Detailed Abstractions

Call the it the little hypothesis which thinks is can, or at least, the little hypothesis which because people thinks it should, must be.

From Mother Jones discussing income inequality between the rich and the poor, decides that those, in this case Matt Yglesias noting that when America sees economic growth, all income groups fair better, are completely wrong [emphasis added] (here):

This is a surprisingly hardy myth, and I’d like to help it die the grisly death it deserves and I’d like to help it die the grisly death it deserves. Here’s a chart showing real per capita GDP growth in the United States over the past century. I’ve helpfully added a straight red line for the period from 1950 to the present day:

US Per Capita Increase in GDP

The past 30 years simply haven’t been a low-growth period. In fact, economic growth has been about the same as it was in the 30 years before that. Our problem isn’t growth, our problem is that the returns to growth have increasingly been skewed in favor of the very rich.

& that’s it.  The article continues about how modern liberalism needs to fix this, yet they offer no proof that it’s actually happening other than a single statement.  In fact, the only thing in the article which might be used as evidence for something, the graph is about GDP trends, per capita.

So if you, like me, have been staying up late nights wondering just how much fame you might get in by answering the unsolvable question: how has the US economy fared over the past 100 years, I must say I’m sorry.  We lost.  MotherJones has beat us to it.  So if asked in the future, you can now safely say, the US economy has increased over the past 100 years.

If however you were searching for actual evidence to their assertion about income inequality, none is found, none is offered.

Which by itself might seem trivial, if you skip the tens of thousands of people who read MotherJones daily.  But even worse, respected economist Robert Shiller when discussing books pushes the MotherJone’s version of things too (article here):

….the politics that lead to rising inequality. That’s been a trend in recent years in most nations of the world. Inequality has been getting worse, particularly in the US, but also in Europe and Asia and many other places.

He even mentions the idea of having the government setup a “choice architectural” because of evidence demonstrating too many irrational decisions made on behalf individuals.  Which of course assumes the government and smart economists could ever replace the collective knowledge of the market, even with irrational actors, with their own ideas or some perfect formula.

But I digress.  The main issue is  they give no reason to believe their assertion is true, yet act like it.  Even with easily found research, with real numbers and everything, from a very reputable source, which as you likely guessed by now,  states otherwise (here via NBER):

Changes in labor’s share of income play no role in rising inequality of labor income: by one measure, labor’s income share was almost the same in 2007 as in 1950.

They go on to discuss reasons inequality exists and discuss things like life expectancy, the difference between the rich and the super rich (say high level executives versus CEOs), but of course when one is looking, it’s not hard to find other evidence MotherJone’s is wrong & they have a nice little graph too (here via Wiki):

US Income by Given Percentile from 1947 to 2007

Doesn’t seem all that “increasingly skewed” to me, but I have been told I see things differently before…

& certainly some may see this distribution as unfair even if it hasn’t been increasingly skewed recently, but they will fail in their attempts to solve this problem for the same reason Mr. Shiller’s belief in the idea of a “choice architecture” will fail.  They simply don’t have the knowledge required, regardless of intellect or brilliance, to supplant an answer supplied by countless independent actions taken freely (mostly) by countless individuals.  It’s simple arrogance.

As Hayek stated so brilliantly:

To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.

For good news – we have more research helping to confirm what true free trade advocates have always believed.  We don’t see a decrease in wages or living standards by trading with developing countries.  Via NBER here:

Concerns that (1) growth in developing countries could worsen the US terms of trade and (2) that increased US trade with developing countries will increase US wage inequality both implicitly reflect the assumption that goods produced in the United States and developing countries are close substitutes and that specialization is incomplete. In this paper we show on the contrary that there are distinctive patterns of international specialization and that developed and developing countries export fundamentally different products, especially those classified as high tech….

Which translated means, the US, one of their main agents in their research, has an economic dynamism (here & here)which results in the US never directly competing with other countries’ lower paid labor:

…Judged by export shares, the United States and developing countries specialize in quite different product
categories that, for the most part, do not overlap. Moreover, even when exports are classified in the
same category, there are large and systematic differences in unit values that suggest the products made
by developed and developing countries are not very close substitutes—developed country products
are far more sophisticated….

& this of course isn’t the only research making such conclusions (here & here).

But that’s not all.  We’ve seen historically that creating obstacles to free trade can hurt us severely (here):

One of the major causes of the Depression was Congress’s passage of the Smoot-Hawley Tariff, which was signed into law on June 17, 1930. Smoot-Hawley placed tariffs on more than 20,000 imported goods. It halted the recovery from the 1929 downturn and resulted in retaliatory tariffs from U.S. trading partners and a decline in U.S. imports and exports of more than 50 percent….

Though not all would say cause (here):

“The best estimates are that the multiplier is roughly 2. In that case, real GDP would have declined by about 3.4% between 1929 and 1931 as a result of the decline in real exports. Real GDP actually declined by about 16.5% between 1929 and 1931, so the decline in real exports can account for only about 21% of the total decline in real GDP.”

Irregardless, the research and economist communities agree on the benefits of free trade (here):

A 1990 survey of economists employed in the United States found that more than 90 percent generally agreed with the proposition that the use of tariffs and import quotas reduced the average standard of living….

Congress’ answer to all of this? A trade war with China (here):

The Democrat-backed bill passed by 348 to 79, and targets countries that hold down the value of their currencies, as many accuse China of doing….

The Senate’s answer?  A trade war with China (here): 

The chairman of the Senate Finance Committee said Wednesday that the upper chamber is “poised” to legislation meant to hammer China for its currency policies…

To paraphrase an axiom:  With economic heavy weights like this as friends, who need enemies… but I’m sure there’s no way they’ll screw up health care, right?

The President? A trade war with China…. sort of no.  While he’s pushing China just as other presidents have (here):

The Obama Administration believes that China needs to take steps on rectifying its currency value, White House Press Secretary Robert Gibbs said….

He hasn’t stated he would sign anything and other administration officials are pushing different views (here):

Treasury Department Secretary Timothy Geithner said there was “no risk” of a global currency war during a wide ranging interview with Charlie Rose Tuesday evening….

Intelligently, he’s keeping his options open in this very way.  Though I’m not sure I want to bet that he continues down the road of economics considering his approval ratings., but a smart move overall.

NBER has a great new research paper out discussing the size of social networking cliques versus their ability to aggregate information among of sources and whether size of the group is a correlative factor to asymptotic of learning (abstract here):

We develop a model of information exchange through communication and investigate its implications for information aggregation in large societies. An underlying state determines payoffs from different actions. Agents decide which others to form a costly communication link with incurring the associated cost….

We define asymptotic learning as the fraction of agents taking the correct action converging to one in probability as a society grows large…..

Our result shows that societies with too many and sufficiently large social cliques do not induce asymptotic learning, because each social clique would have sufficient information by itself, making communication with others relatively unattractive. Asymptotic learning results if social cliques are neither too numerous nor too large, in which case communication across cliques is encouraged….

The short version: If your social network is small enough in size, you can gain information aggregation and asymptotic learning by conversing outside your normal circle, by conversing with friends of friends…. which among other things, means if your social network is kept to a certain level, you are more likely to have more interactions with different social groups than if your group is too large.

For instance – if you have 100 friends, you might have time to wade through some stuff, even post on a few statuses here and there.  You also have the option of seeing other people post on that status whom you might not even know.  That simple interaction can open a new individual source of information and dialog you might never have encountered otherwise.  I can personally think of a few people this is definitely true with me, but that’s a side note.

From the other side – the opposite side is also true.  When your social network becomes too large, your time, ability, and even willingness to move past all the communications you have to view to possibly even interact with others you might not know becomes prohibitive.  IE – the cost of adding yourself into additional social networks and though which learn more, becomes too high.

Take a mundane example – let’s say you love hot dogs and they’re on sale for cheaper than ever, say 50 cents a package.  Why not buy them all?  Because of the law of diminishing returns.  The first 5 packages you pick up might be worth $2.50 easily, but each additional package you retrieve results in spending a higher percentage of your income on something you already now have 5 of.  So each additional package above some individual amount, becomes worth less and less.

Of course this social network size has implications in government as well.  This line of reasoning can be taken to contemplate how large societies in general should be.  Not that there’s a perfect size and I wouldn’t advocate force for any perfect number, but how many people is truly efficient to be under one local government and when does having a larger community under the same local government possibly discourage social interactions & even a feeling or sense of community.

It seems obvious that 300 million under one federal banner isn’t a good idea & the same can probably be said to be true of most large urban areas.   This isn’t to say 20 million people can’t live in a relatively densely populated place, but that even in that sense, there would be many micro communities of much smaller size to encourage interactions, involvement, & true compromise.

As they say, all politics are local.  For me – I can only say I’ve met quite a few friends through this method.  People I call friends who, like most, agree with nothing I ever say, but for whom I’m a richer person for having met all of them.

The moral of the story – I guess the same old thing, everything in moderation.  But again we see the real genius of the internet, in decentralized information sharing.  Without this mechanism making this possible at all, we wouldn’t even be discussing the size of our social networks.

Not that most humans seem destined to challenge themselves or their beliefs… the data shows most people still seem to only seek out confirmation sources instead of new information (here & here)….meh.

Hopefully someday lots of people will use all that wonderful information to question to their beliefs instead of constantly reinforcing their perceptions, but for now – I wouldn’t hold your breathe

Writing in the NY Times, an MIT Professor for the Sloan School of Management, Simon Johnson explains how bad budget deficits will be if we allow the Bush tax cuts to continue.  Basically he tells us, if we fail, it will only be due to the fact that taxes aren’t high enough and we’re not spending enough money on the right things. (here):

According to the Congressional Budget Office, extending all the Bush tax cuts would add $2.3 trillion to the total 2018 debt. The single biggest step our government could take this year to address the structural deficit would be to let the tax cuts expire. Such a credible commitment to long-term fiscal sustainability should reduce interest rates today, helping to stimulate the economy….

According to Mr. Johnson, even though critics say letting the tax cuts expire would retard growth, that money could be used more effectively (he continues):

…If the goal is to boost growth and employment immediately, it would be better to let the tax cuts expire and dedicate some of the increased revenue to real stimulus programs…

You mean, stimulus programs like “Cash for Clunkers” (NBER working paper here)?

…Our empirical strategy exploits variation across U.S. cities in ex-ante exposure to the program as measured by the number of “clunkers” in the city as of the summer of 2008. We find that the program induced the purchase of an additional 360,000 cars in July and August of 2009. However, almost all of the additional purchases under the program were pulled forward from the very near future; the effect of the program on auto purchases is almost completely reversed by as early as March 2010 – only seven months after the program ended….

Or how about the stimulus plan we were told would keep unemployment rates to 8% (DA Post here), while they currently hover around 10% (here):

…in August, and the unemployment rate was about unchanged at 9.6 percent, the U.S. Bureau of Labor Statistics reported today.

Or…maybe the government takeover/purchase of GM (post here):

…in reality, the US Treasury through pressure by the Obama administration spent $50 billion dollars to own 61% of the shares.  With roughly 500 million shares available, this means the US government current owns 305 million shares.  At the current stock price today of .375 dollars, their 50 billion dollar investment is worth roughly 115 million dollars….

Or maybe controlling healthcare costs by passing a bill no one understands…. which has already started failing as insurers have already started raising rates more than goverment predictions (post here):

…The economics and logic of these required rate increases are undeniable.  If someone, in this case the government through force of law, tells a private business that they must increase their spending, under force of law, some, if not all, of those new expenditures will be passed on to consumers…

So to sum up Mr. Johnson, even though evidence, extremely recent evidence, demonstrates what economic thinkers have told us for centuries:  government can not create jobs – the problem doesn’t lie with government spending, but instead in allowing people to keep their own money.

I don’t know when we start understanding what Albert Einstein expressed so eloquently so many years ago, “The definition of insanity is doing the same thing over and over again and expecting different results.” but let’s hope it’s soon.

For more, excellent Cato article The Stimulus: The Government Job Creation Myth

Come on…. we can’t find any good justices to nominate to SCOTUS?  This is what… the third (including the previous administration) uninspired justice nominated in just 5 years.

For such a prestigious and life long appointment, we should expect much better (via Cato here):

Elena Kagan, President Obama’s nominee for the Supreme Court, seemed to shock many people when she dodged questions about the Declaration of Independence during her testimony before the Senate Judiciary Committee…

DA posts here & here

Via Freakanomics here, which will hopefully put to rest the idea that nurses go on strike to “help” patients, from the NBER paper:

…Controlling for hospital-specific heterogeneity, patient demographics and disease severity, the results show that nurses’ strikes increase in-hospital mortality by 19.4% and 30-day readmission by 6.5% for patients admitted during a strike, with little change in patient demographics, disease severity or treatment intensity….

Robert Reich via Salon.com here demonstrates once again how much politics effects his economic analysis.  According to him, this whole economic mess, including a potential backslide can be blamed solely on deregulation:

…starting in the late 1970s, and with increasing fervor over the next three decades, government did just the opposite. It deregulated and privatized. It increased the cost of public higher education and cut public transportation. It shredded safety nets…

Which he believes is causing greater wage disparities:

…We’re back to the same ominous trend as before the Great Recession: a larger and larger share of total income going to the very top while the vast middle class continues to lose ground….

Because with deregulation, of course, companies can become EVIL:

…Companies were allowed to slash jobs and wages, cut benefits and shift risks to employees (from you-can-count-on-it pensions to do-it-yourself 401(k)s, from good health coverage to soaring premiums and deductibles)….

I submit what Mr. Reich fears is freedom – freedom of business owners to hire and fire as they wish, freedom of employees to change jobs easily (401K allows this, pension does not), just freedom.

Secondarily, you can see in his writing that the only thing the government has ever done wrong, is by not getting involved enough.  He doesn’t mention government meddling, deficit spending, enormous new health care expenses, entirely new federal agencies which more money will be needed, idiotic regulations like a moratorium on all oil drilling due to one company’s failure….

Nope, for Mr. Reich, it’s all because the government hasn’t taken enough control over the little people.

Via Cato here, more news on the Obama Administration’s transparency:

The Social Security’s trustees’ annual report is, by law, supposed to be published by April 1. This year, however, the trustees have postponed its release indefinitely. The program’s financial condition continues to remain hidden from public view — and by many accounts will continue to be so until the end of the fiscal year….

Wonder if Reich views this as an issue?

In a great piece over @ The Christian Science Monitor, Arnold Kling & Nick Schultz argue well that Markets fail. That’s why we need markets:

…This seemingly paradoxical view is based on several overlapping strands of research in economics as it pertains to development, history, technology, business expansion, and new-firm formation. According to this view, entrepreneurs at work in the economy – in finance, high tech, manufacturing, services, and beyond – are constantly experimenting, creating new business models, techniques, and technologies that upend the established order of things.

Some new technologies and innovations are genuine improvements and are long-lasting welfare enhancers. But others are the basketball equivalent of pump fakes – they look like the real deal and prompt market actors to leap hastily into action, only to realize later that their bets were wrong.

Given this dynamic, markets are unpredictable, prone to booms and busts, characterized by bouts of exuberance that are rational or irrational only in hindsight.  But markets are also the only reliable mechanism for sorting out this messy process quickly. In spite of the booms and busts, markets drive genuine long-run innovation and wealth creation.

Not as eloquently as they did, I wrote about this earlier in the year (here):

…the dynamic system of the United States might have felt more pain that other countries during this crisis, but due to the mostly decentralized economic model, we will recover more quickly than most…

It then seems for most people to become a question of risk adversity.  Do we allow for individual freedom and understand that sometimes failure is a part of the process?  Or do we constantly attempt to control individual behavior for fear of potential negative consequences?

Only if we first believe in the premise that by trading freedom for stability, we actually get stability.  The CSMonitor article continues:

…When governments attempt to impose order on this chaotic and inherently risky process, they immediately run up against two serious dangers.

The first is that they strangle new innovations before they can emerge. Thus proposals for a Consumer Financial Protection Agency, a systemic risk regulator, a public health insurance plan, a green jobs policy, or any attempt at top-down planning may do more harm than good.

The second danger has to do with the nature of political economy. Politics creates its own kind of innovators who can be as destabilizing to markets as market actors themselves – but in far more pernicious ways.

Economists call these political entrepreneurs “rent-seekers.”…

…This gets to the key difference between markets and governments. When innovation-driven excesses and imbalances are recognized in the marketplace, the system can correct itself quickly. This is less the case when government policy failure occurs.

Because political failure is less publicly tolerable than market failure, the temptation becomes for policymakers to avoid acknowledging their role in creating or perpetuating problems.  Or they double down on bad bets. So rather than recognize the government’s central role in the housing boom and bust and quickly changing its ways, we see the federal policy apparatus continuing to throw good money after bad in the mortgage market and on Wall Street….

I wrote about this “doubling down”  (here):

…For those playing the home game, this means we are taking a problem caused by excessive credit and government incentives and trying to fix it by:

1. Preventing the normal contraction that needs to happen by artificially propping up failed business and bad home purchasing decisions.
2. Keep money cheap by keeping interest rates very low.
3. Then, repeat the same process that got you to the recession in the first place by incentivizing the market to buy a commodity (housing) which is still overvalued in some places….

…I’m not really into prediction making as it’s obviously fraught with so many problems, but I’ll never understand how the solution to cheap money and an over investment of housing, is to keep money cheap and incentivize home buying…

As historically known, the vast majority of centralized government intrusions into free markets and free people has led to disastrous consequences.  NBER research suggests that two of the reasons for the current global economic crisis are due to unfree markets:

…The inability of emerging economies to absorb savings through domestic investment and consumption due to inadequate national financial markets and difficulties in enforcing financial contracts; the currency controls motivated by immediate national objectives;…

Everywhere we look objectively, freedom gives us more of everything.  Do you want to fix healthcare?  Using the government will likely lead to higher rates and more control, using individual freedom however doesn’t cost much as has been proven in other avenues such as food.  Something I think is just as important as healthcare, but been left to the market unlike health care.

& the market has responded.  Food costs as a percentage of disposable income has decreased from 23.4% in 1929, to just 9.6% in 2009 (here).

Meanwhile health care costs continue to increase with government regulation.  In just the past 5 years spending on health care as a percentage of GDP has continue to go up and is projected on that trend still.  In 2005 spending was 15.9% of GDP whereas in 2009 is it 16.9% and projected to be 19.5% in 2017  (here).

It seems that the overwhelming majority of evidence suggests to honestly help the most needy, freedom is not only a moral good, but a requirement for anything approaching success…. yet what seems to be an irrational fear of “economic crisis” many people can’t see the forest for the trees.

Bank of America announced today it’s plans to repay the $45 billion dollars in tarp money to get out from under the restrictions of the government (AFP):

…The bank based in North Carolina said it would repurchase the preferred shares issued to the US Treasury as part of TARP, but would not immediately buy back the warrants, or options to buy additional shares.

“This is good news that the bank can get out of the TARP and can stop having to answer to public and government criticism,” said Jon Ogg at 24/7 Wall Street….

The policies BoA is trying to escape from includes restrictions on the top 25 individuals in the company including the CEO.  I and many others wrote about what a disastrous policy from the new administration this truly was (here):

…Even without bothering with the fact that the government is not in any position to understand what kind of compensation any single employee should have, this is still a radical and arbitrary move that if continued can work to destabilize the economy.

…this decision is an anathema to a free society breaking not only the contract rights of ordinary citizens, but also violating all individuals by pushing a blatant ex  post facto punishment…

Just two days earlier, I also wrote about BoA’s issues with getting a new CEO hired under all the government restrictions (here).  Indeed, at least four potential candidates have simply stated they don’t want the job.

Now, if these policies were actually designed to do this, incentivize those companies with TARP money to pay it back as quickly as possible, bravo!

Taking the language from the administration I doubt it, but it’s always good news when a major business under intense governmental scrutiny shows the quickest to its financial health is to remove the additional scrutiny.

This also  parallels with a recent NBER Paper on the global economic recession (abstract here, full paper purchase price $5).  In the full paper they try to prove the thesis that the main problem with the global economy is that investment money from developed countries should be flowing into developing countries, but instead developing countries such as India and China have investment income flowing into developed countries like the US & Britain.

& This seems pretty intuitive.  In general, investment money will flow to inefficient markets, industries, and companies in an immature market.  The reason is easy – it’s more and faster bang for the buck.  However, in a mature economy like the US and as we move forward in time, there are less and less efficiencies to be gained through anything other than new technologies.

In an immature market it’s the opposite case.  Industries and companies are new.  Small amounts of investment money can return great efficiency gains and therefore monetary gains.

Some people try to blame us citizens, consumerism, and capitalism in general for this failure, but that’s actually the opposite of the truth as well.  The reason Chinese citizens save so much more of their disposable income than do US citizens isn’t because they are more frugal, but have less real options to invest domestically even though major efficiency gains are theoretically possible.

As the abstract states:

…The inability of emerging economies to absorb savings through domestic investment and consumption due to inadequate national financial markets and difficulties in enforcing financial contracts; the currency controls motivated by immediate national objectives; and the inability of the US economy to adjust to the perverse incentives caused by huge money inflows leading to a breakdown of checks and balances at various financial institutions. The financial crisis in the US was but the first acute symptom that had to be treated. A sustainable recovery will only occur when the natural flow of capital from developed to developing nations is restored….

This doesn’t mean the US doesn’t have fault – so long as we continue to allow the government to write blank checks of any amount without respect to the deficit and ignoring huge unfunded liabilities such as MediCare – we seem to be on a sure path to a back slide.  I’m not really into prediction making as it’s obviously fraught with so many problems, but I’ll never understand how the solution to cheap money and an over investment of housing, is to keep money cheap and incentivize home buying (here).

Either way, it’s good news for BoA, with investors showing their interest with heavy after hours trading (here).

As should’ve been expected and according to all recent news, having a Treasury Department position of paymaster isn’t working out so well for the free market.

Earlier this year, against all basic free market principles the Obama Administration through the Treasury Department started setting up compensation boards (CNN):

WASHINGTON (CNN) — An amendment in the $787 billion economic stimulus package passed by Congress Friday would severely restrict bonuses and other forms of compensation for top executives at companies receiving federal bailout money….

Due to all the negative publicity surrounding the government’s handing over billions of dollars in tax payer dollars to corporations which deserved to fell, Senator Dodd explains:

…”The decisions of certain Wall Street executives to enrich themselves at the expense of taxpayers have seriously undermined public confidence in efforts to stabilize the economy. American taxpayers deserve better,” Dodd said….

Now it might just be me, but I’m not sure Wall Street executives are allowed to vote on appropriations bills and then force the treasury to distribute the funds as they see fit.  It seems Mr. Dodd is blaming Wall Street for the government’s failure to handle the crisis correctly.

With all logic aside though, they went forward.  Not only did they seek to limit overall compensation of the highest paid, but asked for refunds from bonuses already given – one provision in the bill:

…The secretary of the Treasury must review past compensation paid to the top 25 employees of TARP recipients and seek reimbursements “if those payments were contrary to the public interest or inconsistent with the purposes of the [stimulus package] or the TARP,” according to Dodd’s statement….

& People everywhere rejoiced…. I mean complained.  In what was an obviously anti-capitalist move sure to do more damage than any political good it might bring about, people everywhere spoke up (examples here, here, & here), including NBER (abstract here – paper costs $5):

…Important facts about compensation are that: the compensation distribution is highly skewed; each year, a sizeable fraction of chief executives lose money; the use of equity grants has increased; the income accruing to CEOs from the sale of stock has increased; regardless of the measure we adopt, compensation responds strongly to innovations in shareholder wealth; measured as dollar changes in compensation, incentives have strengthened over time, measured as percentage changes in wealth, they have not changed in any appreciable way….

Even little ole me could see this as a negative and wrote about this here just a month or so ago (here):

…Even without bothering with the fact that the government is not in any position to understand what kind of compensation any single employee should have, this is still a radical and arbitrary move that if continued can work to destabilize the economy.

…this decision is an anathema to a free society breaking not only the contract rights of ordinary citizens, but also violating all individuals by pushing a blatant ex  post facto punishment….

& now we have exactly what was shown through economic analysis and basic logic to be true (@Bloomberg):

Nov. 23 (Bloomberg) — Bank of America Corp.’s board may extend its search for a permanent new chief executive officer into 2010 if directors can’t settle on a candidate in the next three days, according to people familiar with the matter….

…At least four external candidates, including Citigroup Inc. director Michael O’Neill, rebuffed approaches….

…That’s narrowing the field and giving the board “an incredibly tough job,” said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. “For people who have choices, it’s hard to figure out why someone would take this job.”…

Is it now time to stop calling obvious results  (Un)?intended Consequences…