At The Church Of Fallacy Economics, Burning The Heretics

I have refrained from commenting on it up to now, but there is something quite extraordinary going on in the world of economic policy, namely an incredible piling on against two economists who wrote a 2010 scholarly paper thought to support the view of "austerity" being a good thing.  The fallacy Keynesians are out in great force and viciousness.  It resembles nothing so much as the burning of heretics for daring to question the faith.

​​It started with economists Carmen Reinhart and Kenneth Rogoff, professors at Harvard, writing an article called Growth In A Time Of Debt in January 2010 for NBER.   In the article, the authors did a quantitative analysis of a large dataset, and concluded that at debt levels "above 90 percent" of GDP, "median growth rates fall by one percent, and average growth falls considerably more."   The consequences of this result for appropriate economic policy may not be obvious to the readers of this blog, but the explanation is not complicated.  In the world of fallacy Keynesianism, economic policy is divided into two alternatives, called "stimulus" and "austerity."  "Stimulus" means some combination of government spending increases and tax cuts, thus, debt increasing.  "Austerity" means some combination of government spending decreases and tax increases, thus debt decreasing (or, more likely, increasing a little more slowly).  So the Reinhart/Rogoff conclusion can be used to advocate that Keynesian "stimulus" policies don't work at least when debt has hit 90% of GDP.   More broadly, if you don't get your government spending under control before the debt his 90% of GDP, you will go into stagnation with no obvious way to get out.

You can understand how the advocates of endlessly increasing government spending would hate the Reinhart/Rogoff conclusion, let alone the fact that they come from big-name Harvard, where all the other economists worship at the Church of Keynes.  And the hatred was aggravated by the fact that known vampires like Paul Ryan had cited the Reinhart/Rogoff work in advocating for spending restraint.  Well, a couple of weeks ago a grad student named Thomas Herndon and others at much less big-name U Mass - Amherst published their own article at the Political Economy Research Institute, claiming to find "coding errors, selective exclusion of available data, and unconventional weighting of summary statistics" in the Reinhart/Rogoff paper.   Let the inquisition begin!

I'll give just a few choice quotes from very many that are out there:​

"This is a mistake that has had enormous consequences," wrote Dean Baker of the Center for Economic and Policy Research. "If facts mattered in economic policy debates, this should be the cause for a major reassessment of the deficit reduction policies being pursued in the United States and elsewhere."

From the official Worst Economics Writer In America, Paul Krugman:​

So the Reinhart-Rogoff fiasco needs to be seen in the broader context of austerity mania: the obviously intense desire of policy makers, politicians and pundits across the Western world to turn their backs on the unemployed and instead use the economic crisis as an excuse to slash social programs.

And this, reported by Matt Clinch of CNBC:​

The two economists have also said they have received "hate-filled" and "threatening" emails since the debate began to rage two weeks ago.

Now I'm not going to get into the math of the Reinhart/Rogoff paper, whether it contains errors, and whether those errors are important to the result.  The evidence of the Reinhart/Rogoff paper is a minuscule part of the vast evidence that Keynesian stimulus doesn't work.  If it did, Japan would have boomed for the last 24 years.  If it did, Greece and Spain would be success stories instead of needing one bailout after another.  If it did, France, with spending at 56% of GDP, would be a growth model for all, instead of barely eking out 0.5% growth for the past 5 years and currently shrinking.  If it did, Latvia and Estonia would have collapsed when they dramatically shrank government spending as a percent of GDP a few years ago.  If it did, Hong Kong and Singapore would be basket cases instead of growth leaders.  All you have to do is look around for the most basic statistics as to national economic performance.

​But the Reinhart/Rogoff story is about the enforcement of orthodoxy in academia.  After the firestorm hit, the pair have sent out a series of waffling missives, defending their work but also partially backing down:

"Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis," they said in the Financial Times.

It may be enough to avoid burning at the stake, although perhaps not excommunication.  Remember all ye economists, this is what happens to all those whose work may suggest that government should be cut!​

Things The Government Gets Wrong By 180 Degrees -- Privacy

Despite what you may have heard about Supreme Court cases like Roe v. Wade, the Federal Constitution doesn't ever mention a right to "privacy," at least not using that word.  What it does mention, in the Fourth Amendment, is "[t]he right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures . . . ."  In other words, to the extent there is any right to privacy mentioned in the Constitution, it is a right as against the government only; there is no privacy protection as to other private individuals or companies.

That seems right to me.  It's the government that has the monopoly on legitimate coercive force, the government that can put you in jail, the government that can perpetuate its own power by getting and using potentially damaging information about its challengers and opponents.​  The serious threat to privacy is from the government.

Well, advance forward to today's upside-down world.  Today the Federal government passes endless laws and regulations supposedly to protect our privacy, but always those laws and regulations offer protections only against private actors.  As to the government itself, all the statutes just give the government more and more access to our information.​

​For example, consider the new Health Information Privacy rules coming out of HHS.  They are extremely complex and expensive to comply with.  God help the doctor or hospital that accidentally discloses your health information to the wrong private entity.  But don't worry, here in the list of permitted disclosures of your information we have no fewer than twelve exemptions for the government, for anything from "public health activities" to "health oversight activities" to "research" to "law enforcement purposes."  So if the FBI wants your health information, no more need for clearing a "reasonableness" hurdle with a judge or getting one of those those pesky warrants.  And besides, how can we expect to achieve perfect fairness in the delivery of healthcare if the government can't monitor the details of everybody's diseases and treatments?

Or consider the Fair Credit Reporting Act.  That's the Act that's supposed to protect your information in the hands of the credit bureaus from improper disclosure.   But after long lists of restrictions supposedly to those with a "proper purpose" to be seeking your information, we come to this in Section 1681(f): "a consumer reporting agency may furnish identifying information respecting any consumer, limited to his name, address, former addresses, places of employment, or former laces of employment, to a governmental agency."   Again, no need for subpoena or warrant.  If you are the government (at any level) ask and ye shall receive!

Well, you say, that's not too bad because it's only identifying information; they can't actually get the details of your financial transactions behind your back, can they?  Well, yes they can.  The main source of authority is Section 505 of the USA PATRIOT Act, authorizing what are called National Security Letters.  These are the things that the government can send to banks, cell phone companies, or ISPs instructing them to turn over all their information about you and, by the way, don't tell the subject that you have gotten this letter or it is a felony.  Any need for a warrant for that?  The government's position is no, because in dealing with a third party (such as a bank or telephone company) you gave up any "reasonable expectation of privacy."  Of course, it's impossible to challenge a NSL if the bank or telephone company doesn't tell you about it, and they are not allowed to tell you about it.

As noted by me here, in March a Federal judge in California declared unconstitutional under the First Amendment the portion of the NSL statute that purported to make criminal the public disclosure of the receipt of the letter.  With any luck that will get to a higher court and get affirmed.  But even if it is affirmed and sticks, you will be relying on the decency of your bank or telephone company to tell you if the government comes snooping around.  Meanwhile, you have no choice but to assume that the government is monitoring all your financial transactions and phone calls behind your back. 

It just seems like the concept of privacy has turned around 180 degrees from where it started out.

Is It Possible To Read Anything About Economic Policy That Is Not A Fallacy?

As described in Friday's post, that day's Wall Street Journal had several articles filled with economic nonsense coming out of the mouths of Europe's incompetent leaders.  On Saturday, the New York Times one-upped them with far more of same.  On page 1 we have Andrew Higgins with an article headlined "Europe Pressed To Reconsider Cuts as a Cure," and then on page B-1 Catherine Rampell writing "Federal Cuts Are Concern In Modest U.S. Growth."​  The fundamental proposition of both articles is that increasing government spending grows the economy while decreasing government shrinks the economy.  

Let me pick just a few choice quotes.  From Ms. Rampell:​

The so-called sequester is scheduled to strip $85 billion out of federal spending before Oct. 1, cuts that will have secondary effects throughout the private sector. Furloughed federal workers, for example, will spend less money at local businesses.  While lower government borrowing and spending can help free resources for business when the economy is operating closer to its capacity, that is not the case today.

Ms. Rampell even goes out to find some so-called economists to support the fallacious theory.  For example:​

“With fiscal tightening weighing on the spring and summer quarters, we expect weaker growth ahead,” Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisers, said in a note to clients.

And yet another from a professor at the University of Michigan:​

Justin Wolfers, an economics professor at the University of Michigan, said the government’s fiscal policy was a drag on the economy. . . .   “The bigger picture is that we have a fledgling recovery which needs help but isn’t getting it,” he said.

These people seem to have no idea that year in and year out the economies that are the most successful are the ones with the lowest government spending and the lowest taxes.  The Heritage Foundation compiles the data.   Examples:   ​

Hong Kong.  Government spending as a percent of GDP, 19%.  Top income tax rate 15%.  Five year compound economic growth rate 3.6%.  Unemployment rate 3.4%.​

Singapore.  Government spending as a percent of GDP, 17%.  Top income tax rate 20%.  Five year compound economic growth rate 5.7%.  Unemployment rate 2%.​

Do you know that both Hong Kong and Singapore have surpassed the U.S. in per capita GDP?​

Or how about Switzerland?  Government spending as a percent of GDP is 34.7%, far below any of the major European economies (Germany, France, Spain, Italy, U.K.).  Top income tax rate is 41.5%, but only 11.5% of that is Federal, and the rest varies by canton.  Compound five year economic growth rate is 1.7%.  (That compares to 0.5% in the U.S., 0.5% in France -- home of 56% of GDP government spending, and 1.1% in Germany where government spending is 45% of GDP.)  Unemployment rate is 4.2%. ​

Really, this isn't all that complicated.  And imagine how much more dramatic these differences would be if they stopped wrongly counting government spending at 100 cents on the dollar in GDP!  ​

Europe In The Grip Of Fallacy Economics

Today's Wall Street Journal contains multiple articles on the continuing sluggishness and/or decline of some of Europe's major economies, and the "remedies" proposed by their incompetent government-aggrandizing politicians.  The unquestioning acceptance of the usual fallacies is literally beyond belief -- and not just among the politicians, but also by the WSJ writers.  Help!

​Since the articles are behind pay walls, I will include quotes of the key parts.

The front page headline is about Spain:  "Still Sputtering, Spain Turns Away From Cuts."  Seems that the latest figures from Spain show that the unemployment rate has gone up to an astounding 27.2%  What's the proposed solution?  Better go easy on the "austerity"!  There's that deceptive word again, invoking the usual confused melange of tax increases and spending cuts to keep anyone from trying to shrink the government.   ​

On Friday, the government is expected to announce new, less-stringent deficit targets, which means it won't have to take significant new austerity measures.

​How did Spain get in this mess?  You won't find any information on that in these articles or in the quotes from various government officials.  But perhaps try the Heritage Foundation page on Spain here.  Deficits averaging near 10% of gdp since 2009.  Top income tax rate of 56%, higher than even California and New York City.  Uncompetitive corporate income tax rate of 30%.  Wild spending on ridiculous renewable energy boondoggles.  Government spending as a percent of gdp not as out of line as many others in Europe at 44%, but still way too high.   Do they really expect anyone to keep investing in their bonds if they keep running deficits of 10% of gdp indefinitely?  So they force the banks to buy the debt, and the banks are then insolvent, cutting off business lending in the private economy.   Since taxes are already uncompetitively high, Spain has only one way out of its mess, which is big shrinkage of the government.  They invoke the deceptive "austerity" bugaboo to ward that off.  You'd think at least the Wall Street Journal would be alert enough to call them out.

In another article on page A-16 ("Europe's Unemployment Problems Worsen") we branch out into other European economies like France and Portugal.​  "In France, the number of registered job seekers who are fully unemployed rose to more than 3.2 million, topping a previous record set in 1997."  What does the economic genius Francois Hollande have to say about that?

In, France, President Francois Hollande has championed the charge for greater emphasis on growth, arguing that more austerity at this point is a risk, not a remedy to Europe's crisis. . . .  With no economic growth expected this year, Mr. Hollande is pinning his hopes on state-sponsored incentives for employers to make good on his pledge to start bringing unemployment down by the end of the year. 

This would be the France where government spending already is an astounding 56% of gdp, the corporate income tax rate is 34.4%, and they're trying to implement a top personal income tax rate of 75%.​  The private sector has become a small and shrinking part of the economy, shoved off into some little corner.  Of course the economy is dying, and of course Hollande is recommending "growth" through yet more government spending.  If government spending at 56% of gdp brings sluggishness and decline, does anyone really believe that 60% will bring growth?  How about 80%?  Anybody with a brain knows that this is the route to North Korea.  But there is barely a single politician in Europe with a brain.  (That would be Vaclav Klaus.  Try to name another one!)  

Perhaps you think the Germans are a little smarter?​

But Jorg Asmussen, German Chancellor Angela Merkel's appointee to the European Central Bank's executive board, spoke out in defense of austerity, calling it the only way for countries to secure long-term stability.​

The Germans then are equally incapable of distinguishing spending cuts (government shrinkage) from tax increases (government growth) as elements of economic policy.  Pathetic.​

As to Portugal and Spain:​

Portugal this week presented an ambitious stimulus program aimed at growth, and the Spanish government is expected to outline a similar shift on Friday.​

Japan has had well over 20 years of "stimulus" and stagnation.  The U.S. blew through almost a trillion dollars on "stimulus," raised government spending by about 4% of gdp and has had a stagnation ever since.  France has government spending at 56% of gdp and stagnation.  What's the solution?  More government spending!​

We can confidently predict that the sequence of debt crises in Europe and the economic stagnation are not going to end any time soon.​

The Welfare State Aggressively Advertises To Expand Itself

The phrase often used to describe the welfare state is the "safety net," ​a term with connotations of small numbers of people otherwise in grave danger of harm.  Then we find out that the number of people on food stamps (aka SNAP) has close to doubled over the last four years and now is around 48 million, costing close to $80 billion per year.  How did it get so big so fast, and is the term "safety net" really a fair description of its current status?

Over at the Washington Post a guy named Eli Saslow appears to be undertaking a project to report on the implications of the food stamp explosion in the real world.  On March 16 he had a big report on food stamps in Woonsocket, Rhode Island; and on April  23 another big report from Florida.

Saslow clearly comes at this with a view that all ​food stamps are good and more food stamps are better.  Still, there's a lot to be learned from reading his articles.

First, I found them by a Google search of "food stamps Washington Post."  ​ I guess that determines what ads you get.  At the top of my version of the Rhode Island article we have:

Government Assisted Phone

Get a Free Phone & Monthly Plan.  See if You Qualify for One Today!​

www.assurancewireless.com​

And then down at the bottom of page 1:​

Apply For SSI/Disability

Get SSI & Social Security Benefits Free Consults & Help With Your App

Apply.SSDisabilityApplication.com​

Click that last link and you go not to a government site, but rather to ​the site of a firm called Myler Disability, "Social Security Disability Advocates."

Also, many more such ads scattered through these multi-page articles.​

But let's look at the articles themselves.​  In Florida we follow around a woman named Dillie Nerios, employed by "a local food bank that is funded in part by the state" of Florida.  Her job: to recruit "at least" 150 seniors each month onto the food stamp rolls.  Is it working?  "Nowhere had the SNAP program grown as it has in Florida, where enrollment had risen from 1.45 million people in 2008 to 3.35 million last year."

To help enroll more seniors, the government has published an outreach guide that blends compassion with sales techniques, generating some protests in Congress. The guide teaches recruiters how to “overcome the word ‘no,’ ” suggesting answers for likely hesitations.

Nerios spends a lot of time with a couple named Lonnie, 60, and wife Celeste, who seem to have lost most of their savings in a failed business venture a couple of years ago.  They are eligible for food stamps, but clearly reluctant to take them.  Dillie tries everything to get them signed up.  Saslow meanwhile tries everything to get your sympathy for the effort, including describing the small mobile home where L&C live, and Lonnie's lack of success in getting jobs in the last few years.  Then, even as he's trying to pull on your heartstrings, Saslow basically gives away the game:

They decorated the walls of the mobile home with memories of a different life: photos of Lonnie in his old New Jersey police officer uniform, or in Germany for a manufacturing job that paid $25 an hour, or on vacation in their old pop-up camper.

An "old New Jersey police officer uniform"?  You mean this poor, poor guy has one of those New Jersey police pensions?​  For anybody who follows any news at all, New Jersey police pensions have to be one of the biggest scandals out there.  In this article we never learn how big Lonnie's pension is, or whether he is one of the notorious New Jersey "double dippers."  But hey Eli, an article trying to drum up sympathy for the poor condition of a retired New Jersey policeman who must be entitled to a pension, and doesn't even mention the pension or how big it is?  This is really preposterous!  By the way, Lonnie and Celeste also have five grown working kids.  Any chance that one of them could pitch in before the parents become wards of the taxpayers?

You are probably asking, how can Lonnie and Celeste even be eligible for food stamps if he has one of those New Jersey police pensions?  The answer is that most pensions are not counted for food stamp eligibility.​  Again, we can't know the details if Eli won't ask the most basic questions here.  Oh, and by the way, equity value of home (unlimited in amount) is also not counted in food stamp eligibility, and same for value of a first car (this one varies some state by state).  Don't let being a millionaire slow you down!

​The articles are also completely permeated with the economic fallacy that passing around free money is a good thing for the economy.   As in, for example, "food-stamp enrollment has become a means of economic growth, bringing almost $6 billion each year into the state.  The money helps to sustain communities, grocery stores and food producers."  So I guess the government should just pay everyone to sit around and do nothing -- that will make us all rich! 

​I appreciate the Washington Post at least shining something of a light on what is going on out there.  But really, in its worldview and total acceptance of the most ridiculous economic fallacies, this series is an embarrassment.

UPDATE:  Thinking about this post since I wrote it yesterday, my question is, is it possible that Lonnie came away from his tour as a NJ policeman with no pension?  I don't think so.  Saslow is trying to pull on our heartstrings.  If Lonnie had no pension, there is no way that he would have omitted that fact.  And there is much in the article to indicate that Lonnie must have some source of income, since he clearly spends money (fixing up his mobile home, for example) and Saslow emphasizes repeatedly that all jobs have fallen through.  No, Lonnie has a pension -- and NJ police pensions are known to be some of the most lucrative -- and Saslow is intentionally omitting that fact to deceive the readers.  Not good.​

The Mayoral Candidates Compete On Ways To Impoverish The City

Time to check in on the race for mayor again.  Last night there was a forum for the mayoral candidates at Cooper Union, sponsored by the League of Conservation Voters.  Subject: environmental sustainability.  ​

Could there be a more perfect topic to bring forth the New York conventional ignorance?  Of course the audience consisted mainly of environmental activists, all the more to encourage ridiculous statements from ​politicians striving to say what the listeners want to hear.

I have come across two reports on the forum, one from the New York Times City Room blog here, and the other from ​The Atlantic Cities here.  According to Sarah Goodyear of Atlantic Cities, the candidates "confidently advanced a series of proposals that would have seemed overly ambitious or even silly just a few years back."  Believe me, the proposals are just as silly today.

Let's start with the frontrunner, ​City Council Speaker Christine Quinn.  She started by agreeing that "reducing the city's carbon emission 80% by 2050 is 'where we have to go.'"  That's rather dramatic!  By the time we're done heating our houses, will we still be allowed to have electricity?  You're probably thinking, she must be in favor of nuclear power, because that's the only possible place that we can get all that power without carbon emissions?  Nope.  From the Times: "One candidate, Christine C. Quinn . . . was the only contender to express support for closing the Indian Point nuclear power plant, which supplies much of New York City's electricity."  ("Much of" our electricity would be up to 30% according to Wikipedia.)

We want to be moving toward cleaner, safer energy, she said to cheers from those in attendance at the forum, which was sponsored by Cooper Union and the New York League of Conservation Voters. Ms. Quinn suggested pursuing geothermal energy alternatives, like heat pumps that harness the Earth’s natural energy, to compensate for the loss of the plant.

​So now you must be asking, is it really possible that a credible candidate for mayor of our largest city can be proposing to eliminate essentially all of our sources of electricity for this huge and complex economy and replace them with a source that is a multiple as expensive and hasn't been proven workable at all on this kind of scale?  Yes, she is the frontrunner.

Let's get a smattering of proposals from the other guys.  There's this from our Public Advocate:​

Public advocate Bill DeBlasio called for aggressive financing structures to retrofit aging buildings to make them more energy-efficient.

I strongly suspect that de Blasio doesn't even know what "aggressive financing structures" he is talking about.  Does he really propose to exhaust New York City's borrowing capacity in giveaways to private landlords, leaving nothing for the water system, sewers, streets, subways, etc.?  Well, how about this from former Bronx Borough President Adolfo Carrion, ​running for the Independence Party

Former Bronx borough president Adolfo Carrión, running as an independent [sic - he's running for the Independence Party, not the same thing] said New York should be exploring vertical farming.

You know, Adolfo, there's a reason why farmers grow food out in the country where land is cheap instead of in the most expensive possible place, on the roofs of buildings.​

Overall, you just can't help getting the impression that these people think that energy comes from the tooth fairy and all efforts to wipe out cheap and workable energy and replace it with expensive and unworkable energy are completely cost free.​

Are the Republicans any better?  ​Not really.

Both Mr. Lhota and Mr. Catsimatidis sought to distance themselves from the national Republican Party, saying they believed that making alternative energy a priority would create jobs.

Yikes.  Using public money to subsidize high cost production of a good and to drive away low cost production that the market would provide without subsidy?  That's called "wealth destruction."  But here in New York City even Republicans are not allowed to say that.​

And finally, the moderator (Jim Lehrer) asked all nine candidates at the forum if they "believe" that global warming is man-made.  Eight of nine hands went up.  Congratulations to John Catsimatidis on being willing to buck the conventional ignorance on at least this one point.