Value Added

Lower cost of satisfaction

2012-01-20T13:10:00.001-07:00

One of the few people who regularly reads my blog chided me this morning for not posting. That's because we're busy moving (you can follow those adventures there). Ridding our house of most of our belongings, many of which were obtained second-hand, has made me think about what I need to be "content." I think that so long as I have high-speed internet, a low-end notebook computer, an iOS device, a refrigerator, and hot water I'll be okay. Most of the satisfaction I get during the day revolves around those items.

This has me thinking about one of Tyler Cowen's hypotheses in The Great Stagnation, that things like the internet entertain us immensely for so cheap that we're willing to live on less, need to work fewer hours, and we are therefore less productive (meaning slower GDP growth). This is partly why I frown on OWS-type railing against income inequality and calling for greater redistribution. A local Hebrew professor pointed out at church last week that Solomon's words in Ecclesiastes are backed up by economic studies of Richard Easterlin. Income, in and of itself, does little to predict or improve happiness. Relationships, access to health care, internet, etc. are more important.

One chart I like to share with my Principles of Microeconomics students is one displaying the real cost of various household items over time as Mark Perry often does on his blog. Items like microwaves and refrigerators haven't changed much over the years, they bring the same basic benefits. While median wage growth in real terms may have stagnated since the 1970s, the hours worked to obtain these items has decreased significantly as their prices have fallen:

"In other words, with the income earned working 121 hours, the typical consumer 45 years ago in 1965 would have only been able to purchase a single appliance - the electric oven pictured above, compared to the eight appliances that a typical consumer could purchase today with the income earned working 121 hours."

In terms of appliances and internet speed, those in the top 1% aren't able to buy a whole lot of improvement with their money, and those in the bottom 1% are able to buy much more than they ever could per hours worked. I get an awful lot of free or 99 cent apps that do things that would have been unthinkable or really expensive (like calculators) a few decades ago.Couponing and thrifting gives us access to more items cheaply than ever before, and those don't show up well in official statistics.

Before I'm accused of predicting some type of Wall-E reality where nothing else needs to be produced and nobody works, it's obvious that there is more to be invented and discovered (teleportation, for example) and our quest for more and better innovations will continue to fuel economic growth. However, as Cowen projects, we could be in for a much slower period of growth as we substitute from hours worked into leisure. Those who become unemployed may choose to take longer to find a job, they can get by more easily on their savings and unemployment checks. A slower-growth economy with higher structural unemployment than before shouldn't shock us.

What items do you need to feel "content?" What level of income provides those items?

Book Review (#1 of 2012) Jim Collins - Good to Great

2012-01-10T15:44:00.000-07:00

Good to Great: Why Some Companies Make the Leap...and Others Don't by Jim Collins (2001). This is one of those must-read MBA texts that many people talk about but I just now got around to reading.

Collins teaches at the Stanford Graduate School of Business. His research team looked at 1,435 Fortune 500 companies from 1970 to 2000 in order to find ones that had 15 years in which the stock price grew by about the same rate as the overall average, followed by 15 consecutive years of growth well above the market average. 11 companies fit the bill: Abbott Laboratories, Circuit City, Fannie Mae, Gillette, Kimberly-Clark, Kroger, Nucor, Philip Morris, Pitney Bowes, Walgreens, and Wells Fargo.

The team then found firms in the same industry to compare these firms to, companies that maybe had a few years of outstanding growth and then fizzled. This allowed the researchers to compare and contrast characteristics of firms, so 28 companies are mentioned in total.

The common characteristics of the "Good to Great" companies are interesting. Most of the CEOs preferred almost anonymity, and were fairly disciplined about spending and often forwent bonuses and large amounts of compensation. They had the Warren Buffett characteristic of living in the same house for 50 years, driving a used car, etc. In a few companies, executives were rewarded purely by their titles rather than perks and pay, creating a corporate ethos that seemed to foster productivity. The humility of the successful CEOs was a huge insight.

The companies also stuck doggedly to core principles, whatever those may be. Collins terms this the "hedgehog" concept. Never straying from your core business and defining your mission was crucial. There is also the "three circles" concept, the 11 companies pursued success in areas where they could be highly successful, in which they were highly motivated, and which fit their profile. Collins admits that that some of the companies probably created a few products that may not have added much long-run value to our society (Phillip Morris).

The companies utilized technology where it fit the company, but none of the companies relied on a particular set of technology for a homerun. These companies were studied during the tech boom of the 90's, and many were the antithesis of the fly-by-night companies of that era.

However, something that jumps out about the 11 companies is that just a few years later two of them (Fannie Mae, Wells Fargo) would require extraordinary government help to survive. Collins lauds Fannie Mae's helping pioneer the use of credit default swaps and other financial instruments that helped funnel credit into the housing market, particularly the subprime market, helping to fuel the housing boom. Collins never mentions that Fannie got to borrow at below-market rates because the market knew it had an implicit government guarantee that would keep it from ever defaulting. Wells Fargo was obviously also a large player in the subprime market, though it was interesting to hear how it responded to deregulation and excelled in comparison to other banks. I remember reading in Capital Ideas how Wells Fargo was a pioneer of some areas of financial innovation, and its focus on hiring the absolute best and brightest is highlighted by Collins. To be fair, these companies thrived in an atmosphere of deregulation with certain government supports, but they thrived much more than firms they were competing with in the same environment.

The housing market crash and ensuing recession wiped out Circuit City. I'd like to read a follow-up on how Circuit City went from great to defunct by 2009. Best Buy relegated it to #2 and Wikipedia records that CC had 567 stores nationwide when it went bankrupt.

I've found a few bloggers who have increasingly looked back on this book with a critical eye. You'll also find a number of organizations that give out "Good to Great" awards to employees, managers, etc.

MBA literature is worth reading for the insights it gives into successful companies. But the constant creation of new vernacular (like "Level Five Leader") are a turn-off for me.. too many fads! There's nothing new under the sun, as Solomon put it. What I see from the leadership of the Good to Great companies is very Psalm 15, and that's what I primarily gleaned from the book.

I give it 4 stars out of 5.

Book Review (#37 of 2011) Joe Gibbs - Racing to Win

2012-01-08T13:38:00.001-07:00

Racing to Win: Establish Your Gameplan for Success by Joe Gibbs with Ken Abraham (2002). I well remember Joe Gibbs' Redskins dynasty in the NFL and am well-acquainted with Gibbs' NASCAR team, which he runs with his sons. I didn't know Gibbs' background and upbringing, so I was eager to check out his autobiography. Rather than just being an autobiography, however, Gibbs gives various "cornerstones" for success throughout the book, making it read more like a management/leadership text. (How many "cornerstones" can you have? I would think that after the fourth cornerstone you should call them something else, but that's just me.)

The Tim Tebow controversy this season strikes me rather odd given how outspoken guys like Gibbs were about their faith while in the NFL (Reggie White is another). I guess if you've won multiple Super Bowl titles nobody questions or is offended by what you say? Gibbs is unashamedly evangelical, even closing the book with a Gospel presentation and invitation.

Gibbs' life had follies. His poor financial decisions left him bankrupt at the peak of his NFL career in the late 1980s. He blames his diabetes on his poor lifestyle choices. His competitive drive on the racquetball circuit (who knew?) cost him money and time with his family. But Gibbs preaches from his experiences.

Given that Gibbs has won multiple Super Bowls and NASCAR points championships, it's no surprise that people want whatever his "secret" is, but you won't find much unusual here. One could probably make an argument that Gibbs got his success through good networking and after he'd achieved some success he found others willing to help him out of bankruptcy and into a NASCAR start-up that likely would not have been possible otherwise.

If there's one key trait, I think it would be that Gibbs built his NFL teams around character, doing in-depth research on players to figure out which ones had an internal motivation and not just great physical talent. This seems to be what he looks for in NASCAR drivers as well. He hired someone to develop some type of empirical evaluation to measure their potential at whatever position they were applying for in his organization.
Surround yourself with guys who are highly motivated and that will separate you in a league where parity is the norm.

How Gibbs runs his racing team was most interesting to me. His current team features hard-chargers Denny Hamlin and Kyle Busch, and Busch's character seems to fall far short of Gibbs' standards (Busch was fined and suspended for intentionally wrecking someone late this season, ending his hopes of a title and angering his sponsors). This book was written just after JGR won its first overall points championship with Bobby Labonte in 2001. Gibbs talks of weekly (voluntary) chapel services for all of his employees, of how Dale Jarrett was led to Christ as one of his employees, and how at least one of his major sponsors wants to "reach people for Jesus" via NASCAR. It's hard for me to equate that with the childish, volatile behavior of Gibbs' current group.

But there was almost nothing in the book about his coaching methods, communication style, or even his continual improvement in anything.

In all, I give this book 2 stars out of 5. If you don't care to learn about Joe Gibbs, then this book isn't for you.

Book Review (#36 of 2011) Stephen R. Covey - 7 Habits of Highly Effective People

2012-01-08T13:08:00.000-07:00

Just got back from a great, short trip to Ankara where I've secured housing for my family. But my departure coincided with the end of a road trip and family reunion in Chicago which means I had time to knock out a couple more books before New Years.

7 Habits of Highly Effective People - Stephen R. Covey. I had never read Covey's book, but I assume that almost everyone I know who has held some type of leadership or management position has read it as it's probably the all-time bestselling management/leadership book and easily one of the most influential.

The Seven Habits:
1. Be Proactive - means not blaming others for your circumstances but owning up to them yourself.
2. Begin with the End in Mind - Character matters and underlies everything else. You should have a mission statement that sets out your goal. Each day you "flex your proactive muscles" to make it happen.
3. Put First Things First - Tasks fall into one of four categories and you should focus on the ones that are important but not necessarily urgent. That will help guide your organization and keep things from becoming important and urgent, ie: a crisis.
4. Think Win-Win - Negotiate hard. It's a little like Adam Smith or David Ricardo's idea that two parties don't enter a transaction unless both benefit. So, maximize your benefit and make sure the other party feels it is winning too.
5. Seek First to Understand, Then be Understood - This helps generate Win-Win, and is a basic sales technique. Don't expect to get what you want without respecting the other party's wants.
6. Synergize - Be an effective leader that fosters teamwork and brings out the best in everyone. It's more than the whole being greater than the sum of its parts, but that's the basic idea.
7. Sharpen the Saw - Take time to rest and do activities that improve your physical health and spiritual well-being.

I don't know how many hundreds of books are out there that have built on Covey's concepts. There are a lot of basic, timeless truths that he puts simply and I guess that's why this book is so hugely popular. I'd like to put him in a room with Frederick Taylor and see how it goes.

Reading this book tempts me to size up leaders of organizations by how well they follow the seven habits. I like thinking about the first three the best, particularly in evaluating my time management. Is what I'm doing right now important, and how urgent is it?

I give it 3.5 stars.

Off to Turkey

2011-12-29T19:31:00.000-07:00

One last, quick post. Tomorrow I fly to Turkey to apartment shop and knock on more doors for employment ideas. Also will be seeing some good friends. Until I return, Happy New Year!

Book Review (Antiquities Edition) First and Second Maccabees

2011-12-26T14:10:00.000-07:00

Growing up in the protestant evangelical persuasion means the Apocrypha might as well have meant "Apostate." I'd never read any of its books, even though some of the history it contains is relevant to understanding New Testament Jewish culture. In honor of Hanukkah this year, I decided to read 1 and 2 Maccabees for the first time. I learned a lot.

1 Maccabees was apparently written in Hebrew (wikipedia), though the only surviving text is Greek. 2 Maccabees (wikipedia) is believed to be entirely of Greek authorship. Both focus on the liberation of Jews living in modern-day Palestine during the 2nd century B.C. 1 Maccabees is longer and covers many more events in detail. 2 Maccabees moves more quickly and focuses on a four-year period.

They both read like a combination of the movies Braveheart and 300, in fact I can see how these books could have inspired certain scenes in both films. It reads like most men want the Bible to-- brave warriors standing up for God and slaughtering their oppressive enemies, liberating their people, and having their names echo in eternity. I can imagine that Mel Gibson was heavily influenced by the books, as further evidenced that he is making a movie about Judah Maccabee.

The conclusion of the movie Hoosiers features a locker-room scene with two pastors leading the heroic underdogs in a pre-game devotional. The senior pastor quotes (unattributed) from 1 Maccabees 3:19:
"For the victory of battle standeth not in the multitude of an host; but strength cometh from heaven."

The events of the books are believed to be prophesied in Daniel 11 & 12, when Antiochus IV Epiphanes rules Jerusalem and outlaws the Judaic laws, desecrates the temple, and massacres many Jews. This prophecy is repeated in the New Testament as a foreshadowing of the Antichrist. The horrors that the Jews experienced are gruesomely detailed. In 165 B.C., Judah Maccabee leads a revolt and kills Antiochus and various others who would take his place. The temple is cleansed, the idols torn down, and the sacrifice restored. This is where we get Hanukkah from, although the legend of the oil miracle is not recorded in the books. 1 Maccabees records the Jews' diplomatic outreach to a growing Rome while seeking protection from their neighbors. It records the in-fighting among the various post-Alexandrian factions and Israel being stuck in the middle. Eventually, Judah Maccabee is killed before an army of 20,000 invading Assyrians.

Jesus would have celebrated the Feast of Dedication (John 10) and it seems that many of His followers were expecting him to be the ultimate Judah Maccabee against the Roman Empire, instead of the Lamb of God being led to the slaughter. Reading 1 & 2 Maccabees helps me understand the expectations and disappointment of Jesus' followers.

Knowing that these books were included in the King James Bible and other early texts circulated also helps me understand a little of their influence on Christian culture through the centuries. We get various ideas and idioms in our English language from the Apocrypha via the King James (I read the books in their original King James. I recommend finding another translation). I would say the books also influenced whoever wrote the Book of Mormon, much of it reads very similarly.

In all, I recommend reading these as essential reading for anyone interested in learning more about Jewish and Middle Eastern history. I doubt you can really understand Hanukkah without them.

To my son on his third Christmas

2011-12-25T13:08:00.000-07:00

Dear Elias,

This is Christmas #3 for you, and hopefully the last one in Missouri. We've almost completed an Advent tree, for which you've hung the ornaments after sitting patiently through the stories.

You've also enjoyed playing with a Hanukkah dreidel and eating gelt (chocolate coins) because I was inspired by your Highlights magazine to incorporate that into our holiday as well.

This picture pretty much sums up a good bit of your interests right now.

Mrs. B is your best friend and she is talking to your Aflac duck. You enjoy your various stuffed animals conversing with one another. You also enjoy Spiderman, what little you've seen of him. You like singing the 1960s cartoon theme song, appropriate because this was a popular meme in the U.S. in 2011. Your other pairs of pajamas are mostly Thomas-related.

You do a few things that are worth recording for posterity. We scold you for them but I inwardly smile because it shows you have some natural obtuseness. When we say "Right now!" you reply "Right later!" When we say "put it right here," you say "put it left here." When I say "stand up" you say "sit down." You almost always do what we say so it's hard to categorize your responses as outright defiance. But it shows you cleverly know your opposites want to be your own person. You often will say "no" to something you know is a good idea because it was suggested to you rather than you coming up with it on your own.

God is showing us some of the ways He has made you special. You like to be in perpetual motion, whether it be piggybacking on daddy, spinning upside down, or driving your big wheel down the flimsy ramp we made for you in the front yard. You love music, whether it be listening to your Bible verse CDs during nap time, or watching Lawrence Welk reruns on Saturdays, or singing with us at church. You still request to have "room time" in the mornings where you play and listen to your children's music in your room.

You have a proclivity to memorize things. You've memorized a dozen or so books, a few memory verses, the Pledge of Allegiance, and countless songs. You can count to twenty nine in Turkish, and can count in French and Spanish as well. You're learning to recognize words and read, plus figuring out how to spell; yesterday you almost spelled "train" correctly. Thanks to PBS and the letters we stick on the bathtub.

You are also off the charts, weighing in at 48 pounds and taller than plenty of kids older than you. I'm pleased about this for you and hope it continues.

Our plan is to be in Turkey this time next year. You'll be older, wiser, and probably asking a lot of questions. I've enjoyed the last three years because we could pretty much do holidays and such however we wanted as you were none the wiser about how they "should" be. My promise is to never belittle or grow tired of your questions.

I pray 2012 will be a great year of growth and maturity for you. That you make friends of various cultures and experience things most 3 year old American boys do not. But always that you will continue to read with us, pray with us, and sing with us.That you grow up to be a Godly man of good character. That your current contrariness grows into helpful skepticism and a greater curiosity about how the world works.

I love you very much and hope you one day enjoy more letters from me than I have written thus far.

History of Christmas

2011-12-23T09:40:00.001-07:00

I don't use my blog for article recommendations much anymore, I use my Twitter and G+ accounts instead. However, I came across this Five Books interview with Bruce Forbes, a professor of religious studies at Morningside College in Iowa, that is worth reposting here:
http://thebrowser.com/interviews/bruce-forbes-on-christmas-history?page=1

Forbes offers his five reading suggestions on the history of Christmas, and I learned a bit in the interview that I did not know before. In America we currently have Fox News and others making Christmas and the "War on Christmas" part of a wider culture war, which examination of the historical context of the holiday makes look ridiculous. For example:

Where did the Christmas tree come from?The Christmas tree is mostly of German background, dating back to the 17th century and widespread by the 18th century. I think of Christmas as like a snowball which you roll, and which picks things up along the way. The snowball rolls very interestingly here. The German influences reach England because of the House of Hanover, so the German Christmas tree gets brought to England. Then the prints of Queen Victoria and Prince Albert with a Christmas tree are published, and cause great interest in the United States. That’s how the Christmas tree becomes popular in the US.
Finally – and of course most importantly – where did gift giving come from?That’s a complicated history. In the Church we’d like to say that it has to do with the wise men bringing gifts to baby Jesus, starting a gift-giving tradition. For much of Christmas history, gift-giving was more token, and sometimes was on St Nicholas’s day rather than on Christmas. But more recently – since the 1800s – it has become a great Christmas tradition. Gifts were given in different ways over time. Early on it was in a stocking, then it was under a small Christmas tree on a table. Now, of course, the Christmas tree has gotten bigger and is on the floor. And the gifts have grown and grown.

Read the whole thing. The Christmas we celebrate today, whether the modern consumer-driven shopping one, or the "Here comes Santa Claus" one, or the "it's all about Jesus' birth and gift-giving" one-- all would have been foreign concepts to most societies through the ages.

This leads me to a piece I read by Jim Wallis this week that I agreed with, reposted over at Jesus Creed. Wallis is attacking Fox News' "defense" of Christmas in the culture war. But even Wallis seems to have a higher view of Christmas represents than what history does.

My conclusion: Most Americans are unaware of how they have adopted a version of the holiday that is a very modern, not ancient, creation. Which leads me to my last point: Here's a thoughtful and humorous post by a Türk who offers 10 Reasons Why Turkey Should Not Celebrate Christmas.

Book Review (Kindle Single edition) Launching the Innovation Renaissance - Alex Tabarrok

2011-12-18T15:19:00.000-07:00

Launching the Innovation Renaissance: A New Path to Bring Smart Ideas to Market Fast by Alex Tabarrok. What do Dean Baker (of the Progressive left) and Alex Tabarrok (of the Libertarian right) have in common? Both want to change the patent system in the U.S. to eliminate needless monopolies and foster more innovation. Both want to reform our visa system to allow more high-skilled workers in to end protectionism for the elites.

Tabarrok's Single has received bipartisan praise and the only major criticism seems to be that the book is too short-- I agree. My other criticism would be that he didn't distribute it for free, as Baker did his. The George Mason economist and Principles textbook co-author begins his book by focusing on problems with the U.S. patent system. How instead of creating incentives for innovation, our patent maze creates incentives for rent-seeking behavior. Billions of dollars are wasted in legal battles as firms like Google try to buy up patents that they could be sued over later if they innovate in an area that some patent troll has broadly staked a claim on. These wasted resources hurt our productivity growth.

Immigration reform is also a necessity, the U.S. allows in a ridiculously low number of high-skilled immigrants. Tabarrok doesn't focus as much as Baker does on how this is equivalent to trade protectionism for high-skilled workers, but shows how this is hurting U.S. productivity growth.

Education is another of Tabarrok's targets, famously showing how college is oversold and how the U.S. is turning out only as many, if not fewer, math and technology graduates as it did 25 years ago, even though demand for these positions has soared. The heavily-subsidized U.S. education system is turning out too many workers in fields like English and Psychology for which there are few jobs available. These graduates end up taking lower-skilled jobs that they did not need their degrees for, hence wasting both their own and taxpayer dollars. Tabarrok would like to see better teachers at the secondary level and takes on the teacher unions that oppose any type of merit pay system and make it notoriously difficult to fire even teachers with criminal offenses.

The problems he points out are clear-cut, backed up by plenty of evidence, and the solutions he gives are relatively straight-forward and often peer-reviewed. You can read it in one sitting, and I highly recommend it.

Thoughts on Higher Education (Part 1)

2011-12-17T20:17:00.000-07:00

Since I have just finished a career stop in teaching at the undergraduate level, I may occasionally post some random thoughts of what I've learned about education.
Last night's commencement speaker, Dr. John Marshall, said something to students that I thought was profound enough to record. He defined education as an "external discipline" that you accept in order to bring about internal discipline. He said "You'll know you are educated when you are harder on yourself than your teachers ever thought about being on you." I thought that was a pretty good description of being educated, it definitely works for me.

The previous fall semester started with a faculty seminar led by Dr. David Dockery of Union University. He said something I'll probably never forget: "If you haven't changed your mind about something in the last ten years then you have no business teaching." I often wonder if I am personally too easily swayed by new ideas or the exact opposite-- too set in my ways and current beliefs. I love those who challenge me and change my mind about things. But I have contempt for those who believe differently than I do if I don't feel they've studied the subject matter enough, or as much as I have.

The two highlighted thoughts above are ones I will carry with me for a long time.

What Did Romney Preach and Teach?

2011-12-16T13:42:00.001-07:00

Mitt Romney was Bishop and later Stake President of a Boston area Mormon temple for 15 years and yet I don't see the media asking much of what he believes, as conservatives did with Jeremiah Wright in 2008, even though Wright was only Obama's pastor and not running for office himself. This may be because, unlike Wright, Romney in his Bishop role may not have publicly preached much as that role is generally left to members. But it's very conceivable and highly probable that before Romney was elevated to Bishop that he preached sermons. What Romney preached would reveal important character traits. His sermons would reveal his beliefs, values, and what, if any, political issues he considered relevant enough to preach to his congregation about. The only snippets we have of Romney's pastoral role (Romney called himself a "pastor" for the first time in one Iowa debate) come from a few articles which mention that he was a diplomatic team-builder whose biggest controversial stand was counseling women out of having abortions, something that helps his standing with conservatives since he has famously flip-flopped on this issue multiple times.

Albert Mohler, President of Southern Baptist Seminary and a very evangelical conservative, wrote this blog post that seems to defend Romney from attacks about his religion--Mormonism:

"Furthermore, we must be honest and acknowledge that there are non-Christians or non-evangelicals who share far more of our worldview and policy concerns than some others who identify as Christians. The stewardship of our vote demands that we support those candidates who most clearly and consistently share our worldview and combine these commitments with the competence to serve both faithfully and well."

However, I find Mohler's argument problematic in Romney's case because Romney was not just some casual congregant at a Mormon church, he was an ordained Mormon Elder, Bishop, and Stake President-- high-ranking offices for which he was compensated, and offices that gave him the responsibility to defend doctrine in direct conflict with the Christian worldview. A Stake President, according to the Church Handbook:

1. He is the presiding high priest,
2. He is a common judge.
3. He directs the Church welfare program and operations.
4. He oversees finances, records, reports, and properties.

The first role described by the Handbook:
"Members of the stake presidency are teachers. They teach the gospel in meetings, classes, and interviews. They also bear their testimonies often...They ensure that teaching is effective and doctrinally correct.

So, Romney's beliefs would have come out in his teachings, if not sermons per se. Romney was baptized in a Mormon temple and swore a blood oath to protect the church and keep its secrets. As Bishop, he would have had the role of keeping his congregants from questioning that doctrine and leaving to join other faiths, which Mormons officially see as "apostate" (see the Church Handbook of Instructions here).

The Church of Jesus Christ of Latter-Day Saints is very strict about its core beliefs, and Romney could not have held his positions unless he agreed wholeheartedly to uphold LDS doctrine. This matters because not only is core LDS doctrine entirely in conflict with orthodox Christianity, it requires one to accept various logical contradictions and tenets that contradict scientific and historical evidence. Furthermore, LDS bishops are given strict guidelines of how to deal with people who are questioning the Mormon faith or considering converting to another faith-- and these guidelines, such as excommunication, may look harsh to outsiders. It is not without good historical, philosophical, and biblical reasons that Mormonism is labeled a cult universally by the Catholic church and all protestant denominations.

Jim Spencer, a former Mormon elder turned Christian apologist writes in his book Beyond Mormonism of what it is like to accept the logical contradictions of Mormonism and the shunning that occurs when one begins to question the church or ultimately leave, as he did. He describes the phenomenon associated with all cults of chucking one's brain at the door as "snapping." Spencer and other converts claim that all practicing Mormons suffer from this same well-documented psychological phenomenon, and I believe this is relevant to examine in a presidential candidate.

One question I would ask journalists following the campaign is how did Romney treat those in his church who were questioning Mormon doctrine and history? Did he treat them similarly to how he treated Brett Baier of Fox News when he brought up various contradictions in Romney's statements over the years? Or was Romney the sort of open-minded, highly-educated intellectual that he portrays during the debates? His record as Bishop and Stake President would be helpful in this regard.

So far, the press has not openly discussed the doctrines Romney would have taught and expected his church members to believe as a Mormon pastor, which is odd because Jeremiah Wright's church's doctrinal statement was a major campaign issue in 2008, and Obama was pressured to disavow his membership.

Mormons maintain that all LDS presidents are infallible prophets. Joseph Smith and Brigham Young's prophecies are considered to be correct and infallible, or else they would be false prophets. This includes examples such as Smith's claims that men dressed as Quakers live on the moon, and Young's claim that men also live on the sun (Journal of Discourses 13:271-2). It requires belief in the Book of Mormon's teaching of various warring ancient tribes living in the Americas, who were visited by Jesus, for which there is no archaeological evidence.

The LDS' religion is also very America-centric. Romney would have taught his church that Elohim chose to re-establish his "lost" church in America via Joseph Smith, and that Jesus' next coming would be to a small town in Missouri, not Israel or anywhere else. This has implications for how Romney looks at the rest of the world and conducts foreign policy.

There are other problems that I believe deserve scrutiny. Romney was a Mormon missionary in Europe from 1966 to 1968, achieving the highest possible position as a missionary. This was before the Book of Mormon was edited (in 1978) in order to allow African-Americans to hold Elder positions (they were denied such authority until then) after the LDS President received a "revelation" from God. This means Romney had to support and promote the official 1966 LDS position-- that blacks were spiritually inferior to whites. While Ron Paul gets criticized for some racist writing attributed to him in the early 1980s, Romney has not faced any such criticism for swearing to promote officially LDS doctrine that was overtly racist.

Romney has had to teach other official doctrine, such as Jesus and Satan being spirit-brothers (along with everyone reading this) from the same father --Elohim-- and that man's sin is not atoned for by Jesus' blood alone, but can be atoned for by man's own blood (Journal of Discourses 4:53-54).

As a Christian myself, I find the lack of questions in regards to Romney's faith curious and problematic. I find evangelicals such as Al Mohler claiming that Romney shares a Christian worldview highly problematic given how contrary Mormonism is to the Christian worldview. If he were a Muslim, would there not be more scrutiny, even if he was a pro-life, pro-Israel Muslim?

If you do not believe a person's worldview is relevant to his effective leadership, then none of the above should trouble you. But I believe a person's worldview is at the core of his decision-making process. Romney hasn't answered key questions about his worldview, and I think it's high time we start pressing him--and ourselves--with those questions.

Book Review (#35 of 2011) Frederick Taylor - The Principles of Scientific Management

2011-12-07T08:15:00.001-07:00

Since I've been reading seminal works this year, I decided to read this 1911 classic when it was posted on Project Gutenberg a while back. Taylor is credited as the father of scientific management as a field and this work is cited in Principles of Management classes like Smith's Wealth of Nations is in a Principles of Economics class. It's another example of a book that is oft cited but rarely assigned to students to read-- I recall reading only excerpts from it in several Management classes as an undergrad, but the book is short enough to be fairly easily required reading.

Consider this part of the Introduction, written 100 years ago, after Pres. Theodore Roosevelt gave a speech urging conservation of national resources:

"We can see our forests vanishing, our water-powers going to waste, our soil being carried by floods into the sea; and the end of our coal and our iron is in sight. But our larger wastes of human effort, which go on every day through such of our acts as are blundering, ill-directed, or inefficient, and which Mr. Roosevelt refers to as a, lack of "national efficiency," are less visible, less tangible, and are but vaguely appreciated...As yet there has been no public agitation for "greater national efficiency," no meetings have been called to consider how this is to be brought about. And still there are signs that the need for greater efficiency is widely felt."

Taylor is an engineer who sounds like a supply-side economist. Taylor's cause is fundamentally a Progressivist one, but he stands in opposition to Marxist elements agitating around him who are pitting the worker against the owner. Taylor is promoting a management style that requires heavily-involved owners and managers to increase the efficiency of the workers, the profitability of the businesses, and the wages of the workers.

"The principal object of management should be to secure the maximum prosperity for the employer, coupled with the maximum prosperity for each employee."

This is a nationalist cause for Taylor-- maximum productivity means maximum standard of living for Americans.

"It is no single element, but rather this whole combination, that constitutes scientific management, which may be summarized as: Science, not rule of thumb. Harmony, not discord. Cooperation, not individualism. Maximum output, in place of restricted output. The development of each man to his greatest efficiency and prosperity."

Taylor addresses the issue of shirking, or "soldiering" in his parlance, which he sees as widespread and contrary to the American spirit as demonstrated when Americans compete hard in sports on weekends. This is fundamentally a problem of incentives-- if I'm paid by the day then I have no incentive to work quickly, but rather to prolong the number of days it takes to complete a job. Several examples of this in piece work is given, including the classic 1903 paper "Shop Management" on the Midvale Machine Shop.

Taylor confronts the following thinking that promote such shirking and inefficiency:

First. The fallacy, which has from time immemorial been almost universal among workmen, that a material increase in the output of each man or each machine in the trade would result in the end in throwing a large number of men out of work.
Second. The defective systems of management which are in common use, and which make it necessary for each workman to soldier, or work slowly, in order that he may protect his own best interests.
Third. The inefficient rule-of-thumb methods, which are still almost universal in all trades, and in practicing which our workmen waste a large part of their effort.

Scientific management is more than properly aligning incentives, like just paying someone for output rather than a flat daily rate. It requires investment in scientists who will first carefully observe the work being done and determine the most efficient way to do it. What's the proper size of the shovel? What's the maximum number of repetitions until a job is finished? How far and how fast should the worker walk? How often and for how long should his breaks be? What is the "One Best Way" to do the job? The scientist becomes a micromanager, training workers in new ways of doing things in order to maximize productivity with the incentive dangled that the worker will receive higher pay for doing it this way.

The example Taylor gives is from his time at Bethlehem Steel with workers shoveling pig iron. Here's a summary:

"We found that this gang were loading on the average about 12 and a half long tons per man per day. We were surprised to find, after studying the matter, that a first-class pig-iron handler ought to handle between 47, and 48 long tons per day, instead of 12 and a half tons. This task seemed to us so very large that we were obliged to go over our work several times before we were absolutely sure that we were right. Once we were sure, however, that 47 tons was a proper day's work for a first-class pig-iron handler, the task which faced us as managers under the modern scientific plan was clearly before us. It was our duty to see that the 80,000 tons of pig iron was loaded on to the cars at the rate of 47 tons per man per day, in place of 12 and a half tons, at which rate the work was then being done. And it was further our duty to see that this work was done without bringing on a strike among the men, without any quarrel with the men, and to see that the men were happier and better contented when loading at the new rate of 47 tons than they were when loading at the old rate of 12 and a half tons."

(Note: Taylor enlisted famed mathematician Carl G. Barth in his efforts.) Taylor and his crew succeeded in achieving the 376% increase in productivity. Workers went from earning the standard $1.15 a day to $1.85 a day, a 38% increase in their wage that put them well above what competing firms offered. Interestingly, when someone from another firm came and promised workers an even higher wage the Bethlehem management gave them its blessing to leave. The workers came back to Bethlehem shortly thereafter because they found the other company's management always found ways to keep them from being productive to earn the higher promised wage. Other examples are given.

Taylor's system requires owners to investment in scientific managers, and requires scientific managers to invest heavily in the workers, something with high up-front costs. Floor managers need not be highly educated engineers, only trained in how to use a slide-rule, which is sort of the 1900s equivalent of a scientific calculator.

Wikipedia records Taylor's contribution to management thought and engineering, both here and places like Lenin's Soviet Union. I wouldn't hesitate to require this book in either a Principles of Management or Managerial Economics course.

The practicalities of Taylor's recommendations are questionable, and Wikipedia records that Bethlehem didn't implement all of his suggestions or methods. But it's easy to see how the field of Management grew out of his work. The book reminded me of the last time I worked on an assembly line and the plant had what I called the "Kaizen Team" who were people in white coats and clipboards monitoring our processes and looking for any ways they could improve efficiency. The workers resented the team and suffered from Taylor's fallacy #1 (above) of assuming improved efficiency meant permanently eliminating their jobs (in some cases the workers were correct, however). I doubt many on the Kaizen Team had read Taylor in the original, though.

Aspiring Young Minds

2011-12-03T19:56:00.001-07:00

Cleaning out some old stuff from my parents' house, I ran across this memory. It's an early one where I became somewhat skeptical and cynical of education.

The left hand side is the blue "1st Prize" ribbon I won at my 5th grade science fair, qualifying me for an entry into the Fayette County (KY) science fair. My dad is a civil engineer specializing in things like water and environmental hazards. He put together an experiment in which we looked at how various levels of oil contamination kill fish. I remember a particularly long Saturday at his office lab where we measured precise amounts of water and oil to put into probably five separate containers. I remember the annoyance of having to tare the scale and to get the water amounts absolutely equal in weight with a medicine dropper. One container had no oil, and the others contained gradually increasing amounts. We placed equal amounts of his lab minnows (of which there were probably thousands in his lab) in each container. Over the next several days or weeks, I measured the survival/death rates of the fish.

I don't remember if we calculated a regression equation for the relationship between oil contamination and fish casualties, but we probably plotted some graphs. My dad made sure it was high quality.

The red ribbon on the right is the "Participant" ribbon from the county science fair. I remember having to spend another even longer Saturday near the Civic Center downtown as judges went through hundreds of projects. I never met the judges, I think perhaps we were required to leave while judging occurred. When we returned to the hall in the evening, I remember some of my classmates getting prize ribbons but mine had this blank red ribbon on it and a "disqualified" remark. Disappointment. One judge was at least kind enough to write me a note-- he said my project was good but killing something was against the rules, so I had to be disqualified (and should have been disqualified at the school level as well, but apparently my teacher and school judges didn't know the rules. We certainly didn't know there was such a rule.).

You'll notice that my name is even spelled wrong on the certificate, adding insult to injury.

I was slightly confused-- why was it real science and perfectly okay when my dad runs these kinds of tests all the time in his lab, but not real science when 5th graders do it? (I seem to remember later dissecting frogs and pigs in school, am I to suppose that they died a natural death or something?) The irony that the event was sponsored by the local water company didn't hit me until now.

I have now trashed the items in the picture, but they can live on here for posterity, and maybe be useful for when Elias is in the 5th grade and runs into such barriers and setbacks to his intellectual curiosity. I wonder what age he'll be when I finally tell him "Those who can, do. Those who can't, teach." My guess is that I was in the 5th grade when my dad told me that.

From the Management

2011-11-27T14:18:00.000-07:00

Blogging will continue to be sparse as I am busy working on moving my family overseas for the indefinite future. A lot of things I'd like to write about, as well as plenty of things I wish I had time to read, but right now more important matters are pressing.

Does your school need a football team?

2011-11-14T07:46:00.001-07:00

60 Minutes did a good profile of UMBC President Freeman Hrabowski last night. These aspects of UMBC stand out:

"Much of the hard work at UMBC is in science, engineering and math which accounted for 41 percent of the bachelor's degrees earned there last year - well above the national average of 25 percent. Nationwide, most college students who start off in the sciences either change to a different major or don't graduate. UMBC keeps undergrads engaged by including them in research typically left to graduate students...Students can also get jobs and internships at one of 76 companies located on campus. Most are technology startups...(But) one thing you won't find at UMBC..."

A football team. The chess team is great, but there is no football team.

Hrabowski: "People talk about that. Right. I mean, well-- well, first of all, it takes a lot of money for a football team to win." (emphasis mine)

The rest of the piece is worth reading or watching. So long as the U.S. is graduating fewer math and science majors than it did 25 years ago, the less it is accumulating capital and productivity growth for the future. UMBC is pushing the other direction, and to do so it recruits and invests in training students and measuring themselves by whether they actually graduate rather than devoting millions to developing "student-athletes" who may never graduate (I put "student-athlete" in quotes since it is a term invented by the NCAA with huge legal ramifications as pointed out in the Taylor Branch piece I think everyone should read).

As a nation, we need to figure out what we want more of-- a higher standard of living or just better sports. I vote for the former.

Book Review (#34 of 2011) Toynbee - Turkey: A Past and a Future

2011-11-13T15:41:00.003-07:00

Turkey: A Past and a Future by Arnold Joseph Toynbee. This book was published in 1917 in the midst of World War I (now free at Gutenberg or at Amazon for Kindle). Toynbee was a British historian who had evolving views on Turkey over his career. This book gives an overview of where the Ottoman Empire came from, who the Osmanli Turks were, and what their future, and the future of their subjects, looks like.

Toynbee uses several contemporary sources to explain the rise of Turkish Nationalism, which was leading to changes internally that would have immediate consequences following the War. Toynbee fills in some gaps for me, explaining where the nationalism comes from and why Turkey implemented its controversial policy of expelling Armenians and other groups from their country.

The symbiotic relationship between Germany and Turkey is also explored, Germany was eager to help the Turks complete a railroad system and other development projects that would require German workers and expertise and lead to further gains from trade for both nations. All of this was to create a bulwark for their aspirations of empire:

"Thus Germany's economic activity in Turkey has been not for prosperity but for power, not for peace but for war" (l. 480).

Other people groups subject to the Ottoman Empire were agitating for their autonomy, which was causing some decline in the prosperity in the furthest regions of the Empire as they were often neglected by Istanbul.

There is much eerie foreshadowing in this book. At the time, the Zionist movement in Palestine was growing strong as Jews fleeing Eastern Europe migrated to Palestine, usually through Germany. Toynbee speculates on their fate. The Jewish problem for Germany is sadly foreshadowed by events in Turkey, and several Germans living in Turkey wrote official protests or resigned teaching positions to protest Turkish policy in 1915:

"'If we persist in treating the (questionable policies)...as an internal affair...then we must change the orientation of our German Kulturpolitik...[W]e teachers must give up telling our pupils in Turkey about German poets and philosophers, German culture and German ideals, to say nothing of German Christianity...The things of which everybody here has been a witness for months past remain as a stain on Germany's shield in the minds of Oriental nations'" (l. 564).

Just imagine these words being written about Germany itself twenty years later.

Toynbee also quotes statistics of Americans and others who were working in Turkey prior to the start of the war, building schools and hospitals and such. These, too, were closed down as battle lines were drawn.

Like other people writing around this time, Toynbee seems a pessimist on the future of Turkey. The Turks were seen as less advanced as other nations and with little hope of catching up. I have some biographies of Ataturk on my list to read very soon, because he steps into this void and strives to move Turkey forward very quickly and reverse the decline of the nation. That's the part that I want to explore next.

I give this book 4.5 stars out of 5. I consider it a concise must-read for anyone interested in this brief period of Turkish history.

The eerie calm

2011-11-10T10:50:00.000-07:00

The market is more optimistic today, but it just reinforces my belief that sometimes the market is slow to accept what it really doesn't want to, just as it did from late 2006 - 2008. None of the fundamentals changed from yesterday to today. InTrade is currently giving 70% odds to a country leaving the Eurozone by 2015. Knowing that, it's amazing to me that euro bond yields aren't higher across the board. It's very much similar to 2006 when delinquencies on home loans started to rise and were expected to get worse, but no one wanted to believe home prices would fall across the board, or that AAA-rated securities based on those loans weren't as advertised. The 17-country euro zone as we know it is done, it's just a matter of time.

How prices are useful

2011-11-09T10:33:00.000-07:00

One frustration I have watching the news is the media's incessant obsession with political polls. For example, Herman Cain has been showing an approval rating just under Mitt Romney's, which you hear regurgitated every night as "he could be the Republican nominee." The problem is, we have a better predictor out there of people willing to put their money where their mouth is.

Herman Cain as the GOP nominee is currently trading at $0.45/share on InTrade, meaning the market gives him a 4.5% chance. Compare that to Mitt Romney's 68% probability. When I point that out to people, I sometimes hear "Yeah, but the market doesn't know what will happen between now and next summer; markets aren't efficient," etc. etc. One guy told me "I'd rather listen to the people at 538, because at least they have a proven track record..." He doesn't realize that that is the exact same thing as saying you believe a particular investment advisor that a certain stock is underpriced. If it's really true, then buy the stock and get rich.

If you think Cain has a decent shot at the nomination then the market says you stand to make a good deal of money by betting on him. And if everyone else feels the same way, they will too, otherwise they're leaving free money on the table. Once you put your money where your mouth is with everyone else, Cain's value will rise. The fact that no one is doing that indicates that they don't actually think it will happen. Prices are very useful things. Why the nightly news show us the Dow and S&P, and sometimes talk about bond yields, but focus on polls rather than market indicators for politics is a mystery to me.

Book Review (#33 of 2011) Agamemnon of Aeschylus

2011-11-03T20:17:00.001-06:00

The Agamemnon of Aeschylus was a play written by Aeschylus in 458 B.C. as part of a series (the Oresteia) that won him first prize in the archonship of Philocles. This version was translated into English rhyming verse by Gilbert Murray who also adds helpful footnotes.

Given that the original is in Greek, and this version has not only been translated into English but then made to rhyme in English, makes one wonder how true to the original spirit it remains. For example:
"Paris to Argos came;
Love of woman led him;
So God's altar he brought to shame,
Robbing the hand that fed him."

Author Philip Caputo offered the Oresteia as his one reading recommendation last year, which is why I wanted to read it. .

Agamemnon triumphantly returns home from the Trojan War. He is greeted by Clytemnestra who feigns the loving wife longing for her husband. She then lures Agamemnon and then Cassandra, his captured slave, into the house and murders them. The elders and comrades of Agamemnon move to take revenge against Clytemnestra and her lover, Aegisthus. But Clytemnestra halts the dispute and everyone awaits the return of Agamemnon's son, Orestes, from Troy to exact the revenge.

Early in the play, I found language that sounds biblical enough to make me wonder either about the Greek translation or think about the Gospel authors' exposure to classic Greek literature.

"But the wise Shepherd knoweth his sheep,
And his eyes pierce deep
the faith like water that fawns and feigns."

My favorite part was when Agamemnon is replying to Clytemnestra, who is trying to tempt him to show hubris by treading on tapestries of crimson and gold. He responds by contrasting the honor he seeks with the respect shown only to gods:

"'Tis God that hath
Such worship; and for mortal man to press
Rude feet upon this broidered loveliness...
I vow there be danger in it. Let my road
Be honoured, surely; but as man, not god"

and:
"God giveth, for I reckon no man blest
Ere to the utmost goal his race be run.
So be it; and if, as this day I have done,
I shall do always, then I fear no ill."

But alas, poor Agamemnon:
"For woman's sake he endured and battled well,
And by a woman's hand he fell."

An Occupy Wall Street discussion question

2011-11-03T10:24:00.001-06:00

This is a message board exercise students in Principles of Microeconomics have to do this weekend. They will have read Chapter 7 of Good Intentions entitled "How Did Ben & Jerry Get So Rich?"

This chapter deals with CEO compensation. Many people are outraged that CEOs earn so much more than the average worker. You have likely seen the news coverage of Occupy Wall Street and similar groups protesting this, among other things.

In 2005, the median annual salary for a CEO of a Fortune 500 company (the largest 500 companies in the U.S.) was $6.7 million. The median salary of a factory worker was $29,544. Some people think this is unfair.

Tom Brady, quarterback of the New England Patriots earned $18 million in 2010, while his current wife also earns somewhere around $15 million as a model. Peyton Manning's contract was set to pay him about $23 million this year to QB the Colts (and will still pay him most of that even though he hasn't played a single game due to an injury).

1. Chapter 4 of Good Intentions discussed how workers are paid according to their productivity-- classical labor theory says workers should be paid according to the marginal product of their labor--about as much as they add value to the overall economy. Do you think the median Fortune 500 CEO is 227 times more productive than the median factory worker? Is Tom Brady 609 times more productive? Is Peton Manning 778 times more productive?

2. Why do you think the media and politicians focus on salary and bonsuses for CEOs and not athletes?

3. The NFL is a government-granted monopoly, it is exempt from antitrust legislation. Most CEOs and factory workers work for companies competing globally. How do you think this affects the salaries above?

"Book" Review (not counted) - Read This Before Our Next Meeting

2011-11-01T10:46:00.000-06:00

Read This Before Our Next Meeting by Al Pittampali; I got this when it was free for Kindle. It's really an essay and not a "book," by my definition-- it's not a Kindle Single either. It is a simple 80 page manifesto for changing how we do meetings. You can visit his website at ModernMeetingStandard.com.

I work in a College of Business and I often joke to myself "How many MBAs does it take to run an efficient meeting?" The correct answer is either "zero" or "more MBAs than we have on faculty now." I lean toward "zero." It's amazing to me that we don't incorporate a class on how to hold meetings into curriculum.

Pittampali's suggestions for creating the "Modern Meeting" are almost identical to my own when I ask myself what I would do differently if I ran things. My college violates just about every one of his tenets.

The author's Modern Meeting:
1. Supports a decision that has already been made.
2. Moves fast and ends on schedule.
3. Limits the number of attendees.
4. Rejects the unprepared.
5. Produces committed action plans.
6. Refuses to be informational. Reading memos is mandatory.
7. Works alongside a culture of brainstorming.

"The Modern Meeting focuses on the only two activities worth convening for: conflict and coordination" (l. 286). In other words, the Boss should have already made a decision and informed everyone of it long before, meeting with people individually if necessary. The meeting simply exists to implement the decision and openly resolve any conflicts about it. Concrete tasks will be assigned through the meeting:
"If you don't receive an action plan from the meeting I invited you to attend, you have every right not to attend my next one" (l. 375).

Numbers 3, 4, and 6 above are crucial for me. 90% of our meeting time is listening to someone give a report that is purely informational and could have been written in some bullet points emailed out earlier. This is unproductive and inefficient, wasting everyone's time.

But no one wants to read memos before a meeting, just like students who never read textbooks before coming to class. Just like Sunday school Christians usually never read their lessons or study the text before Sunday or study about what their pastor is preaching on. We come wanting to be entertained, wanting new information. But that is not the job of the meeting, the job of the meeting is decision and action.

But, we're a College of Business, we should be better. We demand our students be prepared, and so should we. "This is not high school; we strive to be a world-class organization. We can't tolerate your unpreparedness anymore. Unprepared participants are dead weight" (l. 365). Save the learning for your own time, a meeting is not a seminar.

I recommend reading the book in your spare time, won't take you any longer than a long-form journal article. Then give it to someone who you wish would run meetings better...

NCAA Eligibility Requirements at Division II level

2011-10-31T12:42:00.001-06:00

I wanted to catalog this for easy find later, but also because I think it speaks for itself. To be eligible to play, a D-II student:

Must earn 24 hours a year, counting summer courses.
Of those 24 hours, 18 must be earned during regular academic year (so, must be non-summer courses).
A student must earn a minimum of 6 hours credit the previous semester.
Division II student-athletes must complete their four seasons of eligibility within the first 10 semesters (5 academic years) of full-time enrollment.
GPA requirements:

After first year (24 hours): 1.80
After second year (48 hours): 1.90
After third & fourth years (72+ hours): 2.00

Developmental (read: remedial) courses only count toward hours for NCAA eligibility in the student's first year of college.

The way I see this play out for fall sports (ie: football) is a coach will have a student take 12-15 hours in the Spring, with an additional 6 in the summer. Then, a student need only pass 3-6 hours in the fall to get 24 for the year (they have to be enrolled in 12 hours). So, the student will flunk all but 3-6 of his hours and play all he wants to. If something goes wrong, he can make up the difference in spring or the following summer.

Of course, that doesn't bode well for the student's degree track. But a lot of those kids aren't going to graduate, that's not what they're recruited for. Many fall within the 6 hours needed to walk across the stage but just short of a diploma.

Coaches also utilize the redshirt option, to help a student raise the GPA or take 15-18 hours so that the student can be cut to 12 hours a semester in other years.

Students who don't meet the minimum entrance requirements of a university can enroll in a Junior College. So long as they fulfill the 24 hour 1.8 GPA requirement they can transfer and be immediately eligible to play in the fall. Often they will take remedial courses (since they count in the first year) and other easier credits (Weightlifting and Human Sexuality are two I see most frequently along with a lot of Physical Education courses. Football, basketball, etc. also count as a one-hour credit course) to get to 24.

I've also seen a student allowed to play without having an official transcript sent from a previous university-- no official proof that he met the above requirements for the previous academic year. The student had played for two previous colleges and sent a transcript from the first school but not the second. He declined to give answers why when repeatedly asked. He transferred again after the season, having flunked all of his classes but played rather well.

DII schools are not subject to the same Academic Progress Rate evaluation that DI schools are. DIII schools have no minimum eligibility standards other than those set by the university.

The Triumph of NGDP Level Targeting

2011-10-30T16:58:00.001-06:00

I've been busy with too many things to blog. My more fluid thoughts are found on Twitter or on Google Plus. But a significant event has been the triumph of Scott Sumner's years-long push to get NGDP targeting on the forefront of discussions of optimal monetary policy, which I've commented on several times here. I started incorporating ideas from Sumner's posts in my Macro, International, and Money & Banking classes two years ago. Two weeks ago, Goldman Sachs' economists published a paper advocating the Fed to adopt the target, and since then several news outlets have picked up the story as other economists have jumped on the wagon publicly. Many of the relevant links are on David Beckworth's post today, he also deserves a good deal of credit for being a "market monetarist" pioneer, and he's taught me as much via his blog as the other market monetarists have.

It's truly a bipartisan affair. Obama's former CEA Chairwoman, Christina Romer, Brad DeLong and Paul Krugman on the Left. Mitt Romney's economic adviser-- Greg Mankiw-- Robert Hall, and Scott Sumner on the Right. That's partly why the Fed was made to be independent-- it's not beholden to political whims and wrangling like Congress is. There are theoretically no political constraints to it adopting Pareto-optimal monetary policy.

Taylor Branch on the NCAA

2011-10-22T20:00:00.000-06:00

Whether you're a sports fan or not, I encourage you to read "The Shame of College Sports" by Taylor Branch in last month's The Atlantic. Branch gives a fascinating history of the NCAA, and how it has tried to maintain its monopoly position by enriching a relative few and destroying some college athletes' careers. I've discussed these issues on this blog several times, this post being among the most recent. Branch shows how a series of lawsuits is currently trying to expose that the NCAA's rulebook contains clauses that trample very basic civil rights in an unprecedented fashion.

The first question I find myself asking in reading the article is why so many religious colleges, who have a faith-based mission statement that they supposedly take seriously, would give obeisance to an institution like the NCAA? The answer is that it's about the money but also about college presidents and donors who demand strong athletics.

The second question is why so many people can sit by and watch it happen. Why don't pastors think about this more? Why doesn't Occupy Wall Street add this civil rights abuse to their list of grievances, along with the increasing divide between what college coaches make next to the athletes that make them their money and faculty who uphold the mission of the schools?

As a Christian, I believe we're to test everything, examine everything. The NCAA is very problematic to a growing number of examinations.

On World Food Day

2011-10-16T14:40:00.000-06:00

Today is World Food Day. A day to recognize that many people on earth do not have enough. I've been thinking about it this week because last Sunday night PBS aired a Sesame Street special on hunger. It was a different take on hunger than ones I grew up with because it focused on fresh produce. Not only are some people in America unable to earn income to feed themselves, many do not have access to healthier options.

The show first highlighted an unemployed single dad on Martha's Vineyard, where an aunt housed his family in a guest room. He visited a local food bank where someone donated shares in a local cooperative farm specifically to his family. As a result, his kids were fed and began cooking and enjoying fresh vegetables instead of canned ones or processed materials. He was overwhelmed because his kids were not only fed, but were now connoisseurs. Eventually he got a job as a bus driver and they got their own place.

The show then switched to the Bronx, where a mother was desperate to find cheap fresh food for her daughter. They went into some neighborhood groceries to highlight how bananas were over twice as much as they would be outside the Bronx. The cheap stuff were the processed things and potato chips. In this scenario, the protagonist was a charity that provides fresh produce and meals made from them. There was a line around the block of locals eager to partake. The mother was a volunteer in the organization, and her daughter also decided to help.

Elmo visited a community garden worked by volunteers in an urban setting, and it appears the producers wanted to promote this idea as a way of encouraging an increase in the supply of produce and healthier options. In many of my travels around the world I've found that urban dwellers often have a plot of land either near their apartment or outside the city where they grow some food for themselves, or for sale. This doesn't happen as much with America's city-dwellers. Why is that?

If I were an alien visiting America I would find this bizarre. Much of America lives in houses with acreage used solely for growing grass. Most could support seasonal gardens growing crops of some variety. Most don't because of the opportunity costs involved-- the time and resources it takes to grow a garden are high enough that people are better off working their regular jobs and then trading with those who produce vegetables. If people in a city are lining up around the block for access to vegetables, it signals that somehow the market isn't functioning properly. If many people in non-urban areas are unemployed and not growing their own food, it tells me the opportunity cost of their time still isn't low enough for it to be worth it to them. Maybe because they can just go to a food bank instead?

Why are prices so much higher in Bronx stores than in others? Why isn't supply meeting demand? Is it because NYC has so many restrictions on businesses and so little viable space for them? Why do cities like New York work so hard to keep Wal-Mart out, when it could provide goods and services much more cheaply? (Some people criticize Wal-Mart's produce for being unripe when picked and such, but I think something is better than nothing. And Wal-Mart's relatively unpublicized buy local initiatives have put a lot more fresh local produce in their stores than in previous years.)

Why do so many of the unemployed in non-urban America not grow food on their lawns? (I'm thinking about my immediate area in SW Missouri). Even the Martha's Vineyard dad was living in his aunt's large house which appeared to be on a large farm plot, capable of growing food. It struck me as bizarre that he'd be totally dependent on someone else's land. Was the opportunity cost really that high?

These are various unresolved questions I had while watching the show. I'm sure there is research with answers to all the above, but opportunity cost for me to look them up is currently too high.

Book Review (#32 of 2011) The End of Loser Liberalism

2011-10-15T18:21:00.001-06:00

One way to get me to read your book is offer it for free, and the other is to have a nice blog. I found Dean Baker's The End of Loser Liberalism: Making Markets Progressive to be a pleasant read. Baker works for the liberal CEPR and is a shill for the unions. His blog, Beat the Press, applies basic economics principles to debunk various articles in major outlets, which is why he's linked on this blog.

If you can get past comparing every cost-saving measure he proposes to how much the "Bush tax cuts for the wealthy" cost, and get past his overlooking of various economic problems with unions, you'll like this book. Baker's goal is to move the goalposts and argue that Progressives are not and should not be anti-markets. He highlights ways Conservatives have disguised various policies as "free market," when in reality they are not. In that, he does everyone a valuable service. Baker's ideas are quite Hayekian. He generally sees the market as favoring Progressive outcomes:

"Progressives should want a free market" (141). "In the same vein, we can structure the market more generally to produce progressive outcomes. The enormous growth of inequality over the last three decades did not come about as the result of the natural workings of the market; it came about through conscious design. The job of progressives is to point this out in every venue and in every way we can. It is not by luck, talent, and hard work that the rich are getting so much richer. It is by rigging the rules of the game" (154).

Trade deals, for example, are never "free trade" as they are labeled and trumpeted in the media. They always contain a large number of restrictions, usually involving patents and "intellectual property rights," and containing provisions that open the market for our financial services. Most of these clauses favor people who work in higher-skill industries, while the trade deals generally lower barriers for goods produced in low-skill industries. Other high-skilled workers (doctors, accountants, etc.) are in services that are not easily tradable, so trade deals don't increase the competition they face. This could be offset if we allowed freer flows of labor along with goods and services. Most high-skilled immigrants (doctors, engineers, etc.) to the U.S. are unwilling to take low-skill jobs in farming and construction. But due to visa laws and making it onerous for employers to sponsor visas, the supply of these workers in the U.S. is relatively small. Hence, wages for these sectors are high. In the 1990s, physicians groups argued against increasing visas for foreign physicians because these physicians were willing to work for less, and hence would lower physicians' wages via competition. Meanwhile, low-skilled workers in manufacturing are increasingly faced with tougher competition and making the same complaints-- but the situation currently favors the doctors over the factory workers.

In this there is no daylight between Baker and a Libertarian. We'd all be better off if all barriers were removed. But as far as immigration goes, a Milton Friedman quote comes to mind: "You can't have open borders and a welfare state." So, Baker argues that we should take advantage of the fact that every other country in the world pays less for healthcare than we do, and find a way to increase trade in services. If we signed trade agreements in health care, where Medicare would pay for services in places like Singapore as well as the U.S., we'd see incredible savings. Someone could have a heart bypass for $40,000 in Singapore as opposed to $100,000 in the U.S., and the taxpayer or the insurance customer could save. The market would develop ratings for international hospitals and insurance companies could build PPO networks just as they do in the 50 states. Government agreements could work out how lawsuits are handled.

The basic Ricardian analysis of comparative advantage typically leads teachers and students to conclude that the U.S. will continue to shed manufacturing jobs and gain more higher-skilled service jobs. But Baker points out that this broad process cannot be indefinite:

"There is no logic whatsoever in the view that somehow the United States will remain dominant in highly skilled occupations, exporting the services produced in these areas to the rest of the world while importing manufactured goods from the rest of the world. It is perhaps a racist conception to believe that workers in the developing world somehow lack the capacity to compete effectively in skilled professions with people in the United States...To imagine that the United States can maintain an advantage over these countries in international trade involving these occupations would require a view that these engineers and designers can be effective when working in Silicon Valley or Seattle but suddenly become 80 or 90 percent less efficient if they return to their home countries or the countries of their forebears. The United States is destined to import major quantities of highly paid professional services in the decades ahead, just as it now imports major quantities of manufactured goods. The argument for the benefit from these imports is the same as the argument for the benefit of importing manufactured goods: it allows us to buy these items at lower prices than if we relied on domestic production. This frees up income to purchase other goods and services, making us richer and increasing growth" (97).

Any sector of the economy where you see increasing gains over time raises a flag that the market must be kept from functioning properly. Whether it be a tech stock bubble, or a housing bubble, or CEO pay. The fact that U.S. CEOs has increased relative to the median worker, and they are paid roughly twice as much as European counterparts without a noticeable difference in value added, is evidence somehow they are being shielded from competition:

"This pay gap suggests the possibility of large gains to the U.S. economy and to groups of workers who are not in top corporate management from taking advantage of lower-paid top management at foreign companies wherever possible...(T)he public has no patriotic obligation to favor contracts with U.S.-based companies simply because the companies have a headquarters in the United States. Where foreign-based companies like Fiat can offer lower costs, at least in part because their executives are lining their pockets much less amply at the company's expense, progressives should jump at the opportunity to bring them on board."

Baker is not promoting nationalism, but rather economic efficiency, as Progressive which is refreshing.

Baker's hypothesis for why these ideas aren't widely embraced by the public is that the media and political class consists mostly of high-skilled, highly-educated workers who want to see their salaries, and the salaries of their equally high-skilled friends and neighbors, shielded from competition. Meanwhile, they aren't as connected to lower-skilled workers and don't care as much. It's also true that many large Progressive donors work in finance (George Soros) or Hollywood, both of which are highly protected sectors, so some Progressive politicians don't want to hurt their financial position. Baker also just believes the general population lacks economic literacy, as seen with his macroeconomic chapters.

Baker takes the time to give an overview of how the Fed works and to explain the national income approach to the balance of payments because he believes most Progressives are ignorant about how these things work (I can't disagree!). Treasury Secretaries' and political candidates' "strong dollar" rhetoric polls well because people have nationalistic sentiments about their currency, but the fact that the U.S. has run a trade deficit for the last 30+ years indicates that the dollar has been consistently overvalued. We'd likely be doing more manufacturing if the dollar was worth less. He takes time to criticize the China-bashing of recent years by pointing out that:

"At the end of the day, the U.S. Treasury has enormous ability to influence the value of the dollar. It is certainly capable of forcing the dollar down against the Chinese RMB and other important currencies, if this is a major goal of economic policy. So far, a lower-valued dollar has not made the cut. A high valued dollar is in the interest of the financial industry and other powerful actors, and so the Treasury Department has not pursued a lower-valued dollar as major goal in negotiations with China or anyone else."

Conservative politicians who are hawks over the U.S. budget deficit cannot logically simultaneously demand a "strong dollar" policy, something which I've pointed out a few times on my blog. Increasing national saving leads to an increase in net exports via a real depreciation of the currency.

Baker would like to see a Fed that pursues higher inflation and worries more about unemployment. He's not terribly far from market monetarism on some points.

Baker's final point is about patent monopolies. He is a champion of the government buying research patents from pharmaceuticals and providing other incentives-- like prizes-- for the development of drugs rather than seeing consumers hurt by higher drug prices as pharmaceuticals recoup the costs of their research. This is an approach discussed by libertarian thinkers like Tyler Cowen. The reason we don't do that, according to Baker, is that it would mean more government spending on scientific research and conservatives paint this idea as central planning. He also applies this concept to music and the arts, which gets a little hard for me to fathom as reality. But I like the ideas and intention-- the way we have set up our patent monopolies have become very onerous and ridiculous as companies like Apple and Amazon, as well as "patent trolls," hire armies of lawyers to sue each other over patenting the most basic of ideas. This system is slowing innovation and hurting consumers, while benefiting lawyers (regressively).

Baker wisely avoids talking about taxes and income redistribution. He wants Progressives to take up causes that Conservatives can't logically or genuinely argue against on the merits. The caricature of Progressives is that they are anti-market and pro-redistribution. Baker wants to change that.

"Conservatives' complaints about the economic distortions created by high taxes have some basis in reality, even if they are often hugely overstated. Progressives should steer clear of the potential for being seen as having an agenda that means slower growth and less job creation. Shifting attention to before-tax issues of income means talking about the big policy items, most importantly the Fed and the dollar, that have the greatest impact on economic outcomes."

I give this book 4 stars out of 5. Since I read his blog, I liked the full elucidation of Baker's ideas that he usually only alludes to in his posts for brevity's sake. I'd rather have policy designed by a Progressive economist than one created by a Conservative non-economist.

Book Review: Treatise on Moral Sentiments, Parts 1 & 2

2011-10-07T15:05:00.000-06:00

Since tackling Wealth of Nations in the spring, I felt like I needed to read the Treatise, since so many people remark on its contrast. I wanted to see Das Adam Smith Problem for myself and see if I could see things the way Halteman does, that Smith's system contains a telos.

However, I find this book extraordinarily dry and unmotivating and probably will move to other more pressing things. But here's what I've gotten so far:
Part 1 deals with Smith's idea of sympathy -- "our fellow-feeling with any passion whatever" (8). What makes us rejoice with someone or grieve with someone, or them with us? Basically, when we're like-minded with them and can put ourselves in their shoes or they can do the same with us. We judge others by our own standards:
"I judge of your sight by might sight...I neither have, nor can have, any other way of judging..."

Anger repulses us unless it's righteous anger, with righteousness shared universally (appealing to the "impartial spectator"):
"We admire that noble and generous resentment which governs its pursuit of the greatest injuries...by the indignation which they naturally call forth in that of the impartial spectator...which never...desires to inflict any grater punishment, than what every indifferent person would rejoice to see executed" (37). Smith continues:

"As to love our neighbor as we love ourselves is the great law of Christianity, so it is the great precept of nature to love ourselves only as we love our neighbour, or what comes to the same thing, as our neighbour is capable of loving us" (37).

Smith believes that contrary to common opinion "(O)ur propensity to sympathize with joy is much stronger than our propensity to sympathize with sorrow" (79).

What is love, what is passion? Why do we feel the way we do? Is it better to be loved by all quickly, like an instant celebrity, or to slowly build esteem and reputation over time?

The similarities between Smith's Moral Sentiments and Wealth of Nations are that they are both a compilation of his own observations about life. One is about the feelings of the people, the other about their economic interactions. Inasmuch, Smith strikes me as someone who had too much time on his hands. Smith's optimism also comes across in both books:

"What can be added to the happiness of the man who is in health, who is out of debt, and has a clear conscience?...This situation, however, may very well be called the natural and ordinary state of mankind. Notwithstanding the present misery and depravity of the world, so justly lamented, this really is the state of the greater part of men" (81). With the caveat that "Though little can be added to this state, much can be taken of it."

Since Locke and the Enlightenment taught us that government arises from the consent of the governed, I found this quote interesting:
"That kings are the servants of the people, to be obeyed, resisted, deposed, or punished as the public conveniency may require, is the doctrine of reason and philosophy; but it is not the doctrine of Nature. Nature would teach us to submit to them for their own sake...to dread their displeasure" (100).

I think many of us resonate with this idea:
“Are you in earnest resolved never to barter your liberty for the lordly servitude of a court, but to live free, fearless, and independent? There seems to be one way to continue in that virtuous resolution; and perhaps but one. Never enter the place from whence so few have been able to return; never come within the circle of ambition; nor ever bring yourself into comparison with those masters of the earth who have already engrossed the attention of half mankind before you" (105).

I liked Smith's observations about contemporary politics. Politicians aren't the brightest or best public servants-- they're the most electable celebrity. The good ones make sure to hire a good support staff to do the heavy lifting and policymaking. We submit to our superiors because we wish we were them, not because we wish them well (paraphrasing, pgs. 95 and 113-114).

Part 2 gets more into the idea of what is kindness, what is justice? Why do we punish someone caught trying to break into a home much less than someone who actually broke into the home? (II.III.17) It illustrates Smith's belief in a God that would allow justice to be meted out in the afterlife, if not in this one:

"As every man doth, so shall it be done to him, and retaliation seems to be the great law which is dictated to us by Nature," (II.II.10). "But if the murderer should escape from punishment...he would call upon God to avenge, in another world, that crime which the injustice of mankind had neglected to chastise upon earth" (II.II.25).

Justice is desirable because we see it as holding society together. The rebellious youth problem is universal across generations:
"We frequently hear the young and the licentious ridiculing the most sacred rules of morality, and professing, sometimes from the corruption, but more frequently from the vanity of their hearts, the most abominable maxims of conduct...and the consideration which first occurs to us, is the disorder and confusion of society which would result from the universal prevalence of such practices" (II.II.22).

What is misfortune? How do all these affect our feelings and why? These are the questions Smith is asking and answering. (It's not even as interesting as this post makes it sound. )

Occupy the Board of Governors

2011-10-03T18:21:00.000-06:00

I'd like to ask all of the Occupy Wall Street protestors to read some Scott Sumner:

"One of the great mysteries of this recession is how the Fed has been able to get away with doing “the wrong thing” for three years in a row. The BOJ would often claim to be unable to boost NGDP. It was wrong, but the explanation sort of made logical sense. But Bernanke could never make that claim, as his academic research showed the Japanese explanation was preposterous. For instance, why did the BOJ repeatedly tighten monetary policy in the 2000s?
Of course the Fed never claimed to be out of ammo; indeed they have argued the exact opposite. This makes the Fed’s public relations success an even bigger mystery. Why have they gotten away with this stance?"

Read his piece in National Affairs, too. Then, go occupy the Board of Governors and demand adequate monetary policy. It's the Fed's fault. And don't blame Wall Street for lining up at the trough when Treasury and the Fed offered them conditions-free life lines. That was also arguably the Fed's fault. Demand the Fed adopt an NGDP growth rate target and use its unspent ammo. The whole world is watching.

Optimal monetary policy

2011-09-26T14:48:00.000-06:00

If you only read one paper about monetary policy, make it this one. This should be put on every politician and presidential candidate's desk (or stapled to their forehead). If my students could just nail down the knowledge in this one paper, they will be equipped to be much better citizens. They would have a proper benchmark for measuring whether we're getting optimal monetary policy or not.

The Dark Ages

2011-09-22T09:23:00.003-06:00

At the last GOP presidential candidate debate, two candidates (Romney and Gingrich) called Ben Bernanke "inflationary," and pledged not to re-appoint him. Rick Perry has accused Bernanke of "almost treasonous" actions and said he would be treated "pretty ugly down here in Texas." Speaker Boehner and Minority Leader Mitch McConnell wrote an open letter to Bernanke urging him not to pursue monetary stimulus as there was "no evidence" any was needed.

After the FOMC announced its new policy yesterday, the Dow fell 200 points and is down another 300 points this morning. The dollar appreciated in value against foreign currencies, gold and oil also fell. The yields on the 10 and 30-year Treasuries fell to new 60 year lows. The 30 year TIPS spread, a market indicator of inflation expectations, fell below 2% for the first time. The yield curve indeed flattened.

All of the above indicate that inflation expectations have fallen off dramatically. Inflation expectations are at historic lows. Accordingly, NGDP growth expectations have fallen dramatically, and the Fed's announcement itself indicates the FOMC is pessimistic about growth and employment.

It's really simple: When demand for money increases, velocity (the inverse of demand) decreases. As a result, NGDP decreases.

The Fed's job is to manage the M x V side of the equation. Yesterday's new policy brought no new increase to M, only a reshuffling of the Fed portfolio to try and get investors to move out the curve at the margin. As Scott Sumner reminds us, a flat yield curve represents tight money, and not loose, "inflationary" monetary policy. If the Fed was pursuing the "inflationary" policies it's accused of the yield curve would be steeper and NGDP growth would be much higher. Anyone who tells you otherwise is ignoring at least 400 years of economic thought. Journalists who are puzzling as to why the market is acting this way should probably order some textbooks off Amazon.

NGDP expectations matter a great deal, as David Beckworth points out:

If firms expect more income, they will invest and produce more. If workers expect higher incomes they will spend more and have more confidence in firms, leading them to hold less cash and save more in the form of stocks and corporate bonds, boosting asset prices. The increase in consumption and investment and production boosts employment and incomes, and the cycle continues.

My thoughts are not new or leftwing-liberal-progressive. Milton Friedman taught them. F.A. Hayek taught them. This "new" (but really very old) school of thought is now called market monetarism, and it is what I most identify with. Ramesh Ponnuru of the National Review has taken up the MM fight several times. Scott Sumner wrote this must-read piece for the conservative National Affairs. If you have put your currency in the hands of a central bank, then its job is to achieve monetary equilibrium and it is the only entity that can do so.

I've become cynical about the GOP's ranting against the Fed because they obviously have the most to lose (2012 election) if the Fed does its job and the economy picks up. I've become cynical about the President because he's allowed two seats on the Board of Governors to go unfilled, along with several positions in Treasury Department and elsewhere, at a time when all hands on deck are needed (the GOP have blocked or threatened to block several nominations, but he could always recess appoint around that and chooses not to). I've become cynical about the FOMC because three members loudly voted against the FOMC's decision yesterday because they do not support "additional policy accommodation at this time." But the most valid criticism of the Fed right now is that they have not plotted any forward course; they have not told us where they want the economy to go. They have simply told us they do not like where we are headed and want to rev up the engines to prevent going there, but they've left the ship in neutral and there is no specific destination. That is defacto the same thing as moving in the wrong direction.

It feels like a Dark Age to me.

Book Review (#31 of 2011) Slave by John MacArthur

2011-09-17T10:19:00.002-06:00

Slave: The Hidden Truth About Your Identity in Christ was sent to us for free by mail. It's actually my first MacArthur book to read, though I'm fairly familiar with his teaching.

The MacArthur disciples I've known tend to be dogmatic and quick to judge (I'm stating my bias outright). I would describe their approach to Scripture as "hyper-sola scriptura," usually culminating in the idea that the Bible is so perspicacious that everything that can be known about God is found in its pages, and anyone can discover all there is to know about God by studying it hard enough. I know one pastor who attended MacArthur's seminary who claimed he could unseal the prophecies given to Daniel (that God says are intentionally sealed until the endtimes) just by studying it harder. (Daniel apparently didn't study them hard enough, nor did anyone else over the millenia.) The Holy Spirit seems a minor player, and the idea that "none of us read the Bible alone" seems anathema to MacArthurian thought (though I'm not certain of MacArthur's own stances).

MacArthur lapses into that caricature at one point in the book (Pg. 75):
“Nonbiblical ministry, non-expository preaching...usurp Christ’s headship, silencing His voice to His sheep... That kind of devastating approach steals the mind of Christ away from the body of Christ...and quenches the work of His Spirit...and sows seeds of compromise. It deflects the honor due to the true head of the church, and the Lord does not take kindly to those who would steal His glory.”

So, if your pastor preaches a topical sermon he is stealing Christ's glory. If your church has a ministry, like youth ministry, that is not found in Scripture then it's "devastating."

However, Slave is a good word-study, and MacArthur draws on a large amount of sources who examine the use of the word and the context of slavery that OT and NT writers would have been familiar with in writing the words. One modern study that he draws on a lot is Murray Harris' Slave of Christ.He also draws on many historical church figures. If you like books with footnotes taking up half the page, then this is a good one.

The Hebrew word for slave ‘ebed’ is used metaphorically to describe believers (more than 250 times) NT use of the Greek word doulos is similar. It is used at least 40 times in NT to denote relationship of believers to divine master. An additional 30 NT passages use doulos to teach truths about Christian life. (Pg. 12)
The Greek word “kyrios” for Lord is used 750 times in NT, fundamentally meaning “master” or “owner”... relational counterpart to doulos. No slave is greater than his “kyrios” (Pg. 77)

MacArthur wrote the book because of what he sees as an "unintentional cover-up" by modern translations and teachers to re-interpret "slave" as something less harsh. While the KJV translates the word as "servant," this is problematic because servants are hired and slaves are owned.

Roman slaves had no recognized personality, they were not considered people and had no rights. While there are examples of abusive owners being publicly shamed or facing penalties, there are plenty of examples of abuse. However, slaves were allowed to be educated and it wasn't rare to find a slave who was a tailor, or a physician, or other skilled trader. But a slave's worth was based solely upon the worth of his master. In cases where slaves were freed, they were usually given Roman citizenship. There are many recorded cases of slaves becoming adopted as sons of the master, which also provides some metaphorical imagery.

MacArthur draws on John Newton (of Amazing Grace fame) to illustrate the difference between the African slave trade and the Roman one. The major difference being that African slavery was based on racism, whereas Roman slavery was not--slaves were of every race. African slaves were forbidden to learn to read in the American South and if granted freedom were restricted in other ways dissimilar to the Roman time period, where full rights of citizenship were usually bestowed. But other than that, the life of a Roman slave wasn't much better than an African one--a point MacArthur emphasizes.

The NT is explicit that we are either slaves to sin or slaves to Christ. Newton's words paint the image most vividly, as he was most familiar with the slave trade having both been a trader and also subject to being enslaved himself for a brief time. Christ frees us from our sins and binds us to Him as His slaves. Even in early church history, believers referred to one another as "fellow slaves." Ignatius (c. 50-110 a.d.) wrote about the "bishop together with the presbytery and the deacons, my fellow slaves." The Shepherd of Hermas (c. 130 a.d.) refers to believers as "slaves of God." I was reminded of the headstone I saw in Ankara of "John" who was known in death as "the slave of God." We don't like to use those terms today.

MacArthur explores a paradox, for we are also adopted as Sons of God. Pg. 175-176:

"Through Christ we have been set free. We are no longer slaves to sin, to the fear of death, or the condemnation of the Law. But we have been made slaves of God, for Christ, to righteousness. Such is true freedom. Thus, we are simultaneously sons and slaves. The two realities are not mutually exclusive--even if the metaphors are different. Forever we will be part of His family. Forever we will be in His glorious servitude."

(The above passage contains sixteen NT references footnoted.) MacArthur deals with John 15:15 where Jesus told His disciples "No longer do I call you slaves...but I have called you friends." Pg. 176:

"At first glance, it seems as if He might be obliterating the slave metaphor altogether. But such is not the case, as evidenced by the fact that the disciples continued to refer to themselves as 'slaves of Christ' long afterwards...Moreover, Jesus defined friendship as submission to Him: 'You are My friends if you do what I command you' (John 15:14)...That Jesus views believers as both friends and slaves is supported by a host of New Testament passages."

We are also citizens of the Kingdom of Heaven, another aspect that MacArthur explores.MacArthur explores how many NT Christians were both actual slaves or owners of slaves, like Philemon. Slaves are exhorted to work "as for the Lord" and masters are exhorted to treat their slaves well with the understanding that they themselves are slaves of the Master.

MacArthur spends several chapters delving into how the proper contextual understanding of the word "slave" jives with theological Calvinism (which MacArthur never calls Calvinism, but rather "doctrines of Grace."). Slaves had no choice about their ownership, and neither do we as the elect. The imagery of slavery and submission are difficult for all modern believers, and generally rejected by various modern liberal traditions I run into, which helped motivate MacArthur to write Slave. I recommend it as a study and as a good reference for other historical works dealing with the issue.

In all, 3.5 stars out of 5.

God Can't Take Risks

2011-09-15T12:51:00.002-06:00

I teach Insurance and Risk Management, a finance-listed course that looks at the insurance industry and how individual firms use insurance to deal with pure risk (the risk of a loss). Which begs the question, is there a biblical basis for risk?

Risk is basically defined as "uncertainty." John Piper had this excellent blog post about God and risk that I shared with my class. Piper is addressing a book he finds scripturally false. The authors state that:
"It seems correct to say that God took something of a risk in handing over his mission to the all-too-sinful human beings who were his original disciples—and all the sinful disciples beyond them. We wonder what Jesus must have been thinking on the cross, when all but a few powerless women had completely abandoned him. Did he wonder if love alone was enough to draw them back to discipleship? ...(I)t is entirely conceivable that history could have gone in a completely different, indeed totally disastrous, direction..."

Piper takes the argument apart to show that an omniscient God cannot take risks-- there is no uncertainty in Him or His mission. Nor is there any uncertainty, ultimately, for Believers because God does not break His promises to them. We may not know what will happen to us tomorrow, but God does and is using whatever is happening for His purposes. Piper:

"The promises of God that all things will work together for our ultimate, Christ-exalting good is the basis of our risk (Romans 8:28). And corporately the basis of global missions, with all its risks, is the total assurance that 'the kingdom of the world [will become] the kingdom of our Lord and of his Christ, and he shall reign forever and ever (Revelation 11:15). The mission cannot fail."

"No saint will say in heaven: The mission succeeded because my will was decisive in taking risks and making sacrifices. Rather, the saints will say, “God equipped us with everything good that we might do his will, working in us that which is pleasing in his sight, through Jesus Christ, to whom be glory forever and ever” (Hebrews 13:21)."

I've thought about this lately in regards to the story of Abram/Abraham. This is my 3 year old's favorite Bible story right now. God told Abraham that he would make him into a great nation and that he'd have many descendants (Genesis 12:1-7). But during his journey, Abraham shows his uncertainty about God's promise and fears for his own life, before ever having descendants or being made into a nation. Twice he lies about his wife because he fears he'll be killed (Genesis 20:11). He's promised that Sarah will give birth to her own child, yet he clearly doubts the promise and has a child with another woman instead (Genesis 17). It's only after Isaac is born that Abraham finally believes God-- when God asks him to sacrifice Isaac-- and believes that God will keep His word regarding his descendants and realizes there is no ultimate risk in sacrificing him (Hebrews 11:17-20). I think of how patient God was for Abraham to get to that point, and His patience with me as I struggle to come close to there.

So, I like Piper's point that Christ-exalting good is the basis of our risk, and so long as we know His promises toward us there is no ultimate risk in obeying Him. God does not fail, does not make mistakes, and does not play dice.

Here's a related Piper sermon (from 1987) entitled Risk and the Cause of God.

Memories of 9/11

2011-09-10T17:19:00.000-06:00

I thought I might as well record my memories of that day since everyone else is too. I share memories with the caveat from this Scientific American article that studies have found memories are very faulty and while we think they're real, they may not be.

9/11 was a Tuesday and I had International Economics in the morning. I remember Dr. Trask telling us "Someone just told me that an airplane crashed into the World Trade Center." She tried to call up a news website but said that the internet seemed to not be working. I remember a student saying something like "Yeah, a second plane hit too," but it didn't register. We proceeded to have class, dealing with international trade. I had remembered reading a blurb in the news about a trade protest and imagined some Greenpeace protestor crashing a small Cessna into the WTC. No big deal, I didn't think much about it.

After class I walked down to Arby's for lunch. As I stood in line to order, I saw people standing and watching the TVs, while others were just sitting and eating like normal. I saw a tower smoking, and it was apparently a replay. As I took my tray to my seat they showed a replay of the towers collapsing. It was all surreal. Then I started to read the crawl at the bottom of the screen and saw that a plane was missing, or that one had crashed in Pennsylvania. That was my first inkling that something was very, very wrong and I felt a chill.

After lunch, I walked back up to campus. On the way I passed Sara, who had been in a group that I went to New York City with in March of 2001. She was on her cellphone but said something like "isn't it crazy?"

I hit the computer lab before class but ran into the same problem Dr. Trask had earlier-- the Internet wasn't working. I recall being able to bring up the NY Times homepage and reading a message about system overloads as everyone was trying to get online to get news. The lack of information was frustrating, so I just rolled with it and went to class-- Russian Language.

When I got in the room, Professor Ruder had a TV on turned to the news. Everyone was just sitting silently watching. Nobody said a word and after about 10 minutes I wanted to ask "Um, are we having class?" Not sure what to do, but pretty certain that this was how we would spend the class period, I just got up and left. I'd rather watch my own TV. Prof. Ruder sent me an email later to check on me because she was concerned at how I just left. I'd have rather had class that day.

Once I got home, I think I turned on the TV to get updates and it didn't take long to learn what everyone else knew-- which wasn't much at that point. I remember checking email and reading a prayer request for a friend's brother who worked at the Pentagon and was unaccounted for (he turned up fine later). I remember calling my mom because it seemed the right thing to do. Don't think anything profound was said, wasn't a long conversation.

I'm not sure how the rest of the day was spent, but I remember that I got word of a student-led prayer gathering on campus that evening. I mainly remember we were in circles of maybe 20 people, holding hands and praying fairly spontaneously. I don't remember if anyone opened or closed the meeting, it was mostly just prayer. And how do you pray in that situation? I remember not really knowing what to pray for.

My worst memory of that day is one guy fervently praying that God would send more planes to destroy more buildings if that's what it took to get America to repent. That struck me as the opposite of how Isaiah and Jeremiah and Moses prayed for Israel-- always begging God for mercy even when they knew Israel deserved judgment. But this guy was praying for just the opposite and I remember one or two others chiming in with "yes, Lord!" as he prayed this ridiculous prayer. Wish I could forget that moment, that guy is still one of my all-time-least-favorite people from college.

It was around that time that I started to pray for countries in Central Asia. I didn't know that in a year's time I'd be packing up to move to one.

After the meeting broke up, a few friends and I went down to one of the places in the Student Union with a big-screen television and watched the President's speech. I remember him invoking language from the Psalms. Then I went home.

That night a telemarketer or surveyor called the house to do a survey. He apologized profusely, you could tell his company was under a deadline to get a survey done (about insurance or something) and he basically begged me to do the survey. I obliged and then he obliged as I shared the Gospel with him when the survey was finished. "If you had been in the towers today, do you know where you'd spend eternity...?"

I remember that all of my Wednesday classes met like normal the next day, and that made me bitter because many of my friends' classes canceled. One teacher felt remorse, I think, so we had a very awkward moment of silence on Friday.

In church on the Sunday afterward, Dr. Henard preached from Luke 13:1-5 "Unless you repent, you will all likewise perish," which I think is appropriate for any disaster (see v. 4-5). For certain services, like this one, he had a way of trying to evoke an emotional response, hinting strongly, but not asking directly, for people to come to the altar and pray at the end of this service. I remember he got kind of mad when people hesitated to come forward and do so, so down front we went. In one of the services, someone (likely a visitor) stood up at his seat and started speaking in tongues, which never happened nor was welcomed at the time, but it passed quickly and was laughed at by staff later.

I taught 9th grade guys Sunday School, and I'm pretty sure I talked about Romans 13:1-5-- how Paul affirmed the authority of the State to yield the sword (ie: as a justification of our now going to war. Was I trying to paraphrase Piper or someone else? Probably, I don't recall). I'm pretty sure the high school SS director made some long comments such that I didn't have much time to teach anyway (my worst teaching experience ever was teaching SS that year. I still regret volunteering to do it-- for multiple reasons).

Those are my collective memories of that week.

By the end of that school year, one of my former classmates who had joined the National Guard to pay for school got called up and began what was a long series of multiple deployments, including stop-loss extra time in Iraq. When he (and others I knew) joined up long before 9/11 it seemed the odds of deployment were very small. War changed the calculus there. It changed everything. The underlying uncertainty of those months was what was most disturbing, and what I most want to forget.

Book Review (#30 of 2011) The Theory of Free Banking

2011-09-05T20:24:00.002-06:00

The Theory of Free Banking: Money Supply Under Competitive Note Issue by George Selgin (1988). Selgin is an economist at the University of Georgia who also contributes to the Free Banking blog where I found this book.

Selgin is eager to put to bed any prejudices against free banking by pointing out that many prominent theorists who had been skeptical of its merits never really studied what free banking really was nor had an all-encompassing theory to work from--until now. Selgin provides some historical background into various short-lived attempts at free banking and examines why they were short-lived. He builds a theory of how currency and a system of fractional reserve banking without a central bank could arise in the hypothetical economy of Ruritania. He then provides a critique of central banking and makes a proposal for how our current U.S. Federal Reserve system could be dismantled and free the banks to be like other businesses in a competitive marketplace.

Selgin is fighting battles on several fronts here-- with modern economists who take our current system as a given, with Rothbardians who believe fractional reserve banking is immoral, and with dead economists who did not properly grasp the history of free banking (or lack thereof). Monetarists squabble about the best way to achieve monetary equilibrium and Selgin's theory presents a believable means to achieving it. I would say the bar for new ideas to be accepted here isn't that high-- since everything else we've tried has failed then why not try this?

I particularly liked the explanation of how in a world where banks are free to issue notes, arbitrage opportunities would eventually cause markets to arise that would cause all notes to be accepted at par. I also liked the practical explanation of how private insurance and reciprocal agreements between banks could prevent a system-wide bank run.

The two specific issues I found inadequately addressed in Selgin's theory are:
1. "Note dueling--aggressively buying large amounts of rival's notes and presenting them for redemption all at once." Selgin says that as all banks learned to keep high reserves, note dueling would cease to be advantageous and banks would eventually not do it. But, why would this not just as easily result in a Nash equilibrium where banks end up holding a large amount of reserves? It seems to me that the Pareto-efficient outcome-- banks holding low reserves and trusting each other not to duel-- creates a real incentive for someone to cheat, leading to a standard Nash outcome.

2. Selgin believes that banks would want to compete with branded bank notes-- like Nike, Reebok, Adidas, but with currency. It seems hard to see how this could lead to monetary equilibrium, as monopolistic competition causes a less-than-socially-optimal quantity to be produced, and at a higher price.

The simplicity of the theory is appealing, but another caveat is that it is looking at banks rather traditionally--abstract from what we now see in modern banking. Little attention is given to the assets the banks hold, presumably they are unregulated so can invest in anything. Presumably since there is no central bank increasing the money supply beyond equilibrium quantity there is no asset bubble & bust that would drive banks out of business. I haven't worked it out in my own mind, but I'm not certain that monetary equilibrium can completely eliminate all asset market inefficiencies and quell the "animal spirits."

There is also little attention given to what happens if an economy, like the U.S., adopts the free banking model from its current central banking position. Is there a first-mover advantage or disadvantage in global capital markets? Free banking also only works, of course, if all other markets are left relatively unregulated-- if government simply maintains its limited role prescribed by classical liberals. I think the last 30 years are evidence that if you deregulate piecemeal, you get serious distortions. Hence, free banking seems to be a Pareto-efficient outcome that is unobtainable given where we are today. But that doesn't mean that a country like Estonia, who I think would be the best candidate, couldn't give it a shot.

In all, I give this book 4 stars out of 5. I liked it, learned a good bit of monetary history from it.

Dirty football

2011-09-03T09:35:00.001-06:00

"Happy is he who does not condemn himself in what he approves. ²³ But he who doubts is condemned if he eats, because his eating is not from faith; and whatever is not from faith is sin" (Romans 14:22-23).

It's college football time, and as I watched the end of last night's Baylor-TCU "instant classic" I was reminded that there is no more exciting sport to watch. But my conscience bothers me.

I've written several times (example) about the problems I see with our minor-league athletics being wrapped in our non-profit university system. The NCAA takes advantage of students to enrich non-students. Resources are crowded out of education to support sports--which doesn't help our country build capital to increase productivity in the long-run.

Last night, PBS NewsHour had a segment on the recent scandals, particularly at the University of Miami, where a booster running a ponzi scheme paid for everything (NY Times) from prostitutes to abortions for players and their friends. The linked article notes that Miami isn't likely to face the harshest penalties because it would cost the NCAA and the ACC "too much money." There are rules, like not allowing a player to profit from selling his own memorabilia even though the school and NCAA can sell it for profit, that should irk anyone who cherishes liberty. But uneven enforcement of the rules or saying "that's just how it is" is maddening for my sense of justice. The Wall Street Journal chimes in with a rating of all 120 teams and how "embarrassed" their fans should be.

Kevin Blackiston, the journalism professor NewsHour interviewed for the segment made the point that the entire system is corrupt, starting with the NCAA overseers, citing the recent Fiesta Bowl scandal as an example-- a non-profit organization showering money and gifts (like visits to strip clubs) on NCAA powers-that-be.

But Blackiston made the following comment in this exchange with Jeffrey Brown that stuck with me:
---

KEVIN BLACKISTONE: It is a very -- to me, a very unholy alliance that we have right now between what is a revenue-generating operation in college athletics placed under the umbrella of a nonprofit institution of higher education, which, to my knowledge, doesn't have a mission statement that says, win the national championship, produce All-Americans, that sort of thing.

JEFFREY BROWN: And, in the meantime, as we said, the games go on, right?

KEVIN BLACKISTONE: Absolutely. And I will be watching them this weekend.

(LAUGHTER)

JEFFREY BROWN: All right.
---

So, even though we all know it's "unholy," "exploitative," and "corrupt" we will continue to watch and pay money to keep it going anyway because it's just so much fun.

That's what gets my conscience-- if you know something is wrong and harmful shouldn't you make a stand against it? I have a little different perspective on this because I teach student-athletes and see the exploitation a little more clearly in their day-to-day lives, but it's also obvious to everyone who watches the sport.

What about the Church here? Shouldn't the Church be different from the culture around us? I've thought about this a few times (example) over the years and found the Church doesn't have much to say. Several years ago, I quit watching Major League Baseball in the wake of the steroids scandal because I felt the evidence showed the problems weren't found in just a few bad apples but rather that the entire system was not what it claimed to be. But now I see our collegiate athletic system does much more harm to its players than MLB ever did--the system is a scandal in and of itself, and it's not just football.

My pastor is a Michigan fan, he even mentioned from the pulpit that he "makes no bones about it," he loves watching the kids line up and bang helmets every week. Other local pastors tweet eagerly about football and other sports. I would just love to hear one admit once that "Yes, the system is broken, unproductive, and exploitative but it entertains me so I watch it."

It seems awkward to start a conversation with a pastor about, but I'd love for one to spell out how he has achieved a clear conscience about watching it. Because the more I watch and investigate, the more frustrated I become. There is no empirical evidence that the resources directed toward football is welfare enhancing for any university. The more I see football players flunk our classes and then transfer to their next playing spot, the more ashamed I am to be a part of the system. The more pastors and university presidents I see cheering the system on the more confused I become.

Socrates said "the unexamined life isn't worth living," and I agree. But the examined life can lead you to some conclusions that make the life feel a good bit lonely. So, who wants to join me?

Lack of Blogging

2011-09-02T12:35:00.000-06:00

The semester has sort of crowded out blogging activity. I still post a daily thought or two over at Google+, and typically share my article readings there. Now that I'm using Pinterest to catalog graphs for class, I no longer need to use my blog for that (which is what motivated a lot of posts). There's not much good news to blog about and I don't want to dwell on the negative right now. Better to not say anything at all sometimes.

Murray Rothbard was wrong

2011-08-28T14:16:00.000-06:00

Other people who have known the man personally or read more of his stuff than I ever will have pointed out that much of his historical commentary is flawed or contains serious errors. But one that I found in his Mystery of Banking is this line (emphasis mine):
"And, indeed, under the Monetary Control Act of 1980, the Fed now has unlimited power to buy any asset it wishes and up to any amount--whether it be corporate stocks, bonds, or foreign currency."

I see no evidence supporting this. Here is an outline of how the MCA altered the Fed's powers. Section 13, Subsection 3 of the Federal Reserve Act gives the Fed the power "in unusual and exigent circumstances" to expand credit various ways. The Fed used this in 2008 when it bought commercial paper, MBS, student loans, etc. but this has never been interpreted as giving the Fed the power to buy corporate stocks. A recent conversation with a Wall Street journalist confirmed this, she had recently interviewed someone on the Board of Governors (or a former Governor, not sure) who explicitly said the Fed did not have power to buy stock. An error like this, spread through the internet as much of Rothbard's writings are widely read, gives people a different perception from reality as to what the role of the Fed is.

Rothbard wrote that in 1983, much closer to the time period than today. But apparently he misremembered the details a bit and never let the record stand corrected. Let the reader beware and reach his own conclusions as to his motives.

Real men use Pinterest (aka The Economics of Pinterest)

2011-08-24T14:16:00.000-06:00

I first heard of Pinterest through a co-worker who got my wife hooked on it. It's a social network that is for sharing ideas and "likes" via the power of visual image (here's a good example). The way it works is you surf the web and see something you like on a site-- could be a recipe or a photograph, any image. You click "Pin This" on the button you've installed on your browser, and it gets added to your Pinterest feed, under a category that you choose. Others who follow you or are searching for things in the same category can see it, and then re-pin it... like RT'ing a tweet on Twitter. A visual idea spreads like wildfire. Visiting the site you'll find it's 99% used by women.

But here is my Pinterest profile, you'll find I found another perfect use for it. It's like social bookmarking through Delicious, except for images. Since I collect an awful lot of graphs and charts for class every day, I now have a way to store them and see them all on one screen. No need to sort through a textual description of it via Delicious. Every economist should use Pinterest.

Note, this post isn't really about the economics of pinterest, I just titled it that to shamelessly get search hits.

Book Review (#29 of 2011) The Mystery of Banking

2011-08-23T20:13:00.004-06:00

The Mystery of Banking by Murray N. Rothbard. Austrians have made pretty much all of their books free, which is part of why their ideas are far-reaching.

This book reads like a well-written textbook and has basically three parts:
1) A primer on supply and demand for money. (Those are parts I quoted from in my previous post).
2) An explanation of how fractional reserve banking works.
3) A history of banking in the U.K. and U.S., with some prescriptions to how an ideal Rothbardian system would work.

While Von Mises and Rothbard build and develop from much earlier monetarists, they reach radically different conclusions from them: Any increase in the overall price level is evil. Fractional reserve banking is immoral because it creates something out of nothing. Our modern banking system is built to create inflation to enrich some at the expense of others. Only by returning to a gold standard and eliminating our central bank and all fractional reserve banking can we achieve a completely stable business cycle (utopia with no involuntary unemployment).

Except for these ideas, parts 1 & 2 are similar to any textbook on Money and Banking, or a Principles of Macro text. Part 3 is very jaded, there is a lot of history that Rothbard omits or reinterprets. For example, there was a lot more going into the Panic of 1873 for the U.S. than Jay Cooke's bubble bursting-- the crisis started in Europe, which doesn't get mentioned. That said, there are a lot of interesting facts I was unaware of. I also liked having a Money & Banking text that didn't deal with interest rates at all, everything was in terms of supply and demand for money. That monetarist bent is badly needed in today's world focusing on a mythical "zero bound."

The book really illustrated for me the quixotic nature of the Austrian cause. Since coinage was invented, the makers of those coins have been debasing them in order to profit or inflate away debt. Since people have gotten used to calling their currency the "pound," "dollar," etc. instead of it just being "gold," people don't notice the debasement. But it would take a radical departure from thousands of years of human nature to move people away from this problem, even if currency was "denationalized."

Rothbard compares the fixing of a price of gold as the same as a government determining uniform weights and measures -- a centimeter is the same everywhere. But the value of a centimeter never changes whereas gold-- being a commodity-- sees its value change with supply and demand, which then changes the value of any currency whose price is fixed to it. The Austrians seemingly ignore this. For example, the late 1800s period in the U.S. the population was growing, output was increasing, but gold supplies were not growing so much so the value of gold rose and prices fell. Rothbard would say this is a naturally good thing, lower prices mean people can afford to buy more. But if you're a farmer who has fixed obligations -- contracted workers, a loan from a bank, etc. lower prices means it's much harder to stay in business and not default. (Hence we had a bimetallic inflationist political movement as a result.) Rothbard completely ignores this.

These fluctuations in the value of gold can happen suddenly and unexpectedly. Given so much of the (correct) emphasis that I see Von Mises placing on expectations of entrepreneurs, I find Rothbard's position pretty problematic.

As mentioned in my previous post, Rothbard and Mises acknowledge that prices are often sticky, but have a one-size-fits-all explanation for this that doesn't actually fit everywhere. All weight is put on the evil of prices inflation, no weight is put on the harmful effects of deflation.

I now see the Austrians as on par with the hard-core left-wing Communists who want to issue in a utopia that is impossible due to human nature. The idea that simply by moving to a 100% reserve gold system and moving to anarcho-capitalism will solve all of our ills and make everyone purely rational yet benevolent is pure nonsense. It's odd to me that as such an astute student of history, Rothbard doesn't see the continual "Road to Serfdom"-like cycle that all civilizations have ridden since the Fall of Man.

In the end, there is an Appendix where Rothbard absolutely rips Lawrence White, also an Austrian, for what Rothbard sees as an incorrect interpretation of the history of free banking. Austrians, like Keynesians, have a good reputation for trying to destroy and humiliate those they don't like.

George Selgin, whose Theory of Free Banking will be my next read, is a former Rothbardian disciple who sums it up thus:

Rothbard, on the other hand, was only too determined to identify himself with the Austrian School and, more than that, to both take part in a personality cult, built around von Mises, and attract such a cult himself. One sign of the presence of such a cult is precisely the scorn its members heap on potential rivals to the cult figure.

As a monetary economist (I don't pretend to judge Rothbard's other economic contributions) Rothbard was mediocre to bad. His version of the Austrian business cycle theory was naive--in essence it equated behavior of M consistent with keeping interest rates at their "natural" levels with the elimination of fractional-reserve banking, an equation that holds only with the help of about a dozen auxilliary assumptions, all of which are patently false. He then went on to conjure up an equally false history of banking and of bank contracts designed to square his theory of the cycle, with its implied condemnation of fractional reserve banking, with his libertarian ethics.

As such, I give this book 3 stars out of 5. It's very readable, and you can learn a good deal of history, monetary economics, and how banking works from it. However, if you don't take it with a large grain of salt you may not see the many errors and omissions that cause it to be quite slanted.

Did Murray Rothbard believe in aggregate demand? (Yes, he did)

2011-08-21T13:37:00.006-06:00

I'm currently reading Rothbard's Mystery of Banking. In the first few chapters I found some things in Austrian thought I wasn't expecting. It appears to me that the Austrian model has a basic framework that it is very much possible to increase output and decrease unemployment by increasing aggregate demand through monetary policy. While heavy on monetary policy, there's hardly any mention in this book of interest rates (which Scott Sumner would appreciate) and nothing about interest rates being artificially below some Wicksellian natural rate. There are also the basic ideas of sticky prices and wages (but explained using only one hypothesis put forth by Von Mises) and an elucidation of the time-consistency problem (this book was written in 1983, same year as Barro and Gordon's paper and two years before Rogoff's time-consistency paper was published). In the models developed in book, I don't see much difference between Sumnerian quasi-monetarist and Austrian thought, except for what Rothbard leaves out--namely the effects of an increase in the money supply on output and employment.

Page 60:

"The only way in which consumers, especially over a sustained period of time, can increase their demand for all products is if consumer incomes are increasing overall, that is, if consumers have more money in their pockets to spend on all products. But this can only happen if the stock or supply of money available increases; only in that case....can most or all demand curves rise...and prices can rise overall."

Is this not NGDP or aggregate demand? Sure sounds like it, though Rothbard never calls it that. Rothbard focuses on the increase in price level as being immoral. But what Rothbard leaves out is what happens to supply. If demand shifts to the right, quantity supplied also increases (if more stuff is being bought, more stuff has to be produced and more resources utilized to produce it). It appears that supply curves are perfectly inelastic in the Austrian short-run, but elastic:

"If...that increase (in demand) is perceived by the producers as lasting for a long period of time, future supply will increase" (Pg. 58).

So, wouldn't an expected permanent increase in price level cause a permanent increase in quantity supplied (Pg. 59)? So, in that sense the Austrians could agree that FDR's devaluation of gold, a clear price-level target, could cause the increase in demand, output, and employment. Am I wrong? To the freshwater economists who contend there is no such thing as aggregate demand, or to those who believe that business cycle fluctuations can't be caused by aggregate demand, it would appear Rothbard disagrees:

"Despite the currently fashionable supply-side economists, inflation is a demand side (more specifically monetary or money supply) rather than a supply-side problem. Prices are continually being pulled up by increases in the quantity of money and hence the monetary demand for products."

This is important because it doesn't say "an increase in the money supply just causes prices to increase," Rothbard is saying prices rise because demand for products increases. Rothbard's model would appear to have to accept that a central bank (or whoever is in charge of the money supply if centrally controlled) has the ability to determine the growth rate of NGDP over a long haul.

It seems pretty clear that if we're not experiencing a high rate of inflation right now then Rothbard would say it's because demand for money is high relative to the supply of money. If people aren't spending it, and firms aren't producing, it's because they don't expect price levels to rise.

More interesting is the contention of sticky wages. Why doesn't a 20% increase in M cause prices to rise by 20%? A 20% increase in M would lead to an increase in aggregate demand and an increase in quantity supplied. Von Mises apparently explained this in Post WWI Germany by saying the Germans simply expected prices to eventually fall again, therefore they held on to their money (demand for money increased, causing a deflationary offsetting of the increase in money supply, Pg. 119-120). **Update. Alex Tabarrok graciously pointed out that it appears Mises was making Krugman's argument on why Japan's monetary stimulus has been ineffective in increasing inflation-- the Japanese simply don't believe the central bank would allow inflation, and hence have expected lower or stagnant prices and kept up their money demand (and they've been correct at calling the central bank's bluff). **

(Rothbard's words):

"(Expectations are sluggish in revising themselves to adapt to new conditions. Expectations...tend to be conservative and dependent on the record of the recent past...Unfortunately, the relatively small price rise often acts as heady wine to government...They can increase the money supply...and prices will rise only by a little bit!"

This is clearly an explanation of a non-vertical Phillips curve (without mentioning such a thing). So long as expectations are anchored, an increase in the money supply can cause an increase in aggregate demand without a 1-for-1 increase in prices. This works until "the public's deflationary expectations have been superceded by inflationary ones," and prices begin to rise faster than output increases (Pg. 122).

So, even Austrians agree that a central bank can fool people in the short-run and get growth at the expense of testing credibility. We all agree that in the long run the effect will be higher inflation as expectations adjust (the long-run Phillips curve is vertical).

Do any Austrians disagree with these contentions?

How to stop a European bank run

2011-08-17T19:29:00.001-06:00

This piece from Joseph Cotterill on the FT Alphaville blog this morning reminded me of what I learned about bank runs from Gary Gorton's book. It relates directly to what the Eurozone countries are trying to do to stave off a run on their banks.

From the 1860s to 1913, there was no U.S. central bank to be lender of last resort. Banks formed "coalitions or clubs of banks" to coordinate in processing checks and to monitor one another's behavior. During a bank run or panic (Gorton):

"banks would jointly suspend convertibility of deposits into currency...clearinghouse member banks joined together to form a new entity overseen by the Clearinghouse Committee...The clearinghouse would also cease the publicatoin of individual bank accounting information...and would instead only publish aggregate information of all the members...the clearinghouse issued new money, called clearinghouse loan certificates, directly to the public."

So, the good banks and bad banks were all lumped behind a firewall, and no one knew who was bad or good; no depositor could redeem his deposit until the banks behind the firewall dealt with the problem, the panic subsided, and the firewall was taken down. This created incentives for banks to behave well and not get risky in the first place or risk being kicked out of the coalition. (Ironically, when the Fed was created in 1913 this practice became illegal and actually made the system less stable.)

Europe is now trying to do the same thing by eliminating individual country debt and only issuing joint Eurobonds. Greece is experiencing the run, and rumors abound that maybe all the countries are doomed-- so Spain and France see their interest rates rise and CDS on their bonds also get more expensive as investors fear default. This is just like a bank run, and a run is a self-fulfilling prophecy.

Like the banking coalition, the Eurobond proposal requires greater uniformity in the behavior of the individual members, lest they be kicked from the club. So, European countries will have to adopt a much stronger fiscal union than before. (Think of the 50 U.S. states that all uniformly have balanced-budget requirements in their constitutions.) Fiscal unity is a prerequisite for a common currency, so this step should have been taken long ago if the euro experiment was to succeed.

It remains to be seen if all the countries will jump on board. Just like the banking coalition, the fiscally sound countries hate the implicit subsidy to the weak countries, but it's necessary if their coalition is going to survive. If they don't adopt the measure, the Eurozone as we now see it is doomed.

Book Review (#28 of 2011) Slapped by the Invisible Hand

2011-08-15T14:14:00.000-06:00

Slapped by the Invisible Hand: The Panic of 2007 (Financial Management Association Survey and Synthesis) by Gary Gorton.

Gorton is a Yale Professor of Management and Finance and an expert in the history of banking and financial markets. Perhaps no one has done as much work on the makeup of the "shadow banking" system as he has. This book is a compilation of a few of his papers, one of which was famously presented at the Fed's Jackson Hole conference in 2008. Gorton's work is at the top of Ben Bernanke's financial crisis reading list.

What is a bank--can you define it? If banks are regulated, but certain non-banks engage in similar activities as a bank, what types of issues arise? I step away from all the books I've read on the issue and come away with two definitions of a bank:
1. An entity that creates a riskless, information insensitive, liquid asset for a customer and funding that asset by creating a relatively risky, information sensitive, illiquid liability for itself.
2. An entity that borrows short and lends long.

Gordon gives some insight into earlier U.S. banking panics that I was unaware of. In 1907, bank consortiums facing a run basically united behind the castle walls of a clearinghouse. Deposits at any individual bank could not be redeemed and customers were instead given a makeshift loan from the clearinghouse. In a panic no one knows which bank is safe, therefore even the healthiest ones are at risk of failure, so the clearinghouse protected all the banks until the panic subsided. Creation of the Federal Reserve eliminated this local clearinghouse concept as the Fed became the clearinghouse, and later allowed banks to fail en masse.

Today, the repo market acts as the banking system for large firms. This activity is performed largely by non-banks and allows firms to earn interest on their large amounts of cash in exchange for collateral-- usually Treasury or other AAA assets. This collateral is generally information insensitive, liquid, and riskless.

"Repo trading has been likened—by repo traders—to speed chess; that is, there is no time to do due diligence on the collateral offered and indeed almost none is done."

As the repo market grows, so does demand for AAA collateral. As subprime lending increased, the collateral more and more became claims on CDOs backed by mortgages. Once doubts began to arise about the worth of that collateral, the repo market began to seize up. There became a general panic about which assets were safe, everyone started to demand larger haircuts and Treasuries. As lending seized up, firms like Lehman Brothers went under and the dominoes fell.

If you have to read one book explaining the Panic of 2007, this is the one. Gorton isn't providing much narrative here, he is an academic looking at the data. As such, much of it is fairly technical. He delves into the prospectuses of various ABS and details how CDOs operate. He looks at econometric analyses to try and develop a theory about why banks and non-bank entities make the decisions they do under regulatory regimes.

If you piece together a narrative, it looks like this:
1. Deregulation of the financial sector led to increased competition and lower profits for banks who were now competing with non-banks.
2. "(I)n attempts to maintain profitability, banks enter new activities which are not necessarily a source of public policy concern per se, but become entwined with traditional banking activities and, hence, a source of concern." Capital requirements were navigated by doing off-balance-sheet activities and increasing securitization.
3. As this continued, the activities of banks and non-banks were increasingly "off the radar" of bank regulators. The repo market was one example of this, the Fed stopped trying to measure the activity altogether.
4. Eventually, ABS and CDOs were created from loans that required housing prices to keep going up in order to be profitable. A sub-prime loan was made with an initial 2-3 year fixed rate that then adjusted upward, with the expectation that in 2-3 years the borrower would refinance the loan having earned equity as the value of his house increased; this could be repeated indefinitely. The loan was sold and securitized as part of a bundle, which was then sliced and diced again into CDOs, CDO-squareds, etc.
5. In 2006, the ABX was introduced, for the first time introducing a price index for subprime securities. People could then bet/trade on what they thought they were worth, and the ABX started to decline as the market started to short subprime.
5. When housing prices stopped going up and the ABX started going down, the CDOs started to take major losses.
6. This triggered even more losses on CDS issued on the CDOs.
7. Adherence to mark-to-market accounting rules forced major write-downs of firm assets, instantly causing many firms to become insolvent.
7. Panic ensues.

Gorton empirically examines two common hypotheses of the crisis and finds them wanting:
1. Lender's increasingly lower lending standards created the problem. This isn't backed up by the empirical evidence.
2. Originate-and-distribute (securitization) created misaligned incentives that created the problem. Gorton points out that all the originators suffered major losses, many going bankrupt. All originators kept a great deal of risk on their books.

The problem was, basically, the creation of assets that were a one-way bet on housing prices. Once assets created from those started to rated well by rating agencies and considered riskless collateral, the system quickly spread soon-to-be-toxic risk all over the world. (I take issue with people who in hindsight say "everyone knew housing prices would fall," because if everyone knew that they wouldn't have made the loans and willfully taken billions in losses and gone bankrupt, would they?)

Gorton takes issue with a few recommendations in regards to regulation. He sees higher capital requirements as only effective in shrinking the banking sector, which may not be what a society really wants or needs. He also notes that until "banking" is better defined, we're always going to have a hard time policing banking activity. Better to create a system that aligns incentives and eliminates information assymetry problems. Mark-to-market accounting adherence during a crisis is ill-advised as well.

There aren't any grand political statements in this book, or vilification of demons. Mostly facts and analysis and some stylized examples.

I only give it 4 stars out of 5 because a lot of the information is jumpy and overlapping. Some of it, like his letter at the end to someone in 2107 was also a little...odd. I also read it on the Kindle and some of the equations and charts were hard to read in Kindle format. But I highly recommend the book.

Should your tithe go to a lobbyist? (Part 3)

2011-08-11T13:32:00.004-06:00

Part 1, Part 2

Here's a different take on the issue. If you subscribe to the Dominion theology school, then you will probably say "Yes" to my question. The wiki definition:
"Dominion Theology is a grouping of theological systems with the common belief that society should be governed exclusively by the law of God as codified in the Bible, to the exclusion of secular law (and) in which the Kingdom of God will be established on Earth through political and (in some cases) even military means."

Ryan Lizza has followed Michelle Bachmann for years and wrote this recent piece in The New Yorker. Lizza explores the spiritual roots of Bachmann's political beliefs, including Dominionism. Bachmann, like many on the Religious Right, was influenced by Francis Schaeffer. Schaeffer's ideas have become repopularized lately by people like Charles Colson and Nancy Pearcey, who together wrote the Schaeffer-inspired How Now Shall We Live (which I read and led a group study on in college. I should say I'm not sure Pearcey should be lumped in with some of the others in the article).

You can read the article for yourself, research the various names, and draw your own conclusions.

I find an odd symmetry on the far religious Left and Right. Dominionists on the Right and Liberation Theology or Christian Anarchist types on the left seem bent on using political means to dictate what they believe to be biblical outcomes (both sides also approve of violent change in some cases). For Schaeffer, John Rushdooney, and the Right, it's an Old Testament-style theocracy with Austrian (Von Mises school) economics at the core. For Jim Wallis and those on the Left, it's essentially communism, and the focus is more socio-economic. Both sides openly hate each other. Both sides have co-opted philosophies of non-Christians for their own use (even though Nancy Pearcey is quoted as saying that all systems created by nonbelievers "must be false"). And churches in both camps currently spend a large amount of resources lobbying and working to change laws and government, and not so much the Church. (Both extremes scare me.)

Meanwhile, in China...

2011-08-10T19:24:00.000-06:00

Little noticed in all the news is that China is letting its currency appreciate at a little faster pace this month. Back in May, Laura D'Andrea Tyson penned this piece in Economix, pointing out that the renminbi was appreciating in real terms:

"With inflation hitting 5 percent annually in China last month, the renminbi has appreciated in real terms by 8 to 9 percent relative to the dollar during the last year. According to calculations by The Economist, since 2005, when China adopted its managed-band system, the renminbi has appreciated about 24 percent in nominal terms and about 50 percent in real terms relative to the dollar."

Today, the renminbi hit a new high against the dollar. Jennifer Hughes at the Financial Times tells us:

"The renminbi this month has been allowed to rise against the dollar at an annualised rate of about 11 per cent, compared with an average 4 per cent this year."

Hughes makes the accurate point that they're probably not shifting into euros, they're just shifting away from their currency peg. This is what Geithner, the IMF, and loud economists like Paul Krugman have been pushing China to do. They still hit a new record trade surplus this month, so they have a long way to go. BUT, it's a sign that China really is moving to stimulate domestic demand instead of subsidizing exports.

The reason many economists in the U.S. have been clamoring for this is because the "Bretton Woods II" arrangement where the world lends money to us while we buy their stuff hasn't been real helpful for U.S. manufacturing or our current account balance. (This is outlined in this book here). China rotating away from U.S. Treasuries eventually means higher interest rates.In an ideal world, we would coordinate all this with China. For us, it means a depreciating dollar and potentially more competitive exports and fewer imports from China. But unless the U.S. starts saving more our trade deficit will simply shift from China to some other countries (current account balance is a function of national savings and investment, I explain that here).

This was brought to my attention today by someone who told me a factory in China they do business with is now requiring payments in RMB instead of USD. That's a good signal that the factory expects more real appreciation.

Book Review (#27 of 2011) Lombard Street

2011-08-10T07:59:00.000-06:00

Lombard Street: A Description of the Money Market by Walter Bagehot (1873, reprinted by Project Gutenberg).
This is the original book about bank runs, financial crises, and the role of a central bank. This is on Ben Bernanke's short-list of recommended books, and he quotes Bagehot often. Bagehot influenced those who would later create the Federal Reserve.

Bagehot is examining the British financial system, then the biggest and most well-capitalized in the world. (Known deposits in London in 1873 were 120,000,000 pounds, while New York was next with the equivalent of 40,000,000 pounds). The capital had done wonders for British industrial development, as a properly functioning financial market is necessary for any advanced country. But risk is inherent:

"The peculiar essence of our banking system is an unprecedented trust between man and man: and when that trust is much weakened by hidden causes, a small accident may greatly hurt it, and a great accident for a moment may almost destroy it."

England had recently (1866) gone through a panic very similar to our recent financial crisis, the Overend Gurney crisis, where some very large players dealing with risky schemes and assets went bust and triggered a panic, handled controversially by the Bank, which suspended payments as the system collapsed.
Bagehot on Overend, Gurney, and Co.:

"(T)hese losses were made in a manner so reckless and foolish, that one would think a child who had lent money in the City of London would have lent it better."

The Bank hasn't always done a bad job of being the lender of last resort, and Bagehot gives a good bit of interesting history.

The Bank of England was privately owned and operated by a large board of executives from various types of industry. It had a rotating presidency and governorship (which Bagehot actually recommends eliminating for a permanent governor and vice-governor) who seemed to run the bank well and rather conservatively. The Bank of England held deposits from all the other banks on Lombard Street as well as the British Exchequer, and foreign governments.

In 1844, Parliament gave the Bank of England exclusive authority to issue notes (ie: currency), so long as they were 100% backed by gold (a rule the Bank could suspend during a crisis). The Act also created a fractional reserve banking system in the U.K., with no required reserve ratio. The Bank of England was the bedrock of the system, and it typically kept a very large reserve as a result. Bagehot gives a lot of insight and praise into its conservative governorship, but suggests it be even more conservative.

Bagehot much prefers the British system to the American, which had just nationalized the currency after the Civil War. He deplores the 2-charter U.S. system with its different regulators required to keep tabs on what banks are doing. There are some interesting comments seemingly in favor of free banking, which I found interesting. Bagehot

Bagehot's role for a central bank during a panic is to:
1. Before the panic, build up a large reserve.
2. During the panic, lend freely, at high rates of interest, and on good collateral.

"A panic...is a species of neuralgia, and according to the rules of science you must not starve it. The holders of the cash reserve must be ready...to advance it most freely for the liabilities of others."

The high rate of interest is to penalize the bad banks who can't afford the loan. Here, he is unaware of the concept of adverse selection--those who will borrow at high interest rates are more likely to be the bad banks, not the sound ones. He makes the point earlier in the book that a bank or creditor in trouble will pay any price for money rather than go broke, but seemingly misses the connection here.

The collateral is important, it needs to be what Gorton would call "information insensitive," something everyone recognizes is most likely a good asset--bank loans, for example. If everyone sees the bank lending freely on decent collateral, then they will stop panicking. These are the days before deposit insurance.

All banks during a bank run need to lend more, not less. Otherwise, people will think they don't have enough money to meet their obligations and the run will intensify-- wiping out good banks as well as bad. The best modern day illustration of this from the Great Depression was in Episode 3 of Milton Friedman's Free to Choose series, I show it to Money and Banking every year.

Another aspect that Bagehot deals with is joint stock companies and the principal-agent problem. He totally identifies that managers and owners may have conflicting incentives. His suggestion is that the members of the board of directors with the most "spare time" basically micromanage the manager's decisions to make sure he's not engaging in overly risky behavior.

Bagehot describes the speculation that happens just before a panic, reminiscent of our housing boom/bust:

"The good times too of a high price almost always engender much fraud. All people are most credulous when they are most happy; and when much money has just been made...when most people think they are making it, there is a happy opportunity for ingenious mendacity."

Another good quote:

"I am by no means an alarmist. I believe that our system, though curious and peculiar, may be worked safely; but if we wish so to work it, we must study it...Money will not manage itself, and Lombard Street has a great deal of money to manage."

I enjoyed this book and consider it a must-read for students of money, banking, and financial crises. I have one more book on my crisis reading list to finish before the semester starts.

Liquidity and Inflation

2011-08-09T13:18:00.000-06:00

Well, according to the grand Expectations Theory of the Term Structure of Interest Rates, longer-term interest rates should have fallen on news of the Fed's decision today-- and they did. However, if the market expected economic growth and inflation to outweigh the liquidity effect, we'd have seen long-term yields rise instead of fall. Basically, the market has acknowledged that rates will be lower for longer than it thought before, but it doesn't see the possibility of increased growth. This isn't a good thing.

That Bernanke doesn't have more support on the Board of Governors for Really Useful Policy is an unforced error by Obama. Republicans haven't helped by filibustering candidates and such, but Obama could always recess appoint someone to the Board of Governors who knows you don't fight a house fire with a garden hose. Judging from the last couple weeks, I think Ken Rogoff probably wishes he could be on the FOMC; he'd have no problem getting bipartisan support. What's the point of having a central bank if it's not going to do its job adequately? That's an argument of free bankers that I think has real merit. The data don't say the Fed (or the ECB) has done a good job. If it's batting .100, maybe it's time to find another batter.

Today in a historical perspective

2011-08-08T16:36:00.035-06:00

S&P 500 P/E ratio adjusted for inflation in a 10-year moving average:

Today we returned to the 50-year average (and are still above the average since 1890). So, maybe stocks were overpriced.

I think the BEA's recent GDP revisions really killed us because it told us that we weren't as wealthy as we thought we were, and not growing as fast as we thought either, hence earnings forecasts were probably overvalued and stocks overpriced. Europe's near implosion last week also hurt, where is growth going to come from? S&P downgrades our long-term Treasuries, and the market gobbles them up:

Historically: 6 month, 5 year, 10 year, and 30 year yields:

So, the market has never before shown both such confidence in U.S. Treasury's ability to repay and ever had such pessimistic views about inflation (economic growth).

But the market also gobbled up gold:

That suggests to me that people are worried about "uncertainty" and probably European defaults more than anything.

If the Fed comes out tomorrow with an explicit NGDP level target, price level target, or just says "we'll hold the fed funds at 0.25% until 2014, no matter what," we'll see a strong rally and the economy will get moving again. If they had done that in 2007 we wouldn't be here right now. But, alas.

If Boehner locks the Tea Party in a closet and holds another slurpee summit with POTUS to get a "Grand Bargain" that includes serious tax reform and revenue increases ironed out clearly beyond 2013 we would also see a strong rally and S&P would probably throw itself on its sword. If they had done that a month ago, what a wonderful world it would be. But, alas.

If Europe would just protect Greece's creditors and Europe's banks and let Greece exit the euro, I think we'd also see a strong rally. They should have done that in 2008. But, alas.

Unfortunately, I think all the above scenarios are equally highly unlikely, and everyone above is hosed.

Should your tithe go to a lobbyist? (Part 2)

2011-08-07T13:00:00.001-06:00

Part 1 here.

The Southern Baptist Convention, of which I am a member, funds a parachurch organization called the Ethics and Religious Liberty Committee (ERLC) which is:
"(D)edicated to addressing social and moral concerns and their implications on public policy issues from City Hall to Congress. With offices in Nashville, Tennessee, and Washington, D.C...the ERLC provides millions of Americans with information vital to preserving the soul and spirit that makes the United States the greatest nation in history."

The ERLC's mission: "To awaken, inform, energize, equip, and mobilize Christians to be the catalysts for the Biblically-based transformation of their families, churches, communities, and the nation."

The ERLC promotes fundraising for causes ranging from world hunger to sonographs for pregnancy counselors. ERLC contains a thinktank of Christian scholars to discuss issues of religion and ethics. It also issues statements urging voters to call congressmen about specific legislation. Prominent in ERLC actions (and on the website) is its long-time president, Dr. Richard Land. Land preaches, writes articles, meets with various legislators, and debates more liberal Christian activists like Jim Wallis.

A few weeks ago, I came across this piece written by Brian Kaylor, a professor at James Madision (who is an SBU alum and son-in-law of a co-worker). He takes Land to task for calling Obama a "playboy" and for spreading verifiable falsehoods. Land also has publicly called a Jewish senator a "schmuck" (which is Yiddish for "dick," which apparently Land didn't know),and used a lot of other derogatory terms for public figures (including comparing the Obama administration to Nazis. I encourage you to read through the various articles). To my knowledge, no Southern Baptist leader or member of the ERLC's board have criticized Land's comments, or called for him to step down or even apologize, even though the SBC recently passed a resolution to "denounce the speech or activities of any individual or group that brings shame upon the name of Christ and His gospel."

Land has become a rather offensive character, not for God's Word, which is offensive (Jer. 6:10), but for his own opinions and falsehoods. That he represents Southern Baptists so prominently in the public eye is of great concern for me.

The ERLC is funded out of the Cooperative Program of the SBC, meaning that a portion of every donation that every SBC church collects goes to fund its work-- including Land. Am I the only Southern Baptist that finds this highly problematic or a gross misuse of resources?

Also problematic for me is the overreach of pastors into the realm of specific sciences, law, and economics. Land overreaches in discussing climate science and advocating voters to lobby for particular legislation, like Cut, Cap, and Balance. It's not the role of pastors to be experts on all matters in the world. There are laypeople in the church that God has gifted for that. I repeat C.S. Lewis' advice here: "“I am not an economist and I simply do not know whether the investment system is responsible for the state we are in or not. This is where we want the Christian economist.”

Does this also mean that the SBC implicitly endorses the view that "the United States is the greatest nation in history," as the ERLC statement says? (Even greater than Israel, wow). Do other Christians around the world unite in this belief? Am I supposed to support such nationalist rhetoric through my tithes? Since Land represents the SBC and states that the earth is getting colder and not hotter, does that mean the SBC endorses his view?

Further, why is the SBC's convention filled with making resolutions and statements about legislation? (Even more eerie from the article: why are some Southern Baptist pastors literally praying for Obama's death??)

The only answer I've so far gotten is from someone close to the ERLC who implies people are waiting for Land to retire so that others can move the ERLC "in a different direction." Why not now?

Part 1 gave my understanding on what the role of the Church in society should be, which is rooted in Anabaptist thought. The SBC views and activities outlined above make it seem quite far from my views. Can someone tell me where I'm wrong?

Downgrade reading

2011-08-07T11:41:00.000-06:00

This is the best piece I've seen on what institutional investors expect from the market tonight and Monday morning. Binyamin Appelbaum's piece is a decent one with a bigger picture.

We don't so much have to worry about U.S. banks or money market funds. Most rules were written assuming that Treasuries would always be AAA, or rely on the fact that 2/3 major rating agencies still have it at AAA. And money market funds hold Treasury bills, which were not part of the downgrade.

Treasury loudly objects to the downgrade, harping on the $2 trillion math error S&P acknowledged. But it's ridiculous to say that if S&P had gotten it right it would have seen that the U.S. debt/GDP ratio was "much more stable" in 2021 (S&P was only off by 8%... do you think 8% makes a huge difference?)

What matters is not 2021, but 2041. We issue 30-year bonds. Debt is projected to be 87% of GDP in 2041, according to the CBO's baseline. And that assumes higher income, payroll, dividends, and capital gains taxes from 2012 to 2041 than would be politically palatable. It also assumes no changes to the Affordable Care Act, and that it bends the cost curve as CBO projects.

Congress has shown itself unwilling to take the measures necessary to address the entitlement problem, and hence, long-run deficits. S&P is highly skeptical that the U.S. will raise taxes as is currently on U.S. books. Why not?

CBO's alternative fiscal scenario, which assumes that Congress does what it always does projects debt-to-GDP over 200% in 2041. Knowing that, why shouldn't the U.S. be downgraded?

Should your tithe go to a lobbyist? (Part 1)

2011-08-05T19:26:00.004-06:00

During the recent heated political discourse, I discovered something that is making me think hard about church membership. What if your denomination uses part of your offering to lobby legislatures and organize political action? Is that the most effective use of resources? Is there any biblical justification for it? Would that fit Francis Chan's challenge of Crazy Love? What standards should be held up for someone lobbying on behalf of a church or parachurch organization?

Michael Gerson's latest column, "What Would Jesus Cut?" illustrates two religious groups who lobbied for opposite outcomes on the debt ceiling debate. An ecumenical group of primarily mainstream denominations (with Jim Wallis prominent) led the "Circle of Protection" movement to prevent cuts in poverty relief programs. Two conservative groups, CASE and FRC, argued directly against the Circle, arguing that freedom and economic growth would help the poor and not "poverty programs." One group asks "What Would Jesus Cut?" and the other asks "Who Would Jesus Indebt?" (Gerson makes some salient points in his column, but he misses on some things--just like his book.) I agree with many goals of both groups (but seeing too many Jim Wallis-isms in the Circle documents makes me leery. HT to Brian Kaylor for all of this). Both groups spent money on attack ads.

As I laid out at the end of this post, I'm skeptical of the idea of Christians trying to legislate morality or remake the world by law as there is no biblical precedent for this. I see us as called to be set apart, a community that loves one another and sets an example that invites the rest of the world to join. Our chief allegiance is to God and His Church (worldwide), not to a temporary country. I see Christians lobbying for government to better fund certain poverty programs as a sign of laziness, the Church does and should be doing many of these things and shouldn't ask someone else to do it. Further, government funds these programs through taxation, which is a forced, coerced activity and there is no love in coercion. Why would we ask the government to do more of it? Why not, as Francis Chan says, just give until it hurts? Why not work for reformation and revival inside churches instead of political band-aids?

Granted, there are certain activities that a government should engage in that the Church or private sector can't-- like funding AIDS and other basic research. Those activities have positive externalities that the private sector won't realize on its own. Catastrophic insurance is another good example. But providing meals for the poor, homeless shelters, job banks, those are all things that churches and other faith-based charities do effectively. But why should my church provide meals for hungry kids if a government kitchen down the street does it?

Libertarians tend to argue that America did a good job in the 19th century of handling poverty--given how poor we were as a nation--without government getting involved. We had active churches and charities that didn't spend much time lobbying the government and you don't read of people dying of starvation, even in our most severe economic downturns. I don't know if any hard data exists about this, but I'd be curious what the arguments are for private charity decline and government rise (or vice-versa).

In Part 2, I'll look at some problems I have with my tithe money going to support Christians who are active in politics and offending a wide range of people with things other than the Gospel.

Book Review (#26 of 2011) A Prisoner in Turkey

2011-08-04T15:29:00.003-06:00

A Prisoner in Turkey by John Still (1920). Reprinted by Project Gutenberg here.

This was a fascinating memoir of a World War I prisoner of war. Still was a British veteran who was one of the first British captured in Gallipoli, and spent over three years incarcerated in various places in Turkey. As far as POW memoirs go, I can only compare it with John McCain's Faith of Our Fathers (my review). There are many similarities of experience. Sometimes they had a decent prison commander, and sometimes a very cruel one. Still is not fond of Turks as a whole:

"There were good [T]urks; there are good wolves, for I have known one; but their rarity was above that of rubies."

A large number of Allied POWs died due to forced marches or labor or malnutrition and lack of medicine. Still was a commissioned officer who was spared some of the abuse of the enlisted men. It was fascinating to get a view of pre-Ataturk Turkey, the Ottoman Empire in its last throes and a society that, to Still, was unready to stand on its own economically.

At one point, Still is housed in Ankara (Angora) where his company was free to explore, and I enjoyed the descriptions of the old town:

"Even to the present day Angora is a great rendevous of caravans...we used to see long strings of laden camels approaching the town from far away...They looked as if they had walked straight out of the Old Testament, and many of the men with them looked much more like what the Patriarchs must have..."

There are some interesting observations on the Armenian "deportations." Still is often housed in quarters vacated by previous Armenian owners.

One thing I learned was that in those days, the government that captured you was supposed to be responsible for maintaining your pay at the rate it would pay officers of the same rank. But Turkish wages were so much lower than British wages that captured Turkish prisoners were compensated by the Crown at a lower wage than their British counterparts, even though it was higher than what the Turks could earn. Turkey reciprocated by paying their British captives the same wage in Turkish currency. But as the war progressed and Turkey inflated their currency, the pay of the prisoners decreased and they struggled to buy their necessities, as these were not provided by the Turkish government.

Upon his release at the end of the war, Still travels through Smyrna, a Greek part of western Turkey inhabited by many Americans. I found the American presence in Turkey interesting (the Ambassador provides for the prisoners in a few places) . Still concludes that Turkey will have a hard time after the war and might better be off being ruled and organized by a colonial power than standing on its own. He clearly did not forsee the rise of an Ataturk, nor the Turkish army's ability to reclaim portions given to Greece as part of the Armistice.

I'm struck by how British the memoir is. While much detail is given to the activities of prisoners-- writing books, plays, teaching each other languages and plenty of other subjects, making furniture, etc. -- not much is given to death and dying, and none to religion. Still avoids writing much detail about the really graphic subjects. He only mentions his wife and newborn daughter in passing, never mentions any emotions or longing for them. That really separates it from McCain's memoirs and other POW documentaries I've seen. Still and his international prisoners faced weeks below freezing, disease, starvation, and confusion but just muddle through and maintain their dignity.

I enjoyed the book, I'd say it's a must-read for a World War I buff.

Inflation expectations are falling. This is not good.

2011-08-04T09:44:00.005-06:00

A picture of monetary policy failure today:

CBO Baseline Projections for June 2011

2011-08-03T13:44:00.002-06:00

If anyone wants to see what assumptions go into CBO's model (as of June), I have uploaded their data into Google Spreadsheets here. You can see the projected RGDP, tax revenue, Medicare outlays, etc. Thanks to @BCAppelbaum for sending it. He's one of the best economics/finance journalists out there, very much worth following.

The last debt-related post (for a while, anyway) I promise.

2011-08-03T07:29:00.006-06:00

Alex Tabarrok links to Russ Roberts' graph of the debt deal:

FT Alphaville linked to this chart from a private forecaster (click to enlarge).

A chart worth pondering

2011-08-02T20:11:00.001-06:00

From David Cay Johnson:
"Both political parties contributed to our federal debt. Manufactured crises like the debt ceiling vote mask the real issue, which is our desperate need for prudent policies that create broad prosperity by taxing, spending and managing debt for the good of country, not party."

Counterfactuals

2011-08-02T10:26:00.003-06:00

This handy NY Times graphic shows us what might have been.

The Grand Bargain would have kept us from having another debacle before December, and another next year over the Bush tax cuts. It would have made the tax code flatter, simpler, and lowered marginal tax rates while increasing tax revenue by phasing out tax expenditures and raising the income cap on the payroll tax (in 2013). It also would have raised the retirement age and phased out certain subsidies.

But the payroll tax increase on top incomes, elimination of certain tax expenditures, and no "balanced budget amendment" were anathema to the Right. Raising the retirement age and repealing certain aspects of "Obamacare" were anathema to the Progressives, and neither party really wants to cut Medicare/Medicaid expenditures. But I think the deal would have been pareto-efficient (everyone wins), and conservatives would have experienced the greatest of those gains.

Instead, we're basically left punting to December and asked to believe in a "super committee," and everyone loses. Hayek was right, the more your democratic government does the harder it is to reach a deal where everyone wins.

Is the debt ceiling deal really a deal?

2011-08-01T07:47:00.010-06:00

It depends on what your definition of "is" is...

From the CBO:
"CBO estimates that the legislation, with the proposed amendment, would reduce budget deficits by about $915 billion between 2012 and 2021." (this is the scoring on the Boehner bill, but my understanding is the final deal agreed upon is set up the same).

The thing to keep in mind is that CBO's projections assume current law stays on the books. That means the projected $915 billion in deficit reduction assumes:
1. The Bush tax cuts expire next year (marginal tax rates and taxes on dividends/capital gains rise dramatically (see chart here).
2. The AMT is not "patched," so that millions of Americans who didn't pay it this year will end up paying it.
3. Medicare/Medicaid payments to doctors are reduced dramatically, ie: there is no "docfix" after this year.

How likely is it that those three assumptions happen? ( #2 and #3 are "patched" every year.)

So, if the majority of congress ensures that these assumptions don't hold, then the deficit reduction is dramatically less. According to the plan, the "super committee" has to come up with further spending cuts or find other ways to make up the difference. Otherwise, you have automatic massive cuts to the budget, primarily to defense. Theoretically, the "super committee" could push tax reform to increase tax revenue without raising the rates, but they have to be able to match or beat the revenue increase from the expiration of Bush tax cuts, otherwise they will have increased the deficit.

It's also worth remembering that this CBO graph from 2010
also assumed #1-3 above, and we still had a long-run problem. The negotiated deal shifts the curve down a little, but the slope is still the same. The driver is health care inflation and its effect on Medicare/Medicaid outlays. You fix that, you fix the debt problem. Otherwise, nothing effective has been accomplished.

*Update*- here's Will Wilkinson saying essentially the same thing, but everyone liked his piece better. What I left out of the above was also that CBO assumes some baseline rate of GDP growth, which I take from previous documents to be around 4% after 2012. If we don't get 4% growth tax revenue is less than projected and the long-term problem is much worse. Unless the Fed gets much more pro-active, 4% is not a realistic assumption for 2013.

**UPDATE 2** - via the magic of Twitter, Binyamin Appelbaum was kind of enough to send me the CBOs baseline numbers. They're assuming 3.33% growth in 2011, peaking at 3.64% from 2014-2015, and then declining to 2.05% by 2021, basically 2% average annual growth after 2020.

Wow, that's depressingly realistic. I'd forgotten that is often a criticism of the Left of the Medicare Trustees-- they (conservatively) assume fairly low rates of economic growth.

Book Review (#25 of 2011) City of Man

2011-07-31T08:39:00.006-06:00

City of Man: Religion and Politics in a New Era by Michael Gerson and Peter Wehner (foreword by Tim Keller).

Since I've been working through various presentations of Christian interaction with society, particularly in the economic sphere, I thought it useful to read some modern takes on Christian involvement in politics. I thought Gerson/Wehner would be a good contrast with Jim Wallis. Gerson is a former speech writer in the G.W. Bush White House and current Washington Post pundit (and occasional NewsHour fill-in for David Brooks) and Wehner was also involved in policy strategy for Bush. Both are professing evangelicals.

As Tim Keller writes in the foreword:

"(A)ny simplistic Christian response to politics—the claim that we shouldn’t be involved in politics, or that we should “take back our country for Jesus”—is inadequate. In each society, time, and place, the form of political involvement has to be worked out differently, with the utmost faithfulness to the Scripture, but also the greatest sensitivity to culture, time, and place."

The authors quickly gloss over a few historical strains of Christian views on politics, comparing the extremes of isolationism and efforts to create theocracy. There is a lot of room between poles on the continuum for a Christians to be.

Engaging in politics as a career can, in the strain of A.W. Tozer, be just as holy an act as sewing a tent, preparing an accounting audit, writing a sermon, or bagging groceries. So long as Christians do the work with a view to glorify God, it is holy, and none of the above are more holy than the other.

The authors look at a proper role of the state that (they hope) all Christians can agree upon while also looking at the proper role of the church within the state. They offer five precepts:
1. Moral duties of individuals and the state are different. Don't confuse Matthew 5 with Romans 13.
2. The Church as a body has different roles and obligations than individual Christians.
3. Scripture doesn't provide a blueprint for government and public policy.
(Emphasis mine):

"(T)he role of the church, at least as we interpret it, is to provide individual Christians with a moral framework through which they can work out their duties as citizens and engage the world in a thoughtful way, even as it resists the temptation to instruct them on how to do their job or on which specific public policies they ought to embrace."

Hence, the church should stand for liberty, justice, and human rights but not endorse specific bills on the floor. As C.S. Lewis believed, it's the role of the layperson and not the clergy to help the Church understand and work through certain issues of expertise. "This is where we want the Christian economist," as Lewis gave as one example that I have posted on my office door.

In stronger language:

"Identification of Christian social ethics with specific partisan proposals that clearly are not the only ones that may be characterized as Christian and as morally acceptable comes close to the original New Testament meaning of heresy."

What is "clearly Christian" is debatable, but I would argue that a pastor endorsing specific budget bills that contain a complex array of complicated items is problematic (more on this tomorrow).

I sent this quote to my congressman:

Yet to govern is to choose—and those in public life have a duty to develop, as best they can, a sound political philosophy, to engage in rigorous moral reasoning, and to make sure they do not become so captive to ideology that they ignore empirical evidence.

4. Political involvement of Christians depends on the context they live in. New Testament Christians accepted their non-democratic governments as given, and submitted to authorities. Through democracy, we have the ability to peacefully pursue changes in our society that they didn't have, and perhaps this obligates us to different action.

5. God doesn't deal with nations as He did with Israel. (America is not Israel. But step into your average Southern Baptist church on a 4th of July service or "God and Country Day," and you might get confused about that).

Gerson and Wehner summarize the emergence of the evangelical Christian Right and the decline of the mainline denominations, for better or worse. They are clearly not fans of Jerry Falwell or Pat Robertson.

They then shift to what they see as the proper role of government:

"There are, we believe, four categories—order, justice, virtue, and prosperity—that can help Christians think through the proper role of government in our lives...A wise government, constructed around a true view of human nature, thus creates the conditions necessary to allow the great mass of the people to live well and to flourish, to enjoy both order and liberty, to live under the protection of the state without being suffocated by it...We count ourselves conservatives in the tradition of Edmund Burke, who averred that God instituted government as a means of human improvement."

Basically, the classical liberal view of man's dignity but supported by a belief in man being created in God's image and undergirded by the ultimate belief in an ultimate source of Truth to provide a basis for our laws. Gerson and Wehner agree that democratic capitalism is the system that best allows man to be free and have the best opportunity to fulfill his God-given potential and creativity. "Judging by its fruit," democratic capitalism has never produced a famine and has provided the highest standard of living in terms of material wealth, liberty, and religious freedom, therefore it makes sense for Christians to promote it as a good way to order society.

The authors conclude the book with a look at rhetoric, how important it is for members of a society to have the freedom to be persuaded:

"(B)ecause human beings are created in God’s image, they are morally autonomous and free to choose. They are capable of reason, and of being reasoned with. What most separates human beings from animals is a moral conscience, the ability to engage in private and public conversations about the human condition."

They conclude with some advice for Christian "persuaders" from the viewpoint of people who were responsible for crafting Bush speeches and op-eds.

There are some real weaknesses in the book, so I give it 3 stars out of 5. It's brief, so they don't contain well-defended arguments of either political or moral philosophy. The sources they draw from are also fairly few. I'm reminded that Christians have been dealing with this for thousands of years, so it'd be better to read something written 1,000 years ago than something written last year. They also ascribe certain economic outcomes to policy they see guided by Christian ethical principles, which I find problematic as economists disagree with them based on the data. Examples: Was it welfare reform that reduced poverty or the 1990s technology boom? Was it Rudy Giuliani's policies that caused crime to decrease in New York, or did he simply benefit from a nation-wide phenomenon of widely debated causes? Economists doubt the effects of policy in these examples, but Gerson and Wehner seem unaware of that. Obviously, the Bush Administration pushing through billions for AIDS-related medicine to Africa had some great outcomes we would not have seen otherwise but other examples they give are not that clean-cut.

Major issues like taxing and redistribution are completely bypassed in this book. They recognize that Christians will debate these issues and that Scripture doesn't give us clear-cut prescriptions.

My biggest disappointment would be that it didn't deal much with the various historical approaches. I look at Christian interaction with society from what I understand to be the Anabaptist perspective (as James Halteman describes it, which differs from how Gerson and Wehner describe it): Our ultimate allegiance as Christians is to God, and not to a country. That doesn't mean that we live as isolationists, but rather that we organize ourselves primarily as a church community that serves as a model for the world and invites others to join. We don't try to force others to adopt our ways and we recognize that we cannot legislate morality, but we argue that God's order is the best order for man to fulfill his God-given potential.

The Christians and Jews of Scripture were living in occupied territories. They understood the Roman Empire both from repeated history and prophecy to be temporary, but the Church would endure forever. So, I think issues of patriotism and nationalism were very familiar to them (particularly Jews) but seen as secondary to the importance of the Church-- among which there is no distinction between race or nationality--"neither Jew nor Greek," as Paul said. As politics inherently involves or results in issues of patriotism and nationalism, it's something that Christians need to be wary about, and something that Gerson and Wehner spend little time discussing.

If the Church isn't our first and primary concern and focus, then we end up engaging in Jim Wallis-like efforts to try and make the government and the entire population do what the church should be doing. We divert Church resources to lobbying Congress instead of working to achieve the same ends they want congressional legislation to do. And we engage in endless useless debate about whether initiatives like welfare reform are biblical or contrary. That's my problem with Gerson and Wehner's ambiguity.

Book Review (#24 of 2011) The End of Influence

2011-07-30T11:44:00.005-06:00

The End of Influence: What Happens When Other Countries Have the Money by Stephen S. Cohen and J. Bradford Delong.
This book would go well with an undergraduate International Macroeconomics course. DeLong and Cohen explain in plain English the national income accounting identity between the U.S. and China -- what Neil Ferguson called "Chimerica." China saves 40% of its national income, the U.S. saves almost nothing. Since China's Savings > Investment, they run a current account surplus, exporting more than they import and purchasing more foreign assets than foreigners purchase of their assets. Investment in the U.S. > Savings so it runs a current account deficit. China lends to the U.S. who in turn buys Chinese products and the process continues.

An estimated 70% of China's $2.5 trillion of reserves is invested in dollar-denominated debt, primarily U.S. Treasuries. China isn't looking to make money on the deal, it loses money, but the accumulation of reserves is necessary to keep its currency and, by extention, goods & services undervalued to a dollar that is steadily depreciating.

The U.S. "enjoys" this position because after World War II, it was the country "with the money," and the dollar has been the world's preferred reserve currency. Since we are the free-market arsenal of democracy, other countries were willing to emulate us and aspire to be like us. But with our affluence came our debt-- developing countries are happy to lend to us and we are happy to import their cheap goods.

The point of the book is that this won't last forever, or much longer:

When you have the money—and “you” are a big, economically and culturally vital nation—you get more than just a higher standard of living for your citizens. You get power and influence, and a much-enhanced ability to act out. When the money drains out, you can maintain the edge in living standards of your citizens for a considerable time (as long as others are willing to hold your growing debt and pile interest payments on top). But you lose power, especially the power to ignore others, quite quickly—though hopefully, in quiet, nonconfrontational ways. And you lose influence—the ability to have your wishes, ideas, and folkways willingly accepted, eagerly copied, and absorbed into daily life by others.

DeLong and Cohen predict the end of neo-liberalism, the worldwide movement of the last 35 years to privatize, deregulate, and loosen barriers to trade and capital movements. The world heeded our neoliberal advice through the 1990s but now watches with cynicism as we practice what we didn't preach:

"When the United States bails out its auto industry, or its banks, or insurers, or airlines—shouldn’t France and Germany do so, too?"

The authors examine the history of the U.S. financial system, in a similar fashion as Johnson and Kwak do in 13 Bankers. From the 1940s to 1970s, we had high income taxes and major restrictions on financial sector activity. Yet, we saw low unemployment and 2.5 percent annual increases in productivity. From the 1970s onward we had lower income taxes and deregulated all sectors of the economy and saw The Great Stagnation-- lower productivity growth. DeLong reminds us that deregulation was championed by those on the Left, like Ted Kennedy and Jimmy Carter:

"Deregulation was, however, a fringe technocratic good-government movement. And it would have in all probability remained a fringe technocratic good-government movement were it not for the macroeconomic breakdown of the 1970s...The failure of the managers of the mixed economy to produce full employment and price stability in the 1970s undermined the whole enterprise—and created the opportunity for the neoliberals to attempt to implement their dream."

The neoliberal enterprise was embraced by those on the center-left as much as those on the far right. The Fed had been soft on inflation in the 1970s, and there were solid arguments for freeing up the private sector from onerous regulation in an increasingly competitive global market. The answer to the central question of whether to make the pie larger or make it more equally distributed became more slanted toward increasing the size of the pie:

"Politicians on the left tended to give a Rawlsian defense that the best way to help the poor was not to punish but to incentivize the rich: Shrinking the regulatory, interventionist, and management role of the states and cutting back on progressive taxes would align the economic incentives of the rich with the social goal of economic growth, and in the end, the relatively poor would wind up better off in a more unequal but much richer society. Politicians on the right tended to regard greater inequality as an absolute virtue: Those at the top of the economic pyramid—because of their smarts, their skills, their enterprise, their industry, their luck, their success at choosing the right parents—deserved a very comfortable life and to be sharply distinguished from their fellow citizens."

The widening income desparities-- the growth in income has been extraordinarily slanted toward upper-incomes has quashed progressive faith in the enterprise.
"The ratio of the top 1 percent (of incomes) to the middle fifth went from 10 to 26 times. What caused the change?"
1. "The top 10 percent (of income) owns 77 percent of all stocks," and those rose in value. 2. Marginal tax rates on upper-incomes were cut. 3. "Huge, recent waves of unskilled immigrants, legal and illegal, compete for low-wage jobs, pulling down the bottom of the income scale."
4. "Imports and offshoring: The influx of imported goods pushed down employment and pricing power at American manufacturers."
5. The decline of unions.
6. Technology replacing low-skilled workers.
7. Culture: CEO pay, top athlete pay, etc. have grown very disproportionately to everyone else.
The authors then relate the phenomena:

"Is there a connection between rapidly rising inequality, stagnant middle-class earnings, and the collapse of savings in the United States? It is very likely that these trends are all closely linked. Faced with stagnant incomes, seeing themselves falling behind those above them on the income scale, and spending their evenings watching Lifestyles of the Rich and Famous, what did the average American family do?"

The average American family took on debt to keep their lifestyles in line with the increasingly wealthy.

"Between 1966 and 2006, this debt, adjusted for inflation, rose by almost 3,000 percent."

This is the agreed-upon hypothesis for our financial crisis from both DeLong on the Left, and Raghuram Rajan on the Right. The push for homeownership--sponsored by the government--increased the amount of this debt, and the bubble built:

"(T)hough mortgage debt rose from about one-third of GDP in 1990 to over 80 percent now, home equity (the percentage of the house not owed as mortgage debt) fell from two-thirds of GDP in 1990 to one-half of GDP by 2006; it has, infamously, fallen since."

The beneficiary of this movement was the financial sector.

"As manufacturing declined as a percentage of what Americans produced—from 21 percent of GDP in 1980 to 14 percent in 2002, finance grew to fill the gap—exactly! And though just about every think tank and politician issued dire warnings about soaring health-care costs, none came forth with programs, or even warnings, to restrain the growth of finance...Finance was the driving force. It had achieved the cultural dominance that so often goes hand-in-hand with economic dominance: its gigantism and ubiquity, its tonic impact on the entire economy, its fabulous success, the sheer gushing of money, its generous funding of elected politicians, its seconding of its top executives to top posts throughout the regulatory apparatus of government, and its simple and powerful message of “let the market work its magic.” It was so easy."

People with degrees in math, engineering, physics, etc. moved from building stuff to engineering financial instruments-- CDOs, CDS, etc. Hence, most of our recent productivity gains have been in the financial sector alone.

DeLong points out, as I thought about recently, there were always two exceptions to the neoliberal rule: Technocratic central banking and defense spending. Through the space race and winning the Cold War, the U.S. government subsidized the invention of the semi-conductor, microwave oven, the Internet, and other private sector "spin-offs." What we called "defense spending" the rest of the world called "protectionism." What DeLong doesn't point out is the rise of monopolies in the financial sector that, as Hayek preached, threaten the neoliberal order before government does.

The fear that international economists had in the last 15 years was of a sudden collapse of the dollar from, for whatever reason, the international community losing its faith in this system. That didn't happen, as the various countries involved worked to keep the value stable. Instead, the world witnessed the collapse of the U.S. financial system and the problems seemingly created by the neoliberal shift in the last 35 years.

But the other aspect of the global economy that threatens the neoliberal order that DeLong and Cohen highlight is the rise of sovereign wealth funds. It's not just rich private citizens making major investment decisions, it's rich countries-- Russia, Norway, Saudi Arabia, China... over $3.5 trillion dollars held in foreign investments. These countries aren't going to be content holding low-yielding assets like U.S. Treasuries forever, especially if America looks unwilling to deal with its long-term structural deficits (Medicare). Eventually, they will move more and more into ownership of private companies. We've already seen some of that tension recently-- the xenophobic reaction when a Dubai company tried to buy a Houston port. They already have the power to direct investment in their own countries-- to engage in industrial policy.

The authors look at some of the rules proposed for these sovereign wealth funds, but it's quite silly to think that national interests won't rule the day. And the U.S. has now lost its ability to influence or preach.

So, what must happen? The U.S. needs to save more and spend less. China needs to save less and spend more. One hopes this happens gradually, orderly, because it will cause shifts in our productive sectors that will be difficult overnight. We'll be manufacturing and exporting more, and our currency will likely no longer be the world's reserve.

I give this book 3.5 stars out of 5. The authors don't bother giving an exposition of where neoliberalism comes from, or explicitly state that countries that eschew markets do so at their own risk (although DeLong preaches this to his students). They also don't talk about how the U.S. is supposed to start saving more when it has a social safety net unfunded into the future with long-term structural deficits as a result.

But that makes it a short read, easy for a layperson or undergraduate to understand.

The Worst Day in Years

2011-07-30T08:37:00.006-06:00

It got overshadowed (as everything has) with the unnecessary debt ceiling debacle, but yesterday was a sad day in the realm of macro. The BEA released revised economic data for the last 3 years along with our advanced estimate for this quarter and told us that the economy has been in much worse shape than we had thought. We have yet to return to our pre-recession level of output.

The gap on the graph above may not look like much, but it makes a big difference. It's quite depressing that we're getting downward revisions in the hundreds of billions of dollars a few years after the fact, and is testimony to how difficult our economy is to measure.

Scott Sumner (emphases mine):

NGDP fell nearly 4% from 2008:2 to 2009:2, and has risen at a tad over 4% a year for the next two years. We are up by only 4.1% in 3 years, that’s a little over 1% per year. In other words, per capita NGDP has barely risen in 3 years! To maintain full employment everyone would have had to go nearly three years without a pay rise. But with soaring minimum wage rates, that wasn’t too likely. I’m sure lots of people in government, health care, education, etc, got raises. I did (even with one year of no raise), as did my wife (a scientist.) So with almost no extra NGDP to go around (per capita), we essentially have a game of musical chairs. The lucky ones get pay increases, the other 9.2% are sitting on the floor.

We already knew that the Fed was behind the curve. There is no way we should have seen unemployment above 9% and inflation expectations falling way below the Fed's implicit target last year, it's the Fed's job to prevent that. Now we know Bernanke's FOMC has allowed NGDP even further below trend since 2007. Reappointing Bernanke now looks to be one of the biggest mistakes of the Obama administration. If he had gone with Larry Summers instead, who would have cracked skulls to get what he wanted, we might be living in a different world.

The data does sorta solve one mystery that I've had to explain in class for the last 2 years: why Okun's Law seems to no longer hold in the U.S. It was a mystery why the "jobless recovery" was so bad, why unemployment had departed so far from the rate of economic growth we were seeing. Now we know that economic growth was not as good as we thought. Claims about a vast increase structural unemployment, rather than cyclical, were therefore misplaced.

There is currently a myth that gets repeated on the political Right-- that the government is currently standing in the way of recovery. That growth today is slow because the increase in government spending is crowding out private spending. But what do the data say? State and local government spending and federal government employment are decreasing. The ARRA stimulus is phasing out, meaning that discretionary spending is already on the downturn. Ryan Avent (The Economist) reminds us that such austerity is contractionary:

Government represented a significant drag in the first quarter, chopping 1.23 percentage points off of growth, 0.41 precentage points of which were due to state and local cuts, and 0.74 percentage points of which can be chalked up to declining defence spending. Indeed, the new report reveals the extent to which government has been an obstacle to recovery. In five of the last seven quarters, government has contributed negatively to growth, again thanks mostly to large state- and local-government cuts that offset the federal government's modest attempts at stimulus.

Private-sector investment has been positive, private sectors of the economy are growing, but the growth in GDP is offset by government retrenchment. This may all be well and good in the long-run (especially if you want to drown the government in the bathtub), but contractionary fiscal policy unaccompanied by expansionary monetary policy creates slower economic growth. This is what makes Congress' current wrangling over the debt ceiling problematic-- the focus is all on discretionary spending and not on entitlements-- where almost 100% of our future deficits will come from. The Tea Party wants to cut minor programs now, thinking that this will boost employment and GDP growth now, tossing 400 years of economic data out the window. (If, as part of their austerity package, Congress wanted to mandate an NGDP level target for the Federal Reserve, I'd be an austerity evangelist).

While Economics21 and others want to claim that it's all government regulation and crowding-out, accompanied by "uncertainty" over government policy, the data don't give them much to stand on. David Beckworth points us to WSJ and NFIB surveys indicating that the main problem is aggregate demand, and not regulation. While I've read articles with CEOs complaining that excess regulation is keeping them from expanding, they never point out a single new regulation that is the culprit. Beckworth notes that problems like regulation seem worse when you're not seeing the sales you're used to. Neil Irwin wrote an article in the Washington Post this week about why companies aren't hiring. While it highlighted frustration with uncertainty over fiscal policy, there was no mention of regulation. I asked Neil via Twitter if any of the CEOs he interviewed mentioned regulation. He said they did in general terms-- they named nothing specific. CEOs seem more fed up with the debt ceiling debate than anything:

The groups that represent businesses in Washington, including the U.S. Chamber of Commerce and the Business Roundtable, have been urging Congress to raise the debt ceiling to avoid the risk of a default or downgrade of the U.S. credit rating, even as many newly elected Republican members of the House — who received support from business interests when running — are reluctant to vote for such a measure. A group of major business groups sent a letter to the president and every member of Congress two weeks ago, imploring them to raise the debt ceiling.

Also on Friday, we saw the biggest 1-day increase in the price of 10-year U.S. Treasury bonds since 2009. Corporations are taking advantage by issuing their own debt as quickly as they can before August 2nd, this is a boon for junk bonds. This is an indication that the bond market--investors--now expect lower inflation and slower economic growth in the next ten years than they did around this time last year.

So, yesterday was a bad day even without the debt ceiling fiasco and the Eurozone implosion. Also, political problems in Turkey mean the markets there could do some interesting things on Monday. (But they have much better monetary policy than we do right now, so I'm not too concerned. )

Book Review (#23 of 2011) 13 Bankers

2011-07-29T09:01:00.004-06:00

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson and James Kwak.

Johnson and Kwak's blog was essential reading during the financial crisis, and is still quite educational. This book is also required for Money & Banking in the fall. (I'm a bit sad because I went way over the Amazon clipping limit, so 314 of my highlights are invisible via the website.)

Johnson approaches the U.S. financial crisis from the point of view of a former Chief Economist of the IMF. That perspective allows him to see the irony of how the U.S. and the IMF advised East Asian countries through their financial crises in 1997-1998 compared to how the U.S. handled its own.

Related to my previous post, Johnson gives a history of banking and regulation in the U.S., from the first central bank charter of 1791 to Jacksonian populism, to the Panic of 1907 to the Great Recession. All of this is great, concise history.

Johnson comes down on the side of Thomas Jefferson--a distrust of centralized power of bankers as a threat to the Republic. He sees what the U.S. has now-- an oligarchy of a few large politically-influential financial institutions-- as little different from the cronyism of developing nations that the U.S. has been quite critical of. The U.S. advice to Asia in the 1990s was that no bank should be "too big to fail," and the big state-backed monopolies should be broken up. Johnson offers that same advice to the U.S. today-- find a way to break up the banks, just as Republican Teddy Roosevelt did with the Trusts of the early 1900s.

About 1/3 of this book is bibliography-- a treasure trove of sources and references. You always hear of the growth of finance, but it's nice to have specific data. The undeniable fact is that the deregulation of the financial sector in the 1970s and 80s did nothing to boost U.S. productivity and therefore did not result in an obvious better allocation of capital. The financial sector replaced manufacturing 1-for-1, and commercial & investment banking and insurance profits grew to be a much larger portion--almost 50%-- of all U.S. corporate profits by 2007. The amount of leverage taken on by financial sector firms became enormous over this time period:

"in 1978, all commercial banks together held $1.2 trillion of assets, equivalent to 53 percent of U.S. GDP. By the end of 2007, the commercial banking sector had grown to $11.8 trillion in assets, or 84 percent of U.S. GDP. But that was only a small part of the story. Securities broker-dealers (investment banks), including Salomon, grew from $33 billion in assets, or 1.4 percent of GDP, to $3.1 trillion in assets, or 22 percent of GDP. Asset-backed securities such as collateralized debt obligations (CDOs), which hardly existed in 1978, accounted for another $4.5 trillion in assets in 2007, or 32 percent of GDP.* All told, the debt held by the financial sector grew from $2.9 trillion, or 125 percent of GDP, in 1978 to over $36 trillion, or 259 percent of GDP, in 2007...In 1978, the financial sector borrowed $13 in the credit markets for every $100 borrowed by the real economy; by 2007, that had grown to $51.14 In other words, for the same amount of borrowing by households and nonfinancial companies, the amount of borrowing by financial institutions quadrupled....by the third quarter of 2009, financial sector profits were over six times their 1980 level, while nonfinancial sector profits were little more than double those of 1980."

The private sector began to wade where only the GSE's had tread before-- securitizing mortgages. Deregulation allowed the lines to blur between banks and non-banks, until the lines were at last removed in 1999. Greenspan and other regulators intentionally decided not to regulate various activities. For example, Greenspan declined to look at the books of mortgage brokers owned by bank holding companies-- even though it was in the Fed's realm to do so. If there were bad practices or "liar loans" piling up, he clearly said the problem would take care of itself (and later regretted his belief in market self-regulation).

The story is that of "bigger and better," following the textbook argument that this was well because insurance conglomerates merging with banking conglomerates merging with investment banks benefited from economies of scope and scale. Johnson, like Hayek, takes issue with this type of argument and offers some good rebuttal using various studies:

"The 2007 Geneva Report, 'International Financial Stability,'... found that the unprecedented consolidation in the financial sector...led to no significant efficiency gains, no economies of scale beyond a low threshold, and no evident economies of scope."

Basically, as banks got bigger they took on even more risk. As commercial banks and investment banks were increasing competition in the securitization game, firms began to engineer products in unique ways to differentiate their products. This caused problems of information asymmetries as very few people--including ratings agencies and the Federal Reserve-- understood the products being created. The banks could manipulate their creations to be rated well by certain risk models when actually they were quite risky. Ultimately, the taxpayer was put on the hook:

"(T)he special inspector general for TARP estimated a total potential support package of $23.7 trillion, or over 150 percent of U.S. GDP (as) theoretical potential liabilities of the government."

Johnson understands the difficulties of regulation, and while he advocated a Consumer Financial Protection Bureau, he understands regulations will do little good if banks know that they are too big to fail. He recommends that a commercial banks' assets be allowed to be no bigger than 2% of GDP, 4% for investment banks.

"Saying that we cannot break up our largest banks is saying that our economic futures depend on these six companies (some of which are in various states of ill health). That thought should frighten us into action."

I give this book 4 stars out of 5. Other reviewers have rightly noted that Wall Street isn't the only place where TBTF rules-- the government has been bailing out the auto industry for years, and various other industries ranging from steel to cotton are heavily subsidized and protected. But the sheer size of the banks, the growing percentage of U.S. GDP generated by finance, and the growing political influence of banks in our "revolving door" government is alarming.

While the book is pretty mistitled, Johnson does make it clear that we've not done much to ensure that a crisis like 2007 doesn't occur again.

Conservatives and Monopoly

2011-07-26T08:05:00.007-06:00

I'm trying to synthesize a couple strands of thought into one post here, so bear with me.

The main reason that I don't think the U.S. will ever go back to an 1800's "laissez-faire" version of government that Tea Party conservatives might wish for is because economic conservatives (the political right, I mean) can't seem to nail down a consistent position on monopoly. Government and business have become too intertwined in the U.S., and you basically have to go further back than 1776 to resolve that.

Anyone who has read Gordon Wood knows the only Founding Father that would recognize the U.S. today is Alexander Hamilton. Hamilton foresaw Manifest Destiny, American empire with a large standing army, and a federal government promoting the interests of American industry through a central bank coordinating loans and a system of trade protection. Hamilton's way arguably helped America achieve its economic superpower status, and we've been wrestling with Hamiltonian vs. Jeffersonian ideas of democracy and government ever since. One symptom of this is recent polling data that show Tea Party Republicans are more protectionist and skeptical of free trade than even Democrats. (Protectionism is contrary to Classical Liberal/Libertarian principles.) Rupert Murdoch, a monopolist, and the Koch brothers, part of a cartel, have helped give the Tea Party a larger platform to speak from. Hamilton was willing to have monopolies, so long as they were American.

But the monopolist has always been seen as the enemy of free markets. Adam Smith:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

Competition is the solution to monopoly, of course, the government should maintain freedom of entry and exit. But classical liberals have always found some regulation necessary-- particularly regulation of monopolies located in the financial sector. There is skepticism about the ability of competition to regulate bank behavior. In Wealth of Nations, Smith recommends a legally mandated cap on interest rates in order to curb what he saw as excesses by lenders.

F.A. Hayek also took a dim view of financial self-regulation. Lawrence White points out in this paper that Hayek didn't support "laissez-faire banking." Hayek believed that competitive commercial banks necessarily engage in a pro-cyclical process of expanding credit due to increased demand, rather than allowing interest rates to rise. He basically argued that as banks compete for customers, there will be an expansion of credit creating a harmful monetary disturbance and a boom/bust cycle. He therefore argued that some central control of monetary policy may be necessary. (White spends much of the paper showing how this contradicts Hayek's other philosophical views.)

Hayek's words remind me of self-professed "lifelong libertarian" Alan Greenspan's recent recantation before Congress in regards to his previous views on financial self-regulation. During the housing boom, Greenspan had repeatedly expressed the view (along with Rubin and Summers) that firms' risk-taking would be curbed by their own self-interest not to go bust, and that assets were priced properly and needed no regulation because the trades were taking place among "professionals."

“All of the sophisticated mathematics and computer wizardry essentially rested on one central premise: that enlightened self interest of owners and managers of financial institutions would lead them to maintain a sufficient buffer against insolvency by actively monitoring and managing their firms’ capital and risk positions,” the Fed chairman said. The premise failed in the summer of 2007, he said, leaving him “deeply dismayed.”

Self-regulation is still a first-line of defense, Mr. Greenspan said. But after the financial collapse of 2007 and 2008, “I see no alternative to a set of heightened federal regulatory rules of behavior for banks and other financial institutions.” He said hoped hoped it would come in the form of tougher capital requirements for banks.

If you read any of the leading Money, Banking, and Financial Markets textbooks you'll find a history of U.S. financial markets as one of increasing consolidation. We have fewer, bigger banks that also now own insurance companies, hedge funds, and other large players in the capital markets. I'm currently reading a book that begins with a historical perspective on U.S. financial markets (not a textbook, emphases mine):

According to historian Thomas McCraw, “in the period 1897–1904 … 4,227 American firms merged into 257 combinations. By 1904, some 318 trusts … were alleged to control two-fifths of the nation’s manufacturing assets.”50 The rise of the trusts depended heavily on investment bankers, who provided the money needed to buy shares and rearrange shareholdings and also offered the social glue necessary to bring disparate industrial interests together. A handful of bankers led by J. P. Morgan played a central role in this rapid transformation...Morgan’s empire handled an extraordinary share of the money flowing into American industry—as high as 40 percent of total capital raised at the beginning of the twentieth century.

After Depression-era regulations on banking activity and consolidation are removed in the 1980s and 1990s, this process continues:

Between 1990 and 1999, the ten largest bank holding companies’ share of all bank assets grew from 26 percent to 45 percent, and their share of all deposits doubled from 17 percent to 34 percent. The largest financial services conglomerate of all (at the time) was put together by Sandy Weill, who began with Commercial Credit, bought Primerica (which owned Smith Barney) in 1988, added Travelers Insurance in 1993, bought Salomon Brothers in 1997, and finally merged his empire with Citicorp in 1998. (this merger was illegal until the Glass-Steagall Act was effectively repealed in 1999.) ...at the end of 2007, Citigroup had $2.2 trillion in assets, not counting $1.1 trillion in off-balance-sheet assets.

Every textbook lays out the premise that the increasing consolidation is inevitable and necessary due to advances in technology. Our economy is better off because the industry exhibits economies of scale and scope. It's interesting that in Road to Serfdom Hayek directly confronts this idea, and sees nothing "inevitable" (his word) about the development of natural monopolies (pgs. 91-94). He sees such arguments as backdoor arguments of monopolists for protection, eventually resulting in state control and socialism. Hayek's recommendation for regulating natural monopoly is simple price controls-- taking away the monopolist's profit and therefore reducing incentive for other monopolies to form:

(W)herever monopoly is really inevitable the plan... of a strong state control over private monopolies, if consistently pursued, offers a better chance of satisfactory results than state management. This would at least seem to be so where the state enforces a stringent price control which leaves no room for extraordinary profits in which others than the monopolists can participate...Only make the position of the monopolist once more that of the whipping boy of economic policy, and you will be surprised how quickly most of the abler entrepreneurs will rediscover their taste for the bracing air of competition!

Hayek goes on to say that he'd rather put up with "a little inefficiency" as a result of government restrictions on monopoly than to have his fate dictated by the monopolists. I can't help but think of Bank of America, the U.S.'s largest bank and wealth manager, active in all 50 states and providing financial services in some way to the majority of Americans. It tried to foreclose on a house that it didn't own, and was even willing to battle in court for it. Is this not the tyranny of monopolists Hayek was talking about?

But there's a knee-jerk reaction on the political right to the word "regulation," it is always and everywhere seen as a bad thing. A stated GOP goal is to repeal Dodd-Frank, or at least not fund regulation for certain aspects. But as Hayek and classical liberals before him have argued, the financial sector is unlike other sectors in its need for regulation.

From the late 1930s to the late 1970s, banking and financial services were heavily regulated. Competition was limited and profits were higher to the banks in business. But the industry was also stable, there were very few bank failures or scandals. The argument for deregulation of the financial sector was essentially that it would increase productivity in the U.S. by better allocating capital. Lower prices and interest rates for the consumers would help foster home ownership and other forms of investment. But the highly regulated banking sector of the 1950s and 60s oversaw 4% annual RGDP growth and one of the greatest booms in productivity in U.S. history. The deregulated banking sector of the 1980s and 1990s oversaw The Great Stagnation-- there were no productivity gains from financial deregulation.

Classical economic theory says that the wages someone earns should be equal to the marginal product of their labor. So, if traders at AIG are earning $165 million bonuses in 2007 and "(Citigroup CEO Jamie) Dimon earned $34 million,( Goldman Sachs') Blankfein $54 million, John Thain of Merrill Lynch $84 million, and John Mack of Morgan Stanley $41 million,"

they must have boosted productivity by that much. But there's no evidence of this, as their firms all took large hits and lost billions in wealth. So, there is a strong case that these CEOs are earning monopoly rents.

And instability has increased, the 1980s S&L crisis, the 1990s failure of LTCM, and the larger debacle of 2007 to today, where banks are still failing every week. The direct result has been the creation of new monopolies.

So, I'm skeptical of Tea Party conservatism because I don't see it attacking the monopoly problem and I see it attacking any government efforts to impose any Classical Liberal regulation on banking monopolies and financial sector activities (regulations now being called for by Randians like Greenspan). I hear anger over government proposing tax increases rather than skepticism over whether the pay of financial sector CEOs and professional athletes match up with their marginal productivity or if it's just monopoly rents that the government might do well to tax. I hear the angry denunciation of "bail-outs," for the financial sector but I don't hear very many (other than Ron Paul) on the political Right calling for the large banks to be broken up to foster competition-- I mainly hear that argument from people on the Left.

(I should note that left-ish economist and sometimes Obama adviser Jeffrey Sachs claims that "It's more accurate to say that the Republicans are for Big Oil while the Democrats are for Big Banks. That has been the case since the modern Democratic Party was re-created by Bill Clinton and Robert Rubin.")

Friedman-Hayek 2012 T-shirt

2011-07-24T10:40:00.004-06:00

I saw a link to this on one of the Google ads on my sidebar here. I like it!

The quote is: "One of the great mistakes is to judge policies and programs by their intentions rather than their results" (Friedman).

I'd love one, but the monopolist price of $27.95 per shirt is out of my budget.

Book Review (#22 of 2011) The Big Short

2011-07-23T14:56:00.008-06:00

I'm catching up on financial crisis history reading since we're a month out from classes starting and a couple classes I teach deal directly with the lessons (hopefully) learned from the event.

The Big Short: Inside the Doomsday Machine by Michael Lewis.
This book is primarily about greed. I would sum up the moral of this book with Proverbs 22:16:
He who oppresses the poor to make more for himself
Or who gives to the rich, will only come to poverty.

Lewis (The Blind Side, Liar's Poker) is one of the best nonfiction writers of our time, a fantastic storyteller. If you've not read his long-form article in Vanity Fair on the Greek debt crisis from last year, it's very much worth your time and you'll see why any efforts to keep Greece on the euro will ultimately fail.

This tells the story of some of the very few people who called the housing bubble correctly, put their money where their mouth was, and made hundreds of millions of dollars.

Michael Burry (this video posted by Bloomberg today tells his story), a former neurosurgeon turned California hedge fund manager who discovers he has Asperger syndrome during the course of his story. His Aspergers explain why he was so successful at consistently being ahead of the market, but also why he burnt out emotionally.

Steve Eisman, a cynical bond trader who also probably has some mental disorder, who often confronted CEOs and other people he saw as villains. He saw shorting the housing market as part of a greater crusade.

A trio of normal guys who start fund called Cornwall Capital, basically betting on "Black Swan" events, even when they didn't know what they were doing.

These guys didn't get famous like John Paulson, but Paulson might not have existed without Burry originating the idea. But these guys pioneered the market for credit default swaps on housing-related CDOs. For Burry and Cornwall, they got to experience the rough treatment that outsiders get from firms like Goldman Sachs-- who basically cheat their customers when they can. (What are you going to do, sue Goldman Sachs?)

The underlying greed of those making money off of housing is the central theme in this book.
"In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $724,000."

The loan is an adjustable rate loan made by someone-- a bank or a mortgage broker-- who knows the migrant won't be able to repay, but the lender doesn't care. Because he has already sold the loan to an investment bank and gotten paid a nice commission for it. Reproduce this transaction thousands of times over in the U.S. Lenders even start making interest-only loans where the borrower never pays down any principle. A stripper in Vegas somehow gets five home equity loans...The investment bank takes the loans and packages them into asset-backed securities (ABS), a pool of mortgages of varying quality which it convinces Moody's or S&P to rate AAA.

Moody's and S&P get paid fees for doing this, so they have an incentive to rate as many assets as they can, even if they think the underlying loans are junk-- that's not their problem. Next, another investment bank might buy several of the ABS and strip out some of the worst tranches, repackage them into a CDO. Even though the underlying mortgages are of low quality, the ratings agencies again rate the CDO as AAA. Maybe because their models say that the low-quality loans are from various regions of the country, and U.S. home values have never all fallen at once (no one was alive in the 1930s, right?). Or their models were flawed in other ways -- rating a floating-rate mortgage higher than a fixed rate, assuming someone could make payments just as easily at 12% as 8%, etc. Maybe because the fees they're raking in help their bottom lines and boosts their stock price--they are publicly traded companies. Maybe because they're incompetent (the smartest guys on Wall Street don't work at the ratings agencies).

When there are no more loans to be made, CDOs are re-created synthetically, multiplying the amount of people who are basically betting on these assets. But very few people recognized that these assets would go bust when rates adjusted upwards in a couple years. Their trading desks kept billions of dollars worth on their books. Their risk management models only speculated that maybe 5% of the underlying loans would default. Everyone is basically passing the buck-- we collect our fees and commissions now, worry about the rest later.

Guys like Burry and Eisman bought millions of dollars worth of credit default swaps on these CDOs, insurance that would pay out if the assets became worth less. When they finally did, the biggest financial companies in the world paid up and went bust.

At one point in 2006 Eisman is invited to a subprime conference in Vegas organized solely to promote mortgage-backed securities and convince investors to stay in the market. He is basically awestruck by how how dumb everyone is and how "the world has turned upside down." The guys creating the CDOs, the trading desks buying them up, everyone seems to be drinking the kool aid that these are safe bets.

"Something must have come over Eisman, for he stopped looking for a fight and started looking for higher understanding. He walked around the Las Vegas casino incredulous at the spectacle before him: seven thousand people, all of whom seemed delighted with the world as they found it. A society with deep, troubling economic problems had rigged itself to disguise those problems, and the chief beneficiaries of the deceit were its financial middlemen. How could this be?"

There is a lot of profanity in this book, Lewis wants the world to see that Wall Street, where he used to work, is not holy. The "villains" of the story, the mortgage brokers, the CDO sellers, the traders and CEOs who lost their companies billions betting on CDOs, mostly walk away with their bank accounts intact, and keeping the millions in bonuses they earned along the way. The taxpayers took the ultimate fall along with, of course, those who lost their homes.

Despite the profanity, I have made it a required text in Money & Banking. The students will see that they will be confronted with incentives that may conflict with Christian ethics. Would you really care what the adverse consequences for others might be so long as you're making millions of dollars? Would you pass the buck? They will also see that it's not true or that simple to say "everyone knew the housing bubble would burst," or "it was all the government's fault."

I give this book 4 stars out of 5. What I really gleaned from the book is the importance of the ratings agencies in all of this. There are so many accounting rules and laws in our financial system that revolve around capital cushions and the value of assets, and if something is rated AAA and is really BBB-, that causes a lot of problems. It doesn't appear to me that those problems are very easily solvable.

"Missing Milton Friedman"

2011-07-22T10:45:00.004-06:00

Will Wilkinson writes a post that repeats sentiments I've been posting here for years (and I've just been echoing several conservative & neoliberal economists' sentiments):

Milton Friedman, classical liberal, champion of libertarian movements everywhere, would blame our current malaise on incompetent Fed policy (just as he blamed Japan's central bank for their malaise). Not that the Fed printed too much money, but that it didn't print enough. Ben Bernanke knows this, agrees with it, but now feels politically constrained to do anything about it.
Because conservatives and libertarians are screaming bloody murder about the Fed "debasing the currency!"

Wilkinson correctly identifies that this is the result of the influence of Rothbardian Austrian economics:

"The influence of this kind of talk has been augmented powerfully by a certain moralising strand of Austrian economics, which is hostile to the very idea of fiat money, and encourages the idea that its entire purpose is to expropriate savings and monetise government debt. This strand of Austrianism also encourages scepticism about the existence of distinctively macro-level economic phenomena...Although sophisticated Austrian-school monetary economists such as George Selgin and Larry White defend rule-based inflation-targeting policies not all that different from Mr Sumner's neo-monetarist nominal GDP-targeting rule, the ghost of Murray Rothbard looms much larger on the free-market right."

What Wilkinson misses in his piece: During the late 1970s, Friedman's University of Chicago pioneered what is now "saltwater" economics, where there is no such thing as aggregate demand and money doesn't matter. A macroeconomic framework that Friedman didn't agree with and that doesn't line up with the data very well. But it (or a politicized version) became the darling of the Right in the 1980s. (Krugman chronicles this in a couple chapters. ) So, when Friedman died, there were very few trained conservative economists who saw the world as he did.

Wilkinson concludes (his quotes are from Rothbard):

I do believe elements of Ron Paul's Rothbardian monetary philosophy enjoy a great deal of currency on the grassroots right, and I believe this exerts a considerable gravitational force on the institutional right, such that arguments for zero or very low inflation are accorded more weight than they would were Milton Friedman still (alive).
If only the free-market right still had such a powerfully persuasive "technician advising the state how to be more efficient", our economy might now be slightly less screwed. Maybe it would help were "advising the state to be more efficient" less widely considered "evil work".

Friedman believed that a gold standard, which Rothbard and Mises promoted, where the government arbitrarily fixes the price of something, was incompatible with liberty. Friedman, like Hayek, instead believed the Fed should follow a simple rule and never depart from it. He varied over the years on what the rule should be. His preferred candidates included growing the monetary base by k% every year, to target expected inflation via TIPS spreads, or (as I've heard, but have never read a piece by him on it) a nominal GDP level target. Friedman (and Hayek) believed such a policy would best promote the free market. (He had other recommendations for monetary policy--like a 100% reserve requirement-- which went hand-in-hand here, I admit.) Such a policy rule-- an explicit target-- would be far superior to the feckless discretionary policy we have now.

Bryan Caplan, an Austrian sympathizer at George Mason puts it:
"In sum, Milton Friedman spoke wisely when he declared that 'there is no Austrian economics - only good economics, and bad economics,' to which I would append: 'Austrians do some good economics, but most good economics is not Austrian.'"

Using the Cloud to help heal people

2011-07-21T19:09:00.004-06:00

My wife's birthday was Wednesday and I want to honor her by posting this story because I think it encapsulates her awesomeness.

One of my pet peeves is email attachments. It's 2011 and we're still filling inboxes with large attachments rather than putting files in the Cloud and then emailing a simple link to view it or work collaboratively on it. Or we're posting paper sign-up sheets and trying to coordinate schedules via email rather than using a rubric in the Cloud (all of which are free).

This week, my wife was able to instantly convert hundreds of people to the power of using Google Docs and help a guy be more efficiently prayed for. That is a Proverbs 31 woman:

It started when a popular blog posted an emergency prayer request for a man named Karl. The author wanted people to pledge to pray at specific times via the comment section, like a sign-up sheet. With dozens of eager prayers, the sign-up sheet became unworkable. So, Joni quickly created a simple Google spreadsheet (here) and posted a link to it. As you can see, Karl was covered (but he still needs prayer). The author was most appreciative, and now all of the readers are connected in a way they've never been before. That's what the Cloud does.

My wife works from home for Roar, a company that designs mobile apps for churches, schools, and other non-profits (they're now the official app maker of Lifeway, of the largest denomination in the U.S.). She writes some good blog posts there too, so check it out.

Hayek and the Debt Ceiling

2011-07-19T12:17:00.008-06:00

I think one can make a Hayekian argument for raising the debt ceiling.

Ignore for a moment that Hayek would have opposed the policies that created the need to borrow on a massive scale, ie: the government dissaving that drags down our national saving. Hayek's writing in Road to Serfdom and elsewhere tends to look at policy pragmatically--given the government has already enacted a sub-optimal policy, how best to deal with it, particularly without causing instability?

*this part updated for clarity*
Hayek is firm in his belief in what he terms the "Rule of Law." This is not the simple protection of property right and enforcement of law, as Hayek has already laid that out as a foundational role of government a classical liberal order. Hayek's Rule of Law is defined as (emphasis mine):

"(G)overnment in all its actions is bound by rules fixed and announced beforehand-- rules which make it possible to see with fair uncertainty how the authority will use its coercive powers in given circumstances and to plan one's individual affairs based on this knowledge. Though this idea can never be perfectly achieved, since legislators... are fallible men, the essential point, that discretion left to the executive organs wielding power should be reduced as much as possible is clear enough...rules tell people in advance what actions the government will take in certain types of situation, defined in general terms, without reference to time and place and particular people."

For Hayek, government changing a long-standing policy was a big deal because it would adversely affect people who had made individual choices based on the established rules of the game. A rule-based system is fundamental to a functioning market because it anchors expectations (emphases mine):

"(I)t does not matter whether we all drive on the left- or on the right-hand side of the road so long as we all do the same. The important thing is that the rule enables us to predict other people’s behavior correctly, and this requires that it should apply to all cases—even if in a particular instance we feel it to be unjust."

Discretionary macroeconomic policy were therefore anathema. One good example of this comes from Hayek's writings on monetary policy in the early 1930s. As Lawrence White writes,
"Hayek’s monetary policy norm in fact called for the stabilization of nominal income (MV), and thus for central bank action to prevent its contraction."

Monetary policy rules have been in the literature for a long time and Hayek has made his contribution. Given a fiat currency controlled by a central bank, the central bank should follow an announced and specific rule so that there is no deviation from expectations.

Now, the Fed pursuing such a policy in 2008 would still have led to a simple graph of M1 like this that would have bothered a lot of Rothbardian Austrians and Glenn Beck:
But as Scott Sumner and David Beckworth (and others) have spent the last few years arguing, if the Fed had an NGDP growth target, it didn't grow the money supply nearly fast enough to hit it during the financial crisis. Nor did the Fed keep inflation expectations in line with its implicit target of just under 2%-- it allowed them to fall far short. In other words, the Fed didn't live up to the markets' expectations of its behavior, and as a result we're still in a sub-optimal recovery.

So a Hayekian central bank under his Rule of Law definition would announce an explicit target of something and then consistently pursue it. (And pursuing that target in 2007-2008 would have led to policies like QE that would have made a lot of classical liberals uncomfortable.)

Hayek recognized that economic disturbances, if handled badly, caused the public to turn against free market capitalism. Hayek and Keynes were in agreement on this point. During the Depression, Hayek had argued for deflation and liquidation, but later regretted it in part because he saw the much worse political fallout.

While a staunch defender of the price mechanism, Hayek recognized that immediately removing England's wartime price controls would cause chaos and backlash against capitalism:

"(H)owever much one may wish a speedy return to a free economy, this cannot mean the removal at one stroke of most of the wartime restrictions. Nothing would discredit the system of free enterprise more than the acute, though probably short-lived, dislocation and instability such an attempt would produce." (emphasis mine).

Hayekian thought thus seems opposed to neoliberal (Jeffery Sach's) "shock therapy," eliminating any heavy wage/price controls and government interventions in the market immediately for countries that have adopted socialist practices. "Get it over all at once," as Sachs said in an interview. (One can argue that Hayek is vindicated by the observation of populist backlash against such capitalist reforms in countries like Russia after privatization was botched.)

Let's return to the debt ceiling debate. Congress has raised the debt ceiling 89 times since 1939. Judging by the yields on Treasury bonds today, the market expects the debt ceiling to be raised again and for Treasuries to keep their value. Like it or not, raising the debt ceiling is part of the Rule of Law that Hayek would expect the government to continue following. Deviating from those expectations would have consequences.

If the debt ceiling isn't raised, the President has to go through budget items line-by-line to figure out what gets funded and what doesn't. Thousands of jobs and incomes are immediately lost, interest rates rise, and the other economic consequences are quite costly. Given we already have a Federal Reserve that hasn't kept its obligation with the Rule of Law (and its Chairman indicates it's politically impossible for it now to do so), I would quote Hayek again here:

"Nothing would discredit the system of free enterprise more than the acute, though probably short-lived, dislocation and instability such an attempt would produce."

Defaulting on its debt, or meeting its debt obligations and cutting current expenditures dramatically to do so, could be as harmful to the long-run cause of free enterprise as the Great Depression was.

Default isn't being pursued or advocated by Hayekian Classical Liberals. It's being advocated by Conservatives who Hayek was very poignant about not being associated with.

Book Review (#21 of 2011) - Hayek Road to Serfdom

2011-07-18T15:12:00.011-06:00

The Road to Serfdom: Text and Documents--The Definitive Edition (The Collected Works of F. A. Hayek, Volume 2) edited by Bruce Caldwell.
(Note, there were some issues with pasting this post from Google Docs, where I originally wrote it. I have re-formatted the below twice to make it easier to read, but on the last edit somehow it got reset. I don't feel like re-formatting it again (namely adding links to external sources).

This new edition of the book features much additional material. The first 20% of the book tells the story of its publishing, explains the context Hayek wrote this book in, and explains the articles Hayek used in compiling the book. It includes the forewords Hayek wrote for the 1956 and 1976 editions, as well as Milton Friedman’s foreward to the 1994 edition and other supplementary documents. Hayek’s notes have been updated to make more sense to a modern reader-- all of which I found essential.

This new edition of the book features much additional material. The first 20% of the book tells the story of its publishing, explains the context Hayek wrote this book in, and explains the articles Hayek used in compiling the book. It includes the forewords Hayek wrote for the 1956 and 1976 editions, as well as Milton Friedman’s foreward to the 1994 edition and other supplementary documents. Hayek’s notes have been updated to make more sense to a modern reader-- all of which I found essential.

Originally published in March 1944, Hayek is responding to some intellectual trends he finds disturbing, primarily the trend of the West moving away from classical liberalism. But he gives caution to those who mischaracterize his words:

“It has frequently been alleged that I have contended that any movement in the direction of socialism is bound to lead to totalitarianism. Even though this danger exists, this is not what the book says.”

Hayek traces the roots of classical liberalism to Christianity, Greek, and Roman thought:

“(T)he essential features of that individualism which, from elements provided by Christianity and the philosophy of classical antiquity, was first fully developed during the Renaissance and has since grown and spread into what we know as Western civilization—are the respect for the individual man qua man, that is, the recognition of his own views and tastes as supreme in his own sphere...”

Hayek spells out the proper role of government under classical liberal tenets:
1. Protection of private property and enforcement of contracts.
2. Provision and enforcement of “the rules of the game.”
3. Provision of pure public goods and correction of negative externalities.
4. Proper regulation of natural monopolies (as opposed to ownership of them).
5. A mild redistribution of income and provision of a social safety net, including catastrophic insurance.

“(T)here can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody. Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance— where, in short, we deal with genuinely insurable risks—the case for the state’s helping to organize a comprehensive system of social insurance is very strong... Wherever communal action can mitigate disasters against which the individual can neither attempt to guard himself nor make provision for the consequences, such communal action should undoubtedly be taken” (emphases mine).

It’s important to note that in points #3, 4, 5 Hayek differs sharply from the Austrian economists he is usually lumped together with as Bryan Caplan explains:
“Mises and Rothbard clearly rejected many of the key elements of modern neoclassical economics (including #3-5), while Hayek did not.”

Hayek also did not see collective government action in the face of a Depression and high unemployment as opposed to classical liberalism (emphases mine):

Many economists hope, indeed, that the ultimate remedy (to business cycle fluctuations) may be found in the field of monetary policy, which would involve nothing incompatible even with nineteenth-century liberalism. Others, it is true, believe that real success can be expected only from the skillful timing of public works undertaken on a very large scale...But this is neither the only nor, in my opinion, the most promising way of meeting the gravest threat to economic security. In any case, the very necessary efforts to secure protection against these fluctuations do not lead to the kind of planning which constitutes such a threat to our freedom.

Many people mistakenly think that the “laissez-faire” classical economists to which Hayek gives deference were “anarcho-capitalists” opposed to government intervention anywhere. Quite the contrary, Adam Smith, Frederic Bastiat, Jean-Baptiste Say, J.S. Mill, Hayek, and Milton Friedman all unanimously agree on #1-#5 above with only a difference in the details. They also clearly acknowledged that monetary and fiscal policy could be effective during an economic downturn.

But all agreed that these government actions could be used as excuses for other encroachments and proposed a high bar that must be met by the government first.

Hayek understood that the British public were enjoying full-employment under a centrally-planned war economy, and many were advocating that this continue after the war since the Great Depression was such a strong memory. Indeed, Socialists were elected into office immediately after the war and seized much of the “commanding heights” of the economy for the State, in the belief that they were preserving individual freedom by saving the populace from economic hardship, as Keynes had believed possible (without the “commanding heights” bit) in his General Theory:
“(T)he modern classical theory has itself called attention to various conditions in which the free play of economic forces may need to be curbed or guided. But there will still remain a wide field for the exercise of private initiative and responsibility. Within this field the traditional advantages of individualism will still hold good” (Keynes, emphasis mine).

Hayek spends much of the book arguing why this is a fallacy. Economic freedom-- the ability to choose between alternatives, to lose your job, to fail at a business, etc. is intertwined with individual freedom:

“Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends. And whoever has sole control of the means must also determine which ends are to be served, which values are to be rated higher and which lower—in short, what men should believe and strive for.”

The Socialists desired to create a Utopia where there would be “full employment,” no poverty, and no perceived unfairness in outcomes. Hayek gives a lucid explanation of why this is incompatible with maintaining individual liberties:

“The choice open to us is not between a system in which everybody will get what he deserves according to some absolute and universal standard of right, and one where the individual shares are determined partly by accident or good or ill chance, but between a system where it is the will of a few persons that decides who is to get what, and one where it depends at least partly on the ability and enterprise of the people concerned and partly on unforeseeable circumstances...”

While a Socialist or Communist regime may eliminate differences in wealth, it doesn’t solve the problem of real poverty and it takes away the most valuable object-- freedom:

“The fact that the opportunities open to the poor in a competitive society are much more restricted than those open to the rich does not make it less true that in such a society the poor are much more free than a person commanding much greater material comfort in a different type of society...in every real sense a badly paid unskilled worker in this country has more freedom to shape his life than many a small entrepreneur in Germany or a much better paid engineer or manager in (Soviet) Russia...It may sound noble to say, “Damn economics, let us build up a decent world”—but it is, in fact, merely irresponsible. With our world as it is, with everyone convinced that the material conditions here or there must be improved, our only chance of building a decent world is that we can continue to improve the general level of wealth.”

Hayek understands the problem that the Soviet propogandists dealt with and we see in North Korea today: Under Socialism, not only do you have to replace freedom and incentives with coercion in order to get labor to produce, but the government has to convince people that its system is “fair,” and eliminate freedom of information to make the people believe they are in the best situation. Because:

“Once government has embarked upon planning for the sake of justice, it cannot refuse responsibility for anybody’s fate or position. In a planned society we shall all know that we are better or worse off than others, not because of circumstances which nobody controls, and which it is impossible to foresee with certainty, but because some authority wills it...Everything which might cause doubt about the wisdom of the government or create discontent will be kept from the people.”

This is why books are burned and banned in every Socialist country. Intellectual freedom is incompatible with a state that has to be believed by the people as making the absolute best decisions.

There were perhaps very few outright Marxists in Hayek’s day, but Hayek spends a good bit of the book explaining that Communism and National Socialism are branches from the same root, and credibly does so from his first-hand Austro-German experience. I appreciated this from the perspective of having celebrated V-E Day modernly in the former Soviet Union with (educated) people there not really able to elucidate what the differences were between Hitler and Stalin.

The weak point of the book deals with how the State or central planner assumes responsibility for defining morality in that society. Defining morality is a problem in any society without an objective standard of Truth.

I piece together Hayek’s thoughts on how a country moves down the road to serfdom:

First, democracy can be frustratingly slow-- as it is designed to be. People hate “gridlock,” and start to clamor for ways to streamline the legislative process. The more tasks the government assumes, the harder it is to find pareto-efficient outcomes. In some cases, technocrats and experts are installed to have control over processes.
Second, monopolies develop and begin to lobby the government for protection. The more protection allowed, the stronger they become. This increases the level of frustration by keeping certain prices high and increasing structural unemployment.
Third, people hate hardships and insecurity. People being laid off by their long-time employer, or losing money in a failed business venture have sad testimonies. Rather than understanding that this is what happens in a world are free to pursue their own economic opportunities, people begin to clamor for a better way, for “economic justice” and “security.” While Hayek agrees with some redistribution for the poor (see above) he points out that some hardship is simply necessary in a free society.
Next, the government begins to intervene in response to the above with “good intentions.” Maybe it’s a tariff to protect an industry, or a price ceiling to “keep things affordable,” or takes over a monopoly, but there are resulting unintended consequences that may exacerbate the problems above or create new ones. People clamor for more relief. Rinse and repeat until eventually the government is trying to direct all economic outcomes.

Hayek does offer some observations that are cause for optimism in 1944-- namely that international socialism is highly unlikely because socialism ultimately collapses in nationalism. Workers in England would object to some world government that redirects capital to, say, Poland:
“That socialism so long as it remains theoretical is internationalist, while as soon as it is put into practice...becomes violently nationalist, is one of the reasons why “liberal socialism” ...is purely theoretical, while the practice of socialism is everywhere totalitarian.”

But Hayek was in favor of something like the League of Nations that could be used to foster the liberal order and help maintain certain international rules-- like trade agreements:

“Federalism is, of course, nothing but the application to international affairs of democracy...a community of nations of free men must be our goal.”

The last few chapters deal with the details of German history, how National Socialism was the natural outcome of the followed philosophies of German philosophers, who Hayek notes were much heralded in the West, particularly in the world of education.

In Hayek’s 1956 foreward, he says that the Socialism and Planning he wrote about in 1944 “in this sense probably came to an end around 1948.” Socialism proved to be inefficient and the loss of individual freedom caused the British public to be alarmed. By 1976, the “Welfare State” with its emphasis on redistribution and soft paternalism had replaced outright central planning on the Left at the same time that many centrally planned economies would begin to free their markets and pursue greater wealth. Even the post-Keynesian attempts by the government to pull levers to achieve “full employment” were widely being abandoned.

Friedman’s 1994 foreward, a re-write of one he wrote in the 1970s, was very lucid. I think Episode I of Friedman’s Free to Choose is much more Hayek than Adam Smith. Highlights:

“What is now described as poverty would have been regarded as plenty when that slogan was first widely used.”
“The free market is the only mechanism that has ever been discovered for achieving participatory democracy.”
“(T)hose of us who were persuaded by Hayek’s analysis saw few signs in 1945 of anything but a steady growth of the state at the expense of the individual, a steady replacement of private initiative and planning by state initiative and planning. Yet in practice that movement did not go much farther—not in Britain or in France or in the United States.”

In all, I give this book 4.5 stars out of 5. It would have meant much more to a European in 1944 than an American today, and parts of the book are very context-relevant. I think Hayek would be concerned that it was being trumpeted by Conservatives, which Hayek was not, to advocate means and ends of which he did not approve in his book.

Will Wilkinson on Faith and Freedom

2011-07-15T11:16:00.005-06:00

Will Wilkinson is a capital l Libertarian (ie: he is closer to Ayn Rand's philosophy than Charles Murray) who writes a great blog at The Economist. He penned "Newt's theology of exceptionalism," after attending an Iowa speech by Gingrich. Wilkinson raises some points that merit pondering and I think demand a response from a faith-based perspective (bolding my own):

Mr Gingrich recurs constantly to the Declaration of Independence's premise that men "are endowed by their Creator with certain unalienable rights". Sometimes he uses it as a shibboleth of Americanism...Sometimes Mr Gingrich pushes deeper and explicitly attacks the secularism he sees lurking behind the 'Obama model'... Mr Gingrich himself implicitly acknowledges, the mere fact of divinely-endowed rights gets us nowhere. It's the widespread belief in rights that really constrains the power of government. It would seem, then, that a conception of rights acceptable to believers and sceptics (sic) alike offers a bulwark against tyranny superior to a vision of rights attractive to believers alone. At the very least, it seems plausible that an account of rights based on a grasp of the empirical conditions conducive to fair, mutually-beneficial social cooperation offers an equally sturdy basis for effective limits on state power. As evidence for this proposition, one might point to countries such as Denmark, which are far more secular than America, but whose citizens are at least as free as Americans.

Wilkinson here brings up the divide between (classical) liberals and (religious) conservatives: One group believes in individual liberty because it's proven "empirically" to be the best way to limit state power and foster mutual cooperation; the other believes in individual liberty because we are all created in the image of God, who is the ultimate source of Truth. Atheist classical liberals run into the problem of evil and the absurdity of life, which raises questions of the definition of justice. If there is no source of Truth, how do you determine what is right or just? What makes an individual life so sacred? Evangelical Christians have little problem here, God is the source of Truth and the Bible spells out where the ultimate source of our rights comes from. Ordering our society around the basic principles of God's revealed order is the best way to see the community flourish. (I'm putting this crudely for brevity, philosophers like William Lane Craig have worded it much more eloquently).

Wilkinson takes offense at Gingrich's implication that anyone who is not of the same faith-based perspective must be a progressive out to undermine individual liberty. Hence, his Denmark example (the Heritage Foundation ranks very secular Denmark ahead of the U.S. in its ranking of Economic Freedom).

Mr Gingrich went on to argue that the judiciary's consistent failure to rule in a manner adequately reflecting the belief that "our rights come from our creator" justifies a congressional usurpation of judicial power. That is, Mr Gingrich argued that Congress ought to override judges who, when interpreting the establishment clause, fail to rule as if dicta in a strongly-worded letter to King George III had established an official American political theology. The mind boggles. American politics is not, as Mr Gingrich would have you believe, a Manichean struggle between devout, liberty-loving champions of heaven-kissed inherent rights and amoral bureaucratic predators ravening for power.

Wilkinson also takes issue with the sponsor of the Gingrich event, an organization very opposed to gay rights in Iowa:
"(R)eligious conservatives have often resisted the idea that citizens ought to be equally sovereign."

(This is why classical liberals like Hayek hated to be mis-identified as conservative). He also points out that liberals (read: American-definition liberals or progressives) often base their policies on classical liberal beliefs of individual liberty, even if classical liberals would disagree with the design of those policies:

It's not so clear that secular liberals are the enemy of the sovereign citizen... If Obamacare is misguided, it is also a sincere, morally-motivated attempt to ensure that all Americans are in a position to meaningfully exercise their self-sovereignty, to guarantee the worth of their rights.

But note Wilkinson's use of the phrase "morally-motivated." How can a secular society define morals in the absence of a standard of Truth? This gets back to the argument that since classical liberalism contains no telos, it will ultimately fail. Adam Smith's moral system maintained a divine judge that provides that moral guidance, but the whole of classical liberalism rejects this, relying instead on the empirics that Wilkson mentions above. (Correct?)

So, while I agree with Wilkinson on the one hand, I disagree on the other. I agree that it's possible to maintain individual liberty in a secular society. But I disagree that it's somehow possible to have a consistent definition of morality--including the morality of individual sovereignty--in that secular society. Thoughts?

Where the debt comes from

2011-07-15T07:47:00.010-06:00

Here's one way to look at it, our current deficits primarily as a revenue issue:
From the WSJ, alternative revenue scenarios:
And here's what the CBO says the long-run spending picture looks like (click to enlarge):
The long-term projected increase in government spending is health-care driven. The rest stays about the same. "Other non-interest spending" is dominated by defense spending. And here is a look at how an aging population and health care inflation are affecting that picture. By 2035, government is projected to spend 16% of GDP purely on entitlements:

But Americans so far have proved unwilling to properly tax themselves to fund those entitlements:If you borrow to pay for things you're spending money on, you incur more debt. Various measures have been presented to deal with the issue, but none agreed upon.

*Update 7/18* Calculated Risk posts an updated chart for archiving here:and Keith Hennessy gives us a summary of the various deficit reduction packages being negotiated, including the numbers.

The AARP and the debt ceiling

2011-07-14T05:19:00.005-06:00

Chapter 5 of Hayek's Road to Serfdom describes the difficulties of governing in a democracy when the government increasingly takes on more duties. Legislative compromising can lead to legislation that contains something for everyone, but pleases no one. It is very applicable to today, whether talking about health care reform or negotiating the debt ceiling.

The AARP is running ads urging seniors to call Congress and tell them to "cut waste and loopholes," instead of touching retirement benefits. This seems to be in response to President Obama's willingness to put entitlements on the negotiating table and to raise the retirement age from 65 to 67, something he was excoriated for from his Left.

The AARP ads propagate the myth that Americans unfortunately believe-- that the majority of government spending is on wasteful pork and fairly easy to solve. I posted this last semester.

Domestic discretionary spending is a small fraction of government spending. The yellow slice is set to increase dramatically as Baby Boomers retire and use more health care. Rising health care costs are what make the long-run deficits so large. As Dean Baker likes to point out, "If the U.S. paid the same amount per person for health care as (other countries) it would be looking at huge budget surpluses in the long-term, not deficits."

There is already belt-tightening by the federal government. An oft-overlooked fact is that since Obama took office, government employees have been losing their jobs at a steady clip: You could privatize the TSA, eliminate the Department of Education, and eliminate all earmarks, etc.-- you still wouldn't solve the debt problem purely due to entitlements.

The Republican plan to solve the problem is/was to eliminate Medicare and replace it with an insurance voucher program. But the GOP plan doesn't shift seniors off of Medicare until 2021, and those who are on before 2021 get to stay on for life. Worse, the plan claims to save $389 billion on Medicare before 2021 without saying how. So, the problem remains.

The Democratic plan to solve the problem is simply to enforce/strengthen the Affordable Care Act. According to Ramesh Ponnuru:

Heavy-handed bureaucratic cost- cutting. The Democratic plan is cutting payment rates so that Medicare becomes as lousy a program as Medicaid, with doctors refusing to participate in it. The Democratic plan is letting an unelected board decide which treatments won’t get funded.

Keith Hennessy points out that Obama's bipartisan deficit commission has further reforms that haven't been put on the table in recent negotiations.

(If Congress actually did nothing and let current laws on the books stand (including increasing the debt ceiling now), the budget would be balanced by 2019. But that includes a large amount of tax increases that no one is comfortable with. )

So, AARP, retiree benefits are the problem. The solution you give in your ad won't be nearly enough to solve it. Care to propose another? Or care to endorse one of the dozen or so that have been put on the table by various think tanks and commissions?

The Washington Post has created a tool for those urging no increase to the debt ceiling: You get to decide which programs get paid and which don't.