The parable of the wise parents

Okay, it’s more of an anecdote than a parable. But it’s an important one anyhow:

Our daughters are 15 and 17. Most of their friends are very concerned about their parents’ financial situations and tell me their parents have too much debt. Whether their parents know it or not, these kids know exactly what is going on and they are scared.

My oldest daughter told me this week that her friend “K”‘s mother is jealous of me. I asked her why, and she said her friend’s mother thinks I never worry about money and seem carefree. I told my daughter that is only because we don’t have debt.

I reminded her of the years when her friend K’s family went on cruises while we were tent camping in a state park. I told her that her dad and I made a decision when we first got married that we weren’t going to buy anything, not even a car, until we had the cash to buy it.

We previously had a mortgage, but we paid it off in 13 years. I told her we just didn’t want the stress. She gave me a hug and walked away without saying anything.

What you give your kids isn’t limited to the material possessions you give them. In fact, those are the least important things you can provide.

Ignorant and slackminded

I was not at all impressed by the lunatic defense of economic credentialism by an economist employed by the very institution that is most responsible for the incoming Great Depression 2.0. But then I read this astonishingly ignorant appeal to morality by Fred Clark and I had to admit that Kartik Athreya may have had a point in insisting that at least some bloggers shouldn’t write about economic matters:

I’m not an economist, but we’ve got five applicants for every single job opening. If you tell me that the best response to that situation is to lay off hundreds of thousands of teachers, I will not accept that this means that you’re smarter and more expert than I am. I will instead conclude — regardless of your prestige or position or years of study — that you’re a moral imbecile. And knowing what I know about your inability to make moral judgments I will have no reason to trust you to make complicated macroeconomic ones.

No, Fred, it’s perfectly clear that you’re not an economist and you don’t know a damn thing about economics. I’ve read a lot of nonsense since the credit crunch began in the summer of 2008, most of it written by economists, but this is remarkably stupid even by those standards. There is simply no defense for either the infantile moral posturing or the spectacular ignorance revealed by it. The misplaced Keynesian faith in animal spirits notwithstanding, economics is not magic. It is complicated, yes, and there are a few special exceptions to the law of supply and demand, but that law is not significantly more flexible than the laws of physics. What the clueless Clark doesn’t recognize is that the federal government has massively and permanently distorted the signals of the labor market for a long period of time, leading to an incredible malinvestment of human capital into various industries, including the education industry. Now that the artificially extended limits of demand have been reached in that and many other industries, the education bubble is in the process of popping precisely as Austrian theory predicts, leaving hundreds of thousands of teachers, (or more accurately, hundreds of thousands of non-teaching admininstrative bureaucrats employed by the school districts), whose labor is no longer necessary or affordable at their current rates by deeply indebted communities.

Morality has nothing to do with the correct conclusion that when a glass is already full, you cannot pour more water into it. It’s simply an observable matter of fact. And if a full glass happens to be shrinking, then water is going to have to come out of it. Taking exception to such basic logic does not make you a moral exemplar, rather, denying it makes you an intellectual imbecile. Based on the evidence here, logic also dictates that no economist, or even economically aware individual, need concern themselves with what Mr. Clark thinks of their moral judgments or anything else.

If Clark wishes to wax indignant over gross and destructive immorality, he should focus his ire on the Fed, on the banks, and on the politicians who constructed a fraudulent financial system that was mathematically certain to fail and inflict millions of job losses on teachers, real estate agents, government employees, Fortune 500 corporations, and small family businesses alike. The salient fact is not whether 9.7% unemployment is high enough or not, but that utilizing more government intervention to prevent that rate from rising higher is guaranteed to extend and exacerbate the trauma to the labor force.

The reason the economic contraction confounds so many political bloggers like Slacktivist regardless of their party allegiance is that the problem cannot possibly be characterized as a Democratic problem or a Republican problem. It is, instead, a fundamentally structural problem with the financial system that dates back to the establishment of the fourth U.S. central bank. The long run has arrived and it has rendered the conventional liberal vs conservative debate completely irrelevant. Ironically, the solution is to be found in the example set by a Democratic president, Andrew Jackson. If Democrats want to find an plausible answer, they need to look to their party roots, not their present ideology.

UPDATE: the comments are even better. This was my favorite: “If Krugman and DeLong are right (and Paul Krugman is always right) then short-term government borrowing and spending should be a high priority right now.”

Paul Krugman is always right? That’s an intriguing statement.

1. Paul Krugman recommended investing in real estate and stocks while making fun of gold investors in 2002.
2. Paul Krugman thought the Fed should inflate a housing bubble in 2002.
3. Paul Krugman declared a $600 billion stimulus plan was required in November 2008. In 2009, he complained that the Obama adminstration’s $787 billion stimulus plan was too small.
4. And he was a bit late in recognizing the obvious.

Attn High Geeks

Today, you must genuflect before Markku, King of the Coders. In case you are interested, we have released the source code under the LGPLv3. And for the gamers, power CAD users, and Photoshop wizards, you have three more days to score the 20% discount.

You can’t teach an old economist new models

While Thomas Sowell is generally right as to his theme of government intervention converting the crash of 1929 into the Great Depression, he is woefully incorrect with regards to the details of how and why it happened:

The widespread belief is that government intervention is the key to getting the country out of a serious economic downturn. The example often cited is Pres. Franklin D. Roosevelt’s intervention after the stock-market crash of 1929 was followed by the Great Depression of the 1930s, with its massive and long-lasting unemployment.

This is more than just a question about history. Right here and right now, there is a widespread belief that the unregulated market is what got us into our present economic predicament, and that the government must “do something” to get the economy moving again. FDR’s intervention in the 1930s has often been cited by those who think this way.

What is on that one page in Out of Work that could change people’s minds? Just a simple table, giving unemployment rates for every month during the entire decade of the 1930s. Those who think that the stock-market crash in October 1929 is what caused the huge unemployment rates of the 1930s will have a hard time reconciling that belief with the data in that table.

Although the big stock-market crash occurred in October 1929, unemployment never reached double digits in any of the 12 months after that crash. Unemployment peaked at 9 percent, two months after the stock market crashed — and then began drifting generally downward over the next six months, falling to 6.3 percent by June 1930.

This was what happened in the market, before the federal government decided to “do something.” What the government decided to do in June 1930 — against the advice of literally a thousand economists, who took out newspaper ads warning against it — was impose higher tariffs, in order to save American jobs by reducing imported goods.

This was the first massive federal intervention to rescue the economy, under Pres. Herbert Hoover, who took pride in being the first president of the United States to intervene to try to get the economy out of an economic downturn. Within six months after this government intervention, unemployment shot up into double digits — and stayed in double digits in every month throughout the entire remainder of the 1930s, as the Roosevelt administration expanded federal intervention far beyond what Hoover had started.

While Thomas Sowell was among the economists I liked and respected most in college, I knew that he had lost his fastball when he wrote a column defending Michelle Malkin’s In Defense of Internment that contained some factual errors regarding Pearl Harbor. When I emailed him information demonstrating that both he and Malkin were factually incorrect and her conclusions were false, he basically hemmed and hawed and said that it really didn’t matter because he likes her work. After that, I pretty much ceased to pay attention to his columns. But a number of people have emailed me this column on the Great Depression, thinking that I would approve of it. And while the cited example of historical employment statistics is a really useful one that I wish I had included in RGD, I have already shown that Sowell’s contention here about the root cause of the unemployment to be false there.

For many years, it was supposed that the Smoot-Hawley tariff of 1930 played a major role in the economic contraction of the Great Depression. As more economists are gradually coming to realize, this was unlikely the case for several reasons. First, the 15.5 percent annual decline in exports from 1929 to 1933 was less precipitous than the pre-tariff 18.3 percent decline from 1920 to 1922. Second,
because the amount of imports also fell, the net effect of the $328 million reduction in the balance of trade on the economy amounted to only 0.3 percent of 1929 GDP. Third, the balance of trade turned negative and by 1940 had increased to nearly ten times the size of the 1929 positive balance while the economy was growing.”

– The Return of the Great Depression, p. 192

Because Sowell subscribes to neo-classical economic theory, he has no idea why the Great Depression occurred and he still hasn’t recognized that we are in the Great Depression 2.0. His instincts are sound enough; he knows that government intervention can’t solve the problem but because his economic model doesn’t account for debt, he can’t figure out what the core problem is. So, like most free market-oriented mainstream economists, he casts about for something that the government did that fits his model and assumes that it must be the causal factor, even when the evidence clearly shows that it was, at most, a trivial factor.

The thing that is so patently absurd about the Smoot-Hawley tariff theory of the Great Depression is that America was not an import/export-based economy 80 years ago. The percentage of imports and exports as a percentage of GDP was so small that not even shutting them down completely could have caused such a massive contraction in the 1930s American economy. Debt was the problem then and debt is the problem now. The federal stimulus exacerbated the problem then, and the global stimulus is exacerbating the problem now. And given the relative size of historical debt+stimulus to present debt+stimulus, it should not be hard to understand why the Great Depression 2.0 will be worse than its historical predecessor.