Mystery Economic Theater 2010

[ewmayer]

Originally Posted by garo

But all three of the points you raise happen in the private sector as well as the public sector, particularly point 3. Turning everything over to the private sector is NOT a panacea. Only the dull and hard work of better administration and improving efficiency is. And there are examples galore that show us that the private sector can get it spectacularly wrong too. Plus there is the issue of "Tragedy of the Commons" which makes it imperative for the state to intervene in many cases. Can you let private sector actors decide whether to build a bridge or not? If those decisions were left to the private sector the state of US infrastructure would be far worse than it is now. The private sector is steeped in myopic short-termism.

You'll get no disagreement from me there, Garo - On this subject, Paul Krugman actually did a rare thing, namely said something I agree with:

Some bleary-eyed thoughts from Japan on the reported administration proposal for $50 billion in new spending:

1. It’s a good idea
2. It’s much too small
3. It won’t pass anyway — which makes you wonder why the administration didn’t propose a bigger plan, so as to at least make the point that the other party is standing in the way of much needed repair to our roads, ports, sewers, and more– not to mention creating jobs. Once again, they’re striking right at the capillaries.

Beyond all that, the new initiative is a chance for me to air one of my pet peeves: the stupidity of the claim, which you hear all the time — and you’ll hear again now — that it’s always better to provide stimulus in the form of tax cuts, because individuals know better than the government what to do with their money.

Why is this claim stupid? Because Econ 101 tells us that there are some things the government must provide, namely public goods whose benefits can’t be internalized by the market.

Note however that, since governments by definition cannot produce the net wealth required to fund such projects, they do need to be careful in their allocation of such public funds. Just because it`s "pro bono publicum" does not mean one should gladly overpay for it. Finite resources ... this is where Krugman and I differ radically, as he is convinced that that the U.S. government possesses effectively unlimited ability to borrow at near-zero interest rates for as long as it chooses to do so. He frequently taunts us deeply misguided learn-to-live-within-your-means types with posts along the lines of "so where are these invisible 'bond market vigilantes' ... nowhere to be see, that's where."

Buddy, you better hope they stay invisible, because once you see them, it`s quite often too late.

Anyway, back to the topic of government spending on vital infrastructure: So what megaprojects do readers here see which have the potential to bring long-term net economic benefits outweighing their cost? I.e. along the lines of the depression-era Hoover Dam and Interstate Highway system, or more recently, the Internet.

Two which occur to me offhand:

1. National alternative-fuel infrastructure grid;

2. A national Thorium reactor R&D program, intended to get a working, cost-effective standardized reactor design to market in 10-15 years. [Looking at the immense promise of this technology, it is shocking to me that the U.S. simply abandoned a promising research program into in during the 1960s ... fortunately, other countries have picked up the ball, yet another example of the U.S. basically abdicating a leadership role in a major area due to lack of long-view-taking leadership.

Other suggestions? Comments?

[Fusion_power]

From 1929 to 1933 things kept getting worse and worse. There's an infographic on Barry Ritholtz's blog today about the deflationary spiral.

Thats an oversimplification of a complex situation. For the sake of argument, let it stand for now.



As Ewmayer points out, there are a few significant areas where government support would pay big dividends.

1. Alternative fuel infrastructure - presuming this would be natural gas fueling stations provided via a tax incentive to existing stations, I agree. The long term benefit would be tremendous.

2. Thorium Reactors - I won't comment except to say that these could be as much boondoggle as boon.

3. Development of renewable energy on a paradigm shifting basis - This would require a major investment of both private and public funds. If done on the scale required, it could make a major difference in our future availability of energy and on our reliance on hydrocarbons. I'm limiting this to solar, wind, and tide power at present, but there are other possibilities.

4. High speed Internet infrastructure - The internet is rife with bottlenecks, slow speed access points, and overcrowding on major backbone routes. A combination of tax incentives and private investment could get fiber deployed to every home and business in the U.S. for about $500 billion.

The above would be worth serious consideration for long term cost benefit analysis. Note that 3 of them are energy and 1 is communication.

I'm going to add a challenge to this: Come up with as many ideas as possible that fit the criteria of needing government support and providing maximum long term benefit and post them here. There is a very diverse range of intellect on this forum, exceeding most government think tanks unless I miss my guess.

DarJones

[garo]

While on the topic of infrastructure:
http://www.ritholtz.com/blog/2010/09...report-card-d/

One of the callers was a civil engineer who suggested we take a look at the US Infrastructure Report Card (infrastructurereportcard.org), which grade the US on a variety of factors. The 2009 Grades include: Aviation (D), Bridges (C), Dams (D), Drinking Water (D-), Energy (D+), Hazardous Waste (D), Inland Waterways (D-), Levees (D-), Public Parks and Recreation (C-), Rail (C-), Roads (D-), Schools (D), Solid Waste (C+), Transit (D), and Wastewater (D-).

[ewmayer]

Paul Krugman is a Moron, and Here is The Ironclad Proof

To those who might still be shy at calling a Nobel Laureate in economics a "moron", as I repeatedly do of esteemed laureate and deficit-spending-without-bounds NYT shill Paul Krugman, you need not fear - ZeroHedge has published the most damning piece of evidence - in this case acutely self-inflicted by Krugman - yet to support the case that Krugman is indeed an irredeemable serial-bunk-spewing high priest of Ponzi-economic doom:

How Keynesian Archduke Krugman Recommended A Housing Bubble As A Solution To All Of America's Post Tech Bubble Problems

Enter exhibit A: New York Times, August 2, 2002, "Dubya's Double Dip?" Name the author:

"The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

My Comment: So, how did that all work out for us, Paul? At least Greenspan had the modicum of decency to finally admit he was wrong, even if in highly-qualified terms, and too late after the fact to do any practical good.

But the bit about "this...not being a typical post-war recession" and thus requiring "unusual" government intervention to "fix" ... that sounds strangely familiar, somehow ... where have I heard that recently? Oh yeah ... pretty much the same thing - only much truer now than in the previous government-abetted bubble-boom-and-bust of 2001-2002 - the pundits are saying (correctly) about the current post-housing-bubble depression. A few of the ZH reader comments are priceless, to wit:

by three chord sloth
on Wed, 09/08/2010 - 00:33
#568892

He doesn't think he's wrong. I guarantee you he and his defenders think his idea was brilliant, Bush just did it wrong. Obama is doing it wrong. The masses just don't listen and obey enough. The implementers are deceitful and treacherous. Dark and mysterious foreign forces undermined his plans. All of the above... and more.


by 1984
on Wed, 09/08/2010 - 02:34
#568964

Yep. The housing bubble didn't work because it wasn't big enough.

Yes, the Greek Government Is *Still* Lying About Its Finances

EU Probes Hidden Greek Deals as 400% Yield Gap Shows Doubt. Four months after the 110 billion- euro ($140 billion) bailout for Greece, the nation still hasn’t disclosed the full details of secret financial transactions it used to conceal debt.

“We have not seen the real documents,” Walter Radermacher, head of the European Union’s statistics agency Eurostat, said in a Sept. 2 interview in his Luxembourg office. Eurostat first requested the contracts in February.

Radermacher vows new toughness when officials from his staff head to Greece this month to come up with a “solid estimate” of the total value of debt hidden by the opaque contracts. “This is a new era,” he said.

Greece is the only euro country [which we know about so far] that lied about using these complex swap contracts after Eurostat told countries to report them in 2008, Radermacher, 58, said. It also likely signed a greater number of individual agreements than any other euro member, based on information it has provided to Eurostat, he said. Greece’s debt was 115.1 percent of its total economic output last year, second among the 16 counties that share the euro, behind Italy’s 115.8 percent.

“What the Greeks did was an absolute cardinal sin,” said Ruairi Quinn, former finance minister of Ireland who presided over the 1996 meeting where debt and deficit limits for countries joining the euro were set. “They deserve to be punished for it. I think they have been severely punished for it.”

My Comment: Three predictions:

1. Greece will prove to be not the only EU country which lied about debt-concealing swaps, though it may prove to have been the worst offender in relative terms;

2. Multiple Eurozone banks - and possibly American ones other than Goldman Sachs - will turn out to have actively aided and abetted the fraud;

3. The "punishment" for such "cardinal sins" will consist of much stern language and public handwringing, followed by many billions in additional bailout monies.


Consumers Shun Credit Cards, Debit Card Usage Rises: Some startling statistics and shifts in behavior here:

Consumers Shun Credit Cards - Credit Card Usage Drops, Debit Card Usage Rises

Total payment volume for debit cards surpassed credit-card volume for the first time in 2009 and will continue to eclipse it in 2010, according to a report released today by the Pleasanton, California-based market-research firm that specializes in financial services.

Fifty-six percent of consumers said they had used a credit card in the past month compared with 87 percent who said they had in 2007, according to the study, which surveyed 3,294 people in November 2009 for that question. Other findings were based on data collected online from 5,211 respondents in March 2010 and 5,000 consumers in November 2009. If the rate of decline continues, 45 percent of consumers will reach for a credit card in 2010, the study said.

Long-Term Shift

Another cause for reduced credit-card use is financial reform aimed at protecting consumers, which has decreased the number of new cards given and cut available spending limits, the Javelin report said. Federal legislation that limits overdraft fees, caps on fees banks charge merchants for debit-card transactions and credit-card legislation mean banks have to recoup losses and are only giving cards to the most creditworthy borrowers, the study said.

Younger people also favor debit over credit because of the immediate nature of making a payment, which means the shift to debit will be long-term, said Van Dyke.

My Comment: Now we just need to start seeing a similar pay-as-you shift with respect to the federal government`s "credit card"...but I fear the latter will not occur voluntarily, and thus will be all the more painful (and "most economists" will call it "unexpected") when fiscal austerity finally does get forced on us.

[garo]

He doesn't read the articles he quotes . Krugman was not supporting a new housing bubble. He was just saying that that is what Greenspan wants to do. In fact the column is decidedly negative about the outlook and says a double dip is quite likely.

Bear in mind that business forecasters are under enormous pressure to be cheerleaders: ''I must confess to being amazed at the venom my double dip call still elicits,'' Mr. Roach wrote yesterday at cbsmarketwatch.com. We should never forget that Wall Street basically represents the sell side.

Bear in mind also that government officials have a stake in accentuating the positive. The administration needs a recovery because, with deficits exploding, the only way it can justify that tax cut is by pretending that it was just what the economy needed. Mr. Greenspan needs one to avoid awkward questions about his own role in creating the stock market bubble.

But wishful thinking aside, I just don't understand the grounds for optimism. Who, exactly, is about to start spending a lot more? At this point it's a lot easier to tell a story about how the recovery will stall than about how it will speed up. And while I like movies with happy endings as much as the next guy, a movie isn't realistic unless the story line makes sense.

[ewmayer]

I did a bit more digging and found that ZeroHedge is not the first major economics blog/venue to have pointed out the unspeakable irony of Krugman`s 2002 self-hatchet piece ... here are some others:

Krugman and McCulley, Déjà Vu All Over Again – Mish, 16. Jun 2009


Dammit They Did What I Said - 16. June 2009 ... This blogger also unearths a post-housing-bubble followup in which Krugman truly breaks the hypocrisy-o-meter:

He must hate it when people follow his advice. I trust he’s not cursing Alan Greenspan now. Oh, dear. Here’s Paul Krugman from March 2008:

Oh, and the man who failed to see the housing bubble and refused to do anything about subprime — and has yet to admit to making any mistakes — ends by reaffirming his laissez-faire faith…

As Ralph Waldo Emerson said, a foolish consistency is the hobgoblin of little minds.

Krugman In `02: 'Greenspan Needs To Create A Housing Bubble' - 17. Jun 2009 ... this one has a postscript citing Krugman`s response to the ensuing chatter, in which he tries to pooh-pooh it as much ado about very little, the old "but I wasn't really advocating a housing a bubble, even though my words were" evasion strategy. Well, I did read it again, Paul, and your later denial reminds me very much of Greenspan`s later denials-in-the-face-of-clear-facts that he ever advocated alternative "exotic" mortgage products like subprime loans, pay-option ARMs, etc.

[cheesehead]

Ernst,

I think you and some of those others may have been so motivated by a desire to slam Krugman that you've been careless in your reading of that 2002 article.

You apparently failed to notice that the paragraph the Zerohedge article quoted was out of context. It needs to be interpreted in the context of Krugman's preceding paragraph (which only Mish included in his quote):

A few months ago the vast majority of business economists mocked concerns about a ''double dip,'' a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I've repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

The second paragraph is describing the "story" of the "arguments of the double-dippers" mentioned in the first of those paragraphs. While I'd agree that it could be read as meaning that Krugman agrees with it, it could instead be read as merely a paraphrase of the double-dippers' arguments without Krugman's implicit recommendation of every single point, in which Krugman simply failed to include one or two words to make that distinction clear.

Krugman said the double-dippers made sense, and their story looked plausible, but that's not the same as recommending every single point they did. Furthermore, this other possibility seems consistent with Krugman's explanation at http://krugman.blogs.nytimes.com/200...ssy-knoll-too/

Here's how the ambiguity could be resolved very simply:

Show us other Krugman articles from 2002 where he unambiguously expresses that his own opinion is to recommend a housing bubble.

(Surely, if Krugman was actually advocating a housing bubble, he would have said so more than once at the time. So ... where else did he say it?)

Yet I don't see you or any of the others showing us any other such occurrence that would demonstrate that Krugman is weaseling now.

If you can do that, I'll agree with your interpretation.

But if you can't, and that article is the only one from 2002 in which any statement Krugman made can possibly be (mis)interpreted as his own recommendation of a housing bubble, rather than a grudging admission of necessity, then I think several folks owe Krugman an apology for their rush to judgment.

[garo]

But cheesehead, slamming a Nobel laureate and calling him a moron is a far more enjoyable activity than doing due diligence and reading the whole article. People have needs. And some people have a need to thumb their noses down at people who may disagree with them.

[Fusion_power]

But cheesehead, ..... some people have a need to thumb their noses down at people who may disagree with them.

That won't make krugman any less a moron nor will it make greenspan any less culpable. The fundamental economy over the last 30 years could be described as the 'age of bubbles'. I expect that some smart cookie in years to come will figure out that there is a fundamental shift in market dynamics in the offing.

I'm reminded of blowing bubbles with bubble gum when I was a kid. Once I got 5 pieces of gum in my mouth and proceeded to blow a bubble over a foot in diameter. It was really nice.... until it popped and blew gum all over my face. Do you see any parallels with the internet bubble? the housing bubble?

DarJones

[cheesehead]

Originally Posted by Fusion_power

The fundamental economy over the last 30 years could be described as the 'age of bubbles'. I expect that some smart cookie in years to come will figure out that there is a fundamental shift in market dynamics in the offing.

That's interesting ... your "last 30 years" reminded me of Arthur Schlesinger's theory of U.S. history, which I mentioned in early 2008. (Second half -- ignore the first half -- of post #223 of the "New U.S. President" thread, http://mersenneforum.org/showpost.ph...&postcount=223)

Schlesinger's theory was that there has been an approximately-60-year cycle in U.S. history, where we've had about 30 years of a "private interest" supremacy when market forces were unleashed and government retreated, alternating with about 30 years of "public purpose" supremacy when the opposite occurred -- market forces being tamed and government expanding.

These 30-year cycles should not be confused with the much-faster alternation of political parties in power!

In this theory, the past three decades have been a "private interest" period, and we're now changing over to a "public purpose" period.

Your 30-year "'age of bubbles'" fits the "market forces were unleashed" characteristic of Schlesinger's "private interest" periods.

[ewmayer]

Originally Posted by cheesehead

Ernst,

I think you and some of those others may have been so motivated by a desire to slam Krugman that you've been careless in your reading of that 2002 article.

You apparently failed to notice that the paragraph the Zerohedge article quoted was out of context. It needs to be interpreted in the context of Krugman's preceding paragraph (which only Mish included in his quote):

The second paragraph is describing the "story" of the "arguments of the double-dippers" mentioned in the first of those paragraphs. While I'd agree that it could be read as meaning that Krugman agrees with it, it could instead be read as merely a paraphrase of the double-dippers' arguments without Krugman's implicit recommendation of every single point, in which Krugman simply failed to include one or two words to make that distinction clear.

Krugman said the double-dippers made sense, and their story looked plausible, but that's not the same as recommending every single point they did. Furthermore, this other possibility seems consistent with Krugman's explanation at http://krugman.blogs.nytimes.com/200...ssy-knoll-too/

Richard, I read Krugman`s bit about the then-double-dip predictors as saying he agrees with their pessimism about recovery, and agrees that what is needed is to unleash pent-up consumer spending, and that a great way to do that would be - as the double-dippers say - for the Fed to create a housing bubble - but that he, Krugman, does not think it is possible for the Fed to do so. We could spend hours parsing Krugman`s phrasing, but - to use a Krugmanite turn of phrase - "as J. Grayson Liburne put it in an April guest-blogger piece for the Christian Science Monitor":

Paul Krugman, the Fed, and the housing bubble

As I wrote last July, context is not Krugman’s friend in this matter…

“…the first paragraph introduces the “double-dipper iconoclasts”, and then clearly states that he, Krugman, agrees with them. The second paragraph then outlines the “basic point” of the double-dippers, which again, he agrees with. And the basic point in question is that to “fight this recession the Fed…needs soaring household spending.” Krugman then continues to say how the Fed would need to accomplish this goal, which again, he supports; he says that the recession needs to be fought with soaring household spending, which Alan Greenspan needs to induce by creating a housing bubble to replace the Nasdaq bubble. By writing, “as Paul McCulley of Pimco put it”, Krugman is not “merely” quoting another person; he is using someone else’s phraseology to express his own opinion.

Another protestation is that Krugman was saying the housing bubble won’t work, since later in the editorial he wrote:

“Judging by Mr. Greenspan’s remarkably cheerful recent testimony, he still thinks he can pull that off. But the Fed chairman’s crystal ball has been cloudy lately; remember how he urged Congress to cut taxes to head off the risk of excessive budget surpluses? And a sober look at recent data is not encouraging.

But this protestation completely ignores the fact that when Krugman wrote in the editorial…

‘Despite the bad news, most commentators, like Mr. Greenspan, remain optimistic.

and…

But wishful thinking aside, I just don’t understand the grounds for optimism. Who, exactly, is about to start spending a lot more? (Emphasis added.)’

…he was clearly characterizing a housing bubble as an object of optimism, whether or not he thought it was possible. In other words, at best, Krugman could be interpreted as saying that it would be great if Greenspan could pull off a housing bubble, but that he, Krugman, doubts whether he’ll be able to accomplish such a worthy feat.

So it should be clear that the Fed causing a housing bubble in order to bring about “soaring household spending” was Krugman’s optimal situation, whether or not he thought it was do-able at the time. Given the consequences of the housing bubble that did ultimately happen, that alone should be enough cause for the public to stop listening to this moron fellow.

Now to your next point -

Originally Posted by cheesehead

Here's how the ambiguity could be resolved very simply:

Show us other Krugman articles from 2002 where he unambiguously expresses that his own opinion is to recommend a housing bubble.

(Surely, if Krugman was actually advocating a housing bubble, he would have said so more than once at the time. So ... where else did he say it?)

Yet I don't see you or any of the others showing us any other such occurrence that would demonstrate that Krugman is weaseling now.

If you can do that, I'll agree with your interpretation.

But if you can't, and that article is the only one from 2002 in which any statement Krugman made can possibly be (mis)interpreted as his own recommendation of a housing bubble, rather than a grudging admission of necessity, then I think several folks owe Krugman an apology for their rush to judgment.

As requested, here - courtesy of mises.org - is a veritable treasure trove of low-interest-and-bubble-advocating quotes by Mr. Krugman from 2001. The money quote for me form that collection is this one:

I’ve always favored the let-bygones-be-bygones view over the crime-and-punishment view. That is, I’ve always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. But I had to face the fact that speculative bubbles usually are followed by recessions. My excuse has been that this was because the policy makers moved too slowly — that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum. That was why I, like many others, was frustrated at the smallish cut at the last Federal Open Market Committee meeting: I was pretty sure that Alan Greenspan had the tools to prevent a disastrous recession, but worried that he might be getting behind the curve.

However, let’s give credit where credit is due: Mr. Greenspan has cut rates since then. And while some of us may have been urging him to move even faster, the Fed’s four interest-rate cuts since the slowdown became apparent represent an unusually aggressive response by historical standards. It’s still not clear that Mr. Greenspan has caught up with the curve — let’s have at least one more rate cut, please — but the interest-rate cuts do, cross your fingers, seem to be having an effect.

If we succeed in avoiding recession, this will mark a big win for let- bygones-be-bygones, and a big loss for crime-and-punishment. And that will be very good news not just for this business cycle, but for business cycles to come.

July 18, 2001