July 2011

July 31, 2011 9:13AM

Basic Economics for Financial Journalists and Other Dummies

While driving home last night, I had the miserable experience of listening to a financial journalist being interviewed about the anemic growth numbers that were just released.


I wasn’t unhappy because the interview was biased to the left. From what I could tell, both the host and the guest were straight shooters. Indeed, they spent some time speculating that the economy’s weak performance was bad news for Obama.


What irked me was the implicit Keynesian thinking in the interview. Both of them kept talking about how the economy would have been weaker in the absence of government spending, and they fretted that “austerity” in Washington could further slow the economy in the future.


This was especially frustrating for me since I’ve spent years trying to get people to understand that money doesn’t disappear if it’s not spent by government. I repeatedly explain that less government means more money left in the private sector, where it is more likely to create jobs and generate wealth.

Media Name: 140.jpg

In recent years, though, I’ve begun to realize that many people are accidentally sympathetic to the Keynesian government‐​spending‐​is‐​stimulus approach. They mistakenly think the theory makes sense because they look at GDP, which measures how national income is spent. They’d be much less prone to shoddy analysis if they instead focused on how national income is earned.


This should be at least somewhat intuitive, because we all understand that economic growth occurs when there is an increase in things that make up national income, such as wages, small business income, and corporate profits.


But as I listened to the interview, I began to wonder whether more people would understand if I used the example of a household.


Let’s illustrate by imagining a middle‐​class household with $50,000 of expenses and $50,000 of income. I’m just making up numbers, so I’m not pretending this is an “average” household, but that doesn’t matter for this analysis anyway.


Expenses Income 


Mortgage $15,000 Wages $40,000


Utilities $10,000 Bank Interest $1,000


Food $5,000 Rental Income $8,000


Taxes $10,000 Dividends $1,000


Clothing $2,000


Health Care $3,000


Other $5,000


The analogy isn’t perfect, of course, but think of this household as being the economy. In this simplified example, the household’s expenses are akin to the way the government measures GDP. It shows how income is allocated. But instead of measuring how much national income goes to categories such as consumption, investment, and government spending, we’re showing how much household income goes to things like housing, food, and utilities.


The income side of the household, as you might expect, is like the government’s national income calculations. But instead of looking at broad measures of things such wages, small business income, and corporate profits, we’re narrowing our focus to one household’s income.


Now let’s modify this example to understand why Keynesian economics doesn’t make sense. Assume that expenses suddenly jumped for our household by $5,000.


Maybe the family has moved to a bigger house. Maybe they’ve decided to eat steak every night. But since I’m a cranky libertarian, let’s assume Obama has imposed a European‐​style 20 percent VAT and the tax burden has increased.


Faced with this higher expense, the household — especially in the long run — will have to reduce other spending. Let’s assume that the income side has stayed the same but that household expenses now look like this.


Expenses 


Mortgage $15,000


Utilities $9,000 (down by $1,000)


Food $4,000 (down by $1,000)


Taxes $15,000 (up by $5,000)


Clothing $2,000


Health Care $3,000


Other $2,000 (down by $3,000)


Now let’s return to where we started and imagine how a financial journalist, applying the same approach used for GDP analysis, would cover a news report about this household’s budget.


This journalist would tell us that the household’s total spending stayed steady thanks to a big increase in tax payments, which compensated for falling demand for utilities, food, and other spending.


From a household perspective, we instinctively recoil from this kind of sloppy analysis. Indeed, we probably are thinking, “Spending for other categories — things that actually make my life better — are down because the tax burden increased!!!”


But this is exactly how we should be reacting when financial journalists (and other dummies) tell us that government outlays are helping to prop up total spending in the economy.


The moral of the story is that government is capable of redistributing how national income is spent, but it isn’t a vehicle for increasing national income. Indeed, the academic evidence clearly shows the opposite to be true.


Let’s conclude by briefly explaining how journalists and others should be looking at economic numbers. And the household analogy, once again, will be quite helpful.


It’s presumably obvious that higher income is the best thing for our hypothetical family. A new job, a raise, better investments, an increase in rental income. Any or all of these developments would be welcome because they mean higher living standards and a better life. In other words, more household spending is a natural consequence of more income.


Similarly, the best thing for the economy is more national income. More wages, higher profits, increased small business income. Any or all of these developments would be welcome because we would have more money to spend as we see fit to enjoy a better life. This higher spending would then show up in the data as higher GDP, but the key thing to understand is that the increase in GDP is a natural result of more national income.


Simply stated, national income is the horse and GDP is the cart. This video elaborates on this topic, and watching it may be more enjoyable than reading my analysis.

July 30, 2011 10:36AM

America 2050: Forget the Forgotten Mode

Half truths, innuendo, and pseudo-science form the basis of a response to my recent Cato paper, Intercity Buses: The Forgotten Mode. The response is produced by America 2050, a project of the Regional Plan Association, a New York City–area regional planning organization. The response's basic thesis of the response is that intercity buses have a role to play in a "balanced transportation system," but they are "no replacement for high-speed rail."

Of course, my report never argued that buses were a replacement for true high-speed rail. But it did show that existing bus schedules in many corridors are faster, more frequent, and charge far lower fares than Amtrak in the same corridors. Of course, there is a "replacement" for high-speed rail: it is called "air travel" and it is far faster and costs about a fifth as much per passenger mile as Amtrak's Acela.

In any case, America 2050 says my report ignored "one of the most powerful arguments for rail: providing an alternative to highway congestion." I didn't address that argument in the paper on buses because, as I've shown in other papers, it's a bad argument. Highways move about 85 percent of all passenger travel and more than a quarter of all ton-miles of freight in this country. If they are congested, maybe we should relieve that congestion rather than spending hundreds of billions of dollars on an elitist rail network that won't relieve congestion and won't carry more than a tiny fraction of the number of people (and none of the freight) moved on the highways.

But we can't fix highway congestion, says America 2050: "providing additional road space does not solve congestion; in fact it creates additional demand for driving." That's another bad argument, for four reasons. First, my bus paper never advocated building new roads, and if asked, I would have suggested relieving congestion using congestion pricing of roads before building new capacity.

Read the rest of this post »
July 29, 2011 4:12PM

Atlas Shrugged Comes to Detroit

In a perverse way, I'm glad that there are places such as Greece and Illinois. These profligate jurisdictions are useful examples of the dangers of bloated government and reckless statism.

There also are some cities that serve as reverse role models. Detroit is a miserable case study of big government run amok, so I enjoyed a moment or two of guilty pleasure as I read this CNBC story about the ongoing decay of the Motor City. Here are some excerpts:

Detroit neighborhoods with more people and a better chance of survival will receive different levels of city services than more blighted areas under a plan unveiled Wednesday that some residents fear may pit them against each other for scarce resources.

...[T]he boundaries of the 139-square-mile city aren't receding. The plan also backs away from forcing the redistribution of what's left of the population into areas where people still live and where the houses aren't on the verge of caving in.

...Detroit's population of about 713,000 is down about 200,000 from 10 years ago, according to U.S. Census figures, and has fallen more than 1 million since 1950. Some areas have fewer occupied homes than vacant ones.

...A 2010 survey found Detroit had 33,000 vacant houses and scores of empty, weed-filled and trash-cluttered lots.

How predictable, I thought. This is what happens when vote-hungry politicians adopt policies that reward people for riding in the wagon and punish the folks who are pulling the wagon.

Read the rest of this post »
July 29, 2011 3:01PM

‘Madder Than Mosquitoes In a Mannequin Factory’

Just for fun, and because it’s a summer Friday afternoon, here’s the text of a court order handed down July 19 by Kentucky judge Martin Sheehan in the case of Kissel v. Schwartz & Maines & Ruby Co. (ScribD, h/​t Nicole Black and Daniel Schwartz):

ORDER…the parties having informed the Court that the herein matter has been settled amicably and that there is no need for a Court ruling on the remaining motions and also that there is no need for a trial;


And such news of an amicable settlement having made this Court happier than a tick on a fat dog because it is otherwise busier than a one legged cat in a sand box and, quite frankly, would have rather jumped off of a twelve foot step ladder into a five gallon bucket of porcupines than have presided over a two week trial of the herein dispute, a trial which, no doubt, would have made the jury more confused than a hungry baby in a topless bar and made the parties and their attorneys madder than mosquitoes in a mannequin factory;


IT IS THEREFORE ORDERED AND ADJUDGED by the court as follows:


1) The jury trial scheduled herein for July 13, 2011 is hereby CANCELED…

If you’re curious to know more about Judge Sheehan, a quick Google search indicates that he’s a judge who’s thrown out a lawyer’s libel suit against a critic (a prosecutor!) on the ground that it was constitutionally protected opinion; that he’s adopted civility rules to keep lawyers from beating up each other and each others’ clients over much in his courtroom; and that he struck down as unconstitutional an overreaching state law that retroactively sought to restrict where past sex offenders could live. Better and better.…

July 29, 2011 2:51PM

This Week in Government Failure

Over at Downsizing the Federal Government, we focused on the following issues this past week:

Follow Downsizing the Federal Government on Twitter (@DownsizeTheFeds) and connect with us on Facebook. We have a new poll up on the Boehner budget plan.

July 29, 2011 2:05PM

The Convoluted Debate on Drones

The same week U.S. Defense Secretary Leon E. Panetta declared “we’re within reach of strategically defeating al-Qaeda”—an assessment that many believe reflects the efforts of seven years of CIA drone strikes—former director of national intelligence Dennis Blair called America’s “unilateral” drone war in countries like Pakistan, Yemen, and Somalia a mistake. “Because we’re alienating the countries concerned,” Blair said, “because we’re treating countries just as places where we go attack groups that threaten us, we are threatening the prospects of long-term reform.”

Given that our Nobel Peace Prize–winning president has drastically escalated the use of these flying, robotic hitmen, there seems to be some confusion at the White House.

Speaking to attendees at the Aspen Security Forum, Blair said drone strikes in Pakistan should be launched only when America had the full cooperation of the government in Islamabad and “we agree with them on what drone attacks” should target. As explained elsewhere, this author accepts the efficacy of America’s drone war, but with enormous reluctance. That said, part of Blair’s assessment seems wildly out of touch. Why would Washington wait for permission from Islamabad to hunt al Qaeda?

First, individuals either within or with ties to Pakistan’s spy agency have collaborated with insurgents that frequently attack U.S. and coalition troops in Afghanistan. That doesn’t speak well for Blair’s call for joint cooperation. Second, we’ve known for years that elements within Pakistan have thwarted — on several occasions — foreign-led attempts to find and take out terrorists. Even someone who is not wildly enamored with drones understands the argument for employing them unilaterally when confronted with uncooperative governments. Policymakers, however, should be weighing the ability to keep militant groups off balance against the costs of facilitating the rise of more terrorists, particularly in a country as volatile as Pakistan.

Read the rest of this post »