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Thursday, February 01, 2007

KUDLOW REPLAY   Here's the YouTube version, in which I defend gold as an inflation indicator, and defend Milton Freidman's dictum that inflation is everywhere and always a monetary phenomenon.

Gary Shilling (who, by the way, is predicting that the stock market will fall 50% this year) took the other side in the debate, but I'm not entirely sure how to come to terms with the intellectual force of some of the things he said. For example...

"Gold is pushed around by a lot of things... The IMF said they're going to sell, but not for twenty years... what Chinese peasants do with their money... who knows what the real meaning is?"

"You look at the dollar against the yen, it's been very strong lately. Yeah, against the euro, no."

"If you say the Fed is a monetary phenomenon, then you say those idiots at the Federal Reserve between 1941 and 1945 didn't know what they were doing. They humped the economy supply and created all that inflation. That's nonsense."

On that last one, I know the Fed does some strange things with printing presses and helicopters, but I'm trying to visualize it humping the money supply... Help me out here...

Posted by Donald L. Luskin at 11:13 PM | link  

HMMM... MAYBE KRUGMAN WAS RIGHT   when he said back in December: "Most, though not all, of the ... economic numbers that came out this week were ... substantially weaker than expected. Pessimists feel vindicated by the downbeat data." Here's the proof:
NEW YORK (AP) -- The New York Times Co. posted a $648 million loss for the fourth quarter on Wednesday as it absorbed an $814.4 million charge to write down the value of its struggling New England properties, The Boston Globe and the Worcester Telegram & Gazette.
Thanks to "public editor" (and artblogger) Irwin Chusid for the link.

Posted by Donald L. Luskin at 8:19 PM | link  


Posted by Donald L. Luskin at 9:25 AM | link  

BIAS? NOPE. NOT HERE. NO WAY!   The lede from an AP "news" story yesterday:
WASHINGTON - The House passed a $463.5 billion spending bill Wednesday that covers about one-sixth of the federal budget as Democrats cleared away the financial mess they inherited from Republicans.
Thanks to reader Tim Daniel for the link.

Posted by Donald L. Luskin at 12:14 AM | link  

BRAD DELONG'S CONCEPTION OF PROPERTY RIGHTS   From a column by Jabba the Economist in the Miami Herald:
Bill Gates, Paul Allen, Steve Ballmer and the other millionaires and billionaires of Microsoft are brilliant, hardworking, entrepreneurial and justly wealthy. But only the first 5 percent of their wealth can be justified as an economic incentive to encourage entrepreneurship and enterprise. The next 95 percent would create much more happiness and opportunity if it were divided evenly among U.S. citizens or others than if they were to consume any portion of it.
So the entitlement that hard-working Americans can claim to the fruits of their labors requires being "justified" on the grounds of incentives? How about "justifying" it on the grounds of freedom? What possible argument in favor of stripping away property rights can come from Brad DeLong's opinion, or anyone else's, that some fraction of those fruits would make other people happier than it makes its creators? I am most assuredly not concerned with the happiness it gives Brad DeLong to appoint himself the arbiter of everyone else's happiness, and to imagine the thrill of the power that would come with deciding how everything should be distributed to maximize that happiness. Let DeLong create something of value for once in his life, and let him be in charge of distributing that.

Thanks to reader Mike Mitchell for the link.

Update... a reader who asks for anonymity thinks the headline for this post should have been "Brad DeLong's Conception of Calorie Rights," and he suggests the following rewrite:

Brad DeLong and other overweight economists earn good money from public institutions and are big eaters and obese. But only the first 50 percent of their calories can be justified as a dietary requirement for healthy living. The other 50 percent would create much more happiness and opportunity if it were provided to starving U.S. citizens or others than if they were to consume any portion of it.
Update 2 [2/2/2007]... Reader Forbes Tuttle makes a good observation:
In taking up the subject of the Microsoft Millionaires, but especially the billions of Gates, Allen, and Ballmer, whose wealth is a result of the appreciation of Microsoft's market capitalization, DeLong is proposing the policy of a 95% tax on capital (wealth). As class warfare, this may get some juices flowing, but as economic policy, this puts DeLong's party--the Democrats--in league with Karl Marx, who preferred 100% of the capital to be in the hands of the state. As regards the consequences of such a policy, I'd suggest DeLong's 95% tax on wealth is a distinction without a difference, when compared to Marx's 100% state control.

Posted by Donald L. Luskin at 12:06 AM | link  

Wednesday, January 31, 2007

KRUGMAN SELLS THE BOTTOM AGAIN   From Paul Krugman's December 1 column, published when economic news was at its bleakest, and on the very day that bond yields hit their lows:
Most, though not all, of the ... economic numbers that came out this week were ... substantially weaker than expected. Pessimists feel vindicated by the downbeat data. Nouriel Roubini..., who has been forecasting a housing-led recession for some time, ... predicts zero growth for the current quarter. Economists at Deutsche Bank say the same thing.

But that’s still a minority position; most forecasters are still telling us not to worry. So whom should you listen to? And how can you avoid believing what you want to believe?

Maybe the best answer is to look at what the financial markets say. Not the stock market, which is a notoriously bad indicator of the economy’s direction, but the bond market...

Since last summer, when the housing bust became unmistakable, interest rates on long-term bonds have fallen sharply. They’re now yielding much less than short-term bonds. The fact that investors are willing to buy those long-term bonds anyway tells us that these investors expect interest rates to fall. And that will happen only if the economy weakens, forcing the Federal Reserve to cut rates. So bond buyers are, in effect, betting on a future economic slowdown.

How serious a slump is the bond market predicting? Pretty serious. Right now, statistical models ... give roughly even odds that we’re about to experience a formal recession. And since even a slowdown that doesn’t formally qualify as a recession can lead to a sharp rise in unemployment, the odds are very good — maybe 2 to 1 — that 2007 will be a very tough year.

Nouriel Roubini and Deutsche Bank must have been thrilled at the time to have Krugman quote them. But now their lousy predictions smell like the rotten fish that they are -- and thanks to Krugman, the stink is out in the open, on the record, for everyone and anyone to smell. Today fourth quarter 2006 GDP growth was announced not at zero, as these foolish perma-bears had said, but at a fast 3.5%. So thanks, Krugman, for helping to expose their idiocy along with your own.

Update... Apparently I was unfair to Deutsche Bank. Stupid me -- I made the mistake of believing that Krugman had accurately represented their view. Roubini is an ultra-bear for sure, but reader Shawn Mercer has discovered the truth about Deutsche:

I realize it wasn't really the point of your latest post, but apparently Krugman cannot be trusted even to fairly portray the views of those he claims agree with him. "Economists at Deutsche Bank say the same thing (prediction of zero growth for the 4th quarter)."

Oh really? See if you agree, but by my reading of their research -- U.S. Outlook for 2007, published in December 2006 -- that sounds like a pretty gross exaggeration:

Base-Case. Putting it all together, we think the US econ-omy is in the midst of what will prove to be a "soft land-ing" — a period of modestly below-trend growth that began in the spring of 2006 and may persist through part of 2007, driven primarily by a housing correction. As residential investment stabilizes, perhaps by late 2007, growth is likely to return to trend, as the knock-on effects from the deceleration in home prices prove modest and partly offset by the economy’s other supports. All told, this period of slightly sub-par growth should be enough to ease rates of resource utilization a bit and help contain and possibly edge core inflation lower. That’s especially true if we are correct that some of the run-up in core inflation early in 2006 owed to transitory factors (energy price pass-through, a catch-up in rents) that are fading. Labor compensation may continue to accelerate modestly, but much of this may reflect catch-up to productivity advances of recent years, which were not fully reflected in labor income. Equivalently, competitive pressures may prevent firms from passing through all the acceleration in labor costs to prices.

Risks. We see the risks to this base-case forecast for growth as asymmetric, tilted a bit to the downside. In particular, the housing correction could be deeper and longer-lasting than we anticipate, with greater knock-on effects to consumer spending. If so, the rest of the world may have a harder time skirting the US slowdown, mak-ing it tougher for US exports to improve. Moreover, a sharper slowing in consumer spending could cause busi-nesses to pull back on capital spending, despite strong corporate finances. Finally, financial conditions may not be quite as accommodative as they appear; if part of the reason that real interest rates are low is because of a surplus of desired savings abroad (i.e., a deficiency of aggregate demand abroad), this suggests that the equilib-rium real interest rate may have declined — so today’s level of rates may not be as stimulative as we think. But the risks are not one-sided. The resiliency of the labor market suggests that the economy may not have slowed much below potential at all over the last three quarters of 2006. So rates of resource utilization may not ease much even if recent growth rates persist. This would be espe-cially worrisome for the inflation outlook if some of the pickup in core inflation in early 2006 was already due to high rates of resource utilization (i.e., if not all of it was transitory). Further, we can’t necessarily count on wide profit margins acting as a buffer against inflation pressures should labor costs accelerate further.

Fed policy. If something close to our base-case scenario plays out, the Fed may be hold for much of 2007. In fact, our base-case scenario is very close to what the Fed would like to see happen — a period of modestly below-trend growth, driven primarily by a housing correction, that helps ease rates of resource utilization and edges core inflation lower. The risks around this base-case fore-cast of a steady Fed are tilted slightly to the side of an eventual easing. The funds rate is toward the upper end of what is generally perceived to be the "neutral" range, and the growth risks are skewed to the downside. But for the Fed to cut rates, we would need to see two things: clear evidence that the housing slump was spilling over into consumer spending and especially into the labor market; and clear evidence that core inflation was peaking if not heading lower. In our base-case, we’re likely to see the latter, but not necessarily the former.

The Deutsche people don't sound like "perma-bears" here. Can this a**hole be trusted to tell the truth about anything?!

Posted by Donald L. Luskin at 4:06 PM | link  

CORZINE'S FOLLY   The state of New Jersey mulls "privatizing" the state lottery. Our correspondent "Irrational Exuberance" notes that this moves, for a change, the liberal stronghold in the opposite policy direction of Venezuela. But is it really so different? All that's happening here is the government as arbitrarily declared gambling -- a victimless crime -- to be illegal for private operators, granting itself a monopoly. Now it intends to make money by selling that monopoly status to a private operator who should have had an unrestricted opportunity in gambling all along. Thus the state collects an extorted premium from the private sector, and consumers lose the benefits of competition. It's still gambling; it's still privately operated; and it's a legal monopoly. Brilliant.

Posted by Donald L. Luskin at 3:52 PM | link  

PERFECT INFORMATION   Think unions are the big special-interest group backing the liberal establishment? I'd rank academia number one on that score, since intellectual cover is infinitely more valuable than mere money. So it follows that universities would be exempt from the usual regulatory considerations of privacy rights and monopoly. From Steve Sailer's blog:
Our Endangered Right to Privacy is a favorite topic of newspaper editorials and long op-eds. Yet, I don't recall ever seeing anyone point out that the extraordinarily elaborate process of applying for "financial aid" from colleges tramples all over your privacy. This says a lot about the deference paid to the college cartel by the American upper middle class.

As you know, colleges set their sticker prices by picking some absurdly high figure, like $46,732 per year, then discount like crazy, although they call their discounts "financial aid." But, they discount the way economic theory predicts a monopolist would - by perfect price discrimination, setting the profit-maximizing price for each potential customer. You learn in Econ 101 that in the real world, this theoretical result is seldom achieved because firms can't obtain all detail necessary about each customer for setting the perfect price. If your econ professor has...a rogue wit, he will then point out that there is a single exception: American colleges, which insist upon complete financial disclosure from applicants for "financial aid."

Thanks to reader Mark Spahn for the link.

Posted by Donald L. Luskin at 9:25 AM | link  

Tuesday, January 30, 2007

LOOK WHO'S BLOGGING!   Our friend and "public editor" Irwin Chusid has started the Jim Flora blog -- celebrating the life and art of the American artist of the 1940s and 1950s. I guess now that Irwin's blogging on his own he won't have time to catch all the dumb errors I make on this blog, so we're going to have to live with a certain degradation of service here. But it's well worth it. Irwin's blog is a beauty -- and it's your only chance to see some rare Flora artworks that Irwin's been holding out on us! Do check it out!

Posted by Donald L. Luskin at 11:13 PM | link  

WHO'S INFLEXIBLE?   Here's a Bloomberg story that pretty much sums up the current impasse over Social Security reform. Treasury Secretary Henry Paulson is applauded for seeking a bipartisan consensus in which "everything is on the table," including a tax increase. President Bush is booed for signaling that while he'll discuss that possibility, he is strongly opposed to it. Every Democrat quoted in the story staunchly insists -- with no room for equivocation or debate -- that a tax hike be part of the solution. Here's a whopper from Dem senator Kent Conrad:
``Both sides have to be willing to give up their fixed positions,'' Conrad, 58, said at a Washington press conference last week. ``There needs to be more revenue.''
Huh? Give up "fixed positions" other than that there "needs to be more revenue!

At the same time, Bush is portrayed as stubborn and inflexible because he is willing to discuss tax hikes, but comes into the discussion opposed to them. Why is one side in this debate entitled to inflexible requirements for the outcome, and the other not? Simple -- there are two reasons. One, because the liberal media is writing the story, so it seems perfectly sensible for the least flexible people to call the most flexible people inflexible. Two, because no good deed goes unpunished -- Bush took the high road and said he would be flexible, so now any expression of his own opinions is used by his enemies as a sign of hypocrisy. God help anyone working on Social Security reform in Washington who actually gives a damn about policy. This crap is nothing but politics.

Update... Rick Gaber says,

While the ten things are all well and good, let's remember the bigger picture:
"If a tax cut increases government revenues, you haven't cut taxes enough." -- Milton Friedman

Posted by Donald L. Luskin at 3:18 PM | link  

DON'T SELL SHORT-SELLERS SHORT!   My DC lawyer/lobbyist friend has something new for us free-market types to worry about:
Another little bit of evidence that the guiding philosophy of the these past 27 years – Reaganomics -- is slipping away. This one concerns stock trading...

If you don’t have both bulls and bears fighting with each other every nanosecond on Wall Street, you don’t have a fair marketplace.

The political pressure to “do something” about some of the practices of short sellers is high and getting more so. The heat is coming from people in both parties, even a smart man like Chris Cox who worked for Ronald Reagan in the White House. Look at his quote:

"This is already a serious issue and it is showing all signs of growing."
Yes, it is a serious issue but many of the allegations presented in the Wall Street Journal article last week on this subject are seriously flawed. Much of this imagined crisis is a misunderstanding of industry practices and procedures. Much of the agitation to “do something” is being generated behind the scenes by companies who hate it when their stock is shorted. Who wouldn’t! Yes, the short sellers can be bastards, or wrong. (No, I don’t represent them.)

If the SEC makes it harder to short a stock, or limits the rights to borrow a stock, or limits the voting rights which now transfer to the borrower, then the SEC will tip the scale away from the bear. Do we want the referee choosing sides and tipping scales?

That is a serious issue which shows all signs of growing.

Posted by Donald L. Luskin at 1:03 PM | link  

WHAT? ONLY TEN?   Our friend Brian Reidl at the Heritage Foundation has ten things you need to know about the 2003 tax cuts:
*Current tax revenues of 18.4% of GDP are now above the historical average;
* The 2006 tax revenues of $2,407 billion were $47 billion above the level projected by CBO before the 2003 tax cuts, and just $58 billion below the level projected by CBO in 2000, before the 2001 tax cuts;
* Capitals gains tax revenues have more than doubled to $103 billion since the 2003 capital gains tax cuts;
* The child credit, 10% bracket, and marriage penalty reduced revenues much more than many of the “tax cuts for the rich;”
* Even if the Bush tax cuts are made permanent, CBO projects revenues will still surge to a record 22.8% of GDP by 2050;
* Letting the tax cuts expire would raise long-term revenues by less than 1% of GDP;
* Historical tax revenues correlate almost perfectly with GDP, and not all with income tax rates;
* Negative GDP, investment, and jobs trends immediately reversed after the 2003 tax cuts were enacted; and
* The Bush tax cuts actually shifted the total tax burden even further towards the rich, according to CBO.
Update [January 31, 2007]... Reader Brian Hart has number 11, and says it should be number 1:
Inflation adjusted tax revenues per capita (less payroll) were 17% higher in 2006 than they were in 2002. When you use % to GDP as the metric, you have ceded that the government should grow its revenues like a private corporation. It also allows the opponents of the tax cuts to claim that anything below the 21% nirvana of 2000 is evidence of “lost revenue” caused by the tax cuts.

Conversely, per capita tax revenue measures capture the fact that the job of the government is to provide services which do not by default grow at the rate of the economy. While it is certainly likely this measure may increase over time, why shouldn’t those who oppose the tax cuts be forced to explain why a 17% increase in real revenue isn’t enough to cover what the government is responsible for?

For conservatives who purport to want to limit the growth of government, I don’t see why this is so hard for them to grasp.

Posted by Donald L. Luskin at 12:52 PM | link  

THE LOVIE AND TONY BOWL   Essayist Joseph Esptein has had it with the lionization of the SuperBowl's head-to-head African American coaches:...every time I hear mention of Lovie Smith and Tony Dungy as African-Americans, I wonder if this emphasis on ethnicity is a good thing. The more it goes on the more I feel that on game day Jesse Jackson will be called in to kick extra points, with Al Sharpton holding. Lovie Smith and Tony Dungy are superior men, smart, dignified, cool under fire, and high above the average of ex-jocks who have gone on to coach National Football League teams. Why make such a journalistic meal out of their being African-American? Nothing nearly similar would be taking place if the two coaches were Italian, Jewish, Irish, Ukrainian or Texan...

Why, then, emphasize the African-Americanness of these two excellent coaches? Doesn't doing so suggest a patronizing sense of amazement at their accomplishments -- as if to say, who'd have thunk not one but two black men could be at the top of their line of work? Doesn't doing so also suggest a note of self-congratulations for Americans -- as if to say, look how far we've come in giving these men a chance? Aren't we grand in our virtue?

Posted by Donald L. Luskin at 8:42 AM | link  

Monday, January 29, 2007

KRUGMAN LIES ABOUT UNEMPLOYMENT INSURANCE   When is this partisan pseudo-economist going to be unemployed himself? From Cafe Hayek:
...this passage in Paul Krugman's column from this past Friday's edition of the New York Times:
For the fact is that F.D.R. faced fierce opposition as he created the institutions — Social Security, unemployment insurance, more progressive taxation and beyond — that helped alleviate inequality.
Did Franklin Roosevelt "create" unemployment insurance? His administration did champion legislation that created government-provided unemployment insurance. But Mr. Roosevelt emphatically did not create such insurance. Here's a letter that I sent to the Times in response:
Paul Krugman mistakenly credits Franklin Roosevelt with having "created" unemployment insurance ("On Being Partisan," Jan. 26).

Private unemployment insurance was offered long before the New Deal. As Professor Michael Rappaport found, starting around 1910 companies began selling such insurance to railroad workers. Alas, seeking to offer such coverage to other workers, private insurers were consistently blocked by state governments. And when New York's legislature in 1931 finally approved the expansion of private unemployment insurance, the bill was vetoed by none other than Gov. Franklin Roosevelt.

Thanks to reader Timothy Wise for the link.

Posted by Donald L. Luskin at 9:29 AM | link  

A LITTLE TIMES LIE   The lead editorial in the New York Times yesterday started out with a lie, designed to make it seem that George Bush had lied:
In the State of the Union speech, President Bush said that the budget deficit had been cut in half from 2004 to 2006. Not quite. The deficit declined, but not by half, from $412 billion to $248 billion. If you measure it as a percentage of the economy, Mr. Bush was off by an amount equal to about $15 billion.
If memory was insufficient, all the Times had to do was quickly search the White House web site to remind itself what Bush's promise actually was. It was to halve the deficit from the 2004 value projected at the time the promise was made -- and that amount was $521 billion (which means the current estimate of $248 billion is better than halving). It turned out with hindsight that the 2004 deficit came in less than originally estimated -- which ought to be good news, except that the Times uses it to make today's good news seem bad (and a lie).

But setting aside this little Times lie designed to make Bush look bad from the get-go, the real burden of the editorial is to strip Bush of any credit for deficit reduction. Forget the economic growth that was triggered by tax cuts as though a starter's pistol had fired -- or anything else that Bush might have had a hand in. According to the Times,

The drop in the deficit over the past few years was due largely to the cyclical recovery from the earlier recession, and to a boost in revenue when temporary business tax cuts expired after 2004.
And why not believe that? It's the liberal formula for prosperity -- sheer luck plus tax hikes. Works every time.

Thanks to reader John Tomasso for the link.

Posted by Donald L. Luskin at 9:01 AM | link