Friday, October 28, 2005

This Guy Hates Keynes...and not in a good way

I am really just stuck on Economics lately. I have to admit it's more the arguments that grab me than the actual numerical/descriptive analysis of economies.
Have you read the "glass window" fallacy? This is old, but was popularized by an economist WSJ writer Henry Hazlitt in a book called "Economics in One lesson." The guy HATED Keynes. He wrote a whole book line by line trying to refute Keynes "General Theory" book and was famous for saying "What is original in the book is not true; and what is true is not original" (which is more or less what Keynes says classical economists would write about his book.)
Anyway, the glass window fallacy: Some kid throws a rock through a baker's window. This is good for the economy because the baker has to give work to the glass installer who pays the sheet glass maker who buys goods (including baked goods) from others with the money. Hazlitt makes the standard refutation of this fallacy by saying the baker will spend $100 replacing the window, but would have spent that $100 somewhere else (presumably on something more desirable or productive). So it doesn't help the economy.
It's not surprising this guy hates Keynes. What Keynes would say is that Hazlitt is absolutely right IF the baker has Zero Propensity to Save Money (e.g. he spends every dollar he has). What if he has savings? What if there is deflation and people are not spending money because they know things will be cheaper in a month (like happened in The Great Depression and in Japan in this decade), causing personal savings to increase, spending to decrease, which causes more deflation...
How do you get the baker to spend money he wouldn't otherwise spend?
1. Break his window
2. Tax him and have the government spend the money for him (not very efficient except for taxing rich people, because most people during a depression need to spend most of their income).
3. Have the Government borrow money (a proxy for the baker borrowing money) and spend it on general productive projects like the Tennessee Valley Authority or police to prevent windows from getting broken.
The whole issue of credit (government and consumer) and propensity to save/invest vs. spend seems by-passed by monetarist types.
Another issue I haven't read discussed is how shifting the distribution of aggregate income alters demand.
A dollar to a poor person = 100% $1 of demand. That's consistent with the classical "Says law" that supply (cost of supply is paid out to "factors" like workers) = demand (because every supply $ will be spent and no more, no less). But the richer the person the less they need to spend and the more they will save/invest. Since the savings rate is a pretty serious indicator (along with things like the consumer outlook or attitude), it's surprising that it doesn't seem generally indexed to distribution of GDP rich<--->poor.
Especially since that has dramatically shifted over the last 20-30 years.
That can actually cause stagflation because more money in the system, if not spent, will result in both inflation and a slower economy.
I think.

Wednesday, October 12, 2005

To err or make an economic prediction is human

It seems to me the history of economics has been a history of modeling human behavior and decision making in particular. That explains why it has been so unsuccessful except when you hold "all other things being equal" or some other elaborate set of constraints and assumptions. Looked at that way, economic predictions aren't that much different than predicting where the dow is going to be next year. Both depend a lot on attitudes. The economy and especially consumer behavior and commodity pricing are subject to the same flux.
Micro = one human. Macro = group of humans in aggregate.
You would think that humans all lumped together would be more predictable (since things average out and irrational factors would be more obvious since more people would follow them), but it's the opposite. Microecon is generally the more practical tool. Walmart uses micro pricing models (albeit more elaborate and data-mine based than you find in textbooks), so they must work. Or maybe that's self fulfilling. Because Wal*mart (I think the asterisk is censored - like cussing in comic strips) sets a price based on a model of behavior, people follow and behave the way the price guides them to. Like people following the old K-mart blue light. They buy more cause it's flashing. It's not flashing because people buy more.

Sallie is a Whore

One thing I've discovered as a landlord: Americans are totally ripped off on education.
Over and over again I see this huge student loan debt on applications from people who have jobs as waiters and retail clerks getting maybe 2000/month. It's sad. They have $30-60K or more in debt for what? I can't tell whether they went to legitimate institutions or rip off trade schools, but it's clear something is broken.
There has got to be more strict accreditation or some different kind of rule. I would say Most of the people under 30 who apply have big student loan debt and some kind of entry level job. That is certainly an artifact of our apartments to some extent (people under 30 love the neighborhood and won't live in the burbs. It's the more trendypart of Portland. ). But even so, there is a large segment of people just getting started in life who have an absurd debt burden without getting the foot up into better jobs that supposedly higher education would give them (not counting film majors). If this happens to one percent of the population, that's $20 Billion in unnecessary debt very roughly. Sallie Mae (SLM NYSE) had $80 Billion in outstanding debt in the most recent quarter.

Monday, October 03, 2005

What Would China Do?

I keep thinking about China. They supposedly have $100 - $300 (latest estimates) billion in US currency & obligations. What will they do with it?
Since the trade imbalance is only growing and they know it will continue that way forseeably, what do they think they will do with it?
They don't want to or won't buy enough American or European products.
Of course they want to buy oil companies because natural resources are something they do want.
They will buy raw materials and technology. They have even bought entire factories.
I predict HUGE amounts of money will be put towards political influence.
Most likely the largest part will come indirectly through China's corporate trade partners.
Walmart in particular probably has or will evolve a huge pro-China-trade lobby.
Energy companies, which are already the most effective lobbiests will be recruited (with semi-direct inducements to officers or through entities like the Carlyle group that exist for this purpose).

But what will they do with all the money they still have? And it's not just dollars. It's billions in Euros too. If they are blocked from buying resources and they can't buy adequate influence to change that, what will they do?
Sell dollars?
Threaten to sell dollars?
Would the US be happier because the weaker dollar (from Chinese hypothetical dumping) might ease trade?
Or??
Or maybe the Chinese are just pretending their dollar purchases are for stabilizing Chinese currency but really it's a sabotage of US monetary policy by forcing a stronger dollar even in the face of a trade deficit (to continue the trade deficit).
They don't really lose much by hording dollars.

It's very puzzling to me. What would you do if you were China.
Your goal is to increase employment and worker standard of living.
To maintain the means necessary for continuing growth and influence in the world.
To improve national defense and regional influence.

The biggest obstacles: Natural resources, trade barriers, technology, infrastructure, geographic (it's a big country with resources and major urban centers very spread out).

It's a reasonable bet that a significant portion of world GDP over the next 10-15 years will go into the Chinese infrastructure.

If I was China, I would be looking to put my money
1. Where it was productive and free of potential politically motivated trade problems
2. Where it could influence trade policy of its partners - especially the US and EU
3. Where it could create a de facto control of territories - esp. Taiwan - where it has an ideological interest.
4. Resources it doesn't have enough of (mostly oil, technology, and technologists).

I don't think they're going to be buying a big pile of Chevrolets.
They're already trying to buy oil (and they did buy Canadian oil)
I bet the influence buying has happened and is just hidden or underpublicized.
Who knows what they're doing in Taiwan. A lot I bet. I wonder if they're making huge investments in Korea to gain influence and/or control there?