David Stockman on the consequences of holding rates at zero percent interest for nine years:
The EINO's (economists in name only) have done exactly as predicted and released a new report clamoring for a maintenance of auto subsidies. Without them, they say, not only will the automobile industry die by 2018 but that it would result in a "$21.5 billion smaller" Australian economy. Never fear though, because "the $500 million the car industry received each year generated a claimed $21.5 billion in economic activity". Why would anyone call to abolish such a successful subsidy for an industry where "the assumptions of elementary economic analysis do not apply"?!
I am not even going to bother looking into how they came up with those numbers, but I already know: using creative assumptions to inconsistently count flow-on 'multiplier' benefits from the $500 million but omitting 'multiplier' costs (where that $500 million came from and where it would otherwise have gone). The technique employed is a simple fallacy dressed up in statistics designed to obfuscate. It is a method that has been expounded by interest groups for centuries and can be applied to any industry; one that was repeatedly mocked by Bastiat in "A Petition" and "What Is Seen and What Is Not Seen". From the latter:
When it is a question of taxes, gentlemen, prove their usefulness by reasons with some foundation, but not with that lamentable assertion: "Public spending keeps the working class alive." It makes the mistake of covering up a fact that it is essential to know: namely, that public spending is always a substitute for private spending, and that consequently it may well support one worker in place of another but adds nothing to the lot of the working class taken as a whole. Your argument is fashionable, but it is quite absurd, for the reasoning is not correct.
Auto subsidies should be abolished. The costs far outweigh the benefits to consumers, who pay more than $500 million in higher prices, poorer products and opportunity costs. The only beneficiaries are the automobile industry, their consultants (EINO's) and the politicians that they lobby to make it happen.
Justin Wolfers tweeted a couple of things recently that, to me, highlight what is wrong with the majority of the economics profession today: that 'a little bit more inflation' does not matter if unemployment is high (the ol' Phillips Curve again).
Dear ECB:When Eurozone unemployment is 12.2%, and inflation is merely 0.7% and falling, you're doing it wrong.Love,Europe
— Justin the Wolfman (@JustinWolfers) October 31, 2013
The Fed's refusal to shift to a tighter policy path makes sense in a time of mass unemployment, muted inflation & elevated uncertainty.
— Justin the Wolfman (@JustinWolfers) October 30, 2013
There are costs and benefits to every decision. In a perfect world, the real obstacles to recovery e.g., regulations, uncertainty (as a result of discretion over rules), and other distortions would be removed to allow for a relatively fast liquidation or reallocation of structural malinvestments that had accumulated during the 'boom'. However, in reality these barriers persist and often grow larger in a crisis as opportunistic politicians exploit it for their advantage.
The solution from the economics profession, as Wolfers' tweets seem to indicate, is often on the side of inflation: print money, get the banks to lend again (bank lending being the real driver of inflation), and those malinvestments that we previously thought had to be liquidated will suddenly start to look good again.
I am of course a skeptic of this view. How much money should be created, when and where should it be 'injected' (assuming central bankers even have that much control), how do they know which prices are falling for legitimate not monetary reasons, or which businesses are failing due to a lack of liquidity and not simply because, at the margin at least, they never should have existed in the first place? These are all questions for which I have never seen a decent answer.
I was happy, then, to see that Richard Ebeling had penned an article a couple of days ago that touched directly on this issue. Ebeling notes that "the quick fix of inflation in creating “good times” and more jobs is short lived, is an illusion like many other “fixes” that provide an initial “high” but soon fade away". In the long run, he continues, we get:
...all-round higher prices, with no lasting net increase in either jobs or production... The “little bit” of inflation that some Harvard economists, Federal Reserve presidents and some in the business world are saying is not only nothing to worry about but is the panacea for all our economic ills, is a phony elixir to cure our national ailments. It will only set America on an even worse inflationary boom-bust rollercoaster than the one that current Federal Reserve monetary policy has been already setting us up for.
I recommend reading the entire article, it is well worth your time.
Lehman was run (badly) for the benefit of its senior employees rather than customers or shareholders. In a market economy, such organisations fail while rivals with better business models and management structures gain at their expense. That process of selection is the reason market economies have an impressive record of promoting efficiency and innovation. The problem revealed by the 2007-08 crisis was not that some financial services companies collapsed, but that there was no means of handling their failure without endangering the entire global financial system.
This, to me, screams "Australian banks". Their oligopoly position - that is, that there must always be "four pillars" in Australian banking - is enshrined in law. This restriction of entry and competition into banking in Australia serves to reduce "efficiency and innovation" by subduing the competitive forces that ensure scarce resources are properly allocated to their most urgent uses.
Stability is likely also affected; on the surface, it looks more stable. Their products are similar, bank returns are more consistent and the unsettling uncertainty of market forces have been somewhat removed. However that same stability allows the banks to make ongoing mistakes without being punished, leaving them exposed to increased instability in the face of a "black swan" event.
Do the banks take this increased risk into consideration? I'm sure, but not to the full extent they should given that every man and his dog knows that the big four banks will receive bail outs from both the RBA and the Federal government if one or more of them look like collapsing. Kay concludes:
The truth is that in a constantly changing environment nobody really knows how organisations should best be run, and it is through trial and error that we find out.
Truth indeed; suppress this force at your peril.
This video is just one of many, many examples of why trying to find the "right people" to put in charge is a dangerous game. It is far more important to have the right rules in place - the right institutions - that restrict the discretionary powers of both good and bad people. Over time bad people have a habit of finding ways to claim any such powers, no doubt granted with the best of intentions, then use them as a club to get what they want.
Without further adieu here is Stephen "I have unfettered legal power" Conroy demonstrating the importance of rules over discretion:
HT: Samuel J at Catallaxy Files