Those people are lazy

You know who I mean, right? We don't need to actually say what we mean. We're all gentlemen here, in contrast to say, thugs.

That's the problem with dog whistles: other people can hear them too. Maybe you can't, because you're old and lost some of your hearing, but trust us, people can hear the whistle.

I'm just about to start my first real job. I've had jobs, even stayed them for a while, but they were all placeholders of sorts and only went on my resume as a way to say that I did something during the previous years.

Looking for work is possibly the worst thing ever. In the supply and demand graphs there's always this feeling that the labor and job pools are just these lines that walk past each other and are, except in truly terrifying economic cases, guaranteed to meet. I suspect that is the case, that if someone keeps at it they will find a job, eventually. But in the meantime the uncertainty is awful.

I've seen other people complain about the sting of rejection. I've been jealous. To get rejected is approximately step 8 in the job search. That put them further along than I was.

1. Figure out what you can do
2. Figure out what you want to do
3. Find places that do both of those
4. Find places that do one and a half of those
5. Find places that do one of those
6. Apply
7. Hear nothing
8. Get rejected
9. Get an interview or two
10. Hired

Half of that process isn't even applying. It's figuring out where to apply, how to, what to. For me, that was the worst part. It's easy to get discouraged when there is absolutely no measure of how you're doing or even if you're on the right path. You're not being rejected, not even acknowledged, and so all the failure is on your end. That adds up. Until step 7 you spend every day blaming yourself. Sometimes I'd take a day off to try to recover, but then I'd feel bad about that. Feeling like a lazy idiot does not give one the confidence to apply for jobs. I at least had opportunities. I had a car available, money for hotel stays so I could make interviews, and some connections.

Contrast that with someone who is barely scrapping by on government assistance. They can't search as wide of a range on the map or the listings. To make it worse, they're being called lazy for taking that government assistance, as if that is somehow what keeps them from getting a job. The lack of jobs in their area is not mentioned. The problems in the hiring process are not mentioned.

Even worse, the jobs that are easiest to find and get, things like fast food, pay very low wages. Yet that might be all a person can get. They're doing the right thing by getting a job. But then they're told that not only should that job not pay them a livable wage, but that they shouldn't even be in that job. What are they supposed to do, quit? Without another job lined up, that just puts them back on government assistance, or possibly worse, not on it because they quit a job that they could have kept. If they did have another job lined up, then they'd take it. Or sometimes they do and work two or three jobs because one or two don't pay enough.

I don't know of an easy solution to the job problem. But in the meantime, we could at least pay those few with jobs enough to support themselves, and stop using food stamps to subsidize employers who won't pay a livable wage. And we could stop using careful phrasing to suggest that certain people who we won't specifically identify are lazy and should just be kicked out in the cold.

Ceilings are Stupid

Gravity is a confirmed phenomenon and has been for centuries. Ceilings will inevitably be pulled downward, thereby removing their ability to be above our heads. In other words, ceilings are self-destructive, their very nature of being above us being what causes them to be pulled down.

Some have suggested using vertical supports to hold up the ceiling. Even if we could imagine such a structure maintaining itself, it only worsens the underlying problems. Regardless of the structures you design, gravity will pull them downward and adding vertical supports to maintain a floating ceiling will only increase the downward force. Any objective physicist can see the data: more mass, regardless of how well-placed, always results in more downward force.

Ceilings, for all their theoretical usefulness, are merely a pipe dream of those who would waste resources by attempting to subvert the natural laws of the universe.

Unemployment insurance isn't a poverty program

This is in response to Unemployment Benefits Decrease Poverty? Really?!

I'd propose an indirect mechanism, which can therefore explain how the correlation can fail to emerge. Unemployment insurance acts as a stabilizing force, allowing families to maintain their lives despite unemployment. Under normal circumstances this would be a temporary effect, tiding them over until they find a new job and begin paying back into the system. In this way, unemployment would have a slight impact on poverty by means of giving people money, but the larger effect would be on maintaining demand, thereby keeping the economy growing. It would therefore have the effect of smoothing out some problems so that free markets can reduce poverty.

This falls apart in a sustained recession. If there are too few jobs to find, then the insurance will no longer be stabilizing the economy. It will instead be propping up people's lives, without being of much benefit to economic growth. In summary, unemployment insurance is a brilliant idea if we're in a short downturn, but not in a long-term economic malaise. It may still be morally justified to help people, but it is not a recovery program.

Of course merely bashing a program isn't of much help. From that we'd conclude that the correct decision is to simply end it. That would crash the economy and ruin many lives. Or end them. It is always good to remember that people can starve to death or die of exposure. Lack of proper nutrition will have a life-long impact on a child.

What are the alternatives then? Or what are the supplements that can be used to improve the program?

First, it is always good to have people in the same place as jobs. Government could offer increased benefits to people who move to areas with lower unemployment or pay some moving expenses. The housing problems don't help, since they may make people feel or actually be stuck in their present locations. Increasing the mobility of labor would decrease unemployment. Economic improvements tend to compound. Lower unemployment will cost fewer resources at all levels of government, while also bringing in greater tax revenues. Even with the buffer of unemployment insurance, we can expect some rise in demand from a family with income than one without, boosting the economy further.

Eliminating rules such as the minimum wage, protections for unions, and workplace safety would make employees less expensive and therefore would encourage hiring. However, in a weak job market and without collective bargaining, there is no guarantee that workers will be paid enough to survive on.

Encouraging hiring would help as well. This could come on the demand side, so that employers see greater benefits from hiring. However, demand-side boosting requires a massive expenditure and we've not yet seen the political will for a sufficiently large stimulus. Alternatively, giving everyone a bunch of currency, using inflation to cause a redistribution of wealth from rich to poor, as opposed to the poor to rich movement we see with most monetary policy, would provoke a backlash from the politically-influential group known as "rich people".

Employers could receive tax benefits for hiring, such as from a pass on payroll taxes. However these tend to be deficit-increasing as the economic growth and resulting revenues don't offset the tax expenditure. The employment boost may end when the tax subsidy ends, and such subsidies tend to encourage hiring for low-wage jobs to game the system. If done at the state level, then it is merely part of the pirating of jobs with no actual economic benefit, an absurd practice known as "tax competition."

Rather than making hiring more profitable, government could use policy to make firing less profitable. A tax on layoffs would add an incentive to retain workers, though the retention would be proportional to the size of the tax, and would reduce business flexibility. It is good, after all, to be able to get rid of workers who don't produce as much as they are paid. Furthermore, if the tax were too high, then we could expect hiring to be reduced due to uncertainty about the need for labor.

Reworking the money supply for explosive economic growth

Make uranium the currency. It sounds crazy, and it comes from an imaginary physicist, so it just might be. But it also might be true, as things in physics often are. Let's set aside the problem of deflation, since the half-life is so long, or the inherent stupidity of making our currency based on a physical substance. Let's instead focus on the positive aspects.

While we might not expect people to trust banks, we can expect them to use banks. No one wants a lot of uranium sitting around their houses, not even terrorists. On the trust front, we can expect that banks would be more highly-regulated. While its easy to wave away responsible regulation on the grounds of "economic freedom", something that they made up on the spot, there is also the issue of terrorism. While the scale of the threat was also made up, it is scary and explodey and both of those are strong motivators. Therefore we can expect that people will use banks and will trust them to not explode.

In the event that the banks do explode, making big explosions, with the usual destruction of property and killing people, is illegal. This means that in the event that bankers blow up the economy again it will likely be accompanied by an actual explosion. Those are much easier to prosecute, since people have more of a tendency to admit that they exist. Fewer people would be claiming that the Federal Reserve or Elders of Zion caused the explosion. That's a good thing.

In the event that the banks do not explode, then the bankers will get to learn the other meaning of liquidator: those who worked on cleaning up the debris from Chernobyl and who suffered tremendously from the resulting radiation poisoning. This may seem to petty spite, and it is. Since when does policy have to be based on being nice to people?

Then a few decades later people will claim that The Wizard of Oz is about expanding the money supply to include strontium-90. Obviously that's stupid, because the half-life is far too short for it to be a sound foundation for the money supply.

Numbers are People

It's easy to forget this, that numbers are meant to reflect reality (except in pure mathematics in which case they are reality).  I ran into this the other day, when a chart was misunderstood and so transportation costs were double-counted.  With a connection to the real world it was clear that if you're not shipping goods to the dock (it was about forgone export income), then you shouldn't count the cost to ship to the dock (at least not the way we were doing the accounting; I suppose you could use a different method and have them as a savings).

On a larger scale, we often hear about unemployment.  It's always some percent or other.  But people are rarely at 8% unemployment themselves; maybe hours are cut, but they tend to be at either 100% or 0%.  In aggregate things might not look so bad, but no one lives in aggregate; they live their own lives.

Unemployment is actual people without jobs.  People without jobs suffering under stress and lost opportunity.

I ran across an interesting study a few weeks ago, which I have sadly forgotten the name of, which looked at employment decisions by MBA students.  The researchers gave two ways for the students to decide what to do with workers.  One was to give them a set of formulas about productivity and labor and benefit costs.  They'd solve the formulas just like any other.  The other method was to give them lists of workers.  Guess which group laid off more workers.

We don't need job-creators.  We need employers.

If I'm not perpetually terrified, I'll sue you

You might have seen the recent story of a few Italian scientists and public officials being convicted of manslaughter related to a 2009 earthquake.  In short, they didn't tell everyone to be terrified, consequently they were not, and then an earthquake hit and killed a lot of people.  The BBC has more detail.  There are a few problems here.

First off, they look more like scapegoats than convicted criminals.  If the goal was to sweep for public officials who could have prevented deaths, why limit it to prediction?  Shouldn't building inspectors, building code writers, and construction companies and employees be going to prison as well?  Surely they are at least partially responsible for the buildings which collapsed.  A better prediction wouldn't have made their buildings not fall down.  That they are left unscathed suggests that the goal was not to systematically punish those responsible, but instead to pick a few high-ranking people to make an example of, thereby deflecting blame from all others.

Second, earthquake prediction is not an exact science.  It has gotten better and is certainly valuable, but to expect predictions with sufficient precision to prevent this incident is ridiculous.  Surely we aren't expecting them to have announced months before that a quake could strike in the coming months.  What do the residents do with that information beside panic?

Seismologists in Italy must be rather nervous and after this, more prone to reporting false positives, all in the name of caution.  Of course they aren't doing this out of public welfare, since they were already doing that and crying wolf does no good, but instead because of their own self-interest.  This isn't me attacking them, just noting that people tend to respond to incentives and punishments and at the current time, the punishment for a false negative has spiked.

This leads me to the rocketing cost of healthcare.  Much of that cost comes, not from actual care or even the astronomically expensive new cancer treatments, but from the tests and more tests.    Doctors, like the scientists, are worried about false negatives.  So they order more tests.  Of course we'd want to rule out those things which are easily detected or most dangerous, but eventually there comes a point when the added information from the tests is not worth the money spent on the added tests.  And yet, if the doctor's freedom and finances are on the line, why wouldn't he order more tests?  It only takes the one time that he acts sensibly and is wrong for the malpractice suit to roll in.

I'm a cautious person by nature, the sort who is prone to indecision, always wanting to know a little bit more.  Yet even I can see that this is absurd, to attack experts for making judgements in their area of expertise.  Sometimes they will be wrong.  That isn't their fault, but merely a property of the universe.  Sometimes things go badly.  We should prepare for that and try to prevent it, but we should not becomes so focused on the possible negative events in the future that we create a certain one now.

It's the bargaining power, not the contributiion, that determines wealth

One of the fundemental flawed assumptions in our economy, and one which hinders reform, is the assumption of a meritocracy.  This is tied in part to what I discussed a few posts back, the way our langauge is permeated with loaded words.  We use terms such as "earned" and "made" rather than "got" or "received" when discussing income.  These suggest that salaries are entirely justified, subconsciously reinforcing the myth of the meritocracy.

While one's contribution to society matters, that is only one aspect when determining income.  Bargaining power matters as well.  History supports this.

Look at the impact of unions.  Did they make workers more productive?  Beside the slow effects of bargaining for training, no.  In the short term their effect was not an increase in the contribution of workers, but the bargaining power.  They gained leverage.

While the contribution matters, it is the bargaining power which can be changed.  This is why the solution to inequality is not training or education (though those will help), but increased bargaining power for workers.  This takes the form of not just unions, but also laws to protect the right to form unions and bring complaints.

Polygamy and the 1%

The scientists are still out on whether humans are monogamous or polygamous.  In the meantime, monogamy is pretty common.  More broadly, women are expected to have one husband or boyfriend, though a man may have several wives.  Cultures treat this in many ways.  Some use it almost as a form of a safety net for widows who would have trouble remarrying: men marry the widows of their brothers.  Others just require that men be able to financially support the women they marry.  And at the lowest end are the cultures which give no rules at all to the men while the women are sluts if they look for a second boyfriend or husband when the first cannot support them.  There are better and worse ways to do polygyny (multiple wives), but the end result is bad for men.

Yes, I did say bad for men.  Women may end up in a bad relationship or social structure, but there is at least the possibility for polygyny to be a step up from poverty and a cluster of fatherless children.  For men it means that some men have many wives.  Naturally there will be slightly more women born than men (it gets worse with sex-specific abortion and child abandonment), but not by enough to support much polygyny.  There will be men who are unmarried, not because they are bad people, but because there are not enough women or because they are concentrated with too few husbands.

These unmarried men don't like their situation.  They tend toward extremism and violence.  And why not?  They have no children and no hope, why would they not try something extreme?  Why would they not be jealous and resentful toward those who have all the women?

Concentration of women does society no good.  It isn't likely to help the women and it is guaranteed to harm the men.

Should we believe that money is any different?  I see no reason that excessive concentration of wealth won't deprive a large segment of the population, creating a large group that has no interest in a safe, stable society because it does not benefit from the safe, stable society.  Of course the pie can grow, and it does, but if most of the growth is all consumed by the 1% and the remaining pie is growing slower than population, then the pie is effectively shrinking.

Monogamy might be less fun and have less stature than polygyny, but it is safer.  In the same way, jobs and wealth must have something near an even distribution to avoid instability.  Not perfectly even, but when a falling tide raises some boats, something is not working properly and cannot continue for long.

Job as noun

In the perpetual process of finding simple divisions for people, I propose this:

There are those who think of job and it is a noun.
There are those who think of work and it is a verb.

The first group is trying to get something.  They want a job.  It's a physical thing for them, as if you could have it, hold it, and also lose it.  A job is a possession and therefore it can be stolen.

The second group wants something to happen.  They want cleaning and making and designing.  They don't want a thing, but a process.  As such, there is no ownership, but rather just something to start and stop.

This is why "job creation" is such a strange term.  Those with capital, the second type, aren't going to "create jobs" because they don't see jobs as a thing to create or destroy.  For them, hiring and layoffs are turning on and off a faucet.  You'd not think of a faucet as a "water creator", just a tool to turn on and off the flow when you need water.

It's time we ditched the notion of the wealthy as "job creators".  They will not create jobs because to them, jobs are not something to create.  If we want to create jobs, then the means to do so must be held by those who perceive jobs as a thing.

And indeed, jobs are a thing: they are security, safety, and stability.  They are car payments, mortgages, groceries.  That's why having a job is so important for workers: it's the thing that contains everything else.  To lose a job is to lose everything until a new one can be found.  But the job creators do not exist.

"Unsympathetic pragmatism" is an oxymoron

Last week I mentioned pie, with the implication that people who feel shorted on their share of the pie may feel inclined to do something about it.  I mostly meant it as a sort of self-interested behavior: if most people would do better off under system A than under system B, even if system B has greater overall wealth, happiness, or whatever other metric you like, most people will support system A (assuming informed actors, which is a terrible assumption).  Though this dichotomy fails to account for a system C which is more evenly-distributed than B, though not as much as A, but due to a "just right" distribution, leads to a larger pie, making everyone better off than they'd be under systems A or B.

But onward to unsympathetic pragmatism.  To contradict myself as soon as possible, this is a sensible notion in certain contexts, such as the doctor who cleans and patches the otherwise-deadly wound, despite the lack of anesthetic making the procedure unimaginably painful.  However, that's not a very good analogy to take to higher scales, such as economies, healthcare, and human survival.

In America we have some people who put on a front of seriousness, people like Paul Ryan who want to balance the budget and will do so by any means necessary (except raising taxes, because those have to go down further).  As they explain it, we need to be pragmatic, to deal with some short term pain, because it will make us better off in the long run.  They may turn to the doctor analogy (I have not yet seen them use it, but it seems like a great misleading analogy) to prove this.  They're wrong on many levels, such as using analogy as a substitute for logic, exceptionally bad math (they use imaginary numbers in entirely the wrong context), and heartlessness.

Heartlessness?  How can that be bad if they're the unsympathetic pragmatist?  Let's go with the doctor analogy, but try to spruce it up a bit.  First off, give the patient a gun and if it hurts to much, he shoots the doctor, himself, or someone else in line of sight.  Oh hey, Greek austerity riots, a surge in crime, and some members of Parliament who would make me nervous if Greece was as awesome as Germany.  Also if they patient suffers too much pain he dies (which literally happens when your budget-balancing involves cutting food assistance, heating, and healthcare).  Furthermore, the patient may suffer serious, possibly permanent damage if the procedure is done wrong (underfed and undereducated children aren't typically superstars in anything).  If the patient thinks the doctor is doing it wrong he can fire the doctor and get a new one, assuming the transition doesn't kill him as well, and assuming the first doctor doesn't get to hang around blocking the other doctor from working while whispering lies in the ears of the patient.  I'm referencing the Republican Party, if you didn't pick that up.  In America.  Not to be confused with the political parties in other countries which tend to be little more than coalitions of unprincipled demagogues selling their influence to the highest bidder with no regard for the safety of their supposed constituents, whilst not speaking English.

My point is that "unsympathetic pragmatism" is not actually pragmatic if the unsympathetic part dominates too much.  The problem arises when people get the notion that the key part is "unsympathetic" rather than "pragmatism", and as a result, they focus entirely on not caring about the harm they do to others, justifying it all with some vague mention of the improving/saving the world part.  The goal should be the goal, not the method.  Alas, being an unsympathetic sociopath is branded as "courageous" rather than "useless heartlessness."  We only need to look at the American War Against Paying Taxes for the War That Just Saved Us (also known as the American Revolution or Tea Party), in which the unsympathetic pragmatist of a king wisely chose to impose the necessary taxes to pay for the war and military might to enforce them, without taking into account the sentiments of the people, such as representation and not having unrelated soldiers sleeping in their beds.  Imagine if the colonies had gained representation in Parliament and didn't have Redcoats looting their larders.  I suspect the British Empire would have been better off under the "sympathetic pragmatist" approach.  Though the downside cannot be emphasized enough: We'd all be speaking English English.

Pie Distribution

Buy-in is important.  Unless distracted or ignorant, people tend to get upset when they feel cheated.  Note that I use the word "feel" rather than "are".  This is because it doesn't matter whether people actually have been cheated or how we'd even determine the objective reality of it.  Action is based on perception, not reality.  Onward to pie.

Imagine two pies and two ways of slicing them.  To simplify things, let's assume that these pies are of equal quality and the only differences are the size (as measured by the number of blueberries used to make them) and slicing method (as measured by the size of the slice you get).  The first pie has 10 pounds of blueberries in it.  It is cut into ten slices and you get one.  In effect, you have 10% or 1 pound of blueberries.  The second pie has 15 pounds of blueberries it it.  It is cut into twenty slices and you get one.  In effect, you have 5% or .75 pounds of blueberries.

In Capitalism 101 we're told that the best result comes from everyone looking out for themselves (in 102 they cover externalities and information asymmetry, but no one takes that class).  What is the best result?  Well strangely enough, we're often told it in terms of "the economy" or "unemployment", broad, abstract concepts which can be thought of as generalized social benefit.  That's nice and all, but teacher told us to look out for ourselves.  So why are we concerned about that social benefit stuff?

If we follow the rules we're taught, to look out for ourselves, we'll take the first pie, because it gives us the bigger slices.  Why would we care about the overall pie if we're supposed to look out for ourselves?

These were, of course, stupid pies.  A more realistic pie would instead be one which accounts for how distribution affects size.  Excessively skewed distributions can cause problems.  If someone is promised too small a slice, then merely cutting it will reduce it to crumbs.  In this analogy the cutting is taxes and cost of living, since by my measure, merely continuing to live is not as good as getting pie.  We could cut taxes, and of course that would help, but the efficient method is to even out the slices, to ensure that no slice is so small as to not be worth cutting.

Promise me a bigger piece and I'll pick more blueberries.  This is good.  Though there is the potential for the promised piece size to rise faster than the blueberry picking, so that, for example, if 20% of people are promised half the pie, the remaining 80% might see themselves as getting cheated.  The perception has come back to us.

Whether you believe the system of the market is fair, the outcomes can quite easily feel unfair.  We could argue that they are not, but that's not going to fix perception.  It's not going to fix action.  By action I mean people getting aggressive: taking and revolting.  We could hire a few to imprison the rest, but as a rule, security is an enabler of wealth, not a creator, so now a certain part of the pie is being used to ensure that others don't ask for more pie.  That's hardly efficient.

Ultimately, the American-style market tends to be self-destructive.  The theoretical perfect market may emerge, but as success is rewarded, it unbalances the field and ceases to as perfectly reward success, with an increasing negative slide.  A few exceptions do not disprove a trend.  Moving away from the economics to the sociology, the mentality needed for a market, of looking out for oneself, is precisely the mentality which would lead a majority of people away from the market because regardless of what it does for the overall pie, it is not the way to maximize their own pie.

In other words, the majority of the world is not extraordinary so a system which places the majority of the rewards with the extraordinary will be unacceptable to the majority.  Thankfully for the wealthy, there are religion, race, and region to distract people from the cause of their misery.

I think this is how the Fed does it, right?

The paper I was writing on the yuan and the effects of its value is complete, for a given definition of complete.  It was fun to write and research, but might have been more fun with a little more time (though for a student there is no such thing as more time, just more procrastination).

Government as a Household

It's a popular analogy, government and household.  If a household has a drop in income it spends less.  By analogy, if government has a drop in tax revenues, it should spend less.  Makes perfect sense.  Unless you actually look at the analogy beyond the simplistic first impression.

First, let's stick with the "government is like a household analogy."  If a family loses income they don't instantly cut spending.  They can't, not unless they want to starve, freeze, and get kicked out of their homes.  Over time they can cut back, but that takes time.  Meanwhile, they look for more income.  They look for new work, second jobs, extended hours, and might argue for a raise (though if unemployment is high this isn't likely).  When they balance their budgets they don't only look at spending; they also look at revenues.

An even greater absurdity is the notion that households must balance their budgets.  Over the long-term, yes.  But over spans of weeks, months, even years, they may run debts.  They take out mortgages, which are a massive source of debt which persists for potentially decades.  They get car loans, another source of debt.  They get college loans for even more.  Households can pile on huge amounts of debt.  The last one may even be necessary, as job prospects and income are far greater with a post-secondary degree, so that not taking on debt is the truly irresponsible action.

People have credit scores and incomes and these are used to determine home much to loan them and at what rate.  Excluding the recent lying-fueled financial bubble, markets are pretty good at loaning money.  If they predict an average loss, they don't loan.

They act the same with governments.  Except in a few cases such as Greece, where the public debt was covered up by a joint public-private partnering on a corrupt government and Goldman Sachs (who has engineered it to make money off the default, still showing that the banks look for profit, rather than civic duty), investors are loaning to governments because they think they will be paid back.  They think that the spending that is being done is either stimulative enough to outgrow interest rates or is at least preventing a loss of value, making the loans as safe place to put money even if not particularly profitable.  If they didn't think so, they'd not loan the money.  If you disagree with that, then you're attacking the very notion that actors in markets seek profits or suggesting that they are all incredibly stupid.

If spending were truly "out of control" relative to expected tax incomes, then the market would stop loaning money.  The government isn't forcing banks and individuals to loan it money.  They are doing it willingly.  If the government fails to pay them back, that's part of the risk of investing.

 The analogy with a household eventually breaks down.  Households are a few people and in the US, people have safety nets.  There are charities and welfare and food stamps.  If the breadwinners can no longer afford living expenses, they can cut spending and their children won't die.  I'm not saying the safety net is perfect in terms of being too strong or weak, but it's there and it means that a family isn't a job loss away from starvation and being beset by bandits.

The magnitudes are different, as well as the responsibilities.  If government stops spending, it ripples out, fast and wide, to hit every single family in America.  Social Security stops and suddenly seniors are without income.  But Social Security isn't the fiscal problem anyway: it won't be insolvent for decades and in the meantime, it's actually a net lender to the government: it holds Treasury bills.  We could cut welfare and food stamps, which are about 13% of the budget, thereby driving millions of citizens further into poverty and possibly starvation.  Private charities aren't going to pick up that slack.  There are not enough jobs for them to all "get a job", not in a recession.  So in effect, advocates of cutting the safety net are suggesting that potentially millions of Americans end up homeless and starving, which would eventually fix unemployment by attrition.  Health care could be cut which would at least have the effect of killing them faster than starvation and exposure.

Infrastructure is about 3%, which on one hand covers bridges to nowhere.  On the other hand, it also covers infrastructure, the roads, bridges, trains, ports, and air system which make it possible to do business here.  Look up the barriers to economic development in poor nations and somewhere between lack of education and perpetual war you'll find lack of paved roads.  Speaking of education, cutting funding there is a great way to ensure that future generations are even less employable, prolonging recessions and stagnation across generations.  Science and medical research are a mere 2% of federal spending and are another necessity for long-term growth.  Cutting any of these are equivalent to selling your arms: it might give some budget relief, but it make future growth and employment even harder.

Households can cut spending without major problems.   Governments cannot.  For all the talk of waste and excessive spending, most of what is spent is spent making this a country worth doing business in, worth living in, and safe enough to work and live in.

Beyond all that, taxes interact in a backward way with the economy.  In a recession, revenues fall.  This is where much of the current "Obama deficit" has come from.  Meeting the legal obligations to citizens, the safety net, tends to get more expensive as more people are unemployed.  None of these are due to bad policies or the particular actions of any adminstrations: neither the Obama or Bush administrations caused the recessions, though the tax cuts by both have increased the budget deficit.  Merely having an economic recovery, with no changes in tax rates or spending, will improve the budget situation.

In summary:
- Governments have obligations to their citizens and their actions have dramatic ripple effects.
- Households, and governments, are under no obligations to run balanced budgets at all times.
- Spending can be stimulative and stabilizing.
- Markets are ultimately responsible for debts as they are the ones who allow them.

Sound Money is Unsound

Wouldn't it be great if a dollar was a dollar and you never had to worry about the Fed inflating you into poverty?  Well then I have a great plan for you!  What if we backed the dollar with a fixed amount of gold, or the reverse (it's a matter of phrasing, but the same thing in practice)?  Now your dollar isn't just a piece of paper, it's based on something solid, something real.

Hop in a time machine and see if your dollar is worth something a thousand years ago.  I bet not!  But your gold will be.  So keep that in mind.  It might work in the future too.

A gold bar is a gold bar is a gold bar.  Perfect, right?  Well, a dollar is a dollar is a dollar.

Gold is not magical.  It's a commodity.  It's just another thing subject to supply and demand.  Just like a dollar.  Increase the supply and the price goes down, increase demand and price goes up.  Aha, prices!  There's the key, we want price stability, right?  Price stability makes it easier to predict costs and that encourages investment and gives us that much more information when deciding whether to borrow or lend.  Price stability.

Enter inflation.  But first, let's break that apart and make sure we're all on the same page.  Money inflation will refer to the number of dollars, or gold.  Price inflation will refer to the price of what you tend to buy, so a 'basket', as the economists call it, of food, gasoline, cars (economists have a strange way of counting a typical shopping trip).  Over the long term, these follow each other.

If you wake up and everyone has twice as much gold and twice as much gold in their contracts (wages, salaries, bond payments, etc.) then after a brief bit of thinking they're rich, everyone will settle into a new habit of everything being exactly the same as it was before, just with all the numbers doubled, along with the population claiming that candy bars were a nickle back in their day.  Hint: Back when they'd have cost a nickle (by backtracking inflation), candy bars wouldn't have had so much inexpensive refined sugar and wouldn't be worth a nickle anyway.

Okay, so now here we are with price inflation and money inflation seemingly interchangeable because money sets the price.  It looks as if price stability is based on money stability.  But that would be wrong.

If the supply of wheat doubles, what happens to the price of wheat?  It falls.  What if the supply of everything except gold doubles?  The price of everything except gold falls, meaning that the price of gold has risen.  Even without any change in the money supply (gold), the price level has fallen.  Price inflation is not the same as money inflation.  Pour money in and sure, you'll get price inflation, so it's a bad idea to just dump money in willy-nilly (which the Fed knows and if you look at the amount of money actually flowing, it hasn't tripled as Ron Paul supporters would claim).  But even without changing the money supply, you're going to get price instability because money is relative to the economy.


Takeaway: A gold standard does not guaranteed price stability and therefore is not a guaranteed store of wealth or an economic panacea.

We can, of course, mine more gold.  Or less.  As the economy grows and technology advances, or as a recession comes and we produce less, we can change the gold supply.  Really?  No!  Gold is subject to the market like anything else.  It will be mined more when its value goes up (meaning a shortage of gold) and less when the prices go down (the inverse), but there are problems.  One is lag, that the gold supply will not react instantly.  Mining and purifying take time.  There would obviously be people keeping gold in reserve, partially out of the supply, who would then see the benefit of buying low and selling high.  This will help to stabilize the supply shocks, but cannot give price stability because the money supply (gold) will still be variable, managed (regulated?) by people around the world with gold reserves.  But we're not even in the long-term yet.  That's when it gets really bad.  In the long term, we don't know if the gold supply will increase in proportion with the economy.  That means that in the long term, there could be a significant amount of money deflation, relative to the economy, which as we saw before, is what really matters (money/economy moving in sync).  A stable money supply, with a growing economy, will trigger price deflation.

Imagine an economy which produces ten bushels of wheat a year and has ten bars of gold (it's a pretty bad economy).  We can't quite say what a bushel will cost, but I think we can recognize that if it produces twenty bushels, the cost of wheat, relative to gold, will drop.  That is price deflation and relative to the economy, money deflation.

Deflation kills economies.  Hyper[money]inflation will too, but it takes a lot of sustained inflation to do that, whereas just a bit of deflation can do the trick.  And it's a bubble.  Money inflation has a limit in the sense that only a money-printer can cause it (or loose loaning standards, but we're working with gold), and if there is no money-printer (central bank), then there cannot be money supply inflation except to the extent that gold gets dug up and that will be based on the value of that money, so in theory it is self-correcting.  Deflation does not have the same limit.  If gold rises in value, what will I do?  Sell?  Oh no, not if I see a trend, then I buy!  And so do others.  If not buy, then they hold.  After all, if a gold bar guys a ton of wheat today and two tons tomorrow, wouldn't you wait a day?  Of course.  So now we see hoarding and a slowdown in buying.  Which lowers the gold in circulation, raising the value, triggering more hoarding and buying up, and so on.  Eventually the 'flowing' gold is at a trickle and the economy has frozen up.

 So fine, fine, let's do this: let's print money but link it to gold.  Then if the economy grows faster than the gold, we print more money.  But now you're doing something wrong.  You're either assigning more dollars to each unit of gold, inflating the money relative to the gold, and therefore devaluing the very money you were supposed to be protecting with the gold link, or you're just lying and saying that money has gold linked to it, when it doesn't.  That's going to not only cause inflation of the money supply, but it's also going to create a false impression of the supply of gold and therefore the relative value of the dollar, effectively devaluing without telling anyone, which might work just fine... as long as not too many people ask for their gold.

Gold does have some things going for it.  As a physical substance it is rare, but not too rare.  It is stable: not reactive and not radioactive.  It's shiny, which is not a trivial matter and certainly played a role in its historical use as a standard of value.  It's traditional.  We think it is valuable because we've always thought it was valuable.  Just like a dollar for billions of people who grew up in a world where a dollar was money because that dollar, rather than being shiny or stable or old, was used to buy things in the biggest economy in world.

Money is what we use to buy things and that is entirely a social/economic construct.  Gold is only valuable as long as we thing it is.  In terms of practical value, it has some use in the jewelry industry (where much of the time we think it looks nice because it's expensive) as well as more practical purposes in industrial and electronic use, but "industrial and electronic use" are not strong foundations on which to stand.

If we really do what price stability then what we really need is a money supply that can grow with the economy.  That means some amount of money inflation.  Does that mean that the dollars i your pocket will be worth less?  Sure.  But your paycheck will go up in price, and the next, and so on, so that the supposed loss from inflation is just a small loss on a small amount of money, but in return you get predictable prices and a stronger economy.  Those are going to give you far more wealth than a pocket of gold coins.

This does not mean that a fiat currency is perfect.  It can be over-printed (or over-electroniced), or under-printed.  In part the Great Depression was worsened by a tightening of the money supply through bank behavior, something which could have been compensated for with, yes, some more printing of money to keep the overall flow constant and the economy moving.  It can be managed poorly.  But it can be managed and it can be tuned to work with the economy.

"So your answer is, it's the spending of money that drives the economy"

Representative John Shadegg of Arizona recently said this, to mock the interviewer (skip to the fourth mention of unemployment benefits). In other words, this seems to imply that this Congressman does not think that the spending of money drives the economy. I will admit that I have never been to Arizona or the Capitol (I'm excluding when I was approximately 1 year old) so maybe I don't know that they use a barter-based economy, or an economy based on mutual cooperation and sharing, which we might call Communism, but I'm pretty sure that in both places they use roughly the same money-based economy as the rest of the United States, and the world.

But maybe I'm being intentionally unfair and I should approach this more objectively. What would be an economy not based on the spending of money? We could have one based on the production of goods, but with no one to consume them, that makes little sense, so even a production-oriented approach eventually needs people to spend money. Besides, it would be rather hard to motivate workers to produce if they did not have any money to spend; slavery hasn't exactly withstood the test of time. Or we could try a research-based economy, driven by knowledge and technology and just generally getting better at everything we know and do. I like the sound of that. But I have to wonder, how do the scientists eat, live, and move? I imagine they require things like food, housing, transportation, perhaps even entertainment, so that beyond this Utopian knowledge-based economy there must also be an economy based on physical production, which goes back to the production-based economy which requires: spending money.

I get that some people are market fundamentalists and believe that any government intrusion in markets must be bad, and so obviously they'd want to reject Keynesian economics of government stimulus spending. But surely they still have some basic understanding of things like people needing money to buy goods to encourage production which is the root of employment. In other words, an economy based on spending money. Or alternatively, the Chicago school which would advocate deregulation and tax cuts, possibly with some trickle-down economics for good measure, which operates partly on the idea that the rich will... spend money!

See a theme here?

Yea, economies need people to spend money. When demand is low, you can cut taxes to encourage spending or you can raise government spending to raise spending. Or you can clap your hands and say "job job jobs!" and make it all better. Republicans like Mr. Shadegg seem to prefer the third approach.

But he's not done yet. The interviewer followed up with this question: "Unemployment checks, people don't spend that money?" To which he responded "No, they'll spend as little of it as possible because they'll hang onto it as long as they can." An excellent point, if it were true. In fact it's the complete opposite of the truth. The long-term unemployed tend to have bills, debts, and all manner of pushed-back expenses. In other words, they are going to spend that money. They have no other choice. Spending that money is what keeps their heat on, their bellies full (or at least half-full, but they might see it as half-empty), and themselves in their homes. So the Congressman is 180 degrees wrong on this. Earlier he said that any extension must also be linked to tax cuts. Why? Well surely it cannot be to hope for trickle-down spending, since the wealthy have a habit of saving their money. Does he want it for investment? In the long term, investment would make sense, but in the short term, who is going to invest in a business if there's no demand for products? Maybe there would be more demand if people were spending money...

White flight, anti-redlining, and the mortgage crisis

I had planned to start this post with the popular story, that the Community Reinvestment Act caused the mortgage crisis. The general story goes something like this: in the name of equality CRA forced banks to give mortgages to people who couldn't pay them back, leading to a surge in home prices out of proportion with income and inflation, peaking with the bubble that we just saw burst. And somewhere I'd seen the graph of home prices, incomes, and when CRA was enacted. It all fit. So obviously I had to prove it wrong.

So please accept this strange assumption: let's assume that the narrative which I disagree with is based on facts, but draws the wrong inferences.

Cancel that, this works. Sort of. It places the bubble at around 1995. But that doesn't fit the data so well. Let's not let facts get in the way of our opponents. Oh the comment makes me laugh.

Let's look at the other side of racism in real estate: where you can buy a home. Once upon a time people would write and accept contracts which stated that they would not resell the home to black people. This was an effective way of keeping white neighborhoods white. At about the same time that CRA went up, so did segregation contracts become illegal. Combine that with legislation for race-neutral lending, and suddenly black people can move into white neighborhoods.

If they can afford it. In fact there was not a flood of poor, uneducated, criminal blacks to white neighborhoods. Instead the black middle class, who wanted to go somewhere better and to get out of that mess, they moved. But why didn't they move to good black areas? Well, there weren't a whole lot, since race-based lending tends to bring down the middle class along with the poor who they are stereotyped with.

But white residents weren't entirely clear on the "middle class black people will not rape your daughter and rob your house while smoke pot" thing. So they left. Simple supply and demand, even without any discounting due to urgency, will drive down prices. That allows a lower class of black people to move in, driving down prices even more, bringing in more, and so on. Meanwhile the middle class blacks see that the neighborhood has gone to shit, so they leave too.

On the surface this would appear to cause prices to drop. On the contrary, it's actually a perfect scenario for both oversupply and higher prices.

Moving out means a new home, driving construction. There's also a rush, meaning the new houses will cost more. Meanwhile in the previous neighborhood the home values are plummeting, after they have been bought, resulting in upside down mortgages. Walk away from that and buy a new house.

Why would the banks give loans for this? Well sure the white people might seem to be overpaying and rushing, but they're responsible middle-class people who have been paying off their loans and have savings accounts and whatnot, so it would seem to make sense to loan money to them. The black middle class, well it is black, but it's middle class and they can't legally discriminate. As for the poor coming after, everything is so cheap, there's nowhere to go but up. It helps when you can just mislabel and sell off the loans if they don't look as good as expected.

So a wave goes out from the city, driving prices up at the front, crashing them behind, and creating the Alice in Wonderland scenario of overpriced homes, oversupply of homes, and a whole lot of unoccupied places.

This shouldn't be taken as factual, and hopefully hasn't, but just as a "maybe this is it?" theory. I'll have to do some more digging to see if it's actually worth anything.

The efficiency of the market and Nazis

Godwin makes everything better.

It is often claimed the the free market produces the most efficient distribution of resources. There are many ways to criticize this, but I will choose two: Nazis and happiness.

Efficiency as an end in itself
There is something seductive about efficiency. It draws you in. It's almost like the thrill of an action movie, explosions and guns and no point at all. There's where the problem comes in: What is the point of efficiency? By itself it is nothing; a tool at most. Tools are useless without something to work on and are terrible is used for the wrong purpose.

Enter the Nazis. They were efficient in many tasks. Such as killing millions of people. Despite the hyping up of health care, Obama's death panels would have a hard time killing millions of people in less than a decade. No matter how many Hitler mustaches and swastikas you paint on him, he is not as efficient as the Nazis.

The Holocaust was efficient, but clearly, efficiency itself is not a noble cause. In contrast modern factories are very efficient and that let's us all (exclude those who are excluded) have a higher standard of living. That is good. But again, efficiency in itself is not good. Instead what matters is the purpose of the efficiency. What goal does the market have? That goal is the true measure of it, not its efficiency.

Efficient happiness
The market produces optimal distribution of goods by allowing us to maximize our happiness through rational exchanges of goods and products. Right? Well that depends on what you're measuring.

If we are looking for the total happiness in the world, then huge gains would be made if you were half as wealthy and that was divided up among the poor. This isn't due to some socialist enlightenment or freedom from materialism. It's simple diminishing returns. Having a car, house, refrigerator, and computer will yield a huge gain in happiness compared to not having those. Spend that amount again fora bigger house, better food in the fridge, and faster computer and you won't have double the happiness. In fact, you're likely to have less, due to additional stress from work and financial strains to afford the luxuries. In terms of arbitrary numbers, it's a case of 100+5+5+5+5+5+5+5+5+5 being less than 90+10+10+10+10+10+10.

If we are looking for individual happiness, well then the free market works very well if you're on the 100 side of the addition, less so on the 5 side.

You are bad and should feel bad
Individual happiness and total happiness are different measures and are unlikely to be reconciled, unless one thing changes: tie individual happiness to total happiness. In other words, give rich people a huge guilt trip.

That's not likely to happen. If someone doesn't feel guilty about corporate policies that cause pandas to be killed by orphan child soldiers, what could possibly cause them to feel guilty?