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15 Economic and Political Myths that are Destroying America

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November 09, 2012 – Comments (36)

15 Economic and Political Myths That Are Destroying America

In no particular order. Comments welcome.

1. Deflation is bad for the economy

No less than Nobel Prize winning economist Paul Krugman lays out the case that deflation is bad for the economy. (I will try to avoid picking on Paul Krugman too much, but I can't promise anything.) Prices fall. People stop spending. Debtors are crushed. Businesses shutter their doors. Mass hysteria ensues.

Except there is no historical link between deflation and depression. None. So behind all of Krugman's rhetoric is zero scientific evidence. The theoretical case is even flimsier, resting on the notion that entrepreneurs are idiots that can't adjust to price changes (even though that's one of the primary reasons they became entrepreneurs) and that consumers are scared little chicklets who will never buy a product if they think it might fall in price tomorrow. This is exactly why computers sit on shelves for years. Everyone knows the price is going to fall. Rrrrriiiight....

This foolish myth is brought to you not just by Krugman and his uninformed followers. Nearly as many so-called free market conservatives believe this same nonsense.

In the end, this unscientific and logically flawed theory gives cover to a government that wants to print money for its cronies, devaluing your savings and robbing you of your rightufly earned productivity gains. Prices should fall. That's a how a market works. Society's productivity rewards all citizens by raising their standard of living. More goods available at falling prices.

Instead, we are stuck with endless money printing justified by charlatans with Nobel Prizes.

2. Voting is your civic duty

Here's how I spent election day. I worked. I watched some TV (but zero election coverage), and then I chatted on the phone and went to bed. I had a very productive day.

Everything I did was a voluntary and peaceful.

On the other hand, everyone who stood in line for hours to vote (seriously? Ha! The State can't even do something as simple as counting efficiently!) engaged in an act of violence. Whose day was more civil?

Here's a quick thought experiment I like, with a hat tip to Constitutional scholar Michael Badnarik. Imagine that everyone in your neighbor was convinced that no autombolie should get less than 40 mpg. (The arguments in favor of this new prohibition on gas guzzlers conveniently provided by the automobile industry, which lined up a group of economists with PhDs and little self respect to persuade you what a great thing this would be for the local economy. Mix in a self absorbed environmentalist and voila! Brainwashing complete.)

So everyone takes a vote. Democracy in action! Your neighbors put little “I voted” stickers on the back of their cars. Maybe tell their friends and family how important it is to do your civic duty. They swell with pride.

Now what? Oh yeah, someone with a gun has to find the offenders and force them to give up their gas guzzling cars.

Your vote only has authority if it is followed up by thugs who got all C's in high school terrorizing peaceful people.

Civic duty huh? There's nothing civil about engaging in violence, and there is nothing civil about voting.

If you want to claim that “hey it's better than a government that doesn't let you vote at all”, sure I buy that. It's still violence. And it's still not your best option, which is to live in peace with your neighbors.

3. Central banks provide more stability than the gold standard

There are just so many awful arguments against gold (among the worst yet most popular among economic illiterates: you can't eat it or there's not enough gold), but this one is the most damaging. Among those who have just enough economic knowledge to be dangerously uninformed, they like to trot out a chart from the NBER or this data set, showing how many recessions we have had on gold and on paper.

The NBER's data set is so easy to tear up that it's shooting fish in a barrel. Among the most egregious inclusions is 1873-1879, the so-called “Long Depression”. That's another myth. There was no Long Depression, and nearly every economist (mainstream or not) recognizes this. 1873 saw a brief recession, which was followed by a 23 year period of growth that marks as the largest and longest expansion of prosperity in human history. Under the gold standard, btw. Careful analysis on a case by case basis shows that our worst instability has been under a Federal Reserve system. And it isn't even close.

But there's another point that needs to be made. Why would gold cause instability? The causal link is never explained by those who remark on gold's supposed disastrous instability. And in fact, we know other countries that didn't have a central bank and used gold as money had no such panics like the United States did pre-Fed. Hmmmm... perhaps there was something about American law that intervened in the proper functioning of the market. And indeed we know that there were plenty of such laws: the creation of short lived central banks before the Fed, legal tender laws that privileged certain notes over others, inflationary wars, and a myriad of other interventions that helped create the booms and busts America experienced pre-Fed.

Just don't expect the surprisingly emotional and un-scientific gold haters to use logic on this one.

4. Democrats are anti-war

This might be the most dangerous myth in America. Even Republican loyalists believe it, as you learn when they inform you that Dems want to “gut the military” and similar nonsense. The big problem with this is that it gives liberals a moral authority they don't deserve. There is absolutely nothing moral about voting Democrat, especially if you think it's a vote for peace.

Truman dropped the only two nuclear bombs in history. JFK and LBJ brought us the Vietnam War. Clinton bombed the Serbs, Sudanese, and Iraqis. Obama has bombed at least 5 countries, covered up the murder of an American teenager, and tried to stay in Iraq (but was thankfully kicked out, except for our remaining mercernary presence.) Meanwhile, under a Democrat controlled Congress and Presidency from 2008-2010, defense spending rose. Yeah, some peaceniks you got there.

Democrats are not pro-peace. Nor are their voters – the American liberal. The liberal doesn't mind war at all, so long as one of our socialist allies in Europe approves, and especially as long as the victims are brown people (Muslims preferred, but just brown is ok.) In other words, not only are liberal voters pro-war, they're also just as racist as their Republican brethren. It's just a different flavor of racism. Moral authority, my butt.

Unfortunatly, this myth hides the fact that a truly peace-loving anti-war voter has no choice in political parties. It's one warmonger or the other. Yet, liberals can go on forever believing that they are making a difference. And nothing changes.

5. Minimum wage laws help the poor

Speaking of racism, that's the origin of minimum wage laws: white Northern union workers attempting to prevent migrating southern blacks from taking their jobs. The last time black male unemployment was lower than white male unemployment was the year before the minimum wage law passed.

The economic arguments for the minimum wage are just terrible, usually followed by the supposedly caring progressive vomiting something about strawberry pickers and how the rest of us are just so cold and insensitive. But what about inner city youth? Does the minimum wage law supporter not care about them, as they represent those who end up unemployed due to the high cost of their labor?

Price controls don't work, as Gov. Christie just learned.

I guess the progressive thinks Crony Capitalism is bad, but Crony Laborism is just fine. And that's all minimum wage laws are. They protect workers in exisitng jobs from competition that would benefit consumers. Just as Crony Capitalism privileges some businesses at the expense of thier competition and the consumer.

If Progressives have the moral high ground, we are all WAY below sea level.

6. The government, through the central bank, should strive for price stability

Again, unscientifically founded and logically flawed poppycock. There is no reason the general price level should be stable, except for a mythical belief that a stable economy is somehow driven by stable prices.

The formation of prices come from many factors, including the money supply. Ultimately however, all price formations are the result of subjective evaluations made by individuals acting in exchange. Any attempt to alter these prices in order to keep the general price level stable is like playing God with the economy. (By gunpoint, of course, since it takes an act of violence to establish a central bank in the first place.) It's the replacement of those subjective evaluations of market actors with subjective evaluations of non-market anti-free market technocrats.

And that would be bad enough, if stable prices actually created a stable economy. However, stable prices can actually mask a great deal of monetary inflation, and its subsequent bubble creation. The 1920's are marked by excessive speculation that was accompanied by a stable general price level and huge amounts of money printing. Since mainstream economists are nimrods, they actually don't believe the 1920s to be inflationary at all. Just greed run amock, they say. Never mind the massive amounts of money that had to be created by the Fed to keep prices stable, which was the first time we see this doctrine put into action.

In other words, this silly myth laid the groundwork for one of the most spectacular bubbles and crashes of all time. And still the mainstream econ profession doesn't get it. They are amazingly dense.

7. A little inflation is good for the economy

This is price stability 2.0, the modern doctrine that calls for a stable amount of price inflation, generally 2-3% per year. Why? Because your econ professor and a technocrat said so. So it must be true.

And just like #6, this is complete unscientifc baloney. Instead of stability, we get bigger bubbles (housing) and bigger crashes. Great job, guys. Can we get some people who aren't completely insane a few teaching gigs, just to shake things up? That would be nice.

8. The stock market's direction is an indicator of economic health

The total market capitalization of the stock market is driven entirely by money printing. It rises with money printing, then crashes when it rises too far (because the underlying economy has been completely disrupted by this monetary intervention that destroyed price signals), and then we have yet another round of printing to prop it back up.

Drug addicts always feel better after another hit. That doesn't mean their body is doing great.

9. GDP measures economic growth

We're beating a dead horse. GDP measures money printing, which in turn is driven by a government's desire to consume as many resources as it can get its greedy hands on.

A time preference shift that increases society's desire to save is reflected negatively in GDP. That's really all you need to know. Yeah there are wackos out there that believe savings hurts an economy, but judging by all the other myths they believe, I think you know what to do with that information.

10. The troops defend our freedom

I'm confused by thios. Do only our troops defend freedom? What about the Soviet troops? Were they defending Soviet freedom when they invaded Afghanistan? And what particular current military operation is defending my freedom? Drone bombing little kids in Pakistan? Oh yeah, I remember how freer I felt the day I learned a hospital full of woman and children was erased in Afghanistan.

But riddle me this, if troops are defending my freedom, why am I less free after every deployment? Hmm.... something's not right...

Oh yeah, now I remember. War is the Health of the State.

11. Watching the news keeps you informed

The more news you watch, the more brain cells you kill. The math on this is tough to pin down, but I'm pretty sure that's the general equation. “But how will I follow current events?” whines the sheep.

Try being just a bit more inquisitive and I suspect you'll do just fine. The mainstream news, whether it's Fox, Drudge, CNBC, MSNC, CNN, NYT, WaPo, or any other garbage you digest is purposely keeping you uninformed. Each fights for access to the Temple. It's that access they want, not any desire to enlighten you. That's how they all end up as government's typewriter. Whether it's cheerleading for the Left State or the Right State, they're all the same to me. Purposefully ignorant and occasionally deceitful spin masters.

Ask yourself this: are you more informed than I? Perhaps you can prove your case in the comment section. I suspect that if you're mainstream news junkie, you're not. But hey, since I haven't watched a single news program since 2007, I should be a cakewalk for you.

12. Capitalism, free markets, and free trade cause economic panics

I was in Washington, D.C. lately. Pity me, I know. It's filled with such disgusting people. One of the most amusing aspects of DC is the bookstores. They are straight out of a 1960's Berkely cartoon. Nothing but Marxism and Keynesianism through and through. I love perusing these stores, as each title yells that “Free Trade Doesn't Work” or “Capitalism is Evil!”

And then I open the book only to find the same old Left-Right talking points. It's always the same. Whatever the policy, be it a trade agreement managed by mountains of paperwork and an army of bureaucrats, it's a “free trade” arranagement that failed (because Republicans supported it, and you know, they're free trade guys... ahem..) Nor will these ideological pinheads ever distinguish between genuine market activity and crony capitalism. Such a dive beneath the surface is beyond the capability of their tiny brains and outside of their agenda.

So if you're wondering where these strawman arguments come from that our imaginary free market world causes all of our problems, they originate in DC bookstores.

13. Deregulation causes economic panics

Bill Clinton said so. It must be true. Democrats are religious about this one.

Allow me to be perfectly clear, so they get where I am coming from. At no point in human history has there been greater amounts of regulatory code, greater amounts of money spent enforcing regulations, greater amounts of regulators, than were in place during this most recent crash.

Deregulation means removing government interference from market activity, not shuffling the deck. It's another false dichotomy brought to you by the Left/Right State that enslaves you.

I already knew that Republicans engage in very little critical thinking. Heck, Sean Hannity didn't even know there were arguments in existence that placed the blame for the Great Depression's severity on FDR. Bill O'Reilly didn't know how to pronounce Keynes' name and had apparently never head of him. Ann Coulter once expressed disdian for economic discussion at a dinner party, claiming economics isn't important.

But now I'm convinced that Democrats are no better.

14. World War II ended the Great Depression

What would it say about humanity if it took the slaughter of tens of millions of people to get an economy going again?

Thankfully, this is only a myth. The Depression was still going strong in 1946. A giant slash in government expenditures, a relaxation on wage controls, and a little hard work helped America produce one if its biggest private output gains ever recorded from 1946-47.

Another related myth is that we only recovered because all other countries had the industrial base destroyed. That's also pretty stupid but widely believed. ...... So it helps your economy to have your trading partners decimated? People really need to start using their own brains.

And while we're on the subject, anytime someone tells you that slashing government budgets ruins an economy, familiarize yourself with 1946-47 and 1919-20, just to name a couple (there are lots more.)

15. We are the Government

In a nation-state, the government is simply the administration of the affairs of the State. We get all excited about voting for one guy, as if that makes a difference to the millions of unelected bureaucrats that really run this country.

We are not the government. We are not the State. We are the market. And we should be proud of it.

David in Liberty

36 Comments – Post Your Own

#1) On November 09, 2012 at 3:52 PM, smartmuffin (< 20) wrote:

1.  Reminds me of Tom Woods' classic argument against Krugman and others who panic over defaltion.  These people actually believe that if the price of coffee steadily went down, nobody would ever buy coffee anymore because "hey, these coffee people must think I'm a sucker, it'll just be cheaper tomrrow, so I'll buy some tomorrow."  Then tomorrow comes around and the whole scenario repeats itself.

6.  Probably the main new idea I got from reading Human Action cover to cover a couple months ago.  Whenever economists and politicians and pundits talk about "stability" we take it as a given that it's preferable.  Generally speaking, most of us would rather live in a society where things are predictable rather than chaotic.  But of course, prices HAVE to be chaotic for them to have any significant meaning.  That's how markets work.

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#2) On November 09, 2012 at 4:48 PM, whereaminow (< 20) wrote:

But of course, prices HAVE to be chaotic for them to have any significant meaning.

Very well said!

Davd in Liberty

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#3) On November 09, 2012 at 5:49 PM, HuellHowser (< 20) wrote:

Interesting read...

As an economic layperson I see the abuses on Wall Street and I say clearly more regulation is needed.  Now I don’t doubt for a minute that regulations are implemented in a way to allow whatever shady practices Wall Street engages in to continue while permitting politicians to say they’re tough on Wall Street. 

However, that said I just don’t see how deregulating an industry that continually proves to be morally bankrupt would have a positive outcome.  I guess my question is realistically speaking how do we keep them honest? 

 

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#4) On November 09, 2012 at 6:19 PM, whereaminow (< 20) wrote:

HuellHowser,

As I'm sure you know, we're all in a real pickle now.  I want you to consider a couple of things:

1. The market, despite all the interventions, actually did its job and tried to put these clowns into bankruptcy where they belonged.  But they ran out an army of propagandists to warn us all that the world would end if they didn't get their bailouts. And even that didn't really work, since most people overwhelmingly opposed it. The market worked. The government failed, caved, and gave them OUR money.

That's typical though, historically.  Wall Street is financed by the banks, which are backed by the Fed.  Generally, governments are addicted to the banking system because they serve as a lender of last resort when the people can no longer bear the government's burden.  Who would buy Treasury debt if the banks weren't around?  Who would fund America's overseas empire without the constant creation of notes by the Fed?  Where would Wall Street get the billions to play drunken blackjack every year if not for the Fed?  

So they are beholden to each other, at the expense of us.

If regulation is designed so that those in power can easily absorb the burden, while those who wish to compete cannot, then it actually benefits the exisitng Establishment.  And that's pretty much all our millions of pages of regulation has ever accomplished.

2.  Their whole game collapses if we remove legal tender laws and allow competition in currency.

David in Liberty

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#5) On November 09, 2012 at 6:27 PM, dbjella (< 20) wrote:

Another related myth is that we only recovered because all other countries had the industrial base destroyed. That's also pretty stupid but widely believed. ...... So it helps your economy to have your trading partners decimated?

I am trying to use my brain :)  

Lets assume there are two islands with industrious people and ample resources. One island is decimated by a hurricane and the other is not. Wouldn't the other island and its people benefit from access to the other islands resources at a cheaper prices?

Cheaper because the decimated island has to "give up" more resources to get back to where it was. They are at a disadvantage regardless of whether they exchange peacefully or not.

I don't think we are talking about the broken window fallacy, because as I understand it that would apply to the 2 islands together...no advantage to sum of both.  What am I missing? 

 

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#6) On November 09, 2012 at 6:27 PM, dbjella (< 20) wrote:

I did like this blog and I wish you would blog more.

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#7) On November 09, 2012 at 6:50 PM, awallejr (79.54) wrote:

These aren't myths, these are opinions some of which I agree with and some of which I don't but my back is in excruciating pain so I will leave it at that.

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#8) On November 09, 2012 at 7:03 PM, whereaminow (< 20) wrote:

dbjella,

Thanks Doug! 

When thinking about this scenario, try this thought experiment. Drop the borders. Consider what would happen if half of America suddenly had 70 years of productivity gains wiped off the table.  The other half would certainly appear wealthier, but only in comparison to their now-poorer neighbors.

In the case of a foreign country being devastated these same problems exist, but currency devaluation caused by the war and productivity losses make the neighboring country appear even wealthier.  But no one is better off when a country gets its industry destroyed.

To think of it another way, try to imagine not only all the finished goods that the destroyed country produced, but also all the parts that they supplied to make other finished products in other countries.  

While it may appear on the surface that things are now better for everyone else, they are not.  

I hope that helps.

David in Liberty

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#9) On November 09, 2012 at 7:03 PM, whereaminow (< 20) wrote:

awallejr,

Bummer. Hope your back gets better.  I was looking forward to our always entertaining back-and-forth.

David in Liberty

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#10) On November 09, 2012 at 7:28 PM, HuellHowser (< 20) wrote:

Thanks David.  I agree with you on your first point, its BS what they pass off as regulation and I don’t see that ending any time soon although I'd give that a slightly higher chance of happening than your second point.As for voting...I get you not wanting to vote for the President but what about propositions or local officials?  It’s been a while since the mayor of Granada Hills waged war on anyone if you know what I mean.   

 

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#11) On November 09, 2012 at 7:45 PM, whereaminow (< 20) wrote:

HuellHowser,

Haha, clever point.  I don't know.  If the candidate actually wanted to dismantle some or all of the local govenment, that would be worthy voting for.  Of course, local unions, opinion molders, and privileged businesses aren't likely to allow any candidate like that to have any success.  Should he or she have a shot though, that might be something.  In that scenario, you're not voting for someone to rule over your neighbors, but rather for someone to remove the existing tyranny.

It's happened before.  The English liberals came to power in the 19th century by doing exactly that.  However, once in power, they pretty much put everything law back in place that they had previously repealed, and usually with even more onerous burdens.  It was ok though, they said, since the people could trust them to know how to write the laws to be just and fair.  Within a generation later, England was back under the yoke, just by a different master.

David in Liberty

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#12) On November 09, 2012 at 10:38 PM, ath002 (< 20) wrote:

Hi David,

Agree with DBJELLA, you should most definitely blog more. Sort of keep us intellectually inquisitive and honest.

One question: where does one get acces to alternative information, if one foregoes MS media? 

Once again, thanks for taking the time to share your thoughts.

Luis 

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#13) On November 10, 2012 at 12:25 AM, whereaminow (< 20) wrote:

ath002,

Thank you. 

Generally if you can find just a couple of sites/blogs that interest you (searching the web for an author or interesting person in your area of interest can get you closer), you can usually go from there, since they will link to or reference other sites.  Good bloggers support other bloggers, or at least give occasional shout outs.  You start by giving each site you visit a litmus test.  Does it provide interesting content? Is it up to date? Is the analysis un-conventional?  What's the quality of the work? Etc.  Bookmark the ones you like and browse them daily.  If you lose interest, cut em and move on.

Once you have 10-15 you like, sign up to have their content emailed to you when they are updated. Almost all do that nowadays.

Lather. Rinse. Repeat. Eventually you'll get down to a handful of favorites that are as important to you as Walter Kronkite was to your grandpa.

If you're not learning anything interesting, anything you can coherently explain to a skeptical listener, you need to start getting new inputs.

David in Liberty 

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#14) On November 10, 2012 at 12:35 AM, smartmuffin (< 20) wrote:

Believe it or not, I've found that Facebook and Twitter are excellent vehicles for staying informed.

There are numerous "news aggregator pages" out there that re-post links to stories relevant to their particular interest area.  Find some good ones, follow them, they show up right on your facebook news feed.

 

And yes, David needs to blog much more.  Perhaps we should take up a collection and offer to pay him.  As a free-market guy, he's probably obsesssive over his opportunity costs from blogging and whatnot.

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#15) On November 10, 2012 at 12:45 AM, awallejr (79.54) wrote:

Thanks David.  I don't know what I did with my back but I really had things to say.  Hopefully I will feel better and get an "as usual" controversial discussion going between us.

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#16) On November 10, 2012 at 12:53 AM, eddietheinvestor (< 20) wrote:

I'd contribute to the collection, smartmuffin.  David in Liberty is by far the most insightful and learned blogger on the Fool. 

David, your blogs are much more intelligent than Krugman's.

As for number 4, the Democrats support wars and aggression for political reasons.  They tend to be anti-Israel (see Carter and Obama, for instance).  Obama contributed to regime change in Egypt (Israel's only ally in the area), leading to Mubarak (friendly to Israel) being replaced by a new Egyptian government that unquestionably is anti-Israel and that wants to end the peace treaty.  Meanwhile, Obama refused to lend a hand to the possible regime change in Iran a few years ago, despite their threats to destroy Israel and despite Iran building nuclear weapons.  Obama has tried harder to stop Israel from building apartments than Iran from building nuclear weapons.  Israel is in a much more dangerous position than in the last 60 years because of Obama.  They are totally isolated, with no ally in the Middle East or in the White House. 

I wonder what Gore would have done after 9/11.  Would he have used military action?  

Great post, David.

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#17) On November 10, 2012 at 1:13 AM, awallejr (79.54) wrote:

Eddie to answer your question about Gore, no he would not have.

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#18) On November 10, 2012 at 1:22 AM, smartmuffin (< 20) wrote:

I disagree.  I think Gore absolutely would have.  Remember the Bush/Gore debates.  If so, my apologies, but Bush was the one preaching non-interventionism.  Following 9/11, the use of force against Afghanistan passed both houses with near unanimous support, and the Iraq war wasn't all that much harder to get through.  Clinton bombed the **** out of Serbia and Gore never seemed to concerned about that.  I see no reason to assume Gore would have done anything differently.

For more on the Bush non-interventionism, I always love this video:

http://www.youtube.com/watch?v=F9SOVzMV2bc

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#19) On November 10, 2012 at 1:33 AM, Valyooo (99.48) wrote:

What, if anything, would you use to measure economic growth?  I don't like GDP, but I have not found anything else I like either

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#20) On November 10, 2012 at 1:45 AM, bscx (< 20) wrote:

real wages?  largely stagnant in past 40 yrs iirc

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#21) On November 10, 2012 at 1:40 PM, whereaminow (< 20) wrote:

Thank you all for the recs and comments.

In regards to the Al Gore question, in addition to the infamous video posted by smartmuffin, there is this speech on Iraq which Gore made in 2003.  I think it's clear from reading this that Gore would have prosecuted the War on Terror in a fashion similar to Bush/Obama but that he was not supportive of invading Iraq.  (Obama also claimed the exact same position when he was a Senator, however, and yet would have remained in Iraq had he not been kicked out.)

Valyooo,

I believe the problem to the idea that one single measurement can provide the number that our society should "target".  GDP isn't the worst idea in the world, as long as it's not used as some holy grail by which monetary authorities should attempt to make sure it's positive and by a certain amount.  

Any easy albeit imperfect solution would be to subtract rather than add Government Expenditures from GPD, since as you know what government consumes must come at the expense of the productive sector. 

But other statistics should also be considered.  Labor productivity (output/man hours), capital formation, real wages (as long as they are based on individual wages and not household), cost of living, etc...

I'd love to see a chart of GDP with the G negative instead of positive. Would  be enlightening and I bet a great deal closer to the truth.

David in Liberty 

 

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#22) On November 10, 2012 at 2:37 PM, somrh (78.62) wrote:

Hi David,

For brevity I'll focus on #1 (and #7) for that matter.

Just to be clear here, I'm not defending Krugman. I'm far more sympathetic to Steve Keen (if you haven't read the exchange between the two it's interesting. See here, for example. He specficially takes Krugman to task on the role of debt.)

A) is there no evidence of a link between deflation and depression? See Figure 1 as an example. 

Irving Fisher (again, I suspect Steve Keen has a better understanding of the Fisher-Minsky tradition than Krugman does) claimed that the link wasn't deflation but debt deflation

Debt complicates the picture significantly. If prices were all capable of moving freely, if capital structure of investment were all financed by equity, then perhaps deflation wouldn't matter as much. Unfortunately this is not true. 

B) It's not falling prices that matters per se that decreases demand; it's falling incomes and their relation to fixed expenses. So I think Krugman is wrong here (and your computer example works fine). 

To give an example, suppose I have $50 in fixed expenses (rent, mortgage, car payment, etc) and I have $100 in income. If prices all dropped at the same rate (they don't, but let's pretend that they do), say, by 10%, then my income would fall to $90. But my fixed expenses are sticky. The end result, is that my income after expenses went from $50 to $40, a 20% decline. So I would have less income available to make pruchases. Prices declined by 10% but my available income declined by 20%.

C) Entrepeneurs don't become entrepeneurs to adapt to prices. They become entrepeneurs to "make a profit", "become the boss", "offer an interesting product-service to the community", etc. 

I would suggest most business folks like stable prices, not volatile ones. Businesses will enter into contracts with customers and suppliers to fix prices so that they can appropriately plan. Others use futures and forward contracts to mitigate those risks. 

D) That all aside, I still don't understand why you think that entrepenuers are able to adjust prices or more generally why they should (if they don't they're "idiots"). 

(1) If there were no fixed expenses (perhaps in a world where all capital was equity financed) then this might be true. We don't live in such a world.

(2) It would actually be stupid for them to lower prices below costs. So you'd have to assume that they could equally control costs (unlikely) or that they will lower enough. 

No doubt businesses lower prices to clear inventory when appropriate but they need not lower prices on future production; they simply won't produce those items.

E) Regarding your last point (in point 1), I think this confuses the "real" from the "financial". Productivity gains will increase goods/services available regardless of what price tag is assigned to them. It's like suggesting that I went from weighing 180 lbs to 90 kg and therefore lost weight (90 kg ~ 200 lbs... ignore the fact that kg measures mass and not weight). The productivity gains are still there. They haven't disappeared. They weren't "robbed" by inflation.See here:

Long-term real growth in US GDP per capita

What can happen, though, is how resources are distributed could be altered. One could point to the increase in income inequality (after all, the above numbers are just "averages") and that might give a disproportionate amount of productivity gains to one group over another. But that doesn't mean that inflation causes it.

In any event, I suspect we can still have some common ground with the private debt issue (Figure 4 from the Steve Keen blog linked above is important imo). 

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#23) On November 10, 2012 at 2:58 PM, somrh (78.62) wrote:

David, regarding GDP - G,

If you've never been there, the Fed has a lot of intereting data series:

FRED

Here I took real GDP - real GOV (hopefully this works):

I'm not sure what you're looking for here.

GDP is an OK metric for income which is important for debt maintanence. That aside, I concur it's probably not that great of a number.

If I get sick and need medical care that improves GDP. Personally I'd rather just not get sick. 

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#24) On November 10, 2012 at 4:01 PM, whereaminow (< 20) wrote:

somrh,

Hey thanks bro.  I'm out and about for most of today, but I'll engage you in conversation on the points you made in comment #22 as soon as I get some free time.

Thanks a lot for the chart.  Is that GDP without Gov exp, or is GDP with Gov exp subracted rather than added?  The latter is what I was looking for.  In other words, remove Gov and then subtract it since I view it as a negative economic activity.

David in Liberty

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#25) On November 10, 2012 at 5:23 PM, somrh (78.62) wrote:

David, both of those sound the same to me :P

More specifically I took this and subtracted this. I believe the second one excludes govt transfer payments (which IIRC are excluded from GDP calculations). 

FRED has many time series for a variety of data so I encourage you to explore them. Perhaps you'll find better series for what you have in mind. 

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#26) On November 11, 2012 at 7:01 PM, Melaschasm (54.73) wrote:

Comment #5

The short answer is that internation economics says trade benefits both sides.  When the industrial base of some countries is wiped out, there is less wealth/trade globally.  

Lets say there are two islands,equally wealthy.  One builds computer hardware, while the other generates electricity.  If one island is wiped out, both lose.

Another way to look at the problem.  You have two identicle islands.  Each generates a couple new inventions/innovations each year.  One island suffers catastrofic damage and goes a decade without discovering anything new.  That means half as many new discoveries occur, and while the island avoiding destruction will be much more powerful than the devasted island, it will have less wealth, because it will not benefit from the discoveries the other island would have made. 

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#27) On November 15, 2012 at 9:49 AM, whereaminow (< 20) wrote:

somrh,

A) Yes, there is no evidence. The paper you link to states quite clearly that there is no evidence, and it is the most exhaustive study of deflations that I am aware of. The Atkinson-Kehoe work gets cited quite often by Austrian School economists.  Usually to the sound of crickets from the Keynesians.

B)  I'm no fan of Fisher, who gave us the horrendous idea of price stability, was a huge statist hack, and made the methodological error of beliving utility could be measured mathetically (which is the equivalent of saying that you can statistically and objectively measure how happy I am writing about Fisher.)  So I doubt that I'll give him thoughts on debt deflation any time.

I know Minsky is the hero of the MMT school. I am not familiar with his work, except that I've been told their counter cyclical spending argument is based on Minsky, which means Minsky must be nuts because MMT's counter cyclical argument is complete baloney with no scientific evidence to support it, nor any theoretical case.

C) Entrepeneurs don't become entrepeneurs to adapt to prices. They become entrepeneurs to "make a profit", "become the boss", "offer an interesting product-service to the community", etc.  

I don't think either is correct.  I think Entrepreneurs must adapt to price changes, or else they wouldn't be entrepreneurs for very long.  Entrepreneurs are in their position for two reasons. They identify opportunity and they take risk.  Either way, you and I are closer to the true nature of the entrepreneur than almost all university level econ professors.

D)  Why would anyone lower prices below costs?  Choosing not to is a decision to sit on inventory.  I lowered the rent I was collecting from my house to below the mortgage I was paying, during the recent depression. Why? Cuz something is better than zero. 

But to assume that costs won't lower as well in a general deflation is kinda silly.

E)   I don't think you understand my point at all.  What "is today" does not meant that is what "would be anyway".  Prices would be MUCH MUCH lower without the Federal Reserve's constant inflation.  Historically, wages do not fall like other prices in a free market (unless there is a huge influx of labor).  

Nor do you seem to agree with the Cantillon Effects of money creation. 

We are definitely robbed by inflation.  

David in Liberty

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#28) On November 15, 2012 at 7:37 PM, somrh (78.62) wrote:

David,

A) The figure I pointed to in the article is evidence; I don't know what you can possibly mean by evidence that would imply that it's not. The rest of the evidence is conflicting evidence. There are two possibilities

1) There is no link between deflation and depression (e.g. the depression era correlation is just a statistical anomoly). 

2) Other variables are at play here that are present in one case and not in the other.

I've already alluded to what the other variables are (related to high levels of debt and deleveraging).

B) Well in case you want to actually read the relevant articles:

The Debt-Deflation Theory of Great Depressions

The Financial Instability Hypothesis

The latter might be worth reading if only for the fact that his borrowing schema can be useful for investing: (see my blog on the subject here). 

C) Sure entrepeneurs must adapt to price changes. That's not why they became entrepeneurs though. At least I've never met one that did. 

"you and I are closer to the true nature of the entrepreneur than almost all university level econ professors."

Perhaps but I'm inclined to disagree here as well. I don't discount the value of secondary markets but I don't actually do any investing in any economic sense. I purchase firms from previous owners. Those firms may or may not be investing (by this I mean buying machinery, conducting R&D, etc). But I'm still largely removed. Many of those firms don't even need financing any more because they have adequate cash/cash flows to meet investment requirements. 

D)  Reread what I wrote above; I acknowledged that they might lower prices to clear inventory where appropriate. We've had this conversation before.  We aren't talking about just inventory.

Let's say a manufacturer chooses to lower prices enough to clear that inventory. Are they going to buy more raw materials? Are they going to produce more goods selling them below cost? If you know of any companies doing so, I'd be interested in shorting them. :P

"But to assume that costs won't lower as well in a general deflation is kinda silly."

To be clear I don't believe in "general deflations". At least not in the sense that all prices decrease at the same rate. And most companies have limited cost control. My point was to illusrate how deflation affects purchasing power when you factor in debt.

E) There's a few things here:

1) There was no loss of productivity gains. They are still there.

2) I agree with you that the benefits of productivity gains can be distributed in different ways (I take that to be your point here). I blogged about it here.

3) I'm also presuming you're referring to the fact that,say, worker wages have been more or less stagnant in real terms but, say, CEO wages have increased, say, 10 fold. I'm presuming you're implying that inflation caused the distribution to occur in this manner. I'd like to see actual evidence. I see no reason to believe it.

I'm guessing CEO pay has a lot to do with the good 'ol boys club that is corporate boards and the overall institutional complacency regarding voting on pay packages. Hopefully that will begin to change soon as people reallize that overpaid CEO's don't make for good investments. I don't see how inflation fits in here but am certainly open to the idea. 

I do find it interesting that health care and education prices are two big "gainers" over the least decade or so. 

4) I'm guessing I'm sympathetic to Cantillon Effects but I'd have to know more about what specific predictions it makes. If it's only the claim that how increases in the money supply permeate through the economy occur unevenly then I have no issue.

5) If wages are "stickier" than other prices, then how is the entrepeneur in part D going to lower costs? :P

That still wouldn't mean that incomes won't fall. Worker income reductions can be acheived by lower hours or laying off workers.

6)  By blaming the Fed, I presume you're assuming (as many Austrians do) a "money multiplier" theory. You might consider looking at the evidence on that issue. Here's a brief piece from Steve Keen on the subject:

The Myth of the Money Multiplier

Regards.

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#29) On November 15, 2012 at 11:43 PM, whereaminow (< 20) wrote:

somrh,

One thing at a time.

The Atkeson-Kehoe states clearly that there is no link between deflation and depression.

Figure 1 represents one historical episode. It is not evidence. It is a weak correlation that is completely lost when one takes a wider view.

In fact, as the paper states, there is a stronger link between inflation and depresion, than deflation (albeit a very weak link as well.

So..... what evidence are you talking about?

David in Liberty

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#30) On November 16, 2012 at 1:37 PM, whereaminow (< 20) wrote:

In relation to Fisher's article (one of the economists primarily responsible for causing the panic of 1929), he appears to believe the 1873 panic was a deflationary panic.

Does he have any understanding of why that deflationary panic lasted only a few months?  Do any MMTers have any reasons why that panic only lasted a few months?

"The panic of 1873 can only be understood in the light of the various tendencies involved—deflation and other; and deflation can only be understood in the light of the various historical manifestations—1873 and other."

David in Liberty

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#31) On November 17, 2012 at 2:18 AM, whereaminow (< 20) wrote:

When it comes to MMTers I don't know why I continue to bother (I'm still waiting for one to accept my debate challenge).  I pull up Minsky's Financial Instability Hypothesis and he starts with:

"capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control."

No, they really don't.  Centrally planned economies exhibit this behavior, particularly those with central banking systems.  No non-central banking free market economy ever had a inflation or debt deflation that "spun out of control."

Minsky then references the Fisher work, which erroneously categorizes 1873 as an out-of-control debt deflation.  Errrrrr.... ok...

Obviously Minsky, like most MMTers I have come across, never read Hayek, particularly Prices and Production.  In that work, he works out the logical case.  It is impossible for a free market economy to suffer any type of inflation or debt deflation that would "spin out of control."  Only through the use of an outside entity could one create enough credit to set the table for such a scenario, since there has to be a force capable of preventing the necessary adjustments to the capital structure.

And that's really the funny thing about this whole exercise (and if anything comes about the continued dialogue between MMT and Austrians, it would be MMT finally admitting that they haven't actually read any Austrian works), is that expansion of credit is a necessary condition of the boom.

If you understand that, you understand why the panic of the bursting bubble would be deflationary. Duh....  So there is nothing peculiar about this panic and its deflationary aspects.  And as such, nothing that renders it a special case. (Except maybe that the Fed has had 40 years to pump and re-pump this bubble as opposed to previous ones that were cut shorter by gold pressures.)

Finally, a comment on sticky wages - yet another wonderful Keynesian mainstream idea that the supposedly non-mainstream non-Keynesian MMT school has adopted....

All wages are sticky.  There is nothing inherently wrong with that.  There is nothing inherently wrong with wage adjustments that move the preference of laborers to how sticky they would like their wages.  As long as the interactions are peaceful (i.e. not backed by government force), the stickiness of wages is of no concern.  And as should be obvious, the stickiness of wages in the 20th and 21st century is not caused by peaceful cooperation, but rather by something else.  That's the problem, not the stickiness.

David in Liberty

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#32) On November 17, 2012 at 2:35 PM, somrh (78.62) wrote:

David,

@#29

I don't know what you could possibly mean by "evidence" to suggest that "one historical episode" is not evidence. It's all evidence.

But you're missing the point here. What the evidence does indicate is that there is not a straight forward one-variable linear link between deflation and negative GDP. I concur.

What I've pointed out is that is not even what's being predicted. What Fisher predicted is that overindebtedness and deflation combined is the relevant effect. This suggests a multivariable and nonlinear model. 

@ #30

I don't know much about the panic of 1873 but it's referred to as the "Long Depression" and wikipedia claims it lasted until 1879.

Looking at some sources I have:

Richard Grossman doesn't give a time span but says "The number of bank failures in 1873 and 1874 was more than 2.5 times that in 1872 and more than six times that in 1871." So that puts it at least 2 years.

According to Reinhart & Rogoff give a starting date of Sept 1873 and claim, "The Philadelphian banking firm Jay Cooke and Company failed, triggering a recession that lasted until 1877." 

I suppose we'd have to define some terminology on what counts as a "depression". IIRC, the other article just used negative GDP (I don't think there was a minimum time frame). 

What evidence do you have that it only lasted for a couple of months?

@ #31

1) Capitalism doesn't necessarily mean "laissez-faire". I know Ayn Rand defines it that way (but who cares about Ayn Rand?). That definition is more recent.

2) I have no idea if Minsky ever read Hayek or that particular book and I'm not terribly interested in your speculations on what people have and have not read. 

3) I don't believe "free markets" exist. (I suspect it's not even a coherent concept but that's neither here nor there.)

So their only use would be if they were useful models for explaining phenomenon. I have in mind here something like the "ideal gas law". While there are no "ideal gasses", some real gasses come close to exhibiting the properties of an ideal gas and the ideal gas model does an OK job of describing those gasses. Which gets me to...

4) Methodology - I presume by saying that Hayek "lays out the logical case", you mean he constructs a model and draws a conclusion from that model. So there's still the question of whether it's a "good model'; we'd have to still test it.

Minimally we'd have to agree on what periods and what countries are close enough to an "ideal gas" ("free market") to be worth considering. The other issue would be how to construct the data series.

5) "expansion of credit is a necessary condition of the boom."

I'm not sure how this conflicts with Minsky here.

The main difference here is the emphasis of exogenous versus endogenous credit expansion. As an example, M2 (and M2-M1) leads the boom while M0 may even lag:

Business Cycles: Real Facts and a Monetary Myth

6)  On wage stickiness... I'm just pointing out the fact that if wages are sticky then cost reductions aren't going to be easy. And that goes all the way down the line since wages are built into supplier prices as well. (I wonder what portion of costs associated with a final product are "labor"... and for that matter "debt".)

Regards.

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#33) On November 17, 2012 at 2:47 PM, whereaminow (< 20) wrote:

What evidence do you have that it only lasted for a couple of months?

For starters real per-capita income either stayed approximately constant (1873-1880; 1883-1885) or rose (1881-1882; 1886-1896), so that the average consumer appears to have been considerably better off at the end of the 'depression' than before.

That's not a depression. That's not even a RECESSION. 

Mainstream economic historians are under the false belief that falling prices MUST indicate a decline in economic activity. Obviously that's not true.  

"But recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870's depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history." - Charles Morris, NYT (http://www.nytimes.com/2006/06/02/opinion/02morris.html)

By pretty much every measure except for the consumer price index, the standard of living for Americas rose slightly in the 1870s and then exploded in the 1880s like no other decade in American history.  

What depression?

Other sources:

Friedman, Schwartz. A Monetary History of the United States: 1867-1960.

Murray N. Rothbard. "A History of Money and Banking in the United States: The Colonial Era to World War II" (pdf), The War of 1812 and its Aftermath, p.145, 153-156. Referenced 2011-01-15.

A.E. Musson. "The Great Depression in Britain, 1873–1896: a Reappraisal", The Journal of Economic History (1959), 19: 199-228

George Selgin. "Less Than Zero - The Case for a Falling Price Level in a Growing Economy", The Institute of Economic Affairs, 1997, p.49-53. Referenced 2011-01-15.

 David in Liberty

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#34) On November 17, 2012 at 2:55 PM, somrh (78.62) wrote:

You may find this article interesting:

Was 'Post-Keynesian' Hyman Minsky an Austrian in Disguise?

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#35) On November 23, 2012 at 11:50 AM, whereaminow (< 20) wrote:

somrh,

If I click on that article and it shows the same lack of understanding of Austrian theory I have seen in just about everything else referenced by MMT, I am going to be annoyed with you.

Also, if you guys want me to stop being mean, drop the mainstream love affair with Aggregate Demand. It's not a real concept. It's made up unscientific baloney brought to us by the market hating economists of the 1930s.

David in Liberty

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#36) On November 26, 2012 at 12:52 PM, whereaminow (< 20) wrote:

No, Minsky was not, though like most MMTers, his most sensible stuff appears to be causal-realist, just like the Austrians, and not the econometric mumbo-jumbo that dominates the mainstream.

And to the author of that mainstream piece, there is more to Austrian theory than Hayek's middle career pragmatic work that is often used to justify government interventions.

David in Liberty

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