Observations on Political Self-Interest

Gordon Tullock and James M. Buchanan wrote The Calculus of Consent, Logical Foundations of Constitutional Democracy which is the book that, in the main, launched Public Choice Theory.

In another book by Tullock, Government Failure, he makes an interesting point that up until Hobbs and Machiavelli (circa 1500) the concept of "self-interest" did not exist in any formal way, that all social and private issues were discussed on moral and ethical grounds with self-interest not a player or formal concept.

“Until the days of Adam Smith (1723-90) most social discussion was essentially moral. Individuals - whether they were businessmen, civil servants, politicians, or hereditary monarchs - were told what was the morally correct thing to do and urged to do it.” (1)

With David Hume and Adam Smith in the 1700’s the concept of self-interest became mainstream but only in private endeavors whereas "government" issues were still discussed on moral and ethical grounds with self-interest not a player. That is to say, government and the politicos that make up government, the issues thereof, continued in the realm of moral/ethical until the late 1940's and mid 1950's when political science was doing a poor job of explaining the inner workings and resulting output of "democracy" which prompted the application of economics to the study of political science and the advent of Public Choice Theory - which clearly shows politicos do function in their own self-interest.

Tullock points out that politicos today still try to dupe the public per talking points such as public servant, working in the public interest and doing the people’s work as they desperately try to convince James and Jane Goodfellow that they, as politicos, are not at all self-interest oriented and are merely working in James and Jane Goodfellows best interests. That is, politicos continue to sell the 16th century in the 21st century.

Which then reminds one of Milton Friedman's famous quote which summed it all up very nicely: "Is it really true that political self-interest is somehow nobler than economic self-interest?"

Notes:

(1) Government Failure, Tullock, Seldon and Brady, 2002, CATO Institute, pages 3 - 4.

PIIGS: the Original Acronym and the Original Proposition

If one thinks back several years to when the acronym PIGGS was coined [Portugal, Ireland, Italy, Greece and Spain] the original proposition put forth was: a debt train wreck involving the PIIGS. Keep this in mind for a moment.

Now consider the many talking heads, pundits and those supposedly in-the-know explaining very assuredly that the EU would “talk” it out and negotiate a deal to avert any supposed debt train wreck.

However, each deal that was supposedly in the pipeline, when hatched, ended, in the main, in yet another deal which lead to another deal and so on which did nothing to solve the crisis. That the debt train wreck would be adverted, really became, a cascading series of “talk” that amounted to more “talk” but never stopped the impending debt train wreck.

One should consider Dr. Frank Knight’s proposition of the First Law of Talk: "Talk is cheap and it drives out talk that is less cheap."

Note: Frank Knight was an economics professor of both Milton Friedman and James M. Buchanan. Both Friedman and Buchanan are Nobel Prize winners in economics.

“Frank Knight humorously hypothesized that this idea about bad and good money could be applied to communication. "Cheap talk" was easily manufactured and it tends to drive out more reasoned talk because the response to cheap talk is more generally even cheaper talk that is yet more inflated. This law can easily be seen in action in the realm of politics and diplomacy. It also applies to academic arguments that generate a certain amount of vitriol.” (1)

Returning to the original proposition regarding a debt train wreck associated with the PIIGS, were the talking heads, pundits and those supposedly in-the-know advocating cheap talk? Was the more reasoned response the original response of: a debt train wreck?


Notes:

(1) Frank Knight's First Law of Talk

http://www.indepthinfo.com/articles/law-of-talk.shtml

Job Openings and Labor Turnover Survey (JOLTS)

*graph above from Stone and McCarthy Research Associates



The Job Openings and Labor Turnover Survey (JOLTS) published 06/19/2012 for month ended  April, 2012 by the Bureau of Labor Statistics (BLS) was an abysmal report. The complete report can be found at the link below:

　
http://www.bls.gov/web/jolts/jlt_labstatgraphs.pdf

　

On page five of the JOLTS (see link above) you will see a graph of The Beveridge Curve which plots job openings vs. unemployment. The Beveridge Curve is not exactly a mainstream concept unless you spend a lot of time in the area of manpower economics. In a nutshell an economic contraction on The Beveridge Curve is indicated by high unemployment and low vacancies. High [job openings] vacancies and low unemployment rates indicate an economic expansion. Hence The Beveridge curve plotted on page five is indicating an economic contraction.

　

The Beveridge Curve can shift inward and outward. If the curve moves outwards then X level of vacancies is associated with increasing levels of unemployment. The shift outward supposedly depicts a decreasing efficiency in labor markets. The implied inefficient in labor markets are supposedly caused by mismatches between available job openings and the pool of unemployed and also associated with an immobile labor force.

　

Hence we have a Beveridge Curve that is plotting in the economic contraction area and is shifting outward. That is, the Beverage Curve is stating few job opening exist and of those job openings, no match exists over time.

Further, the Beverage Curve has been plotting very erratically. Or as Tyler Durden at Zero Hedge depicts it in a recent blog post: “As Job Openings Plunge By Most Since May 2010, Beveridge Curve Goes Berserk”. (1) As Durden aptly points out, the mismatched job opening are not only mismatched, they are being withdrawn as “vacancies” plunge.

Hence the Beveridge Curve is indicating an economic contraction cycle and has indicated so for some time. Further, one reason the unemployed remain unemployed is that there are few job openings. Of those few job openings the match of vacancy to applicant is low. With job openings plunging the situation becomes worse for the unemployed.


Notes:

(1)  As Job Openings Plunge By Most Since May 2010, Beveridge Curve Goes Berserk, Tyler Durden, Zero Hedge, 06/19/2012.

　

　

　

There is the Fiscal Cliff, Then There is the “Fiscal Limit“

In the media recently much has been said of the fiscal cliff such as the following from the Associated Press May 22, 2012:

“A new government study says that allowing Bush-era tax cuts to expire and a scheduled round of automatic spending cuts to take effect would probably throw the economy into a recession.

The Congressional Budget Office report says that the economy would shrink by 1.3 percent in the first half of next year if the government is allowed to fall off this so-called "fiscal cliff" on Jan. 1. The cliff is what experts call the combination of higher tax rates and more than $100 billion in automatic cuts to the Pentagon and domestic agencies.”


The recent and ongoing discussion of the fiscal cliff is interesting, informative and needed. However, an examination of the “fiscal limit” is insightful as well. What is the fiscal limit?


“The intertemporal budget constraint suggests that any
time the real debt increases by even a small amount—a
budget deficit is run in a single year—the expectation
of future taxes or spending must adjust to put the equation in balance. However, the equation says only that surpluses must eventually rise; it provides no guidance on when that must occur. Historical experience doesn’t provide a great deal more insight. For
example, the U.S. government ran moderate deficits,
averaging roughly 3 percent of GDP every year, from
1970 to 1997, with no obvious concern from financial
market participants about the sources of future surpluses.
That experience would imply that governments
can sustain moderate deficits seemingly indefinitely.


　

That is less likely to be true when the imbalance
between outstanding debt and future surpluses is
very large. The larger the debt grows, the larger future
surpluses—revenues in excess of spending—must be
to satisfy the equation. However, there are limits to
future surpluses. Spending cannot drop to zero; to
the contrary, spending is expected to rise to historically
high levels as a percent of GDP even under the
CBO’s most optimistic scenario, and tax revenues
have an upper limit. As tax rates grow higher, they
distort incentives to work and produce, and at very
high rates would shrink the revenue collected by the
government. There are likely to be political limits to
tax revenues even before that point is reached, a reality
reflected in the CBO’s alternative scenario assumption
that tax revenues will revert to their historical average
of 18.4 percent of GDP within a decade. With debt levels
predicted to grow much larger than GDP within
two decades, it is clear that many years of higher taxes
would be required to produce enough surpluses to
resolve the resulting imbalance. There is some level
of debt that is high enough—although how high is
difficult to predict—that generating the amount of
future surpluses required would simply be infeasible.


That point is what economists have called the “fiscal
limit.” At the fiscal limit, the government cannot borrow
further, and the government’s existing spending
promises therefore cannot be funded. At least one of
two events must occur at the fiscal limit: the government
would reduce its debt levels by defaulting, or real
debt levels would be reduced through actions taken
by the central bank.” (1)


For a grand discussion regarding the fiscal limit and what scenarios lead up to a fiscal limit and what actions are taken by central banks at the fiscal limit one may find insight in the newly published Federal Reserve Bank of Richmond’s 2011 Annual Report lead story of interest: Unsustainable Fiscal Policy Implications for Monetary Policy. The fifteen page essay is written in everyday language and is very informative. Link appears below:

http://www.richmondfed.org/publications/research/annual_report/2011/pdf/article.pdf

Notes:

(1) Federal Reserve Bank of Richmond’s 2011 Annual Report, Unsustainable Fiscal Policy Implications for Monetary Policy, pages 8, 9 and 10.

Gasoline Price Swings and the Boy Who Cried Wolf: The Mantras of The Gasoline Price Increase Creates a Consumer Tax and Gasoline Price Reduction Creates a Tail Wind

When gasoline prices rise in the U.S. media sources depict the increased price as a “tax”. When gasoline prices decrease in the U.S. media sources depict the decreased price as a “tail wind”. The basic concept depicted is that as gasoline prices increase consumers have less to spend on other consumption items and as gasoline prices decrease consumers have more money to spend on other consumption items. A nice neat package of price sensitivity and allocation of resources…. or is it?

Obviously price is a signal. However, price is a relative signal. That is, consumer A might be very sensitive to certain price increases where as consumer B is not. Also, what is the exact price level that creates sensitivity? And what ever sensitivity exists, the result is somehow purely demand driven consumer consumption of goods and services?

　

If one assumes consumer A has a household budget then one would assume that consumer A makes an assumption regarding gasoline prices. Lets assume consumer A decides $3.00 per gallon of gasoline will be the average. Hence if gasoline goes to $4 per gallon then consumer A must reallocate the budget. One could say the price increase is a tax upon consumer A’s budget. However, if prices retreat to $3.50 per gallon from $4 per gallon has a “tail wind” been created -or- is the tax on consumer A’s budget merely been reduced but not eliminated. In this example a “tail wind” would only occur if gasoline prices fell below the $3 per gallon assumption in the original budget. However, media sources depict any decrease in gasoline prices as a “tail wind” when in fact it all depends on the base assumption of average gasoline prices used by all the James and Jane Goodfellow(s).

The reverse is true. If consumer B made a bold assumption of $5 per gallon for gasoline and prices only rose to $4, then a “tail wind” existed through out the price changes and a “tax” never occurred.

Moreover, if James and Jane Goodfellow set a price for gasoline within a budget, do swings in price change behavior significantly or do we have more of the-boy-who-cried-wolf phenomena? Tax or tail wind, do constant price swings cause the consumer to create a sinking fund of sorts to deal with the price swings? That is, does the consumer apply risk management to the tax and tail wind price swings and hence neutralize the tax and tail wind phenomena through risk management of gasoline prices?

Finally, the tax or tail wind mantra makes an explicit and implicit assumption: any price change only affects consumption of goods and services. What about savings and investment? What if gasoline price changes only affect savings and investment for certain consumers? Why is gasoline price changes only equated with demand side items?

The next time one hears media sources making sweeping statements regarding gasoline price changes and the supposed tax or tail wind, one needs to consider sweeping macro economic statements of such types need considered on more micro economic grounds.

Limits to Monetary Policy and the Enigma of Fiscal Policy

Regarding Ben Bernanke’s testimony 06/07/2012 and the commentary in the video above, monetary policy has reached its limit. Interestingly enough F.A. Hayek, in real-time during the Great Depression (circa 1938), staked out the position that monetary policy has its limitation and made such comment during the other deep recession regarding Federal Reserve actions at the time [1930's].

Fast forward to the Great Recession and we are at the limit of monetary policy once again. It's on the fiscal side at this point and Ben Bernanke keeps stating such in his speeches. Bernanke knows he is at the limit of monetary policy, he just does not say it, likely for policy reasons, yet alludes implicitly and explicitly to fiscal policy again and again.

The problem with fiscal policy is that it's in essence, ever since Keynes advocated politicos manipulating the levers of the economy, "politico policy". Buchanan and public choice theory leads one to the conclusion that reversing or amending fiscal policy threatens political constituency building exercises through taxpayer dollars…..past, present and future. It goes back to Friedman's discussions that political self interest indeed exists. It's related to Robert Higgs "ratcheting up and never ratcheting back".

Stated alternatively, fiscal policy is many times discussed as blackboard economics [Coase] rather than the real world fiscal policy which has unfortunately become politico policy. In the blackboard economic world one merely tweaks fiscal policy to achieve desired economic outcomes. In the real world politico policy is tweaked to achieve the desired political constituency building exercises outcome through taxpayer dollars.

As with limitations of monetary policy, fiscal policy has become riddled with politico rigidities of political constituency building and ideological belief systems [nothing akin to fiscal policy blackboard economics]. Moreover, changes in fiscal policy means belief systems are threatened i.e. threaten the politicos emotional attachment to beliefs they intensely hold regardless of the economics of fiscal policy.

Fiscal policy has become a murky quagmire brought to you by one John Maynard Keynes and his benevolent dictator approach to politicos manipulating the levers of the economy in the public's supposed best interest. Fiscal policy has become politico policy. Rather than the economics of fiscal policy changing and quickly redeployed, politico policy is rigid, slow to change and deployment is delayed or not at all. Fiscal policy/politico policy has become self limiting.

May 2012 Abysmal Jobs Report: Keynesianism and How It Would be Different This Time.

Regarding the May jobs report released Friday 06/01/2012, yet another abysmal jobs report, making three straight jobs reports of subaqueous nature, the headline unemployment rate ticked up to 8.2%.

Even more ominous is the anemic 69,000 jobs created in May were mostly part-time positions. The bright spot being that the labor participation rate increased slightly as 642,000 people entered or re-entered the labor force seeking employment. (1)

Although more are seeking work there remains a vast reservoir of discouraged workers estimated at upwards of 4 million that remain outside the labor force. That is, if the labor force participation rate was at its historic average then headline unemployment would be well into double digits.

A politically framed argument coming from the Obama Administration is that the Great Recession is such a vast and deep recession that the recession in and of itself is yielding the poor jobs number. Conversely, the same administration advertises yet another argument that the jobs created or “saved” by the same administration numbers in the millions during the same vast and deep recession. Which makes one wonder which argument is one to believe as the two arguments are divergent? -Or- is neither argument valid?

Regarding the Keynesian deficit spending plan also known as “the stimulus plan”, one must keep in mind that a so called stimulus plan is designed, as Keynesians depict it, as a “jump start”. That is, the stimulus plan is not in and of itself suppose to cause a recovery in employment rather the stimulus is supposedly going to cause the private sector to begin producing and hence employing. Stated alternatively, the stimulus supposedly creates the environment for the private sector to recover and it’s the private sector recovery that then drives employment.

In Friedman and Schwartz's book the Great Contraction 1929-1933 there is a compelling if not empirical argument of the Federal Reserve being way too tight in 1929, followed by the Fed's ongoing contribution [or failure to alleviate] the massive decline in the money stock leading to fractional banking in reverse.... and these items contributed to the Great Depression as well as lengthening and deepening the depression.


Fast forward to The Great Recession. Bernanke deploys Friedman and Schwartz’s prescription and does not allow the money stock to contract. However, according to F.A. Hayek monetary policy has limitations. Hence with the money stock in a non-contraction phase and reverse fractional banking avoided, monetary policy has been deployed successfully and to count on monetary policy to do much more is pushing monetary policy limits.


Given the above, in both instances, Great Depression and Great Recession, Keynesian deficit spending plans were deployed. Keep in mind that the two items that receive the most attention regarding economic argument, debate, research, etc. regarding the Great Depression are Keynesian deficit spending and Federal Reserve policy. One must then consider the monetary policy was successfully deployed during the Great Recession via lessons learned from the Great Depression. This leaves only the other major component to discuss which is Keynesian deficit spending.

If, as the argument goes, as well as empirical evidence points to, the Great Depression was deepened and lengthened by both Federal Reserve policy AND Keynesian deficit spending plans aka stimulus.....and in the Great Recession the Federal Reserve policy was corrected via Friedman and Schwartz through Bernanke ....then the deepening and lengthening of the Great Recession only has the other policy component in common with the Great Depression: Keynesian deficit spending.

Whereas the monetary component of the Great Depression was empirically studied by Friedman and Schwartz and a policy prescription was developed and subsequently deployed during the Great Recession with resulting success, what about the deployment of Keynesian deficit spending during the Great Recession? Was Keynesian deficit spending deployed due to empirical work showing a policy prescription leading to success -or- was Keynesian deficit spending deployed based on the notional position of “it will be different this time”?

There is a mountain of empirical evidence that Keynesian deficit spending plans do not jump start anything. The track record of Keynesian deficit spending plans appear to lengthen recessions which was predicted by F.A. Hayek during the Great Depression [Hayek predicted the lengthening of the Great Depression via Keynesian deficit spending and did so in the mist of the Great Depression i.e. predicted in real time during the Great Depression].

Below are three observation regarding Keynesian deficit spending plans and Keynesianism itself that may shed some insight:

“Keynes was exceedingly effective in persuading a broad group—economists, policymakers, government officials, and interested citizens—of the two concepts implicit in his letter to Hayek: first, the public interest concept of government; second, the benevolent dictatorship concept that all will be well if only good men are in power. Clearly, Keynes’s agreement with “virtually the whole” of the Road to Serfdom did not extend to the chapter titled “Why the Worst Get on Top.”


Keynes believed that economists (and others) could best contribute to the improvement of society by investigating how to manipulate the levers actually or potentially under control of the political authorities so as to achieve desirable ends, and then persuading benevolent civil servants and elected officials to follow their advice. The role of voters is to elect persons with the right moral values to office and then let them run the country. - Milton Friedman (2)

For policy, the central fact is that Keynesian policy recommendations have no sounder basis, in a scientific sense, than recommendations of non-Keynesian economists or, for that matter, none economists. - Lucas and Sargent (3)

This way lies charlatanism and worse. To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.

But in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority. Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims. - F.A. Hayek (4)

One must consider that Keynesian deficit spending and Keynesianism itself is more akin to a political science proposition than an economic proposition. That is, the basic premise is that politicos can manipulate an economy. That somehow politico intervention distorting market forces makes for good economics. That the proposition itself, Keynesianism, has little empirical economic basis and is more akin to political notion.

Returning to the beginning regarding the abysmal jobs reports, high persistent headline unemployment and with an army of discouraged workers, one has consider that Keynesian deficit spending plans, regarding the notional proposition “that it will be different this time”, in reality was: “that it will be the same this time” i.e. another failure of the political proposition known as Keynesian deficit spending.


Notes:


(1) America's Transition To A Part-Time Worker Society Accelerates As Part-Time Jobs Hit Record, 06/02/2012, Zero Hedge


http://www.zerohedge.com/news/americas-transition-part-time-worker-society-accelerates-part-time-jobs-hit-record


(2) Milton Friedman, Richmond Federal Reserve Economic Quarterly, volume 83/2 Spring 1997.
http://www.richmondfed.org/publications/research/economic_quarterly/1997/spring/pdf/friedman.pdf


(3) After Keynesian Economics aka After the Phillips Curve: Persistence of High Inflation and High Unemployment, page 57, Lucas and Sargent.

http://www.bos.frb.org/economic/conf/conf19/conf19d.pdf


(4) F.A. Hayek, from the essay The Pretense of Knowledge