Coyote Blog

Kevin Drum is back on his "because Republicans won't agree to more massive deficit spending, they must be purposefully trying to destroy the economy."   Literally.  He translates Republican opposition to Obama's proposed stimulus packages as being explained by this strategy:

Basically, the Republican strategy for the past three years has been this:

1. Do everything humanly possible to prevent the economy from recovering.
2. Wait for 2012.
3. Run a campaign focused on the fact that the economy is lousy.

This is such a shabby bit of false logic it is amazing anyone even attempts this any more, or more accurately, it's amazing that folks continue to buy it.  Is it really so impossible to believe that there are actually people of goodwill who wish to see the economy improve but disagree with Drum and Obama as to the correct course to achieve that?  Apparently not  (I suppose the last stimulus was so wildly succesful that it is impossible to doubt the success of another trillion or so of deficit spending?)

The irony is that for some reason I simply cannot fathom, from a political tactics point of view, he points to this chart when talking about Truman and his "do-nothing" Congress:

He's is trying to make some political tactical point, but he is so blinded by his own assumptions that he misses the real point -- that the American economy grew at records rates through a "do-nothing" Congress.  Now, I suppose Drum might argue that this was an accident of timing, but in fact Truman inherited what should have been, by Drum's Keynesian thinking, the worst economic situation ever since an enormous amount of government spending was going away after the war and new workers were simultaneously flooding back into the job market.  If any time in recent history should have demanded Keynesian stimulus, this was it, and yet a do-nothing Congress led to a massive expansion.  Hmmmm.

Swiss government bonds are trading at rates that imply a negative interest rate.  The German government is issuing bonds with interest rates of zero that are actually trading above face value.

This is really bad news.  Investing in these securities is effectively the equivalent of putting money in one's mattress -- it means that investors don't perceive any money-making uses for their money better than paying paying financially strong governments to keep it safe for a while.   I am far from an expert on banking regulations, but my first guess on this is that this is at least in part a function of bank capital requirements that effectively require banks to put a lot of cash into government securities no matter how bad the return.

Germany and Switzerland certainly are providing some value in creating a safe haven for capital, but I wonder if in the long-run this is anything but destructive, shifting wealth and investment out of the private economy and into investments with no return.

I have been reading of late some histories of Germany in the 1930's, with a particular emphasis on racial laws and policy.   Over time the expanding bans on Jewish participation in the economy and society as well as preferences given to non-Jews for government jobs led to some practical problems, including:

• What percentage of Jewish blood made one Jewish?  The Nazis messed around with this problem a long time, in part because of Hitler's absolute reluctance to get involved in such details.  Was it one grandparent?  Three grandparents?
• How does one test for such things?  In the thirties, there was an boom in geneology research in Germany, as everyone raced around trying to figure out what evidence was sufficient to establish someone's race

It would be nice to think we put this kind of thing to bed, but here we are in the 21st century running around trying to answer the exact same questions

• Does 1/32 Cherokee blood make Elizabeth Warren the member of a protected group?  Does 1/8 black blood mean George Zimmerman is not a racist?
• We are building infrastructures to make rulings on race.  I found this story amazing

This story reminded me of the 1980s case of the twin red-haired Boston firefighters who claimed to be black, based on a photo of a great-grandmother and alleged oral history. While I remembered that they had gotten fired for their alleged fraud, I didn’t remember this detail:

Under current rules, said [general counsel to the state personnel office] Ms. Dale, candidates who say they are members of minority groups are judged by appearance, documented personal history and identification with a minority community. Disputes over claims of minority status are resolved by the Department of Personnel Administration.

 And indeed, there eventually was a two-day administrative hearing, in which the hearing officer determined that the twins failed all three criteria, and thus were not black. A judge upheld the ruling, finding that the twins had claimed minority status in bad faith.I have to admit being under the impression until now that as a legal matter, minority status was an in issue of self-reporting. But at least in the Massachusetts Civil Service system, one can get fired for “racial fraud.”

• Every year, in the name of some sort of racial harmony, I have to sit down and report to the government on the race of each of my employees.  For 364 days a year I can ignore the race of my employees, but one day a year the government makes me wallow in it.  Here are part of the instructions:

Self-identification is the preferred method of identifying the race and ethnic information necessary for the EEO-1 report. Employers are required to attempt to allow employees to use self-identification to complete the EEO-1 report. If an employee declines to self-identify, employment records or observer identification may be used.

Where records are maintained, it is recommended that they be kept separately from the employees basic personnel file or other records available to those responsible for personnel decisions.

Race and ethnic designations as used by the Equal Employment Opportunity Commission do not denote scientific definitions of anthropological origins.

I am told we are trying to create a society free of racism, but the results sure look a lot like racism to me.

I will fight when my liberty is truly threatened.  But I have absolutely no trust in politicians to determine when this is the case.

Which is why my reaction to this is, Oh Crap!

I am sure it is a total coincidence that, after 35 years of butting heads with Iran, this is occurring during a sputtering economy and within months of a Presidential election.

PS-  I watched Wag the Dog the other night.  Every time Dustin Hoffman said "he f*cked a Firefly girl" all I could think of was Gina Torres, Morena Baccarin, Jewel Staite, and Summer Glau.  Well worth losing the Presidency for.

Do you ever wonder exactly what problem this Administration is trying to fix, beyond their bureaucrats' concerns that there is some corner of the economy over which they don't have authority?

A proposal from the Obama administration to prevent children from doing farm chores has drawn plenty of criticism from rural-district members of Congress. But now it’s attracting barbs from farm kids themselves.

The Department of Labor is poised to put the finishing touches on a rule that would apply child-labor laws to children working on family farms, prohibiting them from performing a list of jobs on their own families’ land. ...

The new regulations, first proposed August 31 by Labor Secretary Hilda Solis, would also revoke the government’s approval of safety training and certification taught by independent groups like 4-H and FFA, replacing them instead with a 90-hour federal government training course.

Change:  We won't satisfied until every single American reaches voting age without a bit of work experience.

I wrote on the day of Obama's inauguration:

I will be suitably thrilled if the Obama administration renounces some of the creeping executive power grabs of the last 16 years, but he has been oddly silent about this.  It seems that creeping executive power is a lot more worrisome when someone else is in power.

From Charlie Savage in the New York Times:

As a senator and presidential candidate, he had criticized George W. Bush for flouting the role of Congress. And during his first two years in the White House, when Democrats controlled Congress, Mr. Obama largely worked through the legislative process to achieve his domestic policy goals.

But increasingly in recent months, the administration has been seeking ways to act without Congress. Branding its unilateral efforts “We Can’t Wait,” a slogan that aides said Mr. Obama coined at that strategy meeting, the White House has rolled out dozens of new policies — on creating jobs for veterans, preventing drug shortages, raising fuel economy standards, curbing domestic violence and more.

Each time, Mr. Obama has emphasized the fact that he is bypassing lawmakers. When he announced a cut in refinancing fees for federally insured mortgages last month, for example, he said: “If Congress refuses to act, I’ve said that I’ll continue to do everything in my power to act without them.”

My Forbes article is up for this week, and discusses 10 reasons why legislation frequently fails.  A buffet of Austrian economics, Bastiat, and public choice theory that I wrote for the high school economics class I teach each year.

Here is an example:

3.  Overriding Price Signals

The importance of prices is frequently underestimated.  Prices are the primary means by which literally billions of people (most of whom will never meet or even know of each others' existence) coordinate their actions, without any top-down planning.  With rising oil prices, for example, consumers around the world are telling oil companies:  "Go find more!"

For a business person, prices (of raw materials, labor, their products, and competitive products) are his or her primary navigation system, like the compass of an explorer or the GPS of a ship.  And just as disaster could well result from corrupting the readings of the explorer's compass while he is trekking across the Amazon, so too economic damage can result from government overriding price signals in the market.   Messing with the pricing mechanisms of markets turns the economy into a hall of mirrors that is almost impossible to navigate.  For example:

• In the best case, corrupting market prices tends to result in gluts or shortages of individual products.  For example, price floors on labor (minimum wages) have created a huge glut of young and unskilled workers unable to find work.  On the other side, in the 1970s, caps on oil prices resulted in huge shortages in the US and those famous lines at gas stations.  These shortages and gas lines were repeated several times in the 1970's, but never have returned since the price caps were phased out.
• In the worst case, overriding market price mechanisms can create enormous problems for the entire economy.   For example, it is quite likely that the artificially low interest rates promoted by the Federal Reserve over the last decade and higher housing prices driven by a myriad of US laws, organizations, and tax subsidies helped to drive the recent housing and financial bubble and subsequent crash.  Many will counter that it was the exuberance of private bankers that drove the bubble, but many bankers were like ship captains who drove their ships onto the rocks because their GPS signal had been altered

This seems to represent the general MSM reaction to Peter Gleick's fraud in obtaining Heartland documents:

Peter Gleick violated a principle rule of the global-warming debate: Climate scientists must be better than their opponents....

It’s very tempting for scientists and their allies to employ to tactics of their over-aggressive critics. Yet the global warming camp must make an affirmative case for ambitious action on carbon emissions. Critics need only poke holes in the scientists’ arguments, or, as is so often the case in global warming debates, merely insist they’ve done so. Manipulation and perfidy work much better for the deniers.

Whatever the misdeeds of those who attack climate research, however braindead the opposition to climate scientists appears to be, advocates degrade themselves when they allow their frustrations to get the better of their ethical responsibilities. They lend credence to the (wrong) impression that both sides of the debate are equally worthy of criticism, that global warming is another ideological war that both sides fight deceitfully. In that context, those who want to spend lots of money to green the economy lose, and those who want to do nothing win. As Rick Santorum tours the country accusing climate activists of treachery and conspiracy, this should be only more obvious.

In other words, shame on Gleick for stooping to the level of those corrupt and evil skeptics.  A sentence or two of denunciation of Gleick for an actual crime, accompanied by 500 words of unsubstantiated ad hominem attacks on skeptics.  Nice.  I try to have a "let's play nice" response and this is what comes back in return?  Very frustrating.

It is an open question how long this bailout will plug the dam.  I continue to maintain the position that Greece is going to have to be let out of the Euro. Pulling this Band-Aid off a millimeter at a time is delaying any possible recovery of the Greek economy, and really the European economy, indefinitely.  All to protect the solvency of a number of private banks (or perhaps more accurately, to protect the solvency of the counter-parties who wrote the CDO's on all that debt).

Anyway, the interesting part for me is that with this bailout, the total cumulative charity sent the Greek's way by other European countries now exceeds Greek GDP, by a lot.

Back when he was blogging, TJIC had a nice little animated gif with people running around yelling "Oh Noz."

 [update:  sent to me by by the folks at finem respice]

I wish I had it for this chart and the accompanying text  (via Kevin Drum)

Many young adults have felt the impact of the recession and sluggish recovery in tangible ways. Fully half (49%) of those ages 18 to 34 say that because of economic conditions over the past few years, they have taken a job they didn’t really want just to pay the bills. More than a third (35%) say they have gone back to school because of the bad economy. And one-in-four (24%) say they have taken an unpaid job to gain work experience.

First, this study is great evidence of my "what is normal" fail.  There is no baseline.  OK, 24% moved back in with their parents.  How many did this in good times?  How much worse is this?

But the real eye-catcher to me is that somehow I am supposed to be shocked that people have to find a job to pay the bills.  Even a job that, gasp, they really didn't want.  I have a clue for you.  A lot of jobs 22-year-olds have to take are not that compelling.  Mine were not.  Despite what colleges seem to be telling them, the world does not offer up a lot of really cool jobs to inexperienced young adults.  Long before you are closing deals with CEO's, you are probably writing sales literature in some cubicle.

And by the way, I am struck by how wealthy our society is when I look at this chart.  Look at answers two and three.   In both cases, people are saying that in tough times, they chose to forego income and build their skills, even perhaps paying for the privilege.  What other time in history would people have this luxury?  How many countries today would have so many people with this luxury in hard times?  Even in the Great Depression in this country I don't think we saw the same phenomenon.  Obviously the economy sucks and it would be great for everyone for it to improve, but in most other times and even in many other countries in the world today, a significant bar in bad times would have been "I starved to death."

Kevin Drum apparently believes the reason Republicans are not passing further stimulus spending is because such a stimulus would be too likely to have immediate results improving the economy and thus will help Democrats in the next election.

This is the kind of politcal bullshit that drives me right out of the system.  I am perfectly capable of believing Drum honestly thinks that further deficit spending will improve the economy this year.  I think he's nuts, and working against all historic evidence, but never-the-less I believe he is sincere, and not merely pushing the idea as part of some dark donkey-team conspiracy.  Why is it that he and his ilk, from both sides of the aisle, find it impossible to believe that their opponents have similarly honest intentions?

I mean, is it really so hard to believe -- after spending a trillion dollars to no visible effect, after seeing Europe bankrupt itself, and after seeing the American economy begin to recover only after crazy stimulus programs have mostly stopped -- that some folks have an honest desire to see economic improvement and think further stimulus programs are a bad idea?

A reader sends me this editorial from Jerry Jordan at IBD.  It discusses a topic that is one of my favorites - government mal-investment.  By a thousand different mechanisms, from direct investment (Solyndra) to artificial interest rates to monkeying with price signals to economic rule-making (e.g. community banking, ethanol mandates) the government is shifting capital and resources from the allocations a well-funcitoning market would make to optimize returns and productivity to allocations based on political calculation.  We rightly worry about deficits and taxes, but in the long run this redistribution of investment from the productive to the sexy or politically expedient may have the largest long-term negative implications -- just look at what the management of the Japanese economy by MITI (touted at the time as fabulous by statists everywhere) did to that country, with the lost decade becoming the the lost two decades.

It is hard to excerpt but here is how it begins

It usually surfaces with an entrepreneurial adolescent deciding it would be a good idea to sell lemonade at the curbside to passersby

Parents, wanting to encourage the idea that working and making money is a good idea, drive around to buy the lemon, sugar, designer bottled water, cups, spoons, napkins, a sign or two, and probably a paper table cloth.

Aside from time and gas, the outing adds up to something north of $10. At the opening of business the next day, the kids find business is slow to nonexistent at $1 per cup. So, they start to learn about market demand and find that business becomes so brisk at only 10 cents per cup that they are sold out by noon, having served 70 cups of lemonade and hauled in $7.

The excited lunch-time conversation is about expanding the business. A stand across the street to catch traffic going the opposite direction; maybe one around the corner for the cross-street traffic. The kids see growing revenue; the "investors" see mounting losses.

There is a strand of economics, we'll call it the K-brand, that sees all this as worthwhile. They add together the $10 spent by the parents to back the venture and the $7 spent by the customers and conclude that an additional $17 of spending is clearly a good thing. Surely, the neighborhood economy has been stimulated.

To the family it is a loss, chalked up as a form of consumption. If this were a business enterprise it would be a write-off. In classical economics it is a "mal-investment."

(update: link is fixed)  My new Forbes column is up, and it attempts to strip away the window dressing around the Keystone pipeline decision to get at the core issue -- "a quasi-irrational ('I'm blogging against the modern economy from my iPhone'), almost aesthetic distaste for energy production, the modern industrial economy, and capitalism itself. "  Read it all here.

PS-  the contrast between the Administrations support of the egregious HSR project in CA and its rejection of the takes-no-tax-dollars Keystone XL infrastructure project reminds me of my earlier piece on the Timeless Appeal of Triumphalism.   Politicians love to shift capital from private, boring, productive things like pipelines to sexy taxpayer-funded things that they can put their names on.

The 5-year old transcripts of Federal Reserve Board meetings make for interesting reading.  Bernanke & Geithner basically yawn at concerns raised about housing prices and mortgages.

Let's be clear.  Unlike most of those who are likely commenting on this, I do NOT blame these folks for being wrong about the direction of the incredibly complex economy, and how one or two factors might influence the whole.   My sense has always been that it is impossible to be consistently right.

What I do criticize is the hubris of making major top-down Federal policy decisions that require that these folks be consistently right.  It's simply madness, and I am exhausted with the continuing reaction of both the media and most politicians that if we only had the right folks making these decisions, all would be well.  The reality is that these decisions are impossible to make, and will virtually always lead to gross mis-allocations of capital and resources in the economy that lead to recessions.

Update:  Here is one example

JUNE 28-29: In summarizing Fed officials’ views, Bernanke notes how it’s getting more and more difficult to make forecasts, describing the economic situation as “exceptionally complicated.” Since housing is particularly hard to project, Bernanke calls it “an important risk and one that should lead us to be cautious in our policy decisions.”

So, this seems like an admirable statement of humility.  Given these remarks, the group did nothing, right?  Of course not ... they raised interest rates a quarter of a point.

Neither Medicare nor Social Security should be government programs.  The government essentially takes on two roles in these two insurance programs:  1) To subsidize the premiums of low income Americans; and 2) To use its power of coercion to force everyone to participate.  I have no stomach for the latter role and the former could be much more cheaply achieved with some sort of voucher or credit program.

But these programs are not going away.  While both need reform, it may turn out to be politically impossible to even reform them.

But if we take off the table for a moment their existence and their basic structure, there is still an enormous problem we might fix:  pricing.  There is absolutely nothing more deadly to an economy than a false or corrupted pricing signal.  But that is clearly what we have with these two programs.  The Medicare "premium" (tax) taken out of every paycheck is clearly way too small to cover true actuarial costs of this program.  And while Social Security rates may have been set right if the premiums were really being kept in escrow for the future, the fact is that the so-called trust fund has been raided into oblivion by past government spending programs  -- Social Security taxes need to be reset to reflect that fact.

The result, of course, will be a substantial increase in both payroll taxes.  I am not a big fan of tax increases, and find taxes on labor to be among the worst.  But as long as we hold on to the collective notion that these are insurance programs and the taxes we pay are premiums, its time to stop fooling Americans into thinking that the premiums they are paying are truly sufficient to fund their benefits.  Maybe after we reprice the "premiums" to their true actuarial value, we can then have a real debate about the structure and existence of these programs.

I have zero desire to be  a farmer.  But that would seem to be the logical end result if we take Obama's recent statement to its logical conclusion.  He said in his Kansas "OK, I really am a socialist after all" speech:

Factories where people thought they would retire suddenly picked up and went overseas, where workers were cheaper. Steel mills that needed 100—or 1,000 employees are now able to do the same work with 100 employees, so layoffs too often became permanent, not just a temporary part of the business cycle. And these changes didn’t just affect blue-collar workers. If you were a bank teller or a phone operator or a travel agent, you saw many in your profession replaced by ATMs and the Internet.

As has been pointed out by economists everywhere since the speech, Obama is fighting against the very roots of wealth creation and growth and our economy.  Productivity improvement has always been the main engine of a better life for Americans, but here Obama is decrying it.

This reduction in employment in major industries due to productivity is not new.  It began with the agriculture.  Check this out from the always awesome Mark Perry

This is exactly what Obama is criticizing.  Without productivity improvements of the type Obama seems to hate, nine out of ten of you would be laboring in a field rather than reading this on the Internet.   Are you poorer because you don't have to grow your own food?  Of course not.   Every time we increase productivity in a major industry, we fee up labor for the next big thing.  We couldn't have had the steel or auto or oil industries if agricultural productivity improvements had not feed up labor for them.  The computer revolution would be impossible if we all were working in steel mills.

PS- of course this does not work if the next big thing, say domestic gas productions through fracking, is blocked by the government and private investment capital is diverted by the government to cronies with a solar panel factory.

Arnold Kling has one of the best statements on modern political incentives I have seen lately

Salmon complains that as far as the latest [European debt] plan is concerned, "the commitment is still vague." What I want to suggest is that for the politicians, vagueness is a feature rather than a bug. This reflects a fundamental misalignment between political incentives and economic requirements.

What markets and the economy need are policies that resolve uncertainty. That way, people know who is going to take a hit. Most important, they know where they can invest with confidence going forward.

What politicians need are vagueness and opacity. Having a clear, well-defined policy exposes the politician to the people who are hurt by that policy. Thus, instead of producing a balanced budget today, you produce a plan to produce a plan to balance the budget down the road. Instead of restructuring sovereign debt, you make a commitment that everyone will be made whole, without explaining how that commitment will be honored.

Here is what I remember from the late 1980's - just about every technocratic pundit of the leftish bent, and a number on the right, all hailed Japan as the government economic planning model the US should follow.  One fawning essay after another lauded Japan's MITI and its top-down approach to economic investment.

Practically within hours of when these editorials peaked, the Japanese economy began to crumble.  We know now that MITI and other Japanese officials were creating gross distortions and misallocations in the economy, and inflating an economic bubble with gobs of cheap credit.  These distortions have still not been entirely cleared from the Japanese economy 20 years later, and the country experienced what was called "the lost decade" which may become the lost two decades.

For over a year, it has appeared to me (and many other observers more knowledgeable than I) that China was headed for a crash for many of the same reasons as Japan.  I am now sure this is true, as today Andy Stern (formerly of the SEIU) writes an essay lauding the Chinese top-down state-planned economic model.

The current debates about China's currency, the trade imbalance, our debt and China's excessive use of pirated American intellectual property are evidence that the Global Revolution—coupled with Deng Xiaoping's government-led, growth-oriented reforms—has created the planet's second-largest economy. It's on a clear trajectory to knock America off its perch by 2025....

There is no doubt that China will pass the US in total economic size -- it has three times more people than we do.  But their success is clearly due to the small dollops of free enterprise that are allowed in a statist society, and advances are made in spite of, not because of, the meddling state.

Exactly how much economic progress had China made before its leaders brought in the very free market ideas Stern says are dead?  None, of course.  To read China as a triumph of statism and as the death nell of capitalism, when in fact it is one of the greatest examples in history of the power of capitalist ideas and how fast they can turn around a starving and poverty-stricken country, is just willful blindness.

I will include just one other excerpt

While we debate, Team China rolls on. Our delegation witnessed China's people-oriented development in Chongqing, a city of 32 million in Western China, which is led by an aggressive and popular Communist Party leader—Bo Xilai. A skyline of cranes are building roughly 1.5 million square feet of usable floor space daily—including, our delegation was told, 700,000 units of public housing annually.

Meanwhile, the Chinese government can boast that it has established in Western China an economic zone for cloud computing and automotive and aerospace production resulting in 12.5% annual growth and 49% growth in annual tax revenue, with wages rising more than 10% a year.

My first thought on reading this was that Houston used to look exactly like this, with cranes all over the place building things, until we had an Administration that actively opposed expansion of domestic oil production.  My second thought is that this reads so much like the enthusiast essays written by leftists when they used to visit the Soviet Union and came back telling us Russia was so much superior to the US -- just look at the Moscow subway!

The emergence of hundreds of millions of people in China and India from poverty is exciting as hell, and at some level I don't blame Stern for his excitement.  But I fear that what he is seeing is the US housing bubble on steroids, a gross misallocation of capital and resources driven by a few technocrats who think they can manage a billion person economy from their office in Beijing.

Disclosure:  I seldom do anything but invest in generic bond funds and US stock funds, but right now I am out of US equities and I have a number of shorts on Chinese manufacturing and real estate.

Today, US markets are rallying strongly (Dow up 400 points or so at the moment) on news of coordinated central bank action that, that .... that what?  It looks to me like the US and European banks are merely building up liquidity in preparation for potential bank runs.  I would have considered this bad news, kind of like news we just went to DEFCON 2, but for some reason the market is rallying (though there was also an ADP report saying hiring was way up last month, which is certainly good news).

As I wrote yesterday, there only appear to be 3 solutions to the European debt crisis and this is not one of them.  If I am right and patterns hold, the markets will wake up in a day or two and say, "wait, there is still trillions of Euros of deteriorating sovereign debt sitting on bank balance sheets with 40:1 leverage ratios" and fall back.  I am thrilled that our economy shows signs of life and I know that corporate profits have been good, but I don't see any way a European debt crash won't have substantial negative effects on the US.   If I am wrong, the market will continue up, up and away and you should stop ever listening to me because I clearly don't understand squat.

Update:  Yesterday I posited that real solutions were going to be a combination of 1) default/haircut 2) Make someone else pay back the debt and 3) print money.  I have heard it argued this morning that today's announcement may be evidence of #2 (ie, US taxpayers will bail them out) or more likely #3 (since the ECB can't print money, but the Fed seems to be doing a lot of it, lets get the Fed to print more money for the Europeans .... I don't understand the mechanics well enough to pinpoint who would bear the inflationary consequences of this, but betting on the US to be the world's patsy is never a bad bet).

My new column is up at Forbes, and discusses solutions to the European debt crisis.  The problem is that there are really only three, and all are bad, so most solutions being proposed either attempt to disguise that they are bad or to disguise that they are not really doing anything.  An excerpt:

The default option will almost certainly wipe out a lot of powerful banking and financial interests as well as make it very hard for governments to keep spending money at their historic pace.  This will certainly have a bad effect on the larger economy, but we should be careful accepting forecasts of economic catastrophe as most of these come from these same powerful bankers and politicians.   Every group, down to the local dog catchers, argue that the world will suffer a calamity if their particular profession is harmed.  What we do know is that large banks and financial companies are even more intertwined with the political elite in Europe than they are in the US.   We can be pretty certain that, push come to shove, a solution that saves the banks and allows politicians to keep spending will be preferred.

That is why the Europeans will likely end up printing money to pay off the debt.  They almost certainly would be doing so already,were it not for Germany’s strong memories of its Weimar inflation years, when exactly this kind of money printing to pay down government debt led to hyperinflation and political instability.  But the appeal to politicians of shifting the costs from themselves and banks to the average consumer is simply too great to pass up.  If Germany can be convinced, then the European Central Bank will print Euros.  If Germany cannot be convinced, then countries will leave the Euro and print Lira and Drachma.

Holly Fretwell of PERC discusses the huge leap in agricultural yields since WWII

Not only does this mean that we have have billions of people on Earth and not starve, but it also has freed up labor for more productive and value-enhancing activities.

As an aside, remember this chart when global warming alarmists argue the the warming trend of the last 50 years is reducing crop yields.  (If the linked article seems simply bizarre given the chart above, realize the NYT is saying that crop yields are down from what they might have been.  This is the same kind of faulty logic that was used by Obama to credit his stimulus with job gains when in fact the economy was losing jobs.  They posit some unproveable hypothetical, and then say reality diverged from that hypothetical because of whatever factor they are trying to push, whether it be CO2 or stimulus).

The problem with food prices is not production, its the fact that we take such a huge percentage of our food grains and, by government dictat, convert them to automotive fuel.

I hinted at it in my last post, but have addressed it in more depth in my column this week at Forbes.  A brief excerpt:

The theme from all these failures is distorted signals and corrupted communication.  People, no matter how savvy, cannot possibly research every nook and cranny of the economy before making an investment.  They make decisions, therefore, based on signals – prices, interest rates, perceived risks, and the profit history of other similar investments.  If these signals are artificially altered or corrupted, bad decisions that destroy wealth and growth will result.

Which brings me back to education.    I will tell you something almost every business owner knows:  We business owners may whine from time to time that banks won’t lend us money, but what really is in short support are great people.  Nothing has more long-term impact on an economy than amount and types of skills that are sought by future workers.  That is why everyone accepts as a truism that education is critical to economic health.

Unfortunately, there is good evidence that our education policies have already done long-term harm.   The signals we send to kids making their higher education plans have disconnected them from reality in a number of fundamental ways, causing them to make bad decisions for themselves and the broader economy.

Examples follow.  Read it all.

I find the Left's opinions on Greece to be fascinating.  After all, Greece is essentially the logical end result of all of their love for deficit spending, so what kind of cognitive dissonance is necessary to write about Greece on the Left?  This kind:

OK, but they're spending too much money. Surely they know they have to cut back?

Sure, but the deals on offer are pretty unattractive. Europe wants to forgive half of Greece's debt and put them on a brutal austerity plan. The problem is that this is unrealistic. Greece would be broke even if all its debt were forgiven, and if their economy tanks they'll be even broker.

But that's the prospect they're being offered: a little bit of debt forgiveness and a lot of austerity.

Well, them's the breaks.

But it puts Greece into a death spiral. They can't pay their debts, so they cut back, which hurts their economy, which makes them even broker, so they cut back some more, rinse and repeat. There's virtually no hope that they'll recover anytime in the near future. It's just endless pain. What they need is total debt forgiveness and lots of aid going forward.

I certainly agree that Greece is now in a death spiral, but this analysis is just amazing.  The only way for other countries to avoid sharing Greece's fate is to, very simply, spend within their means.  If they do, problem avoided.  If they don't, and get hooked on deficit spending, then Greece is their future, the only question is when.

So what does Drum do?  He calls the spending withing their means strategy "unrealistic" and "brutal austerity."    So he occupies a long post lamenting what a totally SNAFU'd situation Greece is in, but takes off the table the only possible approach for other counties to avoid the same fate.   And in fact advocates a strategy that will push a few others over the cliff sooner, or even cause a few to jump on their own (after all, if the punishment for spending your way into financial disaster is to get, as Drum recommends, all your debt forgiven and years of aid payments, why the hell would anyone want to be fiscally responsible?)

And it is amazing to me that he calls forgiving half their debt, the equivalent in the US of our creditors erasing about $7 trillion, as "a little bit of debt forgiveness" while cutting government spending a few percent of GDP is "a lot of austerity."

His solution, of course, is not for Greece to face up to its problems but to transfer the costs of its irresponsibility to others and then remain nearly perpetually on the dole.

His mistake is to assume Greece faces endless pain.  It does not.  History has shown that countries that are willing to rip off the bandage quickly rather than over a few decades can recover remarkably quickly if sensible policies are put in place.  Heck, the Weimar Republic, which had inflation so bad people got paid 3 times a day so their family could buy something before the money became worthless a few hours later, got its house in order in a matter of months.

I am willing to believe that the initial push into alternative energy subsidies was undertaken with good, honest (though misguided) intentions to change the US energy mix.  But once such a program is begun, it inevitably gets turned into cronyism.

The best example is probably corn ethanol.  A combination of subsidies and mandates have pushed an enormous proportion of our food supply into gas tanks, for little or even negative environmental effect.   Environmentalists and the Left turned against it, but for a few large corporations like ADM, the subsidies have become life and death, and they do anything they have to to get Congress to maintain them.

The best evidence that corn ethanol shifted from a green program to pure cronyism was the imposition of large import tariffs.  The only possible purpose of these tariffs was to enrich farmers and a few manufacturers.  After all, if one really cared any more about getting more ethanol in the fuel supply, one would welcome low cost imports.

Well, the Solyndra debacle has started to make clear that cronyism has taken over solar subsidies as well.  Every day we find yet another high-ranking Obama supporter with his thumb on the scales tilting the DOE funding decision toward Solyndra.

Now we will see the ultimate test:

A group of U.S. solar-panel makers Wednesday called on the federal government to punish Chinese rivals with extra duties for allegedly dumping their products on the U.S. market…

The U.S. makers are asking the Department of Commerce and the International Trade Commission to impose a duty on panels imported from China, a market that totaled $1.6 billion in the first eight months of 2011. SolarWorld accused Chinese manufacturers of selling solar panels at less than half of what the production costs would be in a comparable free-market economy, and is asking for tariffs to make up the difference.

One could argue that this is in direct response to the Solyndra failure.  Solyndra's failure has been blamed on low cost panel manufacturing in China.   Again, if we care just about energy, we should be thrilled about low-cost Chinese solar panels.  If the Chinese government wants to somehow subsidize our consumption of solar panels, great!

Watch this proposal.  Any politician that jumps on this solar tariff bandwagon will be saying "My statements about wanting to see more solar usage is just a bluff, I only really care about subsidizing a few selected businesses."

I have always defended private unions on the ground that workers have a freedom of association just as much as anyone else.  I think the government has tilted the playing field in the union's favor too much, but I will leave that aside for today.  I will also leave aside the problem of public unions, where there is no one really representing the taxpayer on the other side of the table in negotiations (many politicians in union states owe their jobs to union support).

Leave all of that aside.  The economic problem with unions tends to be that they are such a conservative (little c) force in an economy that needs dynamism to grow and expand wealth.  Here is a great example:

The University of California last week tentatively agreed to a deal with UC-AFT that included a new provision barring the system and its campuses from creating online courses or programs that would result in “a change to a term or condition of employment” of any lecturer without first dealing with the union.

Bob Samuels, the president of the union, says this effectively gives the union veto power over any online initiative that might endangers the jobs or work lives of its members. “We feel that we could stop almost any online program through this contract,” Samuels told Inside Higher Ed.

I have said for a long time that negotiations for pay and benefits (in private unions) tend to be the least problematic union activity (different story in public unions, where the relationship to management is not adversarial).  Longer term, union imposed work rules and restrictions tend to be much more costly.  The reason I think is that corporate executives can easily value the difference between various pay and benefits packages, but have a hard time valuing flexibility and dynamism.  If union rules cut off potential future as-yet-unknown growth and cost reduction efforts, the cost of these rules can be huge but equally they can be almost impossible to value (more like options pricing than straight cost-benefit).