Catallaxy Files

The attack on Julia Gillard and Tony Abbott is front page news here on Drudge via The Daily Mail. Merely for the present as an outside observer, I must tell you my disgust is unbounded. We tend not to jail such people, but that is in the way of more fool us than anything.

My airplane book coming over was Saul Alinksky’s Rules for Radicals which I probably read when it was first released and no doubt at the time, thought he made a lot of sense. Well, I still think he makes a lot of sense. But now that I have joined the middle class and am no longer amongst the OWS crowd, I find his genius in the ability to stage various stunts, some of which work to “expose” “the estabilishment” and some of which do not, but all of which are driven towards a nihilistic destruction of our way of life.

So in Canberra yesterday. There are no positives to come out of this for anyone that I can see. But who is to say what value will ultimately be derived for those who attempt to assault our Prime Minister and Leader of the Opposition, people whose good will for Aborignal people is exemplary and undoubted.

Democrats for Gingrich are pouring money and assistance into his campaign in Florida. Easily more beatable than Romney, there are now an ongoing supply of anti-Gingrich stories that outline his opposition to Reagan when Reagan was President to the various positions he has held on a range of issues that make him less Republican than Romney.

The push signals a growing belief among Democrats that they may have a real chance at helping to derail Romney, who has long been viewed as Obama’s most formidable GOP opponent but is reeling from a loss to Gingrich in South Carolina. Gingrich and Romney are locked in a tight race ahead of Tuesday’s Florida primary.

While unions and other groups commonly run political ads supporting their candidates in the general election, this is something different — an unusually direct intervention by one side into the other party’s primary race, political strategists said.

And with Senator Marco Rubio coming out to outline the assistance he received from Romney when it really mattered and his primary win over Charlie Crist was so uncertain, there is genuine evidence of which is the more conservative candidate of the two, and it isn’t Gingrich.

I also had the experience of watching Obama’s State of the Union speech in the company of many others. I found it hollow empty rhetoric but then everything Obama says seems to be hollow empty rhetoric. But this time others seemed to find the same as the audience just drifted off. You could see they wanted to believe but there was nothing there at all and eventually they gave up listening. With his audience down 12% compared with one year ago, there is real reason to think his hold has deserted him.

Update: In Texas in the middle of the night, not Melbourne in the middle of the evening. But here is Ann Coulter providing more of the same and is doing so when it means taking a different position from many in her natural constituency. A genuinely brave view who has much to lose by taking the strong position she has. Read the comments after the article to see just how out on a limb she is.

In a world where words have meaning, Mitt Romney is not the “moderate” in this race. He is the most conservative candidate still standing, with the possible exception of Rick Santorum, who is bad on illegal immigration. (Santorum voted in the Senate against even the voluntary use of E-Verify by employers, which means he doesn’t want to do anything about illegal immigration at all.)

Romney is “moderate” only in demeanor — which is just another word game. His positions are more conservative than Gingrich’s, but he doesn’t scare people like Gingrich does. Ronald Reagan and Jesse Helms were moderate in demeanor, too. No one would call them political moderates.

Romney is the most electable candidate not only because it will be nearly impossible for the media to demonize this self-made Mormon square, devoted to his wife and church, but precisely because he is the most conservative candidate.

Conservatism is an electable quality. Hotheaded arrogance is neither conservative nor attractive to voters.

The power of theory over common sense and experience is amazing to see in action. Christine Lagarde, the new head of the IMF is there on the front page of The Age telling us that:

Nations may need to contribute more money to keep Eurozone economies afloat – or else face a ’1930s moment’ akin to the Great Depression. She urged governments not to cut back spending even if deficits soar.

What is the warrant for such idiocy? Has the stimulus up until now been so positive that we are almost there and the next bit of stimulus is all that’s needed? Where has she been for the past three years?

And of course, where she has been was in the midst of an economic organisation filled with other economists whose only skill is to do all possible perms and combs on C+I+G to prove that no matter what the outcome, things would have been worse if the government hadn’t spent all the money they spent, wasted expenditure though every dollar, pound, euro and yuan may have been.

And then we are exhorted in that same edition of The Age by the historian Robert Skidelsky, whose economic credentials come from having written a biography of Keynes. And I might note that every paper has been filled with the same today so I am not blaming The Age in any way. What Skidelsky writes is worth reprinting and the headline writer has done his job well. This is indeed what Skidelsky is trying to say: “Balancing the books is the road to ruin”.

It seems that for the “average citizen”, people such as myself for example, worrying about debt makes sense. But for super geniuses like Skidelsky and the folk at the IMF or wherever else these above average types seem to gather, such worries are based on fallacious reasoning. The same kind of fallacious reasoning that had me worried about the stimulus back in 2009 didn’t worry them then and doing the same again doesn’t worry them now.

It is almost beyond belief that such arguments are not immediately seen as fraudulent and dangerously wrong. Governments, apparently according to Skidelsky, do not have to repay their debts. They can always default, so why worry? Reducing deficits, even if everything produced by governments uses up more value than it produces, is the “road to contraction”. More waste, it seems is the key to prosperity. Future generations, moreover, do not have to repay these debts. It is trying to lower the debt level that will be the burden. The size of the debt is anyway no problem since public sector rates are so low.

And if you really wish to see shallow beyond ridiculous, Skidelsky writes that low interest rates for the government do not reduce the cost of capital for the private sector. The man who thinks of default as an answer, describes the rates governments pay as the “risk free” rate. As he writes:

The reason government interest rates in Britain and elsewhere are so low is that interest rates for private-sector loans are so high.”

The level of brain dead stupid, in the reversal of cause and effect is breathtaking. Governments are eating our savings alive and choking off private sector growth. Why he should think this is a reason for even more government debt you would have to ask him.

But his final point is the real point where I can unfortunately agree. If governments don’t fix these problems, we are, he says, looking at revolution in the streets. Whether it will be in the streets or at the ballot box, who can say? But this I can say. If those who manage our economies, these irresponsible international agencies ungoverned by any national parliament, continue us along the road we have already been travelling, there is no depths to which the international economy might not eventually fall.

We are not looking for austerity. We are looking to put our savings and capital into the hands of those who can create value. These radical new ideas of some two hundred years back really do need to be given a go.

I see this from Andrew Bolt’s blog:

THE National secretary of the Health Services Union, Kathy Jackson, has urged independent MP Andrew Wilkie to support a no-confidence motion if Labor MP Craig Thomson is found by Fair Work Australia to have misused union funds.

The regulation of organisations does not come under the Fair Work Act but the Fair Work (Registered Organisations) Act 2009. As I understand it, inquiries and investigations under that Act are therefore the responsibility of the General Manager and not Fair Work Australia.

Part of the problem Mitt Romney has is that he has never been on the other side, the left side. Here he is at a protest FOR the Vietnam War. Doesn’t help that he was right and all those anti-War protestors were wrong. Things look too obvious to him. After fifty years of thinking the left is filled with fools and knaves, hearing them now is just another day at the office.

This is one of the ways he is different from Ronald Reagan. Reagan had seen and felt the attraction of the left in the early part of his career. He could therefore articulate why the left was wrong because he had understood the issues and arguments that had drawn him across to the other side. Sometimes it helps to have once been on the left, unless of course that is where you have continued to remain your whole life long. As the article points out:

The photos show a conservative willing to go against the mainstream in an era when such a position was very unpopular, an admirable act in my mind.

Here’s the question, posed by Peter Costello:

Australia’s post-war manufacturing boom had been fueled by cheap energy, Mr Costello said, but that was now at risk from carbon tax price hikes.

‘If Australia wants to say that it is no longer going to be the home of cheap electricity and cheap power … then the whole premise for the manufacturing industry changes, he said.

Australia should not be taking its economic cues from Europe, Mr Costello said.

‘And yet the one part of the world that is actually enacted a carbon tax is Europe,’ he said.

‘We are not just following Europe on the carbon tax we are implementing a tax that is two or three times higher than the Europeans have done.’

That is, how are we going to expand our economy if we keep raising by deliberate action our production costs through carbon taxes? And the Kim Carr answer:

Manufacturing Minister Kim Carr hit back at Mr Costello’s comments, describing them as ‘complete nonsense’.

He said the car industry would not suffer under the carbon tax because it would receive more in subsidies than it lost as a result of higher power costs.

It is “complete nonsense” because, if I understand this correctly, production costs will not go up since the carbon tax revenue will be used to subsidise the same level of (carbon producing) industry as before. Only now, instead of such businesses getting their revenues from their customers who wish to buy the products they sell, they will get a large part of what they earn from the government which has taxed these businesses to provide the revenue to finance the subsidies they then receive.

I can see the logic, I suppose, I just cannot see the sense. And the economic damage such arrangements will cause is clearly invisible to the Minister as well as to the rest of the Government he is a member of. With policies such as these, I cannot see how the Australian economy can keep from just spiralling down and down.

An article by James Grant in The Washington Post today has a look at the Warren Harding’s economic stragtegy during the post-World War I recession which took hold just after he became President in 1921. First the dimension of the problem and the subsequent result:

Compare [today] with the first full year of recovery from the ugly depression of 1920-21. In 1922, under the unsung stewardship of the president best remembered for his underlings’ scandals and his own early death in office, the unemployment rate fell from 15.6 percent to 9 percent (on its way to 3.2 percent in 1923), while constant-dollar output leapt by 16 percent. After which the 1920s proverbially roared.

Goodness, this was years before Keynes’s had published his General Theory. These were the Dark Ages of economic policy. All they had to base policies on were those classical theories of the cycle based, as you know, on Say’s Law. What could they have done in such unenlightened times so that things should turn out so well? The story continues:

And how did the administration of Warren G. Harding, in conjunction with the Federal Reserve, produce these astonishing results? Why, by raising interest rates, reducing the public debt and balancing the federal budget. Let 21st-century economists rub their eyes in disbelief. Eighteen months after the depression started, it ended.

These policies, as anyone who reads this blog will know, are policies so obvious to anyone if they understand economics in the way those classical economists once did, that there really would have been no alternative.

Economics is not an experimental science but we do have the benefit of different policy prescriptions at different points in time. So we can look at the past as a guide to what works and what does not. We can thus look at Harding’s recovery and see what he did, and we can then look at the non-recovery of the entire Western world’s economies today and see what we have done. And we can draw some conclusions.

Now oddly, and I do sincerely mean oddly, there is only a single book that I know of published since 1936 that explains how economies work based on classical economic theory.

It is an odd thing for me that no one any longer even studies never mind writes books about pre-Keynesian economic theory, the theories that Harding and his economists would have known and built their policies on.

In 1921, I might add, there was no such thing as a libertarian economic theory or an Austrian tradition. There was just the theory of the cycle which is now routinely ridiculed by those economists who brought us the Great Stagflation of the 1970s to go with the Great Keynesian Disaster of the 2010s. And if the events of the 1930s were better understood – the extent to which both Hoover and Roosevelt ran Keynesian-style interventionist policies – these same policies were responsible for the depths of the Great Depression as well.

If you are interested in how classical economists thought about the structure of the economy – which also provides the true story of how the Keynesian Revolution came about – the paperback edition is 24 pounds, around $40 but you need to order it online.

And I can say without much fear of contradiction that it is the best book of its kind because so far as I know, it is the only book of its kind.

But let me just add this, which may only be the sub-editors view and not the author’s. The title of the article is “How austerity cured a depression”. This is not austerity, as in we must make do with less. This is just allowing those parts of the economy that cannot pay their way on their own to release their resources so that more profitable firms can succeed in their place. Recessions are inevitable but they don’t have to go on for ever.

(Via Steve Hayward at Powerline.)

Those voting in the Republican primaries seem to be looking for a candidate who can get them to stand up and cheer over some inconsequential issue rather than someone who will be able, firstly, to win the election and then, secondly, actually do the things that need to be done.

I often come across comments to the effect that Romney is doing so well only because the media has let up on him but wait till the election. Well, part of the reason the media has let up on Romney is because he is almost from central casting. There’s not all that much bad you can say about him other than he is rich and ran a business successfully which required him to shut other businesses down. And why someone in Australia, for example, would feel negative about Romney because he introduced a version of Medicare into Massachusetts and is not 100% lockdown tight against abortion is beyond me. What’s on the list after that?

Nominating Gingrich seems to me a form of electoral suicide. If anyone has been let off lightly it is Gingrich. Romney asked to see the Congressional Ethics Committee reports that Nancy Pelosi mentioned once and then clammed up about. Why has the media said nothing about this either? Does anyone think we are in a drover’s dog election in the US where anyone at all can beat Obama? Not on your life. What do those ethics committee reports say? It’s not going to be like Obama’s college transcripts. You will know every last word of them.

Anyway, more grist for the mill from the Free Republic in an article which goes under the title, “America Hates Gingrich”:

Unlike Mitt Romney, who occasionally beats President Obama in general election poll match ups, Newt Gingrich trails far behind President Obama in every survey. But just how bad are Gingrich’s unfavorable among the general public compared to Obama and Romney?

Not every poll releases their full results, so here are the most recent favorability results I could find for Obama, Romney, and Newt.

Fox News:
Obama, fav/unfav, 51%/46%, +5
Romney, fav/unfav, 45%/38%, +7
Gingrich, fav/unfav, 27%/56%, -29

CBS/NYT:
Obama, fav/unfav, 38%/45%, -7
Romney, fav/unfav, 21%/35%, -14
Gingrich, fav/unfav, 17%/49%, -32

PPP:
Obama, app/dis, 47%/50%, -3
Romney, fav/unfav, 35%/53%, -18
Gingrich, fav/unfav, 26%/60%, -34

You don’t care about his two divorces, his ethics violations, his anti-free-market rhetoric, the disdain everyone who ever tried to work with him has felt, OK fine. Anyone would be better than Obama, but some would be a whole lot better than others and some are much more likely to win the election as well.

Correction: My thanks to James K who has helpfully provided the source for “America Hates Gingrich” at The Washington Examiner. There is also a very nice chart which makes the contrast all that much easier to see.

I am off next week to the US where I will be meeting with near on half the people in the world who think Say’s Law is valid. There aren’t many of us as yet, but the numbers are growing. It is no secret that the Keynesian stimulus has been a disaster everywhere – here too – but if you start from a Keynesian text, it is impossible to figure out why. No modern model is capable of explaining any of it to you.

I have been corresponding with one of the people I will be meeting in New York. This was his last note to me (the links, by the way, are mine and not his):

What do you think about NGDP targeting ala Scott Sumner. But even beyond that, I’ve talked to someone else about free banking who tells me that a free banking system tends to stabilize nominal spending by increasing the supply of notes to meet increased demand for notes, but avoids over-issue thanks to gold redemption and adverse clearing.

What he says is that a central bank targeting NGDP will always be a sloppy second best to free banking and that it will introduce injection effects that lead to malinvestment in ways that a free system won’t. But he does prefer NGDP targeting at a growth rate of 2 to 3% as a better approach than what we do now. This would, he says, at least prevent secondary deflation during a recession.

Here was my reply. And I do apologise for the length of this post.

We can sit down and discuss all of this in a week’s time – quite an unreal thought to me – but let me make a few comments.

Firstly, there is no formula for managing an economy or for managing the banking and financial system that will ever allow an economy to avoid recession. People make mistakes. Even in a world of perfect policy, the longer things have gone well, the more complacent everyone becomes, and the more complacent everyone becomes, the more likely they are to make mistakes.

And while saying that they made mistakes may seem to imply that they might have avoided their misjudgements, most such errors are for reasons they could not have foretold, but occurred because the circumstances of the world had changed in ways they could not realistically have taken into account.

Virtually no business today takes into account, or even would know how to take into account, a closing of the Straits of Hormuz say. This is a low grade possibility that if it occurred would have devastating effects on businesses around the world. But at any moment there are no end of such possibilities which are ignored if one is to get on with life and run one’s business. So the sense in which the word ‘mistake’ is used – these are your malinvestments – is to highlight that in any business the unexpected can have devastating effects on outcomes and no set of financial arrangements could make the slightest difference.

The oil shock of the 1970s led to a loosening of monetary policy as a counterweight which in turn fed a wage explosion which caused an inflationary episode that lasted twenty years. The further consequence was that inflation targeting became the basis for monetary policy from the 1990s onwards, a policy built on the idea that if the inflation rate could be held within the range of something like 2-3%, economies would never go into recessions. Well, how wrong that turned out to be.

As for trying to think through what policies governments are likely to run and then to accurately assess the real world consequences of these policies, no business can ever have such expertise. Who would have predicted how incompetent Obama would be? how large his spending program would become? the level of debt that would result? Even if one could have figured all that out in advance – which no economist could even possibly do – what business person could work out the effect of these policies on their own firms? That is why life is just an adventure. Recessions will happen and to imply something could be done to the financial system to reduce their frequency and amplitude is double-plus unlikely.

As for free banking, by which I assume you mean the abolition of central banks, no controls over the financial system beyond those that apply to any other business, and every bank permitted to issue its own currency if it so wishes. Let me be frank. If this is what you mean, there are few proposals I know of with less likelihood of being implemented and with less merit as well.

If we are talking about the same thing, then if I take my Bank-of-America-issued currency into Macy’s and try to buy something, the cashier at the till would immediately need to know, with no hassle and delay, what the BofA currency I am using is worth in relation to the marked prices on the items I have bought which are denominated in the currency issued by Chase Manhattan. This is an obvious impossibility that no future imaginable tech change will ever permit. I have raised this question with the Free Banking people I know and their only answer is that the market will find a way.

And of course, since the government will want its taxes paid in the currency it issues, every bank-issued currency will need an exchange rate between itself and the national currency. The intricacies of just going out to buy a newspaper and a cup of coffee seem bizarrely difficult. Free Banking, so far as I can see, could not possibly solve any known economic problem while it would create hundreds more.

As for Nominal GDP targeting as proposed by Scott Sumner and many others, none of this will do anything, so far as I can see, to increase the stability of our economies. In my view, no policy aimed at varying the supply of money relative to some external standard can ever be expected to work for very long. Have a look at my book, pages 319-321, on the Quantity Theory of Money. To overlap monetary policy with Keynes is for me a non-starter. I have just looked at Scott Sumner’s website and this is the first para I find:

‘I often say “there is no such things as the multiplier.” Not in the sense that it is zero or one, but rather that there is no stable relationship between government spending and aggregate demand.’

And then, a few pages later, there is this:

‘First recall that C + I + G = AD = GDP = gross income in a closed economy. Because the problem involves a tax-financed increase in G, we can assume that any changes in after-tax income and C + I are identical.’

Whatever Scott might often say, what I say just as often is that any policy built on aggregate demand is guaranteed to be wrong. There is no such thing as aggregate demand separate from aggregate supply. To base any judgement on these fundamental equations of Keynesian economics is in my view to mislead yourself beyond any hope of redemption.

You want to control inflation, then you must balance your budget and reduce as much as possible the role of union power in the determination of wage outcomes. Since I don’t think there is the remotest chance that we will get back to a gold standard any time soon (though the way things are going you never know), you have to work your way around ensuring money retains its value by preventing the two major forces for inflation – governments and unions – from having a major influence on production costs. You might also, therefore, have a look at my section on Classical Inflation Policy (pages 329-331).

I don’t know there is much else to say at this stage. My money and finance chapters 16 and 17 try to show as briefly as possible the linkage between the real side of the economy and the monetary. High interest rates are a better answer than low rates, but keeping public spending low and budgets in balance is the essential. And stopping banks from lending against fixed assets might also be a help but that is an idea that is very ancient and truly classical.

Anyway, these are my thoughts. We look forward to being with you in a few days time, sub-zero temperatures or no.

You know, I had assumed that media organisations had a free hand in writing the news. This excerpt from Guideline No. 288 on “Asylum Seekers” from the Press Council, and which has come via Andrew Bolt is, to me, quite a revelation:

Having considered the matter further, the Council believes that the term ‘asylum seeker’ is a widely understood descriptor, generally a fair and a sufficiently accurate one, and one which avoids the kinds of difficulties outlined above. The Council recommends its use as the default terminology in relevant headlines and reports both by the press and others.

Is it really the presumption every media organisation is forced to take that everyone arriving in such boats is genuine by definition, and is accurately described as an asylum seeker?