Saturday, September 20, 2014

A St. Louis based economist to disregard: Stephen Williamson No. 000077

Macro economics is politics masked as science through which runs a deep political divide. As Michael Pettis well explained recently:
There is as you know a political divide between economists. One group focuses primarily on managing demand to prevent the under-utilization of labor and capital (often called Keynesians). The other insist that it is only by increasing savings, which usually means increasing wealth inequality and allowing the benefits of growth to “trickle down”, that we can generate the increases in investment that drive long-term economic growth (often called supply-siders, or Austrians, although for some reason true Austrians seem to loathe supply-siders).
The point to remember is that rising inequality or, especially in countries like China, a declining household share of GDP, tends to force up the savings rate and to reduce consumption, which sometimes even lowers the investment rate, as we saw in Germany during this century. But because globally savings and investment must always balance (another accounting identity often forgotten in the debate), the tendency to force up the savings rate in any country must automatically be balanced by an increase in investment, an increase in consumption elsewhere, or an increase in unemployment. This is just a matter of logic.
To fortify their political arguments the Supply Siders/Austrians offer "benign view of economic fluctuations in output and employment." Olivier Blanchard, Where Danger Lurks.

According to this view, called either the rational expectations or efficient market hypothesis of the 1970s, “people and firms did the best they could in assessing the future.”

Thus, by 1980 Supplysider/Austrian Robert J. Barro would attack Keynes because Keynes rejected "well functioning private markets."
One reason that Keynes may not have been troubled by this "deficiency" is that he viewed the private economy as inherently unstable. It did not take large (and presumably objectively observable) shocks to triger a recesion, because even a smal shock-when -interacting with the multiplier (and, in some models, also the investment acelerator)-could generate a significant and sustained drop in output and employment.

Keynes had to be rejected for political reasons for, “The [Keynesian] model stressed the failure of private enterprise economies to ensure full employment and production, and the consequent role for active macro policies as instruments to improve outcomes.” Id.


A second facet of rational expectations is its assumption of linearity, of regularity:
These techniques however made sense only under a vision in which economic fluctuations were regular enough so that, by looking at the past, people and firms (and the econometricians who apply statistics to economics) could understand their nature and form expectations of the future, and simple enough so that small shocks had small effects and a shock twice as big as another had twice the effect on economic activity. The reason for this assumption, called linearity, was technical: models with nonlinearities—those in which a small shock, such as a decrease in housing prices, can sometimes have large effects, or in which the effect of a shock depends on the rest of the economic environment—were difficult, if not impossible, to solve under rational expectations.
Thinking about macroeconomics was largely shaped by those assumptions. We in the field did think of the economy as roughly linear, constantly subject to different shocks, constantly fluctuating, but naturally returning to its steady state over time. Instead of talking about fluctuations, we increasingly used the term “business cycle.” Even when we later developed techniques to deal with nonlinearities, this generally benign view of fluctuations remained dominant.
In such a political, non-scientific environment, an assured way to gain attention is to attack, at any opportunity, the leading voices of the opposition and for the the Keynesians that would be Paul Krugman.

So Saint Louisan Stephen Williamson does attacks with regularity, which most disregard. Today we have a new attack on Krugman. Stephen Williamson: New Monetarist Economics: What Have We Learned Since 2009?

And here is the Williamson's argument, "If the phenomenon can be described, and we can find some regularity in it, then it can also be described as the outcome of rational behavior."

But it is Econ 101 that there is no regularity due to: (1) mistakes (Soros); (2) asymmetry of information (Yi-Cheng Zhang, 2005); or (3) reflexivity (“expectations about the economic future tend to actually shift that future” (Syll, 2014). Further, “The interaction between animal spirits, trust, confidence, institutions etc., cannot be deduced or reduced to a question answerable on the individual level.” (Syll, 2014).

Raise State Taxes $3.5 billions (still less than 1980 levels). Idea No. 1 for Missouri's 100 Great Ideas No. 000076

Missouri is not over taxed. In fact, Missouri taxes at only about 60% of the rate it taxed in 1980.

Our state auditor reported in June:
This tax limitation amendment imposes restrictions on the amount of personal income used to fund state government and the amount by which fees and taxes can be increased. Mathematical formulas are used to determine the relevant threshold amounts each year.
The Hancock Amendment limits the amount of Missourians' personal income that may be used to fund state government to no greater than the portion used to do so in 1981. In other words, since 5.6 percent of Missourians' personal income went to fund state government in 1981, then no more than 5.6 percent can be used to do so in future years, unless revenues are specifically excluded by a vote of the people.
The Hancock Amendment also requires voter approval before taxes or fees can be increased by the General Assembly beyond a certain annual limit. Based upon the calculation provided by the Office of Administration, Division of Budget and Planning, the relevant annual revenue limit for fiscal year 2012 was $84.2 million.
For the fiscal year ended June 30, 2013, our review determined no Hancock refunds were due. In fact, total state revenue was approximately $3.6 billion under the refund threshold. In addition, the Office of Administration, Division of Budget and Planning determined that net taxes and fees increased by a total of $28.6 million. As a result, our review concluded the state complied with these provisions of the Hancock Amendment.

The revenue limit has not been exceeded since the year ended June 30, 1999.

Source: MO State Auditor's Office

What next for the United Kingdom? No. 000075

The biggest political news this week might have been the Independence for Scotland election. An insightful look is this new post: What next for the United Kingdom?

Within that essay is a paragraph showing how in many ways our Friends are much more politically sophisticated:

In the last days of the campaign the UK government promised further devolution for Scotland and protection for its current level of fiscal transfers (the so-called Barnett formula). The rest of the UK, notably the leadership of the Welsh assembly, reacted with some anger to this. Scotland currently receives more under the Barnett formula than Wales, which was particularly badly affected by the destruction of the UK's mining industry in the 1980s and 90s and remains depressed with high levels of unemployment to this day. 
The Barnett formula is default rule for allocating national government expenditures locally, on a per capita basis.

Missouri needs this debate for Saint Louis is over taxed, with the taxes its pays to the state being spent outstate, causing lower incomes, fewer jobs, and lower property values in Saint Louis.

Proof that John Cochrane is inept No. 000074

Twitter is a great equalizer. Anyone may confront self-offered pundits and “public intellectuals.”

Recently, I had the opportunity to cross the path of one of our worst “public intellectuals” John Cochrane of Booth (University of Chicago School of Business School).

With tenure, Cochrane is highly paid because he supports the Chicago/Booth political brand with his writing and public appearances. This attracts "investment" in Booth from the wealthy who are interested in preserving and expanding their political power and a higher salary for Cochrane who also enjoys the benefits of the wealthy who overtly attempt to influence his writing and public appearances with fine wine, expensive meals, and access to public officials.

Feynman on learning from experiment or observation when we are wrong.

Cochrane is an inflation hawk who for the last 5 years has preached a brand of non-fact based economics in support of the GOP's political agenda.

Cochrane pretends that his economics is science, wrapping it in math and models, but omitting to mention that his economics has been disproved by scientific method. Feynman explained:

If it disagrees with experiment [or observation], it's wrong. In that simple statement, is the key to science: it doesn't make any difference how beautiful your guess is; it doesn't make any difference how smart you are, who made the guess, or what his name is—if it disagrees with experiment, it's wrong, that's all there is to it.

Source. Richard Feynman, Seeking New Laws, Project Tuva
Cochrane's World view, as summed up by Michael Pettis, is that only by increasing savings through wealth inequality, leading to "trickle down," will lead to long-term economic growth.

There is as you know a political divide between economists. One group focuses primarily on managing demand to prevent the underutilization of labor and capital (often called Keynesians). The other insist that it is only by increasing savings, which usually means increasing wealth inequality and allowing the benefits of growth to "trickle down", that we can generate the increases in investment that drive long-term economic growth (often called supply-siders, or Austrians, although for some reason true Austrians seem to loathe supply-siders)
This raises the question, do we have insufficient savings, today?
Given that demand raises the price---the interest rate---if we had a shortage of savings we would have to see evidence of demand for savings, but there is none. Instead, the price for savings has been declining for 50 years.

This view is confirmed by the yield on Ten Year Treasuries:

So, in sum, we now that Cochrane's underlying premise, his world view is wrong.

This is no to say that there are not times and places where there has been what appears to be a shortage of savings (or a suitable substitute), but in the United States, now and for the past 50 years, we have not had insufficient savings.


The late 20th Century gave us three great economists, Soros, Buffett, and Munger. Why no mention of academic economists? Because none had sufficient skin in the game and most are incredibily siloed. 

Here is an admission by Richard Posner, the most important Law and Economics advocate of Chicago/Booth:

Until last September, when the banking industry came crashing down and depression loomed for the first time in my lifetime, I had never thought to read The General Theory of Employment, Interest, and Money,…It was a work of macroeconomics–the study of economy-wide phenomena…Law, and hence the economics of law…did not figure largely in the regulation of those phenomena. Having [now read The General Theory], I have concluded that…it is the best guide we have to the crisis.
- Richard Posner, Judge, U.S. Court of Appeals for the Seventh Circuit; Senior Lecturer of the University of Chicago Law School. September 23, 2009

Why did John Cochrane never walk down the hall and visit with Judge Posner?

If the most cited legal scholar of the 20th century, a poster boy of the so-called Law & Economics movement, can preside and preach for over thirty years without reading Keynes' magnum opus, something has gone terribly, terribly awry. Economy-wide phenomena are, in fact, legal phenomena. "Interdisciplinary" law school curricula that ignore them are woefully impoverished.

Similarly, economics schools are woefully impoverished.

Sunday, September 14, 2014

Minnesota’s prosperous economy linked to tax, investment and talent-attraction policies No. 000073

Minnesota has the best economy in the Great Lakes. It has a 2012 per capita income of $46,227, $8,730 more than Michigan, and a 2013 unemployment rate of 5.1 percent, well under Michigan's rate of 9.1.

Michigan Future, Inc. asked top state business reporter Rick Haglund to investigate the policies Minnesota has pursued to grow its economy. The results are the topic of his new report: "State Policies Matter: How Minnesota's tax, spending and social policies help it achieve the best economy among Great Lake States."

The report examines policies of two states that looked much alike in 1990, when Minnesota's per capita income was just $555 more than Michigan. The report shows how Minnesota has made major investments in education and urban communities, embraced regional government, and supported policies that make the state more welcome and open to all.

"For decades, Minnesota, under Democratic, Republican and Independent Governors, has rejected the idea that low taxes are the key to a prosperous economy," said Michigan Future President Lou Glazer. "Its alternative has been to focus on making investments needed to educate citizens and create a welcoming and great place to live and work.

The link to the study by Michigan Future is here.

Here is the chart from the BEA release:

Tuesday, September 9, 2014

Minnesota's economy is top dog in the Great Lakes region No. 000072

Minnesota's economy is top dog in the Great Lakes region | Michigan Radio


Minnesota is one of the top-ten best economies in the country; it is also a high-tax and high-spending economy.

"For so long, the accepted formula is that in order to have a healthy state economy, you have to have low taxes, low spending, and right-to-work laws," Haglund says. "Minnesota actually has turned all of that on its head."

In 1990, Minnesota and Michigan were roughly comparable in per-capita income. Now, Minnesota's per-capita income in $9,000 per-person higher than Michigan's. Unemployment is 4.7% in Minnesota, and it hasn't had a month with double-digit employment rates since 1976. Minnesota has one of the highest percentages of adults in the labor force in the country, while Michigan has one of the lowest.

Haglund says it's difficult to say that Minnesota's high-tax and high-spending economy is the sole reason for its success. There are underlying policies that Minnesotans enacted decades ago that contributed to their healthy economy.

"They also have a pretty rich mix of industries," Haglund says. "They're less dependent on one industry, as we are here in Michigan."

Minnesota has a progressive income tax system where those who earn more pay more. Its top income tax rate is 9.85%, and people with lower incomes pay 5.35%.

Michigan has one rate of 4.25%.

Minnesota's corporate income tax rate is a third higher than Michigan's.

The gasoline tax is nine cents a gallon higher in Minnesota, the sales tax rate is 6.85%, and local jurisdictions can add up to a percentage point on the sales tax.

Minnesota has a good education system and has led the nation in the percentage of students who are college-ready, and has the highest percentage of college graduates in the Great Lakes region.