Copy of paper taken from my Day II Opening Address to New Zealand Society of Risk Management Sept 1st 2010.
19/06: The "big problem" summarised
Gary Becker.... from a WSJ interview
Bad legislation, maintained by self-seeking interest groups. Back in 1982, I remind Mr. Becker, the economist Mancur Olson published a book, "The Rise and Decline of Nations," predicting just that trend. Over time, Olson argued, interest groups would form to press for policies that would almost invariably prove protectionist, redistributive or antitechnological. Policies, in a word, that would inhibit economic growth. Yet since the benefits of such policies would accrue directly to interest groups while the costs would be spread across the entire population, very little opposition to such self-seeking would ever develop. Interest groups—and bad policies—would proliferate, and the nation would stagnate.
Olson may have sketched his portrait during the 1980s, but doesn't it display a remarkable likeness to the United States today? Mr. Becker thinks for a moment, swiveling toward the window. Then he swivels back. "Not necessarily," he replies.
"The idea that interest groups can derive specific, concentrated benefits from the political system—yes, that's a very important insight," he says. "But you can have competing interest groups. Look at the automobile industry. The domestic manufacturers in Detroit want protectionist policies. But the auto importers want free trade. So they fight it out. Now sometimes in these fights the dark forces prevail, and sometimes the forces of light prevail. But if you have competing interest groups you don't end up with a systematic bias toward bad policy."
Mr. Becker places his hands behind his head. Once again, he reflects, then smiles wryly. "Of course that doesn't mean there isn't any systematic bias toward bad policy," he says. "There's one bias that we're up against all the time: Markets are hard to appreciate."
Capitalism has produced the highest standard of living in history, and yet markets are hard to appreciate? Mr. Becker explains: "People tend to impute good motives to government. And if you assume that government officials are well meaning, then you also tend to assume that government officials always act on behalf of the greater good. People understand that entrepreneurs and investors by contrast just try to make money, not act on behalf of the greater good. And they have trouble seeing how this pursuit of profits can lift the general standard of living. The idea is too counterintuitive. So we're always up against a kind of in-built suspicion of markets. There's always a temptation to believe that markets succeed by looting the unfortunate."
Bad legislation, maintained by self-seeking interest groups. Back in 1982, I remind Mr. Becker, the economist Mancur Olson published a book, "The Rise and Decline of Nations," predicting just that trend. Over time, Olson argued, interest groups would form to press for policies that would almost invariably prove protectionist, redistributive or antitechnological. Policies, in a word, that would inhibit economic growth. Yet since the benefits of such policies would accrue directly to interest groups while the costs would be spread across the entire population, very little opposition to such self-seeking would ever develop. Interest groups—and bad policies—would proliferate, and the nation would stagnate.
Olson may have sketched his portrait during the 1980s, but doesn't it display a remarkable likeness to the United States today? Mr. Becker thinks for a moment, swiveling toward the window. Then he swivels back. "Not necessarily," he replies.
"The idea that interest groups can derive specific, concentrated benefits from the political system—yes, that's a very important insight," he says. "But you can have competing interest groups. Look at the automobile industry. The domestic manufacturers in Detroit want protectionist policies. But the auto importers want free trade. So they fight it out. Now sometimes in these fights the dark forces prevail, and sometimes the forces of light prevail. But if you have competing interest groups you don't end up with a systematic bias toward bad policy."
Mr. Becker places his hands behind his head. Once again, he reflects, then smiles wryly. "Of course that doesn't mean there isn't any systematic bias toward bad policy," he says. "There's one bias that we're up against all the time: Markets are hard to appreciate."
Capitalism has produced the highest standard of living in history, and yet markets are hard to appreciate? Mr. Becker explains: "People tend to impute good motives to government. And if you assume that government officials are well meaning, then you also tend to assume that government officials always act on behalf of the greater good. People understand that entrepreneurs and investors by contrast just try to make money, not act on behalf of the greater good. And they have trouble seeing how this pursuit of profits can lift the general standard of living. The idea is too counterintuitive. So we're always up against a kind of in-built suspicion of markets. There's always a temptation to believe that markets succeed by looting the unfortunate."
This simple economics really but currently overlooked in most countries
Bailouts and Stimulus Plans
by EUGENE F. FAMA
There is an identity in macroeconomics. It says that in any given year private investment must equal the sum of private savings, corporate savings (retained earnings), and government savings (the government surplus, which is more likely negative, that is, a deficit),
PI = PS + CS + GS(1)
In a global economy the quantities in the equation are global. This means the equation need not hold in a particular country, but it must hold in the world as a whole. For example, in recent years private investment in the US has been greater than the sum of private, corporate, and government savings in the US. This means the US has been importing savings from the rest of the world (by selling US securities to the rest of the world). But the equation always holds for the world as whole.
Bailouts and Stimulus Plans
by EUGENE F. FAMA
There is an identity in macroeconomics. It says that in any given year private investment must equal the sum of private savings, corporate savings (retained earnings), and government savings (the government surplus, which is more likely negative, that is, a deficit),
PI = PS + CS + GS(1)
In a global economy the quantities in the equation are global. This means the equation need not hold in a particular country, but it must hold in the world as a whole. For example, in recent years private investment in the US has been greater than the sum of private, corporate, and government savings in the US. This means the US has been importing savings from the rest of the world (by selling US securities to the rest of the world). But the equation always holds for the world as whole.
14/03: Democracies in Deficit
Nobel Laureate James Buchanan and Robert Wagner have developed a surprising simple but extremely powerful new public choice theory of wht democracies of all hue inevitably end up running deficits. Here Bruce Yandle (bootleggers and baptists summarises.....
"Tossing aside the standard assumptions of Keynesian economics, Buchanan and Wagner explained the systematic tendency of democracies to run deficits, in the best and worst of times. They named their book Democracy in Deficit, a title that surely fits the U.S. in the 21st century. Incentives lie at the heart of their theory.
To keep their jobs, politicians, most of the time, want to bring home the bacon, which means increased spending is always preferred to spending reductions. And to get their jobs, politicians always promise not to raise taxes. Read my lips! Avoiding taxes and increasing spending form the fatal ingredients for the final deficit recipe. Whether Democrats with a big D, Republicans, Labor or Conservative, the tendencies are the same, even though the speeches sound different. There are exceptions to the behavior, of course. But systematic deficits are the result, according to the persuasive Buchanan-Wagner story."
"Tossing aside the standard assumptions of Keynesian economics, Buchanan and Wagner explained the systematic tendency of democracies to run deficits, in the best and worst of times. They named their book Democracy in Deficit, a title that surely fits the U.S. in the 21st century. Incentives lie at the heart of their theory.
To keep their jobs, politicians, most of the time, want to bring home the bacon, which means increased spending is always preferred to spending reductions. And to get their jobs, politicians always promise not to raise taxes. Read my lips! Avoiding taxes and increasing spending form the fatal ingredients for the final deficit recipe. Whether Democrats with a big D, Republicans, Labor or Conservative, the tendencies are the same, even though the speeches sound different. There are exceptions to the behavior, of course. But systematic deficits are the result, according to the persuasive Buchanan-Wagner story."
08/03: The Keynesian Stimulus Dogma
The last two years have been filled with talk of "stimulus spending" as a means for climbing out of recession - as most people's instincts suggest to them, putting out the fire with gasoline is typically not a good idea. The following is a good summary of the flaws in the argument so beloved of the followers of its originator Keynes.
By Mark W. Hendrickson
Most Americans don't believe that the way for Washington to address its gargantuan debt is to increase deficit spending and go deeper into debt.
Nobel laureates Joseph Stiglitz and Paul Krugman disagree. Stiglitz, for example, in an interview televised on Feb. 17, denigrated "deficit fetishism" and assured listeners that more "stimulus" spending now would augment American prosperity, both short-term and long-term.
There are several major defects in Professor Stiglitz' analysis.
By Mark W. Hendrickson
Most Americans don't believe that the way for Washington to address its gargantuan debt is to increase deficit spending and go deeper into debt.
Nobel laureates Joseph Stiglitz and Paul Krugman disagree. Stiglitz, for example, in an interview televised on Feb. 17, denigrated "deficit fetishism" and assured listeners that more "stimulus" spending now would augment American prosperity, both short-term and long-term.
There are several major defects in Professor Stiglitz' analysis.
Basically, It's Over: A parable about how one nation came to financial ruin.
By Charles Munger (in Slate Magazine)
In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature's bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island "Basicland."
The Europeans rapidly repopulated Basicland, creating a new nation.
By Charles Munger (in Slate Magazine)
In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature's bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island "Basicland."
The Europeans rapidly repopulated Basicland, creating a new nation.
Almost all of this analysis applies in one form or another to N.Z. - a bit of care is required in applying the second half of the article to the local economy however.
Bernanke and the Beast
By N. GREGORY MANKIW
Published: January 16, 2010
IS galloping inflation around the corner? Without doubt, the United States is exhibiting some of the classic precursors to out-of-control inflation. But a deeper look suggests that the story is not so simple.
Let’s start with first principles.
Bernanke and the Beast
By N. GREGORY MANKIW
Published: January 16, 2010
IS galloping inflation around the corner? Without doubt, the United States is exhibiting some of the classic precursors to out-of-control inflation. But a deeper look suggests that the story is not so simple.
Let’s start with first principles.
The following is Greg Mankiw's posting of the summary of this paper from Harvard. The significance of the conclusions - while perhaps suspected and in some ways obvious - are difficult to over state.
"We examine the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments, those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions."
"We examine the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments, those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions."
09/06: Fatal conceit???
I notice this morning that Prof Krugman now can estimate with accuracy to within a quarter "when" the recession will end. Why is it that I and my colleagues of quasi Austrian / Chicago roots have all assiduously avoided "guessing" this particular moment and warned others who are tempted.... and yet Krugmanites are there.
Possibly the same reason this group feels they can discern the level of knowledge necessary to guide, nudge and policy whip society into equitable and optimal states of social well being - as Hayek warned so long ago.
Possibly the same reason this group feels they can discern the level of knowledge necessary to guide, nudge and policy whip society into equitable and optimal states of social well being - as Hayek warned so long ago.
03/06: How Not to Run G.M.
Obama's environmental and employment goals could undermine profitability.
Jacob Sullum | June 3, 2009
On Monday, after President Obama unveiled his plan to nationalize General Motors, G.M. Vice Chairman Robert Lutz exulted, "Their No. 1 goal is to make us successful." But Obama seems to have three No. 1 goals: turning a profit, building cleaner cars, and creating American jobs. These priorities clash with each other, with the president's professed desire to "get out quickly," and with his promise of "a hands-off approach."
On March 30, Obama assured a wary public that....
Jacob Sullum | June 3, 2009
On Monday, after President Obama unveiled his plan to nationalize General Motors, G.M. Vice Chairman Robert Lutz exulted, "Their No. 1 goal is to make us successful." But Obama seems to have three No. 1 goals: turning a profit, building cleaner cars, and creating American jobs. These priorities clash with each other, with the president's professed desire to "get out quickly," and with his promise of "a hands-off approach."
On March 30, Obama assured a wary public that....
