Unforgettable Economics Lessons in Tombstone

The lessons of history are there for us to learn…

Economics One

Last night Yang Jisheng was awarded the 2012 Hayek Prize for his book Tombstone about the Chinese famine of 1958-1962.  It’s an amazing book. It starts with Yang Jisheng returning home as a teenager to find a ghost town, trees stripped of bark, roots pulled up, ponds drained, and his father dying of starvation. He thought at the time that his father’s death was an isolated incident, only later learning that tens of millions died of starvation and that government policy was the cause.

Then you read about the Xinyang Incident: people tortured for simply suggesting that the crop yields were lower than exaggerated projections. Those projections led government to take the grain from the farmers who grew it and let many starve; and there are the horrific stories of cannibalism.

You also find out what life was like as a member of a communal kitchen. With free meals people…

View original post 198 more words

Jobs? (No, not Steve)



Jobs? Jobs. Jobs. And more Jobs. Where are the jobs? Always the wrong answer to the wrong question. Do we have to wait upon big employers or the government for deliverance? Why not foster entrepreneurship and broaden capital accumulation to promote wealth creation? Instead we try to make the planet turn in the opposite direction. Maybe the French are finally starting to get it (if they listen to this banker). No such luck on this side of the pond.

From the WSJ:

The Emperor Creates No Jobs

France’s top central banker speaks some blunt economic truths.

French and German ministers met Tuesday in Paris to discuss the euro zone’s stagnant economy and rising unemployment. We hope they took with them the recent annual reportfrom French central bank chief Christian Noyer, who offers as clear an assessment as you’re likely to find in Europe of what ails the euro zone.

“The underlying objective,” Mr. Noyer writes, “is growth. Not just a temporary spurt, sustained artificially by public spending, but strong and lasting growth that creates jobs and is based on the development of modern and competitive production capacity. This kind of growth cannot just be summoned up. It requires a profound change in public policy.”

Consider France’s inflexible labor market. Mr. Noyer says France “is one of the biggest spenders on employment policies in the developed world, but it still has one of the highest levels of unemployment.” The central banker argues that France’s various programs and incentives to boost employment are undermined by their sheer complexity.

He also asks a fundamental question: “Do these subsidies not serve to offset market rigidities that could in fact be addressed directly at a lower cost and with more effective results?” In almost any other country, the question would answer itself. But to argue for “flexibility” in France is to risk the barricades. Maybe it takes a central banker to say that the emperor creates no jobs.

German GDP, Mr. Noyer notes, “contracted almost twice as much as in France in 2009.” But Germany’s greater labor-market flexibility allowed for a much faster rebound. France lost 500,000 jobs in that period, while German unemployment “remained stable,” in part because businesses could cut working hours when growth slowed. [Note: this is called market flexibility in the face of inevitable change.]

With French President François Hollande pushing older workers into retirement to “make room” for the jobless young, we hope he pays attention to Mr. Noyer’s words on jobs: “Public policies are often overly concerned with preserving the jobs of the past, at times to the detriment of future job creation.” He adds: “Today’s jobs are not the same as those of yesterday and, likewise, those of tomorrow will be different from the jobs that exist today.” [And nobody in government or the private sector really knows what tomorrow will bring. I doubt it will be a Tesla in every garage.]

Mr. Noyer’s third truth concerns government spending, which is 55% of GDP. “For the past ten years,” he writes, “France has had one of the highest levels of public spending in the world. Over a certain threshold, which our country has probably crossed, any increase in public spending and debt has extremely negative effects on confidence” (our emphasis). For this reason, trying to stimulate growth through a spending binge is bound to be counterproductive. Businesses and households, anticipating higher future taxes to pay for the binge, will cut back, offsetting any boost from deficit spending.

Mr. Hollande has in recent months led the charge for new German-financed spending to bring Europe out of recession. Mr. Noyer has hit on a better cure: less government spending, more flexible labor markets, and more competitive private firms able to create the jobs of the future. If only the President would listen.

Middle Class and Houseless


From Dr. Housing Bubble (link here):

The bailout of the banking industry was under the pretense that it would help the average homeowner.  What is interesting is that we are now subsidizing the foreclosure process for many of these homes to be sold to investors.  In California, roughly one-third of home sales for the last couple of years have gone to investors.  HAFA (Home Affordable Alternative Program) has made the process of selling distressed homes much easier via short-sales and deed-in-lieu of foreclosure.  Take a look at where most of this has occurred:


42 percent of all HAFA activity has occurred in California.  This has not come at a low price:

hafa amount

What is troubling about this is that many regular homeowners would like to buy these homes if they were actually on the market.  In fact, many would pay fair market value if these homes made it to inventory in a more normal fashion instead of going through the labyrinth of government programs and bank alternative-accounting standards.  Instead, these large cuts in balances are feeding into the investor frenzy.  The end result is a dragged out foreclosure process and the market suffers with a lack of inventory.

Going to any open house in Southern California during a sunny weekend will make you think that the entire housing market is on fire and that the homeownership rate must be going up.  Obviously with all these buyers, the rate must be going up.  Right?  Well, it isn’t because a large number of these buyers will be absentee buyers or will flip the house shortly.  Another bigger reason comes from the lack of supply.  The maddening crowds are simply hungry investors and regular buyers trying to out-bid each other for the limited supply of homes on the market.  Low rates are adding fuel to this mania but the homeownership rate continues to decline.

What higher housing prices and lower ownership rates means is that the benefits are going to fewer and fewer of those who merely want to exploit housing as a speculative asset market rather than a place to live. These are the folks who have benefited directly from bank bailouts and easy monetary policy from the Federal Reserve. The upshot is that the wealth gap between the haves and the have-nots is widening as a direct result of government policy. Is this what we voted for?

(Note: I should add that there is nothing wrong with investors making their bets in a free housing market, but the government shouldn’t be tipping the scales in their favor. The price volatility of an asset market increases its attraction for speculators by creating a greater potential for quick profits. This is the mistake we’ve made with an asset so essential as homes. Instead of secure homeowners to support a growing economy, we’ve created lots of winners and losers, all leveraged with unsustainable debt.)

Casino Fed


Quote from Judy Shelton in the WSJ: “Bernanke Talks, Markets Wobble. There Must Be a Better Way

Since Federal Reserve Chairman Ben Bernanke testified before Congress’s Joint Economic Committee Wednesday morning, commenting on the economic outlook and responding to questions from lawmakers on the likely path of monetary policy, financial markets have experienced turmoil. Triple-digit gains in the Dow Jones Industrial Average turned negative later that afternoon. That spurred a 7.3% plunge in the Japanese stock market, which in turn dragged down bourses in Frankfurt, London, Paris and Rome on Thursday morning—sending U.S. stocks on a roller-coaster ride.

Mr. Bernanke must be thinking: “Was it something I said?”

We should be asking ourselves a different question: Does it make sense for financial and economic outcomes to be so highly dependent on the pronouncements of a single individual? Would it be better if monetary policy were more rules-based and less discretionary?


The Debt Problem Hasn’t Vanished


Quoted today from the WSJ (full article here):

As the debt burden rises, so too does the cost of servicing the debt increase as a share of the growth the economy is capable of generating. When the debt on which interest is paid equals the GDP level of a nation, the economy must grow faster than the interest rate to avoid debt-servicing costs consuming all the benefit of economic growth. A nation then begins to lose its ability to grow its way out of a mounting debt crisis. Its options start to narrow down to forced austerity, inflation or default.

Today the total U.S. federal debt is 103% of GDP. Since interest paid to the Fed, the Social Security system and other government pension funds is effectively rebated to the Treasury, taxpayers currently bear only the burden of interest on 60% of this debt. But the size of the debt and the percentage of the debt on which interest will have to be paid are rising.

The president and many in Washington are complacent because, thanks to the Fed’s unprecedented near-zero interest rate policy, the burden of servicing the debt today is just 0.9% of GDP, the lowest level in over five decades. But this cannot last, and the Fed is already looking for an exit plan.

Sadly, nations generally discover the truth of Albert Einstein’s dictum that compound interest is the most powerful force in the universe—not through the happy accumulation of wealth but through the agonizing enslavement of debt.

This is why the debt-to-GDP ratio is the important one to watch. The following excerpt is from Common Cent$: A Citizen’s Survival Guide

The overall debt limit is a distraction—uncomfortable perhaps, but still a distraction. Instead, we need to consider the long–term consequences of excess debt on the productive capacity of the U.S. and world economy. This is better measured by the ratio of total debt to GDP. In addition, we can measure the short-term trend with the ratio of the annual deficit to GDP. This ratio shows whether our spending is having the positive effect of increasing our incomes, wealth, and standard of living, or merely impoverishing us in the long term.

IRS Shenanigans: Oops!


The IRS scandal is just one inevitable result of a national political class that has chosen to divide and conquer to stay in power rather than serve the interests of the people. We’ve heard the attacks on the Tea Party ad nauseum by liberal Democrats in the mainstream press. And we’ve heard the same attacks against OWS from alternative media sources. My, how this all serves the interests of the crony class.

Unfortunately for this administration, their tenor of denigrating voter protests they “don’t like” has now gotten them neck deep in another serious scandal. How did this happen? This quoted excerpt explains:

…the IRS crackdown on conservative organizations was a direct and inevitable consequence of political and policy messaging by the Obama administration, and by the campaign-finance reformers who share these views. Congressional Democrats are also to blame, since many of them have publicly—as with Max Baucus, chairman of the Senate Finance Committee, which oversees the IRS—or privately urged the IRS to go after conservative tax-exempt organizations.

It’s hard to feel sorry for politicians and activists who attack the peoples’ right to assemble and protest the government and the politicians that serve them. Think about that next time you hear a disparaging remark about the Tea Party or Occupy Wall Street. We’ve got a problem with the dysfunction of politics and government in this country and a large part of the problem is how we are (not) dealing with it.


Last week an unusual breeze of fairness blew through the capital, often from unlikely sources. Consider these remarks from Senate Majority Leader Harry Reid of Nevada:

“There are these shadowy political groups masquerading as social welfare organizations in order to solicit anonymous donations from we don’t know who — big corporations and also wealthy people. That needs to stop. We do not know exactly how much money was spent in the last election by these groups, and I acknowledge most of the money was spent on the right wing, but there was plenty on the left wing.”

Here is the scary thing: USA Today reports that the IRS approved nonprofit status for liberal groups at the same time it was denying that status for conservative groups. Rhetoricians at the University of Pittsburgh and Jesus College, Cambridge, have developed a theory of “keywords,” and it doesn’t take a Pitt or Cambridge degree to ascertain the political leanings of a group with a name such as Missourians Organizing for Reform and Empowerment, which received tax-exempt status at the time when Tea Party groups employing words such as “patriot” did not.

None of this is good for the Obama administration, which otherwise would have had something big to crow about last week. Revised nonpartisan Congressional Budget Office figures put the federal budget deficit at $642 billion. That marks a $203 billion improvement from earlier forecasts — and eerily, $203 billion was the size of the 1981 deficit, expressed in today’s dollars, that propelled Ronald Reagan into office.

But that wasn’t the predominant discussion of the week. Instead, the talk was of how the administration breached some of the most sacred lines in American life. First Amendment purists are right that attacking press prerogatives is an attack on American values. And maybe conservatives are right about taxes, because the type of flat tax they espouse could help take the IRS out of politics and make all of these exemptions meaningless.

This graphic is instructive too:
(Disclaimer: Hope this doesn’t get me audited!)

Pundits and Prognosticators

Great graphic, reprinted from Charles Hugh Martin’s blog. The last pronouncement (#20 by FDR) is quite chilling (and not in a good way)!

1. “We will not have any more crashes in our time.” – John Maynard Keynes in 1927 (1)

2. “I cannot help but raise a dissenting voice to statements that we are living in a fool’s paradise, and that prosperity in this country must necessarily diminish and recede in the near future.” – E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928

“There will be no interruption of our permanent prosperity.” – Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928 (2)

3. “No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment…and the highest record of years of prosperity. In the foreign field there is peace, the goodwill which comes from mutual understanding.” – Calvin Coolidge December 4, 1928 (3)

4. “There may be a recession in stock prices, but not anything in the nature of a crash.” – Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929 (4)

5. “Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.” – Irving Fisher, Ph.D. in economics, Oct. 17, 1929

“This crash is not going to have much effect on business.” – Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929

“There will be no repetition of the break of yesterday… I have no fear of another comparable decline.” – Arthur W. Loasby (President of the Equitable Trust Company), quoted in NYT, Friday, October 25, 1929

“We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices.” – Goodbody and Company market-letter quoted in The New York Times, Friday, October 25, 1929 (5)

6. “This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan… that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years.” – R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929

“Buying of sound, seasoned issues now will not be regretted.” – E. A. Pearce market letter quoted in the New York Herald Tribune, October 30, 1929

“Some pretty intelligent people are now buying stocks… Unless we are to have a panic — which no one seriously believes, stocks have hit bottom.” – R. W. McNeal, financial analyst in October 1929 (6)

7. “The decline is in paper values, not in tangible goods and services… America is now in the eighth year of prosperity as commercially defined. The former great periods of prosperity in America averaged eleven years. On this basis we now have three more years to go before the tailspin.” – Stuart Chase (American economist and author), NY Herald Tribune, November 1, 1929

“Hysteria has now disappeared from Wall Street.” – The Times of London, November 2, 1929

“The Wall Street crash doesn’t mean that there will be any general or serious business depression… For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game… Now that irrelevant, alien and hazardous adventure is over. Business has come home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before.” – Business Week, November 2, 1929

“…despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation…” – Harvard Economic Society (HES), November 2, 1929 (7)

8. “…a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall.”- HES, November 10, 1929

“The end of the decline of the Stock Market will probably not be long, only a few more days at most.” – Irving Fisher, Professor of Economics at Yale University, November 14, 1929

“In most of the cities and towns of this country, this Wall Street panic will have no effect.” – Paul Block (President of the Block newspaper chain), editorial, November 15, 1929

“Financial storm definitely passed.” – Bernard Baruch, cablegram to Winston Churchill, November 15, 1929 (8)

9. “I see nothing in the present situation that is either menacing or warrants pessimism… I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress.” – Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929

“I am convinced that through these measures we have reestablished confidence.” – Herbert Hoover, December 1929

“[1930 will be] a splendid employment year.” – U.S. Dept. of Labor, New Year’s Forecast, December 1929 (9)

10. “For the immediate future, at least, the outlook (stocks) is bright.” – Irving Fisher, Ph.D. in Economics, in early 1930 (10)

11. “…there are indications that the severest phase of the recession is over…” – Harvard Economic Society (HES) Jan 18, 1930 (11)

12. “There is nothing in the situation to be disturbed about.” – Secretary of the Treasury Andrew Mellon, Feb 1930 (12)

13. “The spring of 1930 marks the end of a period of grave concern… American business is steadily coming back to a normal level of prosperity.” – Julius Barnes, head of Hoover’s National Business Survey Conference, Mar 16, 1930

“…the outlook continues favorable…” – HES Mar 29, 1930 (13)

14. “…the outlook is favorable…” – HES Apr 19, 1930 (14)

15. “While the crash only took place six months ago, I am convinced we have now passed through the worst — and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.” – Herbert Hoover, President of the United States, May 1, 1930

“…by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent…” – HES May 17, 1930

“Gentleman, you have come sixty days too late. The depression is over.” – Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930 (15)

16. “…irregular and conflicting movements of business should soon give way to a sustained recovery…” – HES June 28, 1930 (16)

17. “…the present depression has about spent its force…” – HES, Aug 30, 1930 (17)

18. “We are now near the end of the declining phase of the depression.” – HES Nov 15, 1930 (18)

19. “Stabilization at [present] levels is clearly possible.” – HES Oct 31, 1931 (19)

20. “All safe deposit boxes in banks or financial institutions have been sealed… and may only be opened in the presence of an agent of the I.R.S.” – President F.D. Roosevelt, 1933 (20)

ObamaCare’s Chickens

ACAThese WSJ letters to the editor are actually worth reprinting:

The ObamaCare Chickens Come Home for Young Voters

Regarding Ezekiel J. Emanuel’s “Health-Care Exchanges Will Need the Young Invincibles” (op-ed, May 7): Dr. Emanuel suggests that purchasing insurance is a part of “individual responsibility,” and without insurance one is effectively “free-riding on others.” Further, he suggests that President Obama carry this message to the 18-to-29-year-old demographic that helped him into office for a second term.

Unfortunately, President Obama doesn’t have much credibility when it comes to the social debate against free-riding, having run on a platform of low personal accountability. Isn’t this the president who asked for high earners to pay an increasingly progressive tax in an effort to enhance the federal income-tax free-ride? Given his campaign rhetoric, it seems wildly inconsistent for this president to now take on a message of individual responsibility and inclusiveness when it comes to the financial burden this country must bear for health care.

Mark Carter


Dr. Emanuel informs us that “buying insurance is part of individual responsibility.” If not, only older and sicker citizens will be in the insurance exchanges, making coverage extremely expensive. What he neglects to mention is that the penalty for not buying insurance is the greater of $695 or 2.5% of income (say $1,250 for a $50,000 income) in 2016. Yet the Congressional Budget Office says that same year the average cost of the bronze plan (least expensive) in the exchanges will be $4,500 to $5,000 for an individual. These young “invincibles” are supposed to pay over $3,000 more for insurance coverage when, if they just pay the penalty, they are guaranteed coverage. Is he saying that these young invincibles are supposed to be stupid, too?

Ken Nelson


To expedite this process the Obama administration should drop the insurance charade, call a tax a tax and impose it on all of those young Americans whom they wish to motivate. Maybe they will catch on when they realize that once they’ve signed on they will face ever-increasing charges. Then they will be properly motivated. The road to hell is paved with good intentions.

Bernard Kram

Plainview, N.Y.

With the promise that pre-existing conditions cannot be used to deny insurance or raise the premium, ObamaCare eliminates any rational argument for buying health insurance when you are still healthy. The elimination of gender and very limited use of age and health status to adjust the premium will fall particularly hard on young, healthy men and on those who live a healthy lifestyle. Maybe Dr. Emanuel missed the campaign: The president’s plea for re-election was a promise to tax the other guy—either the 1% or the “millionaires and billionaires,” not for young men just getting started with their own lives and careers to pay more now themselves.

James M. Nachbar, M.D.

Scottsdale, Ariz.

As a 29-year-old invincible young man, I have to wonder: When do I get mine? Unemployment among my age group far exceeds national numbers. Student debt is reaching heights unfathomable a decade ago. We are continually asked to pay into Social Security and Medicare when by all estimations the programs will be unable to sustain themselves until our own retirement.

More and more young people are asked to contribute beyond their meager means. At what point in our lives do we begin working for ourselves rather than for others?

Mark Venner

Cambridge, Mass.

Those of us who have some understanding of the type of plans required to be offered via these exchanges know that the base annual deductible for such plans will be $2,500. The proponents of the Affordable Care Act expect folks who don’t find value in purchasing even basic health insurance now to purchase an ACA-designated policy with such a high annual deductible. This will likely not occur. Secondly, the author wants 18-to-29-year-olds to purchase their own plans, when the same law mandates that their parents’ plan cover them until they are 26 years old. Call me silly, but would this make sense to me if I were a 22 year old?

Arvind R. Cavale, M.D.

Feasterville, Pa.

It is almost laughable (were it not so sad) that Dr. Emanuel ties the Affordable Care Act and its financial success and affordability to “individual responsibility” when in fact it is individual responsibility that the law attacks. The ability to act and choose (badly sometimes) isn’t available in the law. You do what is suggested or you are fined, excuse me, taxed.

Peter E. Politi

Greenwich, Conn.

[And my favorite…]

If the success of ObamaCare rides on “Insurance Exchange Days” at Yankee Stadium, I say, “Good luck with that.”

Mark H. Johnson

Berwyn, Pa.

Big Brother.

IRS Scrutiny Was Deeper Than Thought

Government investigators have found that the Internal Revenue Service scrutinized conservative groups for raising political concerns over government spending, debt and taxes or even for advocating making America a better place to live, according to new details likely to inflame a widening IRS controversy.

Unbelievable? All too believable.

It’s 1984.

Breaking News (from the Financial Times):

G7 reaffirms commitment not to devalue currencies for domestic gain.

Finance ministers and central bank governors of the Group of Seven rich economies have reaffirmed a commitment not to seek to devalue their currencies for domestic gain.

After an informal two-day gathering in a country house hotel outside London with no communiqué, participants said on Saturday they were reassured by Japan that its revolutionary new economic strategy was not intended to weaken the yen.

And the results:


What planet do these central bankers think we live on?