This is What Economic Analysis Looks Like

For those of you accustomed to reading all the star economic blogs, I want to direct your attention to one of the best economic analyses I've yet seen in the blogosphere. Here is John Mauldin at The Big Picture:
Oil in the 4th quarter rose from roughly $81 to $89, or about 10%. On an annualized basis, this is 40%. Inventory investment is equal to the change in book value of the inventories, minus what is known as the IVA, or inventory valuation adjustment, which is used to correct for prices going up or down. Because the value of oil rose and thus cost more to acquire, the accounting requires that you reduce the value of the current inventories. Thus “real” imports fell at a 13% annual rate. Why? Because the deflator rose by 19%, largely because of the rise in the price of oil.
And the punchline:
If oil were to go back down this quarter by the same amount, that “growth” could be wiped out. There is no conspiracy here. It is just a statistical necessity, like hedonic measurements, and it is all very clear in the fine print; but when there are wide swings in oil prices over a quarter, and because our imports of oil are so large, you can get these odd accounting factoids. Which the gunslingers on TV (and elsewhere) miss in their urge to be the first to get out a bullish statement!
There is much more meat there, and it is all worth reading. Mauldin next proceeds to explain why the United States is headed toward a major monetary crisis, based purely on US debt levels.

Meanwhile, the rest of the economic blogosphere debates whether boosting "NGDP" will set us on the path to recovery. Folks, our problems run much deeper than that.

I have been reading The Big Picture for a couple of weeks now, and I am absolutely sold.  


Sumner Replies on the Great Stagnation

First a quick item of business: Out of politeness, I am responding to Sumner here rather than on his own blog. He gets lots of replies, and my point is to a great extent a tangent on his original point. Rather than mucking up his blog, I thought I'd much up mine. ;)

To bring you up to speed, here is my original comment:
Prof. Sumner, there is much that you wrote with which I disagree, but one paragraph stood out in particular:
“That means we need more construction workers, and granite miners (quarriers?) We need more cooks and waiters. We need more hotel receptionists and maids. More people to work on Carnival cruise ships. I think our workforce is skilled enough to fill those jobs. It’s very lucky that the high tech companies that will provide all sorts of wonderful services do not need many workers. We aren’t Singapore, and would have trouble supplying them.”
You have basically just described the economy of the Dominican Republic. No, worse: You have described the economy of the Dominican Republic minus the sugar cane, tobacco, and rum.
A 3rd-world country with no cash crops, a plummeting currency value, increasing tax rates, and a shrinking interest in education.
Welcome to the new Dark Ages.
 Sumner replied as follows:
No, because the DR can’t produce all those high tech goodies, and it can’t even produce the houses and services nearly as well as we can. Carnival is an American company, not a DR company.
Sumner's point is threefold: (1) The USA is already a high-tech economy; (2) the USA has much higher worker productivity than the Dominican Republic; (3) The USA is where all those big hospitality companies are based.

I'm going to respond in reverse order:

Regarding (3), while Sumner is right about Carnival, he's not right about companies like Iberostar and Riu Hotels, which are the real hospitality stars in the DR. One is a Spanish company and the other is Brazilian. Sumner's point that the USA houses the headquarters of large international companies - and therefore we continue to demonstrate comparative advantage in intellectual capital - is true today. However, it is a tenuous and rapidly loosening grip on the international economy. I'm not a nationalist, but if we're talking about what's good for gross domestic production, we can all agree that more big successful companies = better. The USA is loosing ground to more competitive companies in countries that will probably not be considered "developing" later in my lifetime. The US economy should step up its game or risk becoming the inefficient producer.

Regarding (2), I'll cite from personal experience. I know a man who runs a one-man web design company. He does the aesthetic designing and client contact, then he outsources the programming to India and Pakistan. Remember, programming is supposed to be that kind of tech work in which the USA is vastly superior. Not anymore. Good code can come from outside the "developed" world, too.

Our higher productivity comes from a superior capital stock. That's it. Mises pointed this out in Human Action back in the 1940s, and probably earlier, too. As soon as the capital stock in developing countries catches up to ours, say goodbye to our comparative advantage.

Again, I'm not one to seek national superiority. But where do you want to live: in a declining country, or a rising one? The USA is declining. The developing world is rising.

Regarding (1), let's recall the context of the discussion. Tyler Cowen suggested that the USA can maintain its position as a major productive force if we make science and technology more socially illustrious. Sumner countered that in the future we will need a smaller technological workforce and a larger service-industry workforce.

So, were we to take Sumner's advice, how long would we continue to be a high-tech powerhouse?


Another Folly of the Net Neutrality Concept

The following just occurred to me:

Proponents of "net neutrality" argue that allowing ISPs to offer some websites at a faster browsing speed compromises our access to all those websites offered at a slower speed.

However, in a free market system, those slower websites would have every incentive possible to create a faster browsing experience that offers comparable accessibility regardless of ISP speed. In this way, the net neutrality movement is a strong disincentive to improve website content efficiency.

But do I have a real-world example? Sure, I do. Remember the days before Facebook, when MySpace was the preferred social networking site of most of us? What ultimately did MySpace in was the clunky website mechanics, slow overall speed, etc. Facebook was superior because it was streamlined and much, much more efficient.

Scott Sumner the Insufferable Pessimist

I have not read Tyler Cowen's new book, and I don't plan on reading it. Scott Sumner, however, has read it and written a lengthy review of it.

As a side-note, he has written my favorite kind of book review: one that actually engages the ideas contained in the book and supplies feedback on those ideas. Whatever happened to this kind of book review? There was a time when most reviews read like this. But anyway...

Perhaps the main idea contained in Sumner's review is this:
From the horse and buggy era to the moon landing in one life.  And all I’ve seen is the home computer revolution.  Not much consolation for a technophobe like me.  I’m probably even more pessimistic than Tyler.
Pessimistic is indeed a good word for it. I want to contrast this view with something Jeffrey Tucker wrote on the Mises Institute Blog not long ago:
The Jetsons video phone was hooked on the wall and you had a special chair to sit in. It was surely expensive. I walked around with mine and I paid nothing. Where are the headlines? This new world seems to have arrived without much fanfare at all. And why? It has something to do with the nature of the human mind but that’s too much for this post. 
Obviously, Sumner's self-professed "technophobia" can go along way toward explaining why we can be, as Tucker puts it, "surrounded by miracles, and nobody cares." Being largely afraid of new technology, Sumner is sadly unaware of the revolution occurring all around us.

After all, twenty years ago I could never have communicated directly with some of the world's brightest economic minds at the touch of a button. More importantly, unless I was a student, they never would have engaged me.

But information is available to all of us now, largely for free. This breathtaking technological achievement goes far beyond crass iPhone apps and the cruise ship economy Sumner wants to see. It reminds me of Alexis de Tocqueville's merry proclamation that "the gradual development of the concept of equality is a Providential fact."

Not to put too fine a point on it: we are not all Keynesians now; We are all economists now. Information flows to me every minute of every day. As I increase the number of subscriptions on my Google Reader (by the way, thanks again for another brilliant invention, Google!), I increase the breadth and depth of my understanding of mathematics, economics, science... and (fortunately for Sumner) cooking, travel, construction, and the service industries.

I guess what I'm really trying to say is that Scott Sumner can't see the future because the future doesn't belong to him, nor to Tyler Cowen. These men have reached a position where any additional forward progress (and creative destruction) means a significant negative impact in their way of life. Traditional university professors are growing obsolete, their ideas are being discarded, and instead of human salvation being left in the hands of "the best scientists" (who are already in the sciences and need no further incentive to be productive, ha ha) our future belongs to...

...The younger folks, and folks like Jeffrey Tucker who spot every changing moment as an opportunity to do something differently and invent something new.

I now believe the Mises Academy (like MIT's free online courses before it) heralds the end of traditional higher education. The reason Cowen and Sumner can't see optimism on the horizon is because they're stuck in the past. They study economics as though the economy were one massive NGDP model. They remain in the 20th Century idea pool with the rest of the Baby Boomers, listening to Phil Collins and wondering why a generation of Alan Ginsbergs couldn't save the world from itself.

The world don't wanna be saved,
Only left alone


Transcribing Music

I spent the last couple of days transcribing the song "At Fate's Hands" by Fates Warning (see below). This was a ridiculously intense musical exercise, a real challenge. More importantly, though, it gave me a fresh appreciation for the level of musicianship possessed by the members of that band. The attention to detail in this piece is utterly mind-blowing.

It got me thinking about music in general. In today's world of Garageband and Guitar Hero and samples and synthesizers, it is a rare individual indeed who will learn to appreciate music on the same level that our forefathers enjoyed it.

Those of you who do not play an instrument will have trouble conceiving of this, but... Music is so much more than the sounds you make and the things you hear. There is something physical that happens when you learn to play a really challenging piece. This magic is raised to a much higher level when you perform a challenging piece with others, in an ensemble. Multiple minds coming together to create something that is impressive and cohesive and beautiful... that is what music is all about.

I can't help but feel sorry for the children of today, so many of whom will grow up with no incentive to learn about what music really is and why people like myself put ourselves through the wringer just to learn an obscure piece of progressive metal history.

But I guess that's life.


The Beginnings of Anti-IP Spotted at The Reference Frame

Love him or hate him (I like him), Lubos Motl has tentatively broached the topic of how restricting rights to intellectual property might improve market outcomes:
It seems to me that lots of the slowdown is due to the patents and copyrights which lead the fast companies to continue with their slower products and which prevent the slower companies from following the footsteps of their faster competitors.
Of course, the patents are very important for keeping research profitable. On the other hand, I can imagine that under some controllable and logical rules, the governments could buy these patents and release them to the public domain, at least in individual countries such as the U.S.
Puzzlingly, Motl implies that this is a "subsidy." I'm not sure why he thinks of it that way, but if he dares to look this far, I wonder how long it will be until he considers what would happen to a market without any IP protection at all.


Does Tyler Cowen Have a Consistent, Underlying Theory?

What governs Tyler Cowen's opinions?

David Warsh once wrote "Sometimes Cowen, 48, seems to have nothing but outside interests".

Recently, Cowen has been extolling the virtues of Scott Sumner's "quasi-monetarist" point of view. At least once a day, he posts something about what Sumner says that he agrees with. Fair enough, except that this seems to be mostly a phenomenon of the past year (at least, if his blog posts are any indication). There was no real process of slowly being won over by Sumner's views, it just seemed to happen one day.

Infamously, Cowen made some Obama-favorable statements in the run-up to the 2008 presidential election, not just on his blog, but also at public speaking engagements. Why this strikes me as odd is that Marginal Revolution is generally regarded as a "libertarian" blog. (I now assume this designation is the result of Alex Tabarrok's infrequent blog posts, not Cowen's.) Much can be said about Barack Obama, but I think we can all agree that he is not a libertarian. For that reason, it seemed odd to me that Cowen would buy into the audacity of hope at all.

On top of all this, one of the reasons I now only infrequently read that blog is due to Cowen's proclamation that he didn't think mosques were an appropriate motifs for European skylines. (I guess he prefers his Europe full of whores, gothic arches, bistros, and cigarettes?)

Taking all this together as one big picture, it makes perfect sense, though. Cowen is a powerful economic mind, but he is not idealistic. His views don't just move with the times, they move with the fashions. What's "in" is what Cowen is interested in. What Cowen is interested in is what he believes in. Before, it was Obama and the Romers. Right now, it's Sumner. In the future, it will (hopefully) be Boettke.

Whatever he believes, he will always believe the most popular thing. He's not into any one thing, he's into the crowd.

Needless to say, things are much different for me.


Happy MLK Day

An excerpt from The Last of the Mohicans, in celebration of human rights and human equality:
"You'll know, already, Major Heyward, that my family was both ancient and honorable," commenced the Scotsman; "though it might not altogether be endowed with that amount of wealth that should correspond with its degree. I was, maybe, such an one as yourself when I plighted my faith to Alice Graham, the only child of a neighboring laird of some estate. But the connection was disagreeable to her father, on more accounts than my poverty. I did, therefore, what an honest man should - restored the maiden her troth, and departed the country in the service of my king. I had seen many regions, and had shed much blood in different lands, before duty called me to the islands of the West Indies. There it was my lot to form a connection with one who in time became my wife, and the mother of Cora. She was the daughter of a gentleman of those isles, by a lady whose misfortune it was, if you will," said the old man, proudly, "to be descended, remotely, from that unfortunate class who are so basely enslaved to administer to the wants of a luxurious people. Ay, sir, that is a curse, entailed on Scotland by her unnatural union with foreign and trading people. But could I find a man among them who would dare to reflect on my child, he should feel the weight of a father's anger! Ha! Major Heyward, you are yourself born at the south, where these unfortunate beings are considered of a race inferior to your own."
"'Tis most unfortunately true, sir," said Duncan, unable any longer to prevent his eyes from sinking to the floor in embarrassment.
"And you cast it on my child as a reproach! You scorn to mingle the blood of the Heywards with one so degraded - lovely and virtuous though she be?" fiercely demanded the jealous parent.
"Heaven protect me from a prejudice so unworthy of my reason!" returned Duncan, at the same time conscious of such a feeling, and that as deeply rooted as if it had been ingrafted in his nature.

Now Reading: Last of the Mohicans

I have joined the ranks of economics bloggers who are e-reading, and posting about it. Mine is not an iThing, nor is it a Kindle. Mine is a Kobo, the Chapters version of the eReader. It has nice features and compatibility, so I think it will serve me well.

Because I plan on dedicating more time to reading, I will incorporate the process into my blogging, as well.

My first Kobo book was The Portrait of Dorian Gray, which I read upon the recommendation of many people. It was pretty good.

Currently, I'm reading this:

Obviously, this appeals to me because it involves two of my favorite subjects: American Literature and early U.S. history. I am about halfway through, and it is a good read. In particular, I enjoy the sense of traditional manhood that permeates the novel. This one will be a good one to read with my future son.

A Brief Side-Note

Hilariously, this blog has seen an uptick in search engine hits, thanks to the fact that Halle Berry was mentioned in  my previous post. I'm not above cheap tricks to increase my readership, but I cannot claim credit for having premeditated this. It was purely an accident of rhetoric.

It does pose a question, though. Can I be a more persuasive blogger if I tailor my language to suit a search-engine-driven internet? I could casually mention a sexy celebrity in each of my posts. I could use bikinis and exotic locations as analogies to proclaim the virtues of the free market. I could even take a page from other pop culture icons and change the name of my blog from Stationary Waves to The Nude Economist. This blog is monetized; think of the AdSense revenue potential.

A laundry-list of interesting words from the above paragraph: pose, sexy, celebrity, bikinis, exotic, free, pop culture, and nude.

So what do you think? Would such an approach be unethical, or brilliant marketing? How much sex need an honest man sell in order to get his ideas out to a critical mass of readers? Is simply asking the question going too far already? Should the business of ideas mingle with the business of baser interests?

Sometimes it's not clear on this blog when I'm being deliberately wry. In case you've been missing the joke here, let me assure you that I am being extremely wry. But if Ayn Rand can sell philosophy by writing novels and Jon Stewart can sell politics using comedy, what's to stop anyone from selling economics using sex?

Like so many other things, these questions are easily resolved by an individual's creed. Perhaps I will blog about creeds next; I'd like to bring them back into favor.


Surrounded by the Cult of Personality

In all directions, I find myself surrounded by the cult of personality. Thanks to the brilliant musicianship of the band Living Colour, this phrase is now inseparable from the song of the same name (see below). This has, ironically, weakened our ability to apply the term and therefore criticize cult of personality movements. (Ironic, because it was the band's very intent to effectively criticize them.)

Wikipedia as usual presents a good synopsis of the concept of the cult of personality as it has applied to historical political movements. But I think society's problem with this runs far deeper than dictatorship. There is something in our psyche (or perhaps only in our marketing culture) that demands a figurehead representative of any concept thirsting for mass appeal.

Which perfume will you buy this season? Walk into the department store and take a look. Each perfume is presented using a trade name and a celebrity endorser. Do you want to smell like Catherine Zeta Jones or Halle Berry this year?

Attending a recent corporate meeting, I was struck by the fact that the meeting closed with a panel discussion featuring the executive board. The emcee (a regular joe working for the company) had a list of prepared interview questions. The executives sat on "director's chairs," their shirt collars unbuttoned, and gave their "take" on how the various HR projects within the company were going. ("It's going well, we have a lot of challenges ahead of us...") Do we need to hear this from the executives? The thing smacks of reverie.

Even a movement as individualistic as libertarianism is not immune. We are regularly confronted with the "Randian" versus the "Rothbardian" point of view. These people are dead. What are the issues?

I am tired of taking sides not between right or wrong, but between figureheads. Perhaps it's society's newfound obsession with presenting a "take" on everything. (Hey, I'm blogging, aren't I? I'm part of the problem?) Anyone who finds themselves a little bit ahead of the game soon waxes about what's going on. And of course you should really care because, after all, those guys are ahead of the game.

I see abstract concepts disappearing. I see genuine inquisition evaporating. What I see it being replaced by are meaningless figureheads. This may be useful for those of you who require a "team" to play on; but for the individualistic among us, it's almost isolating to watch ideas get replaced with people in suits.

I don't want to cheer, I want to think. I don't want a figurehead, I want a choice.


"Unfettered Free Markets"

Without pointing to any specific example from the blogosphere, I'd like to briefly discuss the concept of "unfettered" or "unrestricted" free markets.

Typically such phrases are invoked to spook readers into believing that in absence of strong regulatory policy, free markets have no restrictions; anything goes; people might do whatever they want against you and you'd be up the creek.

My belief is that free markets are always "fettered" or restricted, even without government interference. What restricts markets in absence of government regulation is market forces themselves. I know others disagree, but humor me.

What incentive does an employer have on paying workers pennies when the company down the street is willing to pay them dollars? What incentive does a seller have to charge dollars for a product that the company down the street can sell for pennies? The very nature of economic relationships is that one's market behavior is restricted by the norms and demands of other market participants. Every economic act you might consider, from buying bread to going to work is contingent on what society demands of you via the open, free, and unfettered marketplace. If you cannot produce something at a low enough cost to be valuable to the other market participants, then you are restricted from participating at all. You will attempt to sell your produce, and fail.

What happens when government gets involved is that the demands of the marketplace no longer act as potent stimuli on market participants. An employer who might hire dozens at $5 per hour now only hires a few at $10 per hour. A farmer who is able to work hard and produce hundreds of bushels of apples works 25% less hard and enjoys a production subsidy. Society experiences less production.

Here, it's not the market that's being restricted, but rather the people.

At any rate, I think the concept of "unfettered free markets" is a bit of a ruse. The market is a relentless and hard-driving restrictive force. Such restrictions necessarily keep us honest and productive.


Have I Resolved the Libertarian Debate over Intellectual Property?

Yesterday, Stephan Kinsella wrote out another article critiquing the Objectivist stance on intellectual property. In this case, he cites a well-known Objectivist critique of Kinsella's stance on intellectual property.

If you've been following this issue much, you should be well aware of the fact that both "sides" (and I use the term pretty loosely now that both Rothbard and Rand are dead) are always talking past each other on this issue. Kinsella and those who agree with him tend to postulate obtuse logical postulates that usually hang on a single premise (false, in my view) which, if rejected, render the entire argument null. The Objectivists, on the other hand, do exactly the same thing.

So let's break it down:
  1. The Objectivists (who came first) believe that all property stems from logic and reason and mankind's right to use it in order to survive. It is easy to understand their theory, but if you reject this as the source of property rights, then their view of property rights tends to fall apart.
  2. The anarcho-capitalists, in contrast, believe that all property stems from scarcity. It is easy to understand their theory, but if you reject this as the source of property rights, then their view of property rights tends to fall apart.
This is a decades-old debate that will likely not end any time soon. However, if I may be so bold, I would like to challenge both parties to stop talking about intellectual property and start having an open (and civil) debate about the source of property rights.

It is utterly senseless to debate some particular property right when two parties disagree at the Definition Stasis. The solution is not to continue on in their own private worlds telling themselves how right they are. The solution is to get together, publicly, and debate the specific point of disagreement.

Do rights come from scarcity or do they come from reason? I would suggest neither. Human rights exist regardless of how scarce they are or how reasonable the person holding them. These definitions are silly and obtuse. We need to do a bit better than that.

As for intellectual property, I would suggest that the main problem with the Objectivist stance is not that their source of rights is wrong, but rather the fact that IP enforcement involves attempting to prevent people from doing something even if they have figured out how to do it all on their own. If I learn Coca-Cola's secret formula by trial-and-error, the Coca-Cola Company should not be allowed to prevent me from producing it and selling it (since I did not actually violate their patent).

The main problem with the anarcho-capitalist position, on the other hand, is that it assumes that every idea is nothing more than a thought-pattern. This isn't just unromantic, it's absurd. It would be foolish to claim that Beethoven's 9th Symphony is nothing more than a particular arrangement of existing notes. It is a work of art. It takes more than a random-number generator to produce it. It takes ideas, creativity, individuality, and yes reason.

So let's start talking about where rights come from, and sort out IP once we get there.


Bill Woolsey on Monetary Theory and Interest Rates

On December 28th (I was out of town, unfortunately), Bill Woolsey wrote a fantastic primer on monetary economics at his blog. I have been a big fan of Woolsey's comments on other bloggers' blogs for quite some time (even when I don't always agree), but I only recently discovered his blog. I highly recommend it, by the way.

Woolsey's explanation is quite comprehensive, and most of it cannot and will not be argued with. I do take minor exception to his first three paragraphs, however:

Perhaps it is my imagination, but there appears to be a notion among some conservatives and libertarians that the "free market" response to an increase in saving is for production to fall to match demand, and for firms to lay off their least productive workers. The more productive workers remain employed and continue to consume and save as they choose. If the more productive workers choose to consume more (and there is no reason they should) then production will expand and the least productive workers will again be hired.
Usually, this account is combined with the notion that the saving involves paying down excessive debt accumulated in the past. The suffering of the unemployed today is the inevitable consequence of the excessive debt built up in the past. Only after those who remain employed have paid down their excessive debts can they begin to spend again, so that employment can recover.
Woolsey then goes on to quite perfectly describe the ideal free-market macro situation, in which interest rates respond to market conditions and then market conditions respond to interest rates, and then equilibrium is re-established. Once again, his explanation on that level is among the best I've seen in the blogosphere, so please check it out.

He does point out an important problem with a casual Austrian School approach to the business cycle; namely, if people are out of work and production falls, how are people going to pay off those nefarious debts? Good point!

Broadly, I think Woolsey is right to point out that this is a catch-22. Once production falls, it will have to pick back up again before any of that debt can be paid off.

Where I (perhaps) disagree with Woolsey is that it is incumbent on central banks to solve this problem. Here's an imaginary scenario to consider:

Suppose the Fed set the interest rate at zero, and then ceased all OMOs and never adjusted the interest rate ever again. After a short while, (in particular, after the market finally understood that the Fed was not going to set interest rates or change the money supply anymore) interest rates would rise on the market despite the 0% Federal Reserve recommendation; lending would correspond to only those loans that were deemed by the market to be profitable; banks would carefully ensure that they could cover their reserves or else risk a bank run and an end to their businesses. In short, the market would behave entirely as though no central bank actually existed.

Now, we have heard many times that loose monetary policy caused the recent recession. Theoretically, if interest rates are set (by the Fed) "too low," then there is nothing to stop the market from raising interest rates on its own. Except that there is: The Fed manages the money supply through its relationship with a few major banks in order to ensure that banks can make enough easy Fed money that they are willing to keep their consumer interest rates nice and low. You can think of it as subsidized credit.

Why am I saying all of this? Well, I get the feeling that Woolsey's approach is that since we have a central bank, we have to play by its rules, at least until we get rid of it. The implication there - in light of his first few paragraphs quoted above - is that anyone who feels that the Fed causes the problem and then prevents the "solution" from occurring is not as free market as they think.

Well, I think Woolsey is absolutely correct about the production problem he has pointed out; but I think this doesn't really address the core issue that central banks are causing these problems and cannot pretend to fix them. And I think Woolsey is sympathetic to this view. (And for all I know, Scott Sumner might also be.)

So what we have here is ANOTHER catch-22: this "quasi-monetarist" approach is the problem of the benevolent dictator. Once the Fed starts managing one market process, it must necessarily find itself managing all sorts of other market processes until the whole system is wrapped up in central management. So it's hard to produce a "best choice" when everything falls short of what would occur in the market naturally. It's hard for quasi-monetarists, it's hard for monetarists, it's hard for Austrians, and it's hard for Keynesians.

What a mess!

Anyway, I'd like to thank Bill Woolsey for taking the time to explain all that so effectively. He has obviously gotten my thoughts rolling, as he always does.