Cafe Hayek: The Pessimistic Bias

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April 06, 2008

The Pessimistic Bias

Don Boudreaux

Reading the comments on this post (which in many ways are very much like the comments on many other posts, both here at the Cafe and on other blogs) prompts me to make a couple of points that I've put off making for too long now.

In his indispensable book, The Myth of the Rational Voter, my GMU colleague (and EconLog's) Bryan Caplan finds powerful evidence that non-economists suffer from the "pessimistic bias," which Bryan defines (on page 45 of his book) as

a tendency to overestimate the severity of economic problems and underestimate the (recent) past, present, and future performance of the economy.

Russ and myself (because we're economists?) and many of the commentors here at the Cafe are not pessimistic about the long-run. Problems come; problems are solved. Inability to see the details of the future scare many people; this inability doesn't scare me. As long as individuals have a sufficient quantum of freedom, their self-interest and creativity and inevitable competition will "solve" almost any problem over the long-haul. It's a pattern repeated countless times over the past two-hundred years in capitalist countries. (Please, please don't trot out the Great Depression as a counter-example. First, it was clearly worsened by the Federal Reserve's catastrophically bad monetary policy, and by the worldwide spread of protectionism -- helped along by the Smoot-Hawley tariff. More importantly, there's compelling evidence that the risks of full-throttle socialization of the economy were then real enough to scare investors away until the mid-1940s. And even this greatest of all of America's depressions lasted only ten or fifteen years, depending on how you define the end of the Depression.)

Being optimistic doesn't mean being blindly insistent that the future will always be better than today. Take away enough freedom and, kaboom!, the economy implodes. (Or should I instead say "moobak!"?) Fortunately, though, the capitalist economy is so remarkably robust that it can take lots of beatings -- lots of interventions -- lots of unnecessary taxation -- lots of foolish dissing -- and keep on keeping on at raising living standards.

I'm more optimistic today than I was ten or twenty years ago about just how much counterproductive regulation and taxation the capitalist economy can take before it really starts to fail. But my sense is that the American economy still retains enough freedom -- that property rights remain sufficiently secure -- to ensure continued economic growth over the long run.

I remain bullish over the long run. Very bullish indeed.
....
My second point is that it is a curious phenomenon that those who want more government control over the economy tend to be those who insist that the American economy has performed poorly over the past thirty-five years. Again, as regular patrons of the Cafe know, Russ and I are quite sure that the economy has done very well during these years, even for poor and middle-class workers.

But if I were a pro-regulation and high-tax kinda guy, why would I dispute the claim that America's economy has performed remarkably well for everyone even since 1973? Why would I not say "See, the government programs enacted from the New Deal forward are working!" At no time during the past 35 years has Uncle Sam's budget been severely reduced. During those years, some welfare programs have been scaled back, while others have been expanded and even newly created. Trade is freer today, but the post-WWII trend toward freer trade began in the 1940s, long before those allegedly blissful years of the early 1970s. Since the early 1970s, some regulations have been repealed, while others have been created at both the state and national levels.

In short, despite what some pundits mysteriously assert, America during the past twenty-five to thirty-five years has emphatically not been a laissez-faire society. Not even close. So why do so many persons on the political left see in the economic data of the past three decades a compelling case for even greater government control over our lives and pocketbooks? And why don't more of these same persons on the left respond to those of us who advocate less government by pointing to the evidence of continued and widespread growth in prosperity by saying proudly "See! We're right and you're wrong: government intervention does work well!"

I believe that I know the answer to my (non-rhetorical) question, but this post is long enough, so I'll end it here.

Posted by Don Boudreaux in Current Affairs, Economics, Myths and Fallacies, Standard of Living | Permalink

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Politicians need dragons to slay. Otherwise, they've nothing to do.

Posted by: Marcus | Apr 6, 2008 3:05:26 PM

Fortunately, though, the capitalist economy is so remarkably robust that it can take lots of beatings...

How much of this do you think is due to the rise of additional industries which the government hasn't yet had a chance to wreck, like it has the health care, education and banking industries?

For example, the content of the Internet (everything at the IP level of abstraction and higher) is effectively anarchy. So the Internet, and IT in general, is free to grow regardless of what the government does to other industries. Couldn't this growth, and the other productivity increases it brings, be a larger factor in the constantly-improving economy than growth in old industries?

Fortunately, the structure of IP and the nature of encryption make regulation practically impossible. Unfortunately, software patents still manage to do some damage.

Posted by: Grant | Apr 6, 2008 3:08:28 PM

How do you explain away the unfunded liabilities (I'm actually curious about your answer to this)? They have to be paid for somehow, don't they?

Posted by: Justin Bowen | Apr 6, 2008 4:27:56 PM

" Inability to see the details of the future scare many people; this inability doesn't scare me. As long as individuals have a sufficient quantum of freedom..."

Yep freedom is important!

Home of the free...

Posted by: muirgeo | Apr 6, 2008 5:25:10 PM

muirgeo, you're definition of "freedom" is appalling.

Posted by: mnm | Apr 6, 2008 5:56:32 PM

I'll be the first post to actually try and answer your question. My guess is that it is easier to convince others to change status quo when they think something is wrong. If things are proceeding nicely then why change it?

A derailing point for my argument, however, is that those favoring less government intervention are not claiming that the world is getting worse and that status quo needs changed in the other direction. I suspect that this is the case because they are a relative minority who need to be better about accuracy to remain in the discussion.

Posted by: Justin Ross | Apr 6, 2008 5:58:25 PM

The post makes a fair point that our economy is not a result of laissez-faire policies. It does not follow nor have I seen any significant evidence that a laissez-faire economy would be better then what we have. As far as I can tell a laissez-fair economy has never truly existed on which to base its efficacy.

If nothing else what we might be comparing is the difference between supply side and demand side economics with, in my opinion, the demand sider's seeming to have evidence of greater economic efficiency.

Posted by: muirgeo | Apr 6, 2008 6:28:07 PM

"So why do so many persons on the political left see in the economic data of the past three decades a compelling case for even greater government control over our lives and pocketbooks?"

I suspect they aren't looking at economic data at all. They are instead looking at media sensationalism.

Posted by: mnm | Apr 6, 2008 6:30:03 PM

Does someone know the answer to this is there actually greater taxes and regulations (with the possible exception of protectionism) now than there was in the 1930s? In other words, would a businessman in the 1930s who complained about all the New Deal rules and regulations be gobsmacked at all the rules and regulation that exists nowadays?

Posted by: Gil | Apr 6, 2008 6:52:24 PM

Gil,

I'd say that running a business of any size today is as much about being a specialist in government regulation as it is about providing a service to customers.

Posted by: Randy | Apr 6, 2008 7:09:14 PM

"So why do so many persons on the political left see in the economic data of the past three decades a compelling case for even greater government control over our lives and pocketbooks?"

At this point, seeing Republican presidents add 7.5 trillion dollars of debt to our government it is no longer fair to assume that the left is advocating for greater taxes or more government. The right has shown by it's actions that it is the party of greater government spending but to cowardly to force the American people to pay for their habits.

I have to wonder how many people would still vote republican if they were held responsible for paying of any debt their president accumulates.

I vote we pass a constitutional amendment that voters of the victorious party pay off all the debt at the end of their presidents term.

Let' see .. you Bush voters... what's 5 trillion divided by 60 million? That's what you each owe. Of course I voted for Reagan twice and H Bush once so I'd be paying big for those mistakes.

Posted by: muirgeo | Apr 6, 2008 7:17:41 PM

Gil,

This old post by Professor Boudreaux addressed the issue.
In fact the average person is paying more.

http://cafehayek.typepad.com/hayek/2007/08/tax-burden.html

Posted by: muirgeo | Apr 6, 2008 7:23:19 PM

I would be happy with the amount of government interference we have now if I could be assured that it would never increase. Unfortunately, it's in the nature of government to grow.

Posted by: jp | Apr 6, 2008 7:35:22 PM

"Let' see .. you Bush voters... what's 5 trillion divided by 60 million? That's what you each owe. Of course I voted for Reagan twice and H Bush once so I'd be paying big for those mistakes."

muirgeo

That debt has been accruing since the 1940s. The Bush adminstration didn't spend us that far into debt. Seriously, do you do any fact checking before you post?

Posted by: mnm | Apr 6, 2008 7:55:55 PM

The second point hits the nail on the head.

In the US, real government spending per person is about 20 times what it was in 1929. Almost all that increase is in social spending. The fact is that Americans are better off, but not BECAUSE of government intervention, IN SPITE of government intervention. If government intervention is required for higher living standards for all, why did all Americans do so much better 1800-1929?

Why does the left argue the last 30 years have been a case for government intervention? Heh, Easy! Republicans have been "in control" the last 30 years and they have used free market rhetoric(although they haven't followed it). The left has no choice but to argue for the exact opposite and therefore they argue for more government intervention. Bill Clinton was probably the most "free market"/small government presidents in the last 50 years in policy, but his presidency was a great case for government intervention/democrats because he was a democrat.

In short, it doesn't matter what you DO in politics. What matters is WHAT YOU SAY.

Posted by: Syphax | Apr 6, 2008 8:01:48 PM

http://dcj.state.co.us/ors/images/stats/Violent_vs_Offense/2004_violent_vs_incarceration.gif

This is a wonderful graphic to which you surely have interpreted incorrectly. I bet you don't even understand that the higher incarceration rate causes lower crime rate. I'm willing to be that you would look at this graphic and say "Look the incarceration rate has been going up IN SPITE OF the lower crime rate." When the sentence is more plausible with the clause BECAUSE OF.

I'm not even sure what this graphic has to do with anything in Don's post. Care to explain?

-Ken

Posted by: Ken | Apr 6, 2008 8:07:52 PM

The link in my above comment if from muirgeo's post. It got cut off in mine.

Posted by: Ken | Apr 6, 2008 8:11:03 PM

It has apparently escaped muirgeo's attention that it is him that this post is scorning.

Posted by: ben | Apr 6, 2008 8:41:07 PM

Ken,

Isn't your argument for causation just as fallacious as muirgeo's. Also, Don made a claim to freedom in his post. The links muirgeo provided were meant to illustrate that we are not as free as it may seem.

Personally I think we are quite free in the US, but I do find it appalling how many not violent 'offenders' are locked in prison.

Posted by: Deryl G | Apr 6, 2008 8:47:47 PM

muirgeo, you're definition of "freedom" is appalling.

Posted by: mnm | Apr 6, 2008 5:56:32 PM

I'm not following you. Those in prison certainly aren't free right?

Is it that you think they ought not be free and muirgeo seems to be implying that they ought to be that you find appalling?

Posted by: Deryl G | Apr 6, 2008 8:55:29 PM

Most people have what can only be called a primitive or childlike sense of how the world works. They think that things happen, like bumper harvests or crop failures because of SOME KEY POLICY. It's cargo cult economics. "The depression happened because of X." Or we finally got out of the depression because of Y." People want to believe the problem is that simple because it gives them a feeling that they understand their world, that it's amenable to that kind of control, and that the "problem" can be cured by A BETTER POLICY, much like our pre-industrial ancestors felt everything could be cured by prayer and "perfection."

The phrase I hate the worst is "all we have to do..." This presupposes (a) the speaker has figured it out--they know the BETTER POLICY, and (b) it involves you and I surrendering our personal interests to the "we," which is invariably code for the interests of the speaker.

Alas, there will always be people who are afraid of everyone else (gasp) doing whatever they want. There will always be people who think they know better what everyone should want. The former will surrender state power to the latter, who will exercise it according to their personal interests. The rest of us who complain about it will be called "selfish."

Posted by: M. Hodak | Apr 6, 2008 8:56:55 PM

BTW - That's a long way of saying that I'm fairly optimistic that things would be better, or at least no worse, if the pessimists (or anyone, really) had less access to state power to make themselves feel better.

Posted by: M. Hodak | Apr 6, 2008 9:02:10 PM

I'm not following you. Those in prison certainly aren't free right?

Is it that you think they ought not be free and muirgeo seems to be implying that they ought to be that you find appalling?

Posted by: Deryl G

Good question Deryl. I'm not implying that they ought not be free, although the violents certainly ought not be free. What I find appalling is his simplistic definition of freedom, i.e. that only those not in prison are free. I don't know what the per capita incarceration rates are in North Korea or Cuba, but if they're lower than the US would you argue that Cuba and North Korea are more free than the US? I hope not. The point I'm trying to make is that incarceration rates are not an accurate measure of freedom. In fact, it could be argued that they aren't a measure of freedom at all and using them as such is something of a perversion.

Don was talking about economic freedom, not incarceration rates. http://www.cato.org/pubs/efw/
This is link to an economic freedom index done by divisionoflabour.com's Robert Lawson. He updates the index annually.

Posted by: mnm | Apr 6, 2008 9:24:29 PM

I agree that those in North Korea and Cuba are not fee. I also think we are very free here in the US. I also also think that we have too many people in prison.

Posted by: Deryl G | Apr 6, 2008 9:49:58 PM

Isn't it therefore a big productivity issue first and foremost? Some people live with what others refer to as unfair rules and regulations yet still produce anyway? Similarly is there something to be said for certain groups and, even, nations that are poor or not as rich as they could be, not because of government necessarily, but have some sort of issues where they won't produce? Or to put it another way, some groups of minorities seem to play the blame game and become victims whereas other minorities keep to themselves, work hard, produce and become quite well off in same society that supposed to be keeping the other minorities 'down'?

Posted by: Gil | Apr 6, 2008 9:55:12 PM

"So why do so many persons on the political left see in the economic data of the past three decades a compelling case for even greater government control over our lives and pocketbooks?"

It is indeed strange when politicians go on and on about how poor and miserable we are supposed to be these days. It takes guts for someone like Hillary who is making hundreds of millions to stoop down to "our level" and describe our decent middle-class lives as hard, disappearing, helpless, and what-not.

She is appealing to the "pessimistic bias" that Don mentioned and to the the innate aversion to losses that people harbor deeply in their psyche. And I'm not talking about personal losses (which would be understandable), but to the general losses that happen in a society as a whole.
Wishing to get rid of all losses is a dangerous ideology. Better to stick with Milton Friedman's pragmatism: "profits are important, but failures are too" (I'm paraphrasing).

Ironically the ideology of a perfect "no-loss" society is more common among the wealthy. How often do we hear: "it's a shame that in a rich country like the USA we still have people foreclosing on their houses".

Somehow, everyone has a right to happiness and government's duty is that no one should be denied any desire. The details on how to achieve this are not important, it's a matter of will on the part of the political class. "Just do it". "We just need to stop talking and change the society as we know it". When I hear such talk I feel insulted.

Posted by: Unit | Apr 6, 2008 10:38:12 PM

"I vote we pass a constitutional amendment that voters of the victorious party pay off all the debt at the end of their presidents term." - Murthaduck ("the children they've killed in cold blood")

I take it that secret ballots have no place in your democracy? Who do you propose look over my shoulder to see who I'm voting for? You? Hitlery? The Swimmer? Do you also propose to amend the Constitution to require that all spending bills originate in the Executive Branch instead of in the House? The Muirdiocy compounds daily.

Murthaduck swung and only missed the nail by a few feet this time, which is about as close as the Duck ever gets. I believe it was in Heinlein's 'The Moon Is A Harsh Mistress' where the idea was floated that any time a politician wanted to inflict a program on The People 'for their own good', that the politician had to fund it out of his own pocket. I wonder how willing Congress would be to subsidize GE and ADM for Murthaduck if the Congresscritters had to dig into their own wallets?

Posted by: brotio | Apr 6, 2008 10:54:38 PM

Like mueirgo, i voted repub until 2004. The argument that laissez faire hasn't been tried sounds like the same argument marxists make about communism. We just have to compare different time periods. If you use the Reagan revolution as the starting point, compare the 30 or so years before and since. Back then, real wages grew and a man could support his wife and kids on one income. Now it takes two incomes just to tread water. Why now and not then?

Posted by: estimator | Apr 6, 2008 11:39:36 PM

If there is any rationality to voting this data suggest a clear choice.

Posted by: muirgeo | Apr 6, 2008 11:41:04 PM

As far as I can tell, most economists tend to make a career of asserting that "everything is fine, and if it's not fine, it will be soon."

Of course, everything eventually passes, but this perspective seems to be reductionist to the point of meaninglessness. I have to wonder if this is a consequence less of actual data than it is of a profession bred for service in the highest echelons of bureaucracy.

On the other hand, I don't think there is any hard support for a "pessimistic bias" by non-economists. People seem to be borderline elated as long as they can spend with impunity, whether it is on real income, or just credit.

Generally speaking I agree with the points of the rest of the post.

(Except the the citation of "Myths of Rich And Poor", which is yet another specious attempt to "proof up" our supposed economic bounty by mis-counting credit/spending as wealth and making use of doctored government economic statistics. Oh, and it's by a Fed apparatchik, too, so none of this is of any surprise.)

Posted by: Aaron Krowne | Apr 7, 2008 12:07:15 AM

Posted by: Aaron Krowne

Aaron you're long on speculation and short on facts. Can you prove that those government stats are doctored or do you just choose to believe so for the sake of your arguement? What does his being an employee of the Fed have to do with it? Rather than discussing what he rights you dismiss it because of where he works.

Who's the one being specious?

Posted by: mnm | Apr 7, 2008 8:18:23 AM

I'm sorry that should be "writes." Damn, I'm tired.

Posted by: mnm | Apr 7, 2008 8:19:08 AM

"Let there be no mistake, monetary inflation via debasement of currencies is pure robbery as it diminishes the standard of living for most people. In fact, I would argue that monetary inflation and credit growth are the reasons why, despite economic progress, most people today work much longer hours and most households rely on dual-incomes." -- http://www.safehaven.com/article-9899.htm

"Trade and commerce, and prosperity that depends on them, hinge upon two primal ingredients: integrity and confidence. It is the function of money to implement their existence and interaction. For 63 centuries they have worked together since the first gold slug was used in exchange by men. Gold is the key to confidence. The universal acceptability of gold throughout history has enabled the agencies of production, consumption, exchange, and distribution to bring about the highest level of prosperity commensurate with the prevailing level of knowledge and technology. Take gold out and, lo and behold: knowledge and technology will no longer uphold prosperity. Sinking back to the Dark Ages becomes inevitable." -- http://www.24hgold.com/viewarticle.aspx?langue=en&articleid=240473_Gold_Hoard_vs__Gold_on_the_Go_Antal_E__Fekete

Posted by: David White | Apr 7, 2008 8:26:46 AM

Aaron Krowne accuses Michael Cox and Richard Alm (in the book of theirs that I cite in the post) of "mis-counting credit/spending as wealth and making use of doctored government economic statistics."

First, I join mnm in asking for Mr. Krowne's evidence that the statistics in question are "doctored." While anyone who understands statistics understands that there are many pitfalls along the way in gathering, processing, and interpreting them, there's no evidence that I'm aware of that the stats in question are false.

Second, Mr. Krowne simply is wrong about what Cox and Alm do. The bulk of their book looks at actual consumption -- goods and services purchased (as well as at the work-time necessary to get various "baskets" of goods and services). Cox and Alm in fact spend little time measuring Americans' prosperity by looking measuring the dollars spent.

Posted by: Don Boudreaux | Apr 7, 2008 8:42:13 AM

Back then, real wages grew and a man could support his wife and kids on one income. Now it takes two incomes just to tread water. Why now and not then?

Posted by: estimator | Apr 6, 2008 11:39:36 PM

I can't supply anything but anecdotal evidence, but I suspect that more families could survive with only one income if they made different financial choices. My wife doesn't work and half the guys I work with don't work. None of us drive brand new cars or have tons of 'toys' to play with.

My wife's brother and his wife both work. The could live off of one income if they chose to, but they have two newer vehicles, a big screen TV, several different video game systems, and several newer computers.

Lots of women don't want to stay home. It's a preference.

I'm sure there are some families that can't afford to live with just one income, but I wonder how many of those families could have lived with just one income 30 years ago (or whatever cut-off you want to chose).

Posted by: Deryl G | Apr 7, 2008 8:57:22 AM

Directed to muirgeo: I'm not even sure what this graphic has to do with anything in Don's post. Care to explain?

-Ken

Posted by: Ken | Apr 6, 2008 8:07:52 PM

I'll explain for him. He's a troll and he posts nonsensical or unrelated items all of the time. We respond and defeat his asertions (and off-topic rantings) and he gets the attention he is so desparately seeking.

At this point, seeing Republican presidents add 7.5 trillion dollars of debt to our government it is no longer fair to assume that the left is advocating for greater taxes or more government. The right has shown by it's actions that it is the party of greater government spending but too cowardly to force the American people to pay for their habits.

The left, I would argue, is arguing not for more government regulation but better governmental regulation and a more fair economy in general. The left knows that a demand side economy will be more equitable and likely more prosperous.

I have to wonder how many people would still vote republican if they were held responsible for paying of any debt their president accumulates.

I vote we pass a constitutional amendment that voters of the victorious party pay off all the debt at the end of their presidents term.

Let' see .. you Bush voters... what's 5 trillion divided by 60 million? That's what you each owe. Of course I voted for Reagan twice and H Bush once so I'd be paying big for those mistakes.

Posted by: muirgeo | Apr 6, 2008 7:17:41 PM

- Who here is defending the Right's growth of government under a Republican led congress from 1994-2006?

- So, using your 'prison' logic: is it safe to assume that the Left is no longer advocating for greater taxes or more government? Please explain this because I usually hear the opposite in their rhetoric.

- Can you (or will you) argue what the difference is between better governmental regulation and simply more regulation? You wrote it so some elaboration would be nice.

- Define "fairness" as it relates to an economy?

- Explain how, in a society that makes its legislation to favor consumers over producers, that we should need more so-called demand side and more equity to make us prosperous? And you, muirgeo, take issue with the concept of outsourcing as it is now?...just wait until things break your preferred way.

- For the last time, muirgeo, the congress makes legislation regarding spending. So why would you make such a suggestion that voters of the victorious presidential party should pay off all the public debts before leaving office? Scratch that and forget I asked; you're all about forcing others to pay for someone else's debt...it's in your DNA.

- At least half of that 5 trillion that you mention (if that's even an accurate number) was used to try and make things "fair" and "equitible". And now you're complaining about it? Make up your mind, Doctor!

Posted by: LowcountryJoe | Apr 7, 2008 9:05:57 AM

Here is the counter argument to Cox and Alm.

For myself, do Cox and Alm's data need a revisit now that we are coming to understand the true nature of our consumption. The fact is we spent money and consumed and bought things we truly can't pay for. If I give you a credit card with a million dollar limit you might feel real rich with all the things you've bought but what about when the interest and principal come do.

Cox and Alm state:

"It’s true that the share of national income going to the richest 20 percent of households rose from 43.6 percent in 1975 to 49.6 percent in 2006, the most recent year for which the Bureau of Labor Statistics has complete data. Meanwhile, families in the lowest fifth saw their piece of the pie fall from 4.3 percent to 3.3 percent."

And that is the whole problem. First is to question why the new distribution occurred. Does the new division of wealth have anything to do with true value OR is it more a result of policy. Second, is to realize this is likely the source of pessimism amongst many voters and likely a major contributing factor to the degree of severity of the current economic downswing.

Voters have pessimism based on their actual life conditions which are not seen or experience by the average professor of economics. If voters fully understood THIS data their pessimism would be greater and their vote for change stronger.

Policy matters and there is nothing wrong with well founded pessimism and voting for a brighter future.

Posted by: muirgeo | Apr 7, 2008 9:28:41 AM

Cox and Alm state:

This is critical because the demand side argument would be to suggest that if more of the income had stayed in the lower quintiles it would have been spent as true consumption and the economy might not be where it is today.... bailing out the supply siders... the guys who made greater percentages of all incomes.

The above fact and the current economic state of our country reveal the contrast between supply side and demand side economics. If voters have a reason to be pessimistic it's when those in charge push for supply side economics. When those in charge push for demand side economics they will have reason to be more optimistic.

The debate is indeed never about laissez-faire versus socialism as many here like to set it up. It's about everything we do in between and how actual policy does effect the economy.

Policy matters and for my 2 cents..... demand side to the rescue.... again.

Posted by: muirgeo | Apr 7, 2008 9:40:36 AM

LCJ,

What do you want nothing but gospel preached here? You may not agree with my positions and being a lay person I may not present them well but you can be assured there is a large body of economic literature from which they came and many well reputed professors of economics from which I was helped to form them.

Posted by: muirgeo | Apr 7, 2008 9:57:31 AM

If the wealthy have their wealth confiscated from them, then how do you suppose that the poor will make out better?

There are a handful of things that you should be aware of, muirgeo:

1) Incentives matter to people. No policies can ever repeal this truism. Look up "Homo-economicus" or listen to last week's podcast on EconTalk regarding "Max U.".

2) The wealthy do no spend all of their money on consumption. They generally park their wealth in vehicles/institutions/endeavors which indirectly create value-added jobs for the nonwealthy to perform and make an income at.

3) 'Dead-weight losses' do, in fact, exist with any taxation scheme. Look up this term if you're not familiar.

4) Bureaucracy does not aid in the generation of wealth for an economy. Bureaucracy squanders wealth away from an economy.

5) With very little exception (none that I can remember), everything that you have ever advocated for was more bureaucracy and less individual liberty. And, on top of it [as if that's not enough by itself], you do not seem understand or grasp anything about points 1, 2, & 3.

Posted by: LowcountryJoe | Apr 7, 2008 10:06:51 AM

It's not my blog but I'm generally very happy with what gets preached around here -- even if I have to wade through the muirpidity. But, is staying on-topic and answering point-blank questions too much to ask from a troll?

The thing about your selections of 'literature' from the economics community is that it's like you're a young and picky-eating child going to a large buffet and only eating a small fraction of the foods availible to you. And then you're coming to the table and expecting to converse with the adults about the foods in the whole buffet.

We're you not the guy who said that I was ignorant this past weekend? Physician heal thyself!

Posted by: LowcountryJoe | Apr 7, 2008 10:25:49 AM

Well done (as usual), LCJ. Muirdiot is stricken with impenetrable stupidity and insists on polluting this blog. At first I didn't think he tried to understand what others on the blog wrote (not agree, mind, just understand) but I've come to the conclusion that it's not a matter of trying. It's a matter of ability. He just can't understand. It's all beyond him. He's a moron. I do notice that he doesn't similarly pollute Rodrik's blog.

Posted by: Methinks | Apr 7, 2008 11:50:43 AM

If the wealthy have their wealth confiscated from them, then how do you suppose that the poor will make out better?

Posted by: LowcountryJoe

Well this is one of our basic fundamental disagreements. You presume that wealth is proportional to value. I suggest it is not in many cases.

1. Agreed, incentive matters.

2. You make my point. Wealthy don't consume as much as poor. So when they accumulate greater wealth in proportion to the poor consumption and demand overall goes down and the economy faulters... and even rich people get hurt.

3. Sure.

4. False. Every wealthy nation has varying degrees of Bureaucracy not always proportionate to its wealth. NO WEALTHY NATIONS exist that have no Bureaucracy.

5. I don't think I advocate more Bureaucracy but more efficient Bureaucracy.

You guys with your Darwinistic visions for society are stuck explaining the extinction or non-existence or lack of evolution of a society based on classic economics. If it's so damm good and so obviously more effecient then where the heck is it? They don't exist for a reason. Believing they could work might be as unreasonable as believing communism works... and as much as I might not like it... communism seems more viable then classic liberalism because it at least exist in the real world and not just in theory.

Posted by: muirgeo | Apr 7, 2008 12:45:03 PM

More efficient bureaucracy?
Are you trying To be funny?

Muirgeo no doubt thinks businesses pay the cost associated with regulation.

BTW, I am composing this on my Nokia 810 at a campsite in Big Sur.

Posted by: Sam Grove | Apr 7, 2008 1:24:20 PM

Muirgeo,

"If it's so damm good and so obviously more effecient then where the heck is it?"

At the core of every transaction in which wealth is created. On the day that free markets cease to function government will lose its raison d'etre.

Posted by: Randy | Apr 7, 2008 1:37:27 PM

Spending does not increase productivity. Investment does. If you disagree with this, please expalin why.

Posted by: Deryl G | Apr 7, 2008 1:57:27 PM

5. I don't think I advocate more Bureaucracy but more efficient Bureaucracy.

When you get that taken care of can you work on getting dryer water? I'm tired of ruining my keyboard everytime I spill.

Posted by: Deryl G | Apr 7, 2008 1:58:59 PM

I don’t agree with Caplan’s definition of an irrational voter; it’s not the definition used by most people, but a technical, economist’s definition in which rational action is defined as that which an economist would do. It assumes that voters have the same information that economists have. Voters use the information and assumptions they possess to logically deduce the choices they should make, so they are rational by the common definition.

So why do voters have “a tendency to overestimate the severity of economic problems”? Could it be because the media regularly interviews only the hysterical economists, and that’s the only information that the public has? If voters are overly pessimistic, it’s because the media, politicians and many economists spend all of their effort trying to scare the life out of voters in order to get them to vote for more socialism.

Caplan would be irrational by Mises standards because Mises found any state intervention in the economy to be harmful, and therefore irrational, and Caplan, being a neo-classical economists, has no problem with state intervention in many cases.

Posted by: fundamentalist | Apr 7, 2008 1:59:15 PM

Fundamentalist,

You should read Bryan Caplan's book, for he does not define rationality in the way that you presume that he does.

Don

Posted by: Don Boudreaux | Apr 7, 2008 2:24:29 PM

Spending does not increase productivity. Investment does. If you disagree with this, please expalin why.

Posted by: Deryl G

No one invest unless demand exist. If people have no money because it's all tied up in the wealth of a small minority there is no demand. The wealthy have all the widgets they need.

Give the workers a little more money and their new wealth and demand for widgets will cause productivity to soar.

Posted by: muirgeo | Apr 7, 2008 2:56:11 PM

No one invest unless demand exist. If people have no money because it's all tied up in the wealth of a small minority there is no demand. The wealthy have all the widgets they need.

Give the workers a little more money and their new wealth and demand for widgets will cause productivity to soar.

Posted by: muirgeo | Apr 7, 2008 2:56:11 PM

If there is zero demand in the world, we have reached Nirvana. There will always be demand of some kind. As long as there is demand people will try to meet those demands for profit. They will make those attempts via investment.

Even if I consede your point, you still need money for investment. The rich tend to do that.

Also, there is no reason that the rich having less money would necessitate that the poor will have more.

I also have no reason to believe that taking money from the rich and giving it to governement will result in anymore having more of anything except more government.

Posted by: Deryl G | Apr 7, 2008 3:01:58 PM

Exactly, Deryl G. The government redistributes very little to the poor anyway. All the talk from politicians about inequality is just that - talk. Nearly all of the money goes to the political class and its patrons.

Posted by: Randy | Apr 7, 2008 3:12:10 PM

Wealth is redistributed by things like suppressing union formation and fed policy that Greenspan admitted to using to control wages among many other methods.

Deryl G said
"There will always be demand of some kind. As long as there is demand people will try to meet those demands for profit. They will make those attempts via investment.

Yes but if people don't have money they can't act on their demand. So what do the supply siders do... they make money and loan money and make more money and loan more money and concentrate wealth until they can loan no more and you get the current Greenspan/ Reagan trickle down catastrophe.

Deryl G said
"Even if I consede your point, you still need money for investment. The rich tend to do that."

Absolutely, capitalism works. And the rich have had their share of access to capital and borrowing via the government backed loans and every other sort of incentive. If they make 20% of all income or 18% or if they own 44% OR 39% of all assets they will still have plenty of money to store and borrow to invest to meet the new found demand.

Posted by: muirgeo | Apr 7, 2008 3:49:29 PM

"...but if people don't have money they can't act on their demand."

And again, so what? The government doesn't give money to people who don't have money. It gives money to the political class and its patrons. And these are hardly people in need of more money. If people who care about the poor had any brains they would bypass the government and donate to charitable organizations directly.

Posted by: Randy | Apr 7, 2008 3:59:54 PM

muirgeo:
Yes but if people don't have money they can't act on their demand. So what do the supply siders do... they make money and loan money and make more money and loan more money and concentrate wealth until they can loan no more and you get the current Greenspan/ Reagan trickle down catastrophe.

When you inject "supply siders" into your response it makes it seem as if I had advocated infavor of these supply side policies. Is that your intent? If so, I don't appreciate it.

muirgeo:Absolutely, capitalism works. And the rich have had their share of access to capital and borrowing via the government backed loans and every other sort of incentive. If they make 20% of all income or 18% or if they own 44% OR 39% of all assets they will still have plenty of money to store and borrow to invest to meet the new found demand.

Are you advocating that if we take money from the rich and give it to the not-rich then the rich will will have insentive to invest in ways to earn that money back so that the government can take it away again?

Posted by: Deryl G | Apr 7, 2008 4:00:29 PM

Very nice post. I like the optimistic viewpoint espoused and evidenced in the article. From personal experience, I do feel that I fret over problems in the short run a fair bit more; when in hidnsight I manage to overcome them and come out usually better off. Extend my example to most folks and I can certainly believe that in the long run there are several reasons to be optimistic. In fact, that is what draws me to this blog post. Keep up the good work.

Posted by: Saum | Apr 7, 2008 4:04:36 PM

Deryl, adding to your point and dumbing it down (with certainty that muirpid will still not understand a word of either your post or mine), there is always demand. Human wants and needs are unlimited. As soon as we grow accustomed to one convenience, we're looking for another. As soon as we can cure one disease, we are dissatisfied because we can't cure another. And on it goes. We never know what will be in demand next. How much pent-up demand was there for the i-pod 30 years ago? Each new product satisfies a need that we may not know existed before it came to market. Each entrepreneur needs capital to develop and bring innovations to market. The people who get rich are the ones who invest and take risks to innovate, to improve human life. That wealth is not "held" in a few hands. It is created by risk-taking entrepreneurs and their investors. That group is a minority of the population. Moreover, most of the wealth is tied up in these investments. Re-distributing this wealth means massive liquidation of productive companies and the jobs that go with it. Even the dumbest politician understands that. Take away the incentive of wealth and nobody will take the time and risk to innovate and all but the best rent seekers will be poorer.

A free-market Capitalist system is the only system in which to succeed you must create something that others value. You can only succeed if you please your fellow man.

If we knew perfectly how much of everything everyone needed and wanted at all times, then central planning would be effective and the Soviet Union would have overtaken the US economy long ago. Central planning, of course, is exactly what muirpid wants - even though he's too ignorant to understand that.

Posted by: Methinks | Apr 7, 2008 4:12:56 PM

Boudreaux: "You should read Bryan Caplan's book, for he does not define rationality in the way that you presume that he does."

Wikipedia agrees with me:

“Caplan refers to the make-work bias as a “tendency to underestimate the economic benefits from conserving labor.” (p40) People tend to equate economic growth with job creation, even if those jobs are wasteful or outright detrimental to growth. Economists argue that this is precisely wrong:

Caplan refers to the anti-foreign bias as a “tendency to underestimate the economic benefits of interaction with foreigners.” (p36) People systematically see their country of origin as in competition with other nations and are thus averse to free trade with them. They are the “enemy” even if the two governments are at a lasting peace. Elementary economics argues two countries can benefit a great deal from trade.

Caplan refers to the pessimistic bias as a “tendency to overestimate the severity of economic problems and underestimate the (recent) past, present, and future performance of the economy.” (p44) The public generally perceives economic conditions as declining, often with little or no evidence to back up their claims.

Caplan refers to the anti-market bias as a “tendency to underestimate the benefits of the market mechanism.” (p30) The populace tends to view themselves as victims of the market, rather than participants of it.”

Regarding the survey of economists, Wiki writes: “The answers to the questions are often different: the public often blames technology, outsourcing, high corporate profits, and downsizing as reasons for why growth isn’t as high as it could be. Economists, on the other hand, barely pay any heed to such arguments.”

Caplan clearly compares voter knowledge and opinion with that of economists and calls the voters irrational. However, to be irrational, voters would have to know their opinions are wrong and choose them anyway.

Caplan has repeatedly written in his blog that he is an elitist and thinks the country would be better run by an elite group of economists. His way of promoting that idea is to call voters irrational, which they aren’t.

From Publisher’s Weekly: “Focusing on how voters are systematically mistaken in their grasp of economics-according to Caplan, the No. 1 area of concern among voters in most election years-he effectively refutes the "miracle" of aggregation, showing that an uninformed populace will often vote against measures that benefit the majority.”

Being “systematically mistaken” and “uninformed” are not the same as irrational.

From Princeton Press: “Through an analysis of Americans' voting behavior and opinions on a range of economic issues, he makes the convincing case that noneconomists suffer from four prevailing biases: they underestimate the wisdom of the market mechanism, distrust foreigners, undervalue the benefits of conserving labor, and pessimistically believe the economy is going from bad to worse. Caplan lays out several bold ways to make democratic government work better--for example, urging economic educators to focus on correcting popular misconceptions and recommending that democracies do less and let markets take up the slack.”

Caplan’s solution is to educate to better educate the public. But education won’t cure irrationality. Irrational people choose according to their emotions, that is, if they’re at least mentally healthy. Education won’t affect those emotions.

Princeton Press: “The Myth of the Rational Voter takes an unflinching look at how people who vote under the influence of false beliefs ultimately end up with government that delivers lousy results.”

Again, false beliefs aren’t irrational unless you know they’re false and choose them anyway. Caplan clearly defines rationality by what the majority of economists know or believe. At least that’s what his publisher thinks.

Posted by: fundamentalist | Apr 7, 2008 4:52:18 PM

Caplan seems to believe that voters pull their opinions out of hat. In reality, they get their ideas about economics from the media, most of whom are socialists. The media get their ideas from PhD's and politicians who are socialists, too.

Posted by: fundamentalist | Apr 7, 2008 4:55:36 PM

Here is Caplan promoting his book:
My view is that these are symptoms not of ignorance, but of irrationality. In politics as in religion, some beliefs are more emotionally appealing than others. For example, it feels a lot better to blame sneaky foreigners for our economic problems than it does to blame ourselves. This creates a temptation to relax normal intellectual standards and insulate cherished beliefs from criticism — in short, to be irrational.”
How does Caplan know that voters are not just ignorant, but irrational? He can see into their souls and discern their innermost thoughts. In other words, he’s psychic. What are “normal intellectual standards” other than what economists know?
Caplan: “As long as elites persist in unmerited deference to and flattery of the majority, containing the dangers of voter irrationality will be very hard.”

Caplan’s PhD has gone to his head. He thinks an elite group of economists could run the country better. In the short run, he might be right. But keep in mind that the intellectuals, especially the economists of Germany sold Hitler to the common man. There is no guarantee that any elite group of economists won’t someday turn into Marxists, because PhD’s are no less susceptible relaxing “normal intellectual standards and insulate cherished beliefs from criticism — in short, to be irrational.” Anyone who reads Paul Krugman’s columns should know that.

Posted by: fundamentalist | Apr 7, 2008 5:20:10 PM

"non-economist's bias"?

Not all economists are optimists....Paul Krugman & Alan Blinder, for example. One might also consider the recent surveys of economists polled on whether the U.S. is in recession. The majority of economists felt that it was despite the fact that there is no factual evidence yet establishing negative growth.

Posted by: Cassandra | Apr 7, 2008 6:01:17 PM

Boudreaux's optimism about things working out in the long run may be true. The problem is the cost to people, communities and nations in the meanwhile. Industrialization in England was a good thing, but it also gave novelists like Dickens a lot of material for their books. A lot of people lived lives so harsh that it made a Socialism and Communism look like reasonable alternatives to the then current economy.

Posted by: David P. Graf | Apr 7, 2008 6:29:39 PM

A free-market Capitalist system is the only system in which to succeed you must create something that others value. You can only succeed if you please your fellow man.

Posted by: Methinks

Must create something that others value?

Or at least create pieces of paper with fancy names and convince others that you've sold them something of value while you run off and put your cash into gold before they find out the piece of paper was as good as monopoly money. You mean like that?

Posted by: muirgeo | Apr 7, 2008 6:37:09 PM

No, little tiny pieces of paper required by government agencies for every transactional minutiae so they can feel valued and important, yet create nothing, just like tiny little muirgeo.

Posted by: Mesa Econoguy | Apr 7, 2008 6:47:04 PM

Do you have evidence of fraud, Muirgeo? If so, trot it out. If not, the default assumption has to be that the people who paid believed they were buying something of value. They may have miscalculated the risk and return, but if so, they'll be smarter next time.

Posted by: Randy | Apr 7, 2008 6:50:45 PM

Exactly, Randy, and that’s also not for some rank economic and financial amateur like muirgeo to decide…

Posted by: Mesa Econoguy | Apr 7, 2008 6:53:40 PM

I disagree with much of what you write. I think you don't appreciate the importance of investment in economic growth. I also don't thing you appreciate that it's not a zero-sum game and the rich are not rich at the expense of the poor.

But, I'd like to focus on the comment you made above because I think we may be able to find common ground with it. The Austrian Economists would almost certainly agree with what you have written above. Asset bubbles, which are a misallocation of capital, are caused in large part by this very process.

Pumping out cheap money misallocates capital because it creates false signals of demand. For example, home builders were not being irrational for building like they did during the bubble. Price is a signal and rising house prices is signaling demand. Home builders were rationally responding to that signal.

The problem was, it was a false signal. An illusion created by cheap money.

So, muirgeo, if we can agree on that point, what is the solution?

Posted by: Marcus | Apr 7, 2008 7:19:24 PM

Do you have evidence of fraud, Muirgeo? If so, trot it out.

Posted by: Randy

$800,000,000 billion dollars of over valued assets by "financial experts" is fraud until proven otherwise.

And then there is this.

26 indicted on mortgage scheme
U.S. attorney alleges defendants obtained millions to pay for rent-regulated condominium apartments in Manhattan.

And this.

What happened at Bayou

Big investors were among those burned by a $450 million hedge fund blowup.

Posted by: muirgeo | Apr 7, 2008 7:45:48 PM

There it is. The sum total of your understanding of anything. I don't understand why you like to splash your rank stupidity for the public to point and laugh at, but splash it you do and point and laugh we do. You are a moron.

...Oh, I guess I do understand then.

Posted by: Methinks | Apr 7, 2008 7:50:03 PM

Marcus,

I think from Muiron's response, you see what you're in for. Good luck to you and have a good night.

Posted by: Methinks | Apr 7, 2008 7:52:49 PM

So, muirgeo, if we can agree on that point, what is the solution?

Posted by: Marcus

Bring back Glass Steagall. Let those who want to leverage 100 times over do it with their own money and backing of private money.

Then have a sector that earns money the old fashion way with good over-sight and backing of the U.S. government.

Enforce the Sherman anti-trust laws. Make it easier for unions to form. Stop allowing off-shoring of funds. Rais ethe minimum wage. Re-instate the old tax bracketts for the wealiest 1%.

Drop the SS tax to 4% and get rid of the cap.

Single payor health administration allowing private ensures to compete with public plans but NO EXCLUSIONS for pre-existing conditions.

Short of that I admit the fed has much problems and much conflict of interest. The regulators and the regulated as always are the same group of guys.

Posted by: muirgeo | Apr 7, 2008 7:56:11 PM

$800,000,000 billion dollars of over valued assets by "financial experts" is fraud until proven otherwise. - Muiron

Not under U.S. law, Moron. Unless, as a doctor, you are guilty until proven innocent in your countless malpractice suits. but, as usual, this doesn't jive with your whining and moaning about how many rapists and murderers are locked up in America. Again, muirpid, let's stick to questions you have a prayer answering: Which peg goes in the round hole?

Posted by: Methinks | Apr 7, 2008 8:04:17 PM

Enforce the Sherman anti-trust laws. Make it easier for unions to form. Stop allowing off-shoring of funds. Rais ethe [sic] minimum wage. Re-instate the old tax bracketts [sic] for the wealiest [sic] 1%.

Drop the SS tax to 4% and get rid of the cap.

Single payor health administration allowing private ensures to compete with public plans but NO EXCLUSIONS for pre-existing conditions.
Posted by: Dr. Hosemonkey

Absolutely comical.

Posted by: Mesa Econoguy | Apr 7, 2008 8:24:20 PM

mesa,

I emailed you.

Posted by: Methinks | Apr 7, 2008 8:28:43 PM

Cool, thanks. Got it.

Saw that one. :)

Posted by: Mesa Econoguy | Apr 7, 2008 8:32:17 PM

I thought you might have. I have a bunch of them. Merle Hazard?

Posted by: Methinks | Apr 7, 2008 8:34:39 PM

DK that one. Hit me.

Posted by: Mesa Econoguy | Apr 7, 2008 8:39:37 PM

muirgeo (and anyone else really),

I'd like to focus on the Glass-Steagall act with regards to the current sub-prime business.

I looked the act up on Wikipedia, but it wasn't that much help. Can some explain and/or point me to an explanation of how the two are related? If Glass-Steagall was still in place, why would there not have been some many bad loans made?

thanks.

Posted by: Deryl G | Apr 7, 2008 8:40:26 PM

Absolutely comical.

This answer is why I'm no longer a repub. Why is this comical? Unless you are simply a devoted believer in the dogma of laissez-faire, there is no reason not to go back to the rules and laws that were in place when the rising tide was lifting all boats.

Posted by: Estimator | Apr 7, 2008 8:44:06 PM

...there is no reason not to go back to the rules and laws that were in place when the rising tide was lifting all boats.
Posted by: Estimator

Absolutely more comical.

Posted by: Mesa Econoguy | Apr 7, 2008 8:47:48 PM

Deryl,

There's a very simple reason the wiki entry wasn't much help in explaining the relationship between the Glass-Steagall to the current mortgage issues is because there isn't one.

Posted by: Methinks | Apr 7, 2008 8:52:42 PM

Here’s a good primer.

Posted by: Mesa Econoguy | Apr 7, 2008 8:54:52 PM

This answer is why I'm no longer a repub. Why is this comical? Unless you are simply a devoted believer in the dogma of laissez-faire, there is no reason not to go back to the rules and laws that were in place when the rising tide was lifting all boats.

Posted by: Estimator | Apr 7, 2008 8:44:06 PM

Do you mean that not all boats are being lift or that the tide is no longer rising?

Posted by: Deryl G | Apr 7, 2008 9:29:23 PM

Deryl,

A good layman's explanation of the mortgage mess as it relates to Glass-Steagall can be found here

Posted by: Estimator | Apr 7, 2008 9:36:20 PM

Oh dear. This is very poorly written. Gee, I wonder why?

Robert Kuttner:

Robert Kuttner is the co-founder and current editor-in-chief of The American Prospect, which was created in 1990 as "an authoritative magazine of liberal ideas," [oxymoron] according to its mission statement.
He is also one of five co-founders of the Economic Policy Institute, and currently serves on its board of directors.

More to follow.

Posted by: Mesa Econoguy | Apr 7, 2008 9:51:02 PM

An excerpt from the primer Mesa posted:

The Glass-Steagall Act was the result of congressional efforts during the Great Depression to be seen as doing something about widespread bank failures. No less a banking authority than Paul Volcker, former chairman of the Federal Reserve Board of Governors, has observed that "congressional hearings on the securities practices of banks disclosed that bank affiliates had underwritten and sold unsound and speculative securities, published deliberately misleading prospectuses, manipulated the price of particular securities, misappropriated corporate opportunities to bank officers, engaged in insider lending practices and unsound transactions with affiliates. Evidence also pointed to cases where banks had made unsound loans to assist their affiliates and to protect the securities underwritten by the affiliates." The problem is that none of that is true. Banks were certainly accused of all those things, but during three different sets of congressional hearings held over four years during the 1930s, none of the accusations of conflicts of interest, improper banking activities, or excessive risk attached to banks' securities activities was proved. George Benston, in researching his book The Separation of Commercial and Investment Banking: The Glass-Steagall Act Revisited and Reconsidered, returned to the original hearings records and the reports written during the 1930s and found that there was never any evidence to support the charges brought against the banking industry.

The Glass-Steagall Act passed anyway, for several reasons. First, Sen. Carter Glass believed strongly in the "real bills doctrine." He had long argued for legislation limiting banks to making short-term "self-liquidating" business loans that used inventory as collateral. Senator Glass thought that banks' engaging in securities activities reduced the effectiveness of the Federal Reserve and was contrary to sound banking laws. With the collapse of the stock market and widespread failures among banks, Senator Glass was the man with the plan when his congressional colleagues were ready to do something or anything.

The Glass-Steagall Act passed because Congress wanted to blame some specific, identifiable group of villains for the financial crisis and the economy's troubles. With banks failing in large numbers, bankers were a convenient group to blame. Furthermore, during the 1930s many observers believed that the nation's economic ills resulted from "excessive competition." Legislation affecting several industries during the 1930s was designed to reduce competition and allow for more coordination among producers. In short, much legislation promoted government-sanctioned cartels. In the financial markets, as elsewhere, Congress took steps to provide individual financial institutions with well-defined, protected markets. Restrictions against geographic expansion were reinforced for banks and savings and loan associations. The business of banking, the activities of thrifts, the purview of investment banks and insurance companies were all defined in ways designed to limit interindustry competition.

Finally, policy analysts during the 1930s clearly understood "moral hazard." The Congress that passed the Banking Act of 1933 and created the deposit insurance system was amply warned that federal guarantees for all bank deposits would relieve banks of the need to compete for customers on the basis of their financial strength and stability. By making deposits in all banks equally safe, federal deposit insurance freed bankers to take on more risk in pursuit of higher profits. By strictly circumscribing the range of services banks could provide, 1930s policymakers no doubt hoped to limit the risk embodied in bank portfolios.

Sound familiar? (don't answer that, Muirpid. I know you can't understand a word of it)

Posted by: Methinks | Apr 7, 2008 9:58:30 PM

Problem 1:

"The regulatory reforms of the New Deal saved capitalism from its own self-cannibalizing instincts, and a reliable, transparent and regulated financial economy went on to anchor an unprecedented boom in the real economy. Financial markets were restored to their appropriate role as servants of the real economy, rather than masters. Financial regulation was pro-efficiency. I want to repeat that, because it is so utterly unfashionable, but it is well documented by economic history."

Entirely wrong. See here. And here. And here.

Posted by: Mesa Econoguy | Apr 7, 2008 10:06:56 PM

Problem 2:

"Mr. Chairman, you have had a series of hearings on the sub-prime collapse, which has now been revealed as a textbook case of regulatory failure. About half of these loans were originated by non-federally regulated mortgage companies. However even those sub-prime loans should have had their underwriting standards policed by the Federal Reserve or its designee under the authority of the 1994 Home Equity and Ownership Protection Act. And by the same token, the SEC should have more closely monitored the so called counterparties -- the investment and commercial banks -- that were supplying the credit. However, the Fed and the SEC essentially concluded that since the paper was being sold off to investors who presumably were cognizant of the risks, they did not need to pay attention to the deplorable underwriting standards."

So the existing regulations failed, in a textbook manner. So we need better regulations?

This is complete and utter nonsense.

Posted by: Mesa Econoguy | Apr 7, 2008 10:12:41 PM

Deryl,

The tide is rising but only for the yachts!

So next time a worshiper of the Holy Trinity(Mises, Hayek, Rothbard) tells you that the rich pay all the taxes now you can retort, "No shit, they make all the income now."

Posted by: Estimator | Apr 7, 2008 10:13:20 PM

There’s so much more to tear apart here. Most of the conclusions are wrong, and the economic history is factually incorrect.

Has to wait until tomorrow tho. Sorry.

Posted by: Mesa Econoguy | Apr 7, 2008 10:16:10 PM

I'm going to have to get to these readings tomorrow because my brain is too tired to comprehend right now.

However this part:
However, the Fed and the SEC essentially concluded that since the paper was being sold off to investors who presumably were cognizant of the risks

I like that. The investors were left alone because they were the ones risking money and how much risk they are willing to accept is up to them.

If people invest money poorly and lose it (or, hell, if they invest wisely and lose it) why should government get involved. Investment is risky; deal with it.

Posted by: Deryl G | Apr 7, 2008 10:20:21 PM

Money paragraph from the article I cited:

I just read Chairman Greenspan's fascinating memoir, which confirms this rescue role. His memoir also confirms Mr. Greenspan's strong support for free markets and his deep antipathy to regulation. But I don't see how you can have it both ways. If you are a complete believer in the proposition that free markets are self-regulating and self- correcting, then you logically should let markets live with the consequences. On the other hand, if you are going to rescue markets from their excesses, on the very reasonable ground that a crash threatens the entire system, then you have an obligation to act pre-emptively, prophylactically, to head off highly risky speculative behavior. Otherwise, the Fed just invites moral hazards and more rounds of wildly irresponsible actions.

Posted by: Estimator | Apr 7, 2008 10:35:25 PM

I haven't read the comments section on Cafe Hayek for a long time until two days ago, and reading through this can I see why.

Muirgeo is probably the worst troll I have ever seen on a blog. He is unique in giving the appearance of engaging in conversation when actually doing no such thing. He is prolific. He is the supreme hijacker of threads. Hodak summed up his strategy nicely in a post a couple of days ago, I think.

Readers of this blog would benefit enormously from having the option (on the client side) to ignore users by name.

Posted by: ben | Apr 7, 2008 10:35:58 PM

"Muirgeo is ...... is unique .... engaging... He is prolific. He is the supreme ..... .... I think.

Readers of this blog .... benefit enormously ...."

Posted by: ben

Goll Gee Ben... you bring tears to my eyes...you shouldn't have. But right back at you buddy!

Posted by: muirgeo | Apr 7, 2008 10:54:55 PM

If people invest money poorly and lose it (or, hell, if they invest wisely and lose it) why should government get involved. Investment is risky; deal with it.

Posted by: Deryl G

I agree. The problems could be solved if all such transactions required just one disclaimer.

So like for banking or finance transactions the disclaimer would say;

This transaction is backed and regulated by the government of the United States of America.

or it would say;

This transaction IS NOT, REPEAT IS NOT, backed or regulated by the government of the United States of America.

That's all... problem solved!

Posted by: muirgeo | Apr 7, 2008 11:02:26 PM

1.""It’s true that the share of national income going to the richest 20 percent of households rose from 43.6 percent in 1975 to 49.6 percent in 2006, the most recent year for which the Bureau of Labor Statistics has complete data. Meanwhile, families in the lowest fifth saw their piece of the pie fall from 4.3 percent to 3.3 percent."

Policy matters and there is nothing wrong with well founded pessimism and voting for a brighter future."

2. "You make my point. Wealthy don't consume as much as poor. So when they accumulate greater wealth in proportion to the poor consumption and demand overall goes down and the economy faulters... and even rich people get hurt. "

3. "A free-market Capitalist system is the only system in which to succeed you must create something that others value. You can only succeed if you please your fellow man.

Posted by: Methinks

Must create something that others value?

Posted by: muirgeo |

Wow, I missed a lot while I was at work. There isn't much that I'm going to say that Randy, Mesa, Methinks, and Deryl haven't already covered, but I'll say it anyway.

I know I'm responding to a lot here, so I'll apologize in advance for the long post...sorry.

1. You seem to like pie, muirgeo. I have several points to make here. This is exactly the kind of pitfalls that Dr. Don was talking about in statistics. What you quoted is virtually meaningless. The problem with income is that it flucuates over a person's life. That stats you've quoted are as of A PARTICULAR POINT in time; incomes are no where near that static. Secondly, that income was not distributed, it was earned. The distinction is important. Thirdly, is there something wrong with voting for a "brighter future"? Yes. You cannot legislate a brighter future, you have to make it.

2. So the wealth don't consume as much as the poor, huh? How do you figure? How many poor people live in mansions, drive sports cars, own five cars and a jet? You assume that because rich people save and invest more than poor people that they must be spending less. This assertion is so incredibly ridiculous that I don't think I need to waste time debunking it.

3. I'm so glad that those poor, moronic, gulable fools have you here to protect them muirgeo. If it wasn't for you, they wouldn't have a clue what was in their own best interest. You're such a benevolent dictator.

Elitist.

Posted by: mnm | Apr 7, 2008 11:05:57 PM

Nice one, muirgeo. Be a lot funnier, though, if you hadn't spent the last year destroying this blog's comments section.

Posted by: ben | Apr 7, 2008 11:21:03 PM

"Thirdly, is there something wrong with voting for a "brighter future"? Yes. You cannot legislate a brighter future, you have to make it."mnm

I say you need both. Good legislation and hard work. Your assumption claims working in Mexico, North Korea or the USA shouldn't matter as long as you work hard.

2. So the wealth don't consume as much as the poor, huh? mnm

Proportionatly no they don't.
If you think otherwise you are arguing against Alm and Coox thesis that the poor consume PROPORTIONATLY more (which I didn't clarify well either but that's what I meant).

3. I'm so glad that those poor, moronic, gulable fools have you here to protect them muirgeo.

Nope they don't need me they just need their vote. (But it's being stolen, sold out and mis-informed by bad money and media.)

Posted by: muirgeo | Apr 8, 2008 2:04:19 AM

I agree that those in North Korea and Cuba are not fee. I also think we are very free here in the US. I also also think that we have too many people in prison.

Posted by: Deryl G | Apr 6, 2008 9:49:58 PM

North Korea and Cuba are 100% incarcerated, whether the people are in 10x10 cells or not. That's a BIG difference between there and here, no? Now if you want to have another discussion about drug laws, let's have at it.

Posted by: FreedomLover | Apr 8, 2008 2:08:36 AM

Posted by: estimator | Apr 6, 2008 11:39:36 PM

More people today are single. More women in the workforce then ever, depressing male wages. Why does a single man need to make more money then he needs to support himself in a little apartment anyways? If 2 income-earners get together, and they don't get a $600K mortgage, they can make it.

Posted by: FreedomLover | Apr 8, 2008 2:12:45 AM

Methinks:

If you say Murthaduck is a moron, that's all I need. If only this blog had an ignore option to nuke his ass...

Posted by: FreedomLover | Apr 8, 2008 2:15:20 AM

Nope they don't need me they just need their vote. (But it's being stolen, sold out and mis-informed by bad money and media.)
-- Posted by: muirgeo | Apr 8, 2008 2:04:19 AM

There is no comparison between which system one is best able to 'protect oneself' or to express their best interest.

In democracy one gets to vote once every other year for someone who they hope will represent at least some of the things you believe are important.

In the market you get to vote every single day multiple times a day for exactly your best interest.

I agree that political rhetoric is harmful and misleading. Note, I imply no side. It's just harmful and misleading, period.

Posted by: Marcus | Apr 8, 2008 7:17:30 AM

Nope they don't need me they just need their vote. (But it's being stolen, sold out and mis-informed by bad money and media.)
-- Posted by: muirgeo | Apr 8, 2008 2:04:19 AM

There is no comparison between which system one is best able to 'protect oneself' or to express their best interest.

In democracy one gets to vote once every other year for someone who they hope will represent at least some of the things you believe are important.

In the market you get to vote every single day multiple times a day for exactly your best interest.

I agree that political rhetoric is harmful and misleading. Note, I imply no side. It's just harmful and misleading, period.

Posted by: Marcus | Apr 8, 2008 7:17:30 AM

But what do the rich do with their money? I don't believe they hoard under their bed.

Posted by: Marcus | Apr 8, 2008 7:22:20 AM

I agree that those in North Korea and Cuba are not fee. I also think we are very free here in the US. I also also think that we have too many people in prison.

Posted by: Deryl G | Apr 6, 2008 9:49:58 PM

Posted by: FreedomLover | Apr 8, 2008 2:08:36

I read the tone (which is sometimes misleading in writing) of this response to disagreeing with me, but I feel like the words were agreeing.

Just to be clear I agree with this:

North Korea and Cuba are 100% incarcerated

In regards to drug laws:
I'm probably not a good opponent for a debate on the issue, but currently I am against them (the laws).

Posted by: Deryl G | Apr 8, 2008 7:58:19 AM

In the market you get to vote every single day multiple times a day for exactly your best interest.

I agree that political rhetoric is harmful and misleading. Note, I imply no side. It's just harmful and misleading, period.

Posted by: Marcus |

Thank you for making my point for me sir.

As for your following post, what muirgeo means is that as a percentage of income, the rich spend less on consumer goods than do the "poor" (thank you for clarifying muirgeo). He happens to be right, but I don't see how it's relevant. As I mentioned before, income is not static. People save when they can and don't when they can't. No amount of legislation is going to "fix" this.

Posted by: mnm | Apr 8, 2008 7:59:20 AM

People save when they can and don't when they can't. No amount of legislation is going to "fix" this.

Posted by: mnm | Apr 8, 2008 7:59:20 AM

If government takes money from people that they might other wise save and then spend it, would that not "fix" that.

Please don't read my post to be advocating that action.

Posted by: Deryl G | Apr 8, 2008 8:17:56 AM

If government takes money from people that they might other wise save and then spend it, would that not "fix" that.

Please don't read my post to be advocating that action.

Posted by: Deryl G |

Not what I meant at all Deryl. I was responding to muirgeo. My point was that the stats weren't as telling as they appear to be at first. Because income is not static, people will save when the can (when their income is higher) and they won't when they can't (when their income is lower). In other words, this is people doing what they perceive to be in their best interest and there is nothing here to fix (which is I put "fix" in quotations).

Sorry for the misunderstanding Deryl.

Posted by: mnm | Apr 8, 2008 8:22:30 AM

Oh, now I think I understand what happened. I responded to Marcus' first post and said "your second post," or something to that effect. You thought I meant your post. Hehe. Sorry, I was responding to both of Marcus' posts.

Posted by: mnm | Apr 8, 2008 8:24:57 AM

mnm,

No worries.

I want to pose a question that is not referencing any previous post so as to not obfuscate the issue at all.

Do you agree that the government can shift the general balance between saving and spending through redistribution of wealth?

Posted by: Deryl G | Apr 8, 2008 8:40:37 AM

Bring back Glass Steagall. Let those who want to leverage 100 times over do it with their own money and backing of private money.
-- Posted by: muirgeo | Apr 7, 2008 7:56:11 PM

This is the only thing in your post that addresses the recent housing bubble so it's what I'm going to repsond to.

There is a lot of misinformation (ie. political rhetoric) going around concerning Bear Stearns. It is simply not true that they weren't regulated or that they had no capital ratio requirements. Regulators were actively involved with Bear Stearns and other investment banks prior to its collapse. This is what the SEC chariman recently testified to before the Senate:

"In particular, the SEC requires that firms maintain an overall Basel capital ratio at the consolidated holding company level of not less than the Federal Reserve's 10 percent well-capitalized standard for bank holding companies.

At all times during the week of March 10th through 17th, up to and including the time of its agreement to be acquired by JPMorgan, Bear Stearns had a capital cushion well above what is required to meet the Basel standards."

Posted by: Marcus | Apr 8, 2008 8:40:57 AM

In the market you get to vote every single day multiple times a day for exactly your best interest.

Posted by: Marcus

The market seems to have a one-party system as far as choice of transportation and choice of fuel in which to power that transport vehicle.

Let me guess... I bet you vote Internal Combustion Engine and Petrol.... everyday! That's kinda how they voted in Saddam Hussiens Iraq. Everyone got to (had to) vote but there was just one smiling face on the vote card.

Posted by: muirgeo | Apr 8, 2008 8:45:08 AM

muirgeo,

Right now there really isn't another candidate on the ticket. Maybe if the gov't would stop subsidizing oil and get rid of the car saftey regulations we would see more options.

If you think there is a better candate, who is stopping you from putting it out there for people to vote for?

If you can provide me transportation that is as effective and safe as my current mode at a cheaper price, I would buy it.

Posted by: Deryl G | Apr 8, 2008 8:52:02 AM

The market seems to have a one-party system as far as choice of transportation and choice of fuel in which to power that transport vehicle.
-- Posted by: muirgeo | Apr 8, 2008 8:45:08 AM

Now muirgeo, that's just inaccurate and misleading. There are, in fact, alternatives. But people generally don't like the alternatives.

Your actual complaint and those of left leaning people in general concerning this issue is that you don't like what it is people choose and want to override that choice.

Posted by: Marcus | Apr 8, 2008 8:52:33 AM

The market seems to have a one-party system as far as choice of transportation and choice of fuel in which to power that transport vehicle.
-- Posted by: muirgeo | Apr 8, 2008 8:45:08 AM

Now muirgeo, that's just inaccurate and misleading. There are, in fact, alternatives. But people generally don't like the alternatives.

Your actual complaint and those of left leaning people in general concerning this issue is that you don't like what it is people choose and want to override that choice.

Posted by: Marcus | Apr 8, 2008 8:52:33 AM

I want to add that government is really a problem in the auto industry.

Recently my father-in-law looked into modifying his truck to use natural gas. The government has made this essential impossible for him to do.

Posted by: Deryl G | Apr 8, 2008 8:56:33 AM

The market seems to have a one-party system as far as choice of transportation and choice of fuel in which to power that transport vehicle.
-- Posted by: muirgeo | Apr 8, 2008 8:45:08 AM

And to extend my comments, what choice do you really have in your two-party democracy? Come November you're going to get to vote for Obama (probably) or McCain. And when it comes right down to it, you'll vote for Obama more for what you imagine rather than what he'll actually do.

Compared to our politcal choices in November the market provides a veritable plethora of choices in transportation.

Posted by: Marcus | Apr 8, 2008 8:59:09 AM

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April 06, 2008

The Pessimistic Bias

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