Wednesday, July 4, 2012


((Oops, i had it saved in draft mode. Now it's late.))

From Robot Barro? at Noahpinion:
After relying on the dubious hypotheses of C. Mulligan to diagnose the slow recovery, Barro offers his prescription (and it is here where I really become annoyed):

To achieve a real recovery, government policy should focus on individual incentives to work, produce and invest. Central here are tax rates and regulations, including especially clarity about future policies. In a successful policy package, the government would get its fiscal house in order and make meaningful long-term reforms to entitlement programs and the tax structure.
So, basically, the recommendation is "the exact same bunch of policies that Republicans have been pushing on America without pause since the days when people listened to 8-track tapes." Cut taxes, cut spending, deregulate. Cut taxes, cut spending, deregulate. Cut taxes, cut spending, deregulate. Cut taxes, cut spending, deregulate. We get it!

So now it's time for me to haul out all the old counterarguments to the standard Republican program.

Perhaps Noah should haul out some new arguments. But if you don't mind, I'd rather talk about "individual incentives to work, produce and invest."

I don't know much about microeconomics. But I know it interferes with macro.

Hey, I'm an "individual". You don't see me at "social network" sites. You don't see me parroting Rush Limbaugh or Paul Krugman or Keynes, or anybody. The guy I agree with most -- Steve Keen -- I don't even go to his site, so as not to confuse my own thinking with his. I am an individual.

You can do everything in your power --

No, scratch that.

Let's push the magic button and pretend for a moment we can do everything that everyone says we ought to do to fix the economy. We can increase taxes and cut taxes, we can spend more and spend less, we can regulate and deregulate, all with no conflict and no contradiction. Magic, remember. So, what?

So, all of it is micro. All of it affects the players, or the "economic actors", or the "individuals". This is after all the whole point of Barro's prescription. And Noah agrees with it: "I mean, I like 'individual incentives to work, produce, and invest'. That sounds awesome to me; sign me up."

All of it is micro. None of it is designed with an eye on macro balances.

I always talk about the quantity of circulating money and the accumulation of debt and the ratio of these two numbers. People object. I think people object because I'm not doing micro: I'm not talking about individuals.

I am one, remember?

There is no economy composed only of individuals. The economy is transaction. The economy only exists when individuals meet, agree, and exchange things of value. The individuals are the actors, or the transactors I guess. The place where they meet and agree and exchange things is the economy: the macro environment.

No matter how many wonderful incentives you create for individuals, if you put those individuals in a bad economic environment, the outcome will be disappointing.

An example: Economists fail to see the danger of debt accumulation. Why?

"[O]ne person’s debt is another’s asset," Krugman says. Krugman is looking at debt as merely an agreement between two individuals. In such analysis there is no possibility that debt can become excessive. How could it? Surely, no amount of debt these two generate could be enough to create troubles for the economy! Oh, they may hurt themselves, but they cannot harm the economy... But what if there is an environment of too much debt?

You know the answer.


Anonymous said...


What about doing some reverse engineering to more clearly show the gold panning, gold rush mentality of the Fed, and work on showing the difference between the little guy in the casino being cheated by the house? I'd like to see something that screams speculation and casino on fire and then relate to the latest pumping of the recovery. How can the fallout from the housing bubble be put into graphic form to show that the vast majority of people are not doing well in the casino. How can you show the lotto ticket odds that favor the lucky guy, versus the reality at hand. This connects to your previous post on Survivor Bias.

The Arthurian said...

Hi! Your 'Survivor Bias' comment got me anxious to write more. To understand more. (Perhaps I should point out that I'd not seen the term "survivor bias" before. So maybe I'm a little behind the curve here.)

What comes to mind regarding casinos and luck is this from Keynes:

"Hitherto the increment of the world’s wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough."

Anonymous said...

I enjoy your efforts here a lot, so thanks for the comment.

Re: Keynes:

Maybe this is a related clue?

Underemployment equilibrium

It seems as if the Fed (according to Mr. K) acting as the casino house, or the distributor of lotto tickets, must prime the pump to stimulate more betting.

This connects back to survivor bias, because the market indexes are being manipulated like the stats at a dog race course, where the Fed is helping to manipulate earnings and provide liquidity to the bankrupt casinos.

I think we see this in lower interest rates, designed to excite people about taking another chance on refi or home purchases. Nonetheless, my theory suggests that an increase in home purchase activity will result in a flood of new shadow inventory, thus the Fed will have less and less room to influence future speculators, etc...

Anonymous said...

One last thought: The only way the speculative priming can work, is if we see a long string of winners in every market, i.e., you would need to know that your neighbor just sold their home for more money, or someone in your family would have anecdotal examples from their friends, who have won some financial bets. This is an important concept, because like lotto tickets, casinos or lucky situations, publicity and hype can go a long way in distorting information. Is it thus likely that your neighbor or family are recent lotto ticket winners -- or is it much more likely that you will read about third-party/second-hand news, which is basically just an advertisement to hype your chances at the casino? The Fed is going to induce players to come off the sidelines in hopes that the housing market will suddenly look like its in a full fast-paced recovery, and then hype that story and plant the seeds over and over that a recovery is underway. The big catch will be related to the increase in rents, and the weak employment numbers, thus this attempt to pretend that the race horse is alive should be easy (for everyone) to see as the race is run. As usual, wealthy people will buy more homes to rent, people will grow older, properties will need more and more repairs and jobs will be scarce.

I'm just wondering if your nice FRED charts can show this in graphic terms. It would be nice to drill down and see what's up with some metrics for people 50 and over, because the recovery will depend on younger people that I assume will have very little cash ...

Pardon my intrusion.

The Arthurian said...

Hey, Pard'ner. For me as a blogger there is nothing better than "intrusion".

My reply will be scatter-brained, reflecting my thinking on these topics.

You know, I wanted to do a post or two on housing ever since Krugman called it the main device by which economic recovery is brought about (not his words!) a couple months back. Keep "intruding" and I may yet get to it.

RE: Your "One last thought"...

The only "anecdotal" -- oh that word is so Greenspan -- the only anecdotal evidence that comes to mind is the stories of small business owners who are doing so well they can hide away a lot of cash and not miss a beat. The trouble with that evidence is, it's not what the economy needs.

Your remarks bring to mind the flurry of "green shoots" talk that sprouted like weeds, back in mid-2009. Not much came of that.

All of this, this garbage policy, is a direct result of thinking that the economy depends on expectations. It does, of course, but expectations depend on actual conditions. These idiots are hoping to bullshit people into believing that the economy is okay, because they think that's what it takes to make the economy okay. This suggests to me that they are not even close to understanding what the real problem is.

The unfortunate thing is, it worked in Reagan's time. He was a better bullshitter: he was an actor. And then, the economy was not so bad back then as it is now.

Can you tell I'm two beers in?

I do agree, the Fed "will have less and less room to influence [the] future" unless they adopt a better plan.