The Glittering Eye

In reaction to yesterday’s reports of increasing unemployment, predictably Paul Krugman calls for another, bigger stimulus package:

O.K., Thursday’s jobs report settles it. We’re going to need a bigger stimulus. But does the president know that?

I am an empiricist in these matters as I try to be in much else. One could reasonably argue, since only a minor proportion of the spending passed by the Congress has actually been spent, that the spending has not had a chance to have an effect on employment one way or another but I honestly don’t see how the lack of effect of the relatively small proportion of the whole actually spent constitutes an argument in favor of an additional spending bill. Quite the contrary I think it’s a powerful argument in favor of just letting the actions that have already been taken work their course.

I’ll take this opportunity to repeat the question I’ve been asking on this subject: does anyone have substantial empirical studies that support the idea of the effectiveness of spending as fiscal stimulus? The studies of which I’m aware indicate a multiplier of about .8, which is not particularly encouraging.

Additionally, does anyone have studies which support the idea that the n+1^st dollar of spending has the same or greater multiplier effect that the n^th does? We’ve been engaging in deficit-funded fiscal stimulus of the economy nearly continually over the period of the last fifty years. I think it’s at least possible that it’s running out of steam or has done so already.

I have no predisposition to disbelieve Lord Keynes’s teachings—quite the opposite. When I took economics classes Keynes reigned. However, I do believe that theories proceed from data which proceed from facts rather than the other way around. What are the facts?

Well, at least Dr. Krugman has mollified his language in vilifying members of his own profession who disagree with him:

And as an economist, I’d add that many members of my profession are playing a distinctly unhelpful role.

It has been a rude shock to see so many economists with good reputations recycling old fallacies — like the claim that any rise in government spending automatically displaces an equal amount of private spending, even when there is mass unemployment — and lending their names to grossly exaggerated claims about the evils of short-run budget deficits. (Right now the risks associated with additional debt are much less than the risks associated with failing to give the economy adequate support.)

“Distinctly unhelpful” is a lot better than “traitors” as he called those who voted against Waxman-Markey, the bill that will implement a “cap and trade” system here hoping to reduce carbon emissions.

P. J. O’Rourke:

To grasp the true meaning of socialism, imagine a world where everything is designed by the post office, even the sleaze.

Via Glenn Reynolds, here is a list of what are characterized as the “Top 10 Manly Movie Deaths”,

rare cinematic moments where an emotional response is justified — times when a worthy male protagonist dies a noble and/or tragic death following a great and just struggle

What constitutes a “manly death”? I’m reminded of the phrase from Macaulay:

And how can man die better than facing fearful odds,
for the ashes of his fathers, and the temples of his Gods?

In the comments to the post linked above there are numerous examples given. Some in the list and in the comments, like William Wallace’s death in Braveheart, fit the bill. Others, like Goose’s death in Top Gun almost certainly do not.

I won’t present a list of ten but I’ll give a list of some of my favorite “manly movie deaths”.

Angels With Dirty Faces

You wouldn’t think that a hoodlum going to the electric chair, screaming for his life would be a manly death but when it’s Cagney and he’s pretending to be a coward to save a gang of kids from following the same path he did, it’s tops.

Captains Courageous

I hate and despise the execrable phony Portuguese dialect that Spencer Tracy affects but when Manuel goes down to his watery grave, doing his best to save Harvey any pain, it’s a great moment in motion pictures. And it won Spencer Tracy an Academy Award.

A Tale of Two Cities

Sidney Carton. Ronald Colman. “’Tis a far, far better thing…” Need I say more? This is the very first motion picture I cried at the end of.

A Matter of Life and Death

David Niven preparing to bail out calmly from his burning and spiraling plane without a parachute to fall to certain death is a most remarkable thing in cinema: a death scene without a death. If you haven’t seen the picture, I won’t reveal any more. You’ve just got to see the picture.

Other candidates?

Sam Clemens (Mark Twain):

Man is the only animal that blushes. Or needs to.

The “appeal to consequences” or argumentum ad consequentiam is an argument in which the proposition is deemed true or false depending upon whether it leads to favorable or unfavorable consequences. It is a fallacy. In his column on the Obama Administration’s wildly optimistic early estimates of the state of the economy David Leonhardt observes

The first explanation is that the economy has deteriorated because the stimulus package failed. Some critics say that stimulus just doesn’t work, while others argue that this particular package was too small or too badly constructed to make a difference.

The second answer is that the economy has deteriorated in spite of the stimulus. In other words, the patient is not as sick as he would have been without the medicine he received. But he is a lot sicker than doctors realized when they prescribed it.

To me, the evidence is fairly compelling that the second answer is the right one. The stimulus package does seem to have helped. But its impact has been minor — so far — compared with the harshness of the Great Recession.

It strikes me as a fine example of the appeal to consequences. If in fact the stimulus failed and by failed I mean failed because its premise was wrong, then there’s very little we can do other than to weather out the storm and ameliorate the conditions of those in need as best as we are able.

I think it’s arguable that the stimulus package was intended to fail. My preference would have been to frontload the stimulus with more measures likely to pump money into the economy fast. Instead of that the stimulus was structured in such a way that much of the spending comes just in time for the midterm elections. That’s not a confidence builder for me. Arguing that it was structured that way to prevent a double-dip recession is like looking five moves down the road for the endgame while not realizing that your opponent will place you in checkmate in the next move.

What is the empirical evidence that the stimulus has prevented things from getting worse?

Update

Tigerhawk agrees that Mr. Leonhardt’s column is fallacious but his pick for the fallacy is the false dichotomy:

The author of the article suggests that there are two possible explanations — that the stimulus has not worked, or that the economy was in much worse shape than understood and would be even worse without the stimulus — and elects the second. There is, of course, a third, which is that the Obama administration could not honestly forecast the depth of the recession (even as it was pushing for the stimulus package) because then the Congressional Budget Office would have projected deficits even worse than now foreseen, and that would stoke opposition to President Obama’s vast and expensive program to redesign the health care, energy, and financial sectors of the economy. Call me a cynic, but I pick the third.

In an op-ed in the Wall Street Journal this morning George Newman, businessman and economist, addresses one by one some of the arguments in favor of healthcare reform that are most frequently encountered. The arguments he mentions include the problem of the uninsured and the competitive disadvantage our healthcare system places on American businesses. Some of his responses are good sense; others paint an incomplete picture; still others are claptrap. He doesn’t really engage the scope of the problem.

The graphic above shows the projected growth of healthcare spending in the United States. You may click on the image for a larger version. It’s essentially a straight-line projection and IMO understates the problem if anything. You see, incomes in the healthcare sector are higher than the average in the economy. While that’s good for people who work in that sector it may not be as good for the economy as a whole since another way of stating it is that for a dollar’s worth of revenue the healthcare sector employs fewer people than other sectors of the economy and as it grows the level of systemic unemployment does, too. I believe that the graph substantially understates the likely level of Medicaid spending.

Additionally, the enormous level of subsidy that Medicare and Medicaid represent indicates a substantial deadweight loss. The overall economy will be smaller than it otherwise might be as a consequence.

We can’t put off the problems posed by increasing healthcare costs any longer. The “Medicare trust fund”, the sum of all Medicare contributions since its inception less the expenditures, will be exhausted by 2017. At that point Medicare will be insolvent.

By 2012, the last year of President Obama’s first term, the Medicare system will be paying out more than it takes in. Once that happens we’ll be forced to make some choices: either we’ll reduce what Medicare spends (putting more of the burden on the elderly or on healthcare providers), raise the Medicare tax rate, increase other taxes, reduce other spending, borrow to make up the difference, or some combination.

Placing more of the burden on elders is no solution. Elders are disproportionately poorer than non-elders. Many elders only avoid poverty by virtue of Medicaid. That’s the reason that Medicare was conceived in the first place. I am, however, in favor of means-testing Medicare but I don’t believe that will solve the problem.

If we place increase the burden on healthcare providers, some will become discouraged, others will find ways of offloading their costs to other patients. Raising the Medicare tax rate will make it harder for people to do any number of other things including buy houses or cars, pay for education, or pay for their own healthcare.

As Medicare and Medicaid costs rise it will become increasingly difficult to reduce other spending to pay for it. Tax increases are far more likely. The more borrowing we do the higher interest rates will go and the more difficult it will become for businesses to grow or for people to afford other major expenses.

That’s the essential problem I have with Mr. Newman’s op-ed. It is profoundly conservative in the sense that it’s prescription is to preserve the status quo and that’s not an option. Healthcare reform is in our future. We’re merely discussing the form that it will take.

None of the prospective solutions are particularly appealing either severally or in combination. That’s why I prefer a solution based on abundance rather than one based on administering scarcity.

To the extent that the name of Ernst Haeckel is familiar to most readers at all, he’s known for the most famous of his bons mots: “ontogeny recapitulates phylogeny”. The development of the individual repeats the development of the species. It’s not really true, of course. When growing in the womb human beings don’t really pass through all the stages of evolution from multicelled organism to fish to amphibian to reptile and so on. It’s really a lot more complicated (and interesting) than that. It does fall trippingly off the tongue and sound clever though, doesn’t it?

The first piece of federal legislation ostensibly intended to reduce carbon production in the United States is now making its way through the Congress. I’m not as sanguine about it as Thomas Friedman:

Rejecting this bill would have been read in the world as America voting against the reality and urgency of climate change and would have undermined clean energy initiatives everywhere.

More important, my gut tells me that if the U.S. government puts a price on carbon, even a weak one, it will usher in a new mind-set among consumers, investors, farmers, innovators and entrepreneurs that in time will make a big difference — much like the first warnings that cigarettes could cause cancer. The morning after that warning no one ever looked at smoking the same again.

Ditto if this bill passes. Henceforth, every investment decision made in America — about how homes are built, products manufactured or electricity generated — will look for the least-cost low-carbon option. And weaving carbon emissions into every business decision will drive innovation and deployment of clean technologies to a whole new level and make energy efficiency much more affordable. That ain’t beanbag.

My concern is that, rather than institutionalizing “least-cost low-carbon” options, the law will serve to institutionalize even further the role of political pull in the success of businesses and spawn a million fraudulent schemes for carbon reduction far, far away, beyond the reach of verification. That will do nothing for climate change, manmade or otherwise, but it will be an enormous drag on other innovation in the economy.

The awful truth is that no measure that we take here will have any effect whatever unless China and India follow suit. China already spews more carbon into the air than we do, its present rate of increase exceeds anything we can be expected to offset in reductions, and that would be true even if we produced no carbon emissions at all here.

But whenever you bring out this point somebody is bound to restate Haeckel’s dictum to cover economic development: the economic development of each nation must mimic the patterns followed by developed nations of today and, consequently, it would be unfair to ask China, for example, to reduce its carbon emissions. The Chinese make this argument themselves.

You’d think that so egregiously phony an argument wouldn’t require refutation but apparently it does. Let’s take the argument to its logical (if that’s the right word for it) conclusion. If China must be allowed to follow the same paths as Britain, the United States, France, and Germany did at this stage of their economic development, shouldn’t the use of cell phones, the Internet, modern pharmaceuticals, and macadam for their roads be denied them? After all, none of the developed nations had the use of any of those things when they were at the stage that China is now.

But that’s not what proponents of the argument mean. They really mean that it’s fair for China to pick and choose the technologies that suit them, selecting those they like and eschewing those they find inconvenient, like non-polluting approaches to energy production or transportation and that’s patently absurd.

We are apparently embarked on the path that Europe has followed, following what I believe to be the illusory path of bureaucratic management as a means of reducing carbon emissions. While we do so we’d be making an enormous error if we didn’t encourage the Chinese and Indians to do the same, recalling that if they don’t all of our efforts at mitigating the effects of the carbon we’ve produced will be in vain.

Don’t make the error of thinking the Chinese can be forced to do anything they don’t want to do. They can’t. But they can be incentivized to do what we’d like them to and even single-celled organisms respond to incentives and we’d be fools not to try.

Walt Kelly:

Don’t take life so serious, son, it ain’t nohow permanent.

Demand = 55 million.

Those are the statistics for global automobile production and demand in this discouraging Washington Post article on the GM bailout:

The stake will be worth enough to fully cover the government’s direct investment only if GM’s stock rises above $68 billion. Even at its recent 2000 peak, GM’s stock was worth only $56 billion.

“I don’t see GM hitting those benchmarks in a very long time,” said Maryann Keller, a veteran automotive analyst and author of “Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors,” which was published in 1989.

She noted that global competition will continue to squeeze American automakers. Though the world’s factories can produce about 100 million vehicles a year, demand for them only stands at about 55 million, and the gap will push prices and profits down, she said.

And production capacity is growing, particularly in China and India with others itching to get into the game. The problem will only get worse. Is it any wonder I’ve been harping on this for so long?

IMO any shortfalls in amounts repaid to taxpayers for the GM bailouts should be taken from Congressional re-election and pension funds.

In the interviews with Bernie Madoff’s victims an interesting question came up which I thought I’d put on the floor. Let’s say you were one of Madoff’s victims, that Madoff reported earnings to you, and you paid taxes on those earnings. If you re-file a corrected return, will you receive a refund of the amount of tax that you paid on the fraudulent earnings?