Five Questions for a Keynesian

Steven Horwitz, the Charles A. Dana Professor of Economics at St. Lawrence University, has five questions for a Keynesian:

1. Why did Keynes think savings was bad if when people save through financial intermediaries they give control over resources to the banking system, which in turn will lend that out to firms to create capital and new jobs?

2. How does government spending create jobs and wealth if the resources that government spends must ultimately come from the private sector, through taxes or reduced borrowing due to government borrowing more (or inflation), and the private sector would have spent it either on consumption directly or on investment through savings anyway?

3. If one of the problems of the housing boom is that we put too many resources into housing and finance, how will a Keynesian government spending package know where that spending should have gone instead?

4. Keynes frequently wrote about the importance of the uncertainty of the future and the way that made things difficult for private investors and for the connection between savings and investment. Why doesn’t that same uncertainty prevent governments from knowing exactly how much and where they should be spending in a recession, especially because markets have prices and profits as signals to help entrepreneurs navigate that uncertainty while government bureaucrats do not have similar signals?

5. Given the enormous role that government interventions played in causing the current recession, from the expansionary policies of the Fed to GSEs like Fannie and Freddie, to misguided regulations in housing and banking, why should anyone believe that the same government actors will know how to solve it?

For the answers to these and other questions, be sure to read Professor Horwitz’s interview with Free Market Mojo.

A Positive Step for the Organ Trade

Allow me to begin this post by briefly defending its title. Upon considering the classification of organ transplants as a “trade” or business, most people would either argue that organs are not traded but rather donated, and/or that any organ trade that does exist is a black market activity. Both of these reactions would be groundless.

Organ transplanting is a business, and a lawful one at that. Unfortunately, the actors most essential to the organ trade (the individuals donating their organs) go unpaid. While the doctors, nurses, technicians, and administrative personnel are all compensated at market value – even though the demand for even the doctors is far below the demand for the actual organ donors. In addition, the recipients of the organs are, essentially, receiving life without having to fully compensate the responsible parties.

To be sure, I am not attacking organ recipients or the medical industry in general. But it is disgraceful that significant sums of money are changing hands without any going towards the most essential actors – the donors.

Recently, however, progress has been made in Israel. Ever the bastion of innovation, Israel has changed its law so that organ donors are now given priority should they require an organ transplant (HT Freakonomics). The change was brought on by the shortage of organ donors in Israel. Granted, the moral and practical answer to the shortage would be to allow individuals to sell their organs on an open market, but this change is at least a significant step in the right direction.

The arguments against the amendments to the law center around the “need” of individuals who are not organ donors. The question then arises of how one person’s need is translated into a moral obligation on the part of his fellow citizens. The answer is that, outside of any personal code of morality, a need on the part of one individual or group never creates a corresponding obligation on the part of another. No reasonable argument can be made for treating need as a virtue, and any government enforcement of that bankrupt morality is the equivalent of a state-imposed religion.

Not only is a legitimate organ trade morally permissible, but it should be encouraged. Organ donors essentially give the gift of life, and the fact that our society forbids compensation of that sacrifice is a travesty. Worse yet, prohibitions on organ trafficking infringe on individual freedom, with the effect of causing needless deaths of those who desperately need healthy organs.

Inflation Worries and M2

I hold the opinion that a period of dangerously high inflation could be on the horizon. Collectivist governments (and I would certainly put our current administration in that category) have historically tended towards inflationary policies – oftentimes to a disastrous extent. The Federal Reserve’s current lack of independence and the massive amount of debt being incurred by the federal government worrying me.

Mark Perry, however, points out a possible ray of light – at least for the short term. Annual M2 money growth is at its lowest point in 14 years.

Investopedia defines M2 as:

A category within the money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.

A decrease in the growth of savings will reduce the amount of money banks and other financial institutions are able to lend, thus reducing the money supply. So these numbers could lead to the conclusion that, at least in the short term, inflation may not be a problem. Though this decline in M2 growth could also be looked at as evidence that inflation is very likely. As inflation severely impacts savings and investments, a likely move by anyone predicting inflation would be to save less. So while a lower M2 growth is not what one would expect in an inflationary environment, it could actually be an early warning sign from the financial markets.

Inflation vs. Stock Market Gains

With stock prices rising, many commentators bandy Wall Street’s performance as an indicator of economic recovery. But these heralded returns may not live up to the hype. Unlike other economic indicators, stock market returns are not adjusted for inflation, as E.S. Browning writes in The Wall Street Journal.

Controlling for inflation takes extra work and makes stock gains look punier, so it is easy to see why stock analysts almost never do it. The media almost never do it either. But other things do get measured in real dollars. When economists report whether the economy is growing, they account for inflation. When analysts judge long-term gains in commodities such as gold or oil, they often adjust for inflation.

Because analysts almost never do the same with stocks, it leaves investors with an exaggerated view of their portfolios’ performance over time.

HT: Freakonomics

Quote of the Day

“To this day [Christmas] remains a celebration of liberty and private life, as well as a much-needed break from the incessant politicization of modern life. It’s the most pro-capitalist of all holidays because its temporal joys are based on private property, voluntary exchange, and mutual benefit.”

~ Dale Steinreich

Government Safety Fail

It should come as no surprise that the federal government is using GM as an outlet for its rampant paternalistic urges.  The most recent example, coming from the Wall Street Journal, is particularly disturbing given the potential safety problems it will create.

Starting Jan. 4, General Motors Co. plans to do something unprecedented in the U.S. car industry: It will run its assembly line here around the clock on a permanent basis.

While common in other industries, not even car-efficiency benchmark Toyota Motor Corp. operates its plants routinely with more than two shifts. Car-assembly lines need too much scheduled maintenance and restocking for such intensive production to make sense, many industry experts say.

The Obama administration auto task force that oversaw GM’s reorganization last spring was startled to learn that the industry standard for plants to be considered at 100% capacity was two shifts working about 250 days a year. In recommending that the government invest about $50 billion in GM, the task force urged the company to strive toward operating at 120% capacity by traditional standards.

This situation is not without precedent. Government regulations frequently move behavior in the opposite direction of public health and safety. Increased regulations on average MPG for automakers results in lighter cars and, as a consequence, a higher number of fatalities. While government safety regulations for cars increase costs and incentivize consumers to keep older cars longer, resulting in greater emissions. At the very least, however, the preceding examples of government paternalism had some roots in good intentions. Running GM plants at 120% capacity has the potential to cause deaths for the sake of providing jobs and stimulating the economy. Unfortunately, such Keynesian policies do not provide jobs and do not stimulate economies. So the result of this latest act of paternalism will simply leave us with decreased safety and increased economic inefficiencies.

HT: Cafe Hayek

The Deadweight Loss of Christmas

When people think of Christmas, economic theory rarely comes to mind. But it should be no surprise that Christmas, as always, will come with economic phenomena, since shoppers are estimated (conservatively) to spend $65 billion this holiday season.

One man who considers the economics of Christmas in great detail is Professor Joel Waldfogel of The Wharton School. Waldfogel asserts that much of Christmas giving results in a deadweight loss, an economic term defined by Investopedia as

The costs to society created by an inefficiency in the market. Mainly used in economics, the term “deadweight loss” can be applied to any deficiency due to an inefficient allocation of resources.

An example of deadweight loss is the economic impact of sales taxes. Assume a car is being sold. Tom is selling his car to Jerry. They have agreed upon $10,000 as the price of the car. Without sales taxes, Tom receives $10,000 (which he clearly values more than the car) and Jerry receives the car (which he obviously values more than his $10,000). Both Tom and Jerry are now better off because of this transaction. Now, let us introduce a 10% sales tax and assume that Tom and Jerry split the cost of the tax – resulting in a $500 expense for each of them. Jerry now receives the car, but at a total cost of $10,500; and the amount (net of taxes) Tom receives is only $9,500. Where does the $1,000 go? Surely some of this tax revenue is used for services that Tom and Jerry will benefit from (roads, police protection, etc.), but much of it will be wasted in transaction costs and acts of economic sodomy (i.e. stimulus projects). Whatever portion of the $1,000 that is wasted is known as a deadweight loss. It is, typically, third parties (such as government) that create deadweight loss. Though this is a very simple example, the illustrated principles apply to the most complex transactions.

According to Professor Waldfogel, however, Government is joined in its crime by over-anxious (albeit well-intentioned) gift-givers. Let us now assume that Tom and Jerry, because of the friendly relationship they formed over the sale of Tom’s car, both feel obligated – but not inspired – to give each other a Christmas gift. Tom and Jerry (separately) each budget $75 to spend on each other. If they were each to spend their own $75 on themselves, they would receive at least $75 in value for their spending. But, knowing little about each other, the gifts bought for $75 will have only $60 in value to their recipients. This missing $30 is a deadweight loss. Granted, unlike the deadweight loss created by a sales tax, the loss created by Christmas will at least go to the shareholders of the gift-producing corporations. So Christmas is not nearly as guilty of crimes against efficiency as Government. Nevertheless, Tom and Jerry have still suffered a 20% deadweight loss as a result of Christmas giving. The 20% figure is based on Waldfogel’s research wherein he asked participants to value things they bought themselves and things given to them by others – the difference was approximately 20%.

What does Professor Waldfogel suggest? Cash, gift cards, and charitable giving on behalf of your gift recipients are all excellent alternatives to arbitrary and inefficient gifts. Of course, gifts usually come with a high sentimental value and there is certainly nothing harmful about gift-giving in general. But, hopefully, Waldfogel’s research will encourage all of us to give the gift of efficiency along with those obnoxious sweaters this holiday season.

Vote on Constitutionality of ObamaCare

Earlier today, Senators Jim DeMint (R – SC) and John Ensign (R – NV) raised a Constitutional Point of Order against the Democratic health care bill. This will force the Senate to vote tomorrow on the Constitutionality of the proposed health care reform. Sentator DeMint issued this statement:

Forcing every American to purchase a product is absolutely inconsistent with our Constitution and the freedoms our Founding Fathers hoped to protect… This is nothing more than a bailout and takeover of insurance companies. We’re forcing Americans to buy insurance under penalty of law and then Washington bureaucrats will then dictate what these companies can sell to Americans. This is not liberty, it is tyranny of good intentions by elites in Washington who think they can plan our lives better than we can.

It is interesting to see the alarm at this proposed health care reform. While I certainly agree that the bill is heinous in its violation of individual liberties, I am not surprised that something of this sort has come to pass. Though our country has never been perfect in practice, there was at least a time when Americans understood liberty. We seem to have lost that understanding and, as an inevitable result, are seeing our freedom threatened like never before.

HT: Club for Growth

Politicized Science

When a business accused of fraud begins shredding its memos and deleting its e-mails, the media are quick to proclaim these actions as signs of guilt. But, after the global warming advocates began a systematic destruction of evidence, the big television networks went for days without even reporting these facts, much less commenting on them.

People who have in the past applauded whistleblowers in business, in the military, or in Republican administrations, and who lionized the New York Times for publishing the classified Pentagon papers, are now shocked and outraged that someone dared to expose massive evidence of manipulations, concealment and destruction of data– and deliberate cover-ups of all this– in the global warming establishment.

Today, politicized “science” has too big a stake in the global warming hysteria to let the facts speak for themselves and let the chips fall where they may. Too many people– in politics and in the media, as well as among those climate scientists who are promoting global warming hysteria– let the raw data on which their calculations have been based fall into the “wrong hands.”

People who talk about the corrupting influence of money seem to automatically assume that it is only private money that is corrupting. But, when governments have billions of dollars invested in the global warming crusade, massive programs underway and whole political careers at risk if that crusade gets undermined, do not expect the disinterested search for truth.

- Thomas Sowell

HT: Carpe Diem

US Manufacturing Output Larger than UK Economy

So much for the anti-China league’s endless fretting over American manufacturing jobs. Mark Perry‘s take:

According to the Federal Reserve, the value of U.S. manufacturing output in 2008 was $2.946 trillion, measured in 2000 dollars. Converted to 2008 dollars (link), that would be about $3.7 trillion, and the chart above shows how the U.S. manufacturing sector compares to the entire output, or GDP, of the top five largest economies in the world in 2008 (data): Japan ($4.9 trillion), China ($4.3T), Germany ($3.7T), U.K. ($2.7T) and Italy ($2.3T).

Bottom Line: If the U.S. manufacturing sector were a separate country, it would be tied with Germany as the world’s third largest economy. It would also be larger than the entire economies of India and Russia combined. As much as we hear about the “demise of U.S. manufacturing,” and how we are a country that “doesn’t produce anything anymore,” and how we have “outsourced our production to China,” the U.S. manufacturing sector is alive and well, and the U.S. is still the largest manufacturer in the world.