his Great Recalculation theory. This seems to me like an enhancement to the Austrian malinvestment model. In the Austrian model, the economy goes haywire because of malinvestment, and malinvestment is attributed to bad monetary policy, i.e. central banks setting interest rates which differ from what a market driven interest rate would be. Kling goes beyond that. In Kling’s model, whatever the cause of malinvestment, the correction involves an enormous amount of recalculation. Literally, people aren’t sure what to do and they need time to figure it out. It’s the success of the learning process that determines how long recovery will take. This is significant because it says changing monetary policy won’t make much difference in how long the recalculation takes. The Austrians should chime in by saying the recalculation will be delayed if monetary policy causes further malinvestment.

I’m seeing this all in a larger sense. While malinvestment can occur because of bad monetary policy (as the Austrians claim), it seems to me that it could occur for other reasons as well. The chief suspect is bad fiscal policy. In our case, we’ve had some really bad fiscal policy decisions in housing. We’ve also had bad monetary policy (keeping interest rates too low) and the combination was a double whammy. We can expect the Great Recalculation to take longer than normal. To make matters worse, the current government seems to making even more fiscal and monetary errors. My fear is that this will result in a triple whammy from which recovery will be exceeding difficult and drawn out.

My Congressional representative is outraged by the suggestion that some of the policies to improve housing for the poor may have caused the financial crisis. He’s right in that it was not the sole cause, but he’s wrong in that it certainly contributed. A robust economy can withstand some fiscal error, but it all got to be too much. Who cares which straw broke the camel’s back? It’s not the individual straws, it’s the aggregate.

Things To Worry About

As John Taylor points out, our debt situation today is much scarier than it was after World War II. When the war ended, we stopped accruing war debt. As GDP grew, the ratio of debt to GDP shrank. I would describe our current debt not as war debt but as entitlement debt. Entitlement debt is not frozen. It is growing. It is growing faster than GDP. Very different.

Arnold Kling

Hmm. That’s cause to worry, but here’s something worse: the end of toilet paper as we know it.

Of course, the big worry for everyone is health care “reform”. The most obvious cause for worry is the huge costs and the huge tax increase (which our President insists isn’t really a tax increase). Less visible to the casual observer is the plan to reduce the quality of health care. The proposed bill creates a strong incentive for doctors to avoid expensive treatments or avoid patients with conditions that would be expensive to treat. There will also be a stronger incentive to avoid Medicare patients altogether or at least limit the number seen by a practice. This already happens today, but the need to do so will only grow stronger. This is so appallingly bad that it’s hard to believe it’s even being considered, much less proposed.

Motives

In a prior life I was a foreign policy guy. In my time living and breathing foreign policy it became evident to me that politics is always domestic first. If you want to know why a foreign leader is acting a certain way or taking a specific position, take a look at the domestic political environment.

Do you think the Chinese cared what Americans think, when they threatened to retaliate to the tire tariffs? Do you think Angela Merkel cares what happens to workers at Vauxhall plants in the U.K. when she arranged the Magna deal? Do you think the Americans care about what happens to Frankfurt as a financial center when they bailed out BofA and Citgroup? Of course not.

What matters is placating domestic concerns and consolidating power domestically. So while I talk about the “cozy” relationship between China and the U.S. as a marriage, I am under no illusion that this is anything more than a business relationship. When push comes to shove domestic concerns will win out. And if that means placating rioting workers in fear of losing jobs, so be it.

via The protectionism bogeyman « naked capitalism.

Oooh – this explains a lot – and not just current events.

Obama at the UN

Today, that potential was fully on display before the assembled thugs and hypocrites that make up the U.N. General Assembly. At the risk of offending my own prejudice against categorical assertions of “worst president” status, I will venture that no American president, and probably no world leader, has ever poured more nonsense into one speech.

via Power Line – Obama’s sophomorically utopian oration.

The referenced criticism of President Obama’s speech at the UN is quite harsh. I have no idea whether it what the worst speech ever by a world leader – that seems like a pretty high bar. But the critique reminds me of some important points that it pays to remember when contemplating “international relations”.

• Many governments are run by thugs who have seized power by force and do not in any way represent the “will of the people”.
• Even the most “legitimate governments” created by elections are, at best, speaking for an ill-informed electorate who decided upon it’s national leadership at some point in the past.
• Governments that exist due to seizing power by force have few reservations about extending their power by force, and not just within their national borders. Even more legitimate elected governments have this temptation.
• Alliances between governments may benefit those governed, but they certainly benefit those governing.
• The most trustworthy governments are those that have legal and loud organized political opposition.

New To Me

New facts are, by definition, news. But a lot of information is “old news”, yet still not widely known. Even it is widely known, it may not be known by you…or me. So I am always interested in “old news” that’s new to me. Here are some recent items that were new to me.

The history of taxes during the Great Depression. Laffer argues that taxes both caused and aggravated the Great Depression. Even if you don’t find his argument totally convincing, there are lessons to be learned from history.

The strange rules of international law. It seems that international law greatly favors aggressor nations.

The origin of the U. S. dollar. I certainly was unaware that the Supreme Court once ruled that the U. S. dollar was unconstitutional!

Fair and Balanced

Controllers don’t trust the inherently messy process of trial-and-error competition. They are motivated by two abiding faiths:

The first is in man’s abilities to figure things out through abstract reason.

The second is in the general trustworthiness of smart people to apply the findings of abstract reason dispassionately for the general welfare.

Whenever the controllers see evidence that the world isn’t perfect, they assume that the imperfection can be corrected by government applying genius to the problem.

This “controllers” approach is dangerous.

First, not all imperfections should be corrected. Many are the unavoidable byproducts of productive trial-and-error competition. “Correcting” these imperfections too often means shutting down trial-and-error competition.

Second, because controllers can exercise economy-wide control only through “Big Plans,” these plans are necessarily formulated in aggregate lumps. They are plans for “workers,” for “banks,” for “mortgagees” and so on.

All nuance and individuality are lost, for these Big Plans cannot possibly be customized to account for the different tastes, talents and hunches of each of hundreds of millions of people. The differences among workers, among banks, among consumers are ignored.

Third, because Big Plans are premised on the notion that the planners have figured out just how the different sectors of the economy should operate, these plans crowd out the individual, decentralized experiments that are the hallmark of a market economy.

A plan isn’t really much of a plan if individuals are permitted to ignore it.

Fourth, unlike in decentralized markets, if the Big Plans are flawed — either in design or in execution — there’s no offsetting, competitive alternative. Everyone is along for the dangerous ride. All eggs are in the same big basket.

via Here comes the G-20 – Pittsburgh Tribune-Review.

I’m always happy to see a smart economist write a piece for public consumption that explains key economic issues for the layperson. The last few days have been especially nice in that regard.

The quoted piece if by the often quoted Don Boudreaux. It explains the virtues and pitfalls of free market approaches and the pitfalls of centralized “big government” approaches. I wish he had written a little about the advantage of centralized approaches. The big advantage is immediacy of execution. Think about our system of roads and highways. While something better might have emerged from free market approaches, it certainly would have taken a lot longer. We may chafe at government’s ability to impound property to build roads, but at least the roads materialize in our lifetimes!

Life and economics are about trade-offs. While I agree that free-market solutions are usually best, I also want to fairly consider the alternatives. Too much political argument states only the advantages of one approach and the disadvantages of the alternative. I guess that’s why they call it argument. Maybe we need less argument and more balanced considerations.

Who Pays for Equality in Health Care?

The push for universal coverage is based on the appealing premise that everyone should have access to the best health care possible whenever they need it. That soft-hearted aspiration, however, runs into the hardheaded reality that state-of-the-art health care is increasingly expensive. At some point, someone in the system has to say there are some things we will not pay for. The big question is, who? The government? Insurance companies? Or consumers themselves? And should the answer necessarily be the same for everyone?

via Economic View – Who Will Determine Who Pays for Equality in Health Care? – NYTimes.com.

It’s easy to understand why politicians dislike economists so much. Mankiw does a masterful job of drilling down to the core of the problem in an understandable way. I’ll add this: were we to somehow achieve equality in health care, we would create greater inequality in other areas of society.