As true today as it was then

Oh, the cognitive dissonance

Last week, John Mackey, founder and CEO of Whole Foods and hero to the left, wrote a well-considered and insightful column on health care reform for the Wall Street Journal. No doubt his loyal followers were pleased to learn that those capitalist pigs had finally allowed the light of liberal truth to grace their pages and picked up a copy to see what incontrovertible argument their hero had put forth in defense of nationalized health care.

A Margaret Thatcher quotation? But...but...but. This makes no sense. This guy runs an organic grocery store. He supports green energy. He requires humane treatment of animals by his suppliers. How could he stab us in the backs like this?

Turns out, many of Mr. Mackey's customers were none-to-pleased by his break from the party line, declaring their commitment to never shopping at his stores again and seemingly ignoring every point he made in the column, confused by the fact that someone could be an environmentalist who doesn't want socialized medicine.

What they don't get is that it's possible Mackey's beliefs and actions are determined not by a simplistic and all-encompassing philosophy of liberalism, but by a commitment to personal responsibility. Mackey runs his company in an environmentally friendly manner because he believes that's how it should be run and he takes personal responsibility for ensuring that's how it is run. He provides excellent medical benefits to his employees because he believes he should, and he takes personal responsibility for that, and it turns out, it works out pretty well for him and for his employees with no need to get the government involved whatsoever. Mackey rightly recognized that the reason so many companies offer such crappy healthcare benefits is that the government is too involved in the first place, making it far too difficult to run things the way they ought to be run (in both a moral and practical sense) for any company that isn't as focused on personal responsibility as his to come anywhere close to getting it right. The answer to our woes is not and never has been more coercion. It's allowing the markets the freedom to unlock the best and brightest ideas people like Mackey and countless others have to offer.

President promises candy rain, may be lying his ass off

So leftist Democrats finally figured out what it would take to bribe the Blue Dogs into betraying their constituencies and have gotten the health care bill out of committee in the House, setting up floor votes when Congress returns to session next month. In the mean time, the question of how the fuck we plan to pay for this counterproductive monstrosity remains largely unanswered, with President Obama still insisting that he will not do this in a way that will increase taxes on the middle class. This is, of course, ludicrous.

There are a few possibilities here. The first is that he's figured out how ridiculously bad this whole idea is and is open to a substantially scaled down version that will only waste a little bit of money and only make health care as a whole in this country a little bit worse than it is today. We can only hope...

The next possibility, and the most likely, is that Barry is just an outright liar with no intention whatsoever of leaving the middle class unscathed in the money grab required for this plan to destroy American health care. This plan is tremendously expensive, and someone has to pay for it. The political tactic here is likely to get people behind the plan under the false impression that they won't have to pay for it (a remarkably easy task if you can pull off the convincing them it's free part) and then change everything up at the last minute, raising taxes across the board to pay the bills and hope no one catches on to what has happened.

For the moment, however, let's take the president at his word. Let's assume that he really does intend to push through a bill that does all the things he says he wants the bill to do and that he really does intend to do it without increasing taxes on the poor and middle class. So how do we pay for it? Is the president's answer to everything really just going to be "Well, the rich can pay for it. They have the money."? Really? This is astonishingly short-sighted and simplistic for someone with such a reputation for brilliance and vision, and yet it really seems to be the only thing he can come up with to reconcile the insane statements he's made. Then again, he might just be lying.

So that's what happened...

Here, I thought this economy shit was caused by ill-considered monetary policy or evil capitalists making profits or something like that. Turns out, the problem is "a health care system that is breaking America’s families, breaking America’s businesses, and breaking America’s economy."

This is the recent claim by President Obama, and luckily for him, it means he can fix the economy and push through his pet domestic project at the same time. Brilliant!

Problem is, the idea is totally absurd. America's families, businesses and economy are breaking at the moment, but to pretend that our health care system is anything but a minor contributor at worst is disingenuous. The president knows that the public's greatest fears at the moment are centered around the economy, and he shamefully attempts to present his expensive and counter-productive health care plan as part of the solution.

Greg Mankiw reminds me of why I should have stayed in grad school

Son of a bitch!

Baffled Ben is sad for me.

Immediately obvious unintended consequences of cash for clunkers

Sometimes this shit is so obvious it's hard to believe it's unintended, but we'll give our saviors in Washington the benefit of the doubt and assume these assholes just don't know what they're doing.

A couple of the first things that come to the mind of anyone who's not just looking for reasons to give away free money:

1) This program is only good for the purchase of new cars, and it seems highly unlikely that anyone whose current car is worth more than the $4500 in free money they'll get for it through this program would would participate. They'd rather just sell their $6000 gas guzzler for $6000. So who will be taking advantage of this free money? A bunch of people who are currently driving $4500 cars. Is that really what we want to do right now? Encourage a bunch of people who are currently driving around in $4500 (or just as likely $500) cars to go out and borrow money to buy brand new cars they can't afford? Isn't that sort of along the lines of what got us into this shithole in the first place? Something tells me we'll see a spike in defaults on auto loans in the not too distant future.

2) Not only does this encourage irresponsible consumption, but it punishes those who can't afford to go out and buy brand new cars and are attempting to be responsible by not fucking doing it. By having the government buy up a large portion of the affordable used cars that should be on the market, the supply of these cars available to those who are attempting to be responsible consumers is significantly reduced. This hurts the very poor who won't be able to find the $500 cars they need to get back and forth to their low-income jobs that they're trying desperately to hold onto, and it hurts those middle-income workers who find prices increased on the cars just out of the $4500 range as those who otherwise might have purchased those cars are pushed up into the higher price range by lack of supply.

OO-DE-LALLY, MOTHER FUCKERS!!!!!

So with this brilliant idea of using a surtax on the wealthy to pay for an exorbitant and counter-productive health care plan, Democrats in Washington have left behind the latent "hose the rich" philosophy where they pretend to be operating within the bounds of some warped definition of fairness and have dispensed with all pretense that they are doing anything other than robbing the rich to feed (or treat the sniffles of, as it were) the poor.

The important distinction between this and the bad behavior of our government that we have previously come to accept is that this is a specific tax on a specific group of people to pay for specific services for another specific group of people that is distinct from the paying group. In other words, it is a direct transfer of wealth. We're used to those who make more money having their money taken from them at a greater rate, but there is usually at least a pretense of everyone paying their part.

The Liquidity Trap

All this economy shit (henceforth, this will be the manner in which I refer to our current financial mess), was caused, chiefly, by the fact that we took the single most important price in our economy, the price of money, otherwise known as interest rates, out of the hands of the market and placed it under the control of a bunch of people who, as best I can discern, are in possession of no superpowers, giving them unchecked control over the amount of money we have out there chasing whatever goods are available in the economy. (Note that I did not use the phrase "in my opinion." Get used to that.) Sadly, as men with no obvious super powers are wont to do, they fucked it up. They created far too much money far too quickly and made it so cheap that banks found it reasonable to use it in ways that had far too low a probability of paying out (they loaned it to poor people).

Given that this is what caused the problem in the first place, the policy of creating trillions of dollars more and giving it to the very same banks who are known to behave rationally when they are given cheap money (by taking risks that they might not otherwise take and that we'd all prefer they not take), seems a bit like accidentally blowing up a house and then attempting to use more dynamite to blow all the pieces back into place. In the short-run, though, at least it will have the predictable effect of keeping all the pieces in the air a little while longer.

Or will it? It appears perhaps not. The problem is that money is already so cheap, with interest rates getting very near zero, that creating more and more money can't reduce its price significantly enough to spur more risky lending on the part of the banks to get the economy going again, or at least get the pieces of the economy high enough into the sky that we forget that they've already come apart. What's worse, the increasing supply of money may be decreasing the banks' willingness to use it in the frivolous manner for which our friends at the Fed had hoped. Whereas, before the banks had rationally responded to cheaper money by throwing it at people who didn't know what to do with it, they now seem to be rationally responding by hanging onto every cent they can. But why?

The reason may lie in the fact that these banks are not making their decisions based on the interest rates that we see on the front page of the paper, the nominal interest rate, but on the expected real interest rate, or the nominal interest rate minus expected inflation. When expected inflation is high, which the recipients of trillions of dollars in newly created money must figure it is, and the nominal interest rate that banks are paying the fed is near zero, a couple of things happen. The real interest rate banks are paying becomes negative. In other words, the fed is paying the banks to take all this new money off their hands. The other thing that happens is that the real rate that the banks are charging borrowers (this will never be negative, as banks, unlike the gov't, are operating with the goal of turning a profit), is reduced dramatically, decreasing their incentive to inject this money into the broader economy.

This is the source of the liquidity trap, where money is poured into the financial sector with no results as the banks just hold onto it. Don't get the impression that this is good for the banks, though. It doesn't matter how much cheaper future money will be than today money if they have no source for future money. Whereas you and I may be able to go out and build widgets for a day and make $20k in future money to pay off the car we buy with borrowed today money, the bank doesn't really have many such options. Unless they dramatically increase checking account fees, they're just stuck paying back their trillion dollars in today money, plus whatever interest they owe, with the same trillion dollars they've been holding onto.

So why would the banks bother? They really don't have much of a choice as long as there are other banks out there facing the same dilemma (or as long as the government forces them to take the money whether they want it or not). If none of the other banks take the money, a bank is better off to be the only one taking it because inflation may not be so bad (at least until the gov't figures out another way of getting the new money into the economy), and they have lots of cheap money to play with. If all of the other banks take the money, the individual bank is forced to accept the possibility that this money will make it into the economy, inflation will happen anyway, and it will be left with lower capitalization and, as a result, less market share than its competitors. In short, all the banks will take the money, despite being aware of the fact their lives will suck more as a result.

So what's the solution to this liquidity trap? Stop doing the shit that causes it. The more money we give to the banks, the more they will fear inflation. Without the money actually becoming any cheaper for them, this can only decrease the amount they're willing to put into broader circulation. Paradoxically, the Fed could actually increase the flow of money by contracting the money supply.

No one else I've read has put forward this theory, at least not in this way; so it is either really stupid or really brilliant, though I think the efficient market hypothesis suggests it's probably the former. Someone explain to me why.

Brilliant Pseudo-Economist Starts Blog, Secretly Hopes to Become World-Wide Sensation

When I started grad school (approximately 2 months before I stopped grad school), a professor I'd known for a while took me aside and told me I needed to start thinking of my writing less like "M-A-S-T-U-R-B-A-T-I-O-N" (I'm still not sure why he spelled it out) and more like "consensual intercourse." If he'd talked to the girl I was dating at the time, he might have learned that this distinction meant nothing to me, but as it were, and unfortunately for you poor souls who will be reading this blog, I never did learn this lesson. As a result, the chief goal of this blog is, and will likely continue into the future to be , to stoke my own ego and hopefully help me to impress women. (That's what women are into, right? Guys without jobs who write self-indulgent econ blogs?) If you or, even more astonishingly, I happen to learn something along the way, that's a bonus.

On the subject of people learning things, however, let me take a few lines to explain what this blog will pretend to be after this initial post. This is my blog; so I'll be posting my views on things, but as you see at the top of the page, I am kind of a genius, and therefore, I know how stupid I am. I will be wrong on occasion, and there's no way for me to know when these occasions will occur; so let me know when that happens. That's why there is a comments section (at least until you piss me off, forcing me to disable comments in order to more fully control the thoughts of my readers). Not that I expect too many corrections at the moment, as I make it a point not to associate with people who question my wisdom, but if you guys don't call me out on occasion, you will have provided me nothing in return for all that I will have given you, and I may as well just be doing this by myself. (I know, we covered this at the beginning of this post, but remember we're talking about what the blog pretends to be now.)

At this point, there is only a core group of good friends of mine who are reading this blog, but my hope is at some point to have people who read for some reason other than that they're afraid I'll ask them what they thought of a post, forcing them to admit they don't refresh my blog 3 or 4 times an hour. If you bastards will do what is required of you as my friends, though, to obnoxiously plug my blog to everyone you know at every conceivable opportunity until people get so tired of it that they stop inviting you to happy hours, parties and Christmas dinner, I'm confident that my writing can keep them sated, infuriated or at least morbidly curious enough that they'll keep coming back and maybe even tell a few friends of their own. If we get a broad enough spectrum of readers/commenters, this may actual become fun, and I won't have to revert to copying and pasting my brilliant economic musings from one instant messenger window to another, waiting on someone to bite. Not to mention the ad revenues that will be streaming in once I am a world-wide sensation, allowing me to remain an unemployed economist indefinitely (or at least enough to feel like my loyal readers are buying me a Big Mac every six months or so).

So get on it, and I'll try to have a thoughtful and informative post about economics some time tomorrow.