Man of the Year!

Ben Bernanke has been received praise and awards like Monopoly money. Time Magazine's Person of the Year, Foreign Policy's Intellectual of the Year, etc. Even though there are some lunatic fanatics among us who are pointing to a double-digit unemployment rate, and a continuing slide in non-Governmental--productive--components of GDP as evidence that the "recession" is not over and that a "depression" may still be possible, it is clear to the mainstream media and to many economic thinkers that Ben Bernanke, chairman of the Federal Reserve Bank, staved off the next Great Depression. This was done, supposedly, through his strategic implementation of the corporatist TARP bailouts and through his wise lowering of interest rates. The first question I ask is how do we know this? There really is no evidence that, had Bernanke done nothing, things would not have been better today.
But lets forget about today. Lets consider tomorrow. How will each of his actions eventually impact us? While I do not claim to know specifics, I know that there is no free lunch. "Inflation is always and everywhere a monetary phenomenon." Bernanke believes that the economic recovery we have seen so far remains fragile. Due to this fear he has decided to keep interest rates at essentially zero and keep the printing presses running. There will be inflation at some point in the future. While Chairman Bernanke claims that the Fed has the tools to raise interest rates and control inflation without affecting economic activity when needs be, I am extremely skeptical of this promise of the ultimate free lunch. It is clear that if our bills had another country's name on it, a currency collapse would be a definite possibility. Nobody knows if a currency collapse is realistic, and I have seen data that shows that it is unlikely, but it is not impossible. It would be an ultimate Black Swan, a high-impact, improbable event.

What about the bank bailouts? He may have saved the banking system, but is a system that almost drives us into a Global Depression, as the experts willing to congratulate Bernanke assume, worth saving? Capitalism is about profit and loss. Without the threat of loss, we have fascism of the worst variety. Investment bankers know they are playing with other people's money. These are the same incentives that helped cause the mess. This cannot work and are illustrative of an unsound system. These incentives, more likely than not will lead to further financial "crises."

Maybe I am wrong; maybe Chairman Bernanke with the help of President Obama will be able to engineer an economic recovery without damaging inflation. Maybe they will pull away the punch bowl away just in time as the party gets going. Or maybe, like all central planners dealing with imperfect knowledge and incorrect incentives, they will fail miserably in their "goals" of effectively engineering a $14 economy. Whether I am right or whether they are the point remains: it is too early to congratulate Ben Bernanke on his work until the final result of his work is seen. Many of the now-villified investment bankers were congratulated and rewarded with million dollar bonuses. The point was that they were accumulating all types of hidden long term risks. Bernanke is receiving the same treatment: short term accolades while he is potentially taking on massive amounts of long-term risks. It was a mistake for investment bankers to be compensated in this short-term manner and it is a mistake to praise Bernanke before the costs of his actions are seen. What if his policies create massive inflation or even stagflation in the long-run? Will he even be blamed, or will Obama, or Milton Friedman, or Congress, or the Republicans, or even Keynes? We now know what Paul Krugman knew--and advocated for--in 2001: that the Federal Reserve's response to the Tech Boom and Bust helped cause the Recession of 2008. Imagine if Greenspan and Bernanke, the engineers of that monetary stimulus, were congratulated in 2001 for their work in avoiding a prolonged recession! We are doing the same thing now! The Federal Reserve can cause recessions by keeping interest rates too low and creating malinvestment. They are doing it now. The chickens will come home to roost. And just as 2008 was a larger recession than 2001, the Depression of 2012 may very well be larger than 2008...assuming we do not face a currency crisis before then.

The financial system is more fragile and more prone to negative black swans than it has ever been before.

Hubris I

With the help of President Obama, a deal was cut in Copenhagen. The proposal aims to guarantee that the average Earth temperature does not increase by 2 degrees over the next century. Paint me as an anti-scientific libertarian if you choose, but I remain agnostic on the existence of anthropogenic global warming. I believe that the issue of weather and climate remains a field that is insufficiently understood--actually, virtually impossible to understand and predict. It is not dissimilar to attempts to predict economic forecasts with certainty or explain economic outcomes and historical occurrences with crystal clear ex-post-facto stories; there are simply too many variables to capture in the models. Even though a decrease in supply, when all else remains constant, leads to an increase in price, all else never remains constant. The same is true for understanding and predicting changes in the climate. Though not a physicist or a climatologist, I understand that emissions of CO2, methane, and water vapor can have a greenhouse effect and, all else remaining constant, lead to an increase in air and surface temperature. The problem is that all else does not remain constant. There are literally trillions of other climatic phenomena occurring that have an impact on global climate. Does this mean that we know nothing about these climatic phenomena? No, but it does mean that before we institute, in one form or another, an extreme global carbon tax, we should understand that the climate scientists who speak with certainty are dealing with a subject that is incomprehensibly complex.
I am not denying that anthropogenic global warming is possible; I am merely saying that it is essentially impossible, at least with modern scientific methods, to determine whether anthropogenic warming is occurring today, and anybody who gives me a specific number that they are sure the Earth will warm over the next x-amount of years is demonstrating hubris in the extreme. If we want to cut greenhouse gas emissions as a precautionary measure for the possibility that AGW is real and devastating as we are told to believe, then lets have this debate. This is not how this subject is portrayed, nor was this the tenor of the Copenhagen Climate Summit. Skepticism in science is a good thing, and before we surrender to a world government that has the power to monitor energy consumption on an individual level, I think we should have an honest debate.

Climate Change

World "leaders" are meeting in Copenhagen to discuss the future of the world. The goal of these climate summits is to sign an agreement that will bind every nation to cutting carbon dioxide emissions. There are so many aspects to this issue and it is portrayed incredibly simplistically. The argument for cutting emissions is incredibly flawed. The Obama Administration's goal for emission cuts is 83% below 2005 levels by 2050. This is equal to America's CO2 emissions of 1910! However, there were 92 million people in 1910; by 2050 there will be around 420 million Americans. This means that per capita emissions will be at 1875 levels! This is virtually impossible. What costs would this drastic cut impose? How could we get to this level in 40 years?

• Devoting almost all of America's resources to uneconomical alternative energy sources? As of now, we do not have the technology to meet our goal, and I doubt that a centrally controlled federal plan would allow for sufficient innovation of alternative energy sources. How expensive would this cut be? It would literally kill the American economy. No doubt about it. I think it is impossible to reach Obama's lofty goal through the development and implementation of alternative energy sources alone--at least without devastating economic consequences.
  
• Eugenics? Some groups already propose and advocate forced abortions because newborns will have a large, future carbon footprint. The problem with making the emission cuts is that they would hurt economically per capita. If the population were a 5th of today's population, we would have little problem getting to a 5th of carbon dioxide emissions. But this solution is evil! It is the same Malthusian tendencies that got Malthus worried about population growth on food supply and Paul Ehrlich worried about the same and about natural resources. It is proven time and time again that these worries are unfounded; the human species is remarkably adaptive, and will continue to adapt to a changing world. This is not an immediate danger but I would continue to watch out for this. What will be the next suggestion once the centrally planned alternative energy schemes are ineffective? This is a dangerous tendency that seems to be resurrected from time to time.
• Nationalize or "Internationalize" carbon dioxide emitting energy sources. What if the U.S. nationalized the nations' fossil fuels supply? Or the U.N. doing the same for the world's supply? It could be effective. All the fuel would be used by the government in the form of a police state that would make sure that nobody was going over their incredibly stringent quota. It is a scary thought experiment. Fear of a global government is not irrational.

There are other centralized solutions that do not involve emission cuts--like those proposed in Super Freakonomics, but these will not be considered because environmentalism's primary goal is to end capitalism and material prosperity. It is in all of their rhetoric: take a listen. I do not endorse these solutions, but the fervent criticism of these solutions by environmentalists reveals their true anti-capitalist agenda.
By the way, this all assumes that global warming is a problem to begin with.

Whatever comes out of Copenhagen will do anything to stop global warming because China and India will not sign on. THIS WON'T HAPPEN!! Nothing good can come out of these Copenhagen conferences.

Purpose of Trade

For some reason, international trade is incredibly misunderstood, even by many academics and policy "experts." At the recent G-20 conference in Pittsburgh, "leaders" from 20 economically influential nations discussed ways to plan and run the global economy. One topic that was dicussed was global trade "imbalances." The big focus was on China's net exports and the United States' trade "deficit." Policy experts at the conference noted how U.S. net exports have increased during this recession, and claimed that this was good. For some reason, many people think "exports good, imports bad." This could not be further from the truth; in fact, it is the opposite of reality. Imports, the goods we will consume are benefits and exports, what we send away, are costs. Costs are only necessary to pay for beneficial imports. The fact that we get get more goods from other countries than we send away does not imply that we are in debt, nor does it imply that there is a problem.
Here is an example: I am Mr. Sony from Japan. I sold Joe the Plumber--an American--a Play Station 3 for $300. This would increase America's current account deficit by $300. However, nobody is in debt, at all. Nothing is different than if Mr. Sony was from Oregon and Joe was from Kansas. Why do we not calculate inter-state trade deficits and surpluses? Because it is a silly metric. Borders are a red-herring and trade is trade no matter what borders it crosses.
A common caveat people put into this concept is the one of Chinese currency manipulation. First of all, Chinese currency inflation is bad economic policy, but not because it hurts Americans. It hurts the Chinese people. By inflating the Chinese currency to increase net exports, the Chinese government is lowering the Chinese people's purchasing power and subsidizing American's purchasing power. Americans should be thrilled, we are getting more goods with fewer costs, exports. The Chinese people are forced into making much more than they are able to purchase. This goes back to one of Adam Smith's most basic point about economics. "Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer." This is so intuitive, so why do people make the mistake of valuing exports over imports? In each household we seek to maximize wealth by importing more than we export. It is the same concept between states and between countries.

The most lucid mind that I have found on trade is Don Boudreaux over at Cafe Hayek. Cafe Hayek is a great economics blog,(my personal favorite) and I suggest that everyone check it out, though continue to read My Two Sense!!!

Obama a true PATRIOT?

During America's obnoxiously long Presidential election season, we were led to believe that Barack Obama was the anti-war candidate. A man who had no real legislative record, Obama took down Hillary Clinton in the Democratic Primary by focusing on her vote for the war. Against John McCain, an unabashed war-hawk, Barack Obama made clear his differences with the Bush-McCain militaristic policies. I really thought that Obama would make a positive impact in this realm and really help improve the world's view on America by cutting back on our military spending, scaling back our empire, and ending the war in Iraq. I was worried about his rhetoric on Afghanistan, but some improvement would be better than none.

However, like Obama the free-trader, Obama the non-interventionist is a myth. Instead of scaling back the wars in the Middle-East, Obama is scaling up the war effort. He is sending thousands of more troops to each country and has no plan for getting out. He talked the talk to get elected, but he is not walking the walk. Pandering much?

What about Obama on the Patriot Act and torture? He signed a meaningless document that will close Guantanamo Bay, but this does not mean the end of torture. What about prosecuting the criminals from the previous administration? He is refusing prosecute because he plans on using the same or similar techniques. I have no doubts about this. Obama is a war-hawk like Bush. Not religiously motivated, instead, Obama personifies hubris. He has said that he plans on reauthorizing the PATRIOT Act. How can civil liberty supporters support this man.

"The Obama administration gets a D overall for civil liberties, including a D- for electronic surveillance and a D for the way that state and local fusion centers run by the U.S. Department of Homeland Security collect data on U.S. residents, said Chip Pitts, president of the board for the Bill of Rights Defense Committee."

Totalitarianism is in the air. We now are getting regulation of the internet. The Obama administration has continued the NSA's internet monitoring program. This really is the most totalitarian administration we have ever had. Where is the left's outrage? Is it okay to violate civil liberties if you talk about their importance? We should be legitimately scared of this man and this administrtation because, unlike Bush, Obama is not a complete moron. He knows exactly what he is doing.

In 10 years, will I still be a teenager?

“The American public…just like your teenage kids, aren’t acting in a way that they should act,” Dr. Chu said. “The American public has to really understand in their core how important this issue is.”

This quote summarizes the world view of this administration to a t. We have the president speaking to all of the country's school aged children telling them to work hard. The initial plan was to distribute a lesson plan that would ask "what can you do to help the President?" It is sick. Inherent in the meaning behind Obama's speech is that parents are doing a good enough job. Parents are not getting through with the right messages for their kids, so our President, a man who has done nothing more than get the majority to support his message of hope and change, needs to step in. Good thing Dear Leader is here.

Apparently, the American people do not understand the significance of "climate change," and/or are not taking sufficient steps to control our carbon consumption. We need climate czars do tell us how much energy we can use, what we can buy, what cars we can drive. When will we grow up and stop using our air-conditioning and paint our roofs white? Why am I on my computer now? The battery charges through coal!! Coal is Chu's "worst nightmare." Of course coal has allowed billions of people to escape the state of extreme poverty that human beings have lived in throughout history. Bad coal!!! Bad oil!!! Good thing our science czar knows what temperature the world climate should be, how to acheive this goal, and understands all aspects of global temperature perfectly. Obviously, we are ignorant teenagers in the face of this brilliant, brilliant man.

We spend too much on health care, also. Like teenagers, our health care allowance must be limited. We cannot be trusted with our health care dollars because we just spend too much. (Jokes aside, we are not in charge of our health care dollars now, and I think this is a problem. The consumer of health care should be the customer of health care). Hopefully, when ObamaCare passes we will never have to be worried about choosing our own health care purchases again.

I am such an ignorant teenager. I did not even know where the tires on my minivan were from. I just bought them because they were cheap and of high quality. How ignorant am I? I should have known that I should support the American tire industry and help support the union leaders of the United Steelworkers Union. Left to my own, I would have continued to spend as little money for the highest quality goods. Obama will help make us richer by supporting American industries, jobs, and unions while we spend more on inferior goods. This makes complete sense, right. We will get rich by spending more on fewer, inferior goods.

Mom and Dad, you guys were ok, but President Obama and Secretary Chu really showed me the right way to behave. Maybe, one day, you guys will no longer act like teenagers either.

Smoot-Hawley 2009?

My thoughts on the new tariff:

Government policies always have unintended consequences; however, the consequences resulting from Obama’s new protectionist measure will be severe and predictable. I assume that in an effort to “jump-start” the American economy, President Barack Obama has decided to impose a 35% tariff on Chinese tires. Most economists, from almost all economic ideologies, agree that free trade helps maximize economic production and economic well-being. However, Obama’s new tariff will not just contribute to further economic turmoil, it will cause death and destruction. I know, I know, this sounds extreme. But it is a logical certainty that if this tariff is imposed, President Obama will have blood on his hands. I would argue that President Obama is committing the same mistakes that President Hoover committed.

By definition, a tariff imposed on an imported good is a tax on consumers of that good. Presumably, American consumers buy tires made in China because they are cheaper and/or of higher quality. By taxing tires, consumers will be forced to pay for more for tires meaning that they will be marginally less wealthy. This is true by definition. Less disposable income will lead to lower demand and diminished purchasing power in the economy. Even working within the traditional Keynesian framework this would have disastrous effects. Also, imposing this tariff could lead to a trade war that could affect the trade of many other goods. A decline in world trade is already hurting the economy, and further restrictions could be devastating. One only needs to look at Hoover’s Smoot-Hawley tariff to see the disastrous effects that protectionism can wreck on an economy that is already in recession. It is generally well accepted that Smoot Hawley accelerated the American economy’s slide into depression; this new tariff could lead to further tariffs that would have a worse effect because today’s world economy depends so much more on global trade than ever before.

There is no and can be no economic rationale behind this tariff. It is a payoff to industries and unions that supported Obama. It is an attempt to help a few industries at the expense of the American and the world economy. While the Obama campaign promised that his administration would not be swayed by special interests. This was a broken promise, as his administration has participated in the same type of special interest pandering as President Bush. There has been no change in Washington.

I am willing to claim that Obama will have blood on his hands if this tariff takes effect. By making tires more expensive, some consumers will inevitably put off their purchasing of new tires to a later date when they can afford it. It is logically certain, that, in turn, some marginal group of people will get into an accident due to overly worn tires. This may be a small group, but it will exist. However, the specific incidents will be impossible to identify, so Obama will be not be blamed. This is the law of unintended consequences. Most government policy attempts ignore this law.

I have mixed feelings about China’s retaliatory tariff. I hold the view that the freer the trade, the better. So in this sense, I should be totally and completely against China’s tariff, and this was my initial reaction. However, I think the issue is far more complex. Adam Smith, one of the initial thinkers who understood the benefits of the free market and free trade, also understood the retaliatory tariff as a means to freer trade and more open markets. If China’s retaliatory tariff convinces American policy makers to remove our economic sanctions on foreign goods, then I would consider the tariff to be a good thing. However, there is always the danger of allowing a series of retaliatory tariffs to lead into an international trade war with devastating consequences. We really are on the brink of an economic collapse. Bad economic policy can force the U.S. and the world economy into a severe and prolonged economic depression.