PIIGS: Remember it is Portugal, Italy, Ireland, Greece and……Spain.

“…the historically important central puzzle of economics was to explain how independently acting people in an unplanned decentralized, private ownership economic system allocate their resources and, in particular, to explain how it is that the uses they seem to make of resources seem to be well coordinated”. - Harold Demsetz (1)

Independently acting people in the unplanned aggregate economic environment coordinate well. Man-made systems do not coordinate well in a vast and aggregate economic environment. (2)

Imagine if one is faced with having to “unwind” man-made political systems masquerading as economic systems in Europe. Europe being a vast economic environment. The unwind becomes a crisis for many as the man-made politico systems, the larger and more complex they are, breed larger and more complex negatives that public choice theory explains. (3)

Robert Higgs at the Independent Institute has made the assertion that legislation leading to regulation “ratchets up”. That is, little is ever repealed, merely more is added on. Hence we have a corpus of regulation that can never erode, only expand. A zero floor of erosion in corpus with all new gains in regulation becoming part of the corpus – rarely or never to erode. (4)

Imagine being on the ground in Europe and trying to ratchet back/unwind all the man-made politico silliness and during every step of the way encountering Marie, Thomas, and Peter living off of, and depending upon, the zero floor of erosion of corpus that sustains his/her income in one form or another.

Notes:

(1) From Economic Man to Economic System, Harold Demsetz
http://www.amazon.com/From-Economic-Man-System-Institutions/dp/1107640857

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

(3) James M. Buchanan and Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy, 1958

(4) Dr. Robert Higgs, http://www.independent.org/aboutus/person_detail.asp?id=489

Austerity vs. Stimulus: a False Choice?

Above is a CNBC Squawkbox video from 11/07. Note 8 minutes to 9:50. Below is an excerpt of the text which is of interest:

Question/statement by Liesman of CNBC: If you look at the jobs numbers, there certainly should be higher or would be -- there would be more robust numbers that could engender more confidence if the state and local governments weren't laying off.

Answer by John Ryding of RDO Economics: Steve, let me make this point. I always believe that the distinction between austerity and stimulus is a false choice. It's about sustainability of government programs and the problem is we have a large fiscal deficit at the time of two unsustainable government programs, Medicare and Social Security are kicking in. Now we have to reform those programs ultimately. So they remain viable for the long term. But the U.S. has as many problems with political groups blocking reform....

What Ryding is stating is that X amount of public sector workers, that is completely unsustainable, replaced by a new level of X-1 public sector workers, is not “austerity”. Rather it’s a basic business budget proposition. That remaining at level X as a stimulus approach is a false choice.

An item worth considering is how did one arrive at X amount of public sector workers? X was achieved with state government experiencing increasing tax revenue 2002-2007 (which most states did experience) and additional debt (which many states exercised). Underlying these two phenomena leading to level X amount of public sector workers was politicos that had the same exact mindset as residential homeowners, that is, what goes up continues to go up. Stated alternatively, the rise in tax revenue was considered a constant unending revenue stream leading to level X based upon endlessly rising revenue. In turn additional hiring caused by additional debt which was also based/financed upon the misplaced concept of endlessly rising revenue.

Hence X is/was a false number aka a bubble number. X-1 is the true number. Therefore, reducing to X-1 is not “austerity” its merely returning from a bubble number.

That being said, the counter argument [Keynesian counter argument] is that laying off the public sector workers (movement from X to X-1) reduces demand and hence is counter productive. That “stimulus” needs added to stop the movement from X to X-1 which then stabilizes or enhances demand.

One of the many problems with the Keynesian argument is that “stimulus” proposed to keep X from declining is in essence a continuation of a false bubble number. That in fact the argument regarding "stimulus" is to sustain a component of a larger previous bubble.