Michael B. Duff

Lubbock's answer to a question no one asked

Archive for December 2010

Tax cuts won’t solve the problem

Republicans are celebrating (prematurely) now that Obama seems to be on board with preserving the Bush tax cuts.

I believe that tax cuts are always good, but doing something good for the economy is not the same as fixing the economy.

A friend of mine said recently that Keynesianism is a religion. Paul Krugman is using an unfalsifiable argument when he defends money printing and government stimulus. Sure, our predictions were wrong and unemployment is getting worse instead of better, but imagine how bad it would have been if we had done nothing.

Now Republicans are in exactly the same boat with tax cuts. Obama has called their bluff. They got what they wanted and preserved tax cuts for the “rich,” but what if the economy doesn’t improve?

What will the Republicans say? “Well sure, our predictions were wrong and unemployment is getting worse, but imagine how bad it would have been if we had let those tax cuts expire.”

Same unfalsifiable argument, same blind faith.

Tax cuts are really just another kind of stimulus. You can argue that private stimulus is more effective than government stimulus but even if we grant that, it misses the point.

The economy is not struggling because we lack “liquidity.” Demand for credit is going down, not up. There’s no monetary “shortage” out there. The problem is malinvestment. The succession of bubbles we’ve had in tech stocks, real estate, and bond markets have shifted the focus of the economy to things that cannot produce sustainable profits.

We have too many construction workers, too many bureaucrats and far, far too many real estate and finance professionals performing jobs that do not generate real wealth.

We have to regroup, refocus and retrain. Trillions in bad debt needs to be recognized, restructured and discharged. Hundreds of banks need to fail, thousands of mortgages need to be discharged and hundreds of executives on Wall Street need to go to jail.

Tax cuts are great, but tax cuts can not fix the fundamental problems with this economy.

Picture the economy as a big bucket with a small hole in the bottom. You’ve got a water hose that represents cash — money, liquidity, stimulus, tax cuts, whatever. Good investment stays in the bucket and raises the water level, bad investment leaks out of the hole.

You notice the water level in your bucket going down and you panic. You grab the hose and sure enough, the water level rises again, as long as you keep pouring water/cash into the bucket. But this action does nothing to patch the hole. You’re still leaking money out the bottom. In fact, when you add money into the system, velocity increases and the leak gets worse.

Congress comes along and has to make a choice. Are we going to let these tax cuts expire and reduce the flow of water into the bucket, or are we going to let things continue as they are?

Expiring the tax cuts would hurt the economy, i.e. reduce the total amount of water in the bucket, but they would also reduce the amount of bad investment leaking out the bottom. Allowing the tax cuts to continue will preserve the current rate of flow into the economy, but will do nothing to fix the fundamental problem.

Somebody needs to stand up and shout, “Hey! You’ve got a hole in that bucket!” and find a way to patch it. (In real life, this person is Ron Paul.)

But instead of listening to these people, politicians are arguing amongst themselves. Republicans say, “We need to cut taxes and pour hot water into the economy!” Democrats say, “The government needs to spend more and pour cold water into the economy!”

The only time they agree is when they get together on TV to shout, “Shut up, you idiots! The bucket’s fine! We’re just not getting enough water from the hose!”

This is the basic premise of the Austrian Business Cycle. Our efforts to patch the bucket may disrupt things and lower the total water level for a time, but the whole system will be healthier when we’re done. The repairs will be messy, but the repaired bucket will hold more water in the long run.

So no, I’m not expecting tax cuts to fix the economy. Honestly, I was hoping the Democrats would repeal them. This would serve two purposes. First, it would cause a surge in unemployment and provide evidence that tax cuts for the rich finance jobs for the poor. And second, they would force a lot of marginal companies to go bankrupt and help deflate the stock bubble on Wall Street.

We’re at the point where we must abandon our current tasks so we can focus our attention on better ones. Cutting interest rates and preserving the tax cuts encourages people to stick with the (failed) course they’re currently on.

A tax increase could provide a much-needed reality check to people who are currently addicted to easy money, reducing the “water level” so much, ordinary voters might even notice the hole in the bucket.

It’s a uniquely perverse way of looking at tax policy, but this is the world we live in.

So what should we do? Increase interest rates and stop the crazy flow of money that is making this problem worse. Free money from the Fed is encouraging all kinds of distortions in the market, to the point of rewarding blatant corruption. It must be stopped before things can get better.

The question is, will we stop it voluntarily, or will we have sanity imposed upon us, by a bond market that doesn’t believe our promises anymore?

Written by Not Jaffo

December 11, 2010 at 00:00

Posted in Politics

links for 2010-12-10

Written by Not Jaffo

December 10, 2010 at 23:21

Posted in Uncategorized

links for 2010-12-09

  • Presents Austrian economics to high school students using "mainstream" language that will prepare them for college.
  • Operation Payback is facing a little payback of its own. First Twitter closed the pro-Wikileaks hacker movement's account. And now we hear the Feds are shutting down some online discussion of Operation Payback attacks.
  • "The last time my father left, for real this time, the legal document that came to define our relationship decreed that I had to go there every other weekend. I'm not especially good at being told what to do, by anybody, and neither is he, so when I'd go to the trailer he lived in to angrily serve out my sentence he was rarely ever there. I did what any eighteen year old would do in this situation: I took advantage of his deep roster of top shelf liquor, perused his library of intense VHS erotica, and played darts. I would also take huge stacks of his CDs home to pawn. At the time, I felt like we were more or less coming out even. The upshot of all this, aside from the fact that it makes such a heartwarming Christmas tale, is that I learned Darts is actually a really good game."

Written by Not Jaffo

December 9, 2010 at 23:01

Posted in Uncategorized

links for 2010-12-08

Written by Not Jaffo

December 8, 2010 at 23:01

Posted in Uncategorized

links for 2010-12-06

Written by Not Jaffo

December 6, 2010 at 23:02

Posted in Uncategorized

links for 2010-12-05

  • PayPal has permanently restricted the account used by WikiLeaks due to a violation of the PayPal Acceptable Use Policy, which states that our payment service cannot be used for any activities that encourage, promote, facilitate or instruct others to engage in illegal activity. We’ve notified the account holder of this action.
    (tags: wikileaks)
  • Columbia University’s School of International and Public Affairs, which grooms future diplomats, has confirmed to The Lede that it did send an e-mail to students this week warning them to avoid posting comments online about the leaked diplomatic cables, if they ever hope to work for the State Department.
  • A bank robber held 34 people hostage for more than seven hours in a nationally televised drama that ended when a police sniper crawled through a ventilation duct and shot him in the head, the authorities said. The robber died moments later.
    (tags: crime guns)

Written by Not Jaffo

December 5, 2010 at 23:01

Posted in Uncategorized

links for 2010-12-04

Written by Not Jaffo

December 4, 2010 at 23:01

Posted in Uncategorized

links for 2010-12-03

  • An email to students at Columbia University’s School of International and Public Affairs says: "The documents released during the past few months through Wikileaks are still considered classified documents. [The State Department] recommends that you DO NOT post links to these documents nor make comments on social media sites such as Facebook or through Twitter. Engaging in these activities would call into question your ability to deal with confidential information, which is part of most positions with the federal government."
  • …Gold. The backtested model of shorting gold ahead of NFP has just broken. Margins calls coming in. JPM/Blythe Masters scrambles to prevent an all out rout as the $1,400+ stops are triggered. [Of course, don't expect it to stay at this level. Recently gold has established a pattern of spike and retreat. But the long term trend points to higher prices. Gold responds to world inflation, not just U.S. inflation.]
    (tags: gold economics)
  • Each tree is owned by an identifiable person; none is subject to the theory of the commons. Individual tree-owners rent the leaf crop to other farmers. Thus, a specific individual has an important stake in making sure that the tree is not stripped so bare that it dies. Wood products are a significant portion of an essentially barter economy. All the land is privately held, with the exception of the most-used tracks between villages.
  • Health and wealth plotted over 200 years. MUST SEE. Everyone should watch this and get some perspective on how much technology, economics and trade have improved the world, even in the poorest corners of the globe.
  • I think the democratization of media has come full circle. Bloggers who have spent the last 10 years sneering at the rules and customs of mainstream journalism are having a moment of clarity, as WikiLeaks teaches them about the power of information, and the consequences of indiscriminate publication.
  • Talk to any woman in Moscow, and, regardless of age, education, or income level, she'll have a story of anything from petty infidelity to a parallel family that has existed for decades. Infidelity in Moscow has become "a way of life," as another friend of mine put it—accepted and even expected.
  • When, last year, it was revealed that the Russian navy had set 10 pirates adrift with no navigation aids in the middle of the Indian Ocean, there was little surprise in the shipping world. It's one way of dealing with them.
  • A report by Britain's Maritime Charities Funding Commission in 2007 found that "the provision of leisure, recreation, religious service and communication facilities are better in UK prisons than … on many ships our respondents worked aboard."
  • Every time I question whether the classes I build mean too much organized schooling for the students (I wish I could just trade for their hours in the regular classroom), parents tell me that I’m not the one stealing childhoods — it’s the sports. For a while I didn’t believe it was that bad. But now I’ve witnessed kids with 150 IQs who want to take a math class at MIST Academy reluctantly opt for the sport they’ve played for eight years (because four days of playing just isn’t enough), and then fall from third place to thirteenth place at local math competitions — or to win national awards in the sixth grade, but fail to make the school math team in the eighth grade. And then they don’t know how to catch up with the top students, and rarely do. Nobody tells them what they missed, and by high school there isn’t time left in the day for any but the most absurdly talented and interested students to catch up.
  • Ships always have to pay something to someone, either officially or unofficially. Traversing the canal costs somewhere between seven and 11 cartons of cigarettes in "gifts." Without Marlboro, a dissatisfied pilot or immigration official can have the ship stopped for hours. Unplanned customs inspections, audits, immigration checks, all running up delays and costing money. The cigarettes are cheap in comparison. In some West African ports, I am told, agents and port staff turn up in the bond room with a shopping list. Chocolate, cigarettes, Coke, please.
  • "Our people have grown to look upon this indispensable bridging of the ocean for the supply of our daily food as something no more needing our thoughtful attention than the recurrence of the seasons or the incidence of day or night." Or as the captain might say: Merchant navy, scum of the earth.

Written by Not Jaffo

December 3, 2010 at 23:11

Posted in Uncategorized

links for 2010-12-02

Written by Not Jaffo

December 2, 2010 at 23:01

Posted in Uncategorized

links for 2010-12-01

  • Basically this goes to show just how futile it is to attempt blocking servers in the internet where it takes a few keystrokes to change a client. It also brings up the point of how much further the US will go in its attempt to shut up the internet and ways to bypass such seizures. An interesting analysis out of TorrentFreaks contemplates a BitTorrent based DNS which would make shutting down sites virtually impossible.
  • It seems the days of Wikileaks are over. The Associated Press reports that the website appears to have lost its host. The question now is who will be the next Wikileaks.
    (tags: wikileaks)
  • Somewhere deep inside, you knew you'd end up paying for this didn't you? Notice how quickly the conversation has gone from "bailing out Greece" to "bailing out Europe."
  • Churchill agreed to meet Hitler, who was going to come to see him in his hotel in Munich, and said to the intermediary: "There are a few questions you might like to put to him, which can be the basis of our discussion when we meet." Among them was the following question: "What is the sense of being against a man simply because of his birth? How can any man help how he is born?"
  • "Let me tell you something. You can't write like Hunter S. Thompson unless you are perfectly willing to be cremated and have your ashes blown out of a cannon, or better yet have your remains eaten by a cephalopod of some sort. And thus, when all is said and written, we are left with nothing in Griftopia but the facts in each chapter."
  • The 'reflexivity' de Grauwe worries about is at least in part a function of the embedded moral hazard of the implied guarantees for bondholders. So far they have been told: 'No matter how foolish the risks you have taken, there are always millions of tax cows we can and will milk on your behalf'.
  • When people start to doubt your ability to pay money back, it costs more to borrow it. That means more and more of your current revenue must be spend on debt interest. Expect the European Central Bank to jump in soon and start buying these with printed money, driving the rates down but decreasing the value of the Euro. The trap is slowly closing on them now.
  • This scene is a total deconstruction of the Luke Skywalker/Darth Vader battle, done in a way that perfectly captures the postmodern twists you get with modern roleplaying. Every roleplaying campaign in the world ends up like this. You start with carefully crafted archetypes to tell a classic story, then one smartass goes postmodern on you and refuses to play by the rules. Only this time, the NPC has gone pomo and the hero is still trying to play by the rules.
  • Assange is now wanted by Interpol in connection with a rape allegation. He is in an "undisclosed location." Given the world's track record at finding notorious fugitives in the last 10 years, I suspect he is the safest person in the world, as long as he's in Pakistan.
  • "Secrecy is a form of power. The gaze is a form of power. In a healthy democracy, ordinary citizens should have some measure of both in all aspects of their lives. The WikiLeaks cablegate helps to restore the balance between government and people."
    (tags: wikileaks)
  • This is actually rather poignant and disturbing, but it makes an excellent point. In most cases, medical recovery is not so much a "positive attitude" as it is just not surrendering to despair while you wait for the science to work. The "positive attitude" stuff makes it sound like you should be all fake smiles and brave faces, denying any real fear or sadness so people will think you're brave. Fuck brave.

Written by Not Jaffo

December 1, 2010 at 23:01

Posted in Uncategorized

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