The Crushing Irony of Keynesian Economics

During the Great Depression John Maynard Keynes reprised a discredited theory that government spending stimulates the economy. Frederic Bastiat, in 1850, had provided the jiu jitsu response to this old theory by asking, "When you spend, where does the money come from?" That is, if the government is giving away food, shelter, and clothing, from whence do they get the resources? The answer is often, "From taking the food, clothing, and shelter of others."

Bastiat's idea that Napoleon could not make France more wealthy by burning Paris or by breaking all the windows in France or by paying workers to dig holes and cover them up without withdrawing resources from the economy is known as "crowding out." Government activity crowds out private activity. There is an irony to crowding out that exposes just how foolish Keynes' recycling of Napoleon's idea is.

If the government decides to boost the economy by paying workers to grow potatoes and make potato chips, then private potato chip makers are crowded out. However, if the government decides to dig holes and fill them in, no private "hole-digger-filler-iners" are crowded out, because the market does not perform useless tasks.

So the more useless the government's spending is, the less it crowds out private spending. Hence, Keynes is wrong in any case. But Keynes' government spending would do the most damage to the private economy if the government did something useful.

Fortunately, government mostly concentrates on useless production, such as giving cocaine to monkeys, constructing bridges to nowhere, and building tunnels for turtles to walk under the highway.

Ramona's Pizza

Ramona said, "You two have griped long enough about not having enough help here, so I hired some. I expect lots more pizzas to be cooked."

Pete looked up from the pan he was spreading dough in. "Thank you! Will they be working tonight? After the ball game, we'll be swamped."

"Yeah, they'll be here. All twelve of them."

Sophie said, "Twelve more? We're going to have fourteen people working in this place tonight?"

Ramona put her hands on the sales counter and leaned toward them. "Yup. So I expect that since you'll have seven times as many workers, you'll make seven times as much pizza."

"You're kidding." Pete said.

Sophie threw her hands up. "Where will we put them all? There's not room for that many workers in this place. We'll be lucky if we make twice as many pizzas as usual."

Ramona said, "You're very creative. You'll figure something out." She pulled her inventory clipboard out from under the sales counter and went into the back.

Sophie put her face in her hands, smelling bell pepper on them and wondering if her eyes were going to start stinging. "Those are going to be the most expensive pizzas we ever made. I should just quit now."

Mark Twain and Unions

The riverboat pilot's union that Mark Twain describes in "Life on the Mississippi" added value to society. For a long time the union tried to push on a rope--they just demanded higher wages and bargained themselves out of jobs.

Eventually the union pilots began to record their observations on the latest developments with the ever-changing rivers--where a sandbar had formed, where a new wreck lay, where a new channel was cut. They dropped these written observations in locked boxes where the steamboats moored. Union pilots, therefore, were the best informed on the river.

When an insurance company was contracted to underwrite a steamboat cargo, it insisted on a well informed union pilot. That's when the pilot's union found success by providing valuable information in the market.

People are free under the Constitution to assemble and form whatever associations they want. People are free to resist forming associations, as well. Unions should be free to organize. Business should be free to just say no, if they want. Unions will be successful if they can add value.

New Strange Course

The guy from down the hall who makes decisions on how we spend much of the income from our $10 million endowment asked me if I wanted to teach a new course.

A local businessman who keeps an eye on the regional economy said that we are shifting from agriculture to health care. He wanted to know the impact of this shift.

The guy from down the hall wanted to create a course that would do a research project exploring how this shift would affect the region. The course would have 5-8 students and would produce a substantial study of the topic, which we would publish in a scholarly journal. This is not my usual macroeconomics course.

I thought for a moment and decided that I might enjoy it. I told him I would take the chance and began thinking about how I would prepare to teach the course next spring. He left.

He returned with my associate dean, who asked which of my normal classes I would like to give up in order to teach the new class. I said, "I usually teach three of the same course."

He said, "But which one?"

I paused. "Do you mean this semester?"

"Yes, starting tomorrow."

Boom.

Well . . . uh . . .

So I am teaching this odd course with zero preparation.

Except now we only have one student who wants to take it. So I do not know what they will do. They already have a part-time faculty member teaching one of my sections.

I cautiously await.

New Class Tool

I am using Facebook to pass information to students in my courses this semester. Since I do not want to see what they are posting to their friends, I am hiding their posts. One can easily learn things one would rather not learn.

Paul Solman And Economic Theory

I saw Paul Solman, a PBS economic journalist, at an economics teaching conference in Pittsburgh in 2003. He showed us a video of his report on how the new tax cut on dividends would not affect financial markets, since companies would not actually pay dividends. As evidence, he interviewed a top executive with Harley Davidson, who did not see how the cut to their shareholders' dividend taxes would affect HD--so HD was not going to pay a dividend.

My response at the time was that both Solman and the HD executive were wrong. They were both concentrating on supply, but were neglecting demand.

People buy stock to enrich themselves. The dividend tax cut meant that people who bought stocks that paid dividends could keep more of their income; hence, after the tax cut people would be willing to pay more for stocks that paid a dividend. Therefore, companies that paid dividends would have a higher market value and would find it easier to raise money.

Sellers do not care that much about your tax bracket, except when it influences you to buy their product at a higher price. They do not care about your demand, per se. But in the market, either they respond to you or they fall behind.

Today I read on Harley Davidson's website that they pay a dividend. Economic theory is powerful.

Immigration

I believe in freedom.

Like nearly all economists, I believe that freedom to trade makes us better off. This trade includes free trade of labor.

If I am made better off by trading with someone across town (maybe she mows my lawn) then there is no reason that I cannot also be made better off by trading with someone in another state. Perhaps someone in another state can so something for me cheaper or better than anybody in my town.

Non-economists might say, at this point, "But you are killing jobs in your state by trading with other states." That is true. Just like when I hire someone across town I am killing a neighborhood mowing job. Get off my back, neighbors! I should be free to hire whomever I want.

If I buy Wisconsin cheese I'm putting a Georgia dairy farmer out of work. Too bad it's more efficient to do dairy farming in Wisconsin. Should I support people who want to raise reindeer in Georgia since the climate is all wrong for the reindeer? Enough with you pushy reindeer ranchers!

And if Wisconsin seceded from the U. S., it would still make me better off to trade with them, rather than starting up more Georgia dairy farms.

So I believe that trading with Mexico or Lichtenstein or Japan makes us better off. We only engage in trade with people who can do it better or cheaper or will do lousy work that we do not want to do.

And if it is efficient to import grapes from Mexico, then it may also be efficient to import grape harvesters from Mexico and put them to work in grape orchards. If it did not make me better off, the vineyard, who wants my business, would not hire them.

Yes, somebody will be hurt by immigrant labor, just like that poor Georgia dairy farmer is hurt because I buy cheese from Wisconsin. This is the way that resources go to their most valuable use. (Warning, this link contains strong language.)

But I insist that we not import problems into the U. S. We have enough murderers and thieves here. Let's do a background check on anyone who comes in. Further, we need to keep the murderers and thieves from sneaking in.

I would also insist that not one dime be taken involuntarily from anyone and given to those poor grape pickers. Sorry, no public schools. No public health care.

But, if you have read my views on freedom, you already know that I do not want a dime to be taken from anyone involuntarily to support that Georgia dairy farmer either.

ID

Last fall my son picked me up at work and made an illegal turn as he left the parking lot. Campus police pulled us over. My son did not have his license with him.

The cop chewed my son up one side and down the other, then chewed on me for a while. How could I let him drive without a license? I did not tell the officer that I do not usually frisk people before I get in the car with them--I did not even tell the cop that I remind my son to grab his license every time he leaves the house. How could I let him make an illegal turn? I did not tell the officer that fighting my son for control of the steering wheel as he started the illegal turn could have been dangerous.

The cop seemed ready to haul my son in. If I had not worked for the university my son would have likely been arrested for driving without a license and making the illegal turn. After all, my son once spent a night in jail because he did not obey an officer directing traffic at night at a Y intersection on an unlit curve in the road--because he did not see the officer until he was upon him.

You may not like that we have to carry I. D. when we drive. Heck, legal residents of the U. S. who are not citizens are instructed by federal law to carry their green cards. MyVenezuelan brother-in-law always carried his green card. It's not that hard.

So what is the big deal about the state of Arizona saying they would detain those who were stopped in the normal course of police work if they could not show ID? I do not hear a lot of logic from those who object to Arizona's new law. I just hear the chant of "Nazi, Nazi, Nazi."

If requiring I. D. is the test of a Nazi regime, then our requirements to carry driver's licenses and green cards for non-citizens made us into Nazis decades ago and the chanters are just waking up to that. The chanters should all burn their driver's licenses.

I hear a tumult of illogic that police in Arizona are going to detain every Hispanic in Arizona. The latest census says Hispanics make up 30% of Arizona's population. Are the police really going to pull over one of every three cars and ask for ID? The prison population of Arizona is (by my best Internet search) 30,000. Are the police going to arrest the 2,000,000 Hispanics in Arizona and make their prison population 2,030,000? That could be expensive.

Can't you folks in the other world think about this just a little? Or is it just that you enjoy being outraged more?

Move Over Beckett

Secretary of the Treasury, Timothy Geithner talked about the "too big to fail" problem this week. He said "when large companies manage themselves to the point that they cannot survive without the government, that we put them out of existence."

So if a company gets too big to fail, they kill it.

Geithner is the new master of the absurd, filling the shoes of Lewis Carroll, Samuel Beckett, and John Cleese. If they are too big to fail, we will not let them fail, we will kill them.

Perhaps next week Geithner will decide that attempted suicide will now be punishable by the death penalty.

If we survived the utter destruction of the World Trade Center, no company is too big to fail.

What Is Important?

I was giving a test that started at 8:00 this morning. I had my laptop on and my work email up. At 8:36 a student mailed me. She was "stuck" at registration and would have to miss the test. Could she take it tomorrow?

I thought, "She's five minutes walk from the classroom. They won't let her leave? Taking a test is not as important as registering now?"

Those were the negatives. On the positive side, she was not lying. I suspect that half of the students who take makeups lie about having to miss the original test. Since she was not lying, I mailed back, "You may take the test with another class at 9:35 or not at all."

She replied, "I can't take it then. I have a class."

I began to understand. Taking a test was not as important as registering. It was not as important as attending another class. I was tempted to ask, "Is taking this test the least important possible use for your time?"

But I didn't. I answered, "Then I will assign a zero on the test."

She replied, "I will talk to my teacher at 9:35 and see if it is OK."

She showed up and took the test.

I cannot spend a lot of time worrying about a young lady who is so self-centered, putting emphasis on anything immediate and expecting me--who has the job of evaluating her--to fit myself into her schedule. But I have taught for over twenty years, and that was a first.

Symptoms

I heard an excellent Econtalk.org podcast this morning. Mike Munger put it something like this.

People want to get rid of the money and lobbying to influence politics. But that is the symptom, not the cause.

If we give away wealth, people will compete for that wealth. Giving away wealth brings money and corruption into politics. If you want to reduce the symptom, advocate eliminating the cause. Advocate that government stop giving wealth away.

I thought he boiled it down well. So I will belabor the point by creating a non-government analogy, in direct opposition to his concise wisdom.

If Walmart opens the door every Monday and gives everything in the store away, people will fight and scratch to obtain their weekly or monthly food and necessities and luxuries, resulting in injuries and deaths. Free market prices provide orderly competition and eliminate the fighting and scratching.

Pejoratives

Words do not usually hurt me. When someone in grade school called me a "bastard" it never made an impression on me. When I saw someone rage at being called a bastard, I wondered if there was not some special sensitivity there--perhaps the kid's parentage was in doubt.

I have some Native American ancestors. Even though my personal experiences are far removed from my ancestors' I feel a kinship. The word "Injun" does not bother me, though, even when people might apply it disparagingly to my downtrodden ancestors.

My immediate ancestors were called "white trash." I often refer to my personal habits as part of a white trash heritage--to the shock and horror of those who say, "Human beings should not be referred to as trash!"

As Space Ghost once said, "Yeah, whatever."

Words that were once merely descriptive, such as "bastard," "idiot," and "moron," were destined to become pejoratives, leaving us to find more sanitary descriptives. "Poor countries" became "the third world," then "developing countries." The new descriptives become outre, and the process continues.

Now "socialism" is coming to be seen as pejorative. My view of the word is that socialism describes an economic system under which the individual works for the good of society. Capitalism describes an economic system under which individuals are free to work for the good of whomever they wish--mostly themselves.

Socialism has a bunch of branches and I glaze over when a socialist thinker finely parses the thicket. I have satisfied myself with understanding these three: communism (we own everything and we tell you how to serve society), facism (we don't own everything but we tell you how to serve society), and the soft socialism of Europe and America (we don't own everything but we tell you how to serve society and we take your income and use it for society).

I am not a fan of socialism. I am a fan of freedom. Under socialism, if you disagree on how society is best served or if you do not want to serve society, you will be coerced by force or by the threat of force to serve--if there is no threat, then the socialist system devolves to capitalism, in which people serve whatever they want to.

Since "socialism" is now pejorative, what will we call people that we formerly called "socialists?" Perhaps we will find an term like Warmfuzzies, which will last for a few decades until people recognize that term for the slur that it is.

Does This Bus Stop At 82nd Street?

Ben Bernanke, the Fed Chairman (oops, just lost Rasa on this post), charted a course to take a road trip to Terra Del Fuego, at the southern tip of South America.  He confidently strode to the parking garage, strapped himself into his Beemer and drove for a block and a half.  Then he realized that he was using a map from 1932.  He went back to his apartment and found there was no map to where he wanted to go.

Bernanke has shown supreme confidence that he can suck $1 Trillion out of the banking system at will (the banking system usually has about $2 billion in excess reserves--the two differ by a factor of 500).  To say that no one has ever faced such a task is akin to saying that I have never beaten up the Toronto Maple Leafs.

In taking the first move to return to normalcy, Bernanke cut the rate at which the Fed lends to banks.  Markets dove.  Bernanke said, " That is not it at all. That is not what I meant at all."

So the first glitch happened on Bernanke's first action.  The surprise was delivered by rational expectations theory.  That is, people watch what you do, figure out what you will do next, and make plans accordingly.  People know Bernanke is going to start sucking money out of the system.  They saw the first sign.  They sold.

Bernanke said, "No, no, not yet!"

But people watch what you do.

Bernanke has lingered in the chambers of the sea
By sea-girls wreathed with seaweed red and brown
But human voices woke him.

Terra Del Fuego, here we come!

-----------------

Apologies to T. S. Eliot

Not A Cent

Bush's final Treasury Secretary, Henry Paulson, arranged a shotgun wedding in which Bank of America bought the ailing Merill Lynch.  BoA was given an escape clause if Merill proved to be a millstone.

Merill proved to be a millstone.  The BoA president told Paulson that he would escape.  Paulson threatened him to hit BoA with a government regulatory sledgehammer to spite BoA for upsetting the government's applecart.

Now Paulson is selling a book.  I will not pay a cent for the book.  I will not rent it from the library.

Paulson is a thug.

http://online.wsj.com/article/SB10001424052748704471504574447171063275730.html

Mr. Hood

Your employer pays you because you create more value in working than you use up in resources.  You buy stuff that gives you more value than you have to sacrifice to get that stuff.

Now Robin Hood takes $1 from you (who earned that dollar by providing more than $1 in value) and buys a geegaw for me (you would have spent the dollar on a doodad that gave you more value than $1).  Robin Hood does not know me well, so the geegaw he bought for me is only worth only 50 cents to me.  So Mr. Hood destroyed your more than $1 worth of value to give me 50 cents worth of value.  Mr. Hood made life worse, overall.

And if Robin Hood keeps visiting you, you may end up spending money on hiding your money from Hood.  But hiding your money gives you no direct satisfaction--the doodads you would have bought if there were no Mr. Hood do give you satisfaction.  So more value is destroyed.

Of course, Robin Hood is a government that redistributes income.

This is all too optimistic, though.  Robin Hood knows where the money is coming from and where it's going.  Government is so big, it has no idea.

Incentives

The public school system turned one of my sons against government.  The system has perverse incentives.  He was talking to me about bullying.

In my experience and my son's, teachers turn a blind eye to bullying.  Now and then teachers and administrators work around the edges, but they are reluctant to get serious.  Here are the incentives.

If little Aristotle bullies little Socrates and the school lets this happen, what is little Socrates' parents' recourse?  They can demand the school do something.  Suppose the school does nothing?  Probably nothing happens.  Socrates' parents can sue.  To the parents' attorney, the school presents the paper trail they left that showed they were doing something to try to stop the problem.  The paper trail may be two sided, since the bully, little Aristotle, denied and lied at every stage.

Suppose the school expels little Aristotle?  Little Aristotle's parents have ironclad evidence that the school expelled their son.  Yes, the school has a paper trail, which may be two sided.  But there is clear evidence that the kid was expelled.  And maybe there is some theory by which the school singled out Aristotle.

Little Aristotle's case for being expelled is much stronger than little Socretes' case that the school should have done more.  Bad incentives guarantee that most of the time the bullies win.

The Barn Door

I have published a bit of research on terrorism, beginning over twenty years ago.  So I think a lot about the subject.  The attempt by a Nigerian to blow up a plane enroute to Detroit has me musing again.

Enhanced security measures adopted after 9-11 exasperated me.  Rude, low intelligence, bureaucratic TSA screeners at airports were doggedly searching for men's razors and throwing them in the trash (no, that never happened to me--I did lose a few bucks worth of bottled water once).  I yelled at the television more than once, "Nobody will ever hijack a plane using box cutters again!  Stop it!"

I did not hear anyone agree with me until I saw a CSPAN Booknotes interview with Tom Clancy.  Clancy said exactly what I had been thinking.  The reason that box cutter hijackings worked on 9-11 was that the passengers had no idea that their plane was being hijacked as a projectile.  They thought that they would be taken to a remote location and held for ransom.

Even on 9-11, the passengers of United-93, once they had used their cell phones to find out that they would likely be flown directly into a large building, attacked the hijackers.  If the United-93 passengers had known the truth an hour or so earlier, the hijackers would have never entered the cockpit.

After 9-11, any hijacker without an AK-47 would be subdued or killed by the passengers.  Clancy's analysis was perfect.

We are always closing the barn door after the horse has escaped--searching for useless box cutters and razors.  Now, after a Nigerian attempt to blow up a plan, we are going to require that passengers keep their seats for the last hour of flight.  Uh . . . because the Nigerian chose this time . . . to prepare . . . uh . . .

If we had this rule in effect before the Nigerian attempt, he would have triggered the explosive earlier in the flight.  The new policy is regulatory lunacy.

If we had taken the box cutters from the hijackers on 9-11 the incidents would not have happened.  But afterward we closed the barn door, by preventing incidents that would never again be successfully launched.

But with the Nigerian, we are not even closing the barn door.  If we had put a new policy in place on the morning of his attempt, he would have had the same measure of success (pants flambe).  This time the horse has escaped and we are painting the barn door.

Morality

1.  So if you are too moral to take bad gamblers' money

2.  Shouldn't you be opposed to government programs that forcibly take your money and use it to take bad gamblers' money?

3.  And shouldn't you be opposed to government programs that forcibly take your money and use it to give incentives to people to eschew productivity, the acquisition of human capital, and to create disfunctional family structures?

Cryptically yours,

John

Guys With Guns

Adam says to Karl, "I'll trade you two steaks for 10 pounds of potatoes."

Karl replies, "I'll take two pounds of steak in exchange for two pounds of potatoes because that is fair."

Adam says, "I don't think so.  It's not worth it to me."

Karl slots a clip into his AK-47 with a clack and says, "Think again."

Under capitalism, we trade voluntarily.  Nobody pulls a gun.  Everyone has the right to withhold from everyone else if they do not think they're getting a fair deal.

Under socialism, trade is structured according to someone's conception of what is fair?  Who decides what is fair?  The guys with guns decides what is fair.

We now have a bill passed by our representatives that proclaims that it is fair that everyone should be forced to buy health insurance if they can afford it.  Suppose you do not want to buy it?

You can be sentenced to five years in prison.

Enforced by guys with guns.

Fed's Parable and Joke of the Day

Parable

Ben's children were carrying their eggs to market in their egg baskets.  Ben cautioned, "You children might trip and fall into one another.  So all your eggs might break."

So Ben took each child's eggs and put them in his super basket.  That way . . .

Nevermind.

Joke

O. K., get this--the federal government is worried that the actions of individual banks can create risks for the entire banking system--systemic risk.  So (this is too funny) the Fed will regulate the entire system of executive compensation to eliminate risks that affect the entire system!

Get it!?

They're worried that banks who put all their eggs in one basket may upset the baskets of other banks.  So . . . the fed is putting all of everybody's eggs into their big basket!  That way, if the Fed drops that big basket . . .

Nevermind.