Friedman and Schwartz vs. Today’s Talking Heads: The 88 vs. The Gazillion

Talking heads, pundits, and media types speak/talk/write volumes-upon-volumes about the recent housing boom-bust and subsequent financial crisis. Specifically they commentate that the subsequent deep economic recession, shallow recovery, and subsequent economic malaise has a common thread of risk aversion and the quest for liquidity. They elude to, poke about, show charts and graphs, and otherwise attempt to explain in 100 gazillion words that risk adverse and liquidity is the revealed preference after a cataclysmic economic event.


Consider the following excerpt, specifically the eighty eight words within the following passage that concisely and compactly economize on the 100 gazillion plus words of today's talking heads, pundits, and media types:

“Partly, no doubt, the stock market crash was a symptom of the underlying forces making for a severe contraction in economic activity. But partly also, its occurrence must have helped to deepen the contraction. It changed the atmosphere within which businessmen and others were making their plans, and spread uncertainty where dazzling hopes of a new era had prevailed. It is commonly believed that it reduced the willingness of both consumers and business enterprises to spend ; (6) or, more precisely, that it decreased the amount they desired to spend on goods and services at any given levels of interest rates, prices, and income, which has, as its counterpart, that it increased the amount they wanted to add to their money balances. Such effects on desired flows were presumably accompanied by a corresponding effect on desired balance sheets, namely, a shift away from stocks and toward bonds, away from securities of all kinds and toward money holdings.” - Friedman and Schwartz, The Great Contraction 1929-1933, pp 10-11.



Note: the footnote referenced by Friedman and Schwartz appears below:

(6) See A. H. Hansen, Economic Stabilization in an Unbalanced World, Harcourt, Brace. 1932, pp. 111-112; J. A. Schumpeter. Business Cycles, McGraw-Hill 1939, Vol. II pp. 679-680; R. A. Gordon. Business Fluctuaions, Harper, 1952, pp. 377-379, 388; J. K. Gaibraith. The Great Crash, 1929, Boston. Houghton Mifflin, 1955, pp. 191-192. See also Federal Reserve Board, Annual Report for 1929, p. 12.

Choice, Limited Choice, and Not Choosing Limited Choice

If one is familiar with Milton Friedman one is likely familiar with his mantra of “free to choose”. You may well be familiar with his book and subsequent PBS series of the same title Free to Choose. (1) (2)

If one is -or- is not familiar with Milton Friedman, the following is an observation of one of his core views for the unfamiliar, and an excellent reference for the familiar:

“Friedman’s core view of economics and matters of economic policy was fully developed by the time he undertook the massive of his monetary history of the United States. Nevertheless, the events recounted in a key part of that work, his horror story of the Great Contraction , strengthen his convictions and formed much of the theme song he sang for the rest of his life. His viewpoint was remarkably simple, especially for an economist.

Freedom of decision, Friedman believed, was the necessary condition for the economic system to deliver the highest standard of living to the largest number of people. He was convinced that individuals as a group would make consistently better choices for themselves than bureaucrats who aimed to make decisions for those individuals. The Federal Reserve was just one government agency out of the many he would have preferred to see go out of existence or at least be relegated to just maintaining the money supply at a steady level.” - Peter L. Bernstein, Introduction, 2008 edition of The Great Contraction 1929-1933.

Its been restated many times that a free people, in a free market, free to choose among freely available choices, will make exchange at mutual self interest hence the pie expands. That fallacy exists based on zero sum thinking in that exchange is only a zero sum in that only one party gains at the expense of another party. The fallacy is exposed, in part, due to mutual exchange. If both parties do no perceive a gain, exchange will not occur.

"Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another."- Milton Friedman


One may find insight by considering/constrasting the opposite proposition of Friedman’s free to choose, which is those advocating limited choice:

(1) proponents of limited choice advocate limited choice as the advocates know that the many and several would never choose the limited choice.

(2) advocates of limited choice have in fact chosen the particular limited choice.


Utility, or satisfaction, varies among everyone. Some people derive grand satisfaction by traveling the world while others love to be homebodies. Some love the beach others love the mountains. In each instance the person is free to choose among alternatives that derive the greatest satisfaction for that particular individual in that particular individual’s real time circumstances.

Advocates of limited choice have chosen to limit choice among infinitely dynamically changing choices, of which, yield maximum utility for particular individuals in particular individual circumstances. By extension, individual utility or satisfaction has been thus limited. The “limit” is imposed by limited choice advocates as without the limit the limited choice advocates know that the many and several would never choose the limited choice as they would seek particular-instance maximum satisfaction by way of the many other choices which have now been preempted.

What criteria would one use if one were an advocate of limited choice? Among many “choices” the advocates of limited choice hang their hat upon is “society”. An immediate problem arises in that “society” is an abstract concept. Have you ever met society? Shook hands with “society”? Regarding the abstract concept of “society”, one finds infinitely dynamically changing choices in what society means to particular individuals in particular individual circumstances. Hence the only way “society” can be an argument for limited choice - is if “society” itself becomes an abstract concept of limited definition and meaning.

Note: is society the summation of all the individuals freely choosing -or- is society a top down concept of certain individuals with a pre-chosen vision of society and the now the once free to choose individual must surrenders free choice to fit the pre-chosen vision of certain individuals?

One can quickly see limited choice becomes the plans of the few superseding the plans of the many. That advocates of limited choice want a limit based upon their choices of how they perceive what a limited choice of what “society” should mean to all. (3)

That is, a certain group wants to be free to choose to limit another group’s choice. Choice is used to preempt choice.

　


Notes:

(1) http://www.amazon.com/Free-Choose-Statement-Milton-Friedman/dp/0156334607/ref=sr_1_3?s=books&ie=UTF8&qid=1329543856&sr=1-3

(2) http://miltonfriedman.blogspot.com/

(3) http://www.econlib.org/library/Essays/hykKnw1.html
　

　

Jobless Claims Decline But 5.4 Million Discourage Workers Remain

Regarding recent jobless claim declines in the US economy, and this as an indicator by some of an improvement of the aggregate economy…..what about the 5.4 million total discouraged workers (short-term discouraged and long-term discouraged = total discouraged)?

U6 unemployment measurement includes the short-term discouraged worker as well as other categories of workers and currently stands at 15%. Lets dust off the SGS alternate unemployment rate and bring it off the shelf (reflecting total discouraged) and one notes that it stands at 22.5%.

Focusing on jobless claims and considering a three year trend regarding a declining-to-stagnant economy, jobless claims trended up, peaked, then trended down as firms removed marginal workers at the margin, then marginal workers more toward the core, ending with a firm made up of core workers. Hence with the firm running on core workers and the firm producing few new jobs:

(1) the now “core employment” doesn’t shrink,

(2) few new jobs created means fewer new jobs to be possibly eliminated,

(3) hence fewer jobless claims.

Keep this in mind for a moment.

　

During the same phenomena described directly above, the discouraged worker pool increased at an increasing rate. That is, some sub-set of jobless, having been a prior jobless claim statistic in month MM in year YY becomes long-term unemployed and eventually falls into the discourage worker pool.

We end with a core firm economy, and the core firm within this economy finds it can do more with less. The core firm economy, and its core firm employed, match the demand gap and hence a dynamic equilibrium. The end result is that at this point on the trend line the firm hires few and fires few.

One must consider that the  5.4 million discouraged are attracted back to the labor pool (become active job seekers) once the economy shows signs of improvement (flooding the denominator of the unemployment formula hence sending unemployment upward in a improving economy). Moreover, these 5.4 million can not make a jobless claim, all they can do is show up in the denominator. However, the denominator keeps suffering from statistical revisions [guesses/political guesses?] e.g. 1.2 million statistically eliminated January 2012.

The next observation is: are we at the core or are we at a false core? If government is still spending more than the revenue taken in, is the core false? For example, if government moved toward a balanced budget, government would need to shed workers. If government moved toward a balanced budget, some expenditures would end associated with the private sector, meaning the core economy to some degree shrinks in the short-run.

One must also consider there has to be a cost associated with the 5.4 million discouraged workers. Welfare, food stamps, Medicaid, state level social welfare programs, etc. certainly are costs associated with maintaining the standing army of 5.4 million discouraged. However, considering 5.4 million discouraged workers, where are the soup lines, where are the tent cities, where are the masses sleeping in the street? That means the costs enumerated above must come with some addition cost. That is, since we see no soup line/tent cities there must be some expenditure/cost by some exogenous provider that creates a buffer between what one sees and what one would expect to see with an army of 5.4 million discouraged workers.

One might conjecture that these costs come in the form of items such as living in mom’s basement; the return to the extended family; income diverted from the core employed to the discourage relative; grandparents liquidating wealth and giving the funds to the discourage extended family member, etc.. Consider this, how long or at what rate can this exogenous cost continue? The cost can not be absorbed infinitely. Does the ability to absorb the cost deteriorate and deteriorate at an increasing rate suddenly exposing soup lines/tent cities?

Hence is the media, talking heads and pundits overrating jobless claim declines as a positive indicator?

　

　

　

　

　

　

Consumer Financial Protection Bureau: Consuming Consumer-Taxpayer Dollars At the Consumers Benefit?

“GOP legislators have been howling for months now about the Consumer Financial Protection Bureau's ability to set its own budget (within a generous upper limit) and why that should concern U.S. taxpayers in a time of ballooning deficits. A congressional hearing this week only underscored the validity of their case.

CFPB chief Richard Cordray told a House Financial Services subcommittee that the bureau "only used $123 million" of its $498 million cap last year and expects to remain "considerably below" budget caps of $356 million and $448 million for 2012 and 2013, respectively. The bureau has already undergone two audits. Those documents, plus the bureau's "budget justification" and quarterly reports are all posted on consumerfinance.gov.

Mr. Cordray's testimony sounded convincing -- until the committee dug into the details. Rep. Randy Neugebauer noted that the bureau asked for some $96 million dollars last year in a single-page letter, with no spending justification -- something Mr. Cordray replied was allowed "by law." Rep. Michael Fitzpatrick pointed out that the 2012 fiscal year budget estimates $130 million for "services," with no more explanation, and gives little reason for hiring 400 employees. Rep. James Renacci asked why the bureau was spending $55 million to renovate its headquarters. Mr. Cordray had no reply, nor could he explain why the the bureau wants to hire 1,400 employees in total. Oh, and the agency offers consumer information in 191 languages.

The bottom line is that Mr. Cordray may be uncomfortable (or not) having to answer tough questions, but ultimately the legislature has little leverage over him. The CFPB chief sets his own budget, can only be fired by the president for extreme malfeasance and holds vast regulatory powers over wide swathes of the consumer financial industry. Expect the CFPB spending machine to keep rolling on.” - The CFPB Spending Machine, Mary Kissel, The Wall Street Journal’s Political Diary, 02/17/2012



　

Maxine Waters: Yet Another Reason Dale Carnegie’s Public Speaking Course Is Valuable

New Orwellian Frontiers: Mom’s Brown Bag Lunch vs. West Hoke Elementary School and the Lunch Police

‘A preschooler at West Hoke Elementary School ate three chicken nuggets for lunch Jan. 30 because the school told her the lunch her mother packed was not nutritious.

The girl’s turkey and cheese sandwich, banana, potato chips, and apple juice did not meet U.S. Department of Agriculture guidelines, according to the interpretation of the person who was inspecting all lunch boxes in the More at Four classroom that day.

The Division of Child Development and Early Education at the Department of Health and Human Services requires all lunches served in pre-kindergarten programs - including in-home day care centers - to meet USDA guidelines. That means lunches must consist of one serving of meat, one serving of milk, one serving of grain, and two servings of fruit or vegetables, even if the lunches are brought from home.

When home-packed lunches do not include all of the required items, child care providers must supplement them with the missing ones.’


‘ "What got me so mad is, number one, don't tell my kid I'm not packing her lunch box properly," the girl's mother told CJ. "I pack her lunchbox according to what she eats. It always consists of a fruit. It never consists of a vegetable. She eats vegetables at home because I have to watch her because she doesn't really care for vegetables."

When the girl came home with her lunch untouched, her mother wanted to know what she ate instead. Three chicken nuggets, the girl answered. Everything else on her cafeteria tray went to waste.

"She came home with her whole sandwich I had packed, because she chose to eat the nuggets on the lunch tray, because they put it in front of her," her mother said. "You're telling a 4-year-old. 'oh. your lunch isn't right,' and she's thinking there's something wrong with her food." ‘ - Preschooler’s Homemade Lunch Replaced with Cafeteria “Nuggets”, Carolina Journal Online, Sara Burrows,
02/14/2012

Link to the entire article appears below:

http://www.carolinajournal.com/exclusives/homemade-lunch-replaced-with-cafeteria-nuggets.html


　

Keith Hennessey of Stanford University Explains Ratio Gimmicks in the President’s 2013 Budget.

“The Obama Administration claims their new budget contains $2.50 of spending cuts for every $1 of tax increases. Here is White House Chief of Staff and former Budget Director Jack Lew on Meet the Press yesterday:

'We’ve seen from Republicans in–particularly Republicans in the House, but with Republicans generally, that they don’t want to be part of any plan that raises taxes at all. The president’s budget has $1 of revenue for every $2 1/2 of spending cuts. This can be done, but it can only be done when we work together.'


Their 2.5:1 ratio is bogus. The President’s team is (1) playing a timeframe game and (2) counting interest savings from tax increases as spending cuts.

Contrary to Mr. Lew’s assertion, the President is proposing at least $1.20 of tax increases for every dollar of proposed spending cuts. The President’s budget locks in historically high spending levels and relies more on tax increases than spending cuts for the limited deficit reduction it proposes.

Table S-3 from the newly released President’s Budget starts measuring deficit reduction a year ago, in January 2011. The table shows $5.3 T of deficit reduction over the next ten years resulting from a combination of laws enacted last year and the President’s new proposals released in today’s budget.

The President’s budget is a set of policy proposals for the future. When most people hear the “The President’s budget has $1 of revenue for every $2 1/2 of spending cuts,” they think this ratio applies to the changes the President proposes for the future.

I will therefore split the OMB table and recalculate this ratio, ignoring spending cuts and tax increases that have already been enacted into law and looking only at future policy proposals. I argue this is the right way to do this ratio. Like the OMB table, this one shows deficit reduction for the next 10 years ($ in billions, 2013-2021).

	Already enacted	New proposals	Total
spending cuts	1720	1254	2974
tax increases		1510	1510
interest effects			800
total deficit reduction	1720	2764	5284
spending / taxes		0.83	2.50
taxes / spending		1.20

Looking only at new proposals, the President’s budget proposes 83 cents in spending cuts for each dollar it proposes in tax increases. Or we could say the President’s budget proposes $1.20 in tax increases for each dollar in proposed spending cuts.

The gimmicks

The President’s team is playing at least two games to generate their 2.5:1 ratio:


They are cherry-picking their timeframe to make the ratio look at high as possible;
-and-
They are counting all interest savings as spending cuts.
　
Why did they start measuring in January 2011? Because that was the start of the Republican Congress, because last year only spending cuts were enacted, and because that timeframe maximizes the spending increase to tax cut ratio.” - Keith Hennessey, 02/13/2012


The entire essay, The ratio of spending cuts to tax increases in the President’s budget, appears in the link below:


http://keithhennessey.com/2012/02/13/bad-ratio/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+KeithHennessey+%28Keith+Hennessey%3A+Your+guide+to+American+economic+policy%29