Everything Will Be Different in 17 Minutes

Yesterday, President Obama challenged his cabinet to put a man on the moon this decade trim $100 million from the budget. I hope he didn't spend too much time explaining this sweeping change from George Bush's spending bonanza.

FY2009 Budget: $3.107 trillion
FY2009 Budget per minute: $5.91 million

There you have it, 16 minutes, 55 seconds of change we can believe in. Really. Change. As in the stuff you find under the couch cushions. Here's how Don Boudreaux expressed his under-exuberance:

To put this budget "cut" in perspective, suppose that the typical American family, earning $50,000 annually, plans this year to run a budget deficit proportionate to the deficit that Uncle Sam will run. Such a family would plan to spend $75,000. Now suppose that this family, seeking to signal its faux-commitment to financial prudence, promises spending cuts equal, in proportion to its budget, to the cuts announced today by Mr. Obama.

This family would declare - surely with much fanfare - that it will reduce its planned expenditures for the year by $2.08! Perhaps it might promise to survive the year with one less gallon of gasoline or with one less cup of coffee.

The Resurgence of Main Street

Small towns often seem fragile in booms. If the town is within commuting distance of an urban center, they transform from close-knit ecosystems to bedroom communities. The longer the boom continues, the greater the percentage of the population that works and shops outside of the community. Higher wages in the urban centers offset the commute costs, and local businesses, with their limited market, cannot compete on wages.

The result is easily seen. Drive down Main Street of any small town and you will be greeted by the empty storefronts on either side; what businesses remain are boutique shops and hair salons, where the customer to employee ratio at any given time is at or near 1:1.

Main Street is plagued by infrastructure problems, not the least of which is adequate customer and employee parking. The age of the buildings and their layout are not conducive to employee-intensive operations like manufacturing, and power may be inadequate even if floor space for that type of business can be found. Main Street is built and structured for one-to-one business operations; personalized services like shoe and watch repair, dress shops, smoke shops, a butcher, a cafe, etc.

The decline of Main Street during the boom is often attributed to the big box retailers. And, to the extent that the Super Center on the edge of town offers convenience and commoditization of day-to-day staples, there may be some truth to that. However, the big box retailer doesn't come to town with the intention of shutting down main street; the specific demographic and economic factors that attracted the retailer were preexistent and already working against Main Street businesses.

When a customer can buy a new pair of work boots for $15, there is little or no demand for the services of the Main Street shoe repair shop. There is much wailing and gnashing of teeth as the mom-and-pop shop turns off the lights for the last time and the owners move on to other lines of work. The sense of loss is not for the building owner who finds himself without a tenant, but rather a nostalgia for the tidy shop permeated by the smell of new leather and mink oil.

But, beyond the emotional, what has really happened? Simply, it is a reallocation of resources. The owners and employees of the shoe shop have moved on to produce goods and services that are in demand, thus enabling them to make more money than before. The people in the community can purchase shoes for $15, thus increasing their real wages. And, most importantly, the building previously occupied by the shoe shop is available for other, more productive uses*. In real terms, the community as individuals and as a whole are better off.

As all booms must, however, the recent one ended. Some investments made during the boom have been revealed as unsustainable, and capital held by those investments is being reallocated to other, more productive uses. Labor will be displaced until those reallocations can occur. Driving patterns and consumption habits of the residents of the small town will change.

Among the ranks of unemployed will be a multitude of ersatz entrepreneurs. Perhaps they are naturally inclined to risk taking, but found it more advantageous to work for someone else. Maybe, they will stumble onto an entrepreneurial venture. Or, maybe they will grow tired of looking for employment and decide to make their own job out of sheer necessity. You will know who they are; they're the ones who will be able to match consumer needs and newfound habits with an ability to deliver the demanded goods and services at the right place and price.

You may object on grounds that it will be impossible for customers with no money to pay for the goods and services, so the new entrepreneurs will fail. Doubtless this is true. Many will fail. However, many more will flourish. You may find the answer to your objection in its flip side; that is, how do people get money to purchase the goods and services they demand? By producing goods and services that other people demand, of course.

The farmer trades with people who need food. The plumber trades with people who need plumbing repairs. The HVAC technician repairs furnaces that need repairing. The prices may change to match the amount of money in circulation, but the producers will still produce in their newfound occupation as entrepreneur.

These new entrepreneurs will not have a lot of capital to invest in new buildings and equipment. Some may be able to work from their kitchen table, but others will require low-cost retail space. They will find that space in the empty storefronts on Main Street and long-forgotten strip malls. In other words, the correction precisely reverses the economic trends that drained employees and businesses from Main Street in the first place, with one major difference.

This time, the business owners on Main Street have $15 shoes.

The businesses that will open will not compete with the big box retailer, but rather, compliment the retailer while the owners avail themselves of the lower-priced goods sold by the big box store. The new homes that were built as bedrooms for urban center workers are now new homes for local workers and business owners. The community has come full circle; true wealth creation is not measured in the paper profits of the boom, but rather the standard of living at the low point of the correction.

There are many who correctly predicted the current correction, and still more who have jumped on the negative sentiment to make dire predictions of the future. I do not disagree that there are reallocations which have not been completed and more reallocations to come. However, I believe that the vast majority of any pain to come is in urban areas; in fact, I would predict a lot of up for small towns from here, with a caveat.

Small towns and rural areas will lead the urban centers until the next credit-created boom. However, government statistics and financial reporting is focused on the urban areas, so the resurgence of the small town will be wholly missed. The proof of the resurgence will only be found in the store windows on Main Street.

But, here's the caveat. No one, from Washington D.C., the states' capital buildings, or city hall has realized what a correction means to their fiefdoms. Workers, who come to town to sleep at night, mow the lawn on weekends, and go to the park with the kids, are content to let them play at their petty politics and central planning. Entrepreneurs, risking whatever savings they have left to earn a living, won't.

They will demand that local politicians get out of their way. To the extent that city hall fights them, entrepreneurial progress will be delayed or simply occur in the next town over. It may take an election cycle to remove the current crop of petty tyrants, but they will be removed. That is one of the many good things that come with a correction. Unfortunately, they'll be replaced with a new crop of petty tyrants, but that's a different article.

Gerald Celente looks at empty Circuit City stores and asks, “who will replace them?” as a rhetorical question. I ask the same question, but not rhetorically; I look forward to seeing what some visionary entrepreneur will do with that property, very soon.
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*There are many factors that determine whether the building is put to new use, including the owner's willingness to let the building sit empty rather than reduce rents or sell the building outright. The number one factor, however, is political. A productive, new use is necessarily transformative; the community may prefer to wax nostalgic at an empty storefront than allow the property owner and his new tenants to transform the structure to its new use. Local politicians may require prohibitive kickbacks or favors in return for demolition or building permits. Historical societies may suck whatever remaining value the building has for productive use through arbitrary rules imposed on the property owner.

It may well be that the best use of the property is as new infrastructure for the downtown area: a parking lot. That is a decision that could easily be made by the property owner. The political tide of a thousand petty tyrants, however, too often makes that an impossible use until extensive, expensive “downtown rejuvenation” studies have been completed and the land deeded to the town willingly or through eminent domain.

Of Course They Did

A TARP watch-dog is shocked that Hank Paulson's Treasury overpaid for assets it acquired.

Elizabeth Warren, chairwoman of the Congressional Oversight Panel for the bailout funds, told the Senate Banking Committee on Thursday that Treasury in 2008 paid $254 billion and received assets worth about $176 billion.

The figures were reached by extrapolating the results of a study of 10 government transactions, comparing the price paid by Treasury and the value of the asset at the time of purchase. Warren did not present details of the transactions the panel analyzed. A full report will be released Friday.

If the TARP was supposed to buy assets at their market value, what was the all-pressing need for a TARP?

Again, overnight lending had not "frozen up" it was just more expensive than banks would like (anyone who purchased gasoline in Sep 08 knows the feeling). There were plenty of buyers for so-called "toxic assets", just not at bids the banks liked (anyone who has tried to sell a home since Sep 08 knows the feeling).

The entire point of the TARP was to overpay for assets. When you give a $350,000,000,000 blank check to somebody, with a mandate to "spend, spend, spend" you aren't encouraging thrift.

I would never defend Paulson and Kashkari but, Senator Dodd, what did you expect them to do with the money? Barney Frank, did you expect the former heads of Goldman Sachs to survey money managers they don't like as to
what to buy and how much to pay for it?

Is it really so surprising that the assets purchased were those of friends at inflated values?

Chris Dodd must also sit at green lights wondering where everybody went.

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.

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?

OBAMA: Yes.

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.