Wednesday, November 27, 2013

Janet Yellen and the Bankruptcy of Modern Macroeconomics

Janet Yellen is very well qualified to be the next Chairperson of the Federal Reserve.  No question about it.  She is one of the smartest economists on the planet.  The problem is she toils in a field that is intellectually bankrupt and politically motivated -- modern macroeconomics.

She knows modern macroeconomics as well any other academic around.  But, knowing modern macroeconomics is like knowing Grimm's Fairy Tales.  Modern macroeconomics bears little resemblance to the macro economies that it purports to analyze. The idea that only a dramatic expansion of sovereign debt is the prescription for a country choking in debt is patently ridiculous.  Yet, that is the number one prescription remedy proposed by Yellen and Paul Krugman and others of the modern macroeconomic stripe.

Whether one speaks of the Eurozone or it's twin -- the United States -- the modern macroeconomist lives in the simple world of the Keynesian cross diagram, put forth over a napkin by Richard Kahn (a student of Keynes) in 1928 to explain some of the ideas of John Maynard Keynes.  Nearly 100 years later, things haven't progressed much intellectually.  Most academic research in macroeconomics uses the method of "proof by assumption" to reach conclusions similar to Kahn's napkin demonstration.  If you just say that it works, then it works.  That pretty much sums up modern macroeconomics.

The problems in the US and the Eurozone stem from two broad facts: 1)  Government spending is facilited by massive, unprecedented and unsustainable increases in sovereign debt; 2) The micro-economics environment is being strangled through regulations, taxes, laws, and other rules of the road that make it almost illegal to hire employees and virtually impossible to run a private business.  The result: economic stagnation.  The pitiful economic condition of the US and Europe continues to puzzle the modern macroeconomist and it's no wonder.

Capitalism and free markets made the US the economic wonder of the world.  Obama and his predecessors seem intent on destroying this capitalist icon and they appear to be succeeding.  Europe has long been in the tank and has chugged ahead in the past only because of the awesome strength of the US economy, which pulled an unwilling and socialist Europe along.  The locomotive has stopped pulling and the train has slowed to a crawl. That won't change.

Meanwhile academics continue to push for more sovereign debt and more restrictions on the private economy.  Why not?   Most academics make their money, one way or another, from bureaucracies that don't have to compete in the private sector.  So, modern academics have only the faintest understanding of competitive markets.  Most academics don't believe in free markets anyway, so they live in the right space for their beliefs.

In the long run, only free markets really produce anything that anyone wants to consume.  We will be seeing soon what happens in health care when free markets are abolished by law.  We already know what happens in Europe when free markets are outlawed.

So, expect Janet Yellen to continue to call for more expansion in the Fed balance sheet (equivalent to increasing sovereign debt through the Fed) and more calls for higher US fiscal deficits and larger taxes on the private sector.  Like her fellow academics, Yellen sees little role for the private sector in the economy of her dreams.

Tuesday, November 26, 2013

Western Economies Continue to Stagnate

All quiet on the western front.  The US and Europe are going nowhere economically and the future doesn't look any brighter than the present.  The middle ages was a period of history where the world was economically dead in the water.  We're there again.....and for similar reasons.

Governments make the big decisions now, not individuals.  By and large, the body politic in US and Europe believe in big government solutions.  The health care debacle in the US is not unusual, just more obvious.  Usually, the citizen assumes that his bad experiences with his government are unique.  But bad experiences are not unique, they are ubiquitious.

Removing the economic incentives for performance means economic stagnation.  Government does not provide marginal incentives for performance.  In fact, government provides mainly incentives to cover up poor performance with almost no reverence for honesty and little or no concern for the truth.

China and the Asian periphery are just about the only places in the world today still experiencing economic progress.  Whether that will continue will depend upon unleashing the individual strengths of their countrymen.  If they leave it to government, these countries will falter just as the West has done.

Ironically, when a society becomes wealthy, it turns inward and begins to destroy the inner qualities that led to its economic success.  This is often true of families as well as countries.  It seems a natural human tendency.  It is no accident that the forefront of leftist political movements are populated with the children of the super affluent-- Obama Bin Laden is probably the most famous example.

Joseph Schumpeter was the first economist of note to realize that capitalism breeds its own destroyers and that wealth breeds contempt for what created the wealth.  The current American tide of opinion that makes financial success a criminal activity is an example of what Schumpeter foresaw in the 1930s in his famous book "Capitalism, Socialism, and Democracy."

Schumpeter noted that there was a natural tendency for the children of the affluent to resent their forebearers who created the wealth that they are born into.  In part, this is the expression of a guilt syndrome that permeates the inheriting classes.  These folks seek to expatiate their guilt by pushing government mandates that purport to outlaw poverty and other things that such folks see as a blight on their world view.  Joining up with academics and bureaucrats, these wealth inheritors, with time on their hands, dream up prisons to put average folks in -- prisons like Obamacare, Social Security, Medicare, Medicaid.

This is why elite schools, filled with children of the idle rich, are populated with extreme leftists, both on the faculty and among the student body.  These are all folks riding at the top of the stage coach, who peer, with their noses in the air, at the folks trying to cling to the stage coach.  At less elite colleges, you see less of this arrogant nonsense, both among faculty and among the student body.

So, don't expect economic progress in the Western world.  It will take a revolution in thinking to dispel the myth that government is the ticket to prosperity.  When calls for growth replace calls for redistribution, then real progress has a chance.....but not until then.

Monday, November 18, 2013

It's About Health Care Not About Health Care Insurance

What you really want is quality health care at an affordable price?  In some ways this goal is not possible.  There are some health care procedures that are not "affordable" for everyone.  Other developed countries don't offer these procedures to everyone precisely because they are too expensive.

That's why surgery, for example, is rationed in the United Kingdom and in Europe.  This rationing is accomplished by the simple expedient of long waiting lines.  You die before your number comes up.  Thus, you are not in the statistics that are cited, exclaiming the great advantages of socialized medicine.

Other data is simply based on fabrication.  Take the data on infant mortality.  The US ranks poorly in overall infant mortality, even though at every single "age-of-the-mother," the US ranks number one (lowest, in other words) in infant mortality.  How does this work?  It is because the US has more births to teenagers as a percentage of overall births than any other developed country.  Health care won't change that.  Only changing social behavior will improve infant mortality in the US.

So, what's the deal with insurance?  Why do the supporters think changing the insurance market can improve health care?  Notice that doctors are leaving medicare and medicaid and being dropped from Obamacare insurance plans.  So, now we are going to have better health care with fewer doctors?  Almost half of the hospitals in the state of New Hampshire don't qualify for Obamacare insurance plans.  And other states face similar problems.  So, now we are going to have better health care with fewer hospitals?

Meanwhile for most Americans, health insurance premiums and deductibles are skyrocketing.  Dramatically higher costs with fewer services.  That is the future for American health care and the facts are pouring forth daily.

But, I guess Obama and his allies will be happy because some people can buy insurance who couldn't buy it before.  As for the nearly 200 million Americans who already had health insurance and, by and large, were happy with it, they face a future with much poorer health care availability and dramatically higher costs.

Saturday, November 16, 2013

Read Liz Alderman in Today's NY Times: "Young and Educated in Europe, But Desperate for Jobs"

Liz Alderman has written an excellent account of what big government in Europe has done to the youth of Europe.  While aggregate unemployment is 12.2 percent across the European plain, youth unemployment varies from 25 to 56 percent, depending upon which sluggish European country you happen to find yourself in.  There is no future for these young folks.  The politicians have seen to that.

All of these countries make it almost impossible to fire employees and load businesses up with employee mandates that make employees far, far more expensive than their reported wage rates.  So, who hires?  No one.

Read the stories of young folks looking for work.  Note the disconnect between life up to and including higher education and then the depressing aftermath.

This is the US's future, as we have, in recent years, adopted our own version of European labor laws and the Obama folks are pressing to complete the picture.  Not until we have Europe will the Obama folks be happy.  So, take a look.  Read it and weep.

"Bombshell Paper" - Another Macro Theory Farce

Sean McElwee writes in Salon recently that "if only Republicans knew some economics...."  He then goes on to reference a "bombshell paper" that justifies, academically, more government spending and higher deficits.  The paper he references is a 2012 paper by Larry Summer and Brad DeLong entitled "Fiscal Policy in a Depressed Economy."  This absurd piece of work purports to "show" that increasing deficits now reduces national debt later.

How does this paper "show" this remarkable (and nonsensical) result?  In a manner that has become more and typical of academic macroeconomic "research," Summers and DeLong simply assume the result that they want and then discuss it as if they have "proven" something.  It is the new "proof by assumption" method of doing economics that seems to have taken over academic economics. 

Summers and DeLong assume: 1) a huge multiplier of changes in government spending upon current GDP (when has that ever happened?); 2) a huge multiplier for changes in government spending on future GDP (when has that ever happened?); 3) no impact of higher debt on interest rates; 4) higher inflation to reduce the real value of debt without any increase at all in nominal rates (when has that ever happened?) 5) much higher tax revenues plus (?) lower government spending as GDP rises (when has that ever happened?).  If all this were true, guess what?, they are right.  But, all of these assumptions are precisely the issues that need to be proven, not assumed as Summers and DeLong have done.  Why not just assume that none of the above assumptions hold, then you have "shown" that Summers and DeLong are spouting nonsense.  Which they are.

McElwee cites this absurd paper in a vitriolic attack on Republicans as not knowing any economics.  If this is what McElwee thinks is economics, no wonder he thinks Obamacare is great policy.

Friday, November 8, 2013

$ 10 Minimum Wage -- Bashing Poor People

The President is now planning to criminalize jobs that pay under $ 10 an hour.  Somehow, he thinks this helps poor people.  If so, why not make it even higher?  Why stop at $ 10?  You could just criminalize all jobs.  That would at least provide some equity between high paying jobs and low paying jobs.  Just outlaw them all.  A simple way to do that is to raise the minimum wage to $ 1,000 per hour.  Then practically everyone in the economy could experience the benefits of higher minimum wages.

The President never seems to run out of initiatives to diminish the life hopes of the average American.  Students loaded with massive debt (encouraged to take on that debt by the President's government loan program) enter a job market with poor prospects.  They are asked to pay triple the fair market rate for health insurance in order to subsidize the wealthiest demographic in the US -- the elderly.  His cronies in Congress passed the Dodd-Frank bill which effectively outlaws loans to middle (and below) class Americans.  Now his latest salvo, an increase in the minimum wage, is designed to cut off any opportunity to learn a skill by working temporarily at a pay scale that encourages employers to give a rookie a chance.

It is clear that President doesn't work very hard and maybe his idea is that no else should either.  What better way to accomplish this goal than to eliminate job creation and criminalize the act of making a job offer.

Wednesday, November 6, 2013

The Obvious Arithmetic of Obamacare

All of a sudden 30 million Americans, heretofore uncovered by health insurance, will be given health insurance plans that they can afford.  How can they afford them?  With subsidies that cover most of the cost.

Hooray says the far left!

Who pays?

Current medicare recipients for one.   Medicare lost $ 750 million in reimbursement dollars in order to finance Obamacare.

But, of course, that's not all.

If 30 million Americans are basically going to receive free or almost free health care, someone has to pick this up.

In addition to this, there is now blanket coverage for all kinds of things that many people did not think were worth covering.  But Obama thinks they are worth covering and his view is the only one that matters.

Who pays?

Someone has to make up for the billions and billions in subsidies and expanded coverage that people never knew that they needed until Obama came along.

The payers will be taken from three groups: 1) the taxpayer, of course; 2) all folks that are healthy and have current insurance will see their health care costs skyrocket with higher premiums, higher deductibles and higher copays; 3) the folks that want to continue with their own doctor ... no such will take the doctor that Obama thinks is right for you.....period!

If young folks don't sign up, the expected premium for high deductible plans will quickly shoot to over $ 2,000 per month.  Even with this exhorbitant price, you still will not be able to choose your own doctor and may not even be able to find a doctor that will treat folks with Obamacare insurance.  Medicare and medicaid recipients have already learned insurance is not much help if no doctor will treat you.

The website is the least of their problems.

Wait until people see the true costs of Obamacare and the collapse of the American health care system.  It's coming.

Stewart's Blog

One of my blog posts from back in September attracted the attention of James Stewart and he reported my comments in his own blog.  These comments ran in yesterday's NY Times.

The occasion was the announcement of a government settlement with the SAC hedge fund involving a $ 1.8 billion fine.

I was amused to read the the comments that followed the publication.  Many were vituperative rants about how terrible rich people are.  Most of the comments seem to miss the point of my blog and the point of Stewart's blog as well.

My point was simply that the government and the plaintiff lawyer industry, more often than not, end up tagging folks who aren't the guilty parties.

This is especially true when public companies are sued or fined or indicted.  Who pays when this happens?  Almost never do the so-called perpetrators pay anything.  Instead the shareholders of these companies are punished -- shareholders who are completely innocent and generally unaware of any criminal activity.

The actual wrong-doers usually go unscathed from these lawsuits, fines and indictments.  In many cases, the wrong-doers actually gain in income and wealth from their role defending the public companies against their attackers.  Additional stock grants and compensation are paid to senior officials to make up for lost stock value from the punishments extracted by the courts and the government regulators.

But, no one makes up the loss to the janitor sweeping the floor at night.  He gets hosed in this arrangement, even though he has no idea about any wrongdoing.

The real losers are almost always innocent, middle-class Americans.  The real winners are members of the plaintiff bar -- wealthy lawyers who live for class action lawsuits.  Sometimes the winners are just ambitious and hungry politicians, usually with their own special ethical problems that later come to light.

So, my real point is that if you see wrongdoing, go after the wrongdoer, not the innocent bystander.  Too often, these settlements end up punishing innocent folks, while the guilty emerge relatively unscathed.

I doubt that Stevie Cohen will worry much about the $ 1.8 billion settlement extracted from his hedge fund this week.  We will probably never know about Cohen's guilt or innocence.  That doesn't seem to matter to the regulators anymore as long as they can extract a headline-grabbing dollar settlement.

It seems to me that if someone commits a crime, then you should go after the criminal, not the innocent bystanders.  That's the main point of my blog.

Monday, November 4, 2013

1930's Economics in the 21st Century

You continue to hear economists bemoan the slow pace of economic growth in the western world.  Europe is still asleep economically and the US barely has a pulse.  All of this, say most economists, is the result of too little deficit spending!

Keynes made this argument in the 1930s when governments were relatively small and, in the US particularly, the reach of government was not very extensive.  Much has changed.

Keynes would not recognize the modern western economies.  Laws that prohibit hiring coupled with elaborate price controls (minimum wage, overtime laws, etc.) and workplace litigation over water-cooler conversations would come as quite a surprise to Keynes.  It is impossible to imagine that Keynes would think deficit financing and monetary largesse would have much of an impact on economies with this kind of government overreach.

Yet, the Krugmans and Janet Yellens (and Ben Bernankes) of the world continue to trumpet this absurd message -- that a world drowning in debt needs more debt.  Having laws that make it illegal to hire anyone (minimum wage laws in the US) and punish businesses that do make hires (Obamacare, discrimination laws in the US, and labor laws generally in Europe) don't faze the Krugmans, Yellens and Bernankes.  They don't think these things matter.  They remain puzzled by the sluggish economies in the US and Europe.

They are going to remain surprised.

Keynes would not be surprised.  He understood that you can strangle an economy with an over-extended government.  Absurd debt levels would have seemed to Keynes -- as absurd.

The US and European economies are strangling from regulation and taxation.  The western economies will never return to their old vigor until their governments back off.  The problem is not macro, it is micro.

What is lost on the modern Keynesians is that someone has to decide to hire someone, before getting a job can become a reality?  Modern governments place every conceivable roadblock in the way of a firm attempting to make a hire.  So, businesses are reluctant to hire, even when they wish to expand.  They look for outsourcing or automation solutions.  The last thing any rational firm wishes to do in the modern western economies is add to staff.

Meanwhile, the White House, according to today's WSJournal, is dusting off it's push to increase the minimum wage from $ 7.50 to $ 9.00, threatening the elimination of millions of potential and actual jobs! 

Why not cut to the chase?  Why not raise the minimum wage to $ 100 per hour?  Then everyone could live well, according to modern macroeconomists like Krugman and Yellen.

Modern macroeconomics is a fairy tale, that could only be told in a world in which we no longer live.  Governments have done everything possible to suppress the incentives for ordinary business to hire.  .

But, sooner or later, as the private sector becomes less and less important, the economy grinds to a halt.  The old Soviet Union and the post-1949 Chinese economy are the modern examples of what happens when the government makes all of the decisions.

In the western world, slow growth will disintegrate to no growth and/or negative growth.

Incentives matter, even if Krugman, Yellen and Bernanke think that incentives don't matter.  Nancy Pelosi was correct when she perceived that if her staff was forced into Obamacare, it would make government service less attractive.  That was probably the only time in her political life that she recognized the role of incentives.

If tax and regulatory policies discourage hiring, you won't get hiring. Doing Q1, Q2, Q3, Qwhatever won't matter. Q's don't hire, firm's hire.  This is what the modern macroeconomists never quite get.

Sunday, November 3, 2013

Thomas Friedman -- Extremist in Denial

Thomas Friedman is an extremist.  No question about it.  His opinion piece in today's NY Times says it all.

He describes the decline in America's reputation in Asia (based upon three conversations carefully handpicked, by the way -- typical of the research methods of extremists).  According to Friedman, the threatened shutdown a few weeks ago is the seminal event.   "That a minority of a minority" could threaten the shutdown of the US government............

This is what Friedman sees as America's real problem.

What doesn't bother Friedman is the impending bankruptcies of American cities, states and ultimately the Federal government.  (Detroit and Stockton are just the opening bells).  Friedman is not troubled by the Administration's repeated untruths that lay behind putting nearly twenty percent of the US economy in the direct hands of an unelected, incompetent and corrupt bureaucracy -- Obamacare.

That millions of Americans will not, in the not so distant future,  receive promised social security, medicare, medicaid, public pensions and health care is not a problem for Friedman.  That future generations will be stuck with trillions of debt for goods and services they will not receive does not cause a moment's pause for Friedman.  That Friedman and his generation are systematically looting their grandchildren does not bother him.  Who cares as long as the debt limit is extended and we can continue to spend our grandchildren's money.  That is the view of Thomas Friedman.

Friedman is one more extremist among the rich and powerful who holds the American public in complete disdain.  He sees people who think the government should balance it's budget as extremists.  Friedman is the extremist.  Friedman, along with the NY Times editorial staff, are helping to walk the US over the fiscal cliff.  Their arrogance is breathtaking.

"If you like your health insurance you can keep it....period."  Statements like this, made repeatedly, to justify the imposition of the most onerous and terrifying piece of public policy in US history doesn't bother Thomas Friedman. Friedman's health care is unaffected.  He and Buffett and Obama and Mark Warner need not worry.  It is the rest of the American citizenry who should be terrified.

Buffett, Obama, Warner and Friedman are the extremists and like all extreme leftists, they are personally unaffected by the policies that they inflict on others.  And, like all extremists, they don't care what the average American thinks.  Their contempt for the average American knows no bounds.

Today, the White House released a statement that read "telling the truth would have confused the message."  That pretty much tells it all for extremists like Friedman.  That statement doesn't bother him, but folks calling for the truth are the enemy in Friedman's eyes.