Re: Townhall.com – 2/18/2009 – “Economic Miracle” – Walter E Williams

The n*(n-1) law Williams cites applies only to mutually distinct entities interacting in a one-to-one basis. In fact, most real communications are partly hierarchical and actually follow fewer but longer communication paths, and/or have some communications so infrequent that for all practical purposes they do not occur at all. Sometimes, entities are so strongly correlated that they can be counted as a single entity, or groups of related entities combined to form an independent super-entity --- in mathematical terms, an n*n matrix can often be transformed to a set of m block-diagonal matrices upon which computation are greatly simplified.

In chemistry and physics, statistical mechanics (the physical sciences analog to the workings of the economic free market) can explain well known observational laws and can be used to calculate results independent of the use of those observational laws. But many computations within the domain of statistical mechanics can be made to greater accuracy and with much less effort by using the observational laws instead of statistical mechanics. You don’t need statistical simulations of a zillion consumers to come up with a problem specific version of the law of supply and demand every time you want the know the price of bread at the store --- you go to the store and look. There are things the market can tell us that Congress and/or administration regulators can’t, but there are lots of things that Congress and/or administrative regulators and/or just us plain consumers on our own can figure out without waiting for the market to tell us what happened. If in fact only the market thru its action could tell us where it is going, businesses would be unable to make and carry out financial, production, and marketing plans even as long as 1 day in advance. Businesses can and does plan to a great deal of success, and so can/does government.

If government were to want to open a grocery store (other than the military supply distribution chains it already runs), what in the world makes Williams think government would appoint a czar for every product. Government would structure their grocery business just like private industry would. It would first create an agency (the government analog of a corporation), select a management team, then middle managers, and then workers. The agency would have divisions, just like a supermarket, where wine, meats, fresh vegis, bakery, etc, needs would be centralized. And there would be agency wide support divisions, such as finance, personnel, and purchasing. In fact, except that the board of directors (Congress) can’t fire the chairman (the President) except for high crimes or misdemeanors, there would be little structural differences between a government grocery store business and its corporate analog.

As for an auto czar, would he/she be doing anything that Warren Buffet does not do for all the companies under his control? Buffet doesn’t run the businesses Berkshire Hathaway owns, but he does oversee their budget and their CEOs.

In my opinion, Williams is batting 0 for 4 on this article. He doesn’t seem to understand the workings of math, economics, business, or government.

Williams says “If you have doubts about Adam Smith's prediction, ask yourself which areas of our lives are we the most satisfied and those with most complaints. Would they be profit motivated arenas such supermarkets, video or clothing stores, or be nonprofit motivated government-operated arenas such as public schools, postal delivery or motor vehicle registration? By the way, how many of you would be in favor of Congress running our supermarkets?“ While I’d prefer private grocery stores to government ones, I see little difference between state and private universities (there are really good ones and some pretty lousy ones in both and I’ve studied and taught at both) and definitely prefer buying my physical security (police and military) from the government rather then private providers.

Re: Townhall.com – 2/9/2009 – “Our Deadly Debt: How “Stimulus” Prolongs Pain” Dick Morris & Eileen McGann

Morris & McGann apparently are unable to distinguish debt to fund consumption with debt to fund investment in future production.

Debt supporting consumption is a dead weight on the economy --- it results in no long term income to the debtor necessary to pay off the debt, and as such is a capital drain on the economy in the future. In the present, however, it encourages consumption and thus helps the economy. Debt supporting investment is paid off from the future returns on investment and does not serve as a drag on the economy --- in fact, it is one of the major driving forces of a strong economy. No amount of debt is excessive so long as it: (1) in the long term is paid back by the economic gains from the investments it finances, and (2) in the short term requires no more repayment than cash flow provides. Both consumption and investment debt will help our current economy, but only investment debt will not hurt our future economy.

A college education is not a consumable and does not depreciate. Spending for education is an investment that is easily statistically justified by the increment in future earnings that education generates. Education is an important foundation of innovation and productivity growth. On both a personal and societal level, investing in education is wealth producing. Low cost government loans are appropriate for financing education because the payback time on educational loans is too far into the future to allow borrowers to service their dept near term, and too risky (due to possibilities of untimely death of debtors) for loaners without a huge base of loan customers. But for government, with a huge statistically significant debtor base and a long term prospective, the individual risk in the short term is adequately compensated by the long term return.

Morris & McGann should look to history (the Great Depression, Japan’s recent deflation) and see that our current economic problems may well last past next year, and that an exclusively short term focus may well be detrimental to the solution of our economic problems.

I would agree with Morris & McGann that government borrowing and spending to support non-income producing personal assets is unlikely to help and likely to hurt our attempts to shake our current economic problems. But I strongly disagree with Morris & McGann on the desirability (perhaps even necessity) of other forms of government loans and expenditures at this point in time.

Re: Townhall.com – 2/18/2009 – “Upside Down Economics” – Thomas Sowell

Sowell says “Both HUD and the Department of Justice began bringing lawsuits against mortgage bakers when a higher percentage of minority applicants than white applicants were turned down for mortgage loans”. Perhaps Sowell is younger than he looks, but I remember times of systematic discrimination by the home loan industry where minority (especially black) loan applicants were denied loans regardless of income, wealth, and/or other indicators of good credit risk for all properties except those in minority ghettos. The free market did that without any help from government intervention. In fact, government intervention against discriminatory lending occurred only because of the unethical actions of virtually all major free market lenders. If government intervention to stop such prevalent practices went too far, the real blame is not with the government intervention but the unethical practices that existed on the free market that brought on the government regulation.

Re: Business & Media Institute – 2/2/2009 – “’Bulls & Bears’ Guest Can’t Find Example of Stimulus Success” – Lauren O’Reilly

One of the most striking features of the social sciences is that there is never an example of any action that can be shown to have definitely worked or failed to work in solving a problem. The reason for this is that science requires controlled observation of a statistically significant number of solutions applied to essentially the same problem. Time cannot be rolled back to try alternate solutions to the same problem and not enough essentially identical situations can be found to constitute a statistically significant collection for inference.

FDR’s actions did or did not help us through the depression. One can argue that it did (the depression would have been even worse without FDR’s intervention), it didn’t (the depression would have ended on its own without FDR, whose actions actually prolonged the misery), or any host of alternative conclusions (my favorite being that FDR’s policies didn’t work because they weren’t large enough in scope to cure us of depression --- only WW-II was a large enough government action to end the depression). None of these theories has any real evidence to back them up.

Not only the social sciences lack true scientific testability. The theories of the origin of the universe also belong to this class of testless science --- while the basic theories underlying our beliefs about the origin of the universe are testable, there is no way to prove (or disprove) that the universe was actually created according to the predictions of those theories.

In cases like these, belief is based on faith, not testable scientific conclusions. Some political economists see government action as the cause of all good, others see government action as the cause of all bad. Most realize that government has both good and bad influences on the economy. A few realize that there is not a single example in modern (and probably ancient) history where either government or non-government actions were absent, so the best science has to offer is general guidelines on where more or less government action seems correlated with good or bad results --- these are scientifically weak results hardly rising to the level of pronouncements of success or failure in any particular case.

Re: Townhall.com – 1/28/2009 – “There Is No Santa Clause” – Walter E Williams

Economics is not a zero sum game. Economic activity is not limited by a fixed set of assets. A private enterprise may borrow money, use it to create additional capacity, and sell the outputs of the new capacity to pay off the borrowing and make a profit too. This profit does not necessarily mean some other private enterprise must run a deficit. That’s why economies can grow faster than population growth and standard of living can rise. That’s why government borrowing to finance our interstate transportation infrastructure has been a huge contributor to economic growth.  

Not every government expenditure is wasteful. Government infrastructure (roads, harbors, sewers, etc) and military, police, and communication services have dated back to the beginning of civilization and over time have proven more reliable and cheaper than similar private facilities and services. There are areas in which government finance and management beats private enterprise in quality of service and efficiency.

While the currently proposed stimulus legislation has provisions which seem to border on boondogglery, the problem with the stimulus package is in the details and not in the concept. Williams should back off his knee-jerk rejection of the stimulus and work to insure that the provisions of the stimulus package actually are additive to our economic health.

Re: Townhall.com – 1/27/2009 – “What Are They Buying?” – Thomas Sowell

Typical one-sided thinking --- see only the facts that support your position, ignore the facts that discredit it.

Sowell says “The government is putting money into banks … in hopes that the banks will put it into circulation. But the latest statistics shows that banks are lending even less money now than they were before the government dumped all that cash on them.” The money government invested into the financial system is only a small fraction of the losses in assets the financial system suffered during the recent collapse and that investment went mostly to boosting capital to keep the financial system solvent. As banks bring their leveraging down, new lending will increase. But much pre-collapse loan volume was based on overleveraging and making lots of bad loans that had poor chance of repayment. Do we ever want THAT loan volume back?

Sowell says “Spending money for infrastructure is another time-consuming way of dealing with what is called an immediate crisis. Infrastructure takes forever to plan, debate, and go through all sorts of hearings and adjudications, before getting approval to build from all the regulatory agencies involved. Out of $355 billion newly appropriated, the Congressional Budget Office estimates that only $26 billion will be spent this fiscal year and only $110 billion by the end of 2010”. Is this an argument not to spend $26 billion now and $110 billion by the end of 2010? Furthermore, both the Great Depression and the Japanese economic difficulties lasted much longer than just a couple of years, and any realistic approach to our current economic problems must look further ahead than just an immediate time perspective.

Sowell says “If you cut taxes tomorrow, people would have more money in their next paycheck, and it would probably be spent by the time they got that paycheck, through increased credit card purchases beforehand”.  Unfortunately, lower taxes won’t help those out of work or minimum wage workers who pay relatively little in taxes in the first place. While I have no objections to rational tax cuts, I can see no reason why significant benefits to our current financial problems would come from tax cuts at this point in time. The question of lower taxes at a time when the economy is less sick is of course something else again.

Sowell sys “Crises have long been seen as great opportunities to expand the federal government's power while the people are too scared to object and before any opposition can get organized“. It seems that those who oppose federal power also see opportunity in crisis --- they claim good economy is the result of private enterprise and bad economy the fault of government, so when the economy is in crisis, take power from the government. This is not necessarily a wrong conclusion but is surely an illustration of milking a crisis. In fact, governments mainly step in to solve problems that private sector dynamics cannot solve --- yes, governments tend to act mostly in reaction to existing crisis. Forbidding government from dealing with crisis might eliminate some side effects that governmental action may produce but it will never solve any crisis. Of course, when problems have been solved and where side-effects of government problem solutions become worse than the problems itself, we the voters must instruct our elected government officials to stop trying to solve the solved problems. And we the voters must keep governments from attempting ridiculous solutions. If we can’t do our job, we are unfit to for democracy, and government overreach is the least of our worries. If we can do our job, let’s just do it.

Sowell says “In the name of protecting the taxpayers' investment, they are buying the power to tell General Motors how to make cars, banks how to bank”. As history has demonstrated, neither the government nor the banks seems to know how to make (or, more to the point, when not to make) loans and neither the government nor General Motors seems to know how to make cars. But the Treasury auction has proven to be at least as orderly a market place as the free market of corporate securities, and while the government doesn’t know as much about cars as BMW, Honda, Toyota, and maybe even Ford, GM doesn’t seem to know any more about cars than the government does.

Sowell says “To this day, we are still subsidizing millionaires in agriculture because farmers were having a tough time in the 1930s. We have the Federal National Mortgage Association ("Fannie Mae") taking reckless chances in the housing market that have blown up in our faces today, because FDR decided to create a new federal housing agency in 1938”. It is absurd to blame subsidized agriculture on Congressional reaction to the 1930’s agricultural crisis or FNMA’s financial overreaching on FDR. What government did to avoid future farm and financial crashes were appropriate for their time. What we the voters have let these programs become is something else again. We should consistently reelect those who keep government doing and only doing what government is supposed to be doing, and vote everyone else out of office. But ranting that the 1930’s government is responsible for all our financial troubles ignores the real issues of economic boom/bust cycles. And blaming government for everything is just plain stupid.

Re: Townhall.com – 1/27/2009 – “Where Is Free Market Economics When You Need It Most?” – Mona Charen

Charen says “we got into this mess because government created a housing bubble”. She’s only partially right. Government made it possible for and encouraged us to get into this mess. Private enterprise eagerly took the encouragement to heart and made the bad loans that plague us today; private enterprise should not have made bad loans even if the government thought it should. Private enterprise made the loans because it brought them short term profits at the cost of taking on long term risk and thus deserves most of the blame here.

Government debt is no worse than private enterprise debt. What is common about debt is that nobody can continue to run deficits forever, neither private enterprise nor government, and that any entity that does run deficits too long looses the faith of their creditors that they will repay the debts, and bankruptcy or some other form of financial ruin inevitably follows. Debt should be taken on and paid off depending on short term conditions relative to the long term --- you can take on debt when you need more money in the short term only if you can (and will) pay off the debt later on when short term means exceed needs.

Right now the supply of money has decreased due to insufficient capital in the financial system far in excess of any weak stimulus such as tax relief. Government debt taken on and redeployed to stimulate the economy makes sense even if some of the current proposed stimulations don’t make much sense. But we all should be worried that the money we borrow and inject into the economy to refinance the financial industry and jump-start the economy actually gets withdrawn from the economy as the economy recovers, liquidating the debt and keeping money supply form over extension.