Free Markets, Free People

Economy

We should pay less attention to "results" produced by computer models

That’s the basic message our friend Warren Meyers (of Coyote Blog and now Forbes) makes in an article. His points are not only good, but valid. And if one thinks about how inaccurate the models we’ve seen drive debate and spending are, we’d insist on better data before those decisions are made.

Meyer points out that there are few, if any CEOs in non-financial firms who would invest  a penny based solely on computer models. Yet we have this propensity to place much more confidence in models that have done nothing to earn that confidence than they deserve.

For instance:

Last week the Council of Economic Advisors (CEA) released its congressionally commissioned study on the effects of the 2009 stimulus. The panel concluded that the stimulus had created as many as 3.6 million jobs, an odd result given the economy as a whole actually lost something like 1.5 million jobs in the same period. To reach its conclusions, the panel ran a series of complex macroeconomic models to estimate economic growth assuming the stimulus had not been passed. Their results showed employment falling by over 5 million jobs in this hypothetical scenario, an eyebrow-raising result that is impossible to verify with actual observations.

Not only is it impossible to verify, it was issued as a defacto “truth” and the “stimulus” was declared a “success”.  And don’t forget the inclusion, now, of one of the world’s best weasle words to pad the results – jobs “saved”.  However the administration goes to great lengths to ignore its previous claim that if the “stimulus” was passed, unemployment wouldn’t rise above 8%. One has to guess, given the results, that the computer model was wrong about that.

Meyer goes on to point out how the modeling which can’t predict the complex world of economics, is somehow considered the “gold-standard” of predictability when it comes to the exponentially more complex climate.  So much so that governments everywhere are basing trillions of dollars of taxes (cap-and-trade) on the results of such models in an supposed effort to “save the planet”.

While we have been bombarded with hockey sticks and forlorn polar bears, our focus in climate should really be on the computer models. The primary scientific case for man-made CO2 as the main driver of global temperatures is made in exactly the same way that the stimulus was determined to have created 3.6 million jobs: computer modeling. No one yet has been clever enough to structure a controlled experiment to isolate the effect of rising CO2 levels from other changing variables in the complex global climate. So, just like the CEA did in scoring the stimulus, climate scientists use computer models to run virtual experiments, running the models backward over the last century with varying assumptions for CO2 levels.

This modeling approach yields amazingly circular logic. Like macroeconomic models built by devoted Keynesians, climate models are constructed by academics who passionately believe that a single variable, CO2 concentration, is the dominant driver of the whole complex climate system. When run retrospectively, the models they create unsurprisingly give the result that past temperature increases are mainly attributable to CO2. The problem with these models is that when run forward, as in the case of the Washington Redskins election model, they do a terrible job of predicting the future. None of them, for example, predicted the flattening of global temperatures over the last decade.

Yet policy has been proposed and written based on results that are nonverifiable and questionable at best.  That’s insanity.  But the purported case for using the results is if we wait for real data it may be too late.  But when the real data appears (such as the flattening of global temps for this past decade) the modelers and proponents of the government action want to ignore it and deny its importance.

This all goes back to two themes I’ve been hammering for quite some time – common sense and scientific skepticism.  Both are necessary tools of a rational person.  And Meyers nails the point:

Our common sense about government stimulus tells us that the government is highly unlikely to invest money more productively than the private entities from whom the government took the money. Unfortunately, we have allowed this common sense to be trumped by computer models. Once our imperfect understanding the economy was laundered through computer models and presented with two-decimal precision, smart people somehow lost their skepticism.

We are now facing what is potentially an even more expensive decision: to regulate CO2 based mainly on computer models that claim to be able to separate the effects of trace concentrations of CO2 from a hundred other major climate variables. If your common sense is whispering to you that this seems crazy, listen to it. Otherwise all we get is garbage in, money out.

The “garbage in” should be obvious. Unfortunately, the “money out” is money coming out of your wallet to pay for unproven science and unfounded economic models. 

~McQ

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The Economy In An Anecdote

I think this entire article entitled “Why I’m Not Hiring” could qualify as the QOTD. It neatly explains why businesses are so reluctant to hire anyone right now.

Meet Sally (not her real name; details changed to preserve privacy). Sally is a terrific employee, and she happens to be the median person in terms of base pay among the 83 people at my little company in New Jersey, where we provide audio systems for use in educational, commercial and industrial settings. She’s been with us for over 15 years. She’s a high school graduate with some specialized training. She makes $59,000 a year—on paper. In reality, she makes only $44,000 a year because $15,000 is taken from her thanks to various deductions and taxes, all of which form the steep, sad slope between gross and net pay.

[…]

Employing Sally costs plenty too. My company has to write checks for $74,000 so Sally can receive her nominal $59,000 in base pay … When you add it all up, it costs $74,000 to put $44,000 in Sally’s pocket and to give her $12,000 in benefits. Bottom line: Governments impose a 33% surtax on Sally’s job each year.

There is no grand revelation in Mr. Fleischer’s explanatory essay. Just hard cold reality: make the costs of hiring more expensive, and less hiring will happen.

Some may argue that just because Mr. Fleischer’s company isn’t hiring for these reasons, that doesn’t mean that other companies are refraining on the same basis. True, but what are the other possible reasons then? Logan Penza summarizes some of the arguments:

It’s those Evil, Greedy Corporations.

That’s the simple explanation most of the talking heads have for the continuing high unemployment numbers. Those Evil, Greedy Corporations horde their money and refuse to hire anyone. When they do hire someone, they don’t pay them enough, don’t offer them enough benefits, don’t pay enough taxes, pollute the planet, steal candy from babies, kick puppies, and make obscene gestures at your auntie. Evil, Greedy Corporations are offered up as cartoon villains, detestable and vile and without any redeeming value.

The trouble with cartoon villains is that they are fictional.

Well, yeah, but it’s so much easier to blame fictional bogeymen then to address what the real businesses say.

Another argument I’ve seen advanced is that the marketplace is inherently uncertain, and that businesses who can’t cope with changes in the law are simply unfit to survive. There is a certain laissez-faire appeal to this argument, but ultimately it doesn’t make sense.

The fact of the matter is that the types of market risk that businesses can and do adjust to, aside from increased competition, are changes in demand and supply, natural disasters and war. The more savvy, efficient and customer-sensitive businesses do survive these sorts of uncertainties and ultimately enhance the economy when they do.

In contrast, when the government continually raises the costs of doing business in the first place (or threatens to do so), the only ones who really survive are either the politically connected or the very wealthy (yes, they are often the same thing). That doesn’t have anything to do with building a better mousetrap, as it were, or growing the economy. And it certainly doesn’t do anything to raise everyone’s standard of living. Instead, all it does is reward those closest to the rule-makers, thus creating more competition to be closest to the King rather than satisfying the marketplace. It is exactly the sort of crony-capitalism we claim to detest.

As Mr. Fleischer summarizes:

A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up. From where I sit, the government’s message is unmistakable: Creating a new job carries a punishing price.

Perhaps instead of punishing business, the government could get out of the way. Maybe then we could get some of that job growth we’ve all been looking for. Unfortunately, it seems that few in Washington are listening, or worse, that they don’t really care.

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Idiots to the left of us, yahoos to the right …

I guess the GOP should thank its lucky stars that weeping George Vionovich is headed for the exit.

Of course, he could still team up with some on the Democratic side to do some damage before January if this is any example:

"Fuel taxes today fund the vast majority of the federal government’s investment in infrastructure projects," Voinovich wrote in the letter. "Due to dwindling fuel tax receipts, Congress has had to transfer billions of dollars from the General Fund to the Highway Trust Fund to maintain our current level of federal involvement."

[…]

"The lack of investment in our crumbling bridge, highway, and transit systems is a missed opportunity for the creation of thousands of well paying jobs and long term economic growth for our Nation," said Voinovich. 

And the chorus warms up – anyone?

Yes, that’s right, a fuel tax is a regressive tax because it hits hardest those who can least afford it, but who’s jobs depend on them being able to drive to them daily.  And who is suggesting such a tax in the middle of a deep recession?

That’s right – a Republican.  Even the Obama administration is against a freakin’ increased fuel tax, and there’s hardly a tax they’ve met they don’t like.

“I believe Americans are willing to pay a higher gas tax to create jobs, improve our infrastructure and better our climate," Voinovich said at a business conference in Ohio last month. "And many of my conservative colleagues do not consider that gas tax as a tax, but as a user fee.”

And I believe you’re as full of beans as you usually are, Mr. Voinovich.  Americans have made it clear over and over and over again that they’re not willing to pay more taxes for any reason until government can prove it can balance its budget and pay down the debt.  On top of that, Americans also don’t give a flip what you and your idiot conservative colleagues consider it, it’s a freakin’ tax.

Now I know that Voinovich doesn’t represent the conservative side of the GOP in the Senate.  But there’s still that “R” beside his name and crap like this is why many people don’t trust the GOP any further than they can throw a Democrat.

~McQ

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Unemployment Rises

Today’s news of 131,000 jobs lost last month comes as no great surprise. What should also come as no great surprise is that the official unemployment rate of 9.5% continues to seriously underestimate the actual rate of unemployment.

Civilian population: 237,890,000
Historical Average Labor Force Participation Rate: 66.2%
Proper Labor Force Size: 157,483 000
Actually Employed: 138,960,000
Real Unemployment Rate: 13.3%

Using the same method of calculation, the unemployment rate in June 09 was 11.4%. Over the past six months, the rate had varied as follows:

Feb: 13.2%
Mar: 13%
Apr: 12.7%
May: 12.8%
Jun: 13.1%
Jul: 13.3%

Since April, 495,000 payroll jobs have been lost.

Jobless claims “unexpectedly” rise

Yup, as Tim Geithner would say – “welcome to the recovery”.  And, given the trends, I would guess this isn’t the last of the “unexpectedly” high unemployment report we’ll see.  Again, ad nauseam, there’s been no incentive provided by government, but plenty of disincentives that are keeping businesses on the sidelines and consumers from spending:

Initial jobless claims climbed by 19,000 to 479,000 in the week ended July 31, the most since April and exceeding the highest estimate of economists surveyed by Bloomberg News, Labor Department figures showed today in Washington. The number of people receiving unemployment benefits dropped, while those getting extended payments rose.

A cooling economy means employers will resist taking on more staff in coming months, raising the risk consumer spending will weaken further. The jobless rate rose last month as payroll increases weren’t large enough to keep up with gains in the labor force, economists forecast a government report tomorrow will show.

As if anyone has to be told, this is not good.  And it wouldn’t surprise me to see the U6 unemployment rate tick up over 10% again in the next few months:

“There really is no upside momentum in the labor market, and that’s a critical long-term determinant of where the economy is going,” said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York. “People just aren’t getting jobs.”

That’s because jobs aren’t being created and offered.  Name the incentive, at this point, to do so?  Tax increases are in the offing, health care laws, 1099 requirements, Democrats still pushing for cap-and-trade, new financial regulations that impact the market and economic policies which give the impression the administration is at war with business.

Why would any sane business owner invest in his business in times as unsettled as these?

Answer: he or she wouldn’t.  And that’s the biggest reason unemployment continues to “unexpectedly” rise.  Headcount is the easiest thing to add when times are good.  It’s also the easiest thing to reduce when times are bad.  And if they stay bad – as we’re seeing now – few if any are going to be adding jobs.

Economics 101 – provide incentives to get the behavior you want.  Provide disincentives to discourage the behavior you don’t want.  The administration’s economic policies have, to this point, provided business with all manner of disincentives to hiring.  And then the “experts” are surprised when jobless rates are “unexpectedly” higher than estimated.

Go figure.

~McQ

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Majority no longer blame Bush for economic woes

That’s primarily because the current administration has been in power 18 months, it has spent like there’s no tomorrow with borrowed funds and the economy is still in the tank. Most adults consider that more than enough time to do address the "inherited" problems and if not fix them, be on the road to doing so. But blaming the previous administration is no longer a viable option.

Forty-eight percent of likely voters blame Obama’s policies for the nation’s economic condition, compared to 47 percent who fault former President George W. Bush, according to Rasmussen Reports.

Although the difference is small and within the margin of error, the poll marks the first time in Obama’s presidency that more people blame him than Bush for the economy.

Obama’s 48 percent also shows a three percentage point increase over the past month, according to Rasmussen. As noted, the margin is small and within the margin of error but is, for the first time, against the Obama administration. More importantly, that’s the way it has been trending in past polls.

So essentially what you should expect to see, as the months pass and the unemployment rate remains high, GDP growth sluggish, consumer confidence down and businesses sitting on the side lines is more and more Americans coming to consider this mess the "Obama economy".

The White House has repeatedly tried to inoculate the president from economic blame with the message that Obama inherited a bad economy from Bush, and has made difficult, unpopular decisions to turn it around.

In a speech to the AFL-CIO, Obama made the case that the problems he faces are the result of Bush economic policies.

"We’re not going to go back to digging the hole," he said. "We’re not going to go back to the policies that took Bill Clinton’s surplus and in eight years turned it into record deficits."

Really?

That’s obviously not how the American people are seeing those policies and their effect.  There’s nothing in the Bush years that even approach the record deficits being piled (and projected) by this administration.

So that old song and dance seem to finally be getting old.  And it is surprising the White House is still trying to push it.  You’d think they’d understand that it was a perishable excuse and it has long since passed its expiration date.  And, as the poll indicates, people have grown tired of it and just don’t accept it as a reasonable excuse anymore.

Not that it will stop the "Blameshifter-in-Chief” and his henchmen from continuing to trot it out there at every opportunity.  Their problem is it just isn’t viable anymore.

~McQ

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Will a desperate Obama administration spring an "August surprise" for political gain?

James Pethokoukis is hearing the rumors of something which might put a number of you in the situation where you’re paying down your neighbor’s mortgage – all in the name of politics. I’ll let him explain:

Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.

Essentially Fannie Mae and Freddie Mac would be the vehicles for this $800 billion bailout.  As mentioned above, the “$400 billion limit” for financial assistance to the two institutions was waived by Congress.  And, HARP has been extended.  The ability to do what Pethokoukis is hearing certainly exists.

As I mentioned in the previous post, the election this November isn’t shaping up well for Democrats.  And the administration knows that without the majority in the House and Senate, its agenda is dead.  As Pethokoukis points out, the midterms are expected to be a blood bath for Democrats and this sort of a move may be seen as a last hour way to change that outcome.  The GSEs (Freddie and Fannie) are about the only “levers” left for the White House to pull. And with the economy slowing and the President’s approval ratings tanking, those levers are looking mighty tempting:

The mortgage Hail Mary would be a last-gasp effort to prevent this [loss of House and working majority in Senate] from happening and to save the Obama agenda. The political calculation is that the number of grateful Americans would be greater than those offended that they — and their children and their grandchildren — would be paying for someone else’s mortgage woes.

And, of course, it would be a backdoor “stimulus” that many on the left think is needed.

It may not happen, but as pointed out, the rumors are pretty darn strong with Wall Street firms privately warning their clients it is a distinct possibility.  It would be an incredible move that, given the mood of the country, could backfire spectacularly if done.  But the political calculation may be that if Democrats are supposed to lose badly in November anyway, why not try.

The financial consequence?  Bah … we’re talking politics here, the “religion of the left”.  They’re likely to do whatever they think is necessary, consequences be damned.  And we’ll be left, as usual, holding the bag.

~McQ

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“Stimulus” an expensive bust

The so-called "stimulus", upon closer examination, looks like most government spending – excessive, poorly targeted, poorly monitored and not at all accomplishing what was intended.

Senators Tom Coburn and John McCain have issued a report that details some of the most dubious "stimulus" spending. That’s over and above the money that just disappeared after being sent to non-existent congressional districts and zip codes.

For instance:

$700,000 for a researcher to study improvised music. For a project on interactive dance, 44 percent of the money goes to "overhead."

The $1.9 million spent to photograph ants in foreign countries has created two jobs created so far. That’s better than other ant research stimulus projects: $451,000 has created one job,

$276,000 spent on another created six one-hundredths of a job, and the $800,000 spent on a different one created no jobs.

The $144,000 spent to study the behavior of monkeys on cocaine created four-tenths of a job. To study why monkeys respond to unfairness cost $677,000 – and has created no jobs yet – except maybe for the monkeys.

And my guess is that they will find that monkeys react to cocaine much the same way humans do. Of course the White House claims, most likely through some model in which they plug in a factor (something like x number of jobs are created when y dollars are spent), that 3 million jobs have been "created or saved". But at what cost? Note the amounts spent above to "create" each job. And then there’s the ironic side of the story:

In the state of Washington, another stimulus project may be hurting those it was designed to help. Construction began one year ago today in front of the Archery Bistro Restaurant. The owner says it’s shut off business like a fly in a bowl of soup. He’s had to stop serving lunch, close two days a week and, ironically, lay off 12 workers.

The "stimulus" has been an expensive bust.

What positions have been “created” are temporary at best and will disappear when the tax dollars run out.  Additionally, much of the money is consumed in bureaucratic overhead – certainly “saving” and perhaps expanding those non-productive jobs.

But as for “stimulating” the economy – well, look around.  As my mom used to say, “the proof is in the pudding”.

~McQ

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Quote of the day – why we’re not yet in a recovery edition

Yeah, I know, there are technical definitions of what constitutes a recession and a recovery.  But if you’re unemployed, underemployed or given up on finding a job, you find  none of those technical definitions unimpressive.

Anyway, this particular quote, in a nutshell, tells you why the “recovery” isn’t much to write home about:

Data released by the Bureau of Economic Analysis at the Commerce Department this morning shows that Americans earned a bit more, spent a bit less and saved more in June — all in line with economists’ expectations. Consumer spending drives about 60 percent of the economy, therefore, economists do not expect the recovery to take strong hold until American families feel secure enough and are earning enough to spend again. Unemployment, of course, remains a major drag on the economy.

So, while savings is good in general, it’s not good in a macro sense when you’re in a recession.  And, as the quote notes (and I frankly think the number is low) when 60% of the economy is driven by consumption, increased savings and less spending is not a good sign.  It’s all about confidence, and consumers simply aren’t feeling it.

That may be because of the last sentence which has my vote for the understatement of the year. 

The good news, however, is there was nothing, apparently, “unexpected” about these numbers.

~McQ

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