Why I’m Harping On Karl Smith

There are only two people who make rational arguments on the ‘left’. They’re you and Krugman. We all know he’s a political shill. I’m in the camp that says you’re a moral man, and just missing the point of it all. But if you don’t understand the disastrous externalities created by our statism (re: Nial Ferguson, Rothbard, Mises, and Hayek), then it may not matter if you are a moral man or not. The time frame of data that you mine so carefully (and so well) is too short to incorporate the consequences of long term expansion of the state. Only history will show you that. And the history of political economy is pretty clear on these matters.

On my side of the fence, we’ve given up on Krugman. Myself, I’m looking for the people who unify the two points of view – who use macro without the disastrous externalities of expanding the state. You might be that man. On the other hand, I might just have false hopes. It might be impossible to find someone who can put out a daily column in a major newspaper uniting both sides and creating a political movement that gets us out of permanent political decline.

Someone emailed me yesterday to lighten up on you. I would. But the stakes are too high. I have hope that you’re “neo” so to speak. 🙂 You are articulate enough. You’re skeptical enough. You’re fast enough. You’re humble enough. You understand the data. And you rely upon moral sentiments. A decent editor and you’re there.

Or rather, you’re there if you understand that the state bureaucracy creates ‘bads’. 🙂



Debating Means Of Stimulus – Tradeoffs Between Goods And Bads

Karl Smith (correctly) suggests that we could make drastic tax cuts to fund stimulus, and borrow the money cheaply. I think he misses the point of the entire political debate going on in the country today (people don’t trust the government at all, and with the south re-engaging the republican party, both parties are increasingly becoming polarized). But his overall position that we can borrow very cheaply so we’re able to create a stimulus cheaply as long as it produces any reasonable return that doesn’t jeopardize our future. (I know. Thats a lot to ask. But remember that most Keyneisan and New Keynesian economists use a very narrow window of postwar data – a period of exception – on which to base their judgements.) Karl writes:

If we had enacted $5 Trillion in tax cuts and every bit of it was saved then the total liability that US households face would not have changed.

They would owe more in future taxes but they would be able to pay down their mortgages and other debts. And, that is a net plus because the rate at which the government borrows is much lower than subprime mortgage rates and indeed currently negative in real terms.

Having the government basically arbitrage the public-private spread is a net win for US households.

On top of that I think it likely that some households who didn’t have crushing debt burdens would have taken advantage of the flood of foreclosed homes, cut rates on hotel rooms and dealer mark downs on new cars to get some really great deals.

That would have been good for those well positioned households and good for the US economy which was facing a flood of foreclosed homes, empty hotel rooms and autos piling up on dealer lots.

It would have been good for those less well positioned households because they could have paid down their debt.

The price would be higher future taxes later but with the government paying such low interest rates the real costs of those future taxes would have been smaller than the taxes that were cut.

Moreover, the United States could have potentially avoided the devastating effects of a long term balance sheet recession.

That’s why Galbraith, before he died, me, and a few others recommended paying down mortgages directly with the trillions of available cheap debt.

The “demand story” that you keep referencing in your postings regarding the differences in the size of the boom and recession, is quite simple: that appreciation of home values affects such a vast number of households, that they all spend, even though the actual homebuilding sector is relatively small. Homeowners didn’t feel irrationally wealthy because of prices or credit — but because they believed that they had more income or savings to spend. That’s why the boom and bust has been asymmetrical. Now, after the bust, they think they are poorer than they expected to be. And it affected their retirement plans and calculations. So yes, the shrinkage of the economy has been vast. More so than any suggested stimulus so far will accomplish. And paying down mortgages would have the side benefit that it would not have expanded any of the negative sectors of the state and it’s extra-market allies. Which your recommended stimulus methods DO. Which is why the public won’t tolerate them. The public would have had a frenzy repricing if we had paid down mortgages. Pay down mortgages and refinance them at today’s prices.

Of course, I recommended all this when it started. Because, as Austrians we use analysis of individual actions. We recognize that patterns of sustainable specialization and trade must eventually reflect some global reality, while at the same time we also realize that digging holes is actually pretty wasteful of all the potential human capital that would be created by people actually working on internationally competitive sectors, while also aware that digging holes is wasteful of possible returns on fixed capital investment. (THe pyramids were a great investment.) And because, I do recognize, as do the NK’s, that it is hard to get people ‘swarm’ irrationally, but when they do swarm irrationally to certain things (becoming property owners) the externalities that are caused are ‘good’. Whereas the externalities caused by expansion of the state are ‘bads’.

And we were right to recommend this ‘stimulus’. Absolutely right. For the reasons you’re stating now – in retrospect.

It’s not that we cant still do it. People would become emotionally excited and therefore ACTION ORIENTED at the opportunities created. It would foster the impression of wealth far beyond any institutional stimulus – and it would not expand government – something that the people do not want to pay for.

If we combined direct mortgage pay-downs (maybe 2 Trillion?) with some form of credit towards home ownership for anyone who has lost a home, (using stricter lending requirements), with investments in energy production (nuclear plants), a new power grid, and roads, we would alter the economy rapidly in just months – because we would be funding multiple time scales, we would be empowering consumers, and the political resistance to expanding the state would disappear.

The American people would prefer to live in hardship rather than expand the state that they do not trust. The question remains whether you agree with them or not.



Karl Smith Says The Boom Wasnt All That Big, But The Bust Has Been Huge

Karl Smith wants us to push money into the economy through redistribution. That’s his hammer and everything looks like a nail. In today’s posting, he finds another nail:

This is a theme I talk about it a lot so I can go into it more but the boom in housing construction was not actually that big. It peaked around 2005. It was offset by a decline weakness in commercial construction. That picked up in 2005 but was in decline by 2007. And public construction ran low right up until 2007.

Combine that with the fact that construction is not that big a part of the economy to begin with and the bubble wasn’t really that big.

It looks big in part because prices were so distorting and because single family suburban construction really was moving like gangbusters. That’s where a lot of us live but its not where all Americans live and its not where most Americans work. Urban and rural construction was in the dumpster.

There is a strong argument that this was classic crowding-out though I am not totally convinced. In any case the boom was small and nothing compared to the bust.

People are not only price oriented, but future (opportunity) oriented. Their willingness to spend is based not only on prices but on meta-level discourse, and their ability to flock or school to opportunities.

I know you know this, but how does that play into your model? If people see an uncertain future (like before an expected war, or loss of national competitiveness) then simply reducing interest rates won’t work. If they don’t trust their government (from either pole) then they won’t allow government to grow. The only thing left is a great deal of strategic spending on competitive industries that people will politically support. There are plenty of avenues for that investment. And simply channeling the political discourse to direct investment will eliminate both the irritation with the government and the uncertainty, allowing people to flock/school toward those investments (creating new patterns of sustainable specialization and trade so to speak), and creating demand.

Demand comes from schooling/flocking toward opportunities. I realize that in a neutral polity, lower rates allow people to chase status-oriented consumption. But in a non-neutral, hostile polity, status-chasing can come from destroying the economy itself.

You’re right that we need stimulus. You’re wrong that we can take the lazy way out. That stimulus must go into increasing the international competitiveness of the private sector and productive returns. The population will support that. They wont support aggregate spending, or political expansion. THey just won’t and you won’t convince them.

So what’s stopping you from solving the problem through the third axis? Is it knowledge of what to invest in? (Maybe.) Is it time (you’re losing time anyway by tilting at the political windmill). SO WHO IS BEING IRRATIONAL? In effect, you are.

THe people have decided. And no, your desire for totalitarianism so that you can use your two preferred methods in stead of the third is just not a good idea in the long term.



Karl Smith Says He’s Wearing A Label He Didn’t Ask For

Karl Smith at Modeled Behavior says.

Doing the rounds on Mises circuit I am usually identified as a liberal or a person from the left. I don’t really much care so I take that ID.


??? Why is that important (other than by engaging the Misesians, that you position yourself well). The Rothbardian wing of the Libertarians are radicals – anarchists. And from the extreme right, everyone else looks left.

But you’re a moderate. You’re a classical liberal. In current labels, if you were a little less comfortable with totalitarianism, you’d be part of the Neo-Classical Liberal movement. (See “Bleeding heart libertarians”.) And your belief that we should overthrow the electorate in order to ‘do what’s good for them’ simply proves that you’re a totalitarian. If people prefer what’s bad for them, then that’s OK. RIght now, they prefer to punish their government. You seem to think that’s stupid. But it’s not. It’s just a choice. And that’s what makes the difference between a libertarian and a totalitarian. So, for example, it’s pretty clear that a muslim political majority is economically disastrous for any society that was previously christian. Do you feel that the people have the right then, to demand a muslim government if empirically, it would be bad for them? Likewise, the economic movements in asia that have succeed have been lead by their Christian minorities. So, if Americans want to limit their government if it imposes upon them a cost, then why shouldn’t they?

That set of questions illustrates the difference between reason and scientism. Scientism being a pejorative.

Democratic socialists have co-opted the term ‘liberal’ from Classical Liberalism. Hayek also used the term Libertarian. Rothbard created the Libertarian Manifesto and effectively co-opted the term. Leaving those of us that are neo-classical liberals (bleeding hearts so to speak) without a name.

In the end, in any calculation, from the most numeric to the most heuristic, we must solve for *something*. Some people solve for more freedom over longer periods of time, and others for less freedom and more consumption in the near term. You’re part of the latter group. But I suspect that you’re from the latter group only because you’re enamored of your methods, and ignorant of the long term consequences of the policies you advocate.

I don’t advocate redistribution out of an arbitrary sense of empathy – empathy is a weak means of perception in an economy. I do so because propertarian theory helps me understand that redistribution is necessary simply because the system of property rights imposes a cost on individuals and if they respect property rights then should have dividends on their investment. The problem is that these investments must be calculable. This is not something you are familiar with most likely, (the socialist calculation debate) but pooling of money, and general liquidity are both means of creating incalculable relationships between ends and means. And as such they partly destroy the patterns of information needed for an economy. So, if you want to get money into an economy, then do so in a way that is calculable – by low interest loans in areas of the economy that will provide people with what they desire AND need.



If You Can’t Grasp The Status Signal Economy Then You Have No Place Commenting On Macro

From Will Wilkinson by way of NEWMARK’S DOOR.

Behavioral econ offers policymakers an added dimension of evasion. A government can make a big hullabaloo of caring about energy consumption and climate change by sending folks mail detailing in vivid color their energy use relative to social norms instead of making themselves unpopular by making voters poorer. Not only is behavioral economics not some sort of master-key for effective policymaking, it gives politicians a fresh way to appear forward-thinking, activist policymakers while really doing nothing much at all.

Or rather, behavioral economics illustrates why people are resistant to constant forced transfers. 🙂

The public has decided that the secondary effects, and related costs, of monetary policy are simply too high.

For this reason the governments both here and in Europe will have to insert money into the economy through industrial policy (targeting) rather than through consumer liquidity. Period. End of story. Stop wasting everyone’s time with consumer stimulus.

An economy is not a society. Any economy making use of macro policy must be a relatively homogenous polity. Why? Because ALL MONETARY POLICY IS REDISTRIBUTIVE.

We are not going to end up with the happy homogenous world policy makers and Keynesian economists using the convenience of aggregates desire. That’s because small homogenous nation states with their own currencies are egalitarian and redistributive and therefore tolerant of monetary policy. The citizens of large modern empire-economies like the USA and the Euro Zone find redistributive policy intolerable to the populations. The similarity between the USA’s current culture of political impasse, and the Euro’s culture of monetary impasse is driven by the very same very human behavior – dislike of redistribution across cultures.

And if governments succeeded in enforcing macro policy on those populations over the objections of the populations simply because macro is EASIER to enact than industrial policy, then one of two things would happen: a) the political structures would become increasingly weak and unstable leading to increasingly totalitarian measures, or b) citizens will ‘check out’ of society and the economy.

People will undermine a government that uses their money for purposes with which they disagree. And Germans reject redistribution to Greeks as much as Americans reject redistribution to blacks and hispanics and muslims. It doesn’t matter if it’s unacceptable to state it openly. It’s just reality. And since status signals are more important than money to EVERY HUMAN BEING then human behavior is not going to change. Just as humans cannot think and plan without money and prices, they cannot think and plan without status signals that suit the abilities of their social class. In other words, status signals are as necessary to human cooperation as are prices.

Mr Keynes’ aggregates only apply to homogenous nation states for this reason. I’ll keep promoting this idea until I drop.

And chiding ‘behaviorism’ only serves to reflectively criticize Keynesianism on the same grounds because it likewise relies upon behavior: If we can make use of one cognitive bias by fooling people into thinking they’re wealthier than they are so that they spend by increasing the supply of money faster than sticky prices and contracts can adjust, then we certainly give validity to behavioral methods.

People are not egalitarian across status signals. They are only egalitarian with money BECAUSE it increases the value of their status signaling.

If one cannot grasp this basic fact of reality then one has no place promoting macro – or commending on policy whatsoever.

Which is why I throw it at Krugman and his trio at every opportunity.