Wednesday, May 25, 2022

More Economics Confusion

Economics is a science.  If you begin with fundamental economic principles, you can derive implications - laws - that are true.  You can build models of the economy with them, and they will work.  They'll tell you what is going on and they'll let you make good conditional predictions, that is, if this then that.  And you'll be right.

On the other hand, if you build models on an arbitrary basis, your models will not be any good, except by luck.  You'll ignore fundamental principles, and in effect be denying universal laws... an approach formalized in historicism.  And you'll be wrong, except by accident.

With this in mind, and recalling the previous post, WaPo provides an excellent (i.e. terrible) example of confusion in economics.

“There remains a significant gap between consumers’ demand and businesses’ ability to supply it,” said Adam Ozimek, chief economist at the Economic Innovation Group. “People’s desire to consume more goods than businesses can produce is leading to a rise in prices, and consumers are going to feel that in their pocketbooks.”

Oh, those darned consumer desires!  If only they didn't want so much!  

Look, this is stupid.  People always desire to consume more.  Blaming inflation on consumer desires is ridiculous.  People always desire more, but that doesn't mean inflation.  Instead, consider this: The Fed greatly increased the money supply and the federal government handed out this additional money as Covid payments, or spent it itself.  Either way, nothing increased the supply of goods, so more money bid up up the prices of the goods.  But in addition, the federal government has been shrinking the supply of goods, first with Wuflu lockdowns, and then with increased regulation (raising costs of producing goods) and by shutting down energy production.  Ozimek has no conception of causality; he simply notes disequilibrium and arbitrarily assigns the problem to unreasonable consumers.  

Hey Ozimek, the government dumped extra fiat money in the economy - so when people spend it, prices go up!  MV = PY.  Did you sleep through Principles of Macro?  If you increase the stock of money faster than the growth rate of goods and services, as the government has done, then prices will rise.

He compounds his foolishness by suggesting that when consumers demand more, suddenly they will "feel that in their pocketbooks."  He's trying to blame an exogenous increase in consumption spending for inflation.  But if there were an exogenous increase in demand (there isn't) this would mean increased scarcity, not inflation.  An increase in demand means an increase in willingness to pay.  People who are suddenly decide they are willing to pay higher prices aren't shocked by higher prices, they initiated them.  It appears he slept through Principles of Micro as well.

Lesson: Modeling can done on an ad hoc basis, from arbitrary starting points.  If this, then that doesn't require correct premises, but logical conclusions from false premises won't match reality.  If you start from false premises, you can build an impressive house of cards.  You can even apply some non-robust tests that fail to falsify it, and declare it "science," but it is nonsense and leads to false conclusions.

Don't do this!

Tuesday, May 24, 2022

Recession? Part 2: The economics of a decline

The video in the previous post includes another economist, Mark Hamrick of Bankrate, who says traditional indicators of recession, such as rising unemployment, don't seem to him to be apparent.  Similarly, the IMF's Gita Gopinath suggests inflation, not recession, is the immediate pressing problem.  So why do I disagree?  This is a great opportunity to revisit some fundamental economic theory.

Standard business cycle models imagine a tradeoff between inflation and unemployment, with output fluctutating accordingly.  Countercyclical monetary and fiscal policy are then the standard remedy.  I'm skeptical of those models for a couple of reasons, but for present purposes it's sufficient to note that the inflation-unemployment tradeoff is nonsense.  America's stagflation of the 1970s is sufficient rebuttal.  But more importantly, the standard business cycle is not what we are facing.  Standard theories posit a recession is caused by demand side problems (e.g. consumer pessimism and too little spending) or supply side problems (e.g. bad investments stemming from bad monetary policy).  But that's not the nature of our  current problem.

Indeed we are facing increasing inflation from monetary expansion, as Gopintha warns, and I think it will worsen.  But a steep economic decline is almost assured for reasons other than business cycle.  In no particular order, the American economy faces:
  • Long run reduction in energy.  The federal government is implementing Green New Deal proposals to eliminate fossil fuels.  Fossil fuels cannot be replaced by wind and solar, because wind and solar are not sufficiently scalable and the amount of storage needed to solve the intermittency problem is not feasible.  So the federal government is acting to shrink our energy supply.  This will shrink the economy, and it isn't a recession-like bust.
  • Disruption of supply chains from the Wuflu lockdowns. As I warned at the time, government planners have no idea what is and isn't essential; the terms are almost meaningless in economics.  Small manufacturers and contractors turn down orders and jobs because of lack of materials and labor (former workers still on the dole).  The restaurant industry has been wrecked.  We've still not recovered from these disruptions, and they are being exacerbated by other factors, such as...
  • Increased regulation.  The Biden administration and federal bureaucracy has accelerated regulation, and of particular note they've been doing away with benefit-cost requirements, reducing these substantially.  The decrease in regulation under President Trump was the primary reason for our unprecedented economic boom (the one the Wuflu lockdowns killed).  There is no greater destroyer of entrepreneurship and small business than draconian regulation and regulators.  Draconian regulators -- you know, the people who go back and forth between posititons in TBTF firms and positions in federal administrative agencies?
  • Lockdowns in China's major cities have further disrupted suppy chains.  China is a major source for the world's parts and pieces.
  • Russia's war on Ukraine has disrupted a substantial amount of the world's gas, oil, petrochemical, and agricultural trade.  This is a separate reason for why food and energy prices will rise.  I emphasize that it is separate because it is a factor independent of the homegrown ones the Biden administration wants to ignore.
None of these have anything to do with traditional business cycle theory, and they aren't things you can "countercycle" your way out of.  This is why I'm skeptical of applying business cycle theory to the current debacle.  There's too much else going on.

Let's note one more thing.  The Fed is currently concerned with inflation, and so needs a tighter monetary policy.  But higher interest rates will lead to an higher debt payments, and it won't take much to explode the these to impossible levels.  But a downturn will tell the Fed to pursue a loooser policy with lower rates, the inflation they (supposedly) want to curb.  And you cannot stimulate your way out of reduced supply that comes from less energy, supply chain failures, increased regulatory burdens, and less food production.  You cannot overcome blackouts and food shortages by handing out fiat money.

Short of highly improbable rapid reversals of policies, or other unforeseen contingencies, we are in for a real disaster, I fear.

Recession? Part 1: Joe Brandon tries to debate me

Melina Wisecup of NTD TV interviewed me yesterday for a segment that aired today.  Are we headed for an economic recession?  Joe Biden says no.  I think it's a done deal.  

Mr. Brandon, er, Biden, claims the U.S. has simply inherited the rest of the world's problems but has a strong economy.  I deny this,it's nonsense.  The U.S. suffers from high inflation caused by bad monetary policy, the federal government is working to shut down American energy production and raise energy prices, and the supply chain breakdowns and low labor force participation caused by the terrible Covid policies, and the rapid increase in regulation and taxes -- together these practically guarantee an economic debacle.  Those are all Made in America problems, courtesy of our federal government.  Add the disruptions from abroad, especially China's ongoing Wuflu ongoing lockdowns and Russia's war on Ukraine, and we're in for a real train wreck.

But why read this summary when you can watch us go toe-to-toe... well, sort of...  (Note to readers: notice that unlike Mr. Biden, I don't have a wired earpiece with someone telling me what to say.  Anything I say, I actually believe.)

Monday, May 09, 2022

Graduation! A brief personal note

Greetings, dear readers (it turns out "we" have readers, on at least three contintents!)...

This past Saturday I attended the graduation ceremonies at our college.  Commencement at [redacted]* is always a big event, quite formal and very fun.  This year's commencement speaker was Jordan Peterson.  Peterson is a big draw, and many alumni returned to hear him, hence I met many of my former students.  This was a very happy thing for me.  (See photos below.)  Peterson himself proved to be a gripping speaker.  My impression of him is that he is intense (that's for sure) and high strung (my guess, I did not meet him).  I was pretty much on the edge of my seat during his address.  His message can be summed up simply, I think: "Whenever you're presented with an important choice, your alternatives will be either the high road or the low road.  The low road will take you to self aggrandizement, nihilism, and despair.  The high road is the path of self respect and service to others and life.  Take the high road."

Intense: Peterson seemed to me to be speaking from his heart, not from prepared notes.  He began slowly, warmed up, occasionally got sidetracked as he explained some tangential digression, a few times he nearly cried.  He spoke honestly, and it was good.  I learned something.

The other events were lovely, but most important was being with my students and former students.  I'm astonished at how accomplished they are and what they are doing and will do in the future.  In this year's class, six or seven are going to strong Ph.D. and master's programs in economics, a similar number to top law programs, one was just commissioned as a USMC officer, and the rest are going to productive careers, creating the wealth that sustains society.  And all of them will help defend and promote reason and liberty.  I'm quite proud of them.

Here are a few (click to enlarge).

Michaela ('21), Steele, and Kevin.

Kevin, my fellow economist Ivan P., Noor ('18), Steele, Michaela.

Jack G. and Steele.

Grant W. and yours truly.

Me with Danielle B.

*The name of my college is redacted in compliance with the DiLorenzo Redaction Rule, a formerly de jure and now de facto law governing this blog.  In keeping with the policy of our founder, Charles N. Steele, "we" never list our place of employment (if any!).  This blog is a strictly private endeavor and our employers are not responsible for anything published.  (We deny all responsibility as well!)

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