The False Primacy of Politics over Markets

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Why Must Politics Have Primacy?

Back in 2010, German Chancellor Angela Merkel was making a major push for “the primacy of politics over the markets.” To a far greater extent, the entire doctrine of Keynesian economics which is now crashing against the rocks of high government debt levels and broad economic reality, is founded on the notion of the primacy of politics: that politics must have such primacy.

My question: why?

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The Head Of the CBO Is Dead Wrong

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I Couldn’t Ignore This Stupidity.

Go ahead and check this out on Bloomberg, but the key parts will be shown below.

A permanent extension of Bush-era tax cuts would provide a temporary boost to the U.S. economy and then become a drag on growth by pushing up interest rates, the head of the nonpartisan Congressional Budget Office said.

Douglas Elmendorf said extending all of the breaks due to expire at year’s end would increase demand in the next few years by putting more money in consumers’ pockets.

He says that like it’s a bad thing.

I mean, seriously, hasn’t the main argument been, we need to increase demand? Isn’t that a Good Thing anymore?

There’s more.

Over the long term, he said, the tax cuts would hurt the economy because the government would have to borrow so much money to finance them that it would begin competing with private companies seeking loans. That, in turn, would drive up interest rates, Elmendorf said.

“The problem is that if those tax cuts are not accompanied by other changes in the government budget and are simply funded through borrowing,” the borrowing “crowds out other private investment in productive capital — in the sorts of equipment, the computers, the machinery, the buildings — that are the source of long-term economy growth,” Elmendorf told the Senate Budget Committee today.

“That connection is less visible, and I think thus less apparent in most people’s intuition, but it is no less important for being not-so-visible,” he said.

I see that he is trying to be cute, to offer up what is essentially a supply-side idea that the real source of long-term economic growth is private investment in productive capital (the “supply” part).

Note that those who are concerned about the government crowding out private borrowing say that it’s already happening, but at any rate, this seems to me to be a disingenuous argument. Totally aside from that…

It’s Just Stupid.

I mean, seriously? Raising demand is bad? News flash: if the economy improves due to raised demand, we won’t have to worry as much about borrowing! For that matter, a country on the upswing has people rushing to throw money at it since they know they’ll recoup the investment.

Totally aside from that… this is the same logic with the $30 billion loan support program for small businesses. By and large, small businesses are NOT borrowing, because businesses borrow to EXPAND. When your production is already under capacity due to a lack of customers and orders – that is, due to a lack of DEMAND – there is no point in borrowing more money.

Let the big, bad corporations and the Mom and Pop businesses worry about how to borrow money from the private sector after the economy is back on track and their profits – and the lure of more profits – provide a genuine factual basis for borrowing and expansion.

One More Thing.

Incidentally, I realize the CBO has priced the expiration of the tax cuts for “the wealthy” (and small businesses with gross over 250k yearly – my best assessment of news reports is that there is simply no reliable statistical information publicly available to say how many businesses this includes) into its budget projections. Congress and the White House have similarly factored it in, deciding that the government has a right to that money and speaking of how the nation cannot afford to give a tax cut over and above… the raised level of taxes that will soon arrive as a result of inaction.

They have priced it in, but ordinary families have not. In fact, ordinary people are aghast at the lack of an extension for even the middle class, in addition to a reversal of relief from the Alternative Minimum Tax (AMT) and other “trap” provisions in the tax code that snare the middle class.

In other words, we are not discussing the cost of a “tax cut.” We are discussing the cost of not going through with a heavy tax increase, of which one component is raising the base income tax on the wealthy. (The AMT will surely squeeze a lot more than a simple base rise would.)

In other words, we are discussing raising taxes in a recession, and being proud of it.

Look, I thought this thought but, seeing someone else write it – not to engage in partisan politics, I won’t link, but… the idea is, Democrats are now willing to forgo job creation and economic revival. I’m stopping short of impugning their reasons. The fact is awesome enough in its raw stupidity that it requires no application of malice.

Supply Without Demand Is Ruin

Incidentally, to the extent supply-siders would actually support the idea that demand is irrelevant because supply creates it, that is a stupid and ruinous idea.

Broadly speaking, I’m not quick to support simply throwing money at people, but I’d support throwing money at people a lot faster than spending it in spectacularly wasteful ways that don’t give people the visceral feeling of a free lunch to encourage spending. That’s not really the point here.

The fact you have a factory means nothing if it is idle because you have no customers.

Therefore, a tax increase to support the government’s bloated finances just so that it does not “compete with private business” in borrowing years down the road is openly sacrificing the present for the future.

Look… keep your mind in the here and now, young Padawan. Do not be mindful of the future at the expense of the present.

The present is bad. To admit that not raising taxes would be beneficial in the short term is to make a mockery of the criticism of the long-term “problems.”

Without demand, none of us can do business, period. Without increased demand, few of us can do good business.

Let’s recognize that fact and drain the ideology from the issue. If we want prosperity, it must begin with allowing the economy to heal.

This won’t do it. This is actually choosing to continue the pain in order to create a politically appealing public lashing of the “wealthy” without the slightest regard for the consequences.

I still despise partisan politics in general, but my goodness, I never thought that a party going to the polls would actually choose to shun economic improvement because it doesn’t fit a redistribution agenda.

Economics, Lies, and Damned Statistics

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This post at Ezra Klein’s online space at the Washington Post is meant as a defense of Nancy Pelosi’s saying that extending unemployment benefits is the best job creation measure out there; that it is the most bang for the buck.

Specifically, it includes this graph.

Let me put this in small words.

THIS GRAPH REFERS TO GDP, AND GDP ALONE.

The part at the bottom says, “$ Change in GDP for Each $ Spent.”

When you mistake changes in GDP for the creation of jobs, there is no saving you. You are off the deep end, you are floating in a different dimension of reality. You are not remotely on the same planet as the rest of us in the real economy.

Unemployment is spent on rent or mortgage, utilities, and food. Of course it is spent and not saved. Is it spent on new cars? No. Is it spent on durable goods? No. How many jobs do you think unemployment check extensions are creating in the banking, utilities, and farm sectors?

Someone should teach these people that in a properly functioning economy, the same money “bounces around” as it is used by each party whose hands it enters to buy more goods from other participants in the economy. Money that is 100% spent, but goes straight back to the banking system, to the utilities, or to federally subsidized industrial sized farms, is far less “stimulative” and far less helpful to job creation and job growth than money that bounces around like a pinball.

It isn’t just a matter of how much of $1 thrown into the economy is spent. It’s what that dollar is spent on.

People who can’t grasp that have no hope of understanding how to help the economy. They will throw money at the problem in manners based on statistics that are, by definition, completely out of touch with job creation. GDP was never meant or designed to measure jobs.  I thought Democrats castigated Republicans under George Bush Sr. for worshiping GDP data in a jobless recovery. Maybe they did, and it doesn’t matter; they need to celebrate everything they can get, just like the Republicans tried to do back then.

The point is, mistaking a proportional rise in GDP for total gainful economic activity relevant to job creation is dumb, dumb, DUMB economics. It screams to me that there is something rotten in Washington, and everyone will suffer for it.

I have nothing against smart stimulus. This isn’t it.

My Beef With Ludwig von Mises

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In the interest of greater knowledge, I spent some time in my “youth” – my time after high school – trying to crunch down economics in my head. I wanted to understand, on a more fundamental level, how the world really works. The result is a great deal of knowledge and a great deal of cynicism.

Today, I was inspired by a piece of unimportant stimulus to take another look at the “Austrian School” of economics, championed by Ludwig von Mises, author of Human Action. Years later, I can identify with great speed and vigor my main beef with his whole reasoning process. Mind you, I have concluded that people follow Mises mainly for his conclusions – that government sucks and shouldn’t intervene in the marketplace – rather than his logic.

In fact, logic is precisely where his theory breaks down: his whole thing about praexology is predicated on the notion that man is a fundamentally rational being who makes fundamentally logical decisions as to how to satisfy his wants and needs.

Look, let me be really blunt here.

Human beings do a lot of really stupid things.

Mises dismissed the notion of humans acting without logic because that would make us, let’s see… animals that merely react to stimuli out of instinct. Let me elucidate further:

Many human actions fall in the vast gray area between the perfectly logical and the perfectly illogical.

You’d think this is so obvious that it doesn’t have to be said, but it’s not.

Now, like I wrote above, I understand the motive of this: it’s laying out a framework whereby the collective wisdom of the market is far greater than any government bureaucrat, lacking complete information (since no individual can possess complete information) on how the market operates, and why, at any particular moment, thereby making the entire notion of state intervention seem like literal insanity. However, there really is no collective wisdom of the market, any more than there is collective wisdom in anything else.

Distilling a large number of opinions gets you the lowest common denominator of all these opinions, reducing everything to what all can agree on. The only wisdom that comes from a crowd is “conventional wisdom,” which is often not very wise. While I believe it is very important in strategy to know what the conventional wisdom is, this is mostly for the purposes of defying it; as Sun Tzu would say, seeing the sun and the moon is no proof of sharp vision. The examples of an unregulated market being filled with conventional wisdom that proved wildly mistaken are quite numerous, making the information that the logical, “acting man” is supposedly relying on, rather poor in quality.

Consequently, I do not think that markets are “smarter” than government. Instead, the real issue is that government is more stubborn. When markets make mistakes, they correct themselves; often, an “over-correction” takes place, but in the great scheme of things, markets do right themselves and allocate money to things that add to the productive capacity of society instead of things that do not. The mistakes of the market may be great, but they are finite; the mistakes of government can be great, but the damage of these latter mistakes can linger for a long period of time, deepening the resulting economic wound.

At any rate, any assessment of human behavior that views man as either wholly rational or wholly irrational is bound to fail. Sun Tzu would never have won a single battle if he relied on his opponents behaving in a perfectly logical manner; rather, he banked on the understandable and deeply ingrained tendency of the human eye to see what it wants to see, and to fixate on the obvious rather than on the hidden.

That’s why the book is “The Art of War” and not “The Science of War.” The planet is not populated by Spocks; there’s a lot of Kirk-like human emotion and irrationality to account for.