The incredible vanishing multiplier, and economics as a science

Here is a blast from the past. In this .pdf file, economist Robert Barro talks about the Keynesian multiplier in 2009. 2009, as we recall, was the edge of the precipice. This article was published in February of that year, concurrently with the passage of the “American Recovery and Reinvestment Act,” commonly known as the first stimulus, which granted roughly $800 billion of taxpayer money to political cronies.

Here is an excerpt:

If the multiplier is greater than 1.0, as apparently assumed by Team Obama, the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment. In this scenario, the government spending is a good idea even if the bridge goes to nowhere or if government employees are just uselessly filling holes. This free lunch would make Charles Ponzi proud. If the deal is genuine, why stop with only $1 trillion or so of added government purchases?

It seems as though the best way to judge macroeconomic predictions is with the benefit of hindsight. Indeed, when economists using the same data set come up with estimates that vary by the trillions, one must wonder whether foresight per se exists at all.

With the benefit of hindsight, it is clear that the stimulus did not stimulate. Many excuses have been made for the poor performance of ARRA, but the fact remains that it has failed.

In my view this is not surprising. Most economists, whether classical, monetarist, Keynesian, or whatever else, have been consistently missing the point for decades. They have become so caught up with making their math look legitimate that somewhere along the line they forgot that it should have some connection to the real world.

Perhaps when applied to mainstream macro, “voodoo economics” is a tautology.

Will the Zero Stroke return?

I was recently made aware of an interesting phenomenon called the “Zero Stroke” or the “Cipher Stroke.” It has an article on Wikipedia, so it must be a real thing.

Zero stroke or cipher stroke was a mental disorder, reportedly diagnosed by physicians in Germany under the Weimar Republic and said to be caused by hyperinflation of the early 1920s. The disorder was primarily characterized by the desire of patients to write endless rows of zeros, which are also referred to as ciphers.

Now that we’re in for the four more years of the Obamar Republic, with Ben Bernanke getting free rein to dump Benjamins out of his fleet of helicopters, I wonder whether the Zero Stroke will return?

Maybe it’s the next big thing in psychology!

A note on campaign finance and SuperPACs

In a letter in the Wall Street Journal today, a Richard Williams of Wenatchee, Washington writes with regards to Harold Clark Simmons’ giving more than $18 million to support Republican candidates:

I find Mr. Simmons’s extreme political views pretty abhorrent. Even if I agreed with them, it would disturb me that the political influence and power of one wealthy individual outweighs that of many thousands of other citizens. This situation is incompatible with our democracy.

I have one question for Mr. Williams of Wenatchee. How could you possibly disagree with someone when their opinions are backed by $18 million? What’s that? You are not swayed by huge amounts of money?

So why the assumption that everyone else is? Perhaps the problem is not that Mr. Simmons has given huge sums to promote his political views, but instead the problem lies in the fact that you assume everyone else is such a blithering idiot that they will be unable to help themselves from following Simmons’ money like zombies.

Your logic is poor, Mr. Williams. So poor that I simply cannot fear for the political process based on huge donations like this. After all, if someone with your limited logic skills can see through $18 million, I think the rest of us can fend for ourselves.

“Bad Smell Blanketing the DC Area.” Hooray for Metaphors!

…No seriously. A bad smell is blanketing the DC area. It’s in the news and everything.

Reports of a really bad odor blanketing the metro area have been reported from downtown D.C. to Fairfax County to Oxon Hill!

You may have smelled it Thursday night or Friday morning – and lots  of people are talking about it.

Sometimes they make it too easy.

Expanding access to health care leads to …less access?

Avik Roy, writing at the Atlantic, has an interesting post that directly illustrates the concept of “the solution is the problem.” He dives into the research and comes up with some evidence that expansion of Medicaid actually reduces people’s access to health care.

Chapin White of the Center for Studying Health System Change has published an important new paper in Health Services Research, a journal of health economics, which suggests that a critical part of the Affordable Care Act–its expansion of Medicaid coverage to 16 million more Americans–may actually reduce those individuals’ access to health care.

White’s report comes on the heels of numerous studies that show that patients on Medicaid, our national government-run health-care program for the poor, do far worse on health outcomes than do those on private insurance, and in some cases, worse than those with no insurance at all. (For an extremely deep dive into these studies, see my three-part series on the topic.)

Briefly, the post gives a few reasons that are all supported by the most basic rules of economics. First, Medicaid underpays doctors. This is, of course, by necessity, as Medicaid is devastingly expensive, and governments simply cannot keep up with health care demand. The flipside, though, is that doctors who are underpaid are less likely to offer their services. This is simple supply and demand, and it cannot be repealed.

Furthermore, Medicaid expansion does not lead to more doctor visits. The reasoning here is exactly the same, but with some crowding-out effects added in. As state coverage expands, private insurance gets crowded out, and access diminishes because less private insurance and more government payments means more underpayments to doctors. And more underpayments to doctors leads to less service offered by doctors.

In fact, it’s really quite simple. But many in the political classes refuse to look beyond the first step.

More on China being the “new Japan”

China being the “new Japan” is a claim I have made multiple times before. The pattern is/will be the same:

• First, China will emerge and American will feel threatened;
• China will then seem ubiquitous if only because people are looking for it more often;
• China will purchase things that seem quintessentially “American,” and the jingoist rhetoric will heat up;
• Economic manipulation will cause China’s economy to look comparatively better than ours, increasing calls for statist intervention;
• China will blow up;
• Nobody will care anymore.

We are almost to the end of this cycle. China’s books are so bloated with fake money and unsustainable corruption, the blowup is inevitable (though no one knows when). However, that has not stemmed the tide of calls for statist intervention along the lines of the “China model.”

And so I present an article (admittedly old, which I had bookmarked and forgotten about), by Ross Kaminsky about how the Chinese model is the wrong model for the United States, notwithstanding certain calls for imitation. Here is an excerpt, but as always, you should go ahead and read the whole thing.

The professional left in America and their chattering-class useful idiots have followed a consistent pattern for a century: sympathizing with tyranny in their musings over how to implement policies fueled by jealousy and an undying fear of economic liberty.

There has hardly been a better example in recent years than Andy Stern’s Wall Street Journal December 1st op-ed entitled “China’s Superior Economic Model.” In his article, Stern approvingly quotes Intel Corporation co-founder and former CEO Andy Grove who stated in a 2010 Business Week article that there is “emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better.”

…As someone who was studying economics in college in the mid-1980s, I endured countless comments about how American corporations’ narrow focus on “next quarter’s earnings” (as if that were true) was congenitally inferior to the longer-term view supposedly taken by Japanese companies.

Over the next several years, the Japanese bought Rockefeller Center (from my alma mater, Columbia University), CBS Records (purchased, renamed, and still owned by Sony), and the famed Pebble Beach golf course.

Harvard professor Ezra Vogel published (actually in 1979) a book called Japan As Number One: Lessons for America, in which he argues, as a reviewer for the Economistmagazine put it, “that the United States should give itself a political and cultural heart transplant.

…In 1995, the Mitsubishi Group, which had purchased Rockefeller Center, forced the project into Chapter 11 bankruptcy, losing nearly two billion dollars for their efforts. And a few years later, as GolfDigest‘s Mark Seal put it, when Peter Ueberroth put together a group to buy Pebble Beach for less than the Japanese had paid for it, the deal “bankrupted a Japanese boom-time golden boy, and, most recently, sent an army of Japanese bankers back home with little to show for their seven years of superlative stewardship but their good names.”

Since then, Japan has turned in not just one but two “lost decades” with its persistent near-zero interest rates frequently being described as “pushing on a string.” According to a recent Heritage Foundation study, “In 2010, the Japanese economy looks to have been smaller than it was in 1992, an incredibly poor result. It is not just a matter of a decline in output; it is also a remarkable decline in total wealth.

…So when you hear people — especially non-economists with political agendas — long for the statism that characterizes most of America’s economic competitors, listen with great skepticism.

That, in a nutshell, is exactly the kind of progression I am talking about. If you are interested in bubbles as a phenomenon, or at least a further explication of the Japanese bubble (and many others), I would recommend “Devil Take the Hindmost,” by Edward Chancellor.

And then I would recommend some reflection on the current state of Chinese “state capitalism,” as if such a thing could possibly exist in the long term.

The STRIP Act – A Good Start

Representative Marsha Blackburn has penned a popular piece over at Forbes about her proposed bill, called the STRIP Act, or “Stop TSA’s Reach in Policy” Act.

At a minimum, it would do away with the title Transportation Security “Officer,” and require that TSA agents not wear badges or masquerade as real police officers, which they emphatically are not.

I say this is a good start. TSA has been example one of bureaucratic entrenchment and mission creep over the last decade, and they have made our lives demonstrably worse for it.

While TSA agents’ accomplishments are well-known, like their ability to fail every single audit, and their perfect record of catching zero terrorists, we have to ask – at what cost?

Look, I am all for abolishing the TSA tomorrow, and forgetting about this sorry chapter in American history. (As an aside, can we get rid of the term “post-9/11″? Everything after 9/11 is post-9/11.) But I recognize that getting rid of this wart on society will take measured steps to assuage the fears of the naive and avoid the wrath of the security state and its lobbyists. Rep. Blackburn makes a good point:

Will the STRIP Act solve every problem facing the TSA? Absolutely not. The STRIP Act seeks to expand upon the work of my colleagues by chipping away at an unnoticed yet powerful overreach of our federal government. If Congress cannot swiftly overturn something as simple as this administrative decision there will be little hope that we can take steps to truly rein in the TSA on larger issues of concern.

This is a good start, and I encourage you to write to your Congresscritter to support it.

Don’t know how? Start here: https://writerep.house.gov/writerep/welcome.shtml

Do democracies work by being dysfunctional? Or are they unworkable?

Leon Watson at the Daily Mail has a though-provoking article about the dysfunctionality of democracies.  It is called “Is this the reason democracy can’t work? Study find humans are too dumb to pick the right person to lead us.”

I find this to be an interesting question, and one that goes far beyond the implications of which useless politician we will pick to be our president this November. In fact, I think it goes straight to the foundations of democracy. We need to ask ourselves questions like, what are the things we universally (not individually) desire from our democracy? And, is anyone at all fit to make decisions for the rest of us?

Ultimately, I think Mr. Watson has an unstated premise here: that if we were in fact able to choose the “right” person to lead us, our democracies would function better, and people would be happier with them.

That is a premise I reject. Although I may not go so far as to say that the inevitable mediocrity of our politicians is a feature, rather than a bug, of our democratic processes, I will absolutely say that I would prefer as a leader a mediocre man who is aware of his limits than the smartest man in the history of the world who is unaware of his.

Is that too much to ask? Perhaps. Being aware of the extent of one’s limits is beneficial, but ultimately it is too nebulous a concept to lead to solid conclusions as a matter of policy. And so, as a tradeoff, I would prefer a government set up to reduce the pernicious impact of the hubristic technocrat, at the expense of possibly limiting the beneficial impact of the hypothetical benevolent dictator.

In other words, I respect what the U.S. Constitution set out to do, and I find discussions of who is the “best” person to lead a democracy to be generally moot.

Of course, that does not mean that choosing a Ron Paul over a Barack Obama would not lead to empirically provable better results, and I don’t accept the premise that choosing the person to be the executive of the polity is unimportant. However, those are questions about the margin, and they ought to be distinguished from questions about the “best.”

Again, however, this is exactly the sort of discussion that is far more fundamentally important to our democracy than is the discussion over who is to lead us for the next four years. So feel free to drop me a note if you have something to add. I welcome your comments.

Are people too stupid to choose their leader, or is our stupidity just another (possibly beneficial) limiting factor on the government? What do you want from your democracy? Do you think there ever has been, or ever will be, a single person to whom control of the state could be surrendered?

TSA’s nude body scanners are worse than useless

…because they give us the idea that we are safe while providing a far less than adequate level of safety. I found this video, courtesy of http://tsaoutofourpants.wordpress.com/, very informative:

How To Get Anything Through TSA Nude Body Scanners

Another factoid I found interesting is that no one has brought explosives on an American-originated flight in 40 years. However, if the TSA “officers” and the traveling public are convinced that these machines will help keep that streak alive, and yet they are demonstrably worse than the old-style metal detectors, then it can reasonably be concluded that the machines are actively making us less safe by lulling us into a false sense of security while failing to catch real threats.

Then again, I simply do not accept the idea that an outfit like the TSA has moved the needle higher in security at all. The reason why most planes don’t blow up is because, out of 7 billion people in this world, all but a handful won’t ever blow up a plane. And the ones who might are marginalized otherwise.

The point of diminishing returns has been reached and exceeded long before TSA existed. At this point, TSA’s annual budget of more than $8 billion is worth about as much in actual security as your own vigilance. Possibly less.

The inevitable question that I get from security-statists upon saying that is, “well won’t that make it easier for terrorists?” Sure. But terrorists have an incredibly difficult time of it anyway (and it bears repeating that TSA has never, ever caught a single terrorist). If we spend $8 billion of federal money and have a terrorist attack every decade or two, would that really be any better than spending $0 of federal money and having a terrorist attack every decade or two?

The idea that we can make the threat completely disappear is false. What is left is a balancing act of economic interests, freedom interests, and security interests.

Let’s stop shoveling money at the TSA on the basis of boogeyman stories and start talking tradeoffs like adults.

This is the definition of cognitive dissonance

An article at Fox News a few days ago points out an interesting conundrum. Say you are a supporter of a “movement” like Occupy Wall Street. You are against corporations having too much power and influence. You are against government bailouts. You want more jobs. You hate it when executives give themselves pay raises despite bankrupting their firms.

Oh, and you trust Barack Obama and his political ilk to right these wrongs. So what happens when Obama’s policies not only fail to stop these problems, but actually further them?

An electric car battery company reportedly has laid off 125 employees since receiving $390 million in government subsidies, but is still handing out big pay raises to company executives.

…A123′s primary customer, Fisker Automotive, is also struggling financially. “Yet, this month A123’s Compensation Committee approved a $30,000 raise for CFO David Prystash just days after Fisker Automotive announced the U.S. Energy Department had cut off what was left of its $528.7 million loan it had previously received.”

This month has seen significant pay boosts for other A123 executives, as well, including vice presidents Robert Johnson and Jason Forcier.

…“It looks highly suspicious,” Paul Chesser, associate fellow for the National Legal & Policy Center, told Mackinac [Center for Public Policy]. “It looks like they are trying to pad their top people’s wallets in case something really bad happens.”

Seems to me that this is the definition of cognitive dissonance. Obama’s class warrior rhetoric only goes so far, and we are beginning to see just exactly where its limits lie.

It seems to me that politicians are saying that “it is never okay to lay people off while paying your executives too much money. Unless we say it is okay.” Cognitive dissonance.

Tell me again why you think Obama is the right man to stop corporate abuses? Again, you want fewer mosquitoes, you drain the swamp. Take away the corporate subsidies, even for such touchy-feely pet causes like “green energy,” and you’ll get less corporate abuse.