The red badge of bad economics

Though Brad DeLong is, far and away, my favorite econ blogger out there today, there are times when I disagree with him. In an article in Foreign Policy, Brad reminds us of the origins of many of the bad economics ideas making the rounds among the political right today:

There was silence in the seminar room. Richard Kahn broke it. "Do you mean to say," he asked, "that if I were to go out tomorrow and buy a new overcoat, that it would increase unemployment?"

"Yes," said the man in the front of the room, Friedrich von Hayek, "but it would take a long and complicated mathematical argument to explain why."...

In [Hayek's] thinking, [depressions] were righteous karmic payback for past sins against the gods of monetary orthodoxy. Any attempts to cut them short or make them shallower would produce only temporary palliation, at the cost of a fiercer, deeper, and nastier further depression in the future.

Hayek's fellow countryman, Joseph Schumpeter, went further: "Gentlemen!" he announced to his students at Harvard University (there were no ladies). "A depression is healthy! Like a good ice-cold douche!" If depressions did not exist, Schumpeter thought, we would have to invent them. They were "the respiration of the economic mechanism."

Agreeing with Schumpeter was Herbert Hoover's Treasury secretary, Andrew Mellon...Hoover quotes Mellon: "It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people."

Anyone who has been following the economics press over the past two years will find these ideas very familiar - they are the ideas advanced by conservative-leaning economists and other conservative intellectuals. From Glenn Beck (who hawks Hayek's books on his show) to well-respected economists like Robert Lucas, Robert Barro, and Greg Mankiw, the Right has embraced the idea that depressions like our current one cannot be mitigated by government policy.

But why? Why, in particular, have so many eminent macroeconomists rushed to embrace the notion that their discipline has produced no new useful policy recommendations in the last 75 years? Here is where DeLong and I differ. He believes that the culprit is resentment - the Nietszchean idea that people in a bad situation will come to believe that their suffering is noble, and will try to force their plight on others. DeLong writes:

Nothing has changed in the past few years to make Hayek's, Schumpeter's, and Mellon's arguments stronger intellectually against the critiques of Keynes and Friedman than they were 60 years ago. On substance, their current victory is inexplicable. But their triumph, epitomized by the Tea Party movement and its hostility to government action, can be explained by our fourth horseman: Friedrich Nietzsche...

Nietzsche talked about the losers -- or rather, about those who thought they were the losers. He looked at those who saw themselves as weak and poor -- rather than strong and rich -- and saw trouble. "[N]othing on earth consumes a man more quickly than the passion of resentment," he wrote. It drives us to madness.

Think of that when you consider this: The U.S. unemployment rate is stubbornly high, yet aid from a federal government that can borrow at unbelievably good terms could allow states to maintain their levels of public employment, and those public workers would then spend their incomes and so boost the number of private-sector jobs as well. But the voters are against that. No, they say. We have lost our jobs. It is only fair that those who work for the government lose their jobs as well -- never mind that each public-sector job lost triggers the destruction of yet another private-sector job. It's the underlying logic that has led to a wave of austerity across Europe that is now headed for America's shores. And it's the same logic that says, "It is only fair that homeowners lose their money" -- never mind that everyone's home prices will suffer...

Because some are unemployed, unemployment is good -- we need more of it. Because some have lost their wealth, wealth destruction is good -- we need more of it.

Although I am, in general, a big fan of Nietzsche's psychological insight, I just don't think it applies here. After all, none of the eminent economists who have railed first against stimulus spending and then against quantitative easing have lost their jobs - or even seen their wages cut! - as a result of the depression. They cannot possibly envy the good fortune of the construction workers who were employed by the stimulus. Additionally, studies have shown that Tea Parties, on the whole, are better off than most Americans; they are less, not more likely to be experiencing resentment over losing their jobs.

My guess is that the culprit behind Zombie Economics (as John Quiggin calls it) is simply the same devil that is currently plaguing every other aspect of American public life: identity politics.

American politics right now is all about identity. At the grassroots level, it's about race, with the Tea Party trying to convince poor whites that their interests lie with people of the same skin color - that the tribal threats of immigration and welfare are more dire than macroeconomic mismanagement. At the elite level, it's about the clash between the Business Class on one hand, and academics and lawyers on the other.

As both grassroots and elite America have separated themselves more and more (the so-called "Big Sort"), they have become ever more eager for markers to distinguish their two tribes - cultural flags around which to rally. In other countries, and in times past, identity markers included what church you went to and what accent you spoke with. Nowadays, there are the obvious material symbols, like whether you drive an SUV or a Prius. But in addition, people declare their allegiance by the ideas they accept and promulgate.

If you are a conservative, how do you communicate to fellow conservatives that you are on their side? Being white is not enough, since plenty of whites (about 45%) vote Democratic. Having an SUV and talking with a Southern accent might do it, but that's expensive and difficult. But denying global warming is easy, costless, and instantly and effectively communicates that you are part of the conservative movement/identity/army.

It's the same thing with Zombie Economics. If you are an economist or public intellectual, saying "stimulus doesn't work" or "we're in danger of inflation" or "the economy is being held back by uncertainty over Obama's policies" is just an easy way of saying "I stand with the Business Class against the forces of academics and lawyers." Never mind that the Business Class doesn't really believe we're in danger of inflation - otherwise, the TIPS spread, which is a market measure of inflation expectations among the investor class, would be much higher than it is. Never mind that policy uncertainty is not cited by businesses as a major concern. The purpose of these theories is not to guide policy, but to assert allegiance.

For Nobel laureates and other distinguished economists, it is important job-wise and prestige-wise to stand with the Business Class, who provide demand for the services of the econ profession. For grassroots Tea Partiers, mouthing support for Hayek is either a way of saying "don't give my money to nonwhite people", or simply a way to make conservatism seem like more of a coherent ideology than it is. Resentment need not have anything to do with it.

And if policy is paralyzed by the bad ideas that are used as ideological markers? Well, that's just collateral damage, but if you think about it, it's mild compared to the absolute political paralysis that America's identity rift has already brought about. Americans are more focused right now on dividing the pie than preventing the pie from shrinking. So shrink it shall continue to do.

Damage to Rented Premises

Any time a business rents or leases a space to operate from they sign a contract. In that contract are insurance requirements stating that the tenant will carry certain liability limits. Normally they will ask the tenant to carry a commercial general liability policy, and more often than not they ask for at least $1,000,000 per occurrence limit. The reason they ask for this is that if the tenant is the cause of a fire or other type of damage to the rented building, the landlord wants to make sure that the tenant’s insurance will pay for the damages, and not their own insurance.

Commercial General Liability takes care of a lease contract with two different types of coverages. The first is the coverage I mentioned above of $1,000,000 per occurrence limit. This coverage, however, only gets the tenant half way there. The per occurrence limit doesn’t cover for actual areas of a building that the tenant rents or leases. It will pay for only the part of the building that is not rented by the tenant. An example might help explain this better.

Example:
Let’s say that business XYZ, Inc rents unit A of a four unit office building. If XYZ, Inc causes a fire that extends damages to both unit A and unit B, the per occurrence portion of their insurance policy will only cover damages to unit B. It will not pay for damages to unit A because it is leased or rented by them.

Damage to Rented Premises (sometimes called Fire Legal Liability) is the other coverage a tenant needs when they rent space. This coverage is often included in a general liability policy as well but many times is not specifically mentioned in lease contracts. In the example above, Damage to Rented Premises would be the coverage that would pay for unit A that XYZ, Inc. rented.

The reason I bring this up as a blog article topic is because the Damage to Rented Premises is often overlooked. Since it is left out of many lease contracts, businesses don’t think to check with their insurance carrier about the coverage. Your typical commercial general liability policy will only include $100,000 to $500,000. If company XYZ, Inc. in the above example rented a large space, this may not be enough coverage, and they could pay for some of the damages out of pocket.

So next time you rent a space for your business be sure to have Fey Insurance Services review the lease and double check your commercial general liability insurance limits to make sure you are covered in case of a large fire.

Thoughts on the rise of Asia

David Pilling has a long, rambling, but good column in the Financial Times about the rise of Asia. It's all over the place, but basically it says:

1) Asia is growing much faster than anywhere else.

2) Since Asia is really just a silly European word for "everything on the Big Continent to the east of us," Asia is enormous, and hence it's not particularly unusual for them to be a big share of world GDP.

3) There are still dangers that could stop the rise of China and India, e.g. environmental or political problems.

4) Asia's increasing economy will give Asian countries increased political importance.

All of these are good points. However, let me make a few points that, I think are less commonly made.

First of all, the rise of China may be a return to historical norms, but the rise of India is not. China, historically, was usually one single political unit, while India was always divided between north and south. And while China was the world's technological leader for about 700 years, India has never led in technology. Also, though China often dominated its neighborhood, India rarely did. India had a huge GDP, true, but this was back in the days when everyone's GDP came from farming, and India simply had more farmers and richer farmland. The fact is, India is poised to become a technological, military, and economic superpower for the first time ever. This, it seems to me, is a more momentous shift even than China's rise.

Second, "Asia" will probably never return to its historic share of world GDP, for the simple reason that lots of people live in the Western Hemisphere now. The rise of the U.S., and now Brazil, Mexico, etc. permanently shrinks the relative weight of every other region. And, even more than the rise of India, the rise of the Western Hemisphere is historically unprecedented.

Third, a region's "rise" no longer means what it used to. Namely, powerful countries used to go out and conquer weaker ones (think: Europe in the 1700s, Mongols in the 1200s), but that is no longer an economically advantageous thing to do. The rise of the U.S. led to a smattering invasions and occupations (Philippines, Vietnam, Iraq), but few real conquests or colonizations. We can expect the rise of Asia to entail even fewer.

And finally, the big danger from Asia's rise (besides wholesale exhaustion of the planet's resources) is that Asian countries will fight each other. I humbly submit that Noah's Law of Competition states that competition is more common among things that are similar than things that are different. Or, in this case: Neighbors fight. Europe's rise was accompanied by centuries of internecine warfare; no less than 8 continent-wide wars raged from 1618 through 1945. Asia has already been through a period of war in the 20th Century, so we know that Asians are no more peaceful than Europeans. And Asian states are arming themselves at a furious pace.

Like Pilling's column, this blog post is a collection of tangentially related observations. But the main thrust is this: The possibility of internecine Asian warfare is the scariest political threat facing the world in the next 50 years. And the rise of the Global South, not China, will be the most significant historical event in the next 100.

One way or another, Medicare is going to go

It is becoming more and more apparent that the U.S. government has two choices: A) drastic cuts in health care expenditure, or B) a sovereign default, followed by drastic cuts in health care expenditure. Don't believe me? Look at this graph:










As you can see, though Social Security spending is projected to increase only slightly (as the Baby Boomers retire), but Medicare/Medicaid is projected to explode as health costs soar, sucking an ever-larger amount of our nation's GDP down the toilet of useless health "care." Other much-discussed deficit remedies - higher taxes, lower defense spending, and freezes on discretionary spending - will help only marginally and only for a few years, before the rampaging monster of health costs eats our government whole.

Now, a few points. Point the first: most of our excess health care costs, relative to other countries, go toward keeping fat elderly and middle-aged people alive (also known as "outpatient care"); the fact that our life expectancy is the same or slightly lower than that of other rich countries indicates that our nation is using high-tech expensive medical treatments to (imperfectly) cancel out poor health choices in early life. It's not working, and it is bankrupting us.

We are thus in a political bind, because seniors are disproportionately powerful in our electoral system. It was seniors, angry at Obama for cutting their Medicare to pay for expanded health coverage for the poor, who propelled the Republican Party to its historic landslide victory last week. Seniors fear and revile Obama's plan for socialized medicine for all, because it would necessitate cuts to the socialized medicine that seniors already enjoy.

Now, this is obviously unsustainable. Eventually, the big light-blue wedge on the graph above will force our government to either drastically cut Medicare or default on its sovereign debt. The latter would be an unmitigated disaster for the U.S. economy, and the austerity reforms that would be implemented in its wake would kill Medicare just as surely. However, seniors, with only a decade or two left to live, are perhaps less concerned about the nation's long-term sustainability than I am.

It would be nice to turn this point into a partisan one. I wish I could, as Paul Krugman and Kevin Drum do, simply point out that Democrats are willing to cut Medicare and Republicans are not, and wave my flag and say "Vote Democrat, and America will be saved!" But, although not yet a senior myself, I am old enough to remember 1996, when Bill Clinton pilloried Bob Dole for daring to have suggested cuts to Medicare. I am forced to conclude that, as un-serious as the Republican party is about deficit reduction in general, pandering to seniors is the game that everyone plays.

Our political economy now looks something like this: The party in power, realizing that Medicare is the Death Star, meekly and quietly suggest small and marginal cuts in the program, disguising their suggestions in a thick blanket of technocratic jargon and hiding the cuts inside much larger bills. But the loyal opposition dutifully sifts through the mountains of obfuscation, locates the Medicare cuts, and screams about it until blue in the face. The seniors, quaking in their slippers, turn out in a mighty horde to throw the incumbents out; wash, rinse, repeat, while wages stagnate, the deficit spirals upward, and American power declines.

What do we do about this sorry state of affairs? Sad and painful as it is for me to say this - because I really do have a lot of sympathy for old people - the answer has to be "age war." Unless younger and middle-aged voters unite in grim resolve to "throw Grandma from the train," she is going to leap off anyway and drag us onto the tracks with her.

There are only two ways to smash rising health costs. Either our government must socialize the entire health-care industry and implement draconian rationing ("death panels") to cut costs, or Medicare/Medicaid must be ruthlessly slashed, and as costs continue to rise, slashed again, until brutal market forces stop health providers from raising prices for services that fail to prolong our lives. And what this will mean, I am fairly sure, is a partial return to the culture of the multi-family home, as children are forced to take on some of the job of palliative care for their elders that hospitals now provide. In the long run, of course, a government-spearheaded public health campaign to reduce unhealthy lifestyles (fat, smoking, malnutrition) will help to bring down health costs, but it will not bear fruit in time to save us from fiscal disaster.

In any case, I wish there were another way, but political events have made it clear that Medicare is going to die. The only remaining question is whether it will kill our economy as it goes down.

Online Backup Programs

In a recent article on PCMAG.com we read a few frightening statistics:

1) Of the 700 million computers in the world, about 10% will crash each day.

2) 50% of the business who did not have a back up of their files will never reopen in the event a main computer or server crashes.

3) Only 6% of internet users actually back up their data on a daily basis.

The best way to avoid becoming one of the tragedies is to invest in an Online Backup program. For home use there are a number to choose from such as Mozy, Carbonite, IDrive, MiMedia, Norton Online Backup, SOS Online Backup and others. Presently they are easy to setup and once in operation they will all automatically backup any changes you make to your computer's files without you having to do a thing.

Depending on the size of your computer's hard drive and the speed of your Internet access, the initial backup can take some time. It can range from a few hours, to days or even a full week. If you have a lot of digital photographs on your computer, you could be looking at a week or so for the initial backup. But once the initial backup is established, the Online Backup will do incremental backups only on files which have changed or new files added since the last backup. Those incremental backups will run fairly quickly. Before deciding if Online Backups for home or business are for you, consider what the ramifications would be if you lost all of your personal photos or all of your business records in a computer crash.

How Pick And Pack Services Can Augment A Business

Pick and pack services are services in which designated orders are picked from an inventory or inventories to be shipped to the end customer. Complex businesses which can deal with separate inventories can greatly benefit from such a service. Fulfillment services are beneficial in terms of cost and efficiency for the more intricate delivery jobs.

Sometimes, in order to ship an order, businesses

Winterize Your Outside Faucet

Disconnect your outdoor hoses from their outdoor faucets before it gets too cold. We have already had the first freeze warning for Fall 2010, so if you have not done so, now is a good time to disconnect your outdoor hoses from their outdoor faucets and store the hoses away. If you fail to do this, you run the risk of the water in the attached hoses freezing and cracking the water pipes going into your house. In the Spring when you turn on the hose you could have substantial water damage in your home from the cracked pipes.

On "libertarians"

Regarding my last post, an anonymous commenter asks:

Why do you insist that Angus is a conservative? Are you unable to make a distinction between conservatives and libertarians?

Hint: they are quite different.

Two questions here. The first is easy; I insist that Angus is a conservative because he says a lot of the exact same things that self-described conservatives say. Political ideology is defined by consensus, not by a dictionary. If you are marching in an army, and you point around you and say "I'm not with these guys," I'm going to have to be a little skeptical of your claim. (Yes, I realize that there is a substantial possibility that Angus did not leave the anonymous comment; hence, I realize that saying "your claim" is not entirely appropriate in this situation; it is a figure of speech).

The second question is harder: What is the difference between self-styled "conservatives" and self-styled "libertarians"?

The common answer is: Social issues. Though many conservative politicians and writers call themselves "libertarian," their stances against gay marriage, immigration, and drug use give them away as closet authoritarians. True libertarians, we often hear, agree with conservatives on economic issues (lower taxes, less regulation) and with liberals on social issues (legal marijuana, gay marriage, more immigration).

I do not buy this distinction. As I see it, the American "conservative" ideology is not a rigid and unified canon, but a diverse set of interest groups held together by an unusually stable alliance of convenience. From reading conservative blogs and magazines, watching Fox News, and talking to self-described conservatives, I have grokked that the groups that make up the alliance we call "conservatism" are three: 1. businesspeople and other well-to-do folks who want lower taxes and regulation, 2. ethnic tribalists who think that white, Christian, and Southern/rural people and groups should have political and social primacy, and 3. militarists who want our military to be really big and to go kick peoples' butts. These are known in the press, respectively, as "economic conservatives," "social conservatives," and "neoconservatives." Militarists are the smallest group, so I'll ignore them for now.

What do these groups have to do with each other? Why has this coalition-of-the-willing endured for so long? In a word, socialism. The conservative movement as we know it is an alliance of two groups that felt threatened by the socialist (or "leftist") movement of the 20th Century - economic conservatives because socialists wanted to take their money, social conservatives because socialists wanted to diversify and liberalize their culture. As Wooldridge and Micklethwait document in The Right Nation, economic conservatives had to hold their nose a bit to join with a bunch of moralizing Bible-thumpers, and lower-income social conservatives had to do a bit of doublethink to avoid noticing that conservative economic policies mostly benefit rich people. All this is well known. The difference in priorities between the two main conservative constituencies is undoubtedly why conservatives spend so much time demonizing liberals; they want to keep the focus on the common enemy.

Which brings me to the question: What the heck is the difference between an "economic conservative" and a "libertarian"? Apparently, whether or not that individual publicly endorses the big-tent alliance described above. A true libertarian, we are told, holds true to his ideological self-consistency, and either votes libertarian or not at all.

Which is absurd, of course. On election day, most libertarians hold their noses and vote Republican, exactly as many "greens" and Naderites and assorted other leftists hold their nose and vote Democrat, because at the end of the day, people are not fools, and they understand the two-party system and how it works. In other words, when push comes to shove, libertarians behave exactly like the economic conservatives with whom they are identically one and the same. A few snarky throwaway protest votes do not constitute a separate movement.

And economic conservatives (including many who routinely refer to themselves as "libertarian"), far from being marginalized or disaffected within their movement, comprise the intellectual and ideological leading edge of that movement. It is think tanks like the "libertarian" Cato Institute and publications like the National Review who create and/or promulgate all of the economic ideas that later get parroted at Tea Party rallies and on Glenn Beck's talk show. Why do you think that a bunch of anti-immigration, anti-gay marriage, anti-drug-legalization fire-breathers are snapping up copies of Hayek's The Road to Serfdom? Hint: it's NOT because "libertarians" and "economic conservatives" are quite different.

It is "libertarians" who have created and promulgated the idea that Obama is a leftist, despite his very middle-of-the-road attitude toward business. It is "libertarians" who have given the legions of social conservatives, who hated Obama from Minute 1 because he was black and weird and intellectual, an excuse to associate Obama with Hitler without sounding like the racist tribalist reactionaries that they really are. "Big government!", the Tea Partiers shriek, when in fact they are dog-whistling "Nigger hippie outsider!" The "libertarian" enablers of this little pretense smile behind cupped hands, knowing that when tribal animus propels the Republican Party to power (as it will this evening), they will get their lower taxes and their deregulation. And if gay marriage and immigration take a hit, well, not optimal, but not catastrophic; those issues were never top priorities for economic conservatives anyway.

And those who cast snarky throwaway protest votes on election day will shrug and say "Don't blame me; I'm not a conservative, I'm a libertarian. Don't you know the difference?"