Category Archives: Economics

Recession: A Bit of Context

Posted on December 31, 2008 | Comments Off on Recession: A Bit of Context

The Bureau of Economic Analysis recently revised its third quarter growth estimate to -0.5%. They will release the fourth quarter figures on January 30. If they are negative, as is widely expected, GDP growth for the whole year may well go negative, too.

By my calculations from BEA data, all it will take (for real GDP, not nominal) is -0.79% growth. Well within the realm of possibility.

What would this mean? Even in these hard times, the American economy will still record the second-highest real GDP in human history. For any country. In any time period. Ever. And this in a recession! Remarkable.

Times are tough, to be sure. But they’re not nearly as bad as most people believe.

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Posted in Business Cycles, Economics

Buying Local

Posted on December 29, 2008 | Comments Off on Buying Local

While I was away in Wisconsin, The American Spectator Online ran a column I wrote about buying local. The astute reader will hear echoes of I, Pencil.

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Posted in Economics, Publications, Trade

Three Million Jobs?

Posted on December 20, 2008 | Comments Off on Three Million Jobs?

President-elect Obama is now promising to create three million jobs. He had earlier promised 2.5 million.

If successful, Obama would become the first president in U.S. history to create even a single job.

He forgets that his plan has opportunity costs. It can redirect wealth. But it won’t be creating wealth. Every worker screwing in energy-efficient light bulbs is a worker that can’t be doing something else. The money used to pay these workers’ salaries must be taken out of the economy before it can be put back into it.

These jobs will be touted in press releases and the evening news, of course. But don’t expect very many people to point out that they will not actually be new jobs. Just different jobs.

Much of the necessary spending will be financed by debt. Every dollar lent by investors to the government is a dollar that now cannot be used for private investment. Obama’s program cannot create new opportunities on net. It will crowd out other opportunities.

There is plenty that Obama can do to make it easier for others to create jobs. Regulatory compliance costs are now higher than Canada’s entire 2004 GDP, for example. Identifying regulations that hurt more than they help — and repealing them — could do a world of good. But no president can create a job. By the very nature of government, the president must taketh away before he can giveth.

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Posted in Economics, Political Animals, Stimulus

Make-Work Bias

Posted on December 18, 2008 | Comments Off on Make-Work Bias

Politicians always talk about creating jobs. It is a borderline obsession, especially in these troubled times. Their fixation is an old one – a really old one.

How old? The Roman historian Suetonius wrote of the emperor Vespasian in 117 A.D.(!):

To a mechanical engineer, who promised to transport some heavy columns to the Capitol at small expense, he gave no mean reward for his inventions, but refused to make use of it, saying: “You must let me feed my poor commons.” (Lives of the Caesars, Book VIII, Chapter XVIII)

Vespasian made a common mistake. Had he used the labor saving device, he would have had his columns and another project besides. Instead, he got only the columns. Saving labor doesn’t reduce employment. It creates new employment opportunities.

Today’s politicians are getting set to make the same old mistake with their own public works programs.

So it goes.

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Posted in Economics, Great Thinkers, History

More on Mortgages

Posted on December 17, 2008 | Comments Off on More on Mortgages

Just sent this to the Wall Street Journal:

December 17, 2008

Editor, The Wall Street Journal
200 Liberty Street
New York, NY 10281

To the Editor:

R. Glenn Hubbard and Christopher J. Mayer look with alarm at the decline in housing prices (“Low-Interest Mortgages Are the Answer,” December 17).

Two thoughts: First, why is it acceptable for housing prices to go up, but not down? If Hubbard and Mayer want increased homeownership, they should cheer for lower prices. The law of demand states that when something is cheap, people buy more of it.

Second, artificially tinkering with mortgage interest rates will not change the underlying realities of supply and demand. Existing Hubbard-Mayer-style interventions such as Fannie Mae already induce consumers to take on loans they can’t afford. Too much borrowing is one cause of the current economic slowdown. The solution is not to borrow even more.

If this is the state of expert opinion, then experts should be kept as far away from policy makers as possible.

Ryan Young

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Posted in Correspondence, Economics

In Which Basic Irony Goes Undetected

Posted on December 17, 2008 | Comments Off on In Which Basic Irony Goes Undetected

L. Glenn Hubbard used to be the chief of President Bush’s Council of Economic Advisers. In today’s Wall Street Journal, he and co-author Christopher Mayer worry that “without policy action house prices are likely to continue falling.”

As someone who would like to own a home someday, I might argue that low housing prices are not necessarily a bad thing. Is there any compelling reason why it’s ok for housing prices to go up, but not down?

This of course, is only the beginning of the article.

They go on to encourage lenders to offer sweetheart mortgage rates to people who may not purchase homes under normal market conditions.

Think about what happened the last time the industry did this. This is terrible advice!

Our economic troubles were caused in part from borrowing too much. The Hubbard and Mayer solution is to borrow even more. They say this without any trace of irony.

It is becoming easier to understand why so many of President Bush’s economic policies were so misguided. With advisers like Hubbard, who needs enemies?

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Posted in Business Cycles, Economics

Broken Windows, Broken Logic

Posted on December 16, 2008 | Comments Off on Broken Windows, Broken Logic

My colleague Drew Tidwell and I just sent the following letter to Time:

To the editor:

Michael Kinsley’s latest missive in Time falls prey to one of the oldest traps in economics — Bastiat’s broken window fallacy. Kinsley begins, “Oil prices are low. Too low. Let’s finally impose a big energy tax and use the windfall to help create jobs.”

The problem is that an energy tax cannot create new jobs. Just different ones. The money Kinsley hopes to inject into the economy must first be taken out of it. Add in collection costs and the usual political malfeasance, and we have a net loss to the economy.

There’s more.

Kinsley argues that last summer’s high oil prices were essentially a “tax” on consumers. The money just went to oil companies instead of government. But he forgets that oil companies do not have control over their prices. If they did, then why would oil prices ever drop? Kinsley’s logic does not follow.

Ryan Young and Drew Tidwell
Competitive Enterprise Institute
Washington, DC

The rest of the piece is similarly incoherent.

(cross-posted at Open Market)

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Posted in Economics

The Economics of Christmas

Posted on December 16, 2008 | Comments Off on The Economics of Christmas

Over at the The American Spectator Online, this grinch tries to find some holiday cheer.

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Posted in Economics, Publications

Creating Jobs

Posted on December 6, 2008 | Comments Off on Creating Jobs

President-elect Obama has a plan to create 2.5 million jobs over the next two years.

One of his ideas is to install energy-efficient light bulbs in federal office buildings.

In other words, we’re about to find out exactly how many federal employees it takes to screw in a light bulb.

My guess: a lot.

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Posted in Economics, Executive Power, General Foolishness, Political Animals

Coffee and Economics: Together at Last

Posted on December 5, 2008 | Comments Off on Coffee and Economics: Together at Last

My friend and former colleague Jacob Grier wrote an excellent article for Doublethink about coffee. Jacob traces the rise of Starbucks and its recent troubles from smaller — many would say better — competition.

It’s worth a read. Jacob knows his stuff. But he doesn’t look down on people who don’t. As someone who typically orders “regular old coffee, please” and stubbornly clings to antiquated Small, Medium, and Large sizes, this is appreciated. Good coffee, and good economics to boot. Much to be learned.

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Posted in Economics