http://www.historytoday.com/ian-morris/latitudes-not-attitudes-how-geography-explains-history?utm_source=History+Today&utm_campaign=bfc15ff197-November_Newsletter&utm_medium=email
This article isn't about economics per se. Rather, it purports to explain the West's dominance. In so doing, the author, Ian Morris, denies that West has any innate superiority, such as culture or genetics, and chalks the West's achievements up to luck. A thesis like this should raise flags, because the issue is so loaded -- and so constrained by political correctness -- that to make the opposite argument -- say that Christianity and democracy made the West better -- exposes the author to attacks on his personality. Of course, that doesn't mean his conclusion is wrong, just that one should read it with great skeptcism, because again, the opposite conclusion -- that the West's power and affluence are consequences of unqiuely Western virtues -- is not something one can suggest among the literati. And, when viewed this filter, the article is blatantly illogical and dishonest. I beg you, don't buy Morris' book.
Explaining why the West rules calls for a different kind of history than usual, one stepping back from the details to see broader patterns, playing out over millennia on a global scale. When we do this the first thing we see is the biological unity of humanity, which flatly disproves racist theories of western rule.
"Our kind, Homo sapiens, evolved in Africa between 200,000 and 70,000 years ago and has spread across the world in the last 60,000 years. By around 30,000 years ago, older versions of humanity, such as the Neanderthals, were extinct and by 10,000 years ago a single kind of human – us – had colonised virtually every niche on the planet. This dispersal allowed humanity’s genes to diverge again, but most of the consequences (such as the colour of skin, eyes, or hair) are, literally, only skin deep and those mutations that do go deeper (such as head shape or lactose tolerance) have little obvious connection to why the West rules. A proper answer to this question must start from the fact that wherever we go – East, West, North, or South –people are all much the same."
Is this true? Assuming that the differences don't matter is essentially assuming the conclusion. His argument is that genes don't matter, because by assumption we're all the same. But, he identifies several genetic differences. Could there be more genetic differences that bear on the West's dominance? Have tests ever been conducted to identify relevant genetic differences? As a practical matter, could funding ever be acquired for, and would an academic ever undertake, a study seeking a genetic basis for the West's dominance? I think the answer to the last question is no, indicating that no real research goes into these assertions, which are just axiomatic, because the alternative is something that can't even be contemplated.
"From a global perspective, Christianity, too, makes more sense as a local version of a broader trend than as something setting the West apart from the rest. As the Roman Empire disintegrated in the middle of the first millennium ad and new questions (Is there something beyond this life? How can I be saved?) gained urgency, the new faith won perhaps 40 million converts; but in those same years, in the wake of the Han dynasty’s collapse in China, Mahayana and Theravada Buddhism offered their own answers to the same questions and won their own 40 million devotees. Soon enough Islam repeated the feat in Africa, the Middle East and South Asia."
This is breathtakingly bad logic. According to Morris, Christianity can't explain the West's dominance because other religions existed as well. But, as should be obvious, the other religions were very, very different theologically, leading to very different societies. So, maybe Buddhism, which advocates the suppression of desire, is a poor philosphy for attaining military and economic superiority. To clarify, I'm not attacking Buddhism, or saying Christianity is right in any objective sense. I'm merely pointing out that Morris' reasoning only makes sense if every religion was identical, which is demonstrably untrue.
"Nor was nature even-handed within the lucky latitudes. Some places, above all the so-called ‘Hilly Flanks’, which curve from what is now Israel through Syria, southern Turkey, northern Iraq and western Iran, were extraordinarily well endowed; China between the Yellow and Yangzi rivers and the Indus Valley in Pakistan were somewhat less so; Oaxaca in Mexico and the Andes in Peru somewhat less still. Consequently, the Hilly Flanks were the first to see farming firmly established (by 7500 bc); then came China and Pakistan (around 5500 bc); then Oaxaca and Peru (by 5000 bc); and then, over the next 7,000 years, most of the rest of humanity."
According to Morris, geography dictates outcomes, and Iran, China, Turkey, Pakistan, Mexico, and Peru were "extraordinarily well-endowed." However, those countries are all very poor, and have per-capita GDPs that are a fraction of a place like say Norway. Morris doesn't even attempt to reconcile that a) geography determines wealth and b) the places that he identifies as geographically fortune are impoverished.
"For most of their existence, humans lived in small, egalitarian hunter-gatherer bands. After the Ice Age some hunter-gatherers settled down in villages, where they domesticated plants and animals; some villages grew into cities, with ruling elites; some cities became states and then empires and, finally, industrialised nations. No society has ever leaped from hunting and gathering to high technology (except under the influence of outsiders). Humans are all much the same, wherever we find them; and, because of this, human societies have all followed much the same sequence of cultural development. There is nothing special about the West."
Another massively dishonest statement. Human societies do not all follow the same sequence; some stall out at lower levels of development. Only a handful of nations have ever industrialized, even today. Its simply not true that say Africa and Western Europe are identical societies -- Europe has industrialized, and Africa has not. Bizarrely, Morris tries to pretend otherwise, that all societies are at the same level of development, something that is demonstrably false.
"For centuries, Chinese wealth and power dwarfed the West’s. Between 1405 and 1433, while little Portuguese caravels tentatively nosed down Africa’s west coast, Chinese emperors dispatched gigantic fleets across the Indian Ocean under the leadership of the eunuch admiral Zheng He (who, according to legend, was nearly three metres tall and 230 cm around the belly). Zheng’s flagship was on the same scale as its skipper. At 80 metres long, it was the largest wooden ship ever built. When Columbus set sail in 1492, his own flagship was shorter than Zheng’s mainmast and barely twice as long as the big man’s rudder. Columbus led three ships and 90 sailors; Zheng led 300 ships and 27,870 sailors. His fleet extracted tribute from the cities of India, visited Mecca and even reached Kenya, where today Chinese archaeologists are diving to locate wrecks of Zheng’s ships."
OK, the Chinese had a great start. Why, however did all this progress end? Why was China so dominant in the 15th century and a non-factor later? Because the Chinese state consciously isolated China, closing its borders, guaranteeing stagnation. This was a disasterous decision, but one made by politicians, not dictated by geography. China was obviously well suited for economic expansion, it just blew it.
"The glories of medieval China seem, on the face of it, to disprove any geographical explanation for why the West now rules. After all, geography has not changed very much in the last 500 years."
Morris acknowledges the incoherence of his position.
"Given time, the 15th century’s greatest sailors – the Chinese – would surely have discovered and colonised America too (in 2009 the Princess Taiping, a replica of a 15th-century junk, came within 20 miles of completing a Taiwan–San Francisco round trip, only to collide with a freight ship within sight of home). But in much the same way that geography had made it easier for people in the Hilly Flanks to domesticate plants and animals than for people in other parts of the world, it now again stacked the odds in the West’s favour. The trip from England to New England was only half as far as that from China to California. For thousands of years this geographical fact had been unimportant, since there were no ocean-going ships. But by 1600 it had become the decisive fact. The meaning of geography had changed."
Seeking to explain the unexplainable -- how to reconcile how geography, which is immutable, can dictate success (according to Morris), with the manner in which nations wax and wan -- Morris reverts to dishonesty. His theory explains why China didn't colonize California; it was too far away. Fine, this makes sense.
But it offers no explanation as to why China didn't colonize anywhere else. There were dozens of nearby nations that China could have traded with or colonized. It did not, because it followed a senseless policy of self-imposed isolation. Again, no geographical fact compelled this; it was a foolish decision made by the Chinese leaders. The fact that China is far away from New England explains why China didn't colonize New Englan, not why China didn't colonize anything.
"In the 17th century a new kind of economy took shape, centred around the North Atlantic, generating massive profits and driving up wages in north-west Europe by exploiting the geographical differences round its shores."
I have no idea what this means. He acknowledges that the economy in the North Atlantic flourished, by doesn't explain how. What geographical differences is he referring to? This is a thoughtless sentence, trying to glide over a basic fact, that the Europeans, alone among the world, began to industrialize. His theory doesn't explain it, so he doesn't even try and explain the West's industrialization. Why didn't China industrialize? No explanation is even offered.
<strong>"Newton and Descartes were geniuses, but so too were Chinese scholars like Gu Yanwu (1613-82) and Dai Zhen (1724-77), who also spent lifetimes studying nature."
Newton was a genius who discovered the fundamental properties of force, motion, optics and arguably invented calculus. Nobody had ever done anything remotely approaching that, including Gu Yanwu and Dai Zhen. The Chinese may have spent time studying nature, but they never figured it out to nearly the extent that Newton, and the West generally, did. Morris is confusing efforts with results.
Also, I'll note that Newton and Descartes predated the Industrial Revolution, and had very little to do with it, if anything at all.
"It was just that geography thrust new questions on Newton and Descartes."
Ir wasn't geography that explains Newton's brilliance -- I'm pretty sure that they have gravity and light in China. It was there for the Chinese to explain, they just couldn't do it.
"All barriers crumbled. British warships forced China to open to western trade in 1842; Americans did the same in Japan 11 years later. The age of western rule had arrived."
It is again noteworthy that China and Japan isolated themselves, meaning that they lost all of the benefits of contact with other societies.
"So what do we learn from all this history? Two main things, I think. First, since people are all much the same, it is our shared biology which explains humanity’s great upward leaps in wealth, productivity and power across the last 10,000 years;"
This makes no sense. How can shared biology lead to increased wealth? His article doesn't even support this position. His thesis is that our biology is shared, so that disparaties in wealth can't have biological roots, not that common biological roots cause wealth. A bizzare, nonsensical mischaracterization of his own argument.
So, according to Morris, human existence and the fate of societies boils down to geography. Differences in values, religion, character, intelligence, political and economic institutions -- they are all either nonexistent or meaningless. So, the next time you wonder why the West enjoys greater freedom, equality, democracy, affluence, and technology than the rest of the world, remember that its solely because zebras are difficult to ride and Shanghai is far away from Boston.
Tuesday, November 9, 2010
Article
Sorry for the lack of posts -- I've been swamped at work. I have some posts in the works for this weekend. In the interim, take a look at this fascinating article, which demonstrates that the poor's only chance at a better life is the interplay between markets and rational self-interest -- altruism and aid are at best worthless, and possibly actively harmful:
http://www.heifer.org/site/c.edJRKQNiFiG/b.6351583/
http://www.heifer.org/site/c.edJRKQNiFiG/b.6351583/
Friday, November 5, 2010
Proposition 19
For several reasons, I supported Proposition 19, California's proposed law to decriminalize marijuana. Proposition 19 ultimately lost; however, it received approximately 45% yes votes. Oddly, 45% of California voters favor the decriminalization of marijuana, but as far as I know, no major politician in a position to effect any change, or either the right or the left, has publically supported the decriminalization of marijuana.
This is remarkable, as it shows a huge disconnect between the beliefs held by California's (and to a lesser extent America's) voters and the policies of the political elite. Generally, the left and right disagree on virtually every major issue, mirroring their supporters' beliefs. However, with respect to the Drug War, the left and right seem to be in total agreement, the only controversial issue that I can think of for which that is the case. The unanimity with which the right and left support policies that are expensive, engender violent crime, are destructive to families, and trample individual liberty is truly distressing.
This is remarkable, as it shows a huge disconnect between the beliefs held by California's (and to a lesser extent America's) voters and the policies of the political elite. Generally, the left and right disagree on virtually every major issue, mirroring their supporters' beliefs. However, with respect to the Drug War, the left and right seem to be in total agreement, the only controversial issue that I can think of for which that is the case. The unanimity with which the right and left support policies that are expensive, engender violent crime, are destructive to families, and trample individual liberty is truly distressing.
Hayek v. Keynes
In terms of intellect, Hayek v. Keynes is a bit like the Globetrotters vs. the Washington Generals, but a brilliant video illustrates their disagreement:
http://www.youtube.com/watch?v=d0nERTFo-Sk
http://www.youtube.com/watch?v=d0nERTFo-Sk
Wednesday, November 3, 2010
The Perils of Deflation
We hear so much about the perils of deflation that it's worth noting that the computer industry, which has endured massive deflation in the past 30 years, has during that time flourished, benefitting consumers immensely. This picture tells the tale.
According to Wikipedia, these are photos of an Osborne Executive portable computer, from 1982, and an iPhone, released 2007. The Executive weighs 100 times as much, has nearly 500 times the volume, cost 10 times as much, and has a 100th the clock frequency of the iPhone.
It illustrates a basic point, that deflation is often a wonderful thing that coincides with better products and prices for consumers. It is certainly not, as pundits would suggest, a necessarily bad thing.
Friday, October 29, 2010
Update on the Mortgage Morass
You'll recall Krugman's hysterical response to minor, strictly procedural irregularities in mortgage foreclosure documents:
http://paulkrugmaniswrong.blogspot.com/2010/10/mortgage-morass.html
His paper, the NYTimes, confirmed exactly what I suspected, which is that the irregularities are strictly technical, and that borrowers aren't paying what they owe:
http://www.nytimes.com/2010/10/28/business/28victims.html?ex=1303876800&en=059663b879f3ebf7&ei=5087&WT.mc_id=BU-D-I-NYT-MOD-MOD-M173-ROS-1010-HDR&WT.mc_ev=click
As the NYTimes notes, "Even if the paperwork was faulty, the fact remains that most homeowners in foreclosure have not paid their bills ..." and that "[c]onsumer lawyers and housing experts acknowledge that it is relatively rare that a bank initiates foreclosure on a homeowner who is current on the mortgage or has no mortgage at all"
The following vignette is instructive:
Charlotte and Thomas Sexton, of Carlisle, Ky., fell behind on their mortgage payments because the payments on their adjustable-rate mortgage spiked upwards and Ms. Sexton lost her job.
They tried unsuccessfully to sell the home, to refinance it and to modify their mortgage payment. When the Bank of New York Mellon filed a foreclosure notice last summer, they went to a local lawyer, Brian Canupp, who, with the help of a forensic accountant, found a problem in the foreclosure filing.
Last month, a judge tossed out a foreclosure judgment after Mr. Canupp argued that the mortgage trust that claimed to own the Sextons’ promissory note —Mortgage Pass-Through Certificates Series 2002-HE2 — did not exist.
Instead, another trust, called IXIS Real Estate Capital Trust, Series 2005-HE2, claimed to own the Sextons’ note, court records show.
Ms. Sexton said that regardless of who owns her promissory note, she just wants to stay in her home and hopes that the bank will eventually agree to a loan modification.
“We found a mistake,” she said, “that gave us a light at the end of the tunnel.”
In other words, a highly technical dispute exists between as to who owns the notes, an issue which in no way impacts this deadbeat borrower. The identity of the owner of the note is no way impacts the existence of the indebtedness or default -- the borrower owes the money, its just a question of to what entity. The sensible solution is to allow the foreclosure to proceed, with the property held in escrow until the ownership is determined. This simple procedure -- which is done all the time in legal disputes -- would solve all the alleged problems. Of course, nobody will advocate this, because the result would be that contracts are enforced, which is the exact opposite of what they want. So, the next time you read about these "mistakes", remember that the goal isn't to remedy the mistakes, but rather exploit them as pretenses for bailing irresponsible people out.
http://paulkrugmaniswrong.blogspot.com/2010/10/mortgage-morass.html
His paper, the NYTimes, confirmed exactly what I suspected, which is that the irregularities are strictly technical, and that borrowers aren't paying what they owe:
http://www.nytimes.com/2010/10/28/business/28victims.html?ex=1303876800&en=059663b879f3ebf7&ei=5087&WT.mc_id=BU-D-I-NYT-MOD-MOD-M173-ROS-1010-HDR&WT.mc_ev=click
As the NYTimes notes, "Even if the paperwork was faulty, the fact remains that most homeowners in foreclosure have not paid their bills ..." and that "[c]onsumer lawyers and housing experts acknowledge that it is relatively rare that a bank initiates foreclosure on a homeowner who is current on the mortgage or has no mortgage at all"
The following vignette is instructive:
Charlotte and Thomas Sexton, of Carlisle, Ky., fell behind on their mortgage payments because the payments on their adjustable-rate mortgage spiked upwards and Ms. Sexton lost her job.
They tried unsuccessfully to sell the home, to refinance it and to modify their mortgage payment. When the Bank of New York Mellon filed a foreclosure notice last summer, they went to a local lawyer, Brian Canupp, who, with the help of a forensic accountant, found a problem in the foreclosure filing.
Last month, a judge tossed out a foreclosure judgment after Mr. Canupp argued that the mortgage trust that claimed to own the Sextons’ promissory note —Mortgage Pass-Through Certificates Series 2002-HE2 — did not exist.
Instead, another trust, called IXIS Real Estate Capital Trust, Series 2005-HE2, claimed to own the Sextons’ note, court records show.
Ms. Sexton said that regardless of who owns her promissory note, she just wants to stay in her home and hopes that the bank will eventually agree to a loan modification.
“We found a mistake,” she said, “that gave us a light at the end of the tunnel.”
In other words, a highly technical dispute exists between as to who owns the notes, an issue which in no way impacts this deadbeat borrower. The identity of the owner of the note is no way impacts the existence of the indebtedness or default -- the borrower owes the money, its just a question of to what entity. The sensible solution is to allow the foreclosure to proceed, with the property held in escrow until the ownership is determined. This simple procedure -- which is done all the time in legal disputes -- would solve all the alleged problems. Of course, nobody will advocate this, because the result would be that contracts are enforced, which is the exact opposite of what they want. So, the next time you read about these "mistakes", remember that the goal isn't to remedy the mistakes, but rather exploit them as pretenses for bailing irresponsible people out.
Divided We Fail
http://http//www.nytimes.com/2010/10/29/opinion/29krugman.html?partner=rssnyt&emc=rss
Krugman is playing political pundit this week. I won't respond much to his political claims. I'm no expert on the political process. In fact, Krugman and I are both political dilettantes. The difference is that I'm aware of my limitations; Krugman is not. I will only comment on the obviously dishonest statements:
"Another recent interview by National Journal, this one with Mitch McConnell, the Senate minority leader, has received a lot of attention thanks to a headline-grabbing quote: “The single most important thing we want to achieve is for President Obama to be a one-term president.”"
Wow, those bastard Republicans want a Republican president? They really should learn from the Democrats, who gave such whole-hearted support to George Bush getting elected for a second term. I mean, the Democrats never said a bad word about Bush, or expressed a desire to see Bush lose in 2004. Shame on the Republicans.
"True, Mr. McConnell did say that he might be willing to work with Mr. Obama in certain circumstances — namely, if he’s willing to do a “Clintonian back flip,” taking positions that would find more support among Republicans than in his own party. Of course, this would actually hurt Mr. Obama’s chances of re-election — but that’s the point."
Wow, Republicans only want to support policies that they agree with? Again, this narrow-mindedness is appalling. When I think back to the way that the left embraced Bush's tax cuts, the PATRIOT Act, the Iraq War, etc., it really is shameful.
Snarkiness aside, Krugman makes the bizarre criticism, also levelled at the Tories, that it is somehow dishonest or seedy for a political party to actually act in accordance with its ideology. Its somehow nefarious that a political party will only support policies that it agrees with. This is such a bizarre argument -- basically political parties should have no policy preferences in Krugman's world, or, more accurately, conservative political parties should never actually support right-wing policies, or oppose left-wing policies. In other words, the right should simply go away, and let Obama do whatever he wants.
"When Republicans took control of Congress in 1994, the U.S. economy had strong fundamentals. Household debt was much lower than it is today. Business investment was surging, in large part thanks to the new opportunities created by information technology — opportunities that were much broader than the follies of the dot-com bubble."
Unless Krugman can identify a policy that was enacted in 1993 that caused economic growth, Krugman concedes that Reagan and Bush I's policies laid the groundwork for economic growth.
"In this favorable environment, economic management was mainly a matter of putting the brakes on the boom, so as to keep the economy from overheating and head off potential inflation."
Since according to Krugman the economy managed itself, Clinton's policies had nothing to do with economic growth in 1990s.
"But we won’t get those policies if Republicans control the House. In fact, if they get their way, we’ll get the worst of both worlds: They’ll refuse to do anything to boost the economy now, claiming to be worried about the deficit, while simultaneously increasing long-run deficits with irresponsible tax cuts — cuts they have already announced won’t have to be offset with spending cuts."
The irony is risible -- Krugman, who routinely advocates massive deficits -- is calling the Republicans irresponsible for running deficits. Krugman no doubt also bashed Bush for running a deficit, while advocating the same policy for Obama. Let's give a quick summary of Krugman's "analysis": Democrats' deficits are good, Republicans' deficits are bad. This sort of commentary underscores what a dishonest partisan hack Krugman is.
Of course, Krugman's point that Republicans have a poor record of deficit spending is valid; the Republicans have been extremely irresponsible in the past, and no doubt will be in the future. The issue isn't Republican vs. Democrat, or ideological, its strictly a matter of the incentives that all politicians, regardless of party affiliation, face. Balancing budgets requires spending cuts or tax increases, both of which are political suicide. So, a rational politician will always seek immediate benefits and deferred costs, aka a deficit. A rational politician only cares about the next election; if he loses, his discount rate beyond the day he leaves office is 100%. However, a citizen, who will actually have to pay taxes down the road to cover the deficits, has a discount rate far less than 100%. In other words, politicians and their constituents have very different, and arguably opposing, incentives. This explains why Democrats and Republicans both run deficits, with the federal government running a deficit something like 38 of the last 42 years.
Krugman, as an economist, should understand that people respond to incentives. Hoping, as Krugman does, that politicians will miracuously improve as people and act contrary to the incentives that they face is, to put it charitably, naive. If you believe that people generally respond to the incentives they face, and pursue their self-interest, it follows that limited government is best. That is why, though I will defend Republicans from Krugman's hypocritical, partisan attacks, I would never argue Republicans are good or ethical leaders in any absolute sense. I'm not a Republican, I'm a libertarian.
Krugman is playing political pundit this week. I won't respond much to his political claims. I'm no expert on the political process. In fact, Krugman and I are both political dilettantes. The difference is that I'm aware of my limitations; Krugman is not. I will only comment on the obviously dishonest statements:
"Another recent interview by National Journal, this one with Mitch McConnell, the Senate minority leader, has received a lot of attention thanks to a headline-grabbing quote: “The single most important thing we want to achieve is for President Obama to be a one-term president.”"
Wow, those bastard Republicans want a Republican president? They really should learn from the Democrats, who gave such whole-hearted support to George Bush getting elected for a second term. I mean, the Democrats never said a bad word about Bush, or expressed a desire to see Bush lose in 2004. Shame on the Republicans.
"True, Mr. McConnell did say that he might be willing to work with Mr. Obama in certain circumstances — namely, if he’s willing to do a “Clintonian back flip,” taking positions that would find more support among Republicans than in his own party. Of course, this would actually hurt Mr. Obama’s chances of re-election — but that’s the point."
Wow, Republicans only want to support policies that they agree with? Again, this narrow-mindedness is appalling. When I think back to the way that the left embraced Bush's tax cuts, the PATRIOT Act, the Iraq War, etc., it really is shameful.
Snarkiness aside, Krugman makes the bizarre criticism, also levelled at the Tories, that it is somehow dishonest or seedy for a political party to actually act in accordance with its ideology. Its somehow nefarious that a political party will only support policies that it agrees with. This is such a bizarre argument -- basically political parties should have no policy preferences in Krugman's world, or, more accurately, conservative political parties should never actually support right-wing policies, or oppose left-wing policies. In other words, the right should simply go away, and let Obama do whatever he wants.
"When Republicans took control of Congress in 1994, the U.S. economy had strong fundamentals. Household debt was much lower than it is today. Business investment was surging, in large part thanks to the new opportunities created by information technology — opportunities that were much broader than the follies of the dot-com bubble."
Unless Krugman can identify a policy that was enacted in 1993 that caused economic growth, Krugman concedes that Reagan and Bush I's policies laid the groundwork for economic growth.
"In this favorable environment, economic management was mainly a matter of putting the brakes on the boom, so as to keep the economy from overheating and head off potential inflation."
Since according to Krugman the economy managed itself, Clinton's policies had nothing to do with economic growth in 1990s.
"But we won’t get those policies if Republicans control the House. In fact, if they get their way, we’ll get the worst of both worlds: They’ll refuse to do anything to boost the economy now, claiming to be worried about the deficit, while simultaneously increasing long-run deficits with irresponsible tax cuts — cuts they have already announced won’t have to be offset with spending cuts."
The irony is risible -- Krugman, who routinely advocates massive deficits -- is calling the Republicans irresponsible for running deficits. Krugman no doubt also bashed Bush for running a deficit, while advocating the same policy for Obama. Let's give a quick summary of Krugman's "analysis": Democrats' deficits are good, Republicans' deficits are bad. This sort of commentary underscores what a dishonest partisan hack Krugman is.
Of course, Krugman's point that Republicans have a poor record of deficit spending is valid; the Republicans have been extremely irresponsible in the past, and no doubt will be in the future. The issue isn't Republican vs. Democrat, or ideological, its strictly a matter of the incentives that all politicians, regardless of party affiliation, face. Balancing budgets requires spending cuts or tax increases, both of which are political suicide. So, a rational politician will always seek immediate benefits and deferred costs, aka a deficit. A rational politician only cares about the next election; if he loses, his discount rate beyond the day he leaves office is 100%. However, a citizen, who will actually have to pay taxes down the road to cover the deficits, has a discount rate far less than 100%. In other words, politicians and their constituents have very different, and arguably opposing, incentives. This explains why Democrats and Republicans both run deficits, with the federal government running a deficit something like 38 of the last 42 years.
Krugman, as an economist, should understand that people respond to incentives. Hoping, as Krugman does, that politicians will miracuously improve as people and act contrary to the incentives that they face is, to put it charitably, naive. If you believe that people generally respond to the incentives they face, and pursue their self-interest, it follows that limited government is best. That is why, though I will defend Republicans from Krugman's hypocritical, partisan attacks, I would never argue Republicans are good or ethical leaders in any absolute sense. I'm not a Republican, I'm a libertarian.
Sunday, October 24, 2010
British Fashion Vtctims
One of the maddening things about Krugman's columns is how devoid of serious argument they are. He virtually never deigns to actually discuss anything with any degree of depth. This column is a perfect example:
http://www.nytimes.com/2010/10/22/opinion/22krugman.html?_r=1&partner=rssnyt&emc=rss
"Britain, like America, is suffering from the aftermath of a housing and debt bubble."
OK, so Krugman agrees that the recession was caused by a "debt bubble", which is another way of saying there were massive, unsustainably high levels of public and private debt at the outset of the recession.
"Its problems are compounded by London’s role as an international financial center: Britain came to rely too much on profits from wheeling and dealing to drive its economy — and on financial-industry tax payments to pay for government programs."
Let me summarize, in a nutshell, what happened in Britain and the United States. There was a massive housing and finance bubble, that briefly caused a surge in government revenue. Rather than saving this money, or using it to pay down existing debts, the British and American governments, in a breathtaking display of irresponsibility, spent it all, and then some, leading to a bizarre paradox of surging revenue and deepening indebtedness. The table above illustrates that the British government just kept on spending and borrowing.
Lets be clear on what Krugman is advising: Britian spent wildly, relying on revenue from what even Krugman acknowledges to be bubble. Of course, the bubble burst. Rather than acknowledge the reality that the revenues over time would be insufficient to support the expenditures that the government foolishly made and place spending in line with actual revenues, Krugman advocates perpetuating and institutionalizing spending that simply can't be sustained. In Krugman's world, mistakes should not be undone.
"Over-reliance on the financial industry largely explains why Britain, which came into the crisis with relatively low public debt, has seen its budget deficit soar to 11 percent of G.D.P. — slightly worse than the U.S. deficit."
A little misleading -- during the boom Britain's public debt actually increased, again indicating gross mismanagement. So, its debt, even if "low", whatever that means, was much, much higher than one would expect given the boom Britain had just enjoyed.
"And there’s no question that Britain will eventually need to balance its books with spending cuts and tax increases.
The operative word here should, however, be “eventually.” Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. Right now, interest rates in Britain, as in America, are already very low, with little room to fall further. The sensible thing, then, is to devise a plan for putting the nation’s fiscal house in order, while waiting until a solid economic recovery is under way before wielding the ax."
More on this later -- I just wanted to include it as it is the heart of Krugman's argument.
"Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages."
Unfair on a lot of levels.
First, Mellon was a brilliant businessmen, succeeding in three businesses (banking, oil, and aluminum), which is three more businesses than Geithner, Bernake, et al. have succeeded in, combined. So, Mellon understood business.
Second, Mellon oversaw the economy's massive growth in the 1920s. Sure, there was a recession, but, Mellon oversaw an extremely robust economy marred by a recession. In contrast, FDR and his Keynesian advisers had control over the economy for the better part of a decade, and had nothing to show for it but massive unemployment and debt. Mellon, at a minimum, was generally successful. FDR in contrast was an unremitting failure.
Third, Mellon's philosophy -- free-markets -- had succeeded in turning a small collection of states into the greatest industrial power in the world in less than 150 years. So, unlike Keynesian successes, which are always around the corner, Mellon advocated a philosophy that actually produced results.
Fourth, Mellon's advice was ignored. His advocacy of free markets and sound money was ignored by Hoover and FDR in favor of deficit spending, fiat currencies, massive regulation, tightened money, and a suicidal round of protectionism (Smoot-Hawley). To simultaneously ignore Mellon's advice and then blame the same policies for failing to end the Depression is the height of dishonesty.
"The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack."
Krugman misses a simple point -- there is no money to pay these government workers. The British debt is on the cusp of surging to close to 90% of GDP, or 2-2.5 times its historical average (see tables above). There is no demand for these workers because they simply cannot be afforded.
Krugman also has this pernicious idea, common on the left, that somehow, government workers should not ever have to share in economic pain. Of course, government benefit during the good times, with increased hiring, pay, benefits, etc. But, when the economy contracts, when people are struggling, our nominal public servants shouldn't see their standing of living diminished at all.
"Why is the British government doing this? The real reason has a lot to do with ideology: the Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative."
Yes, the Tories are governing according to the principles that they were recently elected on. Like every political party in history, the Tories are using electoral victory to implement their goals. This is what is known as "democratic governance."
"Indeed, there has been a noticeable change in the rhetoric of the government of Prime Minister David Cameron over the past few weeks — a shift from hope to fear."
Viewing questions of fiscal policy in terms of "hope" and "fear" is an adolescent approach to economics, viewing it as a morality play, thereby obviating the need for reasoned analysis. Its an example of make-believe, embodied by Obama, in which invocation of magic words like "hope" and charisma can overcome economic and arithmetic realities and the need to make difficult decisions. And, for what its worth, I would argue that incurring massive debt, hamstringing future generations, far from hopeful, is an exceptionally cynical, selfish, and nihlistic thing to do.
"In his speech announcing the budget plan, George Osborne, the chancellor of the Exchequer, seemed to have given up on the confidence fairy — that is, on claims that the plan would have positive effects on employment and growth.
Instead, it was all about the apocalypse looming if Britain failed to go down this route."
What an irresponsible son-of-a-bitch for candidly discussing a bleak situation. Public officials have no right to publicly acknowledge that we live in a world of finite resources.
On a related note, Obama, the author of our nation's hopes and dreams, supported the stimulus bill by saying:
“We could lose a generation of potential and promise, as more young Americans are forced to forgo dreams of college or the chance to train for the jobs of the future.”
This is scary, scary stuff, designed by Obama to frighten people into supporting his policies by painting a horrific picture -- an entire lost generation -- of what will happen if people don't listen to him. I look forward to reading Krugman's criticisms of Obama as a fear-monger; Krugman is much too honest to have a double-standard.
"Never mind that British debt as a percentage of national income is actually below its historical average."
Remarkably, 2/3 of the way through a column ostensibly on British public finances, Krugman mentions their actual state for the first time. Unfortunately, his comment is basically wrong, and misleading. First, the historical average of debt to GDP is about 40%; its currently 60%, much higher than average. More fundamentally, as Krugman so often forgets, the world will not end on December 31, 2010. In very short order, by around 2015, public debt will surge to close to 90% of GDP (and come claim higher, if pensions are taken into account) -- see tables above. So, if there is an apocalypse in the next few months, killing us all, Krugman was wise. But, if we actually have to plan for the future, Krugman is at best being foolish, and at worst lying in pretending that Britain doesn't have an exceptional debt situation on its hands that is far, far worse than peacetime Britain has experienced in her history.
Since Krugman is fond of citing IMF studies, I will cite one of my own. According the IMF "the UK and the US also constrained in their degree of fiscal manoeuvre the more so owing to the run-up in public debt projected in coming years" and UK gross debt to GDP ratio will rise to 83.9% in 2015 from 61.5% in 2009. Of course, IMF stands "I Manufacture Fear", because anybody who suggests a limit to government debt is nothing but a fear-monger. Just kidding, the IMF really has released studies showing that the UK's public debt will explode over the next five years. Krugman of course makes no mention of this fact.
"never mind that British interest rates stayed low even as the nation’s budget deficit soared, reflecting the belief of investors that the country can and will get its finances under control."
Taking fiscal cues from the bond markets is like getting personal financial advice from Visa. It is going to tell you to put more money on your Visa card and less in your 401(k). But, as should be blindingly obvious, what's good for creditors is not always good, and is often harmful, for debtors.
And, the low interest rates also stem in large part from central banks deciding to keep interest rates very low, meaning there is no return in private lending. There is something very, very perverse about governments keeping interest rates artificially low, and then using the low interest rates as proof that they are well-governed. Its not exactly objective, disinterested analysis.
"Britain, declared Mr. Osborne, was on the “brink of bankruptcy.”"
I want to reaffirm that I am not omitting anything from Krugman's column here. The head of Britain's finances is warning of bankruptcy, and Krugman literally doesn't respond. I think we all can agree that if Britain is literally bankrupt, new borrowing is a bad idea. But Krugman doesn't even discuss the fact that Britain may in fact be bankrupt, which seems like a highly relevant issue. Its just axiomatic that Britain should borrow, so Krugman doesn't bother to get into the messy details of Britain's actual finances. But, as they say, you may not be interested in reality, but reality is interested in you.
"What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy.
Dynamite analysis -- I'm hoping I can turn my paper on "something lucky" happening to economies into my PhD thesis.
"But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump."
I don't know anything about 1931 Britain, so I am agnostic on that issue, but in America in 1937 and Japan in 1997, both countries had been engaged in heavy-duty, Keynesian-inspired deficit spending for 5-6 years at least. This continues Krugman's bizarre habit of citing past Keynesian failures in support of future Keynesian policies.
To be fair, Krugman always cites 1937/1997 as examples of premature fiscal austerity. But, by 1937, America had been running a deficit (Hoover, much to his discredit, adopted deficit spending in 1930 or 1931) for 6 years. Nevertheless, according to Krugman and other Keynesian/FDR apologists, the fiscal austerity of the 1937 budget ruined the recovery. But, this precisely illustrates that the economic "growth" that Keynesians cite is totally illusory -- its nothing more than unsustainable borrowing, not actual growth. Its economically the same as an unemployed guy who spends $50,000 on his Visa card and pretends that he earns a $50,000 salary. Once the artificial prop of deficit spending -- which is unsustainable -- is removed, the "growth" disappears, underscoring that Keynesian polices offer no sustainable growth, and leave only a legacy of crippling debt.
Japan's Keynesian policies were extremely aggressive -- see the table above for how deeply indebted the Japanese government became. I'm not sure what happened in Japan in 1997 -- from context I assume that Japan committed the grievous sin of temporarily balancing its budget -- but Japan enacted at least six stimulus packages in the 1990s, including ones in 1995, 1998, and 1999. But, according to Krugman, this still wasn't enough, because for one year, 1997, Japan balanced its budget. Apparently, according to Krugman, a single balanced budget, even in the midst of a decade of massive borrowing, can destroy a Keynesian economy. But, if a Keynesian paradigm cannot, in the midst of a decade of deficits and stimuli, survive a single balanced budget, it is so fragile as to be illusory. Again, all we get from Krugman are excuses as to why Japan -- a country that by any standard was orthodox Keynesian -- has nothing to show for its massive debts.
Circling back, Krugman pays lip service to "eventually" balancing the British (and presumably American) budget. But, by criticizing 1937 America and especially 1997 Japan, he is showing that he really has no interest in ever balancing budgets; in fact, he has never identified when or how budgets should be balanced. Krugman has, as far as I can tell, never articulated a standard for determining when a recovery has occurred, or an instance when government spending should be cut.
Impliedly, Krugman advocates deficit spending for at least a decade. But, a decade of massive deficits, combined with the preexisting debt that was the actual cause of the recession and the looming liabilities stemming from the Baby Boomers' imminent retirement, will literally bankrupt Britain and the U.S.
Thursday, October 21, 2010
Just Call Him Bernanke-sama
http://krugman.blogs.nytimes.com/2010/10/18/just-call-him-bernanke-sama/
Krugman cites this graph, I think as part of his general belief that deflation is a bigger threat than inflation. I will only point that core CPI is woefully inadequate, because it excludes taxes (I believe), food and shelter. Taxes are Americans' largest single expenditure, while food and energy are also obviously necessary costs. Taxes, food, and energy -- which, along with healthcare (also rising) -- are the most essential/unavoidable (in the case of taxes), and as the BLS acknoweldges, all of these have risen in the last year. Excluding essential goods from a price calculation renders it useles.
Krugman I think is also citing Japan as an cautionary tale to be avoided. I agree, for very different reasons. Japan suffered a "lost decade" in which the government adopted the very Keynesian policies, running massive deficits, that Krugman now advocates. Krugman will of course argue that the Japanese government didn't spend enough, or wisely. But, the Japanese drank the Keynesian Kool-Aid, running up a national debt close to 200% of the GDP (By way of comparison, Greece, a glorified Third-world, basket-case of a nation has a national debt that is 113% of its GDP), bailing out banks, keeping interest rates at zero -- its hard to see what, from a Keynesian perspective, Japan did wrong.
But, here Japan is, an economically struggling state, a fact made more remarkable by the country's economic dynamism from 1945-1990, before it adopted Keynesian policies. The upshot is that I don't think that there can be any serious argument that: a) from 1945-1990 Japan enjoyed spectacular economic growth and b) since then, Keynesian policies have corresponded temporally with economic stagnation. Krugman evidently misses the irony of using Japan as an example to be avoided while at the same time advocating the same policies that destroyed the Japanese economy in the first instance.
Wednesday, October 20, 2010
Rare and Foolish
Krugman blasts China in his latest column:
http://www.nytimes.com/2010/10/18/opinion/18krugman.html?_r=1&partner=rssnyt&emc=rss
I generally agree with this article -- China is a menace. But, Krugman engages in some flawed criticism of China:
"Couple the rare earth story with China’s behavior on other fronts — the state subsidies that help firms gain key contracts, the pressure on foreign companies to move production to China and, above all, that exchange-rate policy..."
Krugman, like most economists, misses the point that foreign government subsidies are a terrific thing for Americans. If the Chinese are willing to subsidize American consumers, that inures to the benefit of America. Take an extreme example: imagine that China, in an effort to keep its factories humming, decided to give America 50mm pairs of free shoes. This is the ultimate subsidy -- 100% -- but nobody would argue that it hurts America. In fact, America is unquestionably wealthier by getting free shoes. The same logic applies when there is a partial subsidy (which is of course almost always the case). American consumers are being made better off by lower prices.
Of course, the counterargument is always, what about American producers, aren't they being harmed? The answer is no (in the aggregate), and even if they were, it would be of no concern to policymakers. First, to the extent that foreign subsidies lower prices of consumer goods, consumers will have more to spend. This means that American producers should benefit from foreign subsidies by increased aggregate demand (note the Keynesian jargon). Further, to the extent that certain industries (think steel) lose out, this is no reason for concern. Steel companies, like all businesses, exist for a single purpose -- to meet consumers' needs. If domestic steel companies are no longer necessary, because China is giving away what they're selling, they should simply disappear. To argue otherwise is to suggest that corporations have some sort of inalienable right to indefinite existence regardless of whether they actually produce valuable products.
This point is a microcosm of a larger point, namely that the only true consumer advocates are libertarians. Libertarians aren't pro-corporation, they're pro-market, which is a crucial distinction. If a company goes out of business, consumers have spoken that they do not want or need the company's products. Contrary to the narrative of government sticking up for the little guy, government always protects unions and inefficient corporations (who are always well-organized) at the expense of consumers (who are very poorly organized and thus wield no political power). So, we get corporations and unions protecting Americans from the scourge of low-priced products. This phenomenon creates an interesting paradox -- Krugman, a man of the left, ends up defending entrenched corporate interests to a far greater extent than the allegedly pro-corporate right-wingers.
http://www.nytimes.com/2010/10/18/opinion/18krugman.html?_r=1&partner=rssnyt&emc=rss
I generally agree with this article -- China is a menace. But, Krugman engages in some flawed criticism of China:
"Couple the rare earth story with China’s behavior on other fronts — the state subsidies that help firms gain key contracts, the pressure on foreign companies to move production to China and, above all, that exchange-rate policy..."
Krugman, like most economists, misses the point that foreign government subsidies are a terrific thing for Americans. If the Chinese are willing to subsidize American consumers, that inures to the benefit of America. Take an extreme example: imagine that China, in an effort to keep its factories humming, decided to give America 50mm pairs of free shoes. This is the ultimate subsidy -- 100% -- but nobody would argue that it hurts America. In fact, America is unquestionably wealthier by getting free shoes. The same logic applies when there is a partial subsidy (which is of course almost always the case). American consumers are being made better off by lower prices.
Of course, the counterargument is always, what about American producers, aren't they being harmed? The answer is no (in the aggregate), and even if they were, it would be of no concern to policymakers. First, to the extent that foreign subsidies lower prices of consumer goods, consumers will have more to spend. This means that American producers should benefit from foreign subsidies by increased aggregate demand (note the Keynesian jargon). Further, to the extent that certain industries (think steel) lose out, this is no reason for concern. Steel companies, like all businesses, exist for a single purpose -- to meet consumers' needs. If domestic steel companies are no longer necessary, because China is giving away what they're selling, they should simply disappear. To argue otherwise is to suggest that corporations have some sort of inalienable right to indefinite existence regardless of whether they actually produce valuable products.
This point is a microcosm of a larger point, namely that the only true consumer advocates are libertarians. Libertarians aren't pro-corporation, they're pro-market, which is a crucial distinction. If a company goes out of business, consumers have spoken that they do not want or need the company's products. Contrary to the narrative of government sticking up for the little guy, government always protects unions and inefficient corporations (who are always well-organized) at the expense of consumers (who are very poorly organized and thus wield no political power). So, we get corporations and unions protecting Americans from the scourge of low-priced products. This phenomenon creates an interesting paradox -- Krugman, a man of the left, ends up defending entrenched corporate interests to a far greater extent than the allegedly pro-corporate right-wingers.
Friday, October 15, 2010
Mortgage Morass
According to Krugman, America is Thunderdome, where the rule of law is a distant memory.
"American officials used to lecture other countries about their economic failings and tell them that they needed to emulate the U.S. model. The Asian financial crisis of the late 1990s, in particular, led to a lot of self-satisfied moralizing. Thus, in 2000, Lawrence Summers, then the Treasury secretary, declared that the keys to avoiding financial crisis were “well-capitalized and supervised banks, effective corporate governance and bankruptcy codes, and credible means of contract enforcement.” By implication, these were things the Asians lacked but we had."
This little vignette is totally irrelevant to Krugman's argument, and its just a smug swipe at America. It is worth noting however that America is much, much wealthier than Asia, suggesting that, at least possibly, the Asians could learn something about economic management from America.
"The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance."
Because America, with thousands of large corporations, has had two major corporate scandals in the past 10 years, obviously effective corporate governance is a "myth. But, such a low incidence of failure is an extraordinary success story. Following Krugman's logic, because two Congressmen, say Stevens and Rangel, to be bi-partisan, breached rules of ethics in the past 2 years, Congress is a lawless, totally ineffectively regulated body, and any semblance of control or legality is a "myth".
For the young lawyers out there, this is a classic example of a red herring. Raising the spectre of Enron -- which literally has nothing to do with mortgage foreclosures -- is a way of showing how corporations are fundamentally evil, banks (technically bank holding companies) are corporations, and therefore, banks are fundamentally evil.
"And now the mortgage mess is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law."
An amazingly hyperbolic statement. Read on, but Krugman cites possibly inaccurate affidavits as proof that our economy is now totally devoid of law. Its such a melodramatic overreaction that it makes me want to kill myself!
"So servicers — the companies that collect payments on behalf of mortgage owners — have been foreclosing on many mortgages, seizing many homes.
But do they actually have the right to seize these homes? Horror stories have been proliferating, like the case of the Florida man whose home was taken even though he had no mortgage."
Just last week, near Chicago, police falsely accused a man of murder.
http://www.nwitimes.com/news/local/illinois/article_4becd466-2934-52cd-9a24-aeb1b7523299.html
I certainly don't think that means we live under a lawless, tyrranical government that can drag me away in the middle of the night for no reason. The sensible, adult conclusion is that isolated mistakes are inevitable in a legal system with millions of cases pending at any given time, not that mistakes mean that America is lawless.
But, Krugman isn't interested in a reasoned discussion of the relevant issues -- its just one long screed. What is conspicuously absent is any quantification of the scope of the problem. Last year there were over a million foreclosures, in all 50 states. A handful of isolated mistakes were inevitable, which is true in every area of the law. I don't think that there is any doubt that there were any number of frivolous product liability, sexual harrasment, or racial discrimination lawsuits last year. But that certainly doesn't mean that we no longer have any rule of law, or that entire classes of lawsuits are now invalid. Based on a few anecdotes, Krugman now wants to deprive all banks of their day in court.
"Courts have been approving foreclosures without requiring that mortgage servicers produce appropriate documentation; instead, they have relied on affidavits asserting that the papers are in order. And these affidavits were often produced by “robo-signers,” or low-level employees who had no idea whether their assertions were true.
Now an awful truth is becoming apparent: In many cases, the documentation doesn’t exist."
This is where Krugman goes from being hysterical to dishonest. I have no doubt that in the vast majority of instances, there is no dispute as to the existence of the indebtedness, only as to the owner of the note evidencing the indebtedness. If borrower B executes a note and mortgage in favor of Lender C, and Lender L assigns it to Assignee A, there may be a dispute between L and A as to the ownership of the note, but there is no doubt that B owes the money, and mortgaged the property at issue. Under this scenario, B isn't harmed by paying L or A, because she is only paying what she owes. The dispute between L and A doesn't alter B's underlying indebtedness, and B shouldn't get a windfall relief from her debt.
Of course, B could get stuck paying L, and then have A come seeking the money. But, Krugman doesn't discuss this actually occuring, I have never heard of it happening, and, in the vast majority of foreclosures, the borrower has long since stopped paying the note anyways. But, to the extent that B is worried about double paying, and wants clarity as to who owns the note, she can always file an interpleader (or if she is sued and faces the prospect of paying twice, an impleader). The point is, the law already protects borrowers against paying the wrong party. Krugman, if he knew anything about the law, would be aware of this. But, Krugman, in a dishonest way, isn't interested in making sure the right borrower gets repaid, but rather making sure that the borrowers don't have to pay at all.
UPDATE: In the most recent issue of "The Economist", an article discussing this issue confirmed that "no evidence that anyone has been wrongly evicted has yet been found." There is, as I suspected, no evidence at all that any homeowner/borrower's substantive rights have been abridged, or that people have wrongly lost their homes, underscoring that Krugman's hysteria is totally baseless.
"This is very, very bad. For one thing, it’s a near certainty that significant numbers of borrowers are being defrauded — charged fees they don’t actually owe, declared in default when, by the terms of their loan agreements, they aren’t."
How can Krugman possibly know this? Where does the "certainty" come from? Its non-existent. He's not a lawyer, he's never collected a judgment or enforced a mortgage, but he's making bald assertions about what is occuring in American courts.
He also fundamentally misunderstands Anglo-American law. Its an adversarial process -- the borrowers/defendants have the chance to defend themselves. The borrowers all have copies of their notes and mortgages; if they didn't breach the loan documents, they are free to defend against the suit. Nobody is being "defauded" -- plaintiffs are filing suit to have their claims adjudicated, which is their right.
"True to form, the Obama administration’s response has been to oppose any action that might upset the banks, like a temporary moratorium on foreclosures while some of the issues are resolved."
Why would all mortgage enforcement actions be halted because of some bad lenders? The idea that say Wells Fargo shouldn't be able to enforce its legal rights because of say B of A's misdeeds is nuts, roughly the same as saying because your neighbor got a DUI, you're going to lose your license. Its also worth noting that Krugman's idea of collective guilt is totally asymmetrical -- surely he doesn't suggest that because say Illinois politicians are manifestly corrupt, the Utah state government should be reigned in. Tellingly, its only corporate misdeeds that draw his ire, and warrant wholesale condemnation not only of individual wrongdoer, but its entire class.
Also, the Obama administration probably rightly recognized the federal government just spent hundreds of billions of dollars to rescue financial institutions. It would be the height of folly to save them, and then less than two years later strip them of their collateral, leaving them totally unsecured creditors. It would literally destroy the financial system that the government so desparately tried to save.
Lastly, the Obama administration might have given some thought to the Consitutional infirmities of a federal law that would halt state courts from enforcing contracts involving real property, which the Supreme Court (admittedly not in the federalism context) has held is a quintesstially state and local issue. Federal cessation of state court judicial proceedings would be an unprecedented extension of federal power over states, and raise some heavy-duty federalism issues. Krugman of course has given zero thought to these issues.
"The response from the right is, however, even worse. Republicans in Congress are lying low, but conservative commentators like those at The Wall Street Journal’s editorial page have come out dismissing the lack of proper documents as a triviality. In effect, they’re saying that if a bank says it owns your house, we should just take its word. To me, this evokes the days when noblemen felt free to take whatever they wanted, knowing that peasants had no standing in the courts. But then, I suspect that some people regard those as the good old days."
For young lawayers, this is what's known as a straw-man. Nobody is suggesting that if a bank says that it owns your house, it can unilaterally seize it. This is just a lie, a willful mischaracterization.
On its own terms, its a truly bizarre argument. Republicans are, according to Krugman, neo-aristocrats seeking the imposition of some sort of new ancien regime. More than offensive, its just, really, really bizarre. Its a totally baseless accusation that, if Krugman had any intellectual honesty, would embarass him. Its a classic ad hominem attack that in no way deals with the substance of any argument.
For what its worth, Krugman identifies neo-aristocrats by their disregard for property rights. Its worth noting that the closest thing we have to noblemen of yore is the government, which, under Supreme Court precedent, can take your home to hand to a private developer of a mall. It goes without saying that conservatives dislike this practice, and liberals support it. So, in the defending property rights game, conservatives win.
"What should be happening? The excesses of the bubble years have created a legal morass, in which property rights are ill defined because nobody has proper documentation. And where no clear property rights exist, it’s the government’s job to create them."
Krugman again is succumbing to hysteria here -- foreclosures are so complex that normal judicial processes simply cannot handle them. In fact, foreclosures are straightforward legal proceedings. There is no crisis of property rights, simply, at most, contract and foreclosure disputes, which courts have been handling for literally hundreds of years. This is a simple problem, with simple remedies.
Also, this paragraph shows that Krugman has zero understanding of the law's purposes. He says that because property rights are ill-defined, courts can't resolve the disputes. This bizarre assertion means that, according to Krugman, courts aren't capable of making determinations of the legal effects of documents. But, courts exist for precisely this purpose -- to determine complex questions of property and contract rights. Krugman is pretending that courts can't do what they are designed to do -- determine and enforce property rights -- so that he can deprive courts of the jurisdiction to enforce documents he doesn't want enforced.
"For example, the Center for American Progress has proposed giving mortgage counselors and other public entities the power to modify troubled loans directly, with their judgment standing unless appealed by the mortgage servicer. This would do a lot to clarify matters and help extract us from the morass."
Krugman, advocating a solution to a problem that doesn't exist, is literally turning Anglo-American contract law and due process on its head. Under this scheme, a borrower can unilaterally seek ex parte relief from a tribunal, putting the onus on the other party to object. Aside from being constitutionally impermissible (due process) it violates all notions of fairness to allow a party to seek relief against a party with no notice to the other party. Krugman is literally denying certain classes of litigants an opportunity to appear in court based on their statue. This proposed procedure -- in which relief is available to a single class of parties (the borrowers) without notice to any other party -- would be totally unprecedented in Anglo-American law.
Its really important to note what Krugman is trying to do here -- he is advocating stripping courts of their authority. This must be because courts, when resolving contract disputes, have the goal of effectuating the parties' intent. However, in the context of home loans, enforcing the documents means that the borrowers have to pay or lose their home. So, Krugman proposes a parallel legal system is which "mortgage counselors" -- who have no legal training -- are given the authority to unilaterally abridge contracts. "Abridge" is a carefully chosen word here. Unlike courts, which are designed to simply enforce parties' agreements, these tribunals wouldn't honor agreements, but rather would deprive one party of the benefit of their bargain, and the rights that they relied on in extending credit. In other words, he wants to fundamentally alter the legal process so that the decisionmaker (e.g. the court) is not impartial, but would rather exist solely for the benefit of one party (the borrower). And, finally, if judges -- who are experienced lawyers and jurists -- can't correctly resolve the peoperty rights, how can "mortgage counselors", who have no legal training? They can't -- underscoring that the mortgage counselors' role wouldn't be to resolve property rights, but rather simply to ignore lenders' property rights for the benefit of deadbeat borrowers. In reality, courts are anathema to Krugman because they will force borrowers to live up to their obligations.
This article is Krugman at his worst. The problem isn't that Krugman is wrong, its that he's dishonest. What he really wants is a law providing that borrowers' loans are forgiven. He should at least openly advocate this position, instead of using a ficticious crisis to justify creating a parallel legal system totally inconsistent with Anglo-American law in order to let borrowers off the hook. If Krugman actually made the argument that borrowers shouldn't have to repay their home loans, he'd be wrong, but at least he wouldn't be a liar.
"American officials used to lecture other countries about their economic failings and tell them that they needed to emulate the U.S. model. The Asian financial crisis of the late 1990s, in particular, led to a lot of self-satisfied moralizing. Thus, in 2000, Lawrence Summers, then the Treasury secretary, declared that the keys to avoiding financial crisis were “well-capitalized and supervised banks, effective corporate governance and bankruptcy codes, and credible means of contract enforcement.” By implication, these were things the Asians lacked but we had."
This little vignette is totally irrelevant to Krugman's argument, and its just a smug swipe at America. It is worth noting however that America is much, much wealthier than Asia, suggesting that, at least possibly, the Asians could learn something about economic management from America.
"The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance."
Because America, with thousands of large corporations, has had two major corporate scandals in the past 10 years, obviously effective corporate governance is a "myth. But, such a low incidence of failure is an extraordinary success story. Following Krugman's logic, because two Congressmen, say Stevens and Rangel, to be bi-partisan, breached rules of ethics in the past 2 years, Congress is a lawless, totally ineffectively regulated body, and any semblance of control or legality is a "myth".
For the young lawyers out there, this is a classic example of a red herring. Raising the spectre of Enron -- which literally has nothing to do with mortgage foreclosures -- is a way of showing how corporations are fundamentally evil, banks (technically bank holding companies) are corporations, and therefore, banks are fundamentally evil.
"And now the mortgage mess is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law."
An amazingly hyperbolic statement. Read on, but Krugman cites possibly inaccurate affidavits as proof that our economy is now totally devoid of law. Its such a melodramatic overreaction that it makes me want to kill myself!
"So servicers — the companies that collect payments on behalf of mortgage owners — have been foreclosing on many mortgages, seizing many homes.
But do they actually have the right to seize these homes? Horror stories have been proliferating, like the case of the Florida man whose home was taken even though he had no mortgage."
Just last week, near Chicago, police falsely accused a man of murder.
http://www.nwitimes.com/news/local/illinois/article_4becd466-2934-52cd-9a24-aeb1b7523299.html
I certainly don't think that means we live under a lawless, tyrranical government that can drag me away in the middle of the night for no reason. The sensible, adult conclusion is that isolated mistakes are inevitable in a legal system with millions of cases pending at any given time, not that mistakes mean that America is lawless.
But, Krugman isn't interested in a reasoned discussion of the relevant issues -- its just one long screed. What is conspicuously absent is any quantification of the scope of the problem. Last year there were over a million foreclosures, in all 50 states. A handful of isolated mistakes were inevitable, which is true in every area of the law. I don't think that there is any doubt that there were any number of frivolous product liability, sexual harrasment, or racial discrimination lawsuits last year. But that certainly doesn't mean that we no longer have any rule of law, or that entire classes of lawsuits are now invalid. Based on a few anecdotes, Krugman now wants to deprive all banks of their day in court.
"Courts have been approving foreclosures without requiring that mortgage servicers produce appropriate documentation; instead, they have relied on affidavits asserting that the papers are in order. And these affidavits were often produced by “robo-signers,” or low-level employees who had no idea whether their assertions were true.
Now an awful truth is becoming apparent: In many cases, the documentation doesn’t exist."
This is where Krugman goes from being hysterical to dishonest. I have no doubt that in the vast majority of instances, there is no dispute as to the existence of the indebtedness, only as to the owner of the note evidencing the indebtedness. If borrower B executes a note and mortgage in favor of Lender C, and Lender L assigns it to Assignee A, there may be a dispute between L and A as to the ownership of the note, but there is no doubt that B owes the money, and mortgaged the property at issue. Under this scenario, B isn't harmed by paying L or A, because she is only paying what she owes. The dispute between L and A doesn't alter B's underlying indebtedness, and B shouldn't get a windfall relief from her debt.
Of course, B could get stuck paying L, and then have A come seeking the money. But, Krugman doesn't discuss this actually occuring, I have never heard of it happening, and, in the vast majority of foreclosures, the borrower has long since stopped paying the note anyways. But, to the extent that B is worried about double paying, and wants clarity as to who owns the note, she can always file an interpleader (or if she is sued and faces the prospect of paying twice, an impleader). The point is, the law already protects borrowers against paying the wrong party. Krugman, if he knew anything about the law, would be aware of this. But, Krugman, in a dishonest way, isn't interested in making sure the right borrower gets repaid, but rather making sure that the borrowers don't have to pay at all.
UPDATE: In the most recent issue of "The Economist", an article discussing this issue confirmed that "no evidence that anyone has been wrongly evicted has yet been found." There is, as I suspected, no evidence at all that any homeowner/borrower's substantive rights have been abridged, or that people have wrongly lost their homes, underscoring that Krugman's hysteria is totally baseless.
"This is very, very bad. For one thing, it’s a near certainty that significant numbers of borrowers are being defrauded — charged fees they don’t actually owe, declared in default when, by the terms of their loan agreements, they aren’t."
How can Krugman possibly know this? Where does the "certainty" come from? Its non-existent. He's not a lawyer, he's never collected a judgment or enforced a mortgage, but he's making bald assertions about what is occuring in American courts.
He also fundamentally misunderstands Anglo-American law. Its an adversarial process -- the borrowers/defendants have the chance to defend themselves. The borrowers all have copies of their notes and mortgages; if they didn't breach the loan documents, they are free to defend against the suit. Nobody is being "defauded" -- plaintiffs are filing suit to have their claims adjudicated, which is their right.
"True to form, the Obama administration’s response has been to oppose any action that might upset the banks, like a temporary moratorium on foreclosures while some of the issues are resolved."
Why would all mortgage enforcement actions be halted because of some bad lenders? The idea that say Wells Fargo shouldn't be able to enforce its legal rights because of say B of A's misdeeds is nuts, roughly the same as saying because your neighbor got a DUI, you're going to lose your license. Its also worth noting that Krugman's idea of collective guilt is totally asymmetrical -- surely he doesn't suggest that because say Illinois politicians are manifestly corrupt, the Utah state government should be reigned in. Tellingly, its only corporate misdeeds that draw his ire, and warrant wholesale condemnation not only of individual wrongdoer, but its entire class.
Also, the Obama administration probably rightly recognized the federal government just spent hundreds of billions of dollars to rescue financial institutions. It would be the height of folly to save them, and then less than two years later strip them of their collateral, leaving them totally unsecured creditors. It would literally destroy the financial system that the government so desparately tried to save.
Lastly, the Obama administration might have given some thought to the Consitutional infirmities of a federal law that would halt state courts from enforcing contracts involving real property, which the Supreme Court (admittedly not in the federalism context) has held is a quintesstially state and local issue. Federal cessation of state court judicial proceedings would be an unprecedented extension of federal power over states, and raise some heavy-duty federalism issues. Krugman of course has given zero thought to these issues.
"The response from the right is, however, even worse. Republicans in Congress are lying low, but conservative commentators like those at The Wall Street Journal’s editorial page have come out dismissing the lack of proper documents as a triviality. In effect, they’re saying that if a bank says it owns your house, we should just take its word. To me, this evokes the days when noblemen felt free to take whatever they wanted, knowing that peasants had no standing in the courts. But then, I suspect that some people regard those as the good old days."
For young lawayers, this is what's known as a straw-man. Nobody is suggesting that if a bank says that it owns your house, it can unilaterally seize it. This is just a lie, a willful mischaracterization.
On its own terms, its a truly bizarre argument. Republicans are, according to Krugman, neo-aristocrats seeking the imposition of some sort of new ancien regime. More than offensive, its just, really, really bizarre. Its a totally baseless accusation that, if Krugman had any intellectual honesty, would embarass him. Its a classic ad hominem attack that in no way deals with the substance of any argument.
For what its worth, Krugman identifies neo-aristocrats by their disregard for property rights. Its worth noting that the closest thing we have to noblemen of yore is the government, which, under Supreme Court precedent, can take your home to hand to a private developer of a mall. It goes without saying that conservatives dislike this practice, and liberals support it. So, in the defending property rights game, conservatives win.
"What should be happening? The excesses of the bubble years have created a legal morass, in which property rights are ill defined because nobody has proper documentation. And where no clear property rights exist, it’s the government’s job to create them."
Krugman again is succumbing to hysteria here -- foreclosures are so complex that normal judicial processes simply cannot handle them. In fact, foreclosures are straightforward legal proceedings. There is no crisis of property rights, simply, at most, contract and foreclosure disputes, which courts have been handling for literally hundreds of years. This is a simple problem, with simple remedies.
Also, this paragraph shows that Krugman has zero understanding of the law's purposes. He says that because property rights are ill-defined, courts can't resolve the disputes. This bizarre assertion means that, according to Krugman, courts aren't capable of making determinations of the legal effects of documents. But, courts exist for precisely this purpose -- to determine complex questions of property and contract rights. Krugman is pretending that courts can't do what they are designed to do -- determine and enforce property rights -- so that he can deprive courts of the jurisdiction to enforce documents he doesn't want enforced.
"For example, the Center for American Progress has proposed giving mortgage counselors and other public entities the power to modify troubled loans directly, with their judgment standing unless appealed by the mortgage servicer. This would do a lot to clarify matters and help extract us from the morass."
Krugman, advocating a solution to a problem that doesn't exist, is literally turning Anglo-American contract law and due process on its head. Under this scheme, a borrower can unilaterally seek ex parte relief from a tribunal, putting the onus on the other party to object. Aside from being constitutionally impermissible (due process) it violates all notions of fairness to allow a party to seek relief against a party with no notice to the other party. Krugman is literally denying certain classes of litigants an opportunity to appear in court based on their statue. This proposed procedure -- in which relief is available to a single class of parties (the borrowers) without notice to any other party -- would be totally unprecedented in Anglo-American law.
Its really important to note what Krugman is trying to do here -- he is advocating stripping courts of their authority. This must be because courts, when resolving contract disputes, have the goal of effectuating the parties' intent. However, in the context of home loans, enforcing the documents means that the borrowers have to pay or lose their home. So, Krugman proposes a parallel legal system is which "mortgage counselors" -- who have no legal training -- are given the authority to unilaterally abridge contracts. "Abridge" is a carefully chosen word here. Unlike courts, which are designed to simply enforce parties' agreements, these tribunals wouldn't honor agreements, but rather would deprive one party of the benefit of their bargain, and the rights that they relied on in extending credit. In other words, he wants to fundamentally alter the legal process so that the decisionmaker (e.g. the court) is not impartial, but would rather exist solely for the benefit of one party (the borrower). And, finally, if judges -- who are experienced lawyers and jurists -- can't correctly resolve the peoperty rights, how can "mortgage counselors", who have no legal training? They can't -- underscoring that the mortgage counselors' role wouldn't be to resolve property rights, but rather simply to ignore lenders' property rights for the benefit of deadbeat borrowers. In reality, courts are anathema to Krugman because they will force borrowers to live up to their obligations.
This article is Krugman at his worst. The problem isn't that Krugman is wrong, its that he's dishonest. What he really wants is a law providing that borrowers' loans are forgiven. He should at least openly advocate this position, instead of using a ficticious crisis to justify creating a parallel legal system totally inconsistent with Anglo-American law in order to let borrowers off the hook. If Krugman actually made the argument that borrowers shouldn't have to repay their home loans, he'd be wrong, but at least he wouldn't be a liar.
Let the Excuses Begin
Krugman has already started explaining away the latest Keynesian failure, starting with the bizarre proposition that there has been very little increase in government spending under Obama:
"Here’s what you need to know: The whole story is a myth. There never was a big expansion of government spending. In fact, that has been the key problem with economic policy in the Obama years: we never had the kind of fiscal expansion that might have created the millions of jobs we need ...
To be fair, spending on safety-net programs, mainly unemployment insurance and Medicaid, has risen — because, in case you haven’t noticed, there has been a surge in the number of Americans without jobs and badly in need of help."
Again, Krugman says there hasn't really been an expansion in government spending, because he excludes welfare spending. So, Krugman argues that federal spending hasn't increased much by arbitrarily excluding certain federal expenditures from his calculation of government spending.
"And there were also substantial outlays to rescue troubled financial institutions, although it appears that the government will get most of its money back."
OK, so there was more government spending, destroying Krugman's thesis that the government hasn't spent much. He sort of suggests, though is unclear, that it would have been better for the economy if the government didn't get its money back, and if TARP had been a total-black hole, which if true, is insane.
"government purchases of goods and services have gone up. But adjusted for inflation, they rose only 3 percent over the last two years — a pace slower than that of the previous two years, and slower than the economy’s normal rate of growth."
So, government spending has increased both in real terms and as a percentage of the GDP, the latter pretty dramatically. The latter is really the important number, because it provides a context for evaluating the size of the government. As Krugman notes, the government's share of GDP has increased dramatically:
http://krugman.blogs.nytimes.com/2010/10/12/special-bulletin-fractions-have-denominators/
He snidely dismisses this issue, but snarkiness is not an argument. Government expansion in a time of economic contraction means the government's true spending is very, very high.
This 3% figure also excludes welfare payments, which have gone up pretty dramatically, as he himself acknowledges earlier in the article.
"Furthermore, it wasn’t mainly focused on increasing government spending. Of the roughly $600 billion cost of the Recovery Act in 2009 and 2010, more than 40 percent came from tax cuts..."
Partly this is a definitional issue. Oddly, the largest welfare program is administered through the tax code, and welfare payments are made in the form of "tax credits" to people who don't pay taxes. Democrats try to frame these welfare payments as tax cuts, but the CBO, acknowledging the economic reality that you can't give a tax credit to somebody that didn't pay taxes, accurately characterizes them as welfare payments, a/k/a government spending. Using the CBO's numbers, the percentage of the stimulus that is tax cuts is far smaller:
http://www.washingtonpost.com/wp-dyn/content/graphic/2009/02/01/GR2009020100154.html
More fundamentally, Krugman is missing the point here. The issue isn't the raw amount of government spending, but the deficit. A huge deficit -- which Obama has clearly created -- should increase aggregate demand according to Keynesian theory, leading to an increase in employment.
As an aside, you'll note the incoherence of the left's attitudes towards budgets. Obama has overseen a huge increase in the deficit. In fairness, he inherited a bleak financial situation. As Obama himself noted:
"When I first walked through the door, the deficit stood at $1.3 trillion," Obama said, citing the estimates that greeted him a year ago.
But, under standard Keynesian analysis, this deficit should have been a good thing, because it represented increased aggregate demand, and the economy should actually have been on sound footing when Obama took office. How can it coherently be argued that Obama inherited an economic mess because of high deficits, but that he has has done a good job ameliorating the mess by increasing the deficit? Deficits are either good or bad. If they are good, then George Bush did a superb job managing the economy, keeping deficits high, and Obama was the beneficiary of that. If they are bad, Obama is an even bigger moron than Bush, because he's pursuing a policy of larger deficits.
"while another large chunk consisted of aid to state and local governments. Only the remainder involved direct federal spending."
Apparently, state and local government spending doesn't count as government spending.
"Instead, it has insisted throughout that its original plan was just right, a position that has become increasingly awkward as the recovery stalls."
Another failed Keynesian episode. Krugman again is offering excuses, not results. And, it begs the question of how large the deficit has to be for Keynesiasm to work. We are currently running the largest peace-time deficit in American history and government spending as a percentage of GDP is at an a peace-time high. If history-making deficit and spending won't solve the problem, what will? And, its worth noting that the federal government for something like 37 of the past 40 years has run a deficit. So, if deficit spending led to economic growth, America's economy should, according to the Keynesians, be in terrific shape. The fact that its not underscores that the theory is just wrong.
"Here’s what you need to know: The whole story is a myth. There never was a big expansion of government spending. In fact, that has been the key problem with economic policy in the Obama years: we never had the kind of fiscal expansion that might have created the millions of jobs we need ...
To be fair, spending on safety-net programs, mainly unemployment insurance and Medicaid, has risen — because, in case you haven’t noticed, there has been a surge in the number of Americans without jobs and badly in need of help."
Again, Krugman says there hasn't really been an expansion in government spending, because he excludes welfare spending. So, Krugman argues that federal spending hasn't increased much by arbitrarily excluding certain federal expenditures from his calculation of government spending.
"And there were also substantial outlays to rescue troubled financial institutions, although it appears that the government will get most of its money back."
OK, so there was more government spending, destroying Krugman's thesis that the government hasn't spent much. He sort of suggests, though is unclear, that it would have been better for the economy if the government didn't get its money back, and if TARP had been a total-black hole, which if true, is insane.
"government purchases of goods and services have gone up. But adjusted for inflation, they rose only 3 percent over the last two years — a pace slower than that of the previous two years, and slower than the economy’s normal rate of growth."
So, government spending has increased both in real terms and as a percentage of the GDP, the latter pretty dramatically. The latter is really the important number, because it provides a context for evaluating the size of the government. As Krugman notes, the government's share of GDP has increased dramatically:
http://krugman.blogs.nytimes.com/2010/10/12/special-bulletin-fractions-have-denominators/
He snidely dismisses this issue, but snarkiness is not an argument. Government expansion in a time of economic contraction means the government's true spending is very, very high.
This 3% figure also excludes welfare payments, which have gone up pretty dramatically, as he himself acknowledges earlier in the article.
"Furthermore, it wasn’t mainly focused on increasing government spending. Of the roughly $600 billion cost of the Recovery Act in 2009 and 2010, more than 40 percent came from tax cuts..."
Partly this is a definitional issue. Oddly, the largest welfare program is administered through the tax code, and welfare payments are made in the form of "tax credits" to people who don't pay taxes. Democrats try to frame these welfare payments as tax cuts, but the CBO, acknowledging the economic reality that you can't give a tax credit to somebody that didn't pay taxes, accurately characterizes them as welfare payments, a/k/a government spending. Using the CBO's numbers, the percentage of the stimulus that is tax cuts is far smaller:
http://www.washingtonpost.com/wp-dyn/content/graphic/2009/02/01/GR2009020100154.html
More fundamentally, Krugman is missing the point here. The issue isn't the raw amount of government spending, but the deficit. A huge deficit -- which Obama has clearly created -- should increase aggregate demand according to Keynesian theory, leading to an increase in employment.
As an aside, you'll note the incoherence of the left's attitudes towards budgets. Obama has overseen a huge increase in the deficit. In fairness, he inherited a bleak financial situation. As Obama himself noted:
"When I first walked through the door, the deficit stood at $1.3 trillion," Obama said, citing the estimates that greeted him a year ago.
But, under standard Keynesian analysis, this deficit should have been a good thing, because it represented increased aggregate demand, and the economy should actually have been on sound footing when Obama took office. How can it coherently be argued that Obama inherited an economic mess because of high deficits, but that he has has done a good job ameliorating the mess by increasing the deficit? Deficits are either good or bad. If they are good, then George Bush did a superb job managing the economy, keeping deficits high, and Obama was the beneficiary of that. If they are bad, Obama is an even bigger moron than Bush, because he's pursuing a policy of larger deficits.
"while another large chunk consisted of aid to state and local governments. Only the remainder involved direct federal spending."
Apparently, state and local government spending doesn't count as government spending.
"Instead, it has insisted throughout that its original plan was just right, a position that has become increasingly awkward as the recovery stalls."
Another failed Keynesian episode. Krugman again is offering excuses, not results. And, it begs the question of how large the deficit has to be for Keynesiasm to work. We are currently running the largest peace-time deficit in American history and government spending as a percentage of GDP is at an a peace-time high. If history-making deficit and spending won't solve the problem, what will? And, its worth noting that the federal government for something like 37 of the past 40 years has run a deficit. So, if deficit spending led to economic growth, America's economy should, according to the Keynesians, be in terrific shape. The fact that its not underscores that the theory is just wrong.
Thursday, October 14, 2010
Krugman on the Hudson Tunnel
Krugman discusses the Hudson Tunnel, blaming Governer Christie for not opening up the state coffers to pay for a new tunnel.
http://www.nytimes.com/2010/10/08/opinion/08krugman.html?_r=1&partner=rssnyt&emc=rss
As always, Krugman's "analysis" is nothing more than condescending generalities:
"And right now, by any rational calculation, would be an especially good time to improve the nation’s infrastructure. We have the need: our roads, our rail lines, our water and sewer systems are antiquated and increasingly inadequate."
In other words, over the last quarter century, while government spending at all levels has surged, vital infrastructure has been neglected, primarily because sewers and bridges, unlike overpaid government employees, don't vote. Now, the reward for government neglect is more money to governments to solve the problem that their neglect created.
"And the price is right: with interest rates on federal debt at near-record lows, there has never been a better time to borrow for long-term investment."
First of all, why should the federal government finance a commuter tunnel, which is a quintessentially local issue? More fundamentally, Krugman, as always, neglects the tattered finances of state and local governments, which can't afford more debt. Krugman lives in a world of infinite resources.
"We are no longer the nation that used to amaze the world with its visionary projects."
The goal shouldn't be to "amaze the world", it should be to spend wisely for the benefit of American citizens. And, in any event, I find it impossible to believe that people in Shanghai, Berlin, or Sydney are even going to be aware of, let alone amazed by, a new commuter rail tunnel in New Jersey.
"So, about that tunnel: with almost 1,200 people per square mile, New Jersey is the most densely populated state in America, more densely populated than any major European nation. Add in the fact that many residents work in New York, and you have a state that can’t function without adequate public transportation. There just isn’t enough space for everyone to drive to work.
But right now there’s just one century-old rail tunnel linking New Jersey and New York — and it’s running close to capacity."
According to Krugman, the current tunnel isn't even at capacity yet -- its close to capacity. And, as he admits, New Jersey is extremely crowded, meaning there's no way for it to grow substantially. So, its very possible that the current tunnel will meet New Jersey's future needs. I'm not saying it will -- I'm no expert in long-term demographic trends of New Jersey -- but Krugman offers literally no evidence that a new tunnel is necessary or will satisfy any current or future needs.
"So last year the project began. Of the $8.7 billion in planned funding, less than a third was to come from the State of New Jersey; the rest would come, in roughly equal amounts, from the independent Port Authority of New York and New Jersey and from the federal government."
That son of a bitch Cristie is a terrible public servant for not pissing away federal money. Why can't he focus more on pork-barrel projects instead of showing a concern for the greater good?
"Even if costs were to rise substantially, as they often do on big projects, it was a very good deal for the state."
Note the incoherence of this sentence, which is essentially asserting both that: a) Krugman has no idea what the cost will be; and b) it is a good deal. Krugman is trying to do a cost-benefit analysis with no understanding of the cost, which is impossible, underscoring that Krugman just makes baseless assertions.
"When people ask why the Obama stimulus didn’t accomplish more, one good response is to ask, what stimulus?"
Already making excuses for the failure of the stimulus. This is a recurring theme. The New Deal never provided sustainable economic growth (see the 1937 recession), but, according to Krugman, again, this wasn't a failure of Keynesian theory, but inadequate stimulus. Krugman doesn't offer success, he offers excuses.
"Leaving aside the cost of financial rescues and safety-net programs like unemployment insurance, federal spending has risen only modestly"
In other words, if you arbitrarily exclude certain categories of massive federal spending, federal spending hasn't gone up much. This is roughly the same as saying if you exclude their bad loans, banks were extremely well-run.
"By refusing to pay for essential investment, politicians are both perpetuating unemployment and sacrificing long-run growth."
Krugman, like all liberals, sees no dissonance between the assertions that politicians are short-sighted morons, but that they should be given massive power. Interestingly, the great George Orwell, one of my intellectual heroes, made the exact same mistake, destroying any claims he might have had to being a serious political thinker.
UPDATE: My brother, who is an expert on and advocate for mass transit, disagreed with this post, noting that studies project that the tunnel will shave commute times. I have no doubt that this is true. Perhaps I should have been clearer in my post: I have no doubt that the Hudson Tunnel will have benefits. But, benefits in a vaccum are meaningless is terms of evaluating a decision -- benefits need to be valued somehow. Saying that the tunnel will shave five minutes off a commute doesn't answer the question of how much those five minutes are worth to paying customers. The only way the tunnel's benefits can be ascertained is through a properly functioning price mechanism. As always, the question is will riders pay for the convenience.
I propose an elegant solution. There are three constituencies that will benefit from the tunnel -- heavily unionized contractors, heavily unionized Port Authority workers, and commuters. If, as the tunnel's proponents claim, there are benefits to the tunnel sufficient to justify its costs, New Jersey should float bonds to finance the construction of the tunnel. The exclusive source of funds to repay the bonds will be fares. In no event would the taxpayers pay the bonds. If the bonds aren't sold (i.e. the market determines that they can't be serviced from the tunnel's revenues), the contractors and Port Authority workers (or their union pension funds) either accept the bonds in leiu of payment or agree that the tunnel won't be constructed. If the bonds don't sell, or the contractors/Port Authority workers won't accept them, it shows that the whole project is a waste of resources, and that its advocates are just lying about the merits of a project that they themselves won't pay for or believe in.
http://www.nytimes.com/2010/10/08/opinion/08krugman.html?_r=1&partner=rssnyt&emc=rss
As always, Krugman's "analysis" is nothing more than condescending generalities:
"And right now, by any rational calculation, would be an especially good time to improve the nation’s infrastructure. We have the need: our roads, our rail lines, our water and sewer systems are antiquated and increasingly inadequate."
In other words, over the last quarter century, while government spending at all levels has surged, vital infrastructure has been neglected, primarily because sewers and bridges, unlike overpaid government employees, don't vote. Now, the reward for government neglect is more money to governments to solve the problem that their neglect created.
"And the price is right: with interest rates on federal debt at near-record lows, there has never been a better time to borrow for long-term investment."
First of all, why should the federal government finance a commuter tunnel, which is a quintessentially local issue? More fundamentally, Krugman, as always, neglects the tattered finances of state and local governments, which can't afford more debt. Krugman lives in a world of infinite resources.
"We are no longer the nation that used to amaze the world with its visionary projects."
The goal shouldn't be to "amaze the world", it should be to spend wisely for the benefit of American citizens. And, in any event, I find it impossible to believe that people in Shanghai, Berlin, or Sydney are even going to be aware of, let alone amazed by, a new commuter rail tunnel in New Jersey.
"So, about that tunnel: with almost 1,200 people per square mile, New Jersey is the most densely populated state in America, more densely populated than any major European nation. Add in the fact that many residents work in New York, and you have a state that can’t function without adequate public transportation. There just isn’t enough space for everyone to drive to work.
But right now there’s just one century-old rail tunnel linking New Jersey and New York — and it’s running close to capacity."
According to Krugman, the current tunnel isn't even at capacity yet -- its close to capacity. And, as he admits, New Jersey is extremely crowded, meaning there's no way for it to grow substantially. So, its very possible that the current tunnel will meet New Jersey's future needs. I'm not saying it will -- I'm no expert in long-term demographic trends of New Jersey -- but Krugman offers literally no evidence that a new tunnel is necessary or will satisfy any current or future needs.
"So last year the project began. Of the $8.7 billion in planned funding, less than a third was to come from the State of New Jersey; the rest would come, in roughly equal amounts, from the independent Port Authority of New York and New Jersey and from the federal government."
That son of a bitch Cristie is a terrible public servant for not pissing away federal money. Why can't he focus more on pork-barrel projects instead of showing a concern for the greater good?
"Even if costs were to rise substantially, as they often do on big projects, it was a very good deal for the state."
Note the incoherence of this sentence, which is essentially asserting both that: a) Krugman has no idea what the cost will be; and b) it is a good deal. Krugman is trying to do a cost-benefit analysis with no understanding of the cost, which is impossible, underscoring that Krugman just makes baseless assertions.
"When people ask why the Obama stimulus didn’t accomplish more, one good response is to ask, what stimulus?"
Already making excuses for the failure of the stimulus. This is a recurring theme. The New Deal never provided sustainable economic growth (see the 1937 recession), but, according to Krugman, again, this wasn't a failure of Keynesian theory, but inadequate stimulus. Krugman doesn't offer success, he offers excuses.
"Leaving aside the cost of financial rescues and safety-net programs like unemployment insurance, federal spending has risen only modestly"
In other words, if you arbitrarily exclude certain categories of massive federal spending, federal spending hasn't gone up much. This is roughly the same as saying if you exclude their bad loans, banks were extremely well-run.
"By refusing to pay for essential investment, politicians are both perpetuating unemployment and sacrificing long-run growth."
Krugman, like all liberals, sees no dissonance between the assertions that politicians are short-sighted morons, but that they should be given massive power. Interestingly, the great George Orwell, one of my intellectual heroes, made the exact same mistake, destroying any claims he might have had to being a serious political thinker.
UPDATE: My brother, who is an expert on and advocate for mass transit, disagreed with this post, noting that studies project that the tunnel will shave commute times. I have no doubt that this is true. Perhaps I should have been clearer in my post: I have no doubt that the Hudson Tunnel will have benefits. But, benefits in a vaccum are meaningless is terms of evaluating a decision -- benefits need to be valued somehow. Saying that the tunnel will shave five minutes off a commute doesn't answer the question of how much those five minutes are worth to paying customers. The only way the tunnel's benefits can be ascertained is through a properly functioning price mechanism. As always, the question is will riders pay for the convenience.
I propose an elegant solution. There are three constituencies that will benefit from the tunnel -- heavily unionized contractors, heavily unionized Port Authority workers, and commuters. If, as the tunnel's proponents claim, there are benefits to the tunnel sufficient to justify its costs, New Jersey should float bonds to finance the construction of the tunnel. The exclusive source of funds to repay the bonds will be fares. In no event would the taxpayers pay the bonds. If the bonds aren't sold (i.e. the market determines that they can't be serviced from the tunnel's revenues), the contractors and Port Authority workers (or their union pension funds) either accept the bonds in leiu of payment or agree that the tunnel won't be constructed. If the bonds don't sell, or the contractors/Port Authority workers won't accept them, it shows that the whole project is a waste of resources, and that its advocates are just lying about the merits of a project that they themselves won't pay for or believe in.
Wednesday, October 13, 2010
Krugman and the Economics of Mass Transit
Krugman discusses mass transit here, arguing that taxes should be raised to pay for mass transit:
http://krugman.blogs.nytimes.com/2010/10/07/transit-economics/
As usual, he is wrong on every virtually every important point:
"why should only public transit have to self-finance, when private vehicles generally drive on free roads built and maintained out of taxes?"
The average American is in no sense subsidizied when driving. Drivers pay for roads with income and gas taxes and tolls. And, unlike public transit, literally everybody in the United States benefits from roads. There is not a single person whose lifestyle isn't hugely dependent on roads. Even a person with no car is clothed and fed, among other things, by goods sent via road. So, there is really no subsidy. There are three sources of funds for roads:
1) Tolls. Obviously, no subsidy, because the driver is paying for his use of the road.
2) Gas taxes. No subsidy, because the driver is indirectly paying for road construction/maintenance.
3) General taxes. No subsidy, because income taxes are overwhelmingly paid for by the wealthy and to the lesser extent the middle-class, the vast majority of whom drive. So, there is no subsidy, because people driving have paid income taxes to pay for the roads.
Drivers, in short, pay for their roads. In contrast, mass transit is used by a tiny percentage of the American public, who are massively subsidized by drivers.
Krugman next argues that driving in congested areas, "especially in rush hour, imposes huge congestion externalities on other people."
Untrue. An externality occurs when somebody suffers a harm (or benefit technically) stemming from a transaction or activity that they aren't part of. But, when somebody gets on a road at rush hour, they are aware that its crowded, and voluntarily assume the use of the roads (to which they have no property right, or greater claim than somebody else), so its not an externality.
A consideration of property rights is crucial. In the classic externality situation, a polluter is interfering with other peoples' use of their property by belching smoke into their home. In contrast, a public road is owned by nobody, and everybody has equal access to it, so there can't be an externality. Put another way, I have every right to say you can't pollute my land, because I own the land and you can't impose costs on it without my permission. But, I have no right to a highway, and can't plausibly argue that I can tell somebody else that they need my permission, or need to make payment, to use it -- all citizens have equal access to the road. The externality analysis simply makes no sense in a situation where there is no private property.
And, even if it is an externality, everybody imposes the same cost on everybody else, so there is no net winner or loser. Its not like the classic externality, where I own a factory that belches smoke into your yard, and there is strictly a one-way flow, in which I benefit and you are harmed -- you should get compensated for that. But, if you and I are both driving in Dowtown Chicago at rush hour, I am imposing an externality (by assumption) on you by driving a car, but you are imposing the exact same externality on me by driving a car. We're both creating traffic for each other, leading to no net harm. At a minimum, any payment I owe you would be owed to me by you. So, there is no basis for a tax or wealth transfer.
Interestingly, Krugman's argument, if taken seriously, would work both ways. The Chicago Transit Authority's vehicles are in the morning jammed and unpleasant. Under Krugman's logic, since I don't ride the CTA, I am making the CTA more pleasant and quicker for riders of the CTA, and am entitled to a subsidy from CTA riders. There is no way to logically argue as Krugman does that mass transit should be subsidized by drivers without arguing that mass transit riders need to subsidize drivers.
Lastly, you'll note the logical incoherence of Krugman's position. In his scenario Driver A is imposing costs on Driver B. To remedy this situation, you would need to make Drive A pay Driver B. But, Krugman, in an inexplicable logical leap, argues that because Driver A is imposing costs on Driver B, Driver A needs to make payments to Mass Transit Rider C, who has not been harmed at all by Driver A. So, the mass transit riders aren't, as in the classical externality analysis, being made whole, but instead are getting a huge windfall. Again, one is left wondering whether Krugman is dishonest, or just doesn't think things through.
http://krugman.blogs.nytimes.com/2010/10/07/transit-economics/
As usual, he is wrong on every virtually every important point:
"why should only public transit have to self-finance, when private vehicles generally drive on free roads built and maintained out of taxes?"
The average American is in no sense subsidizied when driving. Drivers pay for roads with income and gas taxes and tolls. And, unlike public transit, literally everybody in the United States benefits from roads. There is not a single person whose lifestyle isn't hugely dependent on roads. Even a person with no car is clothed and fed, among other things, by goods sent via road. So, there is really no subsidy. There are three sources of funds for roads:
1) Tolls. Obviously, no subsidy, because the driver is paying for his use of the road.
2) Gas taxes. No subsidy, because the driver is indirectly paying for road construction/maintenance.
3) General taxes. No subsidy, because income taxes are overwhelmingly paid for by the wealthy and to the lesser extent the middle-class, the vast majority of whom drive. So, there is no subsidy, because people driving have paid income taxes to pay for the roads.
Drivers, in short, pay for their roads. In contrast, mass transit is used by a tiny percentage of the American public, who are massively subsidized by drivers.
Krugman next argues that driving in congested areas, "especially in rush hour, imposes huge congestion externalities on other people."
Untrue. An externality occurs when somebody suffers a harm (or benefit technically) stemming from a transaction or activity that they aren't part of. But, when somebody gets on a road at rush hour, they are aware that its crowded, and voluntarily assume the use of the roads (to which they have no property right, or greater claim than somebody else), so its not an externality.
A consideration of property rights is crucial. In the classic externality situation, a polluter is interfering with other peoples' use of their property by belching smoke into their home. In contrast, a public road is owned by nobody, and everybody has equal access to it, so there can't be an externality. Put another way, I have every right to say you can't pollute my land, because I own the land and you can't impose costs on it without my permission. But, I have no right to a highway, and can't plausibly argue that I can tell somebody else that they need my permission, or need to make payment, to use it -- all citizens have equal access to the road. The externality analysis simply makes no sense in a situation where there is no private property.
And, even if it is an externality, everybody imposes the same cost on everybody else, so there is no net winner or loser. Its not like the classic externality, where I own a factory that belches smoke into your yard, and there is strictly a one-way flow, in which I benefit and you are harmed -- you should get compensated for that. But, if you and I are both driving in Dowtown Chicago at rush hour, I am imposing an externality (by assumption) on you by driving a car, but you are imposing the exact same externality on me by driving a car. We're both creating traffic for each other, leading to no net harm. At a minimum, any payment I owe you would be owed to me by you. So, there is no basis for a tax or wealth transfer.
Interestingly, Krugman's argument, if taken seriously, would work both ways. The Chicago Transit Authority's vehicles are in the morning jammed and unpleasant. Under Krugman's logic, since I don't ride the CTA, I am making the CTA more pleasant and quicker for riders of the CTA, and am entitled to a subsidy from CTA riders. There is no way to logically argue as Krugman does that mass transit should be subsidized by drivers without arguing that mass transit riders need to subsidize drivers.
Lastly, you'll note the logical incoherence of Krugman's position. In his scenario Driver A is imposing costs on Driver B. To remedy this situation, you would need to make Drive A pay Driver B. But, Krugman, in an inexplicable logical leap, argues that because Driver A is imposing costs on Driver B, Driver A needs to make payments to Mass Transit Rider C, who has not been harmed at all by Driver A. So, the mass transit riders aren't, as in the classical externality analysis, being made whole, but instead are getting a huge windfall. Again, one is left wondering whether Krugman is dishonest, or just doesn't think things through.
Friday, October 8, 2010
Welcome to my new blog, Paul Krugman is Wrong. My goal is less discussing why Krugman specifically is wrong than simply demonstrating that the Keynesian paradigm is fundamentally untrue. To that end, I will be analyzing Krugman's posts, but will also try and attack other economic sophistry that I come across.
Here are some FAQ's
Q: Why Krugman?
A: Krugman is, as far as I can tell, the most consistent, outspoken Keynesian. In a sense, it's a compliment to Krugman, who actually discusses technical economics, albeit inaccurately.
Q: What are your qualifications?
A: Limited -- an undergraduate degree in economics and a good deal of popular reading.
Q: Where do you get the temerity to criticize a Nobel Prize winner?
A: Hayek and Friedman also won Nobel Prizes -- it certainly doesn't follow that a man of the left couldn't therefore argue in favor of say Social Security because it violates the teachings of Nobel Prize winning economists.
Q: How can I contact you?
A: paulkrugmaniswrong@gmail.com
Note: I selectively quote from Krugman's posts -- I don't republish the entire column. I certainly don't take quotes out of context, but I wanted to make clear that my comments were limited to discrete parts of Krugman's columns.
Here are some FAQ's
Q: Why Krugman?
A: Krugman is, as far as I can tell, the most consistent, outspoken Keynesian. In a sense, it's a compliment to Krugman, who actually discusses technical economics, albeit inaccurately.
Q: What are your qualifications?
A: Limited -- an undergraduate degree in economics and a good deal of popular reading.
Q: Where do you get the temerity to criticize a Nobel Prize winner?
A: Hayek and Friedman also won Nobel Prizes -- it certainly doesn't follow that a man of the left couldn't therefore argue in favor of say Social Security because it violates the teachings of Nobel Prize winning economists.
Q: How can I contact you?
A: paulkrugmaniswrong@gmail.com
Note: I selectively quote from Krugman's posts -- I don't republish the entire column. I certainly don't take quotes out of context, but I wanted to make clear that my comments were limited to discrete parts of Krugman's columns.
Subscribe to:
Posts (Atom)