Do the Math: The Second Great Depression

I’ve posted versions of all of these charts here at one point or another, but it’s nice to have them all in one place to give a full picture of the Second Great Depression that we are currently in. What these numbers show is that the Obama “Recovery” is the worst post-recession period since the Great Depression, and is the second-worst post-recession period in American history. This is quantified through a number of measures:

• This is the worst post-recession job growth since the Great Depression.
• This is the worst post-recession GDP growth since the Great Depression.
• The unemployment rate has only improved through people dropping out of the workforce. If you include those people, we’re worse off than we were at the peak of the depression. The Keynesian models have been tested and proven to fail.
• To get a true measure of how many jobs are out there, we need to look at the civilian employment ratio. This number has been fully stagnant since Obama’s “Recovery” began.
• And of course, we can actually show how many people are dropping out of the workforce by looking at the labor force participation rate. It’s dropping very fast. Under Obama’s policies, we’re becoming a nation of government dependence with a large permanent welfare class.

I’m surprised they didn’t include a graph showing the declining median incomes as well, but that would be implied by the persistently high unemployment.

It’s time to face the facts. Obama has brought our country into a new Great Depression. America has been losing its economic strength, its prevalence of opportunity, and its philosophy of individual achievement under Obama. Franklin Roosevelt’s original experiment in Keynesianism, the New Deal, led to an era of economic stagnation and financial hardship. Now, Obama has repeated the experiment with his stimulus and “New Economic Patriotism” plan, and achieved the same results. The conclusion we can draw from this should now be very clear: Trickle-Down Government is not the solution to recessions. It only draws them out and increases hardship for everyone while forcing us to pay off its debts in the future.

To encourage rapid recoveries from recessions, we need to restore the free-market focus of our economy. There are millions of innovators and entrepreneurs out there who want to start businesses and create jobs, but can’t because of the maze of regulations, licensing laws, labor laws, government fees, taxes, and incentives not to work that threaten to crush their attempts. Additionally, their large competitors are all receiving government assistance, making it impossible for a new business to compete.

Let’s get the government out of the business of picking winners and losers in the economy. As Mitt Romney pointed out in his first presidential debate, Obama has a habit of only picking losers, simply because the winners don’t need any help. That’s how we end up with such monumentally expensive failures like Solyndra and the Chevy Volt. The government should not be using taxpayer money to invest- let us keep our money so that WE can choose where to invest it. We know better how to handle our own money than the government does. Romney made an excellent case for his election when he demonstrated that he understood this.

Obama claims to believe in the free market, but every policy he seeks to enact seeks to restrain the markets and put more of its resources in his own personal control. This is the path to national failure.
It’s time to get the failures out of office and replace them with people who actually trust the capabilities of the general public to make their own investments without the government being an eternal middleman. Through liberty, we can return to the path of rising prosperity.

The Dangers of Debt

The central theory of Keynesian economics is that markets can be stabilized by borrowing and spending heavily during recessions and paying it off during boom periods. However, one of the major problems with this idea is that it completely ignores the risk associated with credit.

According to a new analysis of the Great Recession, the countries that were hit the hardest were those with the most aggregate debt (private + public debt).

Maybe this should be obvious, considering how this economic crash was termed a “credit crisis,” but now we have a definitive picture linking the collapse of the mortgage market (which I’ve already explained in great detail, countless times) to the collapse of the rest of the economy.

Basically, the CRA created a housing and mortgage bubble, which was popped by the Federal Reserve spiking lending interest rates. Normally, such a pop would be dissipated by the strength of the rest of the economy, and this is what Alan Greenspan has admitted he was counting on when he deliberately popped that bubble. However, it turns out there was another, more pervasive weakness in the economy: excessive debt due to at least 7 years of Keynesian stimulus. During the 2001 recession, Bush started a comprehensive Keynesian stimulus plan, including tax credits, stimulus spending, and lowered Fed rates. Even though actual economic recovery didn’t begin until the 2003 tax cuts were implemented, the debt-feeding Keynesian machine continued until 2006.

This is important, because it’s an example of Keynesian policy being implemented exactly as Keynes intended: inflationary stimulus during recessions, with deflationary debt-paying during bubbles. But rather than leveling out the booms and the busts, this policy merely resulted in a new bust being primed by excessive debt, hitting us even harder and faster than the last one.

Suppose you’re trying to walk while holding a glass of water. Keynesian stimulus is like trying to run exactly as fast as the oscillation of the water, so that you can move faster while your rhythm cancels out the waves in your cup. It doesn’t work. You just end up with water all over you.

With this in mind, we should be very worried about the economy in the near future. We’ve now racked up more debt than ever before with the latest round of unprecedentedly large Keynesian stimulus. We even bailed out a lot of the companies that failed last time, so that they’ll be around to fail next time too. It is absolute insanity that we’ve set ourselves up for yet another major recession like this.

Tinkering around with the economy through debt the way Keynes suggested is never safe, and therefore not a responsible approach for a national economy. We need to undo the damage that has been done and reduce our spending and debt levels, or suffer further economic collapse in the very near future.

The End of an Era

I found an amazing article that perfectly describes the current state of political dialogue.

The one thing that people of all political colors can agree on is that we have some serious economic and fiscal problems to work out. The question of “how” is where the disagreement begins.

Ask Paul Krugman or Barak Obama, and they’ll both say we just need to spend more. We just need to put more money into the services and programs that are failing, and then they will have enough resources to provide a good product. We just need to modify the regulations a bit, tighten them here and there, force everyone to do things in a better way, and then we’ll have control over our economy. But the thing is, the progressives haven’t had a new idea in 75 years.

Our education system sucks, and they say we need to increase spending, but that’s what we’ve been doing. It doesn’t work.

Our infrastructure is falling apart, our big cities are in decline, and they say we just need to increase spending, but that’s what we’ve been doing. It doesn’t work.

Our health care system sucks, and they say we just need to increase government control of it, and then we won’t be wasting so much money on competitive profit-based system. It doesn’t work.

The thing is, a lot of smart people like Krugman just can’t seem to accept these simple, hard facts. They can’t get their heads out of the overly simplistic thought constructions of “more spending => better products” and “more control => better engineering.” They’re stuck. But when we reach a point where even the simplest, most widely-held ideas like “increasing educational spending increases education,” turn out to be wrong, a new kind of thinking is required.

The thing is, when it comes to something as complicated and reactionary as an economy, evolutionary development is far superior to rational design. It’s impossible for anyone to ever be sure of what the economy needs at all levels of organization. More often then not, our elected leaders will be wrong about something in their attempts to rationally design a well-engineered economy. It doesn’t matter what party they’re in- it’s just a fact of chaotic complexity that it cannot be fully understood with perfect predictive power.

Consider the example of the horse-drawn carriage in the article I linked to. If you rationally design every part equally well, then when something goes wrong in a way that would destroy one part, all the parts will have the same chance of breaking, and you’re in danger of a total collapse. On the other hand, consider evolutionary development. If one part fails, it is soon replaced by something else which can do the job better. Big crises pose less threat to a system which is more adaptable and capable of recovery.

It all comes down to this simple phrase: If we all live in the same way, then when crisis hits, we will all fail in the same way.

Hence, we should completely decentralize control over economic decisions. Take the government out of the economy. Let the economy evolve on its own. When one business fails, it will have little impact on other businesses which are doing things completely differently. And those businesses which survive will learn from the mistakes of the failed ones, and continue on with their own more successful business model. This is how the economy evolves to become stronger.

The same is true on an individual level. When one individual fails, everyone learns from it. They all continue on, having a better idea of what the correct decisions are. The entire community of individuals adapts to its needs. We don’t need a military-backed government to impose a certain lifestyle. That only harms innovative adaptability. We can choose our own lifestyles, and the entire community will benefit if one of us finds a new formula to success.

We’re at the end of the era of progressive thinking. It’s time to move on to something better- something that actually works. This new decentralized economy- this is the face of the new era.

The Myth That the Bush Tax Cuts Are Causing the Deficit…

I’ve said it time and time again:

• Deficit == Spending – Revenue
• Revenue == f(GDP); Revenue =/= f(tax rates)
• Therefore, the federal deficit is a problem with spending, not with too-low tax rates.

And here I have yet another graph to beautifully illustrate this point.

See that? Tax receipts drop with recessions, and actually rise after the passage of the Bush tax cuts. We can’t ever match the current spending trajectory in revenue by raising tax rates, because tax receipts in the US max out around 20% (Hauser’s Law).

I know I probably sound pedantic, but at this point, it’s just absurd that people keep clinging to the ignorant notion that tax cuts “add cost,” when in fact they simply don’t. Counter-intuitively, tax cuts can even reduce the deficit if they allow the GDP to grow more rapidly. It’s called the Laffer Curve, and the evidence clearly demonstrates that we are still at the high end of it.

Game over. Tax cuts and spending cuts win. Either you agree, or you’re ignoring the MOUNTAINS AND MOUNTAINS of counterexamples against whatever pseudoeconomic philosophy you claim to follow.

Paul Krugman on the Economy

His message: Even after everything we’ve been doing to help the economy over the past 3 years, the economy is still suffering. The recovery isn’t working so well. So, let’s keep doing exactly what we’ve been doing.

In other words, we’re not out of the hole we’ve dug for ourselves yet, so let’s keep digging deeper.

Thus is demonstrated the cognitive disconnect of this so-highly cited economist. Remember this the next time someone cites Krugman in defense of government control over the economy.

On Tax Policy

During a debate on tax policy, someone made this comment:

A tiny tax increase on a small percentage of the population is not “overruling the will of the individuals and satisfying governmental priorities.” It’s sane fiscal policy, and it used to be perfectly acceptable before lunatics and their useful tools like you took over.

I decided to give a full explanation of why raising taxes to generate revenue doesn’t make sense:

See, based on the fundamentals of economic theory which have stood the test of time over the last 200 years, I disagree that “raising taxes is sane fiscal policy.”

Here, let’s take a step back to a point where we can agree. Sane fiscal policy means collecting more revenue than we spend. Now, I know you’re not particularly fond of reducing spending, so let’s just ignore that option for now and assume that all that spending is absolutely necessary, and is a function of population. Bear with me, because this train of thought will take a little bit to lay out.

So, if we raise taxes on businesses and wealthy individuals, do you think the IRS will collect more revenue in the long run? Hauser’s Law empirically demonstrates that no tax rate in the US, from 28% to 90%, has ever generated revenue exceeding 20% of the GDP. To explain this effect, on a theoretical level, I can point to the Laffer Curve, and on a practical level, I can point to all the different ways by which wealth-creation mechanisms disintegrate in a country where it’s too expensive to do business (outsourcing, expatriation, decreased investment incentives, decreased trade due to the expense, etc.). But regardless of its cause, it’s a safe assumption to say that Hauser’s Law, for whatever reason, cannot be broken.

So, in fiscal year 2009, this country spent $3.518 trillion. The GDP for that year was $14.266 trillion. That means for that year, the government spent 24.66% of the GDP. If we freeze spending at that absolute level (meaning no increases in the dollar amount), we need to raise the GDP at least 25% in order to match revenues to costs without breaking Hauser’s Law. Additionally, the Reagan era showed us that we maintain revenue at the upper limit imposed by Hauser’s Law, even with a 28% top tax rate. Hence, the debate over what will balance the budget (and therefore, the question of what constitutes “sane fiscal policy”) comes down to a matter of what will raise the GDP the quickest, the most efficiently, and the most sustainably. This significantly simplifies our problem.

To answer this question, we have to decide where the wealth should be allocated in order to generate the most new wealth, dollar for dollar. If we raise the tax rate, then we’re putting a larger percentage of the wealth produced by investors and businesses in the hands of the government. If we decrease the tax rate, then we’re leaving a larger percentage of that wealth in the hands of the people who created it. So who is able to more efficiently create new wealth? The government, or the private investors who originally generated that wealth.

To answer this question, we need to consider the mechanism of wealth-generation. The following explanation is what you’ll learn in any introductory economics class. Every time you buy something without being deceived or forced through the threat of violence/incarceration, you are gaining something which is of greater value to you than the price you paid for it. Otherwise, you wouldn’t buy it. Hence, even though you’re giving up monetary wealth, you are becoming more wealthy in the general sense every time you buy something which is worth more to you than its price. Generalize this over the entire population, and you have the basis for wealth generation in an economy. Workers labor for an amount of money which they feel is worth more than their time, and they in turn spend that money on goods and services which are worth even more to them. Likewise, business owners give up a product for a higher price than the sum of the monetary cost and their investment of time. Investors give up their money for a more valuable opportunity to make money later.

What this means is that the more effectively money is being used to satisfy individual desires for value-increasing exchange, the faster the economic growth. Whoever knows an individual’s value system best is going to have the greatest capability to bring wealth to that individual through exchanges. And really, nobody knows a person’s value system better than the person himself. There is no possible way for the government to know more about the values and incentives for trade of the entire populace than the sum total of the individuals within that populace. Thus, every time the government takes money from individuals and spends it, instead of letting the individuals spend it on their own, some people will be less happy than others, and some may even gain negative utility as a result of the exchange. Hence, the government cannot possibly generate wealth off of money faster than the sum total of the individuals if that money is left with them. Friedrich von Hayek got a Nobel Prize for formalizing this idea (known as “The Knowledge Problem“).

Coming back to tax policy, what this means is that taxes higher than 20% (the limit from Hauser’s Law) are self-defeating. You actually decrease revenue if you raise taxes above that threshold for more than one year. On the other hand, the lower the tax rate (i.e. the more money we leave with the individuals in the economy), the faster wealth is generated, and the more efficiently the GDP will grow. This faster GDP growth, in turn, results in higher revenues (as an absolute dollar figure) for the government if you’re still collecting 20% of the GDP. This is what people are talking about when they discuss the “Revenue-Maximizing” and “Growth-Maximizing” points on the Laffer Curve. A flat tax of 20% puts you at the revenue-maximizing point on the Laffer Curve. The growth-maximizing point is somewhere even lower. Then, the fastest way to increase the revenue collected by the IRS (and therefore, by your admission, the sanest fiscal policy) is to set taxes somewhere between the growth-maximizing and revenue-maximizing points. When we need money fast, we should set it at the revenue-maximizing rate. When we are looking more towards long-term prosperity, we should set it closer to the growth-maximizing rate.

So that’s where my stance on tax policy comes from. I hope it sounds rational enough.

Dan Mitchell vs. Austan Goolsbee on Taxes

If you want to see what a debate between a Cato economist and a White House economist looks like, now’s your chance.

Judge for yourself: is Dan Mitchell being fair? Is Goolsbee representing the situation accurately? Who has a better grasp on the effects of tax hikes? Whose message do you buy into more? Is there anything you disagree with that isn’t addressed in this video?

The Teacher Bailouts

I’ve been meaning to write a full piece on the Teacher’s Bailouts for awhile now, because of the clarity with which this scenario demonstrates the corruption of our democratic system. Unfortunately, I just haven’t had the time for it. On the other hand, I have found occasional time to debate the issue on the DeviantArt Politics forum, building up my full argument bit-by-bit in a discussion with one forum-goer who frequently finds reason to disagree with me. In the interest of preserving this content at minimum cost of time, I will reprint a transcript (edited for format only) of the debate here.

Tristan 1: I think you need to study systems of incentives a bit more. You complain about the profit motive of businesses, but what do you think the incentives are for career politicians? If you keep a constant flow of money going from your opponent’s constituency to your own constituency, reelection can be quite easy. This is why special interests are so prominent in our political system. Politicians are literally buying votes with taxpayer money. That’s what the “teacher bailout” was about. Teacher employment had barely dropped at all, but union support for the Democrats had been wavering after a number of failed deals at the beginning of the summer. So the Democrats pass a new bailout bill in a sector that’s seen little hurt in this Depression to bribe back the teacher’s union vote.

Doesn’t that sort of bribery offend you? I mean, with corporations, at least they’re only using their own money, acquired through voluntary exchanges, to promote their agendas. With the government, they’re prying that money out of your hands under the threat of violent force. That right there is the difference between legitimate business and organized crime.

JupiterWave 1: You mean…in a democratic system where voters elect someone who they think will support their interests, the elected official will make attempts to promote those interests? I am shocked! Seriously, this is kind of how democracy works, and here you are treating it as some sort of sinister conspiracy. I really don’t know what to tell you. You’re basically arguing that politicians shouldn’t represent the interests of their constituents, except if those interests are ones you find ideologically acceptable, then it’s a crime not to promote those interests. As far as I’m concerned, this is totalitarian thinking. Tell me-you’re always making these criticisms of democracy as leading to corruption. What sort of system do you have in mind that would prevent such “corruption”? I suspect that the answer is something that will elevate your views on public policy above those of others. That’s what I really hate about you libertarians, you know: you claim to be fighting for freedom, but you have no intentions other than seeing a set of very specific and hopefully immutable policy edicts put into place that coincide with your personal views.

An`d beyond that, I think it’s ridiculous to characterize education as a “special interest.” Special interests are things that benefit a small group of people, often at the expense of others. Educating the next generation of leaders to run the country in upcoming years is about as “public” an interest as I can think of. It serves a massive group of people, and it benefits a massive group of people. This is not to say that our education system never needs reform, even radical reform, but we’re talking about a situation where hundreds thousands of teachers could just be out of a job. It won’t help the cause of reform in any way if school districts go bankrupt. They need to be functioning before they can be reformed. But thanks to plutocrats like Charles Koch and his band of useful idiots like you, we’ve gotten to a point in this country where trying to prevent massive job loss in the middle of a recession is a “bailout”, and politicians looking out for the interests of people that elected them is a “bribe.” It’s depressing. I don’t even know why I’m telling you this, you’re so deep into right-wing propaganda. A fish never notices the water he swims in, I guess.

I mean, as far as I can tell, you just hate teachers. You sure bitch about them a lot. In this post, you’re positively angry at the fact that teacher employment hasn’t dropped much. Any rational person would be happy that a group of people isn’t losing their jobs, as that helps the efforts towards recovery, but you’re just resentful and spiteful. See, here’s the thing: public-sector employees aren’t really getting special treatment. Private sector employee are often getting worse treatment from their employers who have cut labor and benefit costs in pursuit of greater profits. The government hasn’t seen a need to do that, so its employees are treated more humanely. And there was a time when lots more jobs in this country were more similar to public sector jobs in terms of benefits, pensions, etc. But the idea of what a middle-class job should consist of has continually been defined down to the point where public jobs merely look better by comparison. Quite frankly, the way you talk, it’s like you’re mad that not everyone is suffering equally. It’s like you’re involved in a capsized ship, and instead of trying to swim to shore, you’re saying we should go around poking holes in people’s life preservers. Who is helped by this blustery nihilism? What are you trying to accomplish? Making people feel miserable about their job status for the sake of fairness? It’s funny how many of these traits are present in the stereotypical success-hating communist you accuse everyone else of being. I think you’re due for some self-reflection.

This “bribery” doesn’t offend me because it’s not bribery, and you’re stupid to characterize it as such. And it’s not “prying” anything, but you’ve proven yourself too stupid to understand what a social contract is and how it operates, so unless you can show me otherwise I don’t have the patience to start that discussion again.

Tristan 2: I suppose I should provide evidence for my suggestion that this latest round of bailouts was completely unnecessary. This should do it. There is no incentive for this beyond bribery.

JupiterWave 2: I’m not going to look at a defense of an idea that I already consider wrongheaded. It’s not bribery, and you’re wrong to call it that.

Tristan 3: Maybe if you look at the evidence, you won’t consider the arguments based in that evidence wrongheaded…

JupiterWave 3: My opinion isn’t hinging on who gave money to who and when. It’s that this action, giving money to school districts in order to prevent mass layoffs, is fundamentally not a bribe, but a sensible economic action and part of what it means to be a democratically-governed society. It’s not a question of facts, but opinions, and my mind is made up.

Tristan 4: …except no mass layoffs were pending, as you’d know if you looked at the evidence I linked to.

JupiterWave 4: Goddamn dude, just do a search on “teacher layoffs”. You’ll find hundreds of stories. I don’t know how Hot Air tried to twist the facts, nor do I care, but teachers are getting laid off all over the place.

Tristan 5: Those “hundreds” apparently add up to very little, considering how little public school employment has changed. And once again, I ask, why are we even so interested in keeping public school employment so high? Does it help the children, or does it help the unions? The graphs here suggest only the latter.

JupiterWave 5: Source? [in reference to the first part of "Tristan 5"]

We as a society are interested in keeping general employment high because it helps the economy, especially during recessionary periods. I really shouldn’t have to explain this. It’s funny how when a billionaire businessman stubbornly stands his ground on what he considers to be his self-interest, you laud him for fighting the evil government, but when working-class Americans do it, you can’t wait to put them down and accuse them of wrongdoing. And don’t tell me it’s because you’re only paying for the second one. In some way, you’re probably paying for both. I think you just hate poor people.

Tristan 6: Source: Figure 3
The cumulative loss in local government education employment since the start of the recession is a stunning…0.5%.

High employment is useful if it creates value. Usually, we don’t have to consider that “if,” because private employment tends to create value. However, government employment is an entirely different story. As I’ve shown with those other charts, the increase in public education employment has failed to improve the efficiency of production of education. Any business would see this as an indication of the need to downsize, or split the company into separate entities. But not the government. Whereas private enterprise creates jobs where jobs will increase value, government just creates jobs. And the jobs that government creates are at the expense of tax-paying investors, meaning a net loss in value-creating investment.

You see, the mistake that demand-side economists (i.e. Keynesians) make in their models is assuming that high consumer spending creates the most economic growth. Nothing could be further from the truth. Consumer spending is usually an indicator of economic growth (in free-market economies), but the extent to which it causes economic growth is minuscule compared to the effects of the supply-side forces of capital investment. Right now, we have a strong demand market, and yet, the demand is being satisfied mostly through imports because our domestic production economy is still in shock over the new regulations and taxes that will go into effect over the next year. This is what happens when we have a national economic policy of “fuck the supply-side to feed the demand-side.” We will not see employment recover until our domestic production recovers- and don’t even try to suggest protectionist tariffs, because that’s just asking for a second Great Depression. If domestic producers aren’t making anything because of the uncertainty of upcoming regulations, and then we go and try to cut off consumers from imports, then all we’re doing is creating a situation with overwhelmingly high levels of unsatisfied demand. Instead, we need to fix the problems at the source, and undo those regulations if we want to get back on the track of economic recovery.

Paul Krugman

Nobel-prize winning economist Paul Krugman is popularly known for the New York Times columns he writes, using his economics knowledge to lambast spending cuts and attempts to decrease the government’s share in the economy. As such, his writings have become a favorite tool of authoritarians and statists.

However, as of late, Krugman hasn’t been making many friends in the economics community. The supply-side economists who dominate the field today have long-since abandoned the Keynesian theories that Krugman seeks to resurrect. And they don’t take too kindly to his less-than-intellectual dismissal of empirical arguments as “fraud.”

Perplexed by Krugman’s deviation from empirical economics, I decided to do a little research to try to figure out what, exactly, leads him to adhere so passionately to theoretical arguments that are so maligned by his opponents. Here is what I found:

Paul Krugman won his Nobel Prize in 2008 “for his analysis of trade patterns and location of economic activity,” particularly pertaining to the increasing returns to scale and its effect on trade. Basically, he [re]discovered the idea that countries specialize their industries (exporting one thing and importing everything else) primarily because one big entity can provide a product more efficiently than lots of independent small entities. Essentially, he likes monopolies, because they’re efficient.

Krugman has taken his economic theory and allowed it to shape his entire belief system, favoring the government-monopoly systems that are capable of greater efficiency of production than any free-market system. And he’s entirely correct- government monopolies are capable of far more efficiency than free, decentralized markets. But to say so is like saying a gas is “capable” of localizing all in one corner of the room without any force guiding it. Technically true- but it will never happen.

Like the physicist who disregards entropy, Paul Krugman’s entire belief system ignores the eternally disruptive force of human incentive. You see, monopolies have the potential to be efficient, but never are, because all incentive to do what’s good for the customer is lifted. In market economies, that generally means prices rise as customers cannot turn to competitors for a better deal. In government economies, that means costs rise and economies stagnate, as there is no incentive to improve services. Efficiency is thrown out the window, because, even though it’s achievable, there’s no reason to invest the time and effort into pursuing it on a fundamental level. In government, this means greater corruption, higher debts, and failed services resulting in extensive squalor.

In this context, it really makes sense why Krugman would toss out any empiricism that his opponents try to bring into discussions. The effects of human incentive are inherent in every economics experiment. This is why economists (and the governments that rely on them) are so bad at prediction- you need to know something about human psychology (and have a good feel for it) before you can understand how a market will react to an impulse. This is something which Krugman’s machine-like theories just don’t address.

And that is why Nobel Prize-winning economist Paul Krugman is wrong…again (and again, and again, and again…).