Willink's Econ Thread

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Re: All aboard the crazy train

Postby Willink » Sun Jun 29, 2014 10:03 pm

Figured I'd type up a post on the GDP numbers that came out for q1 because a lot of the accounts of the contraction I've seen in newsprint are either spin pieces or hallow echo chamber $#!! of similarly spurious accounts of what is happening.

To start, the laughable claim that the q1 contraction was magically caused by "poor weather" : on face, this is absurd given the constrained geographical impact of cold weather on the American economy, and second, it isn't supported by any empirical reasoning beyond inventory liquidation numbers. We also saw personal consumption expenditure not only collapse vs expectations, but further decline from March to May, a far cry from the supposed notion that on the emergence of warm weather American consumers would magically escape their snow ridden properties and start buying flat-screen tvs en mass. Clearly, this is quite something else seeing as it proves the largest contraction since 2009.


If we actually use honest measures of inflation rather than the imaginary cpi numbers put out by the Fed, the contraction looks even worse with some economists I've seen pegging it at - 4 to - 6%:


Consumer Metric Institute: And lastly, for this report the BEA assumed annualized net aggregate inflation of 1.27%…CPI-U index…was over a half percent higher at a 1.80%…the Billion Prices Project (BPP — which arguably reflected the real experiences of American households…) was over two and a half percent higher at 3.91%….If we were to use the BPP data to adjust for inflation, the first quarter’s contraction rate would have been an horrific -5.62%…



Smart money is starting to hedge against a bad market retraction:

Banking phenom Singapore strengthens liquidity requirements on banks, claims "we are in uncharted waters" :

http://m.scmp.com/business/banking-fina ... tail-banks

JP Morgan warns investors about votality in VIX and MOVE measures being dangerously low and "disconnected from market fundamentals" :

http://www.zerohedge.com/news/2014-06-1 ... ndamentals

Bank of international settlements slams market environment as being disconnected from economic reality, claims central banks are setting up another bust:

http://www.zerohedge.com/news/2014-06-2 ... and-market


Looking at option and equity markets right now and you see a lot of otm puts and shifting away from institutional equity acquisition toward retailers shouldering that burden. We're in very murky waters right now, and indicators like VIX hint at us being on the verge of another 08esque contraction further agitated by possibly exploding inflation.
Last edited by Willink on Mon Jun 30, 2014 1:32 am, edited 1 time in total.
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Re: All aboard the crazy train

Postby Willink » Sun Jun 29, 2014 10:40 pm

Addendum from Hussman knocking it out of the park:

As John Hussman explains,

The central thesis among investors at present is that they are “forced” to hold stocks, given the alternative of zero short-term interest rates and long-term interest rates well below the level of recent decades (though yields were regularly at or below current levels prior to the 1960s, which didn’t stop equities from being regularly priced to achieve long-term returns well above 10% annually). The corollary is that investors seem to believe that as long as interest rates are held near zero, stocks will continue to advance at a positive or even average or above-average rate.

It’s certainly true that from a psychological standpoint, the Federal Reserve has induced the same sort of yield-seeking speculation that drove investors into mortgage securities (in hopes of a “pickup” over depressed Treasury-bill yields), fueled the housing bubble, and resulted in the deepest economic and financial collapse since the Great Depression. This yield-seeking has clearly been a factor in encouraging investors to forget everything they ever learned from finance, history, or even two successive 50% market plunges in little more than a decade.

But the finance of all of this – the relationship between prices, valuations and subsequent investment returns – hasn’t been altered at all. As the price investors pay for a given stream of future cash flows increases, the long-term rate of return that they will achieve on their investment declines. Zero short-term interest rates may “justify” the purchase of stocks at higher valuations so that stocks promise equally dismal future returns. But once stocks reach that point, investors should understand that those dismal future returns will still arrive.

Let me say that again. The Federal Reserve’s promise to hold safe interest rates at zero for a very long period of time has not created a perpetual motion machine for stocks. No – it has simply created an environment where investors have felt forced to speculate, to the point where stocks are now also priced to deliver zero total returns for a very long period of time. Put simply, we are already here.

...

The ratio of non-financial equity market capitalization to GDP (which has maintained a tight correlation with subsequent 10-year S&P 500 total returns even in recent times) is now about 134%, compared with a pre-bubble norm of 55%.

The median price/revenue ratio S&P 500 components easily exceeds, and the average rivals, the levels observed at the 2000 peak.

All of this suggests that investors may not appreciate the extent of present overvaluation, lulled once again by the assumption that cyclically-elevated earnings are permanent


As I try to link back to often with these posts, the real culprit here is obvious. It isn't speculation, it isn't greed, it isn't the failure of capitalism, it simply is the natural consequence of the destruction of the principle of sound money in the American economy. It's pretty obvious at this point the Fed is steering the US economy into the ground, and in the process doing nothing but giving massive liquidity boosts to 1%ers , as even federal Reserve board members are now admitting:


As former Fed Governor Kevin Warsh explained this morning, "on the fairness point - if you have access to credit, if you've got a big balance sheet, the Fed has made you richer," concluding rather too honestly for some people's liking, "I would say [Fed policy] has been in some sense Reverse Robin Hood." The bottom line, he chides, "this is a way to make the well to do more well to do because that's all the Federal Reserve can do."
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Re: Willink's Econ Thread

Postby Willink » Thu Jul 31, 2014 5:24 pm

http://libertyblitzkrieg.com/2014/07/30 ... w-vs-1984/

“Three Lost Decades” – How the American Middle Class is 20% Poorer Now vs. 1984


Like so many other things in popular American culture, this quaint notion of a “middle class” in the U.S. is at this point nothing more than a myth; a rapidly fading fantasy from a bygone era. As myself and many others have noted for quite some time, the decimation of the middle class began long ago. It really got started in the early 1970′s after Nixon defaulted on the gold standard and financialization began to take over the American economy. Median real wages haven’t increased since that time and the rest is history.

Although the evolutionary process toward oligarchy began long ago, its finishing touches have been applied in recent years. This has been easily achieved by the Federal Reserve and U.S. government’s response to the financial crisis, which was and continues to be characterized by an intentional funneling of all the nation’s wealth into the hands of their patrons; the 0.01%. As the chart below demonstrates clearly (and as I highlighted in the post: Where Does the Real Problem Reside? Two Charts Showing the 0.01% vs. the 1%), it is the tiny oligarch class that is reaping all of the benefits.


Image

In case you needed any more proof of our current predicament, the Washington Post notes that:
Nostalgia is just about the only thing the middle class can still afford. That’s because median wealth is about 20 percent lower today, in inflation-adjusted dollars, than it was in 1984.

Yes, that’s three lost decades.

Now, as you might expect, the middle class has been hit particularly hard by the Great Recession and the not-so-great recovery. It’s all about stocks and houses. The middle class doesn’t have much of the former, but it does have a lot of the latter. And that’s bad news, because, even though the crash decimated both, real estate hasn’t come back nearly as much as equities have. So the top 1 percent, who hold more of their wealth in stocks, have made up more of the ground they lost. But, as the Russell Sage Foundation points out, the slow housing recovery means that, in 2013, median households were still 36 percent poorer than they were a decade earlier.


So what if the stock market is up? Most Americans are too dead broke to own equities, and in fact, an increasing number need debt and welfare just to survive. Meanwhile, Obama is hosting $32,000 a plate fundraisers all over California, while the median wage in America is only $27,000.
That’s just how the oligarchs like it.
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Re: Willink's Econ Thread

Postby Mackie2001 » Fri Aug 01, 2014 6:40 pm

Frankly, I don't believe that the middle class really existed in the US until after WWII.

Secondly, it doesn't matter what the income gap is. Why should it? What does matter is the overall standard of living and how it has improved over the years. What does matter is that Government has created a major permanent underclass that has continued to grow larger. What does matter is drug use and how it's sapped the energy of the young and turned their lives into a living hell in many cases. What does matter is how the Government turned housing into the automatic winner in the markets until it failed due largely to Clinton/Frank putting pressure on the banks to give loans to substandard borrowers. What does matter is that many of our young people graduate from high school with only the skills of playing video games and dexterous thumbs. What does matter that young people emulate athletes, actors and rock stars. Those people are a whole lot less than desirable as role models. What does matter is the loss of good manufacturing jobs, which started during the Clinton years because of fear of taxation which would increase the cost of doing business. What does matter is that the unions have forgotten where they came from and have put frivolous demands on companies and the suits that gave in. What does matter is the lack of the work ethic and the desire of the young to do it for themselves, instead of become wards of the state and etc.

How did we get to this point in America the land of whining, entitlement and always be entertained? None of that leads to prosperity. It's about bothers and sisters doin' for themselves and becoming independent of political and social changes and the people and products and services that convince us all of problems will be solved with BS.
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Re: Willink's Econ Thread

Postby Willink » Thu Aug 28, 2014 5:07 pm

Here come the helicopters

Image

Image

Ben Bernanke: A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money


http://davidstockmanscontracorner.com/h ... oney-drop/

Moments ago a stunning article appearing in the "Foreign Affairs" publication of the influential and policy-setting Council of Foreign Relations, titled "Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People."

In it we read the now conventional admission of failure by Keynesians, who however, unwilling to actually admit they have been wrong, urge the even more conventional solution: do more of the same that has lead to the current financial cataclysm, only in this case the authors advocate no longer pretending that the traditional monetary channels work but to, literally, paradrop money. To wit:


Council of Foreign Relations: “It’s well past time, then, for U.S. policymakers – as well as their counterparts in other developed countries - to consider a version of Friedman’s helicopter drops…. Many in the private sector don’t want to take out any more loans; they believe their debt levels are already too high. That’s especially bad news for central bankers: when households and businesses refuse to rapidly increase their borrowing, monetary policy can’t do much to increase their spending…. Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly…. The transfers wouldn’t cause damaging inflation (LOL), and few doubt that they would work (LOL). The only real question is why no government has tried them.”




This is a fairly standard view among celebrity economists these days, possibly worth commemorating since the CFR has joined the deluge, although, there are adult members of the CFR who should denounce this position. Money printing by Bernanke and kin has been ad hoc from the beginning, as the ecstatic and clairvoyant Bürgermeisteramt made clear when ZIRP besotted the world.

That “few doubt [handing out money] would work” is true within academia and has-been institutions. History has recorded the contrary. Chase van der Roehr, writing in the August 19, 2014, edition of Bloomberg Briefs, noted “it now takes $37,403 added to the Fed’s balance sheet to stimulate the creation of a new job. That number stood at $7,600 in August 2008 and has deteriorated steadily ever since.”
The median new job pays much less, so the $37,403-to-1 ratio, after being adjusted for a constant quality, is infinite. “[F]ew doubt that they would work” since those polled are entirely ignorant of all but each others’ opinions.
Printing money has never worked, the grander the scale the worse the calamity. The French state in 1790 was falling deeper into debt. The Assembly first confiscated Church property, found itself deeper in debt, authorized a 400 million assignat print, with a pledge that no more currency would be issued. The poor grew poorer, starved, and cries of “We need more money!” elicited another 800 million assignats. This ended in collapse, including the redemptive pleasure of Assemblymen rolled on tumbrels through the streets of Paris to their end.

Germany in the early 1920s suffered central banker Rudolf Haverstein’s delusion. As jobs disappeared along with food, Haverstein worked the presses to death. (Ludwig von Mises recalled hearing “the heavy drone of the Austrian Bank’s printing presses which were running incessantly day and night to produce new bank notes in Vienna.” Austria was following Germany’s lead; a temptation it still suffered from in the 1930s.)
The historian Alan Bullock wrote: “[The inflation] had the effect, which is the unique quality of economic catastrophe, of reaching down and touching every single member of the community in a way in which no political event can. The savings of the middle classes and working classes were wiped out at a single blow with a ruthlessness which no revolution could ever equal…”
Today, Japan’s fascinating yen-printing campaign imitates the same blue print. It is ending with the people unable to pay for food; or much else; Nissan, Toyota, and Honda moving to Mexico; so eliciting hysterical government responses. Bloomberg reporter Katsuyo Kuwako captured the moment in “Japanese Women Armed with Chainsaws Head to the Hills under Abe’s Plan.” Kuwako reported Comrade “Junko Otsuka quit her job in Tokyo and headed for the woods, swapping a computer for a bush cutter and her air-conditioned office for the side of a mountain. She was part of a new wave of women taking forestry jobs, the result of economic, social and environmental policies sprouting in Prime Minister Shinzo Abe’s Japan. Otsuka… said she’s fine with the 20 percent pay cut to be the first female logger at Tokyo Chainsaws…


THIS ARTICLE IS UN-FRIGGIN BELIEVABLE ON SO MANY LEVELS.

First is the source, the Council on Foreign Relations. I mean that is the top of the top. That they allowed something like this to run says a whole lot.

Second is what the article says. Money is no longer a token representing productive work of any kind. Of course final demand is sinking, because we've had an orgy of debt for 30+ years. Recall what debt does: moves future demand into the present. I want to buy that big screen TV but I would have to save for two years; if I borrow however I can have it today. If debt had been used to fund productive assets (factories, highways, airports, inventions) that would be one thing but it's been used to fund consumption (super-sized fries, trips to the Caribbean, Kardashian t-shirts).
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Re: Willink's Econ Thread

Postby APB » Thu Aug 28, 2014 8:06 pm

I'm ready - just tell me where to pick up the bundles of money!
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Re: Willink's Econ Thread

Postby Mackie2001 » Thu Aug 28, 2014 9:44 pm

Now, as you might expect, the middle class has been hit particularly hard by the Great Recession and the not-so-great recovery. It’s all about stocks and houses. The middle class doesn’t have much of the former, but it does have a lot of the latter. And that’s bad news, because, even though the crash decimated both, real estate hasn’t come back nearly as much as equities have. So the top 1 percent, who hold more of their wealth in stocks, have made up more of the ground they lost. But, as the Russell Sage Foundation points out, the slow housing recovery means that, in 2013, median households were still 36 percent poorer than they were a decade earlier
.

We did it to ourselves and then afterwards, then the government buried us in debt.
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Re: Willink's Econ Thread

Postby Willink » Mon Sep 01, 2014 5:22 pm

Hayek trolling Keynes for "having never felt that economic was weighty enough...[he] took it for granted that [Alfred] Marshall's textbook contained everything one would need to know about the subject..There was a certain arrogance of Cambridge economics about them who thought they were the center of the world...He had never thought about the theory of capital, he was very shaky on the theory of international trade. He was well informed on contemporary monetary theory, but even there he didn't know such things as Henry Thorton or [Knut] Wicksell. And of course his great defect was that he didn't read any foreign languages except French, and the whole German literature was inaccessible to him. He did good enough to view Mises' book on money, but later admitted that in German he could only understand what he knew already.:

https://www.youtube.com/watch?v=y8l47ilD0II

Seeing as Keynes himself was more or less committed to a single viewpoint (namely, the aforementioned Alfred Marshall), it comes as no surprise that at its most primitive, unreconstructed level, Keynesian economics writ large is fundamentally no more than a theory of inflationism, e.g. that by printing money wealth is created. This, in general is further part and parcel to some extent the view of the monetarist, e.g. that only if our monetary policy was less tight and we let the presses run free to open up liquidity everything would be hunky-dory. Further, since, as Hayek notes, Keynes was largely unfamiliar with Capital Theory (and, by extension, the role of the entrepreneur as an economic actor) it comes as no surprise his infatuation and intense focus on consumption, and consumption driven approaches to economics.
Here is economist Ludwig von Mises with one of the best shots at Keynesian hysterics ever in his masterwork Human Action :

In recent years economists have paid special attention to the role cash holding plays in the process of saving and capital accumulation. Many fallacious conclusions have been advanced about this role.


Without actually naming Keynes, this is a direct shot at the paradox of thrift, or rather, "savings", "hoarding", w/e is economically disastrous because it deters consumption.

If the individual saver employs his additional savings for increasing his cash holding because this is in his eyes the most advantageous mode of using them, he brings about a tendency toward a fall in commodity prices and a rise in the monetary unit’s purchasing power.



Mises notes that "hoarding" causes a fall in commodity prices and a rise in purchasing power (less money in circulation = higher purchashing power, more bang for your buck = lower prices).

If we assume that the supply of money in the market system does not change, this conduct on the part of the saver will not directly influence the accumulation of capital and its employment for an expansion of production.


The fact the hoarder puts his cash under his bed does not impact his accumulation of capital. Direct shot at Keynes not understanding Capital theory.

The effect of our saver’s saving, i.e., the surplus of goods produced over goods consumed, does not disappear on account of his hoarding.


To tie in with the above, that our bro in this example, hoarder extraordinaire chooses to bury his money either under his mattress or in the sand or whatever doesn't matter, he still has to actually produce something (create capital); that he chooses not to consume doesn't mean the productive capital he created that resulted in him gaining the cash holdings in the first place disappear.

For emphasis, he then repeats the same thing twice:

The prices of capital goods do not rise to the height they would have attained in the absence of such hoarding. But the fact that more capital goods are available is not affected by the striving of a number of people to increase their cash holdings.

If nobody employs the goods—the nonconsumption of which brought about the additional saving—for an expansion of his consumptive spending, they remain as an increment in the amount of capital goods available, whatever their prices may be.


What the hoarder has done then, rather than caused the economy to implode by not consuming, is actual increase the capital stock in the economy while not consuming anything. In fact, the entire reason we are better off is exactly because he is not spending:

The two processes—increased cash holding [=hoarding] and increased capital accumulation [=making us all wealthier]—take place side by side.


One last zinger:

The effect of our saver’s saving, i.e., the surplus of goods produced over goods consumed, does not disappear on account of his hoarding.


First of a few posts I'll do here on standard Keynsian arguments; sticky prices, Say's Law, and Liquidity traps are to follow.
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Re: Willink's Econ Thread

Postby GreenDay » Tue Sep 02, 2014 5:20 am

This is good stuff Willink; well organized. Can I get course credit for reading this? Will there be a final exam?
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Re: Willink's Econ Thread

Postby Willink » Sat Sep 06, 2014 5:27 pm

Next up to bat is the Keynesian theory of sticky prices.

To begin, economist Joseph Salerno:

The linchpin of all varieties of Keynesian economics is the assumption that prices and wage rates are rigid and do not respond to changes in supply and demand, at least in the short run.

It is because prices do not adjust immediately, say, to a fall in demand, that quantities must adjust, meaning that unsold goods pile up in inventories and an excess supply of labor goes unhired resulting in depression. A modern version of this story is also invoked by modern free bankers to justify their conclusion that the supply of money must be continually adapted to changes in the demand to hold money, lest recession and unemployment emerge. This version attributes the rigidity or “stickiness” of prices to objective factors like “menu costs,” which refer to the resource costs that the seller must incur every time he changes his array of product prices.


Of course our daily experience with coupons, early morning specials, restaurant blackboard specials, supermarket rewards cards, and so on makes this widely accepted story of intractable price rigidities ring hollow. But whether prices are rigid or flexible is really beside the point. The point is that the degree of price rigidity or flexibility is not determined by objective external factors such as menu costs, but is chosen by entrepreneurs as one of the dimensions of the good or service they bring to market. As Hans Hoppe once succinctly put it, “Prices are as rigid or as flexible as they need to be.”


Large retailers and transportation firms often vary their pricing policies, trying to achieve the optimal degree of price flexbility in a changing economic environment. As reported this week, retailer J .C. Penney has introduced a radically new pricing policy in response to a shift in consumers’ shopping habits. With the increasing availability of shopping comparison apps for mobile electronic devices and the omnipresence of large Internet sellers like Amazon and eBay, consumers are increasingly shunning high mark-up items which they know will be eventually marked down. In the case of J. C. Penney, in 2002 an item that cost the retailer $10.00 was typically marked up to $28.00. That mark up was progressively increased and by 2011 a $10.00 item sold for $40.00. But despite the greatly increased mark up, the average price that a consumer paid for a $10.00 item rose only from $15.90 to $15.95 duing that same period (Willink note: this is why the internet kills box stores) . Thus consumers have become more savvy and resourceful in their shopping practices. J. C. Penney has responded by slashing its prices by 40 percent and rounding all prices to the nearest dollar. This new “fair and square” pricing policy introduces greater simplicity but more rigidity into its pricing structure and involves getting rid of daily sales on multiple items and establishing three pricing tiers: every day regular prices; month-long specials; and “best prices” for clearance items on the first and third Friday of every month. Walmart has responded very differently via a highly flexible price policy of an Ad Match Guarantee in which it promises to match, under specified conditions, the prices advertised by competitors.


The above doesn't really delve into the theoretical basis of the argument, but at the least highlights the absurdities of the conclusions that contemporary post-Keynesian econ runs into when actually dealing with real life. More on the former below:

When Austrian economists propose that the United States needs a Federal Reserve about as much as it needs a federal car company, it's not surprising that Keynesians ridicule the notion. What is surprising is that otherwise laissez-faire economists, particularly of the Chicago School variety, think that the market economy is good at producing goods and services except when it comes to money.
Specifically, these lukewarm free-marketeers think that, in a pure capitalist system, wages are "sticky." This observation supposedly proves the necessity of a central bank willing to inject whatever inflation is necessary to kick start the economy out of a deep recession.

Here's Greg Mankiw responding to economist Bob Murphy criticizing the notion of negative interest rates:

But if prices are sticky, then the immediate deflation and concurrent increase in expected inflation won't occur painlessly. Instead, it would take a while for the price level to fall, and as we wait, the economy would suffer through a period of depressed economic activity.

According to conventional new Keynesian analysis, sticky prices are the ultimate market imperfection that makes aggregate demand matter. If you deny that prices are sticky and assume they can instantaneously jump downward to new equilibrium levels, many macroeconomic problems become much easier to solve. Indeed, you don't need to solve them at all, as the market would do it.

I wish we lived in the world that Mr Murphy describes, but my reading of the evidence is that we don't.


Murphy on wage rigidity:

As so often happens, the proponents of government intervention are pointing to a problem that is greatly exacerbated by the government itself. Recall that the trouble stems from workers not being willing to take pay cuts. When the demand from employers drops, at the old wage rate there is now surplus labor — a.k.a. unemployment. Only when market wages drop to a lower level, so that demand once again matches supply, will equilibrium be restored in the labor market.
Now we have to ask, why do workers hold out for so long without jobs, insisting on wages that no one is willing to pay? After all, the other goods and services in the economy see their prices fall in a speedy fashion even though the sellers of these items depend on them for their livelihood. So if a street vendor knows enough to slash his hot dog prices when demand collapses, why don't hairdressers accept pay cuts when the same happens to their industry?

In the case of the Great Depression, the answer is simple enough: the federal government didn't allow wages to fall. After the 1929 crash, Herbert Hoover gathered the nation's leading businessmen for a conference in Washington and urged them to allow profits and dividends to take the hit, but to spare workers' paychecks. Rather than cut wages, businesses were supposed to implement spread-the-work schemes where workers would cut back their hours.

The rationale for Hoover's high-wage policy was that the worker supposedly needed to be paid "enough to buy back the product." Hoover had bought into the trendy new economic theory blaming depressions on underconsumption. The idea was that wage cuts would just cause workers to cut their spending, which would in turn lead to another round of wage cuts in a vicious downward spiral.

Because of the uncertainty and actual reduction in the stock of money (an accident of the fractional reserve banking system when people withdraw their cash from banks), prices in the economy fell drastically in the early years of the Depression. But because of pressure from the government, businesses allowed wage rates to fall very slowly. As a result, real wages (i.e., paychecks adjusted for price deflation) actually rose more quickly during the early years of the Depression than they had during the Roaring Twenties! Because labor got more and more expensive, unemployment surged to an unprecedented 25 percent by 1933.

In our times, the extension of unemployment benefits is the most obvious example of a government intervention that prolongs job searches. Rather than accepting a job for lower pay than they are accustomed to, laid-off workers can continue their quest for much longer than would be the case in a free market. (Incidentally, Chicago School economists agree, and so does Mankiw.)

To see that wages can adjust on a relatively free market, even in the face of massive shocks to the economy, consider the 1920–1921 depression. From its peak in June 1920, the Consumer Price Index fell 15.8 percent over the next 12 months — a one-year price deflation that was half again more severe than any one-year drop during the Great Depression.

Even so, the economy quickly bounced back and entered the prosperous 1920s. The answer wasn't a massive injection of Fed money, either; in fact the Fed had jacked rates up to record high levels.

On the contrary, the reason the US economy quickly adjusted in the face of massive price deflation was that wages fell quickly too, dropping about 20 percent in a single year.


Murphy continues:

In the above section we saw that the argument that a free market has "sticky wages" and therefore requires massive doses of inflation simply doesn't hold up empirically. Ever since the 1930s, there have been systematic government (and labor union) efforts to prop up wages during economic downturns. In the relatively laissez-faire year 1920, wages fell quite rapidly to eliminate unemployment in the face of a collapse in prices.


Going right at current Fed policy:

But let's put all that aside, and tackle the issue head-on: Suppose that even on a relatively free market for some reason the demand to hold cash suddenly spikes. If the central bank stands by and does nothing, the increased demand for cash balances (with a constant stock of money) would lead to a general fall in the prices of goods and services. As businesses saw the demand for their products plummet, they would lay off workers. In principle, it could take years for wage rates to fall as much as other prices, meaning the economy would be operating below capacity for a long time.

In our hypothetical scenario, couldn't the central bank alleviate the misery by printing up wads of new cash early on? That way, the demand to hold more money would be satisfied by an increase in the number of dollar bills rather than by a wrenching fall in prices.

To see why this suggested remedy is quite dangerous, let's forget about the sudden demand to hold more cash. Suppose we had an economy with a stable demand for cash, and all of a sudden the central bank doubled the money supply. What would happen?


Important to note this was more or less the Fed response to 2008, e.g. massively expand the money supply and its own balance sheet. In January 2007, the Fed's balance sheet was 860 billion, amassed over a 90 year history. From 2008 to 2014 it increased to 4.3 trillion dollars , or a 500% increase.

At the same time the money supply has gone into the stratosphere as well:

Image


Of course, in the long run, prices in general would rise, perhaps doubling. But in the interim, there would be other effects. In practice, when the central bank increases the money supply, it doesn't magically augment every single person's cash balance by the same percentage. No, some lucky recipients get the new money first. These people then have the ability to spend the newly created dollars at the old prices. They would therefore become relatively richer.

On the other hand, the people who were last in line to receive (or spend) the new money, would see prices rising at the store while their incomes were stuck at the old levels. These latecomers to the party would become relatively poorer.

Beyond the one-shot redistributive effects, there is also the damage caused by the existence of an inflationary central bank in the first place. Knowing that the bank had the ability to inject massive doses of new money into the market, investors and businesspeople would have less faith in the long-run purchasing power of the money unit. They would spend time and devote resources to hedging themselves against erratic central banking decisions, rather than focusing exclusively on the "fundamentals."

All of these problems hold true in a scenario starting with a sudden demand to hold more cash. In reality, it's not the case that every single person suddenly wants to increase his cash holdings by x percent, or that the central bank can instantly endow every person in the economy with the exact amount of new cash that he wishes to accumulate. (And even if it could, who wouldn't then say, "In that case, I'd like some more hundred dollar bills, please"?)

When people become fearful of the future in times of economic uncertainty, they naturally aim to bolster their liquid assets, especially their holding of money. But each person will cut back on his "normal spending" in a unique way. One person might cut out his weekly visit to his favorite restaurant, while another will sell some of his old baseball cards. In order for these subtle differences to be communicated through the economy, entrepreneurs need to see the changes in relative prices. In our example, workers need to leave the restaurant industry, while speculators may want to attend baseball card shows looking for bargains.

By dumping gobs of new money into a few access points of the economy, the central bank overlays these nuanced signals with a huge amount of interference. Only in simplistic macro models, which contain a few variables like M and P, does the "shock" of the increase in demand for money become perfectly offset by the increase in M. In reality, these two different disturbances don't cancel each other out. The economy is in fact left to deal with the real events that fueled the panic in the first place — people don't suddenly decide to hold a bunch of cash for no good reason — as well as the huge injection of money into the hands of politically connected bankers.


Dumping gobs of new money into a few access points huh, would could happen?

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Now, take a pretty run of the mill take of these circumstances by this poor fellow:

http://www.etf.com/sections/index-inves ... ation.html

His first mistake here is using the cooked CPI #'s that don't bear much resemblance to reality, and get continuously reorganized such to make inflation look better than it actually is. Second, we can see where all the inflation has been going; right into asset prices!

After extolling the benefits of lower long-term interest rates on corporate bonds and home mortgages, Bernanke added: "And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion." (Note :lol: :lol: )

The boost to wealth and consumer confidence has accrued almost exclusively to the 52% of Americans who own stocks, based on a Gallup survey. It has not flowed through to jobs as the employment-to-population ratio has remained at 58.6% of the working-age population, within tenths of a percent of the recession low.


This is what you get when people think they can "plan" the wealth of the entire economy. What has happened is that rather than having stocks, speculation, etc have anything to do with the productive allotment of capital, production, price discovery and formation, etc (the actual market purposes of these processes), the Fed (and more generally worldwide, central banks writ large) have turned asset markets into money-printing gambling casinos, where all the losses are guaranteed through the taxpayers while companies with access to high-level funding just take on lots of leveraged debt to merge with another without actually doing anything productive.

And it's getting even worse! Now instead of simply rigging the market from the get go, they are directly interfering with it by buying equities themselves:

http://www.advisorperspectives.com/dsho ... Stocks.php

The report, to be published this week by the Official Monetary and Financial Institutions Forum (OMFIF), confirms $29.1tn in market investments, held by 400 public sector institutions in 162 countries, which "could potentially contribute to overheated asset prices." China’s State Administration of Foreign Exchange has become “the world’s largest public sector holder of equities”, according to officials, and we suspect the Fed is close behind (courtesy of more levered positions at Citadel), as the world's banks try to diversify themselves and "counters the monopoly power of the dollar." Which leaves us wondering where are the central bank 13Fs?

While most have assumed that this is likely, the recent exuberance in stocks has largely been laid at the foot of another irrational un-economic actor - the corporate buyback machine. However, as The FT reports, what we have speculated as fact for many years now (given the death cross of irrationality, plunging volumes, lack of engagement, and of course dwindling credibility of central planners)... is now fact...


To summarize, the global equity market is now one massive Ponzi scheme in which the dumb money are central banks themselves, the same banks who inject the liquidity to begin with.
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Re: Willink's Econ Thread

Postby BF004 » Mon Sep 08, 2014 2:30 pm

On the first graph, the only reason anyone would fit the data to a hyperbolic distribution would be increase their R value. Leads me to instantly believe cherry picked numbers, exlcusion of data, and/or bias in achieving the data. Not saying whether or not I agree or disagree, but nothing in the real world would ever grow at a hyperbolic rate.

Fitting it to an exponential would produce pretty much the same results, perhaps a lowered R-value, but with a change in Fed policy around ~2005-2008, why would you expect to see a smooth fit?

I guess I just don't understand the decision to choose that without questioning motivation.
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Re: Willink's Econ Thread

Postby Willink » Sat Sep 13, 2014 5:15 am

BF004 wrote:On the first graph, the only reason anyone would fit the data to a hyperbolic distribution would be increase their R value. Leads me to instantly believe cherry picked numbers, exlcusion of data, and/or bias in achieving the data. Not saying whether or not I agree or disagree, but nothing in the real world would ever grow at a hyperbolic rate.

Fitting it to an exponential would produce pretty much the same results, perhaps a lowered R-value, but with a change in Fed policy around ~2005-2008, why would you expect to see a smooth fit?

I guess I just don't understand the decision to choose that without questioning motivation.


Not sure as to the methodology there, just pulled the graph for its bit on the creation of money since 2008.

Gonna do a post here inspired by Greenday's post in the Wall Street thread. Namely, why is the left so prevalent in academia? Economist Peter Klein:

Intellectuals, particularly academic intellectuals, tend to favor socialism and interventionism. How was the American university transformed from a center of higher learning to an outpost for socialist-inspired culture and politics?

As recently as the early 1950s, the typical American university professor held social and political views quite similar to those of the general population. Today — well, you've all heard the jokes that circulated after the collapse of central planning in Eastern Europe and the former USSR, how the only place in the world where Marxists were still thriving was the Harvard political science department.
More generally, US higher education often looks like a clear case of the inmates running the asylum. That is, the students who were radicalized in the 1960s have now risen to positions of influence within colleges and universities. One needs only to observe the aggressive pursuit of "diversity" in admissions and hiring, the abandonment of the traditional curriculum in favor of highly politicized "studies" based on group identity, the mandatory workshops on sensitivity training, and so on.

Christopher Cardiff and Daniel Klein have recently examined academics' political affiliations using voter-registration records for tenure-track faculty at 11 California universities. They find an average Democrat:Republican ratio of 5:1, ranging from 9:1 at Berkeley to 1:1 at Pepperdine. The humanities average 10:1, while business schools are at only 1.3:1. (Needless to say, even at the heartless, dog-eat-dog, sycophant-of-the-bourgeoisie business schools the ratio doesn't dip below 1:1.) While today's Republicans are hardly anti-socialist — particularly on foreign policy — these figures are consistent with a widespread perception that university faculties are increasingly unrepresentative of the communities they supposedly serve.
Now here's a surprise: Even in my own discipline, economics, 63 percent of the faculty in the Carnegie study identified themselves as liberal, compared with 72 percent in anthropology, political science, and sociology, 76 percent in ethnic studies, history, and philosophy, and 88 percent in public affairs. The Cardiff and Klein study finds an average D:R ratio in economics departments of 2.8:1 — lower than the sociologists' 44:1, to be sure, but higher than that of biological and chemical engineering, electrical engineering, computer science, management, marketing, accounting, and finance.

Why do so many university professors — and intellectuals more generally — favor socialism and interventionism? F. A. Hayek offered a partial explanation in his 1949 essay "The Intellectuals and Socialism." Hayek asked why "the more active, intelligent and original men among [American] intellectuals … most frequently incline toward socialism." His answer is based on the opportunities available to people of varying talents.
Academics tend to be highly intelligent people. Given their leftward leanings, one might be tempted to infer from this that more intelligent people tend to favor socialism. However, this conclusion suffers from what empirical researchers call "sample selection bias." Intelligent people hold a variety of views. Some are lovers of liberty, defenders of property, and supporters of the "natural order" — i.e., defenders of the market. Others are reformers, wanting to remake the world according to their own visions of the ideal society.
Hayek argues that exceptionally intelligent people who favor the market tend to find opportunities for professional and financial success outside the Academy (i.e., in the business or professional world). Those who are highly intelligent but ill-disposed toward the market are more likely to choose an academic career. For this reason, the universities come to be filled with those intellectuals who were favorably disposed toward socialism from the beginning.

This also leads to the phenomenon that academics don't know much about how markets work, since they have so little experience with them, living as they do in their subsidized ivory towers and protected by academic tenure. As Joseph Schumpeter explained in Capitalism, Socialism, and Democracy, it is "the absence of direct responsibility for practical affairs" that distinguishes the academic intellectual from others "who wield the power of the spoken and the written word." This absence of direct responsibility leads to a corresponding absence of first-hand knowledge of practical affairs. The critical attitude of the intellectual arises, says Schumpeter, "no less from the intellectual's situation as an onlooker — in most cases also as an outsider — than from the fact that his main chance of asserting himself lies in his actual or potential nuisance value."

Hayek's account is incomplete, however, because it doesn't explain why academics have become more and more interventionist throughout the twentieth century. As mentioned above, during the first half of the twentieth century university faculty members tended to hold political views similar to those held by the general population. What caused the change?

To answer, we must realize first that academics receive many direct benefits from the welfare state, and that these benefits have increased over time.
Excluding student financial aid, public universities receive about 50 percent of their funding from federal and state governments, dwarfing the 18 percent they receive from tuition and fees.

To see why this government aid is so important to the higher education establishment, we need only stop to consider for a moment what academics would do in a purely free society. The fact is that most academics simply aren't that important. In a free society, there would be far fewer of them than there are today. Their public visibility would no doubt be quite low. Most would be poorly paid. Though some would be engaged in scholarly research, the vast majority would be teachers. Their job would be to pass the collective wisdom of the ages along to the next generation.
In all likelihood, there would also be far fewer students. Some students would attend traditional colleges and universities, but many more students would attend technical and vocational schools, where their instructors would be men and women with practical knowledge.

Today, many professors at major research universities do little teaching. Their primary activity is research, though much of that is questionable as real scholarship. One needs only to browse through the latest specialty journals to see what passes for scholarly research in most disciplines. In the humanities and social sciences, it is likely to be postmodern gobbledygook; in the professional schools, vocationally oriented technical reports.

Beyond university life, academics also compete for prestigious posts within government agencies. Consider my own field, economics. The US federal government employs at least 3,000 economists — about 15% of all members of the American Economic Association. The Federal Reserve System itself employs several hundred. There are also advisory posts, affiliations with important government agencies, memberships of federally appointed commissions, and other career-enhancing activities.

These benefits are not simply financial. They are also psychological. As Dwight Lee puts it:

Like every other group, academics like to exert influence and feel important. Few scholars in the social sciences and humanities are content just to observe, describe, and explain society; most want to improve society and are naive enough to believe that they could do so if only they had sufficient influence. The existence of a huge government offers academics the real possibility of living out their reformist fantasies.

It's clear, then, that there are many benefits, for academics, to living in a highly interventionist society. It should be no wonder, then, that academics tend to support those interventions. Economists, in particular, play active roles as government advisers, creating and sustaining the welfare state that now surrounds us. Naturally, when government funds their research, economists in applied fields such as agricultural economics and monetary economics are unlikely to call for serious regulatory reform in their specialty areas.
Murray Rothbard devotes an interesting chapter of Man, Economy, and State, to the traditional role of the economist in public life. Rothbard notes that the functions of the economist on the free market differ strongly from those of the economist on the hampered market. "What can the economist do on the purely free market?" Rothbard asks. "He can explain the workings of the market economy (a vital task, especially since the untutored person tends to regard the market economy as sheer chaos), but he can do little else."


Hayek's article (Intellectuals and Socialism) is in its own right IMO one of the most important works of political economy of the 20th century, and his elucidation captures much more than just the above. Namely, those belonging to "the left" often think of themselves as idealists, to whom the idea of "designing" social institutions is a very preferential manner by which to bring about good. This approach isn't particularly appealing for a few reasons. For one, it's very dismissive of the individual. Second, as noted above, its much easier to conceive of in a principle than to consider the practical function of things. For a brilliant example, see healthcare.gov, or consider the vast differences in what a days work consists of for an academic, and someone whose expertise lies in a technical field, or in business; dealing with customers or business entities, setting appointments, directing resources, the specifics of individual action and order and the coordination of those factors. Intellectuals aren't really concerned with these specifics. Further, as they are "undervalued" in their own opinion by the market, they regard it with almost superstitious disregard, and (as Hayek commented on in a few interviews) they tend to rather favor specific interventions that seem to be directed toward some demonstrable good.

I'm not sure what among the college-educated guys experiences were here within academia, but my concentration (political theory) was littered with these kind of people. Made for hilarious trolling opportunities. I had one professor, great guy, very smart and sharp on police state, blow black, history, etc, who I'd consider a good friend but very bad at econ such that it often subtracted from his attempted arguments. For a class I was assisting in he assigned a work at the end of the semester on workers cooperatives in Argentina in the late 90s/early 2000s financial crisis, with the effort of getting students to examine less traditional means of economizing/socially organizing. FWIW I consider the proposed method functionally inoperable based on economics, which kind of drove the whole thing into the ground. Namely:

"Lets say we get rid of the capitalist system and mode of production in Argentina, and commit to communal-style community organizing. If we dispose of private ownership of capital, dispense with the factor owners, banks, etc and leave localized groups to figure these sort of transactions out, how will I as, say, a grocery store owner, know how much electricity to buy, and at what cost, without having any price signals?"

To which the response was something along the lines of "we'll, they'd get together and decide it as a group" which highlights exactly the sort of "unpractical" approach to thinking denoted above. Namely, that, in the haste to "out with the bad" the professor had argued from ignorance, (namely, poor understand of how economics actually work).

(To be a bit more clear; the average layperson has the perception that the "market works" on a basic level as a means of distributing goods, but the economic argument for this comes through the price mechanism, namely, that, in a capitalist system, there exists prices for all goods; most importantly, "higher order" or "capital" goods, which send "price signals" based on demand, scarcity, etc, these cannot be "designed" but are rather the natural outcome of the "spontaneous order" of millions of unguided transactions in a market economy. This is why, in the above example, in a market system, you know how much electricity would cost, because it would be dependent on a multiplicity of price signals [demand, output, cost of delivery, upkeep, etc]. In lieu of this arrangement you would just be ad-hoc making things up as you go along, which is disastrously inefficient and why pure socialism is inoperable at massive scale due to its inability to economically calculate and distribute scarce resources)

Speaking back to the Hayek example, almost as significant is the comments by Czech economist and former president Vaclav Klaus, who applies almost segment by segment the commentary by Hayek to his experiences under the Iron Curtain. A very hilarious read:

http://www.klaus.cz/clanky/2171

To quote liberally:

As I said, the intellectuals want to increase their own prestige and power. When we, in the communist countries, came across the ideas of Hayek and Aron [also a great work, Opium of the Intellectuals], we had no problems to understand their importance. They gave us the much needed explanation of the somewhat peculiar prominence of intellectuals in our own society of that time. Our intellectuals, of course, did not like to hear it and did not want to recognize it because their peculiar prominence coexisted with the very debilitating absence of intellectual freedom, which the intellectuals value very highly. That was, however, not the only argument. The communist politicians needed their intellectual fellow-travelers. They needed their “dealings in ideas”, their “shaping of public opinion”, their apology of the inhuman, irrational and inefficient regime. They needed their ability to supply them with general, abstract and utopian ideas. They especially needed their willingness to deal with the hypothetical future instead of criticising the very much less rosy reality.

The intellectuals at that time, and I do not have in mind the life in the years of Stalin’s terror, were not happy. They were deeply disappointed with their own economic well-being. They were frustrated by many constraints they had to face and follow. Their position in the communist society was, nevertheless, relatively high and, paradoxically, very prestigious (I have, of course, in mind their relative position). The communist rulers, in their arbitrary and voluntaristic way of dealing with people, used and misused the intellectuals and were able to make them up for it. This brought the intellectuals in a very tricky position. They were not “valued” (or evaluated) by the invisible hand of the market but by the very visible hand of the rulers of that society. To my great regret many intellectuals were not able (or did not want) to understand the dangerous implications of such an arrangement.

As a result of this, and, again, it was no great surprise to me, after the fall of communism, in our suddenly free society, where many (if not all) previous constraints were removed practically over night, the first frustrated and openly protesting group were the intellectuals – “journalists, teachers, publicists, radio commentators, writers of fiction, and artists” (to quote Hayek). They were protesting against the unpleasant constraints created by the market. They found out very rapidly that the free society (and free markets) may not need so much of their service as they were used to in the past. They especially understood that their valuation by the impersonal forces of supply and demand may be not only less favorable than their own self-valuation (and Robert Nozick is right when he says that “intellectuals feel they are the most valuable people”) but even less favorable than that of politicians and bureaucrats of the old regime. They became, therefore, the first visible and noisy critics of our new free society we had been dreaming of having for decades.


Because the intellectuals value themselves very highly, they disdain the marketplace. Markets value them differently than their own eyes and, in addition to it, markets function nicely without their supervision. As a result, the intellectuals are suspicious of free markets and prefer being publicly funded. That is another reason, why they are in favour of socialism.



In the first decade of the 21th century we should not concentrate exclusively on socialism. There is a well-known saying that we should not fight the old, already non-existent battles. I find this point worth stressing even if I do not want to say that socialism is definitely over. There are, I believe, at least two arguments, which justify looking at other ideologies as well. The first is the difference between the hard and soft version of socialism and the second is the emergence of new “isms” based on similar illiberal or antiliberal views.
As regards the first problem we can probably confidently say that its “hard version” – communism – is over. It is a great victory for us, but this victory should not demotivate us because the fall of communism does not automatically lead to a system we would like to have and live in. It is not a victory of ideas of classical (or European) liberalism.

Fifteen years after the collapse of communism I am afraid, more than at the beginning of its softer (or weaker) version, of social-democratism, which has become – under different names, e.g. the welfare state or the soziale Marktwirtschaft – the dominant model of the economic and social system of current Western civilization. It is based on big and patronizing government, on extensive regulating of human behavior, and on large-scale income redistribution.

As we see both in Europe and in America, the intellectuals love such a system. It gives them money and an easy life. It gives them an opportunity to be influential and to be heard. The Western world is still affluent enough to be able to support and finance many of their unpractical and directly unpurposeful activities. It can afford the luxury of employing herds of intellectuals to use “poetry” for praising the existing system, for selling the concept of positive rights, for advocating constructivist human designs (instead of spontaneous human action), for promoting other values than freedom and liberty.


We need to understand this contemporary version of world-wide socialism, because our old concepts may omit some of the crucial features of what is around us just now. We may even find out that the continuous use of the term socialism can be misleading.

This brings me to another problem. After the complete discrediting of communism and in the moment of the undeniable crisis of the European social-democratism the explicit socialism has become insufficiently attractive for most intellectuals. Nowadays, it is difficult to find – in the West – an intellectual, who wants to be “in” and to have an influence, who would call himself a socialist. The explicit socialism has lost its appeal and we should not have it as the main rival to our ideas today.
Illiberal ideas are becoming to be formulated, spread and preached under the name of ideologies or “isms”, which have – at least formally and nominally – nothing in common with the old-styled, explicit socialism. These ideas are, however, in many respects similar to it. There is always a limiting (or constraining) of human freedom, there is always ambitious social engineering, there is always an immodest “enforcement of a good” by those who are anointed (T. Sowell) on others against their will, there is always the crowding out of standard democratic methods by alternative political procedures, and there is always the feeling of superiority of intellectuals and of their ambitions.

I have in mind environmentalism (with its Earth First, not Freedom First principle), radical humanrightism (based – as de Jasay precisely argues – on not distinguishing rights and rightism), ideology of “civic society” (or communitarism), which is nothing less than one version of post-Marxist collectivism which wants privileges for organized groups, and in consequence, a refeudalization of society. I also have in mind multiculturalism, feminism, apolitical technocratism (based on the resentment against politics and politicians), internationalism (and especially its European variant called Europeanism [SEE: European Union]) and a rapidly growing phenomenon I call NGOism.

All of them represent substitute ideologies for socialism. All of them give intellectuals new possibilities, new space for their activities, new niches in the market of ideas. To face these new isms, to reveal their true nature, and to be able to get rid of them, may be more difficult than in the past. It may be more complicated than fighting the old, explicit socialism. Everyone wants to have healthy environment; everyone wants to overcome loneliness of the fragmented post-modern society and to participate in positive activities of various clubs, associations, foundations and charity organizations; almost everyone is against discrimination based on race, religion or gender; many of us are against the extensive power of the state, etc. To demonstrate the dangers of these approaches, therefore, very often means blowing against the wind.


5. These alternative ideologies, in their unclear, unstable and yet undescribed potential synergy, are successful especially where there is no sufficient resistance to them, where they find a fertile soil for their flourishing, where they find a country (or the whole continent) where freedom (and free markets) have been heavily undermined by long lasting collectivistic dreams and experiences and where intellectuals have succeeded in getting and maintaining a very strong voice and social status. I have in mind, of course, rather Europe, than America. It is Europe, where we witness the crowding out of democracy by post democracy, where the EU dominance replaces democratic arrangements in the EU member countries, where the Hayek’s “paragovernment”, connected with organized (because organizable) interests is successful in guiding policy, and where even some of the liberals – in their justified criticism of the state – do not see the dangers of empty Europeanism and of a deep (and ever deeper) but only bureaucratic unification of the whole European continent. They applaud the growing formal opening of the continent, but do not see that the elimination of some of the borders without actual liberalization of human activities “only” shifts governments upwards, which means to the level where there is no democratic accountability and where the decisions are made by politicians appointed by politicians, not elected by citizens in free elections.

The European constitution was an attempt to set up and consolidate such a system in a legal form. It was an attempt to constitute it. It is, hence, more than important that the French and Dutch referenda made an end to it, that they interrupted the seemingly irreversible process toward “ever-closer Europe” and that they set into motion a hopefully serious discussion – in Eurospeak it is called “a reflection period”. I do not assume that this permitted reflection organized from above will go far enough to reveal deeply rooted causes of the current European problems. It, nevertheless, opened the door.



We should use this opportunity for reminding our fellow citizens what makes our society free, democratic and prosperous.

It is a political system, which must not be destroyed by a postmodern interpretation of human rights (with its stress on positive rights, with its dominance of group rights and entitlements over individual rights and responsibilities and with its denationalization of citizenship), by weakening of democratic institutions, which have irreplaceable roots exclusively on the territory of the states, by the “multiculturally” caused loss of a needed coherence of various social entities, and by continental-wide rent-seeking (made possible when decision-making is done at a level which is very far from the individual citizens and where the dispersed voters are even more dispersed than in sovereign countries).

It is an economic system, which must not be damaged by excessive government regulation, by fiscal deficits, by heavy bureaucratic control, by attempts to perfect markets by means of constructing the “optimal” market structures, by huge subsidies to privileged or protected industries and firms, by labor market rigidities, etc.

It is a social system, which must not be wrecked by all imaginable kinds of disincentives, by more than generous welfare payments, by large scale redistribution, by many forms of government paternalism.

It is a system of ideas, which will be based on freedom, personal responsibility, individualism, natural caring for others and genuine moral conduct of life.

It is a system of relations and relationships of individual countries, which must not be based on false internationalism, on supranational organizations and on misunderstanding of globalization and of externalities but which will be based on good neighborliness of free, sovereign countries and on international pacts and agreements.

The founding fathers of the Mont Pelerin Society, Hayek and Friedman, together with others, always insisted on fighting for what seemed politically impossible. We should keep doing the same.


Can't imagine Barry-O saying anything like the above, or even thinking about thought that methodologically. Perhaps we have something to learn from Euro heads of state?
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Re: Willink's Econ Thread

Postby GreenDay » Sat Sep 13, 2014 3:10 pm

Hayek's article (Intellectuals and Socialism) is in its own right IMO one of the most important works of political economy of the 20th century, and his elucidation captures much more than just the above. Namely, those belonging to "the left" often think of themselves as idealists, to whom the idea of "designing" social institutions is a very preferential manner by which to bring about good. This approach isn't particularly appealing for a few reasons. For one, it's very dismissive of the individual. Second, as noted above, its much easier to conceive of in a principle than to consider the practical function of things. For a brilliant example, see healthcare.gov, or consider the vast differences in what a days work consists of for an academic, and someone whose expertise lies in a technical field, or in business; dealing with customers or business entities, setting appointments, directing resources, the specifics of individual action and order and the coordination of those factors. Intellectuals aren't really concerned with these specifics. Further, as they are "undervalued" in their own opinion by the market, they regard it with almost superstitious disregard, and (as Hayek commented on in a few interviews) they tend to rather favor specific interventions that seem to be directed toward some demonstrable good.



These themes are echoed in "The Vision of the Anointed" by Thomas Sowell.

I just clicked on the book at Amazon, and the first reviewer wrote:

"To put it more philosophically, the politicians dream is the policy that has no downsides. Sowell realizes that in a nation of many millions, every policy has negatives and that politicians should, instead of being focused on perfection, should be focused on taking the most gain for the least loss. This, Sowell says, is capitalism and markets. Yes, there are some losers. But there will be more winners and less losers through markets than there will through a regulatory state."
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Re: Willink's Econ Thread

Postby Willink » Tue Sep 16, 2014 5:51 am

GreenDay wrote:
These themes are echoed in "The Vision of the Anointed" by Thomas Sowell.

I just clicked on the book at Amazon, and the first reviewer wrote:

"To put it more philosophically, the politicians dream is the policy that has no downsides. Sowell realizes that in a nation of many millions, every policy has negatives and that politicians should, instead of being focused on perfection, should be focused on taking the most gain for the least loss. This, Sowell says, is capitalism and markets. Yes, there are some losers. But there will be more winners and less losers through markets than there will through a regulatory state."


Ya Sowell is spot on. I'd recommend Vision of as well but Sowell deals more with the specific cases in which these sort of attitudes are illustrated rather than the method behind them. Fundamentally it reverts to a desire to "design" society in some way. As someone who figures myself in the classical liberal tradition, I don't have designs on "changing" or "shaping" society toward some nebulous end of which only the "smart people", "experts", (or, to borrow the polylogism of Marxism, the "proletariat thinker") get, I want to leave people alone as much as possible to pursue their own lives.

Hayek wrote a great expose on this "desire to design" in his book The Fatal Conceit. Here's a link and PDF copy:

http://www.amazon.com/The-Fatal-Conceit ... 1469298163
http://www.libertarianismo.org/livros/fahtfc.pdf
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Re: Willink's Econ Thread

Postby GreenDay » Tue Sep 16, 2014 2:22 pm

Thanks for the ref. I've read Road to serfdom but not too much more by Hayak. Read a lot of Mises though - Human Action, Money and Credit, but that was a long time ago...
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