Today's Buggy Topic

Note the subject-title above: arguments of this sort are found daily, even hourly, on the web --- not least put there by economists.  Among them, Professor Tim Duy of the University of Oregon . . . who went on at great length in a diatribe aimed at showing that Bernanke and the Fed don't know what to do; are entrenched in trying to implement a (short-term) interest-rate policy known as ZIRP --- zero-based interest rate policy, of the sort the Japanese implemented in the late 1990s; fail to recognize that a nominal zero-rate interest rate won't reverse deflationary expectations and get banks starting to loan and consumers and businesses to want to borrow money; and should switch to QE --- quantitative expansion of the money supply, supposedly the biggest lesson of monetary policy theorists like the impressive  Milton Friedman taken from the failures of the Fed back in the dark days of the Great Depression between 1929 and 1933.

Enter Prof Bug's Criticisms of Duy

The thread that Duy initiated is found at Economist's View, a centrist-oriented economic blog of high quality run by Professor Mark Thoma of the University of Oregon.  After dozens and dozens of ho-hum and sloppy comments by the posters in that thread, prof bug set out a lengthy, data-based analysis of all the uncertainties and ambiguities and contradictions that mar the historical record of US monetary policymaking in the 1929-1933 period, the problems that appeared for the New Deal in the fairly severe recession that hit the New Deal for several months in 1937-38, and the experience of the Japanese authorities in applying --- after 7 years of a credit crunch and growing deflation in the price-level of the country! --- ZIRP, QE, and recapitalization of the banks by the Japanese Central Bank --- with huge uncertainties still hanging over the success or not of these policies when, after a full decade of stagnation and repeated fall into recession, the Japanese economy finally regained decent economic growth.

Click here for Prof Bug's lengthy, half-technical commentary.

That Was the $64,000 Question Prof Bug Asked Earlier Today at Carpe Diem

There, with a post left by the economist who runs that laudable web-site, Prof. Mark Perry of the University of Michigan, started a thread about the Japanese transplants in the US auto industry, which --- along with another post in a different thread that Prof Perrry posted --- singled out the high wages and benefits of the Detroit Big-3 compared to the Japanese transplants' wages and benefits . . . a good 45% higher: roughly $73 an hour vs. $50 for Honda and Toyota. 

Both these car manufacturers, along with Nissan and Hyundai-Kia (South Korean), are in far better financial shape compared not just with the US auto firms, but also French, German, and Italian firms, not to forget Volvo and Saab in Swden . . . the latter two foreign-owned (by Ford and GM).  And like the Big-3 firms now begging for a government rescue bailout, the same is true of the auto firms in the EU (with some variation across them) . . . but not the Japanese or Korean firms.

So What Explains the Differences

That's the big question that prof bug left in one of those two Perry threads, along with some explanatory efforts . . . but, please note, only some.  Later today, if the buggy guy can find some time, he'll do some googling, draw on his half-way decent knowledge (set out in previous writings) of the Japanese economy and corporate structures, and see if he can come up with a fuller explanation.  In the meantime, anyone reading this who actually has accumulated some hard knowledge of the Japanese auto industry would be doing us all a favor if he or she posted in the relevant thread at Carpe Diem

For that thread, click here

And Note as a Bonus

A regular poster at Carpe Diem is a fellow named Walt-G, an auto-workers union representative who acts as an intermediary between the UAW and management at GM, Ford, and Chrysler . . . or maybe just GM, I forget.  He's very bright and has been critical of both the union and management for their current troubles, just as he blames the union for not being more forthcoming in the current beggar-situation of the Big-3 with concessions about wages and pensions.  (Another poster there notes that the UAW could, if it wanted, buy out the entire Big-3 auto-industry, whose total equity in the stock market is only about $7 billion.  They could then take control of the three firms and reorganize and run them as they wanted.

Today's Buggy Topic

No surprise: it's an effort to answer the above question . . . the buggy reply, fairly lengthy, left at Carpe Diem --- probably the best econ blog on the web when it comes to data-driven posts, all set out in an impressive, easy-to-read set of charts.  I strongly recommend visiting it whether or not you're a libertarian --- prof bug himself not.

Here's the link to the original post left by Prof. Mark Perrry of the University of Michigan, who runs Carpe Diem --- and the buggy reply.

Today's Buggy Topic

It's pretty straightforward, captured by the subject-title of today's bugged-out stuff.  And it's found at Carpe Diem, an unusually good libertarian web site run by Professor Mark Perry of the University of Michigan . . . without parallel, to be precise, in its data-driven post set out usually in easy-to-read graphic form.  If more economic blogs emulated Prof Perry's laudatory work, the rest of us would be far more enlightened by our daily visits to this or that web site. 

This is the case, please note, whether you always agree with Prof Perry's own libertarian slant or not.  Whatever your own ideological tendencies, it's a good check on any dogmatic inclinations to visit web sites with a different approach to the economic and political problems that we are always confronted with . . . not to mention the particular economic and financial crisis that hovers right above our heads currently.

Click here for the Professor Perry's posted article and the lengthy buggy commentary on it. 

Today's Buggy Topic

Small wonder that economists and others, on the web and elsewhere, continue to debate the causes of the Great Depression of the 1930s and what may or may not have contributed to its strange recovery.  What started out in 1929, you see, was an abrupt plunge in the US stock market . . . with a fall-out on the stock markets world-wide.  And, more seriously, a general financial meltdown in the US and elsewhere that entailed, along with other causal influences, a huge decline in GDP --- here and abroad.

By the start of 1933, when FDR came to office (March of that year), US GDP had fallen nearly 33%.  Unemployment had soared to over 20%.  And private business investment had collapsed to 25% of its 1929 level.

Recovery: Why Strange

Well, on the one side, GDP recovery was impressive overall in the 1933-40 era . . . 1940 marking a mild start in rearmament, especially in naval shipping and aircraft, even before we entered WWII in December 1941.  It rose 58% in those 8 years of the New Deal --- this, despite a major if short-lived recession in late 1937 and early 1938 that reduced GDP by 13%  

Please note: the Bureau of Econmic Research, which is in the Commerce Department and manages our national accounts, has updated figures that show only a drop of 3.2% in GDP --- the historical series in the 1930s relatively primitive by comparison with recent calculations.  (These newer calculations use a different, more updated way of transforming nominal GDP into real GDP --- which reduces the former's growth with a GDP-deflator to eliminate inflation.)  And it shows a 49% rise overall in GDP since the start of 1933, as opposed to 58%, through 1940 . . . our last peace-time year.   Click here for the updated BEA Estimates, Table 2 (p. 6)

No matter.  The key point lies elsewhere.

Despite an impressive rise in both GDP and labor productivity, there was still fairly high unemployment in the US --- 11-12%, as opposed to slightly over 20% in early 1930.  And, simultaneously, overall private business investment was only about 50% of its percentage of GDP in 1929. 

It Is These Two Main Problems That Prof Bug Commented On

The two lengthy comments --- fleshed out with the (possibly misleading) older data --- were unpacked by the buggy prof at the Marginal Revolution, the impressive economic blog run by Professor Tyler Cowen of George Mason University . . . a talented fellow, with a flexible view (for a libertarian) of the government's role in our economy.  Also, as an added benefit for regular visitors to Prof. Cowen's site, with a wide-ranging interest in both fiction and non-fiction works to which he regularly links . . . many of which have led the buggy prof to buy those books (or borrow them from the UCSB library.)

Click here for the thread that was started by a colleague of Prof. Cowen --- Prof. Alex Tabarrock.  Note that there are two different sets of bugged-out comments in that thread.

Today's Buggy Topic

As usual, it was started at another economic web-site --- this time, the Marginal Revolution, run by Tyler Cowen (a very good, very flexible libertarian economist at George Mason University).  It deals with the impact of the New Deal on economic recovery in the 1930s after Franklyn D. Roosevelt assumed office in March 1933, two months after Hitler and the Nazis took power in Germany.

The key question that Professor Cowen's original post posed was this: why was there strong productivity growth in the US economy in the period between 1933 and our entrance into WWII at the end of 1941, even though investment by the business world languished in that period and contributed to the still fairly high levels of unemployment that persisted until 1941: around 11-12%, about half of the level that existed in early 1933 . . . followed by a big reduction in unemployment from around 21% to 9.5% or so by 1937, only to rise in the 1937-38 recession and stay, to repeat, at a surprisingly high level of 11-12% until the big rearmament of the US economy and the creation of a huge army of 10 million reduced it to the point that large numbers of women and formerly excluded African-Americans in the South had to be recruited to work in armaments factories.

The Buggy Response

Prof bug responded at length to the Tyler post, arguing in a typical bugged-out way that the large number of other posters --- some of them professional economists or grad students in that discipline --- were keeping the discussion, typically too, way too abstract and theoretical.  In particular, prof bug expanded the discussion's implicit points about the larger impact of the New Deal on economic recovery; looked at the recent debate by economists on it; sorted out what was clearly economically stimulating to economic recovery in the New Deal's programs and what hindered it; and above all set out a comparative perspective by way of an empirical test of the issues . . . superficial as such a top-skimming discussion entailed for such a test. 

No need to say more about prof bug's lengthy comments and its historical and comparative perspective on the New Deal's impact.  Click here for the Marginal Revolution thread.

Note, Though, Two Methodological Issues At Stake Here

*  The first one is how way too many economists seek to make sense of the world by instinctive deductive inferences from a few taken-for-granted theoretical premises --- as though their statistical models have underpinned those theoretical premises to transform them into not just hard-anchored scientific laws, but can also ensure that these alleged scientific laws can be easily applied to concrete, complex economic problems and policy-guides.  Oh sure!  Fortunately, behavioral economists --- a small but growing and influential group in the profession --- aren't operating in this way.  They are studying real economic and wider social behavior in concrete situations the way anthropologists or political scientists or psychologists do; and in fact they draw on a lot of recent work in psychology and social psychology, instead of postulating as axiomatic that economic agents --- whether workers, business managers, or government policymakers --- act as rational self-seeking maximizers.

*  The second methodological issue brings us back to the very different political responses to the Great Depression in Germany and the United States in 1933

In particular, contrary to what you will likely see in print even in good historical works, the Depression in Germany --- where the economic decline was almost as large as in the US --- did not cause the Nazis being elected to office, followed by a massive totalitarian state, war, and the Holocaust.  Huh?

Tersely put, there is no social science causal theory that economic crises of any sort cause any dictatorship to come to power.  In the US, where GDP fell faster and further between 1929 and 1933 --- unemployment too --- the response, politically, was the election of FDR and his administration's recovery programs.  At most, any social scientist could say that the Nazi Party benefitted from the Great Depression in Germany, where democracy in the Weimar Republic was not well established, nor solidly supported by the German Right or the Communist Left.  On this view, the Great Depression's havoc might be a necessary condition of the Nazis taking power in 1933: without it, the Nazis wouldn't have gained over 40% of the vote in two general elections in late 1932 and 1933.  Observe the italics around might.  Whatever else led almost a majority of Germans to vote for Hitler in the last free elections, the powerful elites in the military, big industry, the financial world, politicians and parties on the right, and in the state-bureaucracy all wanted what he did: to rearm Germany and seek to overturn its defeat in WWI and establish German dominance over Europe. 

What Follows, Methodologically Speaking

In shorthand terms, this: Sooner or later, a German-launched war in Europe with huge destructive potential would have occurred with or without Hitler.  In particular, given the fragility of the Weimar Republic and its failure to win the support of most of the German right and the Communist left (which also grew fast in the Depression era, like the Nazis), Germany would have begun the war with some sort of militarist right-wing, anti-democratic, anti-Semitic dictatorship . . . such dictatorial government rife on the Continent of Europe anyway by 1939 except in the tiny countries of Scandinavia, Holland, Belgium, and Switzerland, with France sill democratic but politically polarized and full of latent civil-war conflict that burst into the open after the German conquest in the late spring of 1941.  Further to the east, the Soviet Union was already a mass-murdering totalitarian system.

Whether, without Hitler and an explicit Nazi ideology, that militarized, anti-Semitic German dictatorship would have launched the Holocaust during or after a successful conquest of Europe is the key uncertainty here.  Maybe not.  No way to be sure about such a counterfactual key event.  Note though.  Eliminationist anti-Semitism pervaded the German world-view by the early 1930s, Jews blamed for most of Germany's misfortunes --- not just in Germany itself, please note, but almost everywhere in Eastern Europe too.  And so, with enthusiastic support of the masses in Central and East Europe and a conquered Rusia --- with, further, support of German collaborating regimes in Western Europe --- at a minimum, a German-dominated Europe without an explicit Nazi program would have very likely led to the cruel uprooting and expulsion of not only German Jews (about 0.6% of Germany's 60 million people in 1933), but of the Jews elsewhere in Europe . . . with large numbers brutalized and transported to some isolated area in Madagascar or Asia. 

Today's Buggy Commentary

To no one's surprise, conservative and libertarian economists have been working themselves up into a self-induced lather of fret and worry about Obama's likely economic program . . . some of which was foreshadowed during the recent presidential campaign, with, to boot, a clearer outline of certain key proposals to deal with the current economic and financial crisis set out in his speech to the country yesterday (November 7, 2008). 

An Intensely Giddy Bout of Buggy Fun by Way of Illustration

At EconLog, a libertarian site run by Arnold Kling and Bryan Caplan --- both professors at the libertarian citadel known as George Mason University --- Kling went so far as to express his fears that an Obama-presidency would be a greater "existential threat" to American freedom than Islamist terrorism.  Wow!  Needless to say, prof bug took exception in a lengthy rejoinder. 

Too lengthy as it happened.  Prof bug's long, careful dissections of Caplan's and Kling's theory-driven libertarianism --- mainly (not always) gut-level deductions drawn from unchallenged theoretical premises, and little else  --- got their backs up.  Warned, repeatedly, to shorten his wind-machine, evidence-crammed drivel, prof bug was eventually banned from the site for being disruptive . . . this, please note, even though he was always polite and stuck to hard evidence, clear logic, and translucent writing.

Oh well, can't please everybody --- Yes? No?  Click here for the fun prof bug had with prof Kling's crackling existential angst.

Back To the Bugged Out German-Socialist Future Post Found

At Carpe Diem --- a very good libertarian site, full of data-driven posts, run by Professor Mark Perry of the University of Michigan --- prof Perry posted a commentary with a chart that, taken together, said the US economic future would, in the years to come, end up less innovative and bogged down in a mountain of regulations and high taxes of the sort that characterize the advanced, highly regulated German economy.  In the end, as prof bug's lengthy comments showed, prof Perry's worries are one more conservative and libertarian entry into the Obama-as-Socialist drumbeat campaign.

No need to say more.  The long buggy analysis, with lots of data, speaks for itself.  Click here for the stuff.

Today's Buggy Topic

If you were to read the standard-model economist's view of the electoral system and individual voters, the answer to both questions set out in the title would be a straight-forward --- yes, clearly irrational.  The answers are a direct spin-off of the typical methodology used by economists and those political scientists, less numerous these days thanks to systematic survey-evidence: rational choice.

The Reasons

Rational choice, you see, is invariably translated by economists and those who follow them to mean how an individual --- whether as a worker, consumer, investor, voter, or the like --- seeks to maximize his or her self-interest: how he or she considers household budget options and credit-availability in deciding whether to buy a new TV or not --- or which TV, given prices and quality-judgments --- or chooses to take this job instead of that job, or invests his or her pension funds in the stock or bond markets, and so on. 

In economics, that makes sense --- to a certain degree anyway.  Even in economics, though, starting in the 1960s and 1970s thanks to the work of social psychologists and economists and political scientists informed by their work, the notion of strictly rational economic-man has come in for questioning . . . so much so that a whole new field of behavioral economics has been spun-off.  And it uses a variety of findings uncovered by social psychology --- using a variety of laboratory tests and observations of individual and group behavior in social settings --- that seek to make sense of irrational behavior like "ballooning" stock market exuberance like the dot.com boom and bust or the recent dangerously over-leveraged financial boom, global in nature, based on housing assets here and abroad and creating a world-wide chain of thoroughly unsound, over-exposed creditor-debtor linkages that generated the current financial meltdown. 

Two Free-Market Stratagems  To Salvage Economics as a Powerful Science

Note how, in the face of such irrationally driven booms-and-busts in the financial world over the last two decades --- the Savings and Loans crisis of the late 1980s, the Japanese financial and economic meltdown of the 1990s, the Asian financial and economic crisis of 1997 and 1998, the dot.com boom and crash at about the same time, and the more up-to-date financial crisis here and abroad --- standard economists who adhere to a view of rational economic-man have only two alternative explanations:

• Either they trot in as Alan Greenspan did such pejorative psychological phrases as irrational exuberance, but assume it's a transient phenomenon (or, in Greenspan's case, left him with stunned disbelief) . . . anyway, a matter for psychologists to deal with, not economists.
• Or, as with virtually all libertarian free-market enthusiasts, find some government program --- somewhere, some time (no matter how old, decades even) --- that has caused free-markets not to work properly.

So Why Do Financial Booms and Busts --- Including Panic-Driven Meltdowns --- Occur?

Well, that's the $750 billion question, no?  They shouldn't,  given three intertwined premises as to how, in a widely shared view of financial markets that economists of mainstream persuasion --- whether libertarian, New Keynesian, or the like ---these markets are supposed to operate:

1. The efficient market hypothesis: financial markets incorporate all relevant information for current investment purposes

2. No agent-principal problems.  Specifically, intermediary financial agents, whether banks or brokerage firms or insurance firms or mutual funds and the like --- in fact any creditor or investor on one side of a financial transaction and borrower or agent with whom an individual's or firm's capital is entrusted --- are all responsible and trustworthy and can be counted on to carry out proper risk-management and behave responsibly. There are, on this view, no agent-principal conflicts of interest or important information-assymetries that divide them. (In his testimony before the House Oversight Committee two weeks ago, Alan Greenspan's "stunned disbelief" was provoked, he said, by the failure of agent-financial institutions --- in their dealings with the principals like individual investors or other financial firms (creditor-lender-insurance enterprises.)

3. Rational behavior.  Individual investors --- whether a rich person, an ordinary worker considering where to put his pension funds, a large non-financial corporate business with liquid funds to invest, a commercial bank, an investment bank, a hedge fund, a mutual fund, an insurance company, and the like --- tend to be, on the average, well informed about the alternatives, know the risks of their investments, and trust one another (whether there is or is not transparency and accountability easy to pin down and make sense of) --- are all careful calculators here and make their decisions in light of the information available to them.