From Then to Now
In his January 1961 farewell address, outgoing President Dwight Eisenhower famously warned of what he described as an emerging "military-industrial complex." Less well known among many was his long-term, unwavering dedication to balanced federal budgets: subsequent to a tax cut in 1954, Eisenhower ignored the harangue for more tax cuts, even in the face of recessions and average economic growth less than that of the Truman years. Eisenhower understood that the economy was in the doldrums, but he also grasped that the balanced budgets he would realize in the final years of his tenure were the result both of responsible spending and of responsible tax policy. There was little justification to go along with tax cuts just for the sake of tax cuts as a Keynesian substitute for mature, steady control of the federal budget on both the expenditures and revenues sides. The bawl for tax cuts to boost the economy fell on deaf ears in the Oval Office of Dwight D. Eisenhower, even when the call came repeatedly from his own Vice President, Richard Nixon.
President Eisenhower's successor in office, John Kennedy, caved to the call of both Republicans howling for tax cuts and neo-Keynesians among his own Democrat advisers who firmly believed in federal spending and lower taxes as twin weapons in the war against lackluster economic growth. The tax cuts of 1964, largely the result of encouragement by Kennedy before his assassination, were an integral factoralong with spending on war and domestic social programsin a nearly two-decade upward spiral of federal expenditures with inadequate tax revenues. As time went on through this period, the Federal Reserve would deviate from its exclusive duty in monetary policy of maintaining stability of the aggregate price level and instead steer perilously further into the slippery slope of financing excess spending by the government through accommodative monetary policy. Through the Administrations of Johnson and Nixon, followed by the flaccid "Whip Inflation Now" campaign of President Ford as the inevitable inflation became more and more embedded in the economy, few looked back at the leadership Eisenhower had exemplified, choosing instead to look to the urgency of the contemporary situation to justify one more round of this stimulus, that wage-and-price control regime, or some other doomed-to-fail way of replacing measured, mature macroeconomic policy command with slogans, patches, and promises.
It would take one-term President Jimmy Carter to appoint Paul Volker to chair the Federal Reserve Board before the only real remedy would come: a draconian, sustained, contractionary monetary policy regime. With the cure would come serious pain to augment the suffering of the economy. What had been "stagflation" that had settled in during Carter's term became a full-blown crisis of looming, stunningly hard recession as the draining of liquidity from the economy by the Fed sent interest rates to extraordinary heights. Few were those who credited Mr. Carter for doing what had to be done, and he was defeated by Ronald Reagan in the 1980 general election.
What had been nearly balanced budgets during Carter's last years became soaring deficits as President Reagan, with good justification, led the old-time Republican gospel choir in a successful push for deep tax cuts. It would not be until his Vice President, George H.W. Bush, became President that tax rates would be re-aligned to more responsible levels. His successor, President Clinton, would enjoy the longest sustained economic expansion in U.S. history, an economic boom time attended by low unemployment, low inflation, and strong tax revenues, not the least of which came from robust capital gains realized by investors in a surging stock market.
That unrelentingly good stock market embittered Alan Greenspan, Paul Volker's protégé and successor as Chairman of the Federal Reserve Board. Greenspan testified before Congress that the stock market was exhibiting what he called "irrational exuberance," an utterly fallacious claim that incomprehensible numbers of investors making even more incomprehensible numbers of trades over months and years could possibly sustain "irrationality" at the scale of trillions of dollars in investment decisions. (To his credit, Mr. Greenspan kept a dead-pan serious look on his face as he made his absurd declaration to a gullible assembly of congressional committee members.) Although he did not use the word at the time, Mr. Greenspan might legitimately be credited with introducing the idea behind the vapid term "bubble" to describe, especially in retrospect, any price level increase theoreticians and critics find unacceptable and perhaps incomprehensible.
There was method in Greenspan's claim, though, despite the failure of his effortsincluding the most consecutive increases in the discount rate everto stop the economic juggernaut of the Clinton years. With tax revenues continuing to close in on federal spending, largely because of tax revenues from capital gains, the Federal Reserve would eventually lose its most powerful tool for conducting monetary policy and, therefore, for being a major control agent of the macroeconomy. So-called "open market operations" by the Federal Reserve use short-term government debt instruments as the leverage for adding liquidity to or draining liquidity from the banking system. The Fed sells Treasury bills to member banks to drain liquidity, and it buys Treasury bills from banks to add liquidity; but if the government stops running budget deficits, the U.S. Treasury stops issuing T-bills (and pretty much all other Treasury debt securities, for that matter). Hence, without T-bills being issued by the U.S. government, the Federal Reserve has no instrument for executing open market operations, so it is effectively out of business as a driving force in economic policy-making.
It was with that in mind that, when George W. Bush succeeded Bill Clinton, not only did the Republicans call for tax cuts to deal with a recession that never actually happened at the beginning of the 21st Century, but Alan Greenspan was there with them, in late January of 2001 providing the assurance from the supposedly objective Chair of the Federal Reserve Board that the economy was, indeed, in such dire condition that the tax cuts were needed. The Republican-controlled Congress then had all the cover it needed, thin as that excuse was at the empirical level, to institute sweeping tax cuts that would last a decade to the real, underlying purpose of trying, as President Reagan had a generation before, to starve the federal government of the funds to pay for social programs.
The horror of the events of September 11, 2001, would fuel two extraordinarily costly wars and massive security expenditures in the homeland that would only exacerbate the widening federal budget deficits of the presidency of George W. Bush, leaving the U.S. Treasury bereft of any semblance of buffer when a real, powerful recession hit at the end of the Bush Administration.
The current President, Democrat Barack Obama, will cave to the Republican call to extend those massive tax cuts deployed ten years ago and which are about to expire. More likely than not, despite his protestations that he will draw the line short of extending the tax cuts for the wealthiest Americans, he will probably find no new political backbone and certainly no new reserve of political capital to make good on much of that vow.
For Mr. Obama and his team of advisers, extending the tax cuts will be nothing less than good Keynesian fiscal stimulus policy. In that regard, he will be much like his Democrat predecessor of a half-century ago. Unlike Jack Kennedy, though, Barack Obama will probably not be martyred, and he most decidedly will not be lionized in the decades and years after his short time in office.
In the end, President Obama will be no John F. Kennedy. More importantly to the future of this nation, he will never be Dwight Eisenhower.
In meager defense of Mr. Obama, not one Republican in office today could hold a candle to Mr. Eisenhower, either.
In America, every generation gets the leadership it elects. Consequentially, it gets the leadership it deserves.
Gears of the Macroeconomy
The story is a little more complicated than that, and the outlook for the economy, while not bright, is not as badat least not in the short runas some economists and political interests might suggest. The longer-term prospects aren't particularly attractive, but that goes to the old saying that it's always darkest just before it's pitch black outside. (The optimist's version of that old saying is, "It's always darkest just before the dawn," but this article is about economics, so optimists will be shot on sight.)
First, GDP is the sum of consumption, private investment, government spending (public investment), and net exports (exports minus imports). In the 3rd Quarter, all of the components of GDP except net exports showed good growth. Our thirst for those cheap imports is still sapping GDP growth, but that will change. The bad news is that the recovery of net exports over the next several years will present its own problems, and hints of those problems are already beginning to become apparent.
The U.S. dollar has been getting weaker against other currencies for several years, now. That makes our exports cheaper overseas, which means our net exports will get stronger. The downside is that, as our exports get cheaper in other countries, imports get more expensive here.
Businesses that have invested heavily in overseas manufacturing of products for domestic consumption will eventually have to start charging more for the goods they sell here in the United States. Retailers that have, over the past decade-plus, geared their purchasing toward foreign products to sell at their American stores will be forced to mark up those goods on their shelves. Anecdotal evidence seems to indicate that this is already happening.
The good news is that, if foreign products are more expensive on retailers' shelves here in the U.S., domestic producers of the same products will find their offerings more attractive as alternatives for buyers. Not surprisingly, though, that has a downside: as the foreign versions of products rise in price, domestic producers of the substitutes will have incentive to raise their prices, too. This is especially true in competitive markets, where constituent firms tend to be "price-takers," moving toward prevailing prices established beyond their individual control.
That's when a major force of consumer-level inflation begins to beat on the door, but only if the economy has a lot of liquidity that can allow consumers to buy at higher prices; otherwise, the pressure to raise prices has no fuel in consumers' pocketbooks.
That's where our central bank, the Federal Reserve, comes into the picture. In the short run, the Fed can use "easy money" to stimulate the economy, a policy of expansionary monetary policy it has been following aggressively to help the American economy out of the worst recession in decades. Unfortunately, in the long run, all that money pumped into the economy is nothing other than a vast reservoir of fuel for inflation because it will provide the liquidity by which the incentive of producers to raise prices will meet the dollars available in consumers' pockets to pay those higher prices.
The good news is that consumers really do not have those dollars to spend right now so inflation will not show up until they have considerably greater willingness to consume. That will come only when the unemployment rate falls quite a bit from its current level.
It works like the gears in a clock, then: inflation will stay subdued until the jobs picture improves, but once that happens, the power of consumptionaccounting as it does for about 70 percent of GDP growthwill guarantee that the huge pool of excess dollars poured into the economy by the Fed will turn into an inflation conflagration.
Once the rising prices pick up enough speed to cause serious concern among the Federal Reserve's policy makers, the central bank will be forced to clamp down hard on the money supply to drain that ocean of excess dollars. By that time, though, inflation expectations will have become embedded in both the goods and labor markets (the labor markets will be the last to start realizing their share of inflation-driven price increases), so the Fed will have to crush the money supply not only long enough to drain the reservoir of excess liquidity, but also to drain the reservoir of expectations that the excess liquidity is still around.
The result will be a period of both high inflation expectations driving wages and prices higher along with stagnating economic growth as interest rates rise on the already embedded inflation premium coupled to a sharply contracted money supply. At the end of the 1970s, the term "stagflation" was used to describe this situation.
In the here and now, a modestly rising GDP is perhaps better news than one might think from hearing economists, pundits, and politicians talk. As long as the GDP rises anemically, the unemployment rate will not drop too swiftly; and as long as the labor market remains soft, consumer spending will not pick up speed with any vigor. When it does, price inflation at the retail level will start to rear its head seriously, given that the foreign imports upon which retailers have relied for so long will be getting more expensive, pushing the prices of domestic equivalents up, too.
When things will turn rather sour, with inflation getting noticed by the mainstream media, might be difficult to predict down to the month or even the quarter, but an optimistic guess would put the time frame somewhere around 2012 for the inflation to get serious enough for the Federal Reserve to finally react forcefully enough and long enough to tame it. The resulting economic slowdown, then, might start some time in the latter part of 2012 or in the first half of 2013.
A less optimistic forecast would put clear evidence of inflation at the retail level happening in late 2011 or early 2012. In that scenario, the Fed would have to start clamping down on the money supply by the Summer of 2012. As rough as that would be, what might become serious efforts to bring the deficit spending spree of the past decade under control would start to bite hard into the GDP (remember that government spending is one of the four components of gross domestic product). Rising interest rates, inflation at the retail level, and less government spending could all come together like the proverbial perfect storm to claw consumer confidence and business investmentessentially, the whole economic recovery enginedown to a crawl just around the time of the general election, when the current occupant of the White House would be hoping for all kinds of good news to get re-elected.
The Republican nominee would, of course, breathe polemical fire about the end of civilization as we know it, and the Democrat incumbent would find himself having to try a second round of soaring rhetoric about hope and change.
As an alternative, the President could take the even less useful route of trying to teach the American public about macroeconomics. This would be the same American public that just return to control of the U.S. House of Representatives members of the party whose last reign ultimately put the entire financial system of the world at the brink of cataclysmic collapse and drove the American economy into the worst recession in decades. Yes, that's the sort of class every teacher wants to educate without a cattle prod and a crate of detention slips.
Is that less optimistic forecast how it's all actually going to happen? Probably. After all, this is economics.
If you want happy endings, watch reruns of The Love Boat. If you want inspiring stories, watch reruns of Touched by an Angel.
If you want darned good forecastingalbeit with a generous but necessary dose pessimistic, cynical despairlearn economics from your host here at The Dark Wraith Forums, where misery loves company. It is far better to be with others when the future is bleak and there's nothing whatsoever you can do about it.
Remember to keep hope alive; otherwise, you'll have nothing to give up when all is lost.
The Freedom to Be Eaten
Competitive markets are not the same as "free markets." The difference is easy to spot: corporations and their shills will run like Hell from competitive markets; Republicans will never speak of competitive markets; and Democrats will slap any fixno matter how complicated, expensive, and ineffectiveon a problem to avoid modernizing and reforming antitrust law to crush the companies that have constructed non-competitive markets.
Competitive markets are brutal to the participants on the supply side.
Free markets are even more brutal to the participants on the demand side.
The bad news is this: now that the extremists of free markets are ascendant in public policy, you could very well get eaten.
The good news is thus: so could the imbeciles who put those Right-wing hoe-handles in power.
Lie low and avoid the chow line. The herd is about to be culled of its idiots.
Special Video Lecture: Leftist Economics
The lecture begins quietly and traditionally, providing a brief review of important principles and assumptions at the heart of economics as it is typically taught in American colleges and universities. Students preparing for the final may benefit from this summary.
About a third of the way through the lecture, however, the tone begins to change, and the lecture takes on a darker, sharper tone that plunges into and then back out from advocacy for positions of early Leftist thinkers. In several places, the language used and ideas set forth are harsh, heretical, and, to at least some, offensive. I make no apology for this, given that I have spent an entire semester and nearly 30 years teaching the conservative economics that serves as a pale proxy for academic honesty in higher education.
On May 5, 2010, the lecture you will view below, which has a run time of 51 minutes, 22 seconds, was to be delivered in a large lecture hall. Attendance was open to anyone at the school. Within hours of posting a sheet in the department offices announcing this, the notice disappeared; then, on the day of the public lecture, the room I had scheduled to use was occupied. I was told by the information assistant at the front desk of the building that the room would be in use all day. That meant I had to sit near the doors to the building and tell those coming to my lecture that it had been canceled.
The video below was recorded the next day in the last class of one of my principles of microeconomics sections. If nothing else, the events that led up to the lecture you are about to watch made it even fiercer than it usually is. That is all to the good: the students who were in attendance heard what they will likely never again hear; but even if they don't, at least some of them will never forget this last lecture.
Enjoy the show.
Financial Industry Reform
A December 12, 2009, article at Big Brass Blog, an online property of Dark Wraith Publishing, detailed a bill passed by the U.S. House of Representatives to overhaul the regulatory structure that oversees the financial services industry. Below I republish in expanded form my responding comments to that article.
While meaningful, penetrating financial reform is desperately needed, and has been needed for over a decade, given my deeply cynical tendencies, I am most decidedly not impressed by the work of the current Congress in this matter. Any attempt at "reform" that does not address the causes of the near-collapse that has led to the recognition of such need is doomed to failure. Far too much emphasis is being placed upon the failures of the private sector financial institutions and their principals, while far too little attention is being given to the public sector institutions and people who had within their power the means and authority to responsibly carry out their duties but did not.
First, members of Congress demonstrate no courage when, instead of first addressing the irresponsible policies of their own chambers, they pose to lead a populist mob against the private sector. This is not to say in any way that those financial institutions and their principals were not, in their own right, deeply flawed in their activities that led to the crisis. They were, and they rightly deserve a much firmer, far less accommodating grip of oversight; but that brings us to a deeper problem that regulatory reform refuses to address, and this is my second point.
To imagine that the benefits of a so-called "free market" are not tied to the power of a fiercely competitive industry structure is sheer folly. We have now and always have had a bias in public policy toward a substantial amount of freedom in enterprise. Regulations of all kinds are actually the primary evidence of this: containing the excesses, negative externalities, and other unfortunate consequences of market activity through legislation enforced by regulatory agencies is a means by which to give license to a free market environment while merely circumscribing its actions, but not prohibiting pursuit of profit gained for risks taken.
At what point the scale of individual companies within an industry becomes significant in terms of so-called "market power" is a matter of enduring debate, but it certainly depends upon the industry. To the extent that the prospect of scale economies encourages growth of individual companies, market concentration would seem to be favorable to cost efficiency in production and, theoretically, therefore to final prices of goods and services. Against this well-embraced argument, however, are the risks associated with big companies dominating an industry and a subtler possibility that those scale economies are gained at the expense of opportunity costs incurred by factor input markets, consumers, and prospective competitors facing prohibitive barriers to entry.
The first and most apparent risk of market concentration is that of failure of one or more of the huge firms. At some scale, a single firm falling apart can have not just microeconomic impact, but also macroeconomic consequences. A casual look at the financial services industry during last autumn's crisis gives evidence of a cascade effect, where the fall of several industry leaders induced destructive consequences upon other financial institutions and, in fact, upon firms beyond the industry. In current news, the potential default on debt of Dubai World, one of the largest holding companies on the planet, would have staggering consequences on countless large and small financial intermediaries and their stakeholders across the globe.
We cannot have a free market that remains in the grip of fiercely competitive firms that can succeed and fail inconsequentially to the macroeconomy while allowing that freedom to cabin scale that most decidedly can be consequential to the macroeconomy.
A second and more pernicious risk of big companies dominating an industry is the political power they can come to exert. When our government in all three of its branches considers the voices, expertise, and opinions of industry leaders to be co-equal with that of citizens ignorant or informed as they may be the concept of democracy has taken a gravely radical turn from any sense it might have had among the ancient Greeks to whom we so scrupulous refer when constructing our own ideals of what a democracy is or should be.
The current President, who campaigned on a platform of change, nevertheless draws to his inner counsel men and women from companies of scale and, in some cases, disrepute.
Members of Congress allow their votes to be influenced by lobbyists paid by powerful corporate interests.
The judiciary deems the concept of "personhood" to encompass both people of flesh and blood as well as business entities, recognizing for each group a certain set of rights as well as responsibilities, never resolutely establishing definitive judgment upon the problem of how natural law could possibly inhere to innate, conceptual constructs like corporations, partnerships, and limited liability companies. (See my article, "Plain Language," for an overview of natural law and inherent rights.)
Returning finally to the matter of why the current posture of regulatory reform for the financial services industry is largely worthless in my judgment, I have no reservation in that assessment, again, because the failures of public sector institutions and personnel are being hidden behind the parade of righteous indignation and resolutions aimed at the private sector, altogether deserving of unrelentingly harsh criticism as it is.
From at least 2004 until around the time of the beginning of the noticeable part of the financial crisis last year, the largest monetary aggregate, M3, was spiraling upward at an annual rate that finally reached nearly 20 percent. The Federal Reserve, which has sole responsibility for the money supply, dealt with this by suspending publication of the M3 data. (See, for example, my May 11, 2008, article, "The Gospel of Impending Doom.")
At the same time this was happening, the monetary aggregate called M1 was barely growing.
Now, M1 is money that includes cash and checking account funds. M3 includes M1, but also includes highly illiquid (that is, not immediately usable) money like massive time deposits, Eurodollars, and the like. (Read about monetary aggregates in Part Three of my series, "The Economics of Wreckage.")
The growth rate of M1 was not sufficient to keep up with the real growth rate of the economy, which meant that a slow, choking throttle was being applied to the economy that uses cash and checking account funds. That's the economy of everyday people and businesses.
The rapid growth rate of M3 was flooding the financial system with a kind of money that the institutions comprising that system could not use directly. So, what does a rational economic agent do when it has an enormous amount of value that it cannot use but little in the way of cash that it actually needs? It will do what quite a few rational individuals in that position would do: it will pledge the highly illiquid assets against instruments that produce meager amounts of immediate money.
That's what people do when they have huge value tied up in a home but don't have money for their day-to-day expenditures. They'll use their homes as backing for lines of credit and other instruments. If that's not enough, they'll pledge the hard assets on bets that are sure things at first but become less and less so the farther out on a limb they go. If you have an investment that will pay off in six months, if you've got lots of wealth but little immediate income, you'll go long against your illiquid assets to buy in on the fast money makers. That's not "human nature": it's rational survival behavior, personal and institutional. (And save me the talk about how "responsible" people don't behave that way. Put just about anyone in the right circumstances, and responsibility goes from fiduciary to personal in no time flat.)
Hence, in the financial industry, we saw credit and other derivatives coming on line as financial intermediaries and other financial institutions utilized vast oceans of M3 money to squeeze out small amounts of liquid cash.
In retrospect, that's extraordinarily risky, of course, but retrospective wisdom is always in unlimited supply, and I dare say that a whole lot of liberal I-told-you-so types did not know beans about what was going on at the time, and they certainly weren't in the mood to knock off their Hey-Hey-Ho-Ho-George-Bush-Must-Go chants long enough to read the articles I was writing and publishing about what was going on and where it was going to lead.
Forward-thinking risk analysis is never particularly easy to come by, and that's why we have a regulator like the Federal Reserve. Whereas no one pays me to write about impending doom, the men and women at the Fed get paid very well at least to try a little bit of objective thinking once in a great while, like when the U.S. financial system is on a run-away freight train to a cliff.
The unfortunate part, though, is that the Fed could do nothing about the soaring M3 without the Chairman of the Board of Governors, Ben Bernanke, going to Congress during the Bush Administration and telling those Representatives and Senators, so many of them full of hubris and bereft of any knowledge of financial systems and economics, that the M3 money supply was spiraling upward out of control and all proportion, and the result was a financial system that was living on borrowed time and madly leveraged non-Tier 1 assets.
Were the Representatives and Senators to have asked how this looming M3 apocalyptic flood was happening, Mr. Bernanke were he to have the guts, which neither he nor his addled, pathetically partisan predecessor, Alan Greenspan, did would have explained that it was directly and inescapably the fault of the Congress and the Bush Administration because they were all keeping the U.S. economy going by leveraging off wildly huge trade deficits that were filling the coffers of foreign central banks with American dollars that those foreign central banks were then lending back to the United States government to finance its irresponsibly low taxes and irresponsibly high spending. (See, for example, articles I have written including Part 4 of my series, "The Economics of Wreckage," as well my prior articles about U.S. trade deficits, like "Foreign Trade and Debt," "Seven Principles of Macroeconomics," and "Exchange Rate Regimes," among others published over the past five years here at The Dark Wraith Forums.)
And why were those trade deficits so ridiculously high?
Was it greed of corporations moving their operations overseas?
Was it expensive, slothful American union labor?
Was it ignorant American consumers who wouldn't just "Buy American"?
No, unfortunately for the finger-pointers on the Left and on the Right, it was considerably simpler: China, India, and several other countries were pegging their currencies at staggeringly low, out-of-line exchange rates against the dollar. (Nobel-Prize winning liberal economist Paul Krugman thinks this is just fine, which is why Dr. Krugman is on my all-time Lowest-of-the-Low list of liberals, right beside venture capitalist rich boy PowerPointer Al Gore.)
They, especially the Chinese, were bleeding us dry, wiping out tens of millions of American jobs and hundreds of billions of dollars of our industrial base, all while lending us back the money they were getting from us by virtue of selling their products at to us at artificially low prices that made the Blue Light Special at K-Mart pale by comparison.
Hence, the U.S. government (along with the private sector) lived beyond its means, M3 spiraled, M1 was being crushed by the Federal Reserve in a ludicrously inadequate attempt to counter-balance the spiral of the larger monetary aggregate, and the financial system was swelling like a balloon with illiquid money that it used as the backing for derivative swaps off which its member institutions could make what seemed like a fast buck until the leverage became so great that even a small pull on the fulcrum (as happened on about September 15, 2008) sent the whole teeter-totter into a great big flop off that flimsy fulcrum of trust in the system.
Mr. Obama and his Democratic allies spend like there's no tomorrow while they talk about reforming the tax system but do nothing whatsoever that would come even within a trillion dollars a year of closing our federal budget deficits, and they rely for an economic recovery on unemployment staying high so worker productivity will go up to pull us into a growth phase just like Keynesians for the past seven decades have been doing. (Part Three, linked above, of my series, "The Economics of Wreckage," explains the theory, and my recent articles, "Recession to Recovery: The Rough and Narrow Road Ahead" and "Favorable Signs of a Sustainable Economic Recovery," show how this theory is playing out in the real world of the current economic recovery.)
Financial reform does not impress me.
When the government (at all levels) stops spying on its citizens like every one of us is a criminal waiting to be caught, when the Obama Administration starts prosecuting Bush Administration officials from the top down, and when the members of Congress start educating themselves about economics and finance and stop drooling to every pathetic interest from AIPAC to the healthcare industry to the banks to the military and its failed commanders like Petraeus and McChrystal, then I'll be on board the reform efforts.
In other words, I shall remain now and permanently a cynic.
The Dark Wraith has spoken.
Favorable Signs of a Sustainable Economic Recovery
"Unemployment is as high as it has been in 26 years, and it is not likely to fall significantly for some time to come. Believe it or not, that's good news, if "good" can mean continued hard times for millions of Americans. No one is expected to cheer if, in the months ahead, news analysts keep talking about stubbornly high jobless rates, but a sluggish rebound in the jobs market could very well be the engine for a sustained period of robust economic expansion down the road."
The dynamics distill to a trade-off between timeliness of the recovery in the jobs market and inflation. An unemployment rate dropping too rapidly will ignite inflation, and the cure for inflation coming fast and furious would almost certainly throw the country right back into recession.
The graph below, drawn from the Bureau of Labor Statistics database, shows the corrosive effect on per-person output of the recession that is now ending and how the beginning of the recovery was led by the first increase in productivity since the beginning of 2008. For the second quarter of 2009 (the most recent for which data is available), the index of output per person in the manufacturing sector rose from 173.162 to 175.164, as workers still employed were pushed to produce more.
This goes right along with what I wrote in "Recession to Recovery: The Rough and Narrow Road Ahead":
If [businesses restock declining inventories] with their existing workforces and maybe a modest increase in new hires, the workers doing their jobs will work harder, and the companies will see their profit margins start to improve as the inventories are sold; but if the companies have to hire lots and lots of workers to rebuild inventories, competition for qualified workers will heat up, and companies will have to start bidding up wages and salaries.
So far so good. Productivity per worker is going up, and this is happening without any increase in the overall rate of employment, which means it's the already employed workers who are pushing harder at their jobs. (That, of course, is not great news for working people, who are quite likely feeling as if they're being flogged to greater productivity in the national ship's slave galley right about now.)
What about labor costs, though? If this really is shaping up as a strong recovery, the other part of the equation, worker pay per hour, should be holding steady. In fact, labor costs had risen dramatically right before this latest recession in a typical Keynesian catch-up with other price increases earlier in the 2001 to 2008 economic expansion; but they have now leveled off, staying almost flat from the first to the second quarters of 2009, as indicated in the graph below.
That means wage inflation is in check for the time being, so as other prices rise, workers will have to continue delivering greater productivity to hold on; and as long as businesses don't have to start furiously competing with higher wages for new workers, the unemployment rate can be brought down slowly without triggering the inflation spiral I described in "Recession to Recovery."
So, bad news really is good news, at least sometimes. Unemployed people really are suffering, and that is where public policy projected through assistance programs can blunt the damaging effects of joblessness and all the problems it creates for people, families, and communities.
We have the makings of a sustainable, strong economic expansion. The figures provide clear evidence of this, but the story isn't finished. Once the expansion gets its own momentum, the central bank of the United States will have to turn its attention away from providing liquidity to keep interest rates low and start the long, difficult process of draining from the economy an incomprehensibly large overhang of dollars that has been accumulating year after year, starting early in the current century.
That excess liquidity is much like a tidal wave still well out at sea. That rolling, roiling mountain of rising prices is headed right for shore, and if the unrelenting swell of pounding surf is not drained away long before we see it, the resulting inflation will be a debilitating, destructive force that only the most draconian and protracted of contractionary monetary policies can stop.
The question yet to be answered is whether or not there will be enough time: the economy must gather sufficient upward momentum to no longer need extraordinary stimulative spending by Congress accommodated by extraordinary liquidity provided by the central bank. If the Fed starts draining the dollar overhang too soon, the economic recovery will be slowed or even stopped; but if the Fed waits too long, the inflation spiral will be so embedded in labor and business expectations that the contractionary monetary regime will, once again, slow or even stop the economic recovery.
In a worst-case scenario where the Fed waited too long to face the inflation problem, the eventual clamp-down on the money supply would have to be long enough in duration to potentially be economically devastating as well as politically disastrous to the incumbent President and members of Congress, who would almost assuredly be blamed by the electorate for the collapse of the economy back into recession.
Right now, it looks like a controlled rollover by the Fed away from accommodative monetary policy can still be accomplished in such a way that the nascent economic up-swing can be sustained.
Unfortunately, the size of that tidal wave of liquidity mentioned above is not really appreciated by most people, and maybe not even by most policy makers in Washington. It is out there, still well over the horizon. It's coming; and just like tidal waves on the ocean, which have the odd habit of making the tide go out right before the massive wave hits, the dollar overhang will have the perverse effect of creating sporadic evidence of deflation in the months before the inflation comes in as a relentless force driving commodity prices, wages, food prices, and interest rates upward.
If it gets to the point where our public policy officials are fighting the tidal wave at the shoreline, we will have a hard, debilitating battle, indeed.
We should hope that our leaders in Washington will seize the opportunity now available to deal with the impending challenge before they have to manage an inevitable disaster.
Recession to Recovery: The Rough and Narrow Road Ahead
We still have incomprehensibly large work to do to reform and modernize financial and public institutions, and politicians on both sides of the aisle will do anything and everything they can to avoid taking on the underlying problems.
It is not just the public sector that is excitedly declining the opportunity to reform rather than repair long-standing, self-destructive policies; but neither those who hold elected office nor those responsible for the safety and security of their own households seem permanently committed to relying less on debt and more on a certain degree of character-building austerity.
In these very tentative steps of the newly born recovery, the numbers will swing between bad and good. On some days it will sound from the news stories like we're still in a recession. The most difficult part of this recovery to explain to the average person is that some of the bad news will actually be good news, at least for the long run, and some of the good news might be cause for quite a bit of concern.
Unemployment is as high as it has been in 26 years, and it is not likely to fall significantly for some time to come. Figures released earlier this week indicate that the labor market is still suffering: unemployment rose in September to 9.8 percent from 9.7 percent in August.
As counterintuitive as it might sound, that's good news, if "good" can mean continued hard times for millions of Americans. While no one should be cheering if, in the months ahead, news analysts keep talking about stubbornly high jobless rates, a sluggish rebound in the jobs market could very well be the bellwether indicator of a sustained period of robust economic expansion down the road.
The Great Depression opened the doors of national political dominance to the long-backbenched Democrats, led by Franklin D. Roosevelt, the President of the United States who brought with his administration a new kind of economics, set forth by a man named John Maynard Keynes. We call his economic policy prescriptions "Keynesian economics," and greater or smaller tools in the Keynesian relief kit have been used by both Democrats and Republicans ever since. In theory, the policies distill down to some relatively simple ideas. In recessions, the government should run deficits by cutting taxes, spending money on jobs programs, helping the poor and unemployed, and generally stimulating the economy. In boom times, the government should pull back on all the fiscal stimulus by raising taxes to keep the economy from running too hot, pay off the federal debt, and build a surplus; and the government should back off all the generous jobs programs, big benefits, and grandiose public projects, at least to some extent.
This is called "countercyclical policy," and although it has had an unfortunate bias toward stimulus even in good times, it has unarguably served to greatly shorten the boom-bust business cycles, make recessions quite a bit milder, and cause the periods of expansion to be considerably longer by comparison.
It has a dark side, though, and even Keynes, himself, described the crucial nature of this part. He described a phenomenon he called "sticky wages," the tendency of compensation to labor to lag behind rising consumer prices and rewards to other factors of production. This stickiness is critically important because, if prices are rising all around people, but their incomes are not going up in lock step, they will have to work longer and harder to maintain their lifestyles, pay their fixed obligations, and keep their lives running relatively smoothly. It is this rising productivity that propels the economy into a period of expansion without inflation being fed by rising wages and salaries.
That means, if we see the unemployment rate falling too fast in the coming months, the economic recovery will be stymied before it gets momentum, and here's why. A recent statistic released by the government showed that business inventories are falling, and if this trend continues, companies will have to start boosting output levels to restock. If they do this with their existing workforces and maybe a modest increase in new hires, the workers doing their jobs will work harder, and the companies will see their profit margins start to improve as the inventories are sold; but if the companies have to hire lots and lots of workers to rebuild inventories, competition for qualified workers will heat up, and companies will have to start bidding up wages and salaries.
A rapidly falling national unemployment rate will sound like good news at first, but once wages and salaries start catching up with other rising prices, that means inflation will have begun to take on a life of its own because those rising compensation levels will give households more money with which to buy goods and services, and the increasing demand pressure will start pushing prices at the consumer level up even more. Making things even worse, that building demand by households for goods and services will induce businesses to hire even more workers to keep up with the demand that's clearing inventories at an increasing rate.
More workers being hired means more wage and salary increases, which means even more demand for final goods and services, and the cycle begins to take on a self-feeding inflationary aspect.
But all of that is only the prelude to the real problem: inflation, as mean and annoying as it is, pales in comparison to its muscular after-shock, which is expected inflation.
The central bank of the United States is called Federal Reserve, or the "Fed" for short, and one of its most important responsibilities is to conduct monetary policy. If it allows the growth rate of the money supply to exceed the real growth rate of the economy, that so-called "excess liquidity" will eventually become inflation, since each dollar's value will be watered down, meaning more dollars will be required to buy things. When the Fed wants to help the government pull the economy out of a recession, it will print money at an unusually high rate and use that money to help fund the government's deficit spending. Done right, the Fed can then drain that excess liquidity back out once the economy gets back on its feet. But therein lies the tricky part: interest rates are the "price" of money, so if the Fed, in its effort to prevent inflation, reduces the supply of money too fast, interest rates will rise too much and too quickly, and the economic recovery will be killed in its tracks. We've probably seen this happen in the past. The result is called a "double-dip recession."
On the other hand, if the Fed acts too slowly to claw the overhang of dollars out of the economy, the inflation lingers long enough for both businesses and workers to start expecting it, which means everyone will be pushing up their prices because they want to get in front of everyone else pushing up their prices. This makes the Federal Reserve's job of stopping inflation quite difficult: not only does it have to drain the excess liquidity, but it also has to hold the choke for a while longer to convince businesses and labor that it is serious.
That was what happened in the recession of 1981-82: years of expansionary monetary policy had caused inflation to get so severe by the end of the 1970s that no one believed the Fed would finally deal with it once and for all. So when President Jimmy Carter appointed a tough guy named Paul Volker as Chairman of the Federal Reserve, Mr. Volker had to throttle down the money supply fast and hard, which drove interest rates through the roof, and he had to hold the money supply down for months and months until not only was all the excess money drained out of the economy, but also the entrenched expectations of inflation were flogged out of planning by businesses and labor.
As a side note for history buffs, Jimmy Carter was defeated in the presidential election of 1980. Therein lies a cautionary tale for our current President, Barack Obama: it's good to do the right thing, but if there's going to be pain involved, it's better to do it considerably before voters go to the polls. Unemployment isn't just for the private sector.
Returning to the present, we have a large overhang of dollar liquidity swirling through the economy. Some of this is the result of recent Fed activity to support the economic stimulus package enacted earlier this year, but a huge amount is the result of years of expansionary monetary policy to help pay for year after year of federal budget deficits. (The share of the deficits not covered by the Federal Reserve's money printing machines has been picked up in large part by foreign central banks that hold American dollars earned by their businesses exporting more to us than we sell to their people.)
The money the Fed has printed in excess of what was needed for transactions among businesses, consumers, investors, and workers in the American economy is the liquidity that has to be drained out because it will be the fuel for a spiraling inflation. If the Fed starts that grim work too soon, interest rates will rise rapidly, and the U.S. economy will nose over back into recession; but if the Fed waits too long, seeping inflation will become a flood as unemployment drops too quickly, causing wages to join other prices going up, and the economic recovery will evaporate into a spiral of inflation that will push up every price, including the price of money, which is interest rates.
Inflation-driven increases in interest rates will stagnate the economy, and we will again have, as we did at the end of the 1970s, a bad economic situation called "stagflation," for which the only cure is the old-time gospel of tough, sustained, contractionary monetary policy, which will drop us into another painful recession.
Is this the inevitable path of the current economic recovery? Certainly not.
As long as the unemployment rate drops slowly, the Federal Reserve will have time to keep interest rates low for a while longer to let the economy get back on its feet, and as long as the Fed's eventual pattern of draining the excess dollars out of the economy is carefully planned and not the result of panic-driven work to stop an already-building inflation spiral, we can have a recovery that becomes a genuine economic expansion with reasonably stable prices, sustainable growth in American jobs and, with that, more tax revenues to help close the large federal budget deficits we are now running to get us out of this recession.
It might require the proverbial wisdom of Solomon for our leaders in Congress, the White House, and the Federal Reserve to execute the necessary economic policies at just the right times, but we must hope they know what they are doing and have the will to carry through with their responsibilities.
While the road ahead for American workers may be difficult for some time to come, a sustained economic expansion serves not just our own interests, but those of the generations that will benefit after us.
As much as we want a solid foundation upon which we, ourselves, can stand, we must also appreciate that we are building a bridge to the future for our children. That bridge should be not only strong enough to support their needs, but also wide enough to accommodate their hopes.
Subtle, Yet Somehow Rather Troubling
Interview with a Grouchy Economist
Will vowed never again to be sick on a school day.
Moving on from that story about the terrible state of modern English education (which will play a minor role in what is to come, below), a new instructor at one of the colleges where I teach apparently gave her students the assignment of interviewing a professor about an important topic in the news. That meant a class of maybe 18 students would be running around, trying to find some hapless sap willing to carve out the time to write out answers to a series of questions submitted by someone who might not have enough background in the subject area to pose questions that even make sense, and it would mean doing this in the last several weeks of the Summer Semester, the term when courses are twice as long each day so that a normal, 16-week semester can be compressed into eight weeks. It would also mean that the instructor who gave students such an assignment was going to be the subject of what in academia we diplomatically call a "conversation" with her division chairman. That conversation will be short: advise your teacher that, if she ever pulls a stunt like that again, your entire division will be denied access to the leftover doughnuts from the faculty senate meetings.
I have not spent a whole lot of time on campus the past couple of weeks; I have to gear up for the monster course load this Fall, a schedule that spans two schools and courses ranging from microeconomics, macroeconomics, and finance, clear through to a night course in transcription and proofreading. I keep my office hours, and that's it. That means the occasional student who is not in one of my summer classes is probably not going to catch up with me except by accident or by concerted effort to track me down.
Much to my dismay, several in that other teacher's class did. By last week, having been rebuffed by every other professor who was not particularly stupid, those students were desperate to find someone anyone who was an "expert" in an area of current news interest.
What was I supposed to do, tell kids to go away? I can't do that. My conscience doesn't bother me if the students can't find me; but if they catch me, my conscience pins me to the wall.
I agreed to be interviewed, but I stipulated that I did not care for giving answers that needed considerable background explanation that would be difficult to provide to an unprepared audience, and I made it clear that I reserved the right to publish the questions posed, along with my responses.
Below is the product of one of those interviews. The subject is unemployment. Readers should be forewarned that I took each question at its face value, trying not to read into the sometimes muddled grammar more than I had to. A phenomenon I have seen with increasing frequency is students who pound out text without even the slightest effort to look at what they have just slapped together. They print out what they have written and hand it in, send it out as e-mail, or otherwise publish it through their online communities; and they just don't care about the quality, comprehensibility, or readability of what they are presenting to others. I used to see this quite a bit among bloggers, but it seems to me that it is not quite as prevalent anymore, especially since many of the weaker bloggers have vanished and at least some of the survivors have become more aware of message quality as integral to the message being conveyed.
I should mention that the student who wrote the interview questions that follow has been in college for several years, and she has taken my course in microeconomics. She is somewhat accustomed to my sometimes sharp responses, and she probably knows that I will not allow for a simple answer without at least making mention of related issues. She also knows very well that I do not suffer fools: as I recall, she sat near the back of the class and took on the faint hint of a fetal position when I would start raging about the blazing stupidity of economic policies during the Bush era.
With all of that in mind, below is the product of her interview with me.
1) Is unemployment a big issue in U.S.A.? Why or why not?
- It is obviously a "big" issue because the mainstream media routinely report work force-related statistics, the most prominent being the monthly national unemployment rate and the bi-weekly number of net job losses. Another set of statistics being reported with some degree of regularity right now is the state unemployment rates.
While the importance of these statistics might be debated by conservatives and liberals, the numbers are a "big" issue because of two prevailing assumptions: first, that the national unemployment rate is a good measure of overall national economic vitality; and second, that a high national unemployment rate is an indicator of economic distress of citizens. To the first matter, the term "high unemployment rate" is relative: liberal economists have long held that there is a so-called "natural" unemployment rate, but we now understand that, even if there is some desirable level of unemployment, or some tendency of the unemployment rate to some long-term, equilibrium value, it might be dependent upon the era, and it might be a number we do not want to achieve until other numbers are in line with desired targets. To the second matter, economic misery translates at some point into political upheaval, as happens relatively peacefully from time to time in American history for example, in 1932, in 1980, and in 2008 and rather more violently in other places in the world from time to time.
2) How unemployment rate should be reduced (in your opinion)? Or what are the ways more jobs should be created? (because of the bankruptcy in businesses people are losing more jobs)
- Your question is too leading. Do not assume that I think the unemployment rate "should be reduced," at least not right away and not as a first priority; in fact, as painful as it is for people to be out of jobs right now, the longer the unemployment rate stays high, the longer we will postpone an inevitable, debilitated inflation spiral caused by years of outrageously malfeasant monetary policy conducted by the Federal Reserve, first in the later years of Alan Greenspan as Chairman, and then under the incompetent watch of Ben Bernanke and his fellow Federal Reserve Governors.
The Congress of the United States, with full support and encouragement by the Obama Administration, has authorized the expenditure of $787 billion in economic stimulus, much of it to the direct or indirect purpose of creating jobs. Fortunately, this recession is deep enough to make such otherwise ridiculously expansive fiscal policy stimulus actually work fairly slowly, which should lead to a controlled, slow decrease in the unemployment rate over the next three to five years. If the Federal Reserve can be brought back to conducting monetary policy responsibly, and if the Congress and the President can successfully move past their deficit spending binge, we might have a chance to move into an era of healthy job growth, while draining out the incomprehensible overhang of liquidity before it turns into a raging inferno of inflation.
In my judgment, will it work out that way? No. The Federal Reserve cannot be depoliticized, much less can it be brought back from utterly irresponsible monetary policy regimes. For its part, the Congress is not thinking about controlling the deficits; it is, instead, planning new, wildly out-of-control spending, while fantasizing that new taxes and tax structures, along with renewed, useless vows of spending control, will somehow make everything work out.
As for the President, he is an institutional center-right leader. Some of his people are the very individuals who had a hand in making our economy such a mess. Far worse, regardless of what he says, his actions belie a belief that we can somehow return to a set of status quo ante assumptions that, in reality, are no longer operational. The lasting legacy of the era of George W. Bush is that the extremists of the Republican Party, who long ago had expressed the desire to "change government as we know it," did so. They wrecked entire groups of solutions that were attainable from the Clinton years; yet, Mr. Obama and his Democratic allies just keep plowing ahead as if the Bush years and the degraded nation we now have from that time never happened.
Here's the reality. Keynesian policy relies upon a lag between economic recovery and the realization of wage gains by workers. The aggregate price level rising without contemporaneous increases in aggregate wages means workers will have to work harder and longer to cope with prices rising all around them. During the Bush Administration, this "sticky wages" effect extended from the factors of production we call "labor" and "human capital" over to another factor, the one we call "equity." The factors we call "land" and "physical capital" were left to benefit greatly (as were narrow channels of human capital we generally refer to as executive compensation). The lag between the strong economic expansion and significant wage gains during the Bush Administration was considerable: only by the period near the end of the last overall growth phase did labor experience anything remotely like real gains; and as for equity, the stock markets never did deliver broad-based, real (that is, inflation adjusted) gains before the crash.
3) Should jobless people get an extended aid? Why or why not? Is extended aid making those people lazier?
- Asking me, "Should jobless people get an extended aid?" is tantamount to asking me if we should feed starving children. Yes, of course we should expand the period of unemployment benefits in bad economic times, and we should contract that period when economic times are good. Whether or not it induces the moral hazard of making people "lazier" is irrelevant: if a working-class family has no income, the children in that family go hungry. Regardless of whether or not their parents are lazy, public policy must always be to the effect of maximizing the survival of children, making sure that they are healthy, and seeing to it that they understand that the government can be a beneficent force in their lives, so that when they grow up, they not only support the government, but insist upon a government at least as humane in that future time as it was when they were children in need.
That does not mean I support any and all government programs that give people incentives not to care for themselves and watch out for their own interests. This talk about government-funded, comprehensive health care is a case in point. I most certainly do not want my tax dollars paying for those who take inappropriate risks with their lifestyles, nor do I want to pay for goods and services sold by a medical-pharmaceutical industry that delivers dangerous, worthless, and over-blown products and procedures to gullible health care consumers. If the government is paying for everything, we rely upon that same government which has so massively, systematically failed us in the past to somehow, this time, do right on a permanent basis. If we are talking about life-saving and critical quality-of-life medical matters, and especially if we are talking about them for children, the elderly, and the truly poor, then I shall lead the parade for government-funded health care; but when I hear others promoting their own desire for health care consumption excess by hiding behind the needs of the genuinely needy, then I condemn it, and I condemn those who have the brazen gall to wave yet another bloody red shirt just so they can get something and make other people pay for it.
(On the topic of health care industry reform, I shall soon offer a small, pure, "market reform" proposal at which I know right now both liberals and conservatives will sneer derisively; but mark my word, if that idea were ever to get before Congress as proposed legislation, the medical-pharmaceutical industrial complex would see to it that the bill got killed like a sparrow being silenced by a nuclear bomb.)
4) Who is being more affected by decreasing unemployment rate: educated or non-educated?
- The unemployment rate is most certainly not "decreasing." I have no idea where you got that information, but it is wrong. The unemployment rate is increasing, and it is increasing for both the "uneducated" as well as the "educated." You have taken a microeconomics class, now, and you should know better than to classify workers as "uneducated" and "educated"; labor supply is far more nuanced than that. The purely unskilled labor market in this country is but one of many, each characterized by some greater or lesser degree of valuation based upon the degree of formal education, training, and/or on-the-job skills development and innate ability.
In virtually every one of the definable labor markets, unemployment is far higher right now than it has been historically. That having been said, though, myths abound about how recessions differentially impact these different labor markets. For one thing, unskilled labor generally has two advantages in recessions: first, basic services are always needed; second, low-skilled workers who exit the "official" labor force are more likely to have resources and/or lack of countervailing risk aversion to enter less formal, "gray" or "black" market work.
More educated people, while appearing to be better able to retain employment, too often face the phenomenon or "underemployment" (not getting enough work) or "misemployment" (working in jobs that do not utilize the most valuable of their skills). Remember that the U.S. Bureau of Labor Statistics counts a labor force participant as "employed" even if that individual worked only one hour during the reporting period; and the BLS makes no effort in its widely reported unemployment statistics to determine the extent to which a worker is utilizing the skills he or she has spent the most time developing to highest comparative advantage.
So, there they are: my answers to interview questions from a student who probably wanted short, easily digestible responses. Quite obviously, that is what I provided. If she and her instructor want the long answers, they'll have to take several of my courses, or they'll have to read several hundred articles I've written and published.
Either way, they will get a whole lot more than I can provide in a short interview that neither of them probably really wants to read; but, then again, that's the way it is with most people who avoid my lectures and my writings: they want answers, but they want nothing to do with the knowledge that leads to answers. Hence, they don't really want answers.
That, of course, is what makes you readers different from most people. You made it all the way through to the very end, in fact of yet another one of my articles.
The Dark Wraith is, once again, mighty annoyed that not everyone can be dismissed as incurious.
The Teaching and Use of Economics
That project will take quite awhile to complete, and it will take some time for me to talk myself into starting. The best motivation is for me to read what others write on economics because this is what convinces me that I must set the record straight. To ramp myself up, I shall deal with relatively small matters I have seen addressed by others. Just today, I saw a reference to "the law of supply and demand." This and other myths and misunderstandings make the rounds on blogs and in the mainstream media with sufficient frequency that I actually repeat them to my economics and business classes to highlight the extent to which they, my students, are becoming separated through their learning from those around them who only think they know what they're talking about.
Concerning that "law of supply and demand," I am reminded of an incident from several years ago at a blog not far from here. A good friend of mine had posted the link to an article entitled, "Law of Supply & Demand Is Dead for Gold & Silver," by a fellow with an MBA (a bad sign to begin with) and a Master's degree in public policy. The writer of that story went into all manner of statements that were just patently incorrect, posing as he was to have knowledge of economics and finance way beyond his realm. The very title of his article, declaring as it did that a non-existence "law" is "dead," was a virtual sandwich-board sign that he was going to be sacrificing innocent electrons to the word processor god of nonsense. Any hope I might have had that reading his tripe was not a waste of ten minutes of my life was dashed when he made use of the word "bubble" in reference to commodities markets. For the time being, I have given up trying to deal with the conceptual vacuity of "bubble," which has become like the invocation of "Moloch" in the stupefyingly brain-dead "poetry" of the stupefyingly brain-dead "poet" Allen Ginsberg. The writer of the fairy tale article about the death of a non-existent thing in the gold and silver markets was not particularly cutting edge; but that word "bubble," especially in the context of how commodities markets actually work, is the mantric utterance of the thunderously uninformed, or in some cases it is the insider's o-so-revealing story line to make a few bucks telling silly stories to suckers who want simplistic explanations to make themselves feel smarter than they really want to work at being.
On the blog where my friend posted the link to the MBA guy's article, I wrote in comments that there was no such thing as a "law of supply and demand," a point I make emphatically in the early days of every microeconomics class I have taught for nearly three decades. I explained that there is a "Law of Supply" and a "Law of Demand," and I went on to make a summary statement of each of these, as I herewith shall:
The Law of Supply
As the price of a good or service increases, producers tend to provide a greater quantity of it to the market.
The Law of Demand
As the price of a good or service increases, consumers tend to want a lesser quantity of it.
The Law of Supply operates because, as the price of a good or service rises, the opportunity cost of using factors of production to make alternatives rises.
The Law of Demand principally operates because, as the price of a good or service rises, the price-relatives of substitutes fall, inducing consumers to move toward those alternatives that have become relatively cheaper.
The Law of Supply is captured graphically as an upward-sloping curve in quantity-price space, and the Law of Demand is captured graphically as a downward-sloping curve in quantity-price space.
(Each of these laws, by the way, has a rare but interesting exception.)
Okay, I laid out the Law of Supply and the Law of Demand as a quick primer on a basic topic in microeconomics, and I thought that would be the end of the matter there at that blog, but I was wrong. A Leftist commenter who had, with increasing frequency, been displaying the odd behavior of posting one comment right after another, came from out of nowhere and started using appallingly foul language to berate me, spewing howling nonsense from complete ignorance. He asserted something to the effect that there most certainly is a 'law of supply and demand' and he knew all about it. He went on to claim I had never written anything that was accurate about real-world economics, and he made some other blatantly false and appallingly hateful statements.
Because the owner of the blog chose not to make any public effort to deal with his verbally menacing behavior, I never wrote a comment there again. The blog belongs to her, of course, as she later declared in her own over-the-top, inappropriate response to a commenter who had dared to disagree in relatively mature language with the prevailing wisdom. When he noted her disproportionately nasty response, she told him that it was her blog, and she could do whatever she wanted there.
It seems that, when it comes to a small group of Leftists, private property is a thing of horror to be condemned until the private property belongs to a Leftist, at which point it becomes an altogether sacred site upon which anything goes, including decorum out the window.
Once again, there is no "law of supply and demand," although I have heard that mythical term used so often that it has become some kind of assumed thing, sort of like the legendary yeti.
Okay, I shall concede that stories about the abominable yeti are reinforced every time Dick Cheney shows up in public to talk, but that's not the same as saying the yeti, itself, exists only that reasonable facsimiles of it are available for hire as has-been political commentators.
Returning for one more example of out-sized tedium in overwrought statements about economics, the claim was made in comments to a recent post at Big Brass Blog that "macro and micro econ. people get the supply and demand part, but schools don't teach too much else."
This assertion is far from my experience, both in my own classrooms and from what I know of what happens in the overwhelming majority of classrooms in American colleges and universities where economics is taught.
First, supply and demand would be taught in microeconomics; macroeconomics also covers supply and demand, but the constructs are different in the study of economies at the large scale, which is why, in macroeconomics, we use the terms "aggregate supply" and "aggregate demand" to distinguish them from their respective counterparts in microeconomics.
Moreover, although economics textbooks vary to some extent in topical sequence, the scope is relatively consistent from one book to the next, and the syllabi in colleges and universities tend to follow the layout of the textbook being used, so a certain degree of uniformity exists across schools. The topics of "supply" and "demand" are respectively underlain by a considerable build-up: "demand" is part of the theory of the consumer, and "supply" is part of the theory of the firm. In neither aspect of a microeconomics course are the coverages of supply and demand ends, in and of themselves. Not even close. Eventually, the two parts of the market are brought together to show how the so-called "equilibrium price" and "market-clearing quantity" are established, and then some work is done in supply and demand dynamics so students will be able to predict, under relatively simple conditions, what happens to that equilibrium price and market-clearing quantity when supply and/or demand changes. All kinds of useful and interesting results can be obtained, and I have a somewhat proprietary method to make the mechanical part of the analysis a little easier so more time and energy can be spent looking at what the results actually indicate and what they mean for real-world kinds of applications.
In macroeconomics, the topical material is far more integrated than it is in microeconomics, at least if the course is constructed well, the way I do it. The material is conceptually deeper, with more historical references, and a necessary requirement that students hold together an arc of thinking that spans virtually the entire course. While I enjoy teaching many of the topics in microeconomics, it is in macroeconomics that I can see the students, toward the end of the course, compiling a comprehensive picture that deeply affects their thinking about economic life, politics, and their place in a world where vast forces far beyond their control are affecting them and have been since long before they were born.
I shall stipulate that I have seen both microeconomics and macroeconomics taught badly, and that usually happens when a Right-wing or Leftist professor cannot keep his or her own unsupported ideas from going wild in front of students who are unable to know that the material being taught is tainted or who are too afraid to complain. I had a personal experience with a Right-winger who was teaching such unconscionably wrong material that his students were completely incapable of taking any other economics courses after he had finished with them. The situation was outrageous, and the very presence of such people in academia speaks to deep problems with the tenure system and modern methods of granting faculty appointments. One day, I shall write in scathing, personal terms of this mess. Fortunately, most professors are good, and I can state without qualification that most professors who have strong ideological tendencies Right or Left will nevertheless deliver a good course with considerable objectivity. At the same time, I have no problem (as my students will verify) declaring that I am the best teacher ever.
Self-promotion is cheaper than major media ad space.
An extraordinary amount of material is taught in microeconomics and macroeconomics; in fact, I tell my students right up front that economics principles courses are among the hardest courses they will take, certainly at the introductory level. They believe me within only a few class periods. Even though my failure/dropout rates are very low compared to those of most other teachers (and I am one of the toughest testers and graders I know), my drop/fail rate still hovers around 20 to 25 percent.
Beyond the classroom, I have published numerous articles on microeconomics and macroeconomics, including a killer, four-part series entitled, "The Economics of Wreckage." I hold in great esteem the clutch of long-time readers here at Dark Wraith Publishing online properties who have plowed through some of my more intensely analytical writings, a list of which can be found in my post, "The Echo of Now." As I tell my own classroom students, I do not expect anyone to thoroughly, deeply, comprehensively understand the principles of economics in one pass or even several. The understanding is not so much a process as it is a demanding trial. Much like any science or art, mastery is not something that just arrives at people's unconscious behest because they believe they know what they're doing or because they think they have insights from "wisdom and experience," although both are deeply important contributors to bringing the subject matter of any discipline to life outside the classroom and the textbook. This is tangentially related to the modern myth among early learners and the general public that the "Internet" is the key to unlimited genius at the touch of a button. Only slowly do students in good colleges come to realize that the online world they have known is nothing more than a child's wading pool compared to the vast ocean of content that flows from professors, from books, and from the deep resources, some fee-based, in databases like Lexis/Nexis, the Standard & Poor's Reports, Business Elite, Shadow Government Statistics, FRED (Federal Reserve Economic Data), and thousands of other incomprehensibly vast lodes of data and information. Once students see the ocean and lose their fear of its impenetrable scope, the incredibly limited value of Google and Wikipedia, so overused by those who think knowledge is push-button easy, becomes apparent.
I do what I can, and I encourage the same in my students. "Thinking outside the box" is utterly useless without a deep, thorough knowledge of what, exactly, is inside that box. Shed light there, and quite a few myths will disappear about what it is that we have spent centuries developing, teaching, questioning, revising, and expanding. I have no intention of allowing the fields of my wide academic training, business experience, and years in teaching to be further eroded by either iconoclasts or institutional shills. I am old enough to be intensely bored by the wild 'n crazy crowd that thinks anything goes, and I am marginalized more than enough to be enraged by a corporatized, authoritarian system of governance that has penetrated society down to the very core of how people frame their concepts of personal, intellectual, and political freedom.
I am, on the other hand, not old enough to give up. I offer free subscription on Apple iTunes to entire courses in microeconomics, macroeconomics, and other courses I teach. These are podcasts of live, classroom lectures, and my subscriber base is not just my own students. People from all over the world listen, and the very fact that they would do something like that speaks to a heartening value at least some people hold: that information is insufficient without knowledge, and knowledge is insufficient without understanding.
At the end of the day, even understanding is insufficient if it fails to elicit within the learner at least a modicum of wisdom. That last step, I cannot provide. Many attain high degrees, great honors, and wide recognition, yet stop somewhere along the path from accepting raw data into their minds to distilling that data down to information and then processing it into knowledge. Others can make the journey without the need for those high degrees, great honors, and wide recognition. In any event, wisdom does not come without the prior journey. Most unfortunately, genuine wisdom will never be particularly valued, not in a society where ignorance is considered a viable voice, polemics a call to action, and wisdom a matter of opinion.
That does not mean the alternative in disciplined thinking backed by committed, on-going learning is dead.
Not, at least, until the Right-wingers and the Leftists who want teachers and practitioners like me to shut up get the guts to make their dream of a world of ignoramuses just like them come true.
The Dark Wraith has spoken.
Republicans: "U.S. economy is robust and job creation is strong"
Via the Democratic Congressional Committee Campaign, which linked to the article from Rochesterturningpoint, I present to you a screen capture from a page at The National Republican Campaign Committee. (Click to enlarge.)
The Webpage reads as follows:
Thanks to Republican economic policies, the U.S. economy is robust and job creation is strong.
Republican tax cuts are creating jobs and continuing to strengthen the economy, yet there is still more to do so that every American who wants a job can find one. Congressional Republicans understand that many Americans are working hard to make ends meet. That is why the GOP continues to push for pro-growth policies that create jobs and oppose tax increases that would add a burden to working families and set back our economy. Republicans believe we should:
- Allow families to plan for the future by making tax relief permanent.
- Encourage investment and expansion by restraining federal spending and reducing regulation.
- Make our country less dependent on foreign sources of energy through a comprehensive national energy policy.
- Expand trade and levels the playing field to sell American goods and services across the globe.
- Protect small business owners and workers from excessive frivolous lawsuits that threaten jobs across America.
- Lower the cost of health care for small businesses and working families through Association Health Plans, tax-free Health Savings Accounts, tax credits for employer contributions to Health Savings Accounts, Medical Liability Reform, and health information technology.
Additionally, to keep our economy growing, we must reform the tax code to make it simpler, fairer, and more pro-growth. Embarking on a bipartisan effort to reform and simplify the tax code is one of the goals of the Republicans in Congress.
That's right, folks. According to the Republicans, "...the U.S. economy is robust and job creation is strong."
Yes, the Republicans have finally lost it. They are offically, certifiably insane.
Off their meds BIG time.
'Round the bend.
Send them to the zoo and watch the monkeys run.
Call 'em "Ed" so everybody will yell, "Hey, Special Ed!" when they walk by.
(That last one was insensitive.)
Anyway, there you have it: the official Party of the Opposition is now in full regalia, letting the American people know that it's ready, willing, and able to retake command of this nation whenever the citizens are once again burning with desire to commit collective, national suicide by means of the time-honored, much-heralded method known around the world and across history as Death by Stupid.
The Dark Wraith will now accept inquiries on just how stupid stupid can get.
Principles of Finance and Economics: The Sex and Money Edition
To keep the adrenalin flowing and, in the process, to promote greater understanding and knowledge of economics and finance I herewith offer a rejoinder to her delicious rant in that article about the young lady, Natalie Dylan, who is offering her virginity to the highest bidder.
Good morning, Jersey Cynic, and thank you for a stimulating post.
One minor correction is in order. In your article, you write the following:
"If this really is a legit auction (as it's being called) how is it that offering money for sex is o.k. over the internet, but illegal everywhere else (except in Vegas of course maybe that's the loop hole!)"
In point of fact, although prostitution has limited legal protection in Nevada, it is not legal is Las Vegas.
Somewhat simplified, the statutory standard for licensure of brothels and other venues of sex for money has to do with the size of the county; but Nevada state law allows any county or other incorporated entity to outlaw the trade as it chooses. The county in which Las Vegas is incorporated prohibits prostitution. So do Reno and several other tourist spots in the state.
That does not mean, of course, that prostitution does not exist in Vegas, Reno, and other places where free markets thwart the will of even the most ardent of morality regulators; it just means that the commercial trade in sex is not sanctioned by municipal law. This simply imposes an additional cost (part of which is borne through the bearing of risk) on the market participants.
Free markets will find a way to express themselves, whether they be functioning under the fist of the Right or the Left. Greed, in and of itself, is a powerful, animating force of human activity; coupled with lust or one of several other cardinal sins, it becomes commerce under a greater or lesser guise of civilization.
The moral of the story is clear: if you want butt, go to Nevada; if you want butt with a side of risk, go to Vegas (or any other place where "public policy" concerns itself with controlling the otherwise unbridled passions of people).
Now, with respect to the story of the young damsel selling her virtue at auction, this again is merely an expressively free market manifestly operating to the end of bringing together suppliers of a product with those willing and able to command it through the pricing mechanism. In this particular case, a subtle but important rule in economic behavior is brought to light by her efforts and the men who have bid for first access to the goods and services she is offering at auction: no principle of economics prohibits the fool from being taken by a lesser fool.
In fact, I emphasize in finance classes a related principle sometimes referred to as "the greater fool theory": whenever an investor purchases a stock, it must rationally be to the purpose of eventually finding a greater fool than himself who will buy it from him.
This principle is so obvious that it amazes me when people think I am being flip in stating it.
Think about it. If you have bought a share of common stock of, say, Microsoft, you might or might not have been particularly foolish. Ultimately, in order to realize any capital gain, you must sell it; and if you sell it, someone must exist on the other side of the transaction as the purchaser.
However, if you are selling that share of Microsoft common stock, you must have concluded that no further gain commensurate with the risk can be extracted by holding the security. That means, at least in your judgment, whoever buys it must be a greater fool than you were when you bought it! Whether you were smart or stupid when you bought the stock, in order to sell it you must find someone who is less smart or more stupid than you were. It is that simple.
Now, you might be thinking that someone might be compelled to sell a stock for reasons other than the assessment that its capital gains potential has run its course, but that cannot be the case: if you really just need money, you can surely pledge the security to acquire money you need; either that, or you could form a position in options to gather some money for a short time while retaining the underlying security.
No, stock markets work efficiently by the consistent, persistent existence of the greater fool theory. If no greater fool exists than the last buyer of a security, that instrument will never be sold.
With respect to the young trollop selling her virginity, a man who is to some greater or lesser degree a fool will buy it, having valued her asset at the closing price of the auction; then she will be handed off to a greater fool, the next gentleman to whom she will provide access to what remains of her much-depleted asset.
This, by the way, is related to yet another economics phenomenon called "winner's curse," something quite frequently observed at auction sites like eBay: with a curious degree of regularity, in an "English auction" (one where the bids rise from an initially low starting point) the winning bid is actually higher than the market clearing price the auctioned item would have commanded in a more traditional market environment like a store. The spread between the clearing price in a traditional market and the closing auction price can, to some extent, be assessed to a "winner's premium": at high probability there will be at least one among many bidders who is willing to pay a premium over what would otherwise be "rational," and that person takes the hit just to be the winner of the auction. He or she, in that circumstance, then, is the greater fool.
The bidding for the virgin has hit close to $4 million. The rising high bid means that more fools will find opportunity beneath the eventual winner at the initial auction. Given the entrepreneurial young tart's proclivity for commercial endeavors, and given that the winning bid will be astronomical by almost any bidder's standards, in the fullness of time Ms. Dylan will reveal to the world a veritable legion of greater and greater fools.
Provided, of course, that she does not work in Vegas, where she would be arrested.
Unless, of course, she holds her auctions in one of the better hotels on the strip.
The Dark Wraith has spoken.
Macroeconomics Quiz 2: Monetary Policy, Fiscal Policy, and International Trade
The problems below are variations straight from a final exam I would give in a principles of macroeconomics course. I hand-selected 10 of the 100 multiple-choice questions just for you. These are all problems I would expect any economics student to know by the end of the semester. Even if you've never had a core macroeconomics course, if you have been following my articles here (and you can find a summary list of some of them by clicking here), you will ace this quiz.
Take this quiz, report your results in comments if you so desire, and then brag to your friends about having faced down a killer economics test given by a particularly ill-tempered economics professor.
Or, if things don't go so well, quietly send me a private e-mail message telling me that I'm ugly. I like getting e-mail from friends who care.
Lock and load, good people.
What Your Score Means
|100%:||You know economics too well to be a mainstream media pundit.|
|70%-90%:||You know economics too well to be an adviser to the President.|
|40-60%:||You know economics too well to work for the Democratic Party.|
|10-30%:||You know economics too well to work for the Republican Party.|
|0%:||Okay, it's time for you to get a job in Washington.|
The Dark Wraith awaits the results of this delightful little diversion.