Free Markets, Free People

Economics

Observations: The QandO Podcast for 11 Mar 12

This week, Michael, and Dale talk about the week’s “slut” talk, and the economy.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.

Musings, Rants and Links over the 18th Fairway:03/16/2010

The French Finance Minister has noticed that the disparities within the European economy are causing a number of issues, and fingers the….Germans!

“Clearly Germany has done an awfully good job in the last 10 years or so, improving competitiveness, putting very high pressure on its labour costs. When you look at unit labour costs to Germany, they have done a tremendous job in that respect. I’m not sure it is a sustainable model for the long term and for the whole of the group. Clearly we need better convergence.”

You see, having an economy so efficient that you can be more competitive than your neighbors with high wages and a high standard of living means you need to change so that the French, Greeks and other assorted PIIGS can continue down the path they have chosen. The Germans are just too darned efficient for the greater good.

In the interest of being helpful I have identified several important initiative’s that the Germans should adopt to align themselves more fully with their neighbors.

  1. Do not keep your debt levels below 3% of GDP…ever.
  2. Encourage massive strikes at the drop of a hat.
  3. Make public services far more attractive than working in the private sector, with massive  strikes and riots to keep it that way.
  4. Make it almost impossible to layoff anyone for any reason.
  5. Mandate at least six weeks paid vacation for every employee.

That should make sure your economy is not too efficient.

Is China’s economy about to rollover?

I won’t explain this, just let it sink in:

I don’t think it will be as bad as Japan, but the evidence isn’t giving me any great comfort either.

I love Apple, and I love my iPhone. Still, is Apple really worth more than Walmart? Or these various baskets:

  • 4x the global smartphone market
  • 5x the global music market
  • 100x the global smartphone app market
  • Enough to buy HP, Dell and Hitachi, with mad money left over for Xerox or Seagate

Yep, that whole efficient markets hypothesis may take a beating again.

Did any of you see Michael Lewis on 60 Minutes Sunday? If you didn’t, I highly recommend it.


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Cross posted at The View From the Bluff

Scary Employment Chart of the Day

When it comes to employment, we have dug ourselves a tremendous hole. I will be surprised if unemployment is back to where it was four years from now. This chart gives us all an idea why:

Of particular interest is the path of the last two recessions which had anemic job growth despite relatively shallow initial dips. The recovery period for each far exceeded previous recessions. If we see a repeat this time the V shaped recovery in employment we keep hearing about is not going to happen. So why the difference?

The earlier recessions exhibited a similar pattern of sharp drops in employment followed by sharp recoveries as the economy snapped back. The change that we began to see in the 1990 recession is partly structural. The layoffs associated with the much larger manufacturing sector in recessions of the past were associated with a rundown in inventories which then snapped back once the inventories were depleted.

Something else is going on here as well in my own opinion. As the eighties gave way to the nineties the US was in the early stages of an experiment in monetary and economic policy. Monetary policy was explicitly geared to reduce economic volatility. This led to attempts to reduce the severity of recessions, and also led to a reduction in upside volatility as well. This was (at least for a while) somewhat successful, resulting in what became known as “The Great Moderation.” The recession of 1990 was the first crack in that system. Attempts to limit volatility not only reduced the violence of the recession, but the explosive growth typical after recessions previously. It also was a recession which was a result of a financial crisis (the S&L’s) and the real estate boom of the late eighties. The deleveraging of the finance and debt recession (what we are going through now, only in miniature) was sluggish. It took a good while for the adjustment to occur.

We followed a familiar script of lowering interest rates and encouraging credit expansion. Constant expansions of credit whenever things slowed kept the engine running until a bigger crisis hit with the bursting of the tech and telecom bubble. Once again we applied even more credit easing to soften the blow, and the attempt to avoid wringing the excesses of credit from the system led to another sluggish recovery with anemic job growth. Profits however were large and the return for the steadily growing financial sector was immense. If the economy was going to be stabilized by constant applications of credit expansion, then the financial sector was the main beneficiary. Finally we have the latest crisis, one where the financial system itself was the most important bubble.

What we can now see is that the types of recessions we have been experiencing are successive deleveraging cycles, each “solved” by releveraging the economy and leading to a bigger crisis down the road. Sadly deleveraging processes, especially if drawn out by keeping them from running their course, result in tepid job growth. We are now in a massive deleveraging cycle which we are once again trying to solve by adding massive debt to the system. Once again job growth and recovery is slower. Unless we break this cycle (which would be very painful) we should expect nothing different in the outcome, except that the problem is bigger and will last longer.

Cross Posted at: The View from the Bluff

Podcast for 29 Sep 09

In this podcast, Bruce, Michael, and Dale discuss the Obama Enigma, the current state of politics, and Iran’s progress towards nuclear weapons.

The direct link to the podcast can be found here.

Observations

The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download here.

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2007, they can be accessed through the RSS Archive Feed.

Pontiff Pontificates On Economics … Badly

When it comes to economics, the Pope should stick to poping. While it’s not uncommon for the papacy to issue decrees and opinions vaguely in line with common socialist principles (e.g. love thy neighbor, etc.), it is somewhat rare for the Pope to outright call for one-world government:

Pope Benedict XVI on Tuesday called for a radical rethinking of the global economy, criticizing a growing divide between rich and poor and urging the establishment of a “world political authority” to oversee the economy and work for the “common good.”

He criticized the current economic system, “where the pernicious effects of sin are evident,” and urged financiers in particular to “rediscover the genuinely ethical foundation of their activity.”

He also called for “greater social responsibility” on the part of business. “Once profit becomes the exclusive goal, if it is produced by improper means and without the common good as its ultimate end, it risks destroying wealth and creating poverty,” Benedict wrote in his new encyclical, which the Vatican released on Tuesday.

I wonder what happened to leave to Caesar what is Caesar’s and to God what is God’s? Or how about that whole concept of “free will”; you know the very basis and foundation of our religious “faith” (which, of course, can only come from choice and not from force)? That seems to be under indictment with Pope Benedict’s latest encyclical.

Leaving aside world governance for the moment, the Pope really goes off the rails when he gets into economic policy. For example, at one point he decries “globalization” and “outsourcing” as little more than the rich preying on the poor:

Indeed, sometimes Benedict sounds like an old-school European socialist, lamenting the decline of the social welfare state and praising the “importance” of labor unions to protect workers. Without stable work, he notes, people lose hope and tend not to get married and have children.

But he also wrote that “The so-called outsourcing of production can weaken the company’s sense of responsibility towards the stakeholders — namely the workers, the suppliers, the consumers, the natural environment and broader society — in favor of the shareholders.”

In short, managers should run their companies for the benefit of those who whine about the common good rather than for those who actually paid for the company (i.e. the shareholders). I’m guessing this is the “squeaky wheel” part of the sermon.

Yet, while outsourcing is deemed “bad”, the Pope also laments that poor countries aren’t better taken care of by richer ones. Towards that end

Benedict also called for a reform of the United Nations so that there could be a unified “global political body” that allowed the less powerful of the earth to have a voice, and he called on rich nations to help less fortunate ones.

“In the search for solutions to the current economic crisis, development aid for poor countries must be considered a valid means of creating wealth for all,” he wrote.

Except for the fact that “development aid” is not wealth. Wealth is created through productivity, not handouts. Indeed, the surest and simplest way to aid development in poor countries to give them jobs … a.k.a “outsourcing.” Doesn’t that whole give a man a fish/teach a man to fish thing ring any bells, your Holiness? Moreover, the more things like outsourcing happen, then the greater wealth there is in the world, and the more work/wealth/happiness there is for everyone to enjoy. Again, I’m pretty sure that was something about loaves and fishes in the Bible that would help illustrate this point.

So much for Papal infallibility.

Just to be clear, I say all of this as a practicing Catholic who is raising his own children in the same tradition. I have great respect for the Pontif when it comes to matters of the spirit. I just wish he’d leave the day-to-day management to the rest of us.

Podcast for 24 May 09

In this podcast, Bruce and Dale discuss discuss the president’s announcement of legal indefinite detention, and the economy.

The direct link to the podcast can be found here.

Observations

The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download here.

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2007, they can be accessed through the RSS Archive Feed.

Free Market Bashing

Since the inception of the current downturn, free market capitalism has taken quite the bashing. Supporters of significant government involvement in the economy deride the horrors of “unfettered capitalism” and a “free market run amuck.” Frequently, deregulation of capital markets is singled out as the most dastardly culprit, to which Pres. Obama seems to be alluding when he blames “relying on the worn-out dogmas of the past,” and “too little regulatory scrutiny.” Yet, after the last eight years in which we witnessed Sarbanes-Oxley, No Child Left Behind, Medicare Part D, and numerous attempts to reign in Fannie Mae and Freddie Mac shoved aside by legislators, evidence of unregulated economic activity being the source of our crisis seems rather scant.

The idea that “deregulation” was somehow responsible for the mortgage meltdown is a particularly shaky proposition. Shannon Love explains why:

Leftists have to answer a question: if greedy, irresponsible, unregulated etc. capitalism caused the housing bubble, why didn’t we see a similar bubble in commercial real-estate markets which operate under even less regulation than the residential markets? Why does the politically neglected and unregulated commercial real-estate market exhibit much milder swings?

[...]

The differences between residential and commercial real estate provide the means to test the hypothesis that government intervention or the lack thereof caused the housing bubble and subsequent collapse of the financial system. We can compare the two markets because the same institutions ultimately make residential and commercial loans. They make loans in the same communities and regions. Changes in the economy affect both types of real estate at the same time and to the same rough degree. The only major difference between the two markets lies in the degree of government intervention.

After dispensing with some obvious questions about the comparison, Love highlights how the residential market was essentially turned into a Lemon’s Market:

More than any other policy, the creation of Freddie Mac and Fanny May distorted the residential mortgage market in a way that the commercial market escaped. The FMs exist solely to induce lenders to make residential loans that the free market judged too risky. The FMs buy up residential mortgages from primary lenders and bundle them together in securities. They do so precisely in order to short-circuit the free-market feedback system that communicates to banks when the financial system as a whole has lent out as much money as it safely can. That feedback system worked like a governor on an engine. It kept the system from running away and lending more money than it could recoup, but also prevented people with poorer credit from getting loans.

Politicians who wanted the engine to run faster created the FMs to bypass the governor in order to get higher performance in the short run. Since the FMs would buy up almost any mortgage, lenders could make riskier and riskier loans without suffering any negative consequence. The FMs replaced the self-interested secondary-market buyers with people playing with government money and a mandate to induce more and more lending. Special dodgy accounting rules allowed the FMs to hide the risk behind the securitized mortgages they sold.

Deregulation caused the residential mortgage meltdown?

Deregulation caused the residential mortgage meltdown?

As Love points out, the commercial real estate market has no such mechanism muddying its waters, and information is comparatively less asymmetric. Without the government interference, commercial mortgage lenders let the potential for bad outcomes drive their decision making:

Tellingly, no such intervention occurred in commercial markets. The FMs’ charters expressly prevented them from buying commercial mortgages. As a result, the commercial mortgage market functioned with a free-market governor. When lenders made too many risky loans, free-market secondary buyers stopped buying their mortgages and the system cooled down. As a result, commercial markets saw no runaway boom and subsequent colossal bust.

Although I think that laying the crisis solely at the feet of the residential mortgage market is overly simplistic (for example, what was up with the ratings agencies?), Love does point to a very apt comparison as to how government intervention in the market changes incentives and behavior. If you guarantee risks against bad loans, and subsidize the debtors, then more of such loans will be made. Remove such a guarantees and subsidies and market forces will severely punish improperly compensated risk taking.

The trade off, of course, is that free markets do not allow much opportunity for rent-seeking. Which is why Love’s final lament is so true:

Sadly, experience suggests that mere empiricism has no place in political economics.

That’s because empiricism does not buy votes.