 | | The Daily Reckoning | Tuesday, October 5, 2010 |
- Revisiting the problematic statistics of economic "recovery"...
- The truth behind the Orwellian Newspeak of mainstream economics,
- Plus, Bill Bonner on travel warnings, the Unfair Trade Act, gold and plenty more...
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|  | | Maintaining a Misguided Belief in Recovery
| How mainstream economic statistics are used in self-deception
| |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
Late last year, when the world (as we now "know") had just freed itself from the vise of the longest recession since WWII, we posed, somewhat tongue-in-cheek, the following line of questioning to our Fellow Reckoners:
"If GDP is telling us that the US economy is steadily improving, how come so many folks on Main Street feel so bad? Don't they read the papers? Don't they know the GDP is improving?"
The widening chasm between the fantasyland of popular economic statistics and the reality of day-to-day life implores us to again revisit the questions above. If the US economy is indeed experiencing a genuine recovery, as we are regularly reassured, why then do so many people continue to struggle along, barely making ends meet? With shrinking (real and nominal) wages to spend on items they want, how could consumers, which account for an extraordinarily large percentage of the US economy (approx 70%), actually be better off today than they were yesterday? And, with the value of their largest asset - the family home - still going down, how can any politician look a voter in the eye and tell him things are actually getting better?
Either our own experience is not what we thought it to be or the shysters in critical decision-making positions are lying to us...or, at the very least, making use of metrics that do the lying for them.
We'll leave the question of which seems most likely to the safekeeping of the reader. But first, consider the following scenario:
Imagine, for a second, standing on the scale on Monday to find that you weigh 200 pounds. After consuming a dozen cheeseburgers and a few liters of cola per meal for a week, you return to the scale the following Monday to discover you have somehow managed to lose 10 pounds. All else being equal, the honest dieter must confront one of two possibilities. Either:
1) He/she has just made a revolutionary - nay, miraculous - discovery about the weight-loss properties of fast food or,
2) He/she is in need of a new scale. Unfortunately, many dieters - including ALL unsuccessful ones - tend to err on the side of dishonesty. The same self-deception is no less prevalent when it comes to the sphere of economics. To cite one of Bill's oft-repeated Daily Reckoning dictums, "People will come to believe what they must believe when they must believe it."
Why else, for example, would otherwise reasonable folks so willingly allow themselves to be fooled by such nonsense as appears nightly on the evening news? Why else would we continue to adhere to junk statistics like GDP and U3 unemployment when attempting to gauge the sickness or health of the economy? And why would we celebrate (and decorate with Noble Prizes!) anyone who employs such nonsense measures with a straight face?
We've explored the fraud that is the GDP measure in these pages before. And anyone who's ever heard the phrase "discouraged workers" knows better than to trust the official unemployment rate. So far, so good. But why, do we still look to GDP to define for us whether or not we are in a recession? And, if we know that employment does not necessarily equal productivity, why are we so transfixed by what Henry Hazlitt calls "The fetish of full employment"? If it were true that we could drag ourselves out of recession by simply counting one and other, as the government recently employed hundreds of thousands of census workers to do, the mayor of New York would be well advised to hire the City's entire jobless population to polish each and every blade of grass in Yankee Stadium with a quiver of Q-tips. Bang! Full employment!
What's more, the government could pay its army of scrubbers a million taxpayer dollars a year each for their efforts. Boom! Rising GDP!
But so what? The make work scheme might do well to tip the scales toward "official" recovery, albeit temporarily, but how is society made any better for it in the long run?
Intuitively, we know it is not...but most folks fall for the sham anyway. Investors load up on junk food non-indicators as part of their program to build a newer, fitter self. And all the while they scratch their heads and wonder why reality stubbornly refuses to comply with the statistics that are supposed to represent it.
Of course, the belief that one can stem the flow of specious news reporting with a few words of logic is akin to charging into a hurricane with a cocktail umbrella. More than a century and a half after Frédéric Bastiat effortlessly dispelled the myth that destruction of capital is good for an economy with his "Broken Window Fallacy," for instance, today's leading Keynsian apologist has returned to argue the exact opposite.
In today's column, special guest essayist and Austrian School scholar, Steven Horwitz, offers his thoughts on Paul Krugman's latest. Please enjoy...
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| The Daily Reckoning Presents
| The Newspeak of Paul Krugman – Destruction is Creation
| |  | | Steven Horwitz |
In his September 28 New York Times blog post, Paul Krugman announced that "economics is not a morality play." That turn of phrase is his way of defending the idea that in unusual times, such as the sort of deep recession we are in, we can get strange relationships between economic cause and effect. The result is that actions which we might find highly distasteful can have positive effects. Thus we cannot afford to be overly concerned with morality if the goal is to get out of the recession.
Specifically, Krugman defends the claim that World War II got us out of the Great Depression, because "this is a situation in which virtue becomes vice and prudence is folly; what we need above all is for someone to spend more, even if the spending isn't particularly wise." Even spending on something destructive like war, he argues, is what is needed to solve the problem, especially when the "political consensus for [domestic] spending on a sufficient scale" is not available. In Krugman's version of Orwell's Newspeak, destruction creates wealth, and war, though not ideal, is morally acceptable because it produces economic growth.
Thankfully, we can get behind his Newspeak to see the fallacy of his economics. To believe that spending - any kind of spending - is the cure for what ails us is to ignore the subjective nature of wealth and the microeconomic basis of economic growth in favor of an absolute reification of economic aggregates such as GDP and unemployment. Spending trillions of dollars fighting a war can certainly bring idle capital and labor into employment, driving up GDP and lowering unemployment. But this does not mean we are any wealthier than we were before.
Wealth increases when people are able to engage in exchanges they believe will be mutually beneficial. The production of new goods that consumers wish to purchase is the beginning of this process. When instead we borrow from future generations to spend on goods and services connected not to the desires of consumers, but rather to the desire of the politically powerful to rain death and destruction on other parts of the world, we are not allowing individuals the freedom to do the things they think will make themselves better off. And we are certainly not extending that freedom to those killed in the name of our economy-enhancing war. At a very basic level, the idea that any kind of spending is desirable overlooks the fact that spending on war (and, I would argue, public works as well) actively prevents people from enhancing their wealth through production and exchange linked to consumer demand.
Employing people to dig holes and fill them up again, or to build bombs that will blow up Iraqis, will certainly reduce unemployment and increase GDP, but it won't increase wealth. The problem of economics is the problem of coordinating producers and consumers. This coordination happens when we produce what consumers want using the least valuable resources possible. That is why it is wealth-enhancing to dig a canal using earth-movers with a few drivers rather than millions of people using spoons, even though the latter will generate more jobs.
Sending soldiers off to war is a waste of human and material resources, and is almost by definition wealth-destroying, no matter what it does to GDP or unemployment rates. The only way one can view economics amorally, as Krugman wishes to, is if one is only concerned with total GDP and not its composition. However, it is the composition of GDP, in the sense of how well what we've produced matches consumer wants, that ultimately matters for human well-being. It's easy to create jobs and generate spending, but those do not constitute economic growth, and they are not necessarily indicators of human betterment.
So yes, Professor Krugman, it does matter how we try to get ourselves out of depressions. The world is not upside down and vices aren't virtues. War isn't peace and destruction isn't wealth-creation. The real solution to digging out of a recession is to remove the barriers to the free exchange and production that actually comprises wealth- creation. Borrowing trillions more from our grandchildren to spend on building the equivalent of pyramids or on blowing up innocents abroad only digs the hole deeper. And when one is reduced, as Krugman is, to saying we "needed Hitler and Hirohito" to get us out of that hole in the 1930s, one has abandoned morality to worship at the altar of economic aggregates.
No critic of free-market economics can ever again accuse us of being irrational and immoral when it is Paul Krugman who says destruction creates wealth, and war is an acceptable second-best path to economic growth. Don't let Krugman's Newspeak fool you: War and destruction are exactly what they appear to be. To argue as Krugman does is to abandon both economics and morality. Big Brother would be proud.
Steven Horwitz,
for The Daily Reckoning
Joel's Note: Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback. This article originally appeared in The Freeman and was published by the Foundation for Economic Education.
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| | | Bill Bonner
| Free Trade: The Only Fair Trade
| |  | | Bill Bonner |
Reckoning from Paris, France...
The US issued a terror warning to Americans traveling to Europe. "Watch out," said the feds. There could be strikes in Europe similar to those in Mumbai last year.
In the Mumbai event, terrorists came ashore in inflatable boats...heavily armed. They headed for major tourist hotels - like the one where we had reserved a room...the Taj Mahal. Once there, they started shooting people.
"Hey, we're from Baltimore," we answered when someone asked why we would go to such a dangerous place.
So, here we are at the Paris airport.
We see no signs of beefed up security. In fact, there are no signs of any security at all.
But the reckoning must go on. And what we reckon with today is a whole world that looks dangerous. The airports are dangerous. The hotels are dangerous. And the markets - especially the markets - are dangerous.
But what the hell... We're from Baltimore.
The Dow fell 78 points yesterday. Gold lost only a dollar.
Gold has been such an investment sensation that the banks are opening up old vaults, and building new ones, to store clients' money. Investors buy gold. Then, they need a place to keep it. So the banks have a new way of earning fees - by safeguarding gold.
As Warren Buffett tells us, at the beginning of a bull market people buy for the right reason. At the end, they buy for the wrong reason. We can't but wonder: why are people buying gold now?
Ten years ago, we urged dear readers to buy gold. Why? It was cheap. It was bound to become dear.
And it has. Every year, gold has gotten more expensive. And it appears to be on course again this year for another big gain. But why are people buying so much of it?
We know why we're buying it. Because we think the people running fiscal and monetary policy for the US and other countries are lunkheads. We think they're going to make a real mess of the dollar. Gold is the best alternative.
For example, in yesterday's Wall Street Journal was an article about the Currency Reform and Fair Trade Act. Once you see something called "fair trade" you know it's going to be bad news. "Fair trade" is code for "managed trade" - which, like managed paper currencies, is a fraud. You either trade freely...or you impose conditions in order to protect some special interest or promote some pet project. Then, it's not free anymore. Whether it is "fair" depends on your point of view. But the only really fair trade is free trade - that is, trade that people willingly do without asking anyone else's say-so.
In the present case, the "Fair Trade Act" has been ominously appended to the Smoot-Hawley Tariff Act...a previous experiment in managed trade. Smoot-Hawley was partly responsible for the depth and breadth of the Great Depression. In the '30s, it was bad enough that people were going broke. It didn't help that Misters Smoot and Hawley prevented them from buying and selling freely.
But all but five Democrats voted for the bill last week. So did 99 Republicans. If passed and signed into law, it will give the feds new ammunition in their fight to make the Chinese stop free trade with China. If they get their way, you'll only be able to trade with China if it complies with certain restrictions and qualifications regarding the yuan (or renminbi). They fair traders want the Chinese to raise the value of its currency. How they know what China's currency should be worth is a mystery...
But if the '30s are anything to go by, this legislation will make the Great Correction worse. It will stymie world trade - just like Smoot- Hawley did.
This might be good for gold. It might not.
But real messes can take time to develop. We wonder if these new gold buyers are prepared for the wait.
And more thoughts...
Zombies on the march.
What's going on in Ecuador? Nobody seems to know. The president says the police held him captive for 10 hours.
"Did not," say the police.
Why would the police kidnap the president? Zombies. The Herald Tribune says they were annoyed by his "austerity plans" - reduced benefits, slower salary increases and so forth.
Who knows?
Meanwhile, Bloomberg has a report, telling us that nearly 3,000 millionaires have collected unemployment compensation:
According to US Internal Revenue Service data, 2,840 households reporting at least $1 million in income on their tax returns that year also collected a total of $18.6 million in jobless aid. They included 806 taxpayers with incomes over $2 million and 17 with incomes in excess of $10 million. In all, multimillionaires reported receiving $5.2 million in jobless benefits.
"It's a larger number than I would have expected," said Alan Viard, resident scholar at the American Enterprise Institute, a Washington research organization. "But, people at any income level can lose their jobs." "Hey, Bonner...what are you complaining about? They paid into the system, just like everyone else. They're entitled to benefits, aren't they?"
Hold on. We're not talking about people breaking the law. Or people doing anything wrong. We're just talking about zombification...in which you fully comply with the law...and begin standing in lines, filling out paper work...angling...chiseling...and getting something from the government. A special parking place...drugs...jobs...food... Then, once you get it...you don't want to give it up. Look at what is happening here in Paris. President Sarkozy has proposed to raise the retirement age from 60 to 62. What happens? The zombies take to the streets!
PARIS (Reuters) - French families, students and private sector workers joined mass demonstrations on Saturday as trade unions ramped up pressure on the government to drop pension reforms.
Opposition to President Nicolas Sarkozy's plan to raise the retirement age to 62 from 60 showed no signs of abating and hundreds of thousands across the country marched in the fourth round of rallies in as many months
Unions said that about 2.9 million had marched, while police said the crowds numbered 899,000. The union figure was about the same as at the last demonstrations on September 23. The police figure was slightly lower.
A survey published by French daily newspaper L'Humanite showed more than 70 percent of people backed the day of action.
"We won't back down," said Bernard Thibault, head of the powerful CGT union. "If the government won't listen there will be further action." So far, dear reader, only we realize what is happening. Silently, slowly, stealthily the zombies are taking over...
Regards,
Bill Bonner
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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| |  |  |  | A Market for Long-Term Investors
Which do you think will be worth more, dear reader? Twenty years from now. A $20 bill issued by the US Treasury. Twenty dollars worth of US stocks? Or $20 worth of profit-making companies in high-growth economies? We don’t know how much the stocks will be worth. But we have a strong hunch that a $20 bill won’t be enough for a cup of coffee.
Government Workers: The New Upper Crust?
Fragging Your Own Money | Connecting the Dots of Chinese Gold and Currency Reserves
The problem for me is that China’s annual production of gold is, obviously, relatively fixed in the short run and, due to depletion of a finite resource, bound to hit something like Peak Chinese Gold, especially since gold and gold mining are not new to China! So this “20 years of buying all internally produced gold” figure also supposes that China’s foreign exchange reserves will not grow at all – zero growth! – for 20 years.
Buying Gold Before the “Blow Off Phase”
The Comedic Value of Naked-Short Paper Gold | Is the Fed Better... as the Devil You Know?
If Dr. Ron Paul is one of few voices of reason in Congress, then Thomas Hoenig may be the Fed’s Ron Paul. As president of the Federal Reserve Bank of Kansas City and voting member of the Federal Open Market Committee, he’s been the lone vote of dissent against the Fed’s ultra low-interest rates –six times.
Interview: Warren Buffet and Jay-Z on Investing Success
When Only a Much Weaker Dollar Will Do, Part Two of Two | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  | |
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