Fail Economics & You

 

The joys of fiscal austerity

"Similarly, if surpluses are too high, the government is forced to purchase private assets and gradually nationalize the economy." - (Broda and Weinstein(2004))

Socialism 2.0! Reminds me of that Norwegian pension fund that owns a large percentage of the Norwegian stock market (and they have another fund that owns quite of a bit of the rest of the world).

Kind of bizarre (but awesome!) in that in my zeal for low government spending and high taxes I would end up with a situation where in the very long run the government would own a significant stake in almost all large entities. Though given the immoral fiscal policies pursued by the past few generations of people in most parts of the world, there would be a long period of paying for the petulant excess of our parents and grandparents (the bastards should be ashamed of themselves) before the "problem" of governments having actual savings would come into play.

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Lament for the Bundesbank

http://www.bloomberg.com/apps/news?pid=20601109&sid=aNGzMecnv4o0


Looks like the Germans are being overwhelmed by the sheer quantity of joke countries that have benefited from the low inflation legacy of the Bundesbank being transfered to the ECB but are now willing to abuse it to create unsustainable economic bubbles and inflation which they misread as growth. After the Swiss Franc and the Yen I view the Euro as the best currency to have if you must/want to hold cash, but at this rate it'll probably join the Pound and Dollar in long term unreasonably large depreciation. The EU - or at least Germany, deserves better than this.

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The effects of stimulus spending

From a 2001 article in the telegraph:

"The government's piling up all this debt, and that will be a real problem for our children," said his wife, Akemi, 37. "We have to save money, not just for ourselves, but for them."

"When everything was going right in the 1980s we didn't have to think about anything," said Mr Tamura. "Now I follow what the government is doing. I hate it that they're spending all this money on public works projects that we don't need."

 

The Japanese government's huge deficits encouraged people not to spend as they realised that unsustainable spending today will mean higher taxes tomorrow for either themselves or their children. Thus not only does stimulus spending get wasted pouring concrete into holes, it also encourages the very behaviour its architects are trying to avoid. 

 

In the vast majority of cases stimulus spending is pure economic destruction. It discourages economic activity for fear of future tax expenses, crowds out the private sector debt markets and wastes resources in the construction of economically dubious infastructure that would never have been constructed under reasonable budget constraints given the poor cost/utility ratio.

 

Stimulus spending is embarrassingly stupid.

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Daniel Hannan's speech rings hollow

Link to speech: 

There has been much praise heaped upon the speech given by David Hannan MEP in the European parliament railing against Gordon Brown's policies.

It was a great speech, but I can't help but remember his party opposing the labour party when they used the proceeds from the sale of 3G operator licenses to pay down the national debt. I find the gain in the polls for the conservatives to be completely bizarre. All the things that the labour government have done wrong have been wrong because they were too far in the direction that the conservative party leans. The conservatives were for the Iraq war, for reckless tax-cuts during the boom times and against the euro, all three policy mistakes that the UK is paying for now. 

It should be the Liberal Democrats who are benefiting from all this, yet it seems that being "not the government" is enough to get the Conservatives elected, despite the fact that if they had been in power the UK would no doubt be in an even worse state than it is now.

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The Economist fail

article: http://www.economist.com/books/displaystory.cfm?story_id=13176890

Gets owned badly by the first comment:

"You write: "Too ready, perhaps: what if the price of greater equality is lower growth?"

I can hear your voice ringing down the ages: What if the price of environmental protection is lower growth? What if the price of civil rights for blacks is lower growth? What if the price of women's suffrage is lower growth? What if the price of the abolition of slavery is lower growth? What if the price of overthrowing a dictatorial monarchy is lower growth? What if the price of religious freedom is lower growth? If we had listened to your voice over the centuries, we would still be serfs in medieval kingdoms, lorded over by a rich overclass that enjoys the benefits of "growth".

Your mantra is growth without regard for who benefits from it. Appropriate, I suppose, for a magazine with economics as its focus. Fortunately for us, most of the world believes that there are values that are more important than economic ones, prime among which is the creation of a society that is just and which, for that reason alone, will not perish from this earth."

I've come to dislike The Economist alot. It forever bashes Japan despite Japanese socio-economic development being at a much higher level than the rest of the world. Here are two other comments on another article that really rang true for me:

article: http://www.economist.com/displayStory.cfm?story_id=13061521

"I wouldn't trust anything The Economist writes about Japan as its editorial staff seem to have had a visceral dislike of the place for years which taints its views.

Diversification in itself is not proof of bad management. If importing Italian tomatoes is profitable, then that's good, and diversification of business lines can spread risk. This is trite economics.

Japanese companies are not perfect, but they are hardly as badly managed as The Economist seems to think. If The Economist's ideal is the Anglo-Saxon maximising shareholders' returns to the detriment of all other stakeholders, then we already have the answer to what the result is: GM, Chrysler, RBS, , the ghastly South-West Trains, Lloyds Bank etc. that awful company BA...

Japanese management may not be perfect, but at least they don't pay themsleves obscene sums of money for poor performance. Give me bumbling Sony any day!"

"To economists who measure everything by return on capital, the japanese model is deemed "inefficient". That is because the japanese put social stability, cohesion, preservation of culture, etc higher up their scale of priorities. They don't subordinate everything to the pursuit of money.Sure, Japan is not perfect and can benefit from some fundamental reform. But the resilience of japanese society despite the bursting of their credit bubble in the early 90s gives food for thought. Measured over the half-century since the end of WWII, they have produced a more equitable society than the rest of the G7, not to mention world-beating industrial companies that are still eating America's breakfast during their "lost decade", while America bankers were preoccupied with "creating value" from flogging their IOUs to China and teaching the heathen how to do business before the roof caved in on their elaborate Ponzi schemes.There are more ways to live than "growth = accumulation of material wealth"."

While I used to think quite highly of it, more and more I think The Economist has completely missed the "meaning" of everything. As in, they do not seem to be willing to see that Japan's economic system has built a far superior society than the USA or the UK, which can be plainly seen in less crime, less social problems, low income inequality, a vibrant culture that has actually thrives despite being constantly merged with new technology, no socially oppressive religion and a people famed for their politeness and so universally principled that all manner of objects can be laid unsecured and in public and will not be abused or stolen by a random person as would happen in the USA or the UK.  The cost of this is indeed paid for by less return to shareholders and less opportunities for individualists to become hugely rich. But even with that trade Japan maintains a similar per capita income of other fully developed countries (including some Scandinavian countries which also make fantastic counterexamples to the anglo-saxon way, though these countries are also quite different to Japan).

I see no hard logical rigour in The Economist's writings, only an endless cawing of ideological positions that are embarrassing failures in reality.

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real GDP growth per capita and the BoJ

A brilliant veil-lifting article on the real GDP growth per capita of various countries over the past few years, written about half a year ago:

 

http://www.economist.com/finance/displaystory.cfm?story_id=10852462

 

While I am not a fan of the GDP measure, I did love the reality-basedness (is that a word?) of this article. By discounting population growth, a true measure of the actual increase in wealth creation can be more clearly seen. With real Japanese growth per capita snapping at the heels of the UK and above the USA, one is left pondering and in doubt about the quality of the large amounts of economic analysis intent on "fixing" Japan's economic issues. Particularly the obsession of many scholars with the "problem" of mild deflation deserves some further critical analysis.

 

Furthermore, as some of the economic growth in the UK and USA over the period in question are the result of an unsustainable residential real estate ponzi scheme which is now collapsing, Japan's economic performance may be seen in an even brighter light. However an offsetting factor may be the huge increase in Japanese government debt which may play a similar restrictive role in Japan's future economic development as the collapse of the real estate markets will for the UK and the USA. 

 

The resistance of the Bank of Japan to taking more extreme measures to end Japan's low inflation/deflation (the rate has varied significantly above and below zero over the past few years) has received strong criticism from both the government of Japan and from a wide variety of international economists. Policy suggestions such as a much larger level of government debt monetization by the bank or the adoption of an official inflation target have met with consistent rebuke from the BoJ. The BoJ argues, among other points, that such policies could result in large excessive inflationary pressures that may be difficult to control and run the significant danger of trigging asset price bubbles, as has occurred in the past, or that greatly increasing it's level of monetization of the government debt itself creates a moral hazard as it discourages fiscal discipline on the part of the government and it is likely that the government would just waste any money received in this manner. 

 

It would seem that the BoJ's policies have been vindicated by the performance of the Japanese economy and its restructuring to an environment of price stability. While the lack of inflation in Japan is slated as a cause of low domestic demand and a reduced incentive to invest, this is committing the same fallacy mentioned in a previous post of mine, of assuming that arbitrary consumption for the sake of consumption (and investment for the sake of investment) is a good thing, regardless of the fundamentals involved. It is the very lack of inflation in Japan that has discouraged "panic-buying" of assets and helped it to avoid malinvestment and over-leverage that has lead to bubbles in the UK and USA. Japanese corporate debt has fallen dramatically since the onset of deflation, with consumer debt also falling at a moderate rate and in stark contrast to the rise in consumer debt seen in the UK and USA. Further elaboration can be found in another brilliant article:

 

http://www.economist.com/finance/displaystory.cfm?story_id=12059274

 

Under price stability, Japanese market participants are free to make more rational consumption and investment decisions, as there is no longer a time correlated penalty to non-consumption and non-investment of cash holdings. A lack of inflation also reduces the incentive to increase leverage through debt issuance, as the real value of the principle will not be eroded over time. 

 

I am personally very interested in the unsung benefits of a zero inflation environment and think it would be a fascinating research topic. It is apparent that it may provide significant robustness in resisting asset price bubbles and discouraging over-leverage. 

 

The BoJ's policies may well be a glimpse of the future path of other central banks. Big Ben himself mentioned a month or so back that central banks may have to change their policies to try to actively target asset bubbles before they inflate too far with tighter policy, instead of letting them grow and explode on their own and then cleaning up afterwards with extremely aggressive preemptively loose policy. In saying that, given the overwhelming criticism in academic papers of the Bank of Japan's recent policies, including criticism from Big Ben himself, I find it difficult to imagine such a large ideological shift will be possible any time soon. Perhaps the current crisis may give an impetus to viewing the BoJ's policies in a kinder light. 

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Forced loans

 


To illustrate the folly of tax rebates funded by public debt, I though it might be interesting to use a metaphor of "forced" loans. Imagine if, under the pretense of "stimulating the economy", the government took out a loan on your behalf at the local bank and posted you the cash proceeds. What would one think? 


Likely a mixture of anger at having one's personal financial affairs violated, combined with bafflement as to how one is expected to feel "better off" or be inclined to spend more when all that has happened is some money juggling. The first course of action would probably be a trip to the bank with one's borrowed money in hand to pay off a forced loan that one did not want or need.


Yet this bizarre scenario is endorsed by many politicians and economists of late, as a remedy for busted bubbles, market collapse and poor reelection prospects.


But what complicates the matter greatly and turns the situation from a bizarre but amoral happening into an immoral arbitrary wealth redistribution exercise, is the intergenerational burden that the issue of government debt creates. For any man that gets his tax rebate cheque, then spends it and promptly dies shortly afterwards will never have to pay his forced loan back. Yet the child born that day will have to pay more taxes through its life to pay for the arbitrary consumption granted to the man that just died. The longer time that is spent without paying off the debt, the greater the disconnect between those who get to enjoy excess consumption and those end up paying for it. 

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Re: bailouts

A quick answer: yes.


Long answer: A bailout is usually suggested as a solution to market failure. In many cases a bailout can make a profit for the government from two perspectives:

1) From a pure monetary perspective a frozen/panicked/dysfunctional market places a premium on liquidity that is disproportional to the fundamentals involved. Considering the extremely long term time horizon that the government operates on, it is likely that purchasing these assets which have suffered large declines in current market price because of market failure will be profitable for the government in the long run. This was done in Japan in 2002 with shares and resulted in a large profit for the government as the shares were sold off over the years when prices recovered.

2) The purchase of the distressed assets themselves can lead to the avoidation of worse economic conditions. Both the psychological impact of the governments actions, the removal of "harmful" assets from the balance sheets of market participants and the lessening effect the purchases have on the magnitude of the excessive price decline of the asset in question (perhaps this could be called a reduction in volatility) all have positive economic effects. Furthermore these economic effects will benefit everyone, not just the ones being "bailed out". 

Stimulus packages on the other hand are just basically equivalent to robbing money from your child's piggy bank and then forcing them to pay back the robbed sum with interest. Stimulus packages are far too blunt an instrument to be used effectively in dealing with economic crisis's that have specific causes. While a bailout is also funded with debt, the bailout precisely targets the area where the economic disruption is being caused. A bailout also receives assets for its cash, assets which may even appreciate in value over the long term given the nature of such crises as stated above. A stimulus package in tax rebate form produces less spending than its issue amount and arbitrary spending itself will only very indirectly give any sort of relief in a crisis with specific identifiable issues. It is also questionable as to whether encouraging consumption for the sake of consumption is a good thing at all. Should we just go around smashing windows during an economic crisis so as to encourage window consumption? Also if one were to subscribe to Ricardian assumptions, then the populace may end up just saving the rebate money in the expectation of higher future taxes to pay for the current government deficit, therefore creating no real economic effect. 

A stimulus package involving deficit spending on public works or other government spawned activities will result in physical assets being created. But one must ask, if these works lacked enough merit to be undertaken by the government under normal budget constraints, then surely the return on investment or benefit to society from such constructs will in no way be able to match the great burden of public debt and the required interest payments thereof that they necessitate. Again as above, the stimulus to economic activity will be blunt and matched by a large issue of public debt which may itself create a large crowding out effect on the private sector.

Bailouts are economically effective and the moral hazard they create is greatly exaggerated and in my own opinion, non-existent in the case of equity confiscation. No market participant ever wants to be in a situation where they need to be bailed out. Fannie Mae and Freddie Mac were "bailed out" - their shareholders lost almost everything. It is absurd to say that, if market participants were put under the assumption that their businesses would be prevented from collapsing in the event of overwhelming losses by government nationalization at the expense of the vast majority of their equity position, that this would be an incentive to take excess risks. Businesses exist to make profit for their shareholders, they inherently abhor anything that involves massive destruction of equity value. A bailout and collapse are for all intents and purposes equally disastrous to a business with a fiduciary duty to shareholders. So long as a government receives equity for providing it's "bailout", there will be no significant moral hazard.

Thank you for your question - it provided a great "stimulus" to get me writing :)


> To: faileconomics
> Subject: bailouts
>
> http://faileconomics.posterous.com/nevar-forget
>
> So you oppose stimulus packages and support bailouts? (Just clarifying)

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nevar forget

"Japan has become the world’s strongest piece of evidence that the Keynesian policy of economic growth through deficit spending does not work well."


While Japan's economic problems have been greatly exaggerated, this is still the elephant in the corner. Stimulus packages don't work. They have never worked. The packages being announced across the world recently are purely a wealth redistribution exercise, allowing people alive today to enjoy higher consumption at the arbitrary expense of people born in the future. This is stupid and immoral.

 

 

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UK going down the path of fiscal ruin

http://www.bloomberg.com/apps/news?pid=20601039&sid=a8kMMkZtE6xw&refer=home

I would've expected better from Gordon Brown. Is there not anyone left in the world who will stand up and say "The money just isn't fucking there. Pay more taxes, have less services and shut up" to the masses? Instead they would enslave future generations to debt that has nothing to do with them. How dishonourable. How unmasculine and irresponsible!

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