Government and Economics Pt. 2

A point of clarification:

Mr. Leonhardt’s argument is not without merit.  You can point to many successful economies with significant government influence: Canada, the Scandinavian countries, France, Germany, etc.

It is his statement that irked me.  He stated, unequivocally, that government involvement is the only way to achieve economic success.  That statement is clearly, factually, and historically false.  That was my point

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Government and Economics

I was reading the New York Times this morning on my coffee break, and I came across this blog post by the incomparable David Leonhardt.  Now, I don’t always have to agree with what Dave has to say, but he is always a good read and usually informative.  However, one line in this blog caught my attention:

When it comes to economics, we know that a market economy with a significant government role is the only proven model of success.

I had to do a double take when I first read this.  Actually, I did a triple take.  I had to read it again to make sure I read it correctly.  Then I read it just one more time.  Leonhardt makes a rather sweeping sentence: we know the economy can only be successful with significant government involvement.  With all due respect, if Mr. Leonhardt had remembered either his Econ 101 or taken a look at the historical record, he would not have made such a statement.

The basic economic theory states that, when there is an outside influence on the market (such as government interference), the market fails to allocate resources efficiently, thus leading to lower prosperity.  So, theoretically, he has no standing.

What about historically?  Let’s start at the basics.  The Medieval period.  A market economy with significant government and guild interference.  Not really the best of times was it?  Lots of poverty.  With the exception of nobles and guild masters, most people didn’t live too well.

Let’s jump ahead to the 18th and 19th centuries.  Mercantilism runs rampant.  The definition of a significant government involvement.  Who gets rich here?  No one.  All countires try to export and not import.  So who buys?  No one.  Granted, life is better than during the 14th Century, but still not that great.

But in 1776, a wise man saw the dangers of Mercantilism and advocated a new system that would become, over time, Capitalism.  That man was Adam Smith.  Since then, the standard of living of people in countries where the government intervened minimally has grown exponentially.  The historical record is quite clear on this.

And let’s look at some recent government involvement in the markets: historically low interest rates (as dictated by the Federal Reserve) which helped fuel the housing bubble.  Trillions in stimulus funds and unemployment is still over 9%.  Free trade across the world hindered by Congressional bickering.  A default crisis that causes major worries throughout Europe.  Government bailouts in the 80’s that set a precedent for failure in the auto market.

My point is you cannot make a sweeping statement like Mr. Leonhardt did.  Or, if you are, at least make sure the facts are on your side.

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On the Debt

A lot has been made recently, and for good reason, on the current fight in Congress regarding the debt.  On August 2nd (my birthday), if an agreement cannot be made to rise the debt limit, then the United States will default on our obligations.  Both sides claim that, if this were to happen, it would be the first default in American History.

Well, that is hardly true.  The United States has defaulted on our debt several times, most recently in 1979.  The situation was similar to currently.  Congress was arguing over raising the debt ceiling (which was $829 million).  A deal was reached at the very last minute.  However, a series of “word processor issues” caused the Treasury to not send about $120 million in checks to creditors.  Thus, the US defaulted.  And the markets reacted.  According to a paper written by Terry Zinvey (Ball State University) and Dick Marcus (also of Ball State), the “series of defaults resulted in a permanent increase in interest rates.”  In fact, they estimate interest rates increased by 0.5%, which translated into billions of dollars in extra interest payments.

Of course, if the US reaches the Aug 2nd deadline and defaults, it will be an entirely manufactured crisis.  Even without raising the limit, the US has trillions in assets (such as oil, land, etc) it can sell to pay our bills years into the future.

Just a thought

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Some Links

So, work has been busy and so has after-work life, so here is a short post:

Here are a few rival economics blogs.  They are good reads:

Here is Dr. Greg Mankiw’s blog.  He is currently a professor at Harvard and has served as the economic adviser to President W. Bush.

This blog is written by the always entertaining Dr. Paul Krugman.  He has a political POV, but it is certainly good reading and is always chocked full of good economic info.

These are different blogs written by Wall Street Journal contributors.  Some of them are subscriber-only, but the free ones are always a good read.

These are blogs collected by the Economist magazine.  They are a collection of a number of different blogs from around the word.  Updated every day!

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I apologize for the fact I have not posted in a long time.  I moved to Concord, NH on the 4th and I began my new job on the 6th.  Most of the past two weeks have been working and settling into my lovely apartment here in Concord.

So, for my first post in a long time, I’d like to discuss some of the major myths surrounding manufacturing in the US.

Myth: China produces more than the US.

Fact: US manufacturing output in 2009 (the most recent numbers) was $2.15T.  Chinese manufacturing output in 2009 was $1.48T.  That’s a 46% greater amount of output than China.

Myth: The US doesn’t make “stuff” anymore.  We just make big things that cost lots, this the high values.

Fact: US manufacturing output accounted for 20% of all manufacturing in the world.  In other words, 1 in 5 of all the stuff made in the world was made in the USA.  This is also the largest percentage for any country.  To put it in some context, the US produced more than Japan, Germany, Britain and Italy-combined.

Myth: “These jobs are going, boys, and they ain’t coming back.”

Fact: Surprisingly false.  While US manufacturing employment has declined rapidly during the previous decade, a number of companies are bringing manufacturing jobs back from over seas, including Caterpillar and Wham-O (who make Frisbee) and Ford.

Most of the pessimism surrounding manufacturing comes from misleading and incomplete news reports.  Employment in manufacturing has declined rapidly.  However, our actual output is growing.  This means manufacturing is becoming more efficient and capital-intensive.  This is a good thing.  It means cheaper products and more resources that were tied up in manufacturing (such as labor) can now be used elsewhere.

If you want to hear some more on which I have been talking, I’d suggest you listen to the weekly radio show conducted by my bosses Alan and Brian Beaulieu.  You can find it here.  It is on Monday afternoon at 4 PM.


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Hazards of the Job

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As we enter the Summer of 2011, we are faced with, in my opinion, a dangerous combination: inflation and persistently high unemployment.  Despite of (and in some cases, in spite of) the actions taken by the Obama Administration, unemployment is still over 9% in the United States and prices are on the rise.  The Federal Reserve bank argues that inflation is muted, but anyone who has filled up their gas tank or gone to the grocery store lately will big to differ.  In economics, we call this combination of inflation, lack domestic demand and high unemployment stagflation.  The last time the nation suffered from stagflation, Jimmy Carter was president and I was still 19 years away from being born.  Really, the only way to combat stagflation is to both get people back to work and to get prices under control.  There are many ways to do this.  So which should be taken?

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