Published on 22 Feb 2017
In this episode, Dr. Antony Davies, Professor of Economics of Duquesne University in Pittsburgh, and Dr. James R. Harrigan, Senior Research Fellow at Strata, in Logan, Utah discuss the way the Congressional Budget Office works, and outline its history of failure at accurately forecasting increases in the national debt.
Find out more about the CBO and debt projections here:
Plus, check out this great 360 Video from Learn Liberty with Antony Daves that helps put the massive scale of the current US Federal debt into perspective: https://www.youtube.com/watch?v=ErUZjM16r1M
And track the National Debt in real time here:
February 23, 2017
February 19, 2017
Published on 19 Nov 2015
“Are you better off today than you were 4 years ago? What about 40 years ago?”
These sorts of questions invite a different kind of query: what exactly do we mean, when we say “better off?” And more importantly, how do we know if we’re better off or not?
To those questions, there’s one figure that can shed at least a partial light: real GDP.
In the previous video, you learned about how to compute GDP. But what you learned to compute was a very particular kind: the nominal GDP, which isn’t adjusted for inflation, and doesn’t account for increases in the population.
A lack of these controls produces a kind of mirage.
For example, compare the US nominal GDP in 1950. It was roughly $320 billion. Pretty good, right? Now compare that with 2015’s nominal GDP: over $17 trillion.
That’s 55 times bigger than in 1950!
But wait. Prices have also increased since 1950. A loaf of bread, which used to cost a dime, now costs a couple dollars. Think back to how GDP is computed. Do you see how price increases impact GDP?
When prices go up, nominal GDP might go up, even if there hasn’t been any real growth in the production of goods and services. Not to mention, the US population has also increased since 1950.
As we said before: without proper controls in place, even if you know how to compute for nominal GDP, all you get is a mirage.
So, how do you calculate real GDP? That’s what you’ll learn today.
In this video, we’ll walk you through the factors that go into the computation of real GDP.
We’ll show you how to distinguish between nominal GDP, which can balloon via rising prices, and real GDP—a figure built on the production of either more goods and services, or more valuable kinds of them. This way, you’ll learn to distinguish between inflation-driven GDP, and improvement-driven GDP.
Oh, and we’ll also show you a handy little tool named FRED — the Federal Reserve Economic Data website.
FRED will help you study how real GDP has changed over the years. It’ll show you what it looks like during healthy times, and during recessions. FRED will help you answer the question, “If prices hadn’t changed, how much would GDP truly have increased?”
FRED will also show you how to account for population, by helping you compute a key figure: real GDP per capita. Once you learn all this, not only will you see past the the nominal GDP-mirage, but you’ll also get an idea of how to answer our central question:
“Are we better off than we were all those years ago?”
December 8, 2016
Published on Nov 5, 2016
Even as the use of paper money grew, ties to the gold standard remained… and remained challenging. From the First Opium War to the Great Depression, events around the world stretched the capacity of bullion based economics. So what – and who – finally abandoned it?
July 29, 2016
Curiously, as a man of the thirteenth century, I “believe” in the price mechanism. (You know: wheat crop fails, price goes up; too much wheat, price goes down.) As a visitor to the twenty-first, I believe it is no longer working. Nearly one full century into the experiment of unlinking money from things, and linking it to “policy” instead, not one person is left on the whole planet with the fondest idea how our system works.
Some years ago I assembled a little team to study what had gone into the price of a loaf of bread. We had to give up. It was too complicated. Bread was officially “untaxed” in the jurisdiction; yet about the only thing we could establish with any confidence, after looking through the production process, was that more than half the price was cumulative direct and indirect taxes.
David Warren, “Deflationary asides”, Essays in Idleness, 2015-01-27.
March 28, 2016
One of the most thorough and meticulously documented accounts of the Fed’s inflationary actions prior to 1929 is America’s Great Depression by the late Murray Rothbard. Using a broad measure that includes currency, demand and time deposits, and other ingredients, Rothbard estimated that the Federal Reserve expanded the money supply by more than 60 percent from mid-1921 to mid-1929. The flood of easy money drove interest rates down, pushed the stock market to dizzy heights, and gave birth to the “Roaring Twenties.” Some economists miss this because they look at measures of the “price level,” which didn’t change much. But easy money distorts relative prices, which in turn fosters unsustainable conditions in certain sectors.
By early 1929, the Federal Reserve was taking the punch away from the party. It choked off the money supply, raised interest rates, and for the next three years presided over a money supply that shrank by 30 percent. This deflation following the inflation wrenched the economy from tremendous boom to colossal bust.
The “smart” money — the Bernard Baruchs and the Joseph Kennedys who watched things like money supply — saw that the party was coming to an end before most other Americans did. Baruch actually began selling stocks and buying bonds and gold as early as 1928; Kennedy did likewise, commenting, “only a fool holds out for the top dollar.”
When the masses of investors eventually sensed the change in Fed policy, the stampede was underway. The stock market, after nearly two months of moderate decline, plunged on “Black Thursday” — October 24, 1929 — as the pessimistic view of large and knowledgeable investors spread.
The stock market crash was only a symptom — not the cause — of the Great Depression: the market rose and fell in near synchronization with what the Fed was doing. If this crash had been like previous ones, the subsequent hard times might have ended in a year or two. But unprecedented political bungling instead prolonged the misery for twelve long years.
Lawrence W. Reed, “The Great Depression was a Calamity of Unfettered Capitalism”, The Freeman, 2014-11-28.
May 25, 2015
Deflation occurs when there is not enough currency in circulation to meet the needs of the economy. Here again, the classical definition focuses on falling prices rather than an insufficient currency stock, but deflation is primarily a monetary phenomenon.
It is the economic version of anemia: too little blood is reaching the body. Each unit of the currency goes up in value relative to the goods and services available, but because the stock of currency isn’t growing fast enough, it starves the economy of investment capital. There isn’t enough money to build out existing business, to create new ones, or to hire new workers. (This is in part what happened during the Great Depression of the 1930’s.) Inventories shrink, but new goods aren’t being produced due to the lack of investment capital. Eventually the economy grinds to a halt as production withers away.
Specie currencies are more prone to deflation than fiat currencies for the simple reason that fiat currencies are not based on scarce (and thus valuable) resources like gold, silver, or what have you. There’s only so much gold and silver to go around, and sometimes the supply of bullion can be interrupted for long periods. (Sometimes this is even done deliberately by rival nations or speculators.) Also, because the value of gold and silver is set outside the control of government or authority issuing the currency, it limits the kinds of monetary policy the sovereign can conduct, especially during times of crisis.
Monty, “Inflation, Deflation, and Monetary Policy”, Ace of Spades HQ, 2014-07-11.
May 18, 2015
Inflation is a phenomenon that occurs when the value of a given unit of currency becomes debased in some way, and prices then rise to offset the currency’s loss in value. The standard definition of inflation is given in terms of rising prices rather than falling currency value, but that’s misleading. The value of goods and service don’t increase so much as the currency’s value relative to those goods and services decreases, so inflation is more of a monetary phenomenon than a market-price phenomenon.
The more the currency loses value, the higher prices denominated in that currency rise. The classical example of hyperinflation is the 1921-1924 hyperinflation in Weimar-era Germany, though in modern times Zimbabwe’s currency has undergone the same radical devaluation.
What causes a currency to become devalued? There are many causes. With specie currency like gold and silver coins, debasement is usually physical — in former times coins were “shaved” or “clipped” or adulterated with baser metals. The clippings could then be melted down and recast into new coins, but the clipped coin could still be passed off at full value (until the merchants got wise and started weighing and/or assaying the coins). This is why coins began to have milled edges — it made the practice of clipping easier to spot. A variant of the “shaving” debasement strategy is one carried out by the treasury or mint itself: reducing the amount of gold or silver in a coin, but leaving the face-value of the coin the same. This happened often to the Roman denarii — as the Imperial stocks of silver bullion waned, each coin was reduced in weight but mandated to retain the same value. (In modern fiat-money times, coins are generally manufactured out of base metals like nickel, tin, and zinc, but even so, the value of the metal is sometimes still higher than the face-value of the coin.)
In a fiat money regime, debasement is usually the result of creating too much currency for the economy to absorb. If the money supply exceeds some thresh-hold (it’s very complicated to figure out exactly what that thresh-hold is), you have more units of currency chasing the same amount of goods and services — which means that the real unit value of the currency will drop and prices will go up.
Another way a fiat currency can become debased is to arbitrarily re-value your currency relative to the market, or relative to other currencies. If an issuing authority declares the value of a quatloo to be three quatloos to a dollar, even if the market is trading at five quatloos to a dollar, the currency will be debased because it’s not actually worth what the issuing authority says it is. Prices go up, and the government usually responds by implementing price-controls, and in turn the goods and services simply become unobtainable at any price because producers won’t continue to produce at a loss.
No good or service has an absolute value. The value of a good or service is what someone is willing to pay for it. Currency is a specialized good, and is subject to the same law. If the stock of currency grows faster than the value represented by that currency in the wider economy, the currency is in an inflationary state.
Monty, “Inflation, Deflation, and Monetary Policy”, Ace of Spades HQ, 2014-07-11.
January 23, 2015
At Worthwhile Canadian Initiative, Nick Rowe explains just how important Milton Friedman still is in economics today:
I can’t think of any economist living today who has had as much influence on economics and economic policy as Milton Friedman had, and still has. Neither on the right, nor on the left.
If you had a time machine, went back to (say) 1985, picked up Milton Friedman, brought him forward to 2015, and showed him the current debate over macroeconomic policy, he could immediately join right in. Is there anything important that would be really new to him?
We are all Friedman’s children and grandchildren. The way that New Keynesians approach macroeconomics owes more to Friedman than to Keynes: the permanent income hypothesis; the expectations-augmented Phillips Curve; the idea that the central bank is responsible for inflation and should follow a transparent rule. The first two Friedman invented; the third pre-dates Friedman, but he persuaded us it was right. Using the nominal interest rate as the monetary policy instrument is non-Friedmanite, but the new-fangled “Quantitative Easing” is just a silly new name for Friedmanite base-control.
We easily forget how daft the 1970’s really were, and some ideas were much worse than pet rocks. (Marxism was by far the worst, of course, and had a lot of support amongst university intellectuals, though not much in economics departments.) When inflation was too high, and we wanted to bring inflation down, many (most?) macroeconomists advocated direct controls on prices and wages. And governments in Canada, the US, the UK (there must have been more) actually implemented direct controls on prices and wages to bring inflation down. Milton Friedman actually had to argue against price and wage controls and against the prevailing wisdom that inflation was caused by monopoly power, monopoly unions, a grab-bag of sociological factors, and had nothing to do with monetary policy.
December 3, 2014
Money is a symbolic system, the purpose of which is to facilitate exchange and to act as a recordkeeping technology. That money is so very important to our everyday lives and yet has no real connection with physical reality is the source of many apparent paradoxes and contradictions. These are the best of times, these are the worst of times.
Measured by money, things look relatively grim for the American middle class and the poor. Men’s inflation-adjusted average wages peaked in 1973, and inflation-adjusted household incomes for much of the middle class have shown little or no growth in some time. The incomes of those at the top of the distribution (which is not composed of a stable group of individuals, political rhetoric notwithstanding) continue to pull away from those in the middle and those at the bottom. The difference between a CEO’s compensation and the average worker’s compensation continues to grow.
But much of that is written into the code. If, for example, you measure inequality by comparing the number of dollars it takes to land at a certain income percentile, with a hard floor on the low end (that being $0.00 per year in wages) but no ceiling on the top end, and if you have growth in the economy, then it is a mathematical inevitability that incomes at the top will continue to pull away from incomes at the bottom, for the same reason that any point on the surface of a balloon will get farther and farther away from the imaginary fixed point at its center as the balloon is inflated. This will be the case whether you have the public policies of Singapore or Sweden, and indeed it is the case in both Singapore and Sweden.
Purely symbolic systems are easy to manipulate, which is why any two economists can take the same set of well-documented economic data and derive from it diametrically opposed conclusions.
With economic models, we are a little like Neo in The Matrix, before he takes the red pill: We are not in the real world, but in a simulacrum of it, one that has rules, but rules that can be manipulated by those who understand the code. Economic models and analysis are very useful, but it’s worth taking the occasional red-pill tour, leaving behind the world of pure symbolism and taking a look at the physical economy.
Welcome to the paradise of the real.
Kevin D. Williamson, “Welcome to the Paradise of the Real: How to refute progressive fantasies — or, a red-pill economics”, National Review, 2014-04-24
November 12, 2014
Banking is a service, […] and a service has a cost associated with it. Modern banking has all kinds of fees and charges associated with it. But depositors are often charged for keeping too low a balance in their savings or checking accounts, not too large a balance. What’s going on here?
Central banks have created this monster via the regimen of ZIRP (Zero Interest Rate Policy). This is a way of implementing Keynesian stimulus, but central banks have run up against the liquidity-trap wall: interest rates cannot fall below zero. Monetary policy stops working at the zero-interest boundary.
For central banks, the problem is that in a slow-growth economy (or actually a recessive one) a paradox arises where rational behavior on the part of savers leads to bad results: consumers save their money out of concern for the future, but the economy — starved of the cash that fuels it — slows still further. This is the argument behind Keynesian stimulus; inject more (newly-printed) money into the economy until people stop being scared and start spending freely again (with their own money and borrowed money). The danger of inflation looms, however, so central banks try to implement various regimes to keep it under control (with varying degrees of success).
This theory founders on the shoals of reality, alas. It’s rational for people to save money, particularly during bad times, because people believe their currency stock to be an appreciating (or at least a constant-value) asset. But when a sovereign inflates (devalues) its currency to solve a short term economic problem, they run the risk of damaging confidence in the currency itself. Inflation may inject some nitrous oxide into the engine of the economy for a short time, but the outcome may be a blown engine (i.e., a ruined currency, as it was during the Weimar era).
When people lose trust in a fiat currency, it’s nearly impossible to restore confidence in it. Trust is all a fiat currency has — without trust, fiat currency is just worthless paper. This is really the core of the sound-money argument: deflation is bad because it can stall an economy and make debt servicing murderously difficult, but inflation is worse because it wrecks the currency itself. Hard-money currency regimes may be somewhat prone to deflationary cycles, but at least they never go to zero value; they always retain some value. Fiat currencies can go to zero.
Monty, “DOOM: The Wrath of Draghi”, Ace of Spades H.Q., 2014-11-06.
April 5, 2014
Stu Burguiere looks at the remarkable increase in higher grades handed out at US universities:
I never went to college so I missed out on all the keg parties and, apparently, a surplus of good grades.
Contrary to the concept of school as you knew it growing up, A’s are pretty easy to come by these days. In fact the only thing you have to work really hard to get are D’s and F’s. In college today, an A is over four times as common as a D or an F combined.
It’s a drastic change from the 15% of students who received A’s in 1960.
The pool is a little higher today. Ok, it’s a lot higher. If you look at this chart you’ll see that 43% of all letter grades given today are A’s.
And this sort of makes sense if you think about it. No one wants to pay $40,000 a year to hear that they’re dumb.
College is one of the rare businesses in which you pay them and at the end of the experience they tell you how well they did. If you’re a parent and you send your kids to school and they get A’s you feel good about the purchase. But if your kids get F’s you feel like they wasted your money.
And amazingly these institutions of higher learning, that do little other than indoctrinate kids against the evils of capitalism, sure do understand incentives.
February 24, 2014
The Argentine government has announced it will be increasing spending on their armed forces by a third in the coming year. While this report in the Daily Express takes it seriously, it fails to account for the overall sorry state of the Argentinian economy … it’s not clear if there’s any actual money to be allocated to the military:
Buenos Aires will acquire military hardware including fighter aircraft, anti-aircraft weapons and specialised radar, as well as beefing up its special forces.
The news comes months before drilling for oil begins in earnest off the Falkland Islands, provoking Argentina’s struggling President Cristina Fernandez de Kirchner.
Last month she created a new cabinet post of Secretary for the Malvinas, her country’s name for the Falklands.
Meanwhile, Defence Secretary Philip Hammond has refused to confirm that Britain would retake the Falklands if they were overrun by enemy forces.
The extra cash means Argentina will increase defence spending by 33.4 per cent this year, the biggest rise in its history. It will include £750million for 32 procurement and modernisation programmes.
They will include medium tanks and transport aircraft and the refurbishment of warships and submarines. The shopping list also includes Israeli air defence systems, naval assault craft, rocket systems, helicopters and a drone project.
As reported earlier this month, the economy is suffering from an inflation rate estimated to be in the 70% range, the government has expropriated private pensions and foreign-owned companies, and is unable to borrow significant amounts of money internationally due to their 2002 debt default. Announcing extra money for the military may well be the economic version of Baghdad Bob’s sabre-rattling press conferences … just for show.
On the other hand, military adventurism is a hallowed tradition for authoritarian regimes to tamp down domestic criticism and rally public opinion. Being seen to threaten the British in the Falkland Islands still polls well in Buenos Aires.
February 1, 2014
In Forbes, Ian Vasquez looks at the plight of the Argentine economy:
Argentina’s luck is finally starting to run out. It devalued its currency by 15 percent last week, marking the beginning of a possible economic crisis of the kind Argentina has become known for. Argentina’s problem is that it has followed the logic of populism for more than a decade and President Cristina Kirchner is showing no interest in changing course.
In the 1990s Argentina combined far-reaching but sometimes flawed market-reforms with irresponsible fiscal policies, culminating in its 2002 default on $81 billion in debt — the largest sovereign default in history. The country delinked its currency from the dollar, experienced a severe economic crisis, and initiated its current period of populist politics.
Those policies included price controls on domestic energy, reneging on contracts with foreign companies, export taxes, more pubic sector employment and vastly increased spending. When you don’t pay massive debts, you get temporary breathing room, so growth resumed. High commodity prices and low global interest rates that lifted demand for Argentine exports also helped produce Argentine growth.
But the government’s appetite has consistently grown faster, and, with little ability to borrow abroad, it has turned to other sources of finance. In 2008, Kirchner nationalized private pension funds worth some $30 billion, and has since nationalized an airline and a major oil company. As it drew down reserves, the government turned to printing money to finance itself, falsifying the inflation rate it says is about 11 percent, but which independent analysts put at about 28 percent. Economist Steve Hanke estimates it is much higher at 74 percent
September 17, 2013
Tyler Cowen wraps up the rise and fall of “right” and “left” economics in the US since the 1960s:
Throughout the 1970s and most of the 1980s, the so-called “right wing” was right about virtually everything on the economic front. Most of all communism, but also inflation, taxes, (most of) deregulation, labor unions, and much more, noting that a big chunk of the right wing blew it on race and some other social issues. The Friedmanite wing of the right nailed it on floating exchange rates.
Arguably the “rightness of the right” peaks around 1989, with the collapse of communism. After that, the right wing starts to lose its way.
Up through that time, market-oriented economists have more interesting research, more innovative journals, and much else to their credit, culminating in the persona and career of Milton Friedman.
I’ve never heard tales of Paul Samuelson’s MIT colleagues mocking him for his pronouncements on Soviet economic growth. I suspect they didn’t.
Starting in the early 1990s, the left wing is better equipped, more scholarly, and also more fun to read. (What exactly turned them around?) In the 1990s, the Quarterly Journal of Economics is suddenly more interesting and ultimately more influential than the Journal of Political Economy, even though the latter retained a higher academic ranking. The right loses track of what its issues ought to be. There is no real heir to the legacy of Milton Friedman.
August 14, 2013
It’s been a while since I reminded everyone that the official Chinese government statistics can’t be trusted. Here’s Zero Hedge on the same topic:
How Badly Flawed Is Chinese Economic Data? The Opening Bid is $1 Trillion
Baseline Chinese economic data is unreliable. Taking published National Bureau of Statistics China data on the components of consumer price inflation, I attempt to reconcile the official data to third party data. Three problems are apparent in official NBSC data on inflation.
First, the base data on housing price inflation is manipulated. According to the NBSC, urban private housing occupants enjoyed a total price increase of only 6% between 2000 and 2011.
Second, while renters faced cumulative price increases in excess of 50% during the same period, the NBSC classifies most Chinese households has private housing occupants making them subject to the significantly lower inflation rate.
Third, despite beginning in the year 2000 with nearly two-thirds of Chinese households in rural areas, the NSBC applies a straight 80/20 urban/rural private housing weighting throughout our time sample. This further skews the accuracy of the final data.
To correct for these manipulative practices, I use third party and related NBSC data to better estimate the change in consumer prices in China between 2000 and 2011.
I find that using conservative assumptions about price increases the annual CPI in China by approximately 1%.
This reduces real Chinese GDP by 8-12% or more than $1 trillion in PPP terms.