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Here we go again….  I just posted about the broken window fallacy on Saturday, and here comes Eric Zencey writing in the NY Times trying to claim that “If you get into a fender-bender and have your car fixed, G.D.P. goes up” and that “Hurricane Katrina produced something like $82 billion in damages in New Orleans, and as the destruction there is remedied, G.D.P. goes up.”

According to the blurb at the end of the article, Eric Zencey is “a professor of historical and political studies at Empire State College”.   Now I don’t know where  Empire State College is (I’m guessing New York) or what it may have as a claim to fame, but basic economics – or common sense – evidently isn’t a prerequisite in order to be a professor at the institution.

According to Mr. Zencey “If you get into a fender-bender and have your car fixed, G.D.P. goes up.” The only way that makes sense is to assume that the person who got the bent fender just happened to have the money to repair that fender lying around.  And by “lying around” I mean that literally.

If it happens to be invested in company stock, it’s already in the GDP.  If it happens to be in the bank in a savings account, it’s already part of the GDP.  Only if it’s in a mason jar buried in your backyard (or the equivalent) could the money you spent repairing a fender be included in the GDP.  Here’s why.

From Wikipedia – The GDP is calculated as: GDP = private consumption + gross investment + government spending + (exports − imports)

The money to fix the fender HAS to come from somewhere.  Let’s say it cost $1000 to fix.  If that $1000 came from your savings account, it decreases the investment amount by $1000 and the net change to the GDP is zero.

Does this change if you have insurance and the insurance company pays to repair your fender?  No.   Where did they get the money?  It was invested – insurance companies call the money you’ve paid them (but that they haven’t yet had to pay out) “float” and Warren Buffett got to be a billionaire by investing that float in places other than your fender.  All his billions are invested somewhere, so when Geico pays to fix your fender, it’s still subtracting from the overall investment total.  The NET EFFECT IS ZERO.

The same is true if the government spends more money with a “stimulus package”.   The only way GDP can increase via government spending is if the money didn’t come from another category.  But government money comes from higher taxes – which reduces the “private consumption” part of the equation – or it can come from borrowed money, which reduces the “gross investment” and/or increases the “import” (depending on where you borrow the money from) part of the equation.

Government spending only appears to increase GDP if it was previously collected but not spent.  In that case it transferred the spending from one time frame to another.  Government spending can increase the current GDP only at the expense of decreasing the GDP at another time.  If the government spent money it had saved, it decreased the earlier GDP.  It the government borrowed money and spent it, it’s decreasing future GDP.  This ain’t rocket surgery.

Money was simply moved from an investment where (it hopefully) could be used to create something valuable – to somewhere where it HAD to be used in order to repair an asset which had already been purchased.

It’s a bit crass, but think of it this way – if destroying an asset (via fender bender or hurricane or earthquake or nuclear war or whatever) CREATED wealth, here’s a solution to all our problems.

Why wouldn’t that work?  Got an answer for that Professor Zencey?

Cash for clunkers is the same concept.  Taking money from one part of the economy and spending it in a different part has a net effect of ZERO.  It may appear that you’ve got a bump in GDP for awhile, but that’s simply because you haven’t had time to see the effect of the loss in the other area.   Every government dollar spent buying a clunker is a dollar that isn’t spent providing health care, or building bridges or highways, or defending the country, or building a subway, or whatever you think the government should be spending money on.

The net effect is still zero, because every dollar the government spends has to come from somewhere – and “somewhere” means taxpayers.  And that’s why government spending (unless it’s from unspent tax surpluses of which the US has none) doesn’t actually do anything.

gk

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Just scanning the headlines on Google News tonight and happened across this in the NY Times.

The highly complex tactic has become a cause of growing concern within the Internal Revenue Service in recent years because it deprives the Treasury of billions of dollars a year, according to private-sector estimates.

It “deprives the Treasury of billions of dollars a year”?  Really?  How about phrasing it something like “it doesn’t take billions of dollars a year from the companies who earned it”?

BTW – The “highly complex tactic” simply says that a company isn’t taxed on money it earns outside of the country as long as it re-invests the money in the country where it was earned.  As in building a better, more efficient factory, or buying the materials it needs to keep producing the product

The NY Times (and Obama) seem to think that they are being “deprived” of billions of dollars per year.  How?  Did they earn it?

That’s what I thought.  Now shut up and quit spending so much of our money.

gk

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It’s easy to find dumb articles on the economy these days, but this one by Robert H. Frank in the NY Times is quite possibly the dumbest collection of nonsense that I’ve read in quite some time.

Mr. Frank is an economist at Cornell – evidently Cornell has loose requirements on who can claim that title – and he has his facts wrong.

For example, Mr. Frank states:  In 1929, President Herbert Hoover thought that the best response to a collapsing economy was to balance the federal budget. With incomes and tax receipts falling sharply, that meant cutting federal spending. But as almost all economists now recognize, President Hoover was profoundly mistaken.

Everyone has heard some variation of that basic statement over the years. The problem is that it’s simply not true.  That’s a polite way of saying that Mr. Frank is lying.

Hoover did not cut federal spending – Hoover increased federal spending.  Here is a chart of federal spending from 1928 -1940.   (Source data is the GPO here – link opens Excel spreadsheet.)

As anyone can plainly see, federal spending actually increased every single year from 1929 through 1932 – the four years of the Hoover presidency.  Yet Mr. Frank states that Hoover cut spending. The fact is that federal spending increased from $2.9 billion in 1928 (the year before Hoover took office) to $4.6 billion in 1932.

That’s a 63% increase in federal spending in just 4 years!  How can Mr. Frank be that ignorant of history and still write authoritatively about economic history?

And this data also lets a little air out of the myth that FDR’s spending brought us out of the depression.  It’s true that FDR increased spending, but when you actually look at the numbers, he increased spending in his first term from $4.6 billion in 1932 to $8.2 billion in 1936 – a 76% increase.  That’s not dramatically larger than Hoover’s 63% increase.  And during his next 4 years, FDR increased spending from $8.2 billion in 1936 to $9.4 billion in 1940 – a meager 15% increase in 4 years.

I have no doubt that “almost all” Keynesian economists will continue to propagate the lies about the Great Depression, Hoover, and FDR, but you and I know that they’re lying.

With that common fallacy exposed, we now turn back to Mr. Frank.

Mr. Frank states When a downturn throws people out of work, they spend less, causing still others to be thrown out of work, and so on, in a downward spiral. Failure to use short-run deficits to stimulate spending amplifies that spiral, causing further declines in tax receipts and even bigger deficits. That this path makes no sense is a settled issue.

It sounds good, but his statement that this is “a settled issue” is false.  It’s false because of his implicit premise that government deficit spending creates productive employment.  I have no doubt that government spending can employ otherwise idle people, but this is not a net gain for the economy.  The government simply transfers wealth from one segment of society to another – it doesn’t create wealth.  Mr. Frank’s major flaw is in his unstated assumption that the government can allocate resources better than individuals.

Take the current auto bailout as an example.  What would have happened if the government didn’t bail out GM?  GM would have declared bankruptcy.  People who had invested in GM stocks and bonds would be SOL – and that’s the way it should be.  When you invest your money, you (whether you realize it or not) are incorporating risk in choosing where to invest.  You may choose to invest in something risky like a dot com or alternative energy start-up, because you balance the risk of them going bankrupt against the possibility of huge returns.

It’s your money – invest it however you want.  But don’t bitch and moan and beg for a bailout when the money you invested disappears because the company goes broke and leaves you with a sock puppet.

In the case of a GM bankruptcy, valuable assets such as factories and parts would be auctioned off to the highest bidder.  Assets with no value are wiped out and those who invested in them would lose money.  Some would be unable to survive and would themselves go broke.

In other words, the “bad” (non-profitable) assets of GM would disappear.  But the “good” (profitable) assets would be sold to private investors (or companies) who would put them to productive use.  Good companies survive and thrive off of the mistakes of their competitors.  Just imagine how many productive  jobs Honda, Toyota, or Nissan could provide using GM facilities and patents.

Mr. Frank also shows his ignorance when he states Once the downturn ends, there should be no need to incur additional debt. Indeed, there are many ways to pay down debt without requiring painful sacrifices. A $2 tax on each gallon of gasoline, for example, would generate more than $100 billion in additional revenue a year.

Politicians and economists have been saying that they’ll balance the budget and start paying down the debt for as long as I can remember – and I’m 47.  It has not happened in my lifetime.  Not once.

The last time the US reduced the national debt was 1957.  (Source is the US Treasury.) When do you suggest we start making payments on the principal Mr. Frank?

And a $2 per gallon tax on gasoline would be an additional $283 billion in taxes at the current rate of consumption of 141.9 billion gallons per year. (Source is US Energy Information Administration.)

Mr. Frank also says It’s also useful to put the nation’s debt burden into perspective. Over the last eight years, Bush administration deficits raised the national debt by almost $5 trillion. Given the current crisis, it’s easy to imagine a similar increase during the next four years. At recent interest rates, servicing $10 trillion of extra debt costs about $400 billion annually — a big amount, to be sure, but less than 3 percent of the economy’s full-employment output. We’ll still be the richest country on the planet even after paying all that interest.

Bullshit.  That’s like saying you got the highest score of those who failed.  I’m not a fan of Bush – since I consider Bush the worst President in my lifetime, that’s the understatement of the year – so I don’t like it when Obama imitates Bush.  Liberal or Conservative – big government is big government.

The 3% figure Mr. Frank gives is technically accurate – when you take the $400 billion figure he uses – but why does he use that number?  The bottom line is the one that matters.

The national debt is currently over $11 trillion (source US Treasury).  The US GDP for 2008 was $14.2 trillion (source BEA).

Our current national debt is 77% of GDP.  If Obama adds $5 trillion more in the next 4 years (as seems likely) our debt will be over 100% of GDP.  And if Mr. Frank thinks that’s sustainable, I’ve got some great beach-front property to sell him.

I could go on and on about the errors in Mr. Frank’s article – such as his mistaken assumptions about the wealthy – but you can read it yourself.  I’m amazed that the NY Times editors allowed an article this full of errors to be published.

gk

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Good series of articles in the NY Times today titled When Will the Recession Be Over?

It’s a good read with differing views, but the bottom line consensus is “not soon”.

gk

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Here are the current top three stories in the NY Times Business Section as of 9:30pm ET, July 28th:

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While checking out the headlines this morning, I ran across this from David Brooks at the NY Times.  Anyone at or approaching middle age should check it out, because it’s a humorous take on memory loss and information overload.

Here’s his take on the start of a conversation: 

This divide produces moments of social combat. Some vaguely familiar person will come up to you in the supermarket. “Stan, it’s so nice to see you!” The smug memory dropper can smell your nominal aphasia and is going to keep first-naming you until you are crushed into submission.

Your response here is critical. You want to open up with an effusive burst of insincere emotional warmth: “Hey!” You’re practically exploding with feigned ecstasy. “Wonderful to see you too! How is everything?” All the while, you are frantically whirring through your memory banks trying to anchor this person in some time and context.

A decent human being would sense your distress and give you some lagniappe of information — a mention of the church picnic you both attended, the parents’ association at school, the fact that the two of you were formerly married. But the Proustian bully will give you nothing. “I’m good. And you?” It’s like trying to get an arms control concession out of Leonid Brezhnev.

Good stuff!  At least it was funny when I read it – I forgot why…. 

gk

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Wow, I know the NY times is not a fan of deregulation (in any form) but they’re piling on in the past few days.  Check out this editorial calling for more federal regulation on credit cards.

As an example of why more regulation is needed, they provide an anecdote of a stupid man in Chicago.  Here’s a quote:

At a recent news briefing in Washington, a Chicago man told about what happened when he charged a $12,000 home repair bill in 2000 on a card with an introductory interest rate of 4.25 percent. Despite his steady, on-time payments, the rate is now nearly 25 percent. And despite paying at least $15,360, he said that he had only paid off about $800 of his original debt.

Despite paying at least $15,360, he’s only paid about $800 of the principal?   The only way this is possible is if he’s been paying the minimum for the past 8 years.  If that’s what he’s done, he’s a moron! 

I suppose we should look to the government to bail him out too? 

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I ran across an interesting article in the NY Times today.  Gail Collins obviously believes in cradle to grave socialism, but she writes well. 

She sarcastically lambasts McCain for wanting the current crop of hustlers to fail on their own, and she doesn’t seem to understand the consequences of what she’s advocating.  If people (and companies) are bailed out for their bad choices, they will continue to make bad choices.  Even worse, others will be encouraged to make bad choices, thus compounding the problem in the future when more people need help.

This is no different than Medicare/Medicaid, food stamps, subsidized housing, welfare, etc.  Let people fail – and let them bear the consequences of their failures – and they improve their decisions in the future.  Bail them out and they’ll continue to need help forever.

gk

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Paul Krugman has a decent opinion piece in the NY Times today.  If you’ve read any of his stuff before, you know that he thinks government has all the answers – and that government can fix whatever is wrong with (pick your topic!).

Todays’ article basically blames everything economic on “A Crisis of Faith”.  He says that investors have lost faith in the security of the underlying investments, and their lack of faith is causing the Port Authority’s borrowing cost to go up.  Technically that’s true, but he doesn’t go deep enough into “why” investors don’t have faith.

It’s not that they distrust the Port Authority ability to raise taxes to pay them back – it’s that the insurers are technically bankrupt – IF the Port Authority doesn’t pay the money back, there’s no second layer of protection.  It’s the same as if you were thinking about putting your money into a bank that has a great reputation but isn’t FDIC insured.  If you can get the same return on your investment from an FDIC insured bank – why would you bother with the non-insured bank?

When Ambac and MBIA are technically bankrupt, why bother with anything they insure?  There are safer places to put your money.  Not necessarily big FDIC insured banks – sure you’ll get your money back if the bank fails, but it may take quite a while.  Local banks that didn’t resell the mortgages they wrote should be fine – they were conservative in writing the loans, so they won’t be hit as hard when a lot of people default over the next couple of years – but I think gold and/or silver will have better returns than most other common investment over the next 1 to 2 years.  This financial crisis is just getting started.

gk

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