Wednesday, January 28, 2009

The New Low Hurdle

As everyone else tightens their belts, US government anti-reason is crafting a multi-grazillion dollar expansion in spending. The first non-story is that only 12% of the bill is going towards projects that could remotely be considered stimulus-typey. The second non-story, only because it is being flatly denied at this point, is the question of whether all this "found" money to pet projects of the party will be considered the new baseline in future budgets.
The larger fiscal issue here is whether this spending bonanza will become part of the annual "budget baseline" that Congress uses as the new floor when calculating how much to increase spending the following year, and into the future. Democrats insist that it will not. But it's hard -- no, impossible -- to believe that Congress will cut spending next year on any of these programs from their new, higher levels. The likelihood is that this allegedly emergency spending will become a permanent addition to federal outlays -- increasing pressure for tax increases in the bargain.

And, why not? If there is some positive return to all this stimulus, why not repeat it every year? Why not double it every year?

If the multiplier is positive, is there a diminishing return at some point? What point? How do you know that point is beyond this trillion-dollar hootenanny?

What prevents raising the baseline? There's nothing mechanical stopping it. There are no repercussions. You are electorally safe. No one will even pay attention to your denials today.

Of course it will be the new baseline.

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Sunday, January 11, 2009

Obama's Magic Speedometer

A two-part article at Freedom's Phoenix describing the Myth of Aggregate Demand: Part I , Part II

Think of aggregates, like GDP, as a simple speedometer. Assuming your vehicle is not on a treadmill, the speedometer tells you how fast you're going, but it doesn't contain any of the quality measurements like direction or gas mileage. With aggregates, though, you can't even make the non-treadmill assumption because of the lack of quality measurements.

With any aggregate, you introduce bias. That was the heart of Hayek's dissection of Lord Keynes, it is the fundamental flaw in hedonics (and, actually, the reason hedonics even exist), and is, in fact, the major failing of the entire field of macroeconomics.

Paul Krugman noted, in The Return of Depression Economics and the Crisis of 2008, that models are essential to understanding economic phenomena. Fair enough, but why-oh-why does he refuse to acknowledge the importance of including quality measurements in his models? No one would consider even riding a tricycle in a Krugman-esqe style, so how in the world can you drive an entire economy in that fashion?

In Part I of the article linked above, I give a tiny glimpse into just how massive the model would have to be to encompass just one consumer good in a strictly-defined scenario. To model an entire economy, with even a hint of usefulness, would require calculations of unimaginable complexity. But, even those calculations would only tell you something of a point in history; they would say nothing of the world as it exists now or in the future.

Lucky for us, though, we have at our disposal a model which includes ALL the quality data IN REAL TIME. That model is systematically rejected, though, because it reveals all the flaws in macroeconomic methodology and the futility of government intervention.

That all-encompassing model is the market itself.

At any given moment, the market is reacting to the latest-and-greatest data it has. Functionally, that means all economic actors are constantly making conscious calculations about the best use of resources under their control. That is not to say that anyone, including that actor, will be happy with the results ex post (after the fact). But, ex ante (before the fact), any other use of those resources is contrary to the best data at hand, an impossibility in a praxeological sense.

To entice an actor to use resources in a manner inconsistent with the best data, one must alter or supplant the data at hand. This is what a mugger and the tax collector do; by threatening violence, they entice the actor to relinquish their resources rather than take a bullet to the head.

The only way government can alter or supplant the data is to appropriate those resources via taxation, borrowing, or printing. When any of those things are done, though, the resources are no longer available to that actor, so the altered data can have no bearing on how the resources are used. Those resources consumed in altering the data are wasted, with much less chance of post ante satisfaction, since the use was contrary to the best data at hand.

With that in mind, consider the newest remarks made by President-elect Barack Obama to George Stephanopoulos in an interview that aired today:

STEPHANOPOULOS: Let me press you on this, at the end of the day, are you really talking about over the course of your presidency some kind of a grand bargain? That you have tax reform, health care reform, entitlement reform, including Social Security and Medicare where everybody in the country is going to have to sacrifice something, accept change for the greater good?


STEPHANOPOULOS: And when will that get done?

OBAMA: Well, the -- right now I'm focused on a pretty heavy lift, which is making sure that we get that reinvestment and recovery package in place. But what you describe is exactly what we're going to have to do.

What we have to do is to take a look at our structural deficit, how are we paying for government, what are we getting for it, and how do we make the system more efficient?

STEPHANOPOULOS: And eventually sacrifice from everyone.

OBAMA: Everybody is going to have to give. Everybody is going to have to have some skin in the game.

Mr. Obama, respectfully, if you don't know that everybody already has skin in the game...

"The Economy" is doing nothing different than it does all day, every day. It is reallocating and repricing resources to meet expected future demand. Functionally, again, that means all economic actors are making the conscious decisions they make all day, every day to use resources in a manner consistent with the best data at hand.

The difference between today and a "normal" market day, is that massive reallocations and repricing are occurring. That introduces pain in the form of revealed misconceptions for everybody as the entire structure of production is being transformed; factories, offices, raw materials, houses, and, yes, even labor is being put to different uses by different actors.

The only difference between the reallocation and repricing that is already occurring and the "reinvestment and recovery" package you propose, is that the work being done in the market is based on the best data available, and your package is based on aggregates that say nothing useful about how resources are allocated and priced.

Quite simply, Sir, you are focusing on Krugman's speedometer while the individual actors of the world are pointing out the sign that says, "Road Ends - Right Turn to the Destination".

Every dollar you spend, every barrel of oil you burn, every stapler you use, and every worker you entrench is unavailable for this much-needed reallocation and repricing; every bit wasted perpetuates the misalignment of the structure of production to that extent and prolongs this downturn by exactly that much.

Before you drive off the cliff do everyone a favor and make these macroeconomic policy experts show you the quality in their data. Make them satisfy you that their aggregates differentiate between tuna, tractors, and rolling mills in terms of who uses the resources, what the resources are used for, why the resources are used in that way, IF the resources are even used, and when the resources are used.

If they can't show you (and, they can't), then let the microeconomic actors, who DO use that data, complete their own reinvestment and recovery.

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