Our Archaic, Idiosyncratic, Evil Constitution

"As the nation teeters at the edge of fiscal chaos, observers are reaching the conclusion that the American system of government is broken. But almost no one blames the culprit: our insistence on obedience to the Constitution, with all its archaic, idiosyncratic and downright evil provisions."

The ravings of some fringe anarchist?  The rantings of a social pariah, angry at being marginalized by "the system?"

Nope, this is the introductory paragraph published in the New York Times and written by Louis Michael Seidman.  The same Louis Michael Seidman that is the Carmack Waterhouse Professor of Constitutional Law at Georgetown University.

It is remarkable in its Herculean efforts of straw-man construction.  As one who is partial to the textualist approach to constitutional interpretation I'm impressed with Professor Seidman's tango with arguments that nobody has ever made.  It is easy to build up a body of half-truths and nonsensical extrapolations and then tear the whole thing down.  When you present people with whom you disagree as idiots not meant to be taken seriously, to an audience all to eager to accept this presentation, you are freed from the obligation to make an actual argument that can withstand scrutiny.

But then the good professor saves anyone from the obligation of taking his argument seriously by basically saying "never mind."  You see, he doesn't think the entire constitution is evil and should be ignored.  Just the parts he doesn't like.  "This is not to say that we should disobey all constitutional commands. Freedom of speech and religion, equal protection of the laws and protections against governmental deprivation of life, liberty or property are important, whether or not they are in the Constitution. We should continue to follow those requirements out of respect, not obligation."

Why Economists Shouldn't be Listened To

It's not that Paul Krugman has taken time off, it's just that I tried, I really did, to get off that ship.  But here he goes again.

Please read this.  And don't get thrown.  It is not "wonkish" unless wonkish means deliberately obfuscating some pretty simple concepts.

Krugman presents the following graph:

He writes the following: "Now, in a perfectly competitive economy (don’t worry, we’ll talk about what happens "if not"* in a minute), we would expect the labor force to achieve full employment by accepting whatever real wage is consistent with said full employment. And what is that real wage? It’s the marginal product of labor at that point — which, graphically, is the slope of the aggregate production function where it crosses the vertical blue line." (* quotes added for clarity and emphasis added by me)

This is, so far as any economic theory can be, correct.  Krugman then goes on to make the point that under certain circumstances, technological improvements can lead to lower real wages.  This, too, is correct.  The workers may not share fully in the productivity gains.  So the next logical question is "so what?"  So long as the wage matches the marginal product of one's labor, then we're good.  Unless some people think it better to pay people for work they are not doing so long as those wages for unproductive labor are being paid by someone else, but who would be so damn fool as to think that's a good idea?

But before I come across as callous about people being paid less money for less work (yes, I understand fully the problems and pressure a family can face if, through no fault of one's own, if wages are lower in real terms in succeeding years), let me address what Professor Krugman skips over with an all-too-casual afterthought.  He writes: 

Start with the notion of an aggregate production function, which relates economy-wide output to economy-wide inputs of capital and labor. Yes, that sort of aggregation does violence to the complexity of reality. So?

Furthermore, for current purposes, hold the quantity of capital fixed and show how output varies with the quantity of labor.

In the first part he explicitly acknowledges that the aggregate models has no real bearing in reality.  Will that stop him?  Of course not.

In the second part, he “hold[s] the quantity of capital fixed” in order to show how his spurious function using a bogus model will affect real wages.  The problem is that in any real economy, the quantity of capital is not fixed.  And in a thriving free-market system (which ours isn’t, but if he can live in a fantasy world, why can’t I) far more capital is created than destroyed and everyone is better off.  Further, technological improvements affect positively all of the factors of production, if not there would be no increase in efficiency and thus it would not be considered a “technological improvement.”  Does a technological improvement increase all factors of production evenly?  No, of course not.  But productivity is increased.  And this benefits the economy as a whole, however marginally.  And that is reality.

Politics is What Politicians Do

In response to this piece, a short memo to the president, who happens to be a politician:

1) Whatever a politician does as far as his job is concerned is politics.  Not just when you disagree with what the politician does.  Politics may be a dirty word, but it is the likes of the president and our legislators that have helped make it a dirty word.

2) The legislation proposed would not "take away" anyone's rights.  It would give an employee the right to choose not to be represented by a union.  And if union membership os so wonderful why is membership and dues paying mandatory?

On First Thought

After four years of mulling things over, Paul Krugman comes to the conclusion that he is, in fact, the smartest man in the world.  But woe is him, the world just won't listen.

Back to Work

Anyone miss me?

I want to start by saying I don't care for Mitt Romney, nor do I particular care for Paul Ryan.  And if time allows I will expand on that further at some other time.  They may be fine human beings, but since the odds of our crossing in any meaningful way is nil I don't care.  I don't care for them as politicians and I don't want them to win the election.  I don't care for Obama either and the same corollaries apply. Biden, however, I think is a snake and is the main reason I hope Obama remains healthy so long as he is in office.

So I don't care for any of the principals

But what I really don't like are asinine, hackneyed, ad hominem attacks by alleged journalists.  I don't care who the attacker is and I don't care who the target is.  If you wish to attack a politician's policies or an economist's analysis, a court's opinion or a coach's strategy, fine.  Do so with gusto.  But you are obligated to stick to facts and stick to the policy or analysis or opinion or strategy, at least if you are to be taken seriously.  Some consistency can be helpful as well, but isn't necessary.  See Emerson if you need to learn the dangers of foolish consistency.

And this brings us to Matt Taibbi, a writer for Rolling Stone, among other publications, a frequent guest on Bill Maher's HBO show and he looks, acts, talks and writes like a douche.  Sure, it's ad hominem but he's earned it.

He wrote an article for Rolling Stone.  I read Rolling Stone not too long ago when Howard Stern was on the cover and rather enjoyed the issue.  The writing wasn't half bad.  Beyond that, I hadn't seen the magazine in well over a decade and haven't picked one up since.  I get the feeling that the Stern issue was an exception and the muck Taibbi rakes is the rule.  Regardless, a friend posted the article on facebook, so that's how I came across it.

I didn't finish the article.  I gave it the old college try and slogged through the first eleven paragraphs.  Some tidbits (emphasis added for added emphasis):
 

·      the drama of this rhetorical high-wire act was ratcheted up even further when Romney chose his running mate, Rep. Paul Ryan of Wisconsin – like himself, a self-righteously anal, thin-lipped, Whitest Kids U Know penny pincher who'd be honored to tell Oliver Twist there's no more soup left.

·      He said as much when he unveiled his choice of Ryan, the author of a hair-raising budget-cutting plan best known for its willingness to slash the sacred cows of Medicare and Medicaid. "Paul Ryan has become an intellectual leader of the Republican Party," Romney told frenzied Republican supporters in Norfolk, Virginia, standing before the reliably jingoistic backdrop of a floating warship.

·      Our collective debt is no ordinary problem: According to Mitt, it's going to burn our children alive (italics in original).

·      But what most voters don't know is the way Mitt Romney actually made his fortune: by borrowing vast sums of money that other people were forced to pay back. (Italics in original, this isn't necessarily inflammatory, but do keep this in the back of your head).

·      By making debt the centerpiece of his campaign, Romney was making a calculated bluff of historic dimensions – placing a massive all-in bet on the rank incompetence of the American press corps.  (I would take that bet).

·      choosing as his running mate perhaps the only politician in America more pompous and self-righteous on the subject of the evils of borrowed money than the candidate himself.

·      No one in history has ever successfully run for president riding this big of a lie. It's almost enough to make you think he really is qualified for the White House.

·     it stands as an emblem for the resiliency of the entire sociopathic Wall Street set he represents

·      Mitt Romney, it turns out, is the perfect frontman for Wall Street's greed revolution
 

·      A takeover artist all his life, Romney is now trying to take over America itself. And if his own history is any guide, we'll all end up paying for the acquisition.  (Again, please keep this last clause in mind).

These are all just from the first eleven paragraphs, mind you, of a 7,800 word article with 79 paragraphs.  One might get the idea that Taibbi not only doesn’t like Mitt Romney personally, but that he might have some sort of axe to grind.

I made some snide comment to the friend who posted the story about having wasted my time and though that would be it.  Then I saw this:

And then I got pissed.

Because Matt Taibbi doesn’t know what he’s talking about.  Personal attacks aside, when you go to such lengths and make so many personal attacks while demonstrating an extraordinary ignorance of fundamental concepts you deserved to be called out.

What do private equity firms do?  Here is a great piece by the Planet Money guys at NPR that actually gives a case study on a Bain Capital investment:

(Also, a very insightful podcast from Russ Roberts with Steven Kaplan on EconTalk here.  And a paper by Roberts here.)

Basically they will raise funds and take over a company (the investors’ money is the “borrowed money” Taibbi is referencing when not knowing what he is talking about).  They will either make the firm profitable or, failing that, liquidate the assets.  They get a management fee and an share of the profits, usually 20%.  So the Private equity firm wants profits.  The investors want return on their investment.  Profits and returns on investment are known, in the fields of finance, accounting and economics as “good.”  Let me know if I get too technical here.

The added benefit is that if the company that is taken over runs more efficiently, delivers more profits, the investors and the equity partners aren’t the only winners.  Everyone is.  And if the firm ends up being liquidated, that means that there are more effective uses of the capital that the firm employs.  All of the capital: the land, the machines and the people, those resources will get reallocated to more efficient uses.  And that benefits everybody.  Yes, those who lose a job may not appreciate the macroeconomic benefits, and that’s why I am a supporter of unemployment compensation.  Not the way that it is currently funded and managed, but that is another matter.

And if the firm fails?  They don’t get paid and the investors lose their money.  Society may or may not be better off by the reallocation of resources, because they may have been best used where they were.  So it is good for everyone when private equity firms do well, not just for the members.  And if the private equity firm continues to make bad investments, they won’t be a private equity firm for long.  Investors typically don’t like to lose money.

So when Taibbi says, “How is it that no one is bringing up that the fact this guy was a leveraged buyout expert.  I mean, this is how he made his fortune.  And what is leverage?  Leverage is debt.  What this guy did for a living is he borrowed money that other people had to pay back,” it becomes painfully obvious that he’s an idiot.

But this is also a nice segue to idiotic point number 2: “They’re (Romney, Ryan, Republicans, conservatives, infant eating monsters all) trying to make this a referendum on the irresponsibility of the Obama administration borrowing tons of money, pouring it into stimulus, to a lesser degree the bailouts, though they complain a lot less about that for some reason.  But it’s this massive national debt that they’re focusing on and I think that this really strikes a chord with a lot of ordinary Americans despite the fact that I think that a lot of people don’t really don’t understand how deficit spending works and whether it’s always dangerous which is an open question, I think, um, but ordinary people respond negatively to the idea of spending beyond their means.”

In honor of the late, great Ron Palillo

I know how deficit spending works.

And Matt Taibbi may think it’s an open question, but it isn’t.  It’s always bad.  Because the government doesn’t create capital when it gets something right.  It destroys capital.  Now there are trade-offs.  Let’s take the roads that the Democrats just seem to love talking about.  Yes, we need roads.  And police.  So we need taxes to pay for these things.  And when legislators, or despots for that matter, want to spend more than they take in in taxes they can issue debt.  And right now, it doesn’t cost a lot of money at all for the United States to issue debt.  Interest rates are incredibly low.  But low interest isn’t no interest, so there is a cost.  Government borrowing also increases interest rates (long story, but the short answer is “market for loanable funds” and "the quantity of loanable funds"; negative government spending reduces the quantity of loanable funds, interest rates go up*).  The Federal Reserve can do some things to mitigate these factors, and boy howdy have they been doing them.  It also helps to have the rest of the world doing far worse than we are, making our bonds seem the only safe form of sovereign debt out there.  Suffice to say that without Federal Reserve tinkering, interest rates would be (marginally) higher than they are due to the deficit spending.  And the credit downgrade that the US earned would have also hurt much more were it not for the Europeans.  But we can’t count on the Europeans being worse off than we are forever, because we’re going to pass them and become less attractive.  And the Fed keeping rates even marginally lower than they otherwise should be means more capital is borrowed and poured into housing and other long-range investments rather than saved.  Which is what caused the current financial crisis.

But Taibbi’s fatal flaw is his inability to see the difference between private and public finance.  If Mitt Romney makes a bad investment, yes, he may still make money and a firm may end up in ruins, but if the investors don’t make their nut, he won’t have investors.  If banks are left holding the bag, banks won’t work with him.  There are repercussions, consequences that will force the capital (money and otherwise) to its most (more) efficient allocation.  These repercussions and consequences don’t exist when the government spends other people’s money.  For our “investment” in GM to break even, GM shares need to be worth about $53/share.  It closed today at $23.37, so we’ve lost half that money.  And all of the money in Solyndra, after the government insisted on not having lien position in case of liquidation.  These are not the sort of stupid investments that private firms make because they are stupid investments.  But governments do, because Matt Taibbi, the readers of Rolling Stone, the Huffington Post are the ones who don’t understand how deficit spending works.

But keep attacking Mitt Romney personally, for the things he actually did well.

* This is no Austrian theory, this is no Friedman-esque monetarist theory, this is Keynesian economics and is Econ101 stuff.  Yes, Lord Keynes thought, other things equal, deficits are bad.  Short-term deficits during a recession are not to be worried about.  I can agree with Keynesians on this.  I don't think there needs to be concern about cutting government spending, when it comes to government spending on legitimate functions of government (see here for a handy list of what those functions are).  But those arguments go out the window when you're accumulated debt is >$16,000,000,000,000; annual GDP is about $14,500,000,000,000 and annual deficits are >$1,000,000,000,000.  What this means is that if all of the country's production for one year went not to wages, not to firms, not to revenues or profits, but if everything produced in one year were able to be liquidated and that money sent to Washington, we'd still have over $2,000,000,000,000 in debt and it would still be growing.  Oh, and you'd have not the United States but a country poorer than Congo.  The ability to print money to dodge the consequences of this profligacy is no solution.  As Hayek noted, "A government which uses inflation as an instrument of policy but wants it to produce only the desired effects is soon driven to control ever increasing parts of the economy."

Context

So the president says something stunningly stupid on Friday (08 June 2012, below).  It happens.  In our modern culture people are unfortunately expected to talk a lot.  The thinking seems to be that if you speak often, people will think you know something.  Or maybe Ford Prefect was right all along*.

Anyway, when you speak often of many things, especially, in the case of this president, about things you know absolutely nothing about like the economy or the constitution, you are bound to slip up every now and again and say something that pegs the asinine meter.  Obama said the private sector was doing "fine."

So what?  So his press secretary says today that the press isn't doing its job.  It's not reporting on "context."  In this case, Obama is saying that the drag on the economy is the loss of public sector jobs.  And, as a quick aside, based on current political rhetoric one would think that the only public sector employees we have are policemen, firemen and teachers.

So the press secretary has the cojones to berate the press for not doing its job properly because his boss said something just beyond-the-pale stupid and they don't take care to parse nuance?

Please.


http://youtu.be/DvUMvknc228


*Hitchhiker's Guide to Galaxy reference.  I'll explain fully later.

When Ideas Have Sex

What does an Acheulean handaxe have to do with the mouse sitting there on your desk?

I heard this story on NPR today.  A new show my local NPR station called the TED Radio Hour.  It is an interview and abridgment of a speech given by author Matt Ridley (video below).  I transcribed one part of the interview that was particularly sharp and one of the more important points I wish critics of free markets would get their heads around.

Can you explain why you measure prosperity in terms of time?

Yes, this was an insight that's occurred to a lot of people in the economics profession before.  This is what economic prosperity, what economic growth is.  It's a reduction in the amount of time it takes to fulfill a need.  That's how we fit so much consumption in our lives; [it] is by reducing the amount of time it takes to earn it.  So I think in the end the real measure of how well off you are is how long you have to work to fulfill a need, or indeed a luxury, and the difference between a need a luxury is often blurred.

Technological advances benefit everyone in the long run.  Looks like there's another book I'll be picking up.