Showing posts tagged economics

Sense of humor of economists: Brad Delong edition

[Adam] Smith claims that the system of natural liberty; with government restricted to the rule of law, infrastructure, defense, and education; is the best of all social arrangements.  Brad Delong.

Oh, a government restricted to just those few minor things: judges, cops, laws (such as those determining property rights and union control), transportation, power and water, the Army and Navy and all their procurement and drafts (impressment), and lets also throw in education. That hardly touches anything at all, right?  Leaves the economy to operate in a natural state? Because invading China to open up markets for a government monopoly opium business is somehow “hands-off” ?

A government like that of the USA or the UK during the height of laissez-faire, with “rule of law” that suppresses labor unions, infrastructure that favors some social  or ethnic groups over others, “defense” that involves world-wide military adventures to control markets and resources, and educational policy that  maintains class privileges is a very active participant in economic decision making. All governments are active participants in economics. The fiction of economics is that certain types of active government are consistent with “natural liberty” and therefore invisible or barely visible or at least not spoken of in polite company. Thus, the “free trade” era in the UK in  the 1850s as the invisible hand guides UK firms to invest in slave labor in the southern USA with slaves kept in bondage by relentless state violence and terror, participate in the East India Company opium monopoly, call the army out to kill union organizers, and address balance of payments issues by having the navy shell China to protect state supplied narcotics dealers. The epic injustices of this era are, according to the liberal economists, addressed by letting the government at long last intervene in the economy via regulations and social welfare.  But having accepted the axiom of right wing economics that the State that only enforces the Combination Acts and prosecutes the Opium War is not managing the economy, the liberal economists keep getting tangled up on their own shoelaces. The assumption is that social democracy inserts the government into economic activity and this view  depends on making  all the other stuff invisible.

By the way, Adam Smith favored government regulation of interest rates. He was not as impressed with the wisdom of rich men as were Victorian Imperialist Alfred Marshall or Professor Fred Hayek, the advocate of torture and rape in the name of freedom.

The US Government is not a payday lender

If that’s confusing, there’s an even easier way to think about it. TARP made its first round of investments on Monday, October 13, 2008. As of November 21 last year, TARP was about to turn a paper profit, at least according to the Treasury Department, getting $432 billion back on $422 billion in investments. That’s a 2.4% total return over more than five years, or an annualized return of less than 0.5%. If the government had instead put its money into the stock market on Friday, October 10, 2008, it would have earned a total return of 132% over the same period, or more than 18.3% per year. [James Kwak]

Right, because if some other entity had stopped the bank panic, rescued the auto industry, and bailed out credit unions, then the stock market would have gone up. The US government should have just waited for this mysterious other entity to show up and then - PROFIT! This is like complaining about a builder who wasted so much concrete on the foundation instead of building some more floors on the top.

Yes, the government got back more money than it invested, if you are looking solely at TARP disbursements. But if Larry Summers evaluates his own investments that way, then he should find someone else to manage his money

Summers did not claim that the government’s investment was the most profitable possible. That’s actually not the purpose of government bailouts. This is what Summers wrote:

In the moment, though, the overwhelming imperative was restoring confidence at a time when complete breakdown looked like a real possibility. The government got back substantially more money than it invested.

He’s not arguing that the government maximized profits, whatever that might mean in this case. He is arguing that the Obama administration was a careful steward of public funds. Considering that the Democrats had to battle back against Paulson’s plan to just give money away and the Obama administration’s situation on taking office after Paulson had already sent out $350billion of TARP funds, that’s a pretty solid claim. Should the FDIC should evaluate each bank rescue against the possible returns from a mutual fund; should the DOE  compare investments in solar power to returns available by payday lending?  This is a ridiculous line of attack which has, probably unconsciously, incorporated all sorts of dumb libertarian arguments about the role of government.

I should also note that TARP rescued the Auto industry and 1 million jobs - something that seems to be hard for Obama administration critics to remember. If the “liberal” critics of the Obama administration had been able to curb their enthusiasm for joining in the right wing attack on government financing, TARP could have been extended into a rolling fund that the government could have used to provide financing to areas where the dysfunctional finance sector fears to tread: wind and solar, urban low income housing, minority small business,  … . But the “Progressives” are in the grip of Paulism and can’t seem to shake it.

Who is Noah Smith kidding?

Students’ dissatisfaction is mostly about politics — they perceive mainstream economics as thinly disguised shilling for unrestrained free-market capitalism (also called “neoliberalism”). But that criticism is extremely out of date. Any Econ 101 course not taught by a total ideologue will contain plenty of theories that support the need for government intervention. Mankiw’s book certainly does. These include externalities, asymmetric information, strategic behavior (game theory), welfare economics, monetarist and Keynesian macroeconomics, and more. I could teach you an Econ 101 course straight out of Mankiw that did nothing but give reasons for more government. The fact is, if your Econ 101 course is a front for neoliberal propaganda, it’s only because your professor wanted it to be.

Should I first point out that “government intervention” is not the difference between right wing and left/liberal views? Hayek supported the army and secret police mass murdering union organizers in Chile - that’s a serious government intervention. At least to me.  And Mankiw’s right wing politics permeate his book, whether or not Smith is willing or able to notice. On page 10 students are told that taxes “adversely affect the allocation of resources for they distort prices and thus the decisions of households and firms.”  Nothing political or ideological in that, just fact, proven by empirical research. Uh huh.  On page 13,  students are told “the growth rate of a nations productivity determines the growth rate of its average income.”  Even mainstream economists like Larry Summers have known that to be false for DECADES.  On the same page, “when a government creates large quantities of a countries money„ the value of the money falls.”  This is what every right wing hack in the world says - announced here as a fact. On page 30, students get a lesson in the difference between positive (fact based, scientific) assertions and “normative” (emotional, magical thinking ) assertions. The example, is Polly scientifically explaining that minimum wage laws cause unemployment and that hippie Norm demanding that government raise the minimum wage.  Subtle!  And on page 36, students are invited to wag their heads wisely, but sadly, as Greg wonders why cities have rent control laws despite economists factual explanation that these things make matters worse. And at that point, I give up.

Right wing politics disguised as “science”. This stuff is junk and only those whose paychecks depend on it argue otherwise.