Tag Archives: Common Sense

“Brilliant” Modern Economists: More Idiot Than Savant…

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The Model For Today's Economist

The Model For Today’s Economist

Bernanke is a case study for the shortcomings of modern economists.  Over four years, he has single-handedly disproven the supremacy of monetary theory as the overriding law of the economy.  0% fed interest rates and heavy rounds of quantitate easing have been the law of the land for four years and the economy continues to grind to a halt.  Despite sitting on $1.6 Trillion of cash reserves, the banks aren’t lending money.  Inflation has remained extremely low, defying all of the models of monetary economists everywhere.  How could they have been this wrong?

To figure out this economic caper of the ages, all Bernanke has to do is go to his local bank and ask for a loan.  His experience would probably be similar to that of a relative of mine who recently tried to procure a loan.  This relative, armed with perfect credit and a deep ledger of collateral, recently went to his bank (one of the five biggest) to pull out a loan against a house he owns to buy a condo.  He was rejected, for any amount of money against any amount of collateral.  Having spent the last forty years of his life in the real estate market, my exasperated relative asked, “So what do you guys do here all day?”.  The banker gave an ironic chuckle and said, “I honestly don’t know”.

The local loan officer would be able to tell Bernanke that there is little incentive to give out small business and real estate loans at such a low interest rate, because the return would largely be gobbled up by future inflation.  He would say that despite the high reserves relative to historical averages, Dodd-Frank regulation requires that they give out fewer loans against those reserves.  Even if Bernanke somehow convinced the bank to give him a loan, no one there would really even know how to lend under rapidly evolving (and expanding) rules that no one has had the time to learn how to navigate.  The only loans happening are the federally mandated and subsidized loans to sub-prime recipients…   Loans that the bank can then turn around and sell to the government.  The impotence of Bernanke’s policies isn’t the grand mystery of the 21st century, it can be explained by any loan officer in the country.

So, you might ask, what then what about the improving home values and increased consumer confidence since Bernanke stared the third round of quantitative easing, or “Operation Twist”?  The nature of the latest round is an over $40 Billion a month purchase of debt that includes sub-prime mortgages.  When the government is buying $40 Billion a month (about half a Trillion a year) of a thing, it isn’t surprising that the price of that thing will go up… So what happens when they stop buying it?

Monetary economists aren’t the only ones who can’t seem to figure out how the economy actually works. Most economists suffer from looking at the economy as a single-variable system.  Monetary theorists believe that the fortunes of the US economy rise and fall at the whims of the Fed Chairman.   Keynesian economists believe that the economy is governed by demand, regardless of where that demand comes from. Right-wing tax theorists believe that the elixir of economic growth is a simple low tax rate.  Though they all have important contributions to the overall equation, it is impossible for any one of them to predict an outcome without a unified multi-variable economic approach.  Monetary policy, regulations, taxes, tariffs, and resources all play into the system, but no single one dominates consistently.

Much of the problem stems from the insulated nature of the economist’s world.  Academia fiercely protects its subjects from the real life experiences.  Though complicated models and comprehensive inputs are available for the creation of economic theory, they have no exposure to common sense that comes from hands-on experience.  In the case of Bernanke, if he actually worked in the loan granting division of any bank he would have been able to see how ridiculous, and even counterproductive, his monetary policies were in the context of the Dodd-Frank regulation.

The same goes for any demand-side Keynesian economist.  Put Paul Krugman in any company as the CFO for a year and he would discover the simple fact that there are a few more lines on an income statement underneath the “revenue” line.  In an isolated system, increasing revenues would stimulate businesses to grow and hire new workers.  However, in the multivariable real world, he would discover that revenue increases are filtered through the increased labor expenses associated with unions, increased medical costs of Obamacare, increased regulatory expenses, and the dramatically increased taxes (especially for over 50% of companies that file as a sub-chapter S corporation).  It would become clear to him why, in spite of increased top-line growth, these companies are firing employees.  He would also see a group of managers making investment decisions.  He would quickly discover companies plan for future growth, and that they don’t act as mindless drones that only react to a temporary “stimulus bill” increase of the revenue line.

The right-wing tax economist would see that regulation and global influences can also have dramatic effects on the economy, even in the face of a tax hike.  Clinton increased taxes, but the economy was able to grow with a retreating Japan, free trade agreements like NAFTA, and a new technological revolution.  They also come up short when trying to explain the robust growth of the economy from 1950 to 1970, when the top marginal rates was as high as 90%.  Though they strive to explain the loop holes that kept the real paid rates closer to 35% in the top brackets, the tax economist misses the growth story of the global economy at the time, and the technological and manufacturing advantages the US had over the rest of the world following WWII.

We are long overdue for a wave of practical economists.  Six trillion dollars of elevated government spending and trillions more of monetary easing have yielded no results in the face of an onerous burden new regulations and tax hikes unseen since FDR’s reign of economic terror.  It is only surprising that the results are much the same as what we experienced back then to economists stuck in single-variable economic models contrived in academic bubbles.  Bernanke’s perception of the economy was created far away from the practical influences and simple lessons of the real world.

Unfortunately, the real world has to bear the consequences of his ignorance.

Common Sense Economics: Spain

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The Real Madrid vs Barcelona rivalry is about to heat up…

One of the most ambitious, and successful, efforts of the academic Left has been a war on common sense.  True economics is a science governed by very intuitive rules.  Extremely complicated monetary theories have arisen to confuse the subject and contradict common sense conclusions any high school graduate can come to with minimal effort.  The confusion puts up a veil behind which leftist social engineers can operate with reduced risk that someone empowered with simple intuition can identify that the King, in fact, has no clothes…

On of the most intuitive rules is the following: The more you punish success and take the fruit of people’s labor, the less productive they will be.  Spain has ignored this rule for many decades.  Years of anemic growth and re-distribution of capital from productive hands to the lazy regions of the country have created a fragile economy unable to weather the global downturn.  More importantly (here comes one of those intuitive laws economics/human nature), the productive parts of the country are starting to resent supporting the dead weight. The Catalan region of eastern Spain has long been the industrious part of the country.  As per a recent article in Reuters, a significant part of the economic output of the region (8% or $21 billion) is redistributed from Catalonia to the remainder of the country every year…

Which brings us to our second super-simple economic lesson:  People grow entitled to charity quickly.  Give someone a dollar one day and they say “thank you”.  Give that same person a dollar for seven days and then try to walk by on the eighth day.  He will angrily ask where ”his” dollar is.  Appreciation turns quickly to entitlement.  When I lived in Spain eighteen years ago, I don’t recall a “Catalonia appreciation day” for supporting the rest of the country.   I am guessing that it hasn’t started since.

Liberals will argue that there has always been a separatist movement in Catalonia, and they would be right.  However, it didn’t gain any political power until the economy tanked and the country raised taxes to meet the bills.  Since tax burdens weigh disproportionately on the most productive parts of society, Catalonia was hit especially hard.  Rather than continue to support an entitled country incapable of balancing the checkbook, the people of Catalonia are looking to shrug off the oppressive weight.  Just recently, the local government gained a majority capable and willing to vote for separation.  Who can blame them?

How much worse does it have to get before we see the same thing in the US?  Secession petitions have been submitted by people in more than 30 sates in the US, but there is no real political will behind them.  However, what happens when the people of Texas and Florida see their taxes going to bail out the entitlement groups of California and Illinois.  Like in Spain, England, and France the increased taxes in those states will not bring in nearly as much revenue as their predictions and certainly not enough to meet their debt obligations.  Eventually, like with Greece and Spain, the other states will have to come to their rescue, but the constituencies of the bailed out states will not allow any fiscal restraint. We will see riots and paralyzed liberal politicians who, like a child whose gambling debt comes due, will be backed into a very uncomfortable corner.  At some point Texas and other productive states will not want to pick up the tab for California.  Secession risk will become real.

The road we are on and where it leads has never been so clear. You don’t need a crystal ball to figure it out, just pick up the paper.  Only a nation that has lost its ability to exercise common sense will be caught by surprise.