Crawl Across the Ocean

Friday, January 30, 2009

You Can't Handle the Truth

I recently ran across a somewhat disturbing post over at Mark Thoma's 'Economists View'. Thoma is a neo-liberal in the Krugman mould, and in this particular post, he links to a number of prominent economists discussing the notion that we have, from an economic perspective, nothing to fear but fear itself.

This is an argument you'll often see made, that the only reason bad things happen, is because some people are not sufficiently optimistic about the future. If one truly believe this theory, then it makes sense to lie to people to pretend that all is well, since the lie will transform into truth as long as enough people believe it.

First up is Olivier Blanchard who states his thesis up front,
"Were a magic wand to remove uncertainty, the next few quarters would still be tough (some of the damage cannot be undone), but the crisis would largely go away."


'Better safe than sorry' is the motto. Unfortunately, while the motto may make sense for individual investors, it is having catastrophic macroeconomic consequences for the world. It is triggering enormous spreads on risky assets, a credit crunch in advanced economies, and major capital outflows from emerging countries.

It affects consumption and investment decisions, and is largely behind the dramatic collapse in demand we have observed over the last three months. Sure, consumers have lost a good part of their wealth, and this is reason enough for them to retrench. But there is more at work. If you think that another Depression might be around the corner, better to be careful and save more. Better to wait and see how things turn out. Buying a new house, a new car or a new laptop can surely be delayed a few months. The same goes for firms: given the uncertainty, why build a new plant or introduce a new product now? Better to pause until the smoke clears.


Coherent financial, fiscal and monetary measures are all needed. All three will have direct effects on demand. But, as importantly, they will help reduce uncertainty, lower risk spreads, and get consumers and firms spending again. If policymakers act decisively, private demand will recover sooner rather than later. And, within a year or less, we can be on the path to recovery.

Responding, Esward Prasad takes the argument a little further:

Mr Blanchard asks policymakers to do a lot. But aren’t perceptions of uncertainty malleable and important as well? Don't they have real consequences? Here the media plays a role—it has an inherent bias towards reporting and highlighting bad news, which is especially unhelpful in these difficult times. The drumbeat of sobering news and the screaming headlines that accompany it—Dow Plunges! Exports Collapse! Deflation Looms!—just feed into the uncertainty. Clearly, we must also co-opt the media to turn around confidence more quickly. Perhaps the IMF could do the world a service by setting up a unit to gather and disseminate to the media whatever tidbits of worldwide good news are available. Denial of some realities got us where we are, and perhaps that’s what will help get us out of this hole as well.

Mark Thoma weighs in,
"I want to emphasise the sentence in the article that says, "Above all, adopt clear policies and act decisively", though I would add that clear evidence that the policies work may also be required. The reason evidence of policy effectiveness may be required is the erratic nature of policy to date, particularly from America's Treasury, and the sparse evidence that the policies adopted so far have been successful at stopping the downward spiral of the economy. My hope is that the actions of policymakers to date have not placed us in a Catch-22 situation where policies won't work until people believe in them, and people won't believe in them until they can see with their own eyes that there has, in fact, been progress. If that is the case, if recent policy mistakes mean that people have to see it to believe it, and if it's much harder to see it if they don't believe it, recovery could be a slow process."

Tyler Cowan agrees:
"I agree with Olivier Blanchard that fear and lack of confidence are major problems behind the current economic downturn. I also agree that the banking sector requires recapitalisation and that this is hard to do. But I dissent from his analysis in a few key regards.

First, to the extent that the real problem is fear, this militates in favour of placebo policies. By that I mean initiatives which appear bold and have great symbolic value, but which don't necessarily cost us very much.


Most of all, I don't think we are paying enough attention to the placebo idea. It is well known in the medical literature that sometimes placebos work as well as the drugs themselves. "

Alberto Alesino agrees too,
"BLANCHARD'S piece is absolutely on the mark regarding the analysis of the crisis. ... I fully agree with Mr Blanchard that the world is panicking above and beyond what is reasonable. (And incidentally, the comments of pundits who have seized on the crisis as an opportunity to criticise the market economy and spread fear of the Great Depression are adding unnecessarily to the panic.)"

Finally Ricardo Caballero also agrees,
"the main characterisation of the crisis and the policy prescriptions are right on the mark. Following Lehman’s demise, world financial markets have been ravaged by uncertainty and fear.


Thus, I believe we can go back to a world not too different from the one we had before the crisis (real estate prices and construction sectors aside), as long as the government becomes the explicit insurer for generalised panic risk."


Imagine, for a second, that instead of judging our progress as a society based on how many transactions involving money we undertake in a year, we measured it based on how much time we spent swimming in the ocean. So everything is going along fine, more and more people swim in the ocean for longer each year and the economists are happy until, one day, a couple of people are seen emerging from the ocean with limbs missing.

Suddenly, people become scared to go in the water. There are rumours of sharks. The amount of time spent swimming in the ocean falls and the economists are unhappy.

This brings us to the economists quoted above, who all agree that the amount of time spent swimming won't increase unless the uncertainty about the safety of the water is removed. So they brainstorm about various ways to persuade people it is safe to go back in, most of which amount to having the government guarantee that you won't come to any harm if you go in, and that it will pay your medical bills if any harm does befall you.

Not once do they stop to consider: What if there actually is a shark in the water? After all, something happened to those first victims and it wasn't a lack of confidence. If there is a shark in the water, then isn't the only solution to kill the shark first, and *only then* try to restore confidence?

Back to reality, what if resolving the uncertainty about the economy honestly means admitting that there is a shark in the water? That something triggered this crisis and that something hasn't been dealt with yet?

Could a concerted effort to prevent people from worrying that tech stocks were overpriced in early 2000 have prevented the bubble from bursting and prices coming back down to reasonable levels? Not likely. In the same manner, clapping harder won't undo the massive debt bubble that we have built up over the last 30 years.

Robert Shiller, the best of the bunch on this occasion, says, "Why should anyone trust the valuations banks put on their assets when these vary so much, from less than 50 cents on the dollar to almost 90 in the case of subprime mortgages? Private investors are understandably reluctant to commit more capital when it is unclear whether a bank holds enough toxic waste to render it insolvent."

Of course the reason people are unwilling to put a (true) value on the bank's 'toxic' assets is because doing so would resolve the uncertainty all right, but not in a good way.

If the economists above were really committed to solving the uncertainty regardless of the outcome, then that would be one thing, but it seems like what they are saying is that we should resolve the uncertainty by convincing people that all is well, whether it is or not.

Kind if makes you take every optimistic thing you read from an establishment figure with a grain of salt, doesn't it?

For example, "Bank of Canada Governor Mark Carney said there is little chance of deflation in the world’s eighth- largest economy"


"Economy will recover in 2010: Carney"

Not that I'm saying our central bank governor would lie to us for our own good, just that it seems to be a near unanimous opinion among mainstream economists that he should, that's all.

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Granite countertops, yes.

Science, renewable energy, no.

I know I covered this in my post on the budget already but I remain amazed that any sane, conscious person could decide that paying people to renovate their houses was a higher priority than genetic research or developing renewable energy sources.

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Wednesday, January 28, 2009

No Free Lunch

I met up with a friend earlier today, a friend who bought a house a month or two ago that needs a ton of renovations. I told him that since Harper had volunteered me to contribute $50* towards my friend's renovations, the least he could do was buy me lunch. Sadly, this gambit did not work. Perhaps I can trade my $50 for credit towards help with his renovations (e.g. get out of painting duty...)

* A rough estimate of my personal tax contribution towards the $1.35B granite countertop stimulus package.

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Tuesday, January 27, 2009

Almost forgot...

...About the dumbest idea in the budget which was the First Time Home Buyers Tax Credit.

If only there was somebody somewhere in the government who understood the first thing about economics they might realized that paying people to buy houses only drives up the price. It doesn't help first time home buyers - it helps existing home buyers.

Let me explain this slooowly. Prices are set by supply and demand. Increasing demand (through tax breaks for purchasing a home) will cause the price to rise. Since prices for houses are already set to whatever the market will bear, this tax break is a subsidy for those who already have a house as it will increase the price they get when they sell it.

If you want to help first time home buyers, stop trying to increase demand and instead increase supply, or, given that we already have too much supply, simply stop trying to increase demand and then stand back and let prices fall to their natural level (i.e. the one people can afford without subsidies from the government).


Update: I should add that if we were talking about some easily manufactured widget, then an increase in demand might just mean making more for the same price to meet the demand. But houses don't work like that, house prices relate more to what people can afford to pay than they do to the cost to build them.

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Federal Budget 2009, aka Thank God for the Coalition, aka The Future Can Take Care of Itself, thank you very much

Previous Federal Budget Posts:
2005: part 1, part 2, part 3 (I was keen, back in the day)

So, the budget.

1) First of all, for anyone who voted Conservative and feels betrayed by this 'betrayal' of conservative values, let me make clear the distinction between 'Fiscal Conservative' and 'Right Wing Government'.

Fiscal conservatism means not spending more than your income as well as paying down your debts while times are good.

Recent right wing government leaders have included George Bush Jr., George Bush Sr., Ronald Reagan, Mike Harris, Gordon Campbell, Brian Mulroney and Stephen Harper. Some of these people inherited deficits, some inherited surpluses, some governed through good times, some governed through bad times - they ALL ran budget deficits. Right wing government is all about cutting taxes, which is not fiscal conservatism, in fact it means reducing your income which is the opposite of fiscal conservatism

Ever since taking power a few years back, Harper and co. have been cutting taxes and increasing spending. While it's true that the economic downturn is hard on the government's finances, as pointed out at Accidental Deliberations, the forecasted deficit for the next 5 years of $85B is less than the combined total of the cost to the treasury of the gst cut + the tax measures in today's budget over the same time period.

People who refuse to adjust their preconceived notions that people on the right are responsible stewards with firm hands on the tiller while people on the left are starry eyed hippies who are still trying to get their head around the concept of a 'budget' are clearly slow learners, so let me help:

Right wing governments are not fiscally conservative
Right wing governments are not fiscally conservative
Right wing governments are not fiscally conservative
Right wing governments are not fiscally conservative
Right wing governments are not fiscally conservative
Right wing governments are not fiscally conservative
Right wing governments are not fiscally conservative

Got it?

2) Overall, this could have been a lot worse, hence the post title, 'thank god for the coalition' which scared the Harperites into acting at least somewhat reasonably with respect to the country's finances. As pogge notes, they'll likely go back to their childish ways once the budget is passed, but the budget is important, so my thanks to Layton, Duceppe and Dion for saving us from a plan along the lines of the disastrous Fall Update. Most of the spending measures are temporary, at least a few of them seem like good ideas and there's nothing here that's truly awful, so by my low expectations, I'd call it a relief.

3) Alas, this leads me to the great flaw in the budget which is: Climate Change, Peak Oil? Hello?

This would be a great time to start making the necessary investments to allow Canada to reduce its contribution to climate change, and thrive in a world running short on cheap oil. But there's very very little in this budget to address any of this. A huge opportunity missed, and one we're likely to regret in the future.

4) What's up with the up to $1.35B in government subsidies for people renovating their homes? Could someone from the government please explain to me why, because there is an economic downturn it means that I, as a non home-owner, should be subsidizing the granite countertops and expanded decks of my neighbours? I think I know more arguments for government intervention in the economy than most people, but I suspect that has got to be a new one. Stuff like this really suggests the Cons have no idea what they are doing or even what government is for.

It's as if they said, 'you want us to spend? fine we'll spend' and just started randomly coming up with ideas without any consideration for where government spending is appropriate or what future needs the country has.

Saying that reminds me that they did lay out 3 priorities for spending, of which #2 was
"Targeted. Measures that target Canadian businesses and families most in need will trigger the largest increase in Canadian jobs and output."

So as compared to people who don't own a house, it is homeowners who are 'most in need' and need to be targetted?

CalgaryGrit puts it well, "I can't help but think that the lack of focus stems from this government's refusal to recognize the problems we were facing until a month ago, and their refusal to accept that government can actually be a force of good in shaping the future of a country."

5) The Cons have now responded to some of the strongest economic conditions ever seen by cutting taxes, and to some of the weakest economic conditions we've seen by cutting taxes. Next time some right winger is arguing we need to cut taxes because the economy is strong/weak, tell them to stow it. While I'm on the topic, we'll need to raise taxes one of these days to put the government's finances back in order.

6) Memo to the Conservative government, we just had a housing bubble (you helped make it worse, remember?), government subsidies to build *more* housing is not a priority right now! In fact, it's the last thing we need.

7) As of this budget, the government will now be providing low interest loans totaling $125 billion to the financial sector (what the government refers to as 'purchases of insured mortgages' is in fact very low interest loans to the banks). But when they provide $4 billion in loans to the Auto sector at higher rates, "we are doing this with the knowledge that the automakers must change the way they're doing business in a very serious way and must bring their products on their costs into line with the market place."

8) As Mike notes it looks like Conservatives will have to now agree that Bob Rae was right all along. After all, if you look at the chart on page 58, it suggests that we should expect a recession that is nowhere near as bad as the one from the early 90's, and yet here the Conservatives are running a massive deficit. This chart also leads me to think that...

9) People, including the ones who wrote the budget, are still in deep denial about what is coming.

10) Does anyone know if there's any way to tell if the government will finance this deficit through borrowing or through printing money? I'd feel a lot more happy about this if they were going to print money. Right now we've got way too much debt in our economy and having government borrow to replace collapsing private borrowing won't help the overall situation. To get rid of the debt will either require destruction of our (credit) money supply likely leading to damaging deflation or printing money so that the money supply can stay stable while the debt collapses.

11) Most of the infrastructure spending depends on funds being matched by other levels of government. I can't speak for other municipal governments but Vancouver is already being stretched pretty thin by the economic downturn and has nowhere near the federal capacity to either borrow or print money. Thanks for nothing.

12) The chart on page 46 on the 'evolution' of private sector forecasts for economic growth is amusing. I always thought that forecasts were supposed to be a leading indicator, not a lagging one!

13) Unlucky number thirteen. I said it before, but it's worth repeating: wind energy? hydro? transmission? smart meters? the future? Apparently not, after all, who can afford to fight climate change or prepare for peak oil when there are granite countertops to be installed.

It would be nice to have a government that would be actively taking on the important issues facing the country (see Obama, Barack), not one where you just feel relieved that their budget is a mess and a waste rather than being a disaster.

The folks at Relentlessly Progressive Economics have a pretty good, relentless summary of the budget here.

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Friday, January 23, 2009

Stimulus Stories

I’ve been doing lots of reading over the last few months, trying to get my head around the current financial meltdown.

In my current thinking, which is likely to change as I continue to try and organize my thoughts, I see three stories that relate to the question of 'should we try to undertake a government stimulus and if so, how big should it be?'

This post lays out those three stories to provide some context for our current economic situation and perhaps sort out some of the different threads of the argument.

Story #1: The Counterweight

In this story, we have an economy that goes through periodic ups and downs. Because we would prefer things to be stable rather than having ups and downs, the government times its discretionary spending to offset these ups and downs.

When times are good, government runs a surplus and dampens economic activity. When times are bad, government runs a deficit and increases economic activity.

It’s a pretty simple story. The main concerns are 1) Does government surplus/deficit have the effect on the economy we think it does? And 2) Will government actually run a surplus during the good times to offset the deficits from the bad years, or will they just accumulate more and more debt.

One positive is that by spending during downturns, government can generally get more bang for its buck since things tend to be cheaper during a downturn. Since these things (like infrastructure spending) need to be done anyway, it is good long term planning to undertake them during downturns as much as possible.

Certain government programs such as welfare and unemployment insurance are called 'automatic stabilizers' because they naturally go up during hard times and go down during good times, providing the sort of counter-cyclical government activity that is desired in the counterweight story.

Given that Canada is in a downturn, this story suggests that a government deficit that will boost the economy during this downturn is a good idea. However, these types of recessionary deficits are usually just the ones that occur naturally when tax revenue falls and government social spending goes up in a recession. We don't normally pile a large additional 'stimulus' on top of the recession caused deficits.

Story #2: The Global Imbalance

In this story, the world is comprised of a number of countries, some of whom, like China, Japan and Germany (the savers), produce a lot more than they consume, some of whom, like the U.S. and the U.K. (the consumers), consume a lot more than they produce, and some, like Canada, that are pretty much in balance.

In order to make the payments balance, the savers use their extra money to buy up the countries of the consumers, investing in their stocks and bonds to generate a return in dividends, capital gains and interest payments. This process, however, can only go so far before it starts to break down and the consumer countries no longer have enough money to keep paying the saver countries the interest and dividends on all the investments the savers have made in the consumers country. Or as more typically happens, you reach a point where the savers get nervous that the consumers can't pay them back so they yank out their money and crash the economy of the consumers.

Eventually, one way or another, the consumers will have to consume less and save more, and vice-versa. Typically, you would expect the currency of consumer nations to fall, making their exports cheaper, their imports more expensive and rebalancing the situation (we can see this happening currently with the fall in the value of the British Pound), but this does not always happen soon enough to prevent a crisis and there can be barriers to this process (for example, savers might peg their currency to the currency of the consumer nation as China does with the U.S.)

In this story, it would be unwise for the consumer nations to take on more debt in an effort to sustain their consumption. It is, instead, the saver nations that should be trying to stimulate their economies so that their own citizens can take up some of the slack when the consumer nations stop living beyond their means.

Given that Canada is relatively balanced between saving and spending, this story has little relevance for us.

Story #3: The Stag Hunt

The Stag Hunt is a 'game' (in the game theory sense), that has the following characteristics:

There are two equilibrium situations:

1) A 'good' equilibrium where hunters catch deer, the most valuable game animal in the forest. Because the deer is elusive, catching it requires cooperation between the hunters.

2) A 'bad' equilibrium where the hunters don't cooperate, and are not able to catch the deer so they catch rabbits instead, which can be caught without cooperation, but are not as tasty and meaty as deer. Mmm, venison.

In the 'bad' equilibrium, the hunters know they could do better by working together to catch a deer, but because nobody can act on his own (you can't catch the deer without help) and because they can't be sure that if they go to hunt deer that others will help, it is safer to just catch rabbits, rather than going off by yourself to catch the deer, having nobody help you and ending up with nothing.

During the Great Depression, Keynes theorized that the economy resembled the Stag Hunt game (although of course Game Theory had not been discovered yet, so he didn't describe the situation in those terms). The economy had a 'good' equilibrium where people were willing to make risky investments because these had a reasonable chance of making a good return, because everybody else was also making investments, allowing money to circulate and the economy to reach its full capacity.

The Great Depression, per Keynes, reflected a situation where the economy had fallen into a 'bad' equilibrium, where people were too scared to make risky investments, and that because nobody had enough resources to act alone, anyone who did make investments would just lose their money and scare off other would-be investors even more.

In this situation, Keynes reasoned, the only way out was for government, the only entity in society with the necessary resources, to commit itself to doing so much investment that it could carry the economy by itself for a while. This would then encourage others to make investments since they would know that the economy was going to be all right since it was being sustained by government spending.

Once the 'good' equilibrium had been restored, then government could withdraw and allow the economy to continue functioning on its own.

It is as if a mighty hunter appeared who could catch deer by themselves and set off, boldly announcing their intention to do so, knowing that if their claim was credible, and that if deer catching was now seen as assured (or reasonably likely) then the other hunters would all come along to share the bounty. Once all the hunters were happily deer hunting again, the mighty hunter could withdraw and leave them to it, resting his or her weary steed for the next hare-brained crisis.

Under this story, the stimulus needed is not the sort of counter-cyclical balancing described in the counterweight story, but rather a massive, 'shock and awe' style stimulus that is enough to carry the economy almost on its own for long enough to persuade the private sector to join in. The historical view of this story says that it was the massive government spending undertaken to fight World War II that shifted the economy from the 'bad' equilibrium of the Great Depression to the 'good' equilibrium of the post-War years.

So the question for Canada is if we are in danger of slipping into the 'bad' equilibrium (I don’t think anyone would say we were there already). If the answer is yes, then we have a second question – can we pre-emptively stimulate the economy to prevent the transition to the lower equilibrium, or do we need to wait until the 'bad' equilibrium is reached and then try to stimulate ourselves out of it.

One of the risks here is that if the government tries to shift the economy from one equilibrium to another and fails (the people don't believe the government can catch the deer), we will have that much more government debt and be no better off (aside from now having whatever it is the stimulus was spent on). For consumer nations like the U.K. and the U.S., there is the added risk that the government will spook its foreign creditors running up all the extra debt, moving forward a crisis as people scramble for the exits.

Another risk is that it is possible that there were certain weak points in the economy that triggered the transition from 'good' equilibrium to 'bad' equilibrium and that the 'good' equilibrium is not actually an equilibrium any more and can not be achieved, or at least sustained, until those weak spots have been fixed. Based on the run-up to both the Great Depression and our current troubles, likely candidates for such weak points include, at the least, overly high debt levels and income inequality.

Given our current situation, an inadequate supply of cheap energy may be another potential weak point that prevents the 'good' equilibrium from being sustained.

What type and size of stimulus you support for Canada depends to a great extent on which of these (or some other) stories you believe to be operative currently and how you weigh the benefits and risks of each approach.

A note on game theory, the 'stag hunt' problem is quite similar to the better known prisoner's dilemma. The main difference is that in the prisoner's dilemma, the best possible outcome for an individual is for the other person to cooperate and for you to betray them. In the stag hunt, the best possible outcome is the cooperative one.

The effective difference is that to reach the best overall outcome in the stag hunt game, you only need coordination and trust, whereas in the prisoners dilemma you need coordination, trust AND some additional quality (you might call it 'loyalty' or 'empathy' - or, in a repeated game, 'payback') that makes you feel the pain of the other person so that you choose the overall optimum (cooperation) rather than the personal optimum (betraying the other player).

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Memo to All Would-Be Progressives

Government deficits are *not* your friend! They increase the percentage of tax revenue that must go to interest rather than program spending, they further the right-wing meme of ineffective government, they make it harder for people to see a return on their tax dollars, and they eventually lead to spending cuts justified by the need to trim the deficit.

Other than, 'I want to spend money and I want to spend it now', what good do deficits do that so many (although by no means all) progressives seem to support them?

Note: I am not referring in this post to the Keynesian argument about deficits to escape a liquidity trap, that is a separate discussion, I'm just talking about run of the mill deficits such as the one we are now in.

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Thursday, January 22, 2009


Remember back when the Liberals would budget prudently, include a cushion of a few billion dollars, generate surplusses during the good times and everybody used to get all upset that the surplus kept coming in a few billion dollars higher than they predicted?

I miss those days.

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Wednesday, January 21, 2009

Cheap Shots

Neil Reynolds, August 15, 2007, Globe and Mail:

"What's the best way to expand a welfare state, irrationally assuming for the moment that you want to expand a welfare state? Cut taxes. Especially cut corporate taxes. You will collect less revenue every time you nick a dollar but you will have many more dollars to nick - and you will almost certainly find yourself with more tax revenue than you know what to do with. Iceland is a good example."

Willem Buiter, January 21, 2009, Financial Times (London):

"Iceland’s largest three banks with border-crossing activities collapsed last fall, as did its currency. The three banks are in administration and new state-owned banks with a purely domestic focus have been set up. Strict capital controls make external borrowing all but impossible and discourage foreign investment. The country now has an IMF program.


Iceland’s government had to let the country’s three main banks go into administration because it did not have the fiscal capacity to bail out financial institutions with balance sheets amounting to 600-700 per cent of annual GDP. Any attempt to commit further government resources to the rescue of the banking system would have precipitated a sovereign default.


The excesses in Iceland during the past decade were greater than in the UK, but not qualitatively different. In both countries, the regulation of banks was laughably lax.


Households were permitted, indeed encouraged, to accumulate excessive debt - around 170 per cent of household disposable income in the UK, over 210 percent in Iceland.


Both countries permitted the real exchange rate of their currencies to become materially over-valued, more so in Iceland than in the UK, but still to a worrying extent even in the UK. The same version of the ‘Dutch disease’ - the crowding out of the non-financial internationally exposed sectors (exporting and import-competing) by the excessive growth of the financial sector and the construction industry - occurred in both countries, again to a greater extent in Iceland than in the UK, but to an highly undesirable extent even in the UK. Iceland’s gross and net external indebtedness are much greater than that of the UK, and its current account deficits during the years just prior to the crisis were much larger than those of the UK.

Both countries pay the price for the hubris of policymakers who believed that they had engineered the end of boom and bust and replaced it with perpetual boom. The risks associated with asset market and credit booms and bubbles were dismissed (”how can you be sure it is a bubble? Do you know better than the market etc.”). In neither country have the responsible parties (the prime minister, the minister of finance, the governor of the central bank and the head of banking regulation and supervision) admitted any personal responsibility for the disaster. Instead we are told tales of a once-in-a-lifetime calamity, coming at us from abroad, that ruined a perfectly sensible and sustainable set of domestic policies, regulations, rules and arrangements. As if!"

Neil Reynolds, January 9, 2009: Globe and Mail:

"Why Government Can't Stop Market Crashes"

The man really has no shame. But of course there are always going to be ideological hacks who move on blithely from failed prediction to failed recommendation and back to failed prediction without ever a word of apology, a reconsideration of their premises or a questioning of the ideology that blinds them. The question is why the Globe and Mail thinks one of these people should be one of their columnists.

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Tuesday, January 20, 2009

2009, You Should Have Taken the Blue Pill

Year end is always a good time, I figure, to step back and look at the bigger picture and see how things are going. To begin with, I want to review something I've covered before, but is worth repeating at least once more: the exponential function. No don't skip ahead, this is not complicated, and it's important.

If something grows exponentially, all that really means is that the bigger it is, the faster it grows. You can understand how this is a process that could accelerate over time, and eventually get quite out of hand. Get bigger, grow faster, which makes you bigger, which makes you grow faster, which makes you bigger, and so on.

The thing about exponential growth patterns is that they can have a long period of what looks like stability, but that the growth cycle gets out of hand and there is a sudden unsustainable burst followed by, in most cases, a crash.

This initial long period of relative stability can create the illusion of sustainability. The example that made this clearest to me is the example of a water lily which doubles in size every day. Eventually, the lily will occupy the whole pond and smother it, killing all other life in the pond. But how much of the pond will the lily occupy just one day before the whole pond is covered? Only half. And the day before, only a quarter. The end will come suddenly, after a long period where it seemed everything would be all right.

Exponential growth can not be sustained and the only way out is to lower the rate of growth somehow.

Consider the following chart of global population over the last few hundred years.

Image from here

You can see the pattern of exponential growth, the line getting ever steeper and steeper as growth feeds size which feeds growth and so on. And keep in mind that on top of this growth in population, our economy is premised on exponential growth in wealth per person. So we have an exponential growth piled on top of an exponential growth.

Clearly, a continuation of this level of growth was not possible, and thankfully, reductions in global birth rates (especially in China) have ended this exponential growth pattern in enough of the world so that global population is levelling out and may even decline at some point in the next century.

However, global population has so far been able to rise to about 7 billion and counting, without being brought down by famine, pestilence or some other limiting factor. In order to understand if we can maintain this record, we need to understand what has allowed us to continue feeding (almost) everybody and advancing civilization, in the face of such huge numbers of people on a finite planet.

Some would say it is simply the expansion and application of human ingenuity, an infinite resource, and that we therefore have nothing to worry about, and could handle a global population of 20 billion or 50 billion or 100 billion.

Although I agree that human ingenuity is important, I offer two caveats (with a third implicit caveat being that there probably should be more caveats, I just haven't thought of them).

1) As much as ingenuity is important, if that ingenuity can’t come up with a replacement energy source for oil we have big problems. With enough energy you can solve almost any problem. Short on fresh water? Pipe it over mountain ranges, extract it from the oceans, build massive dams and reservoirs and irrigation systems. Short on food? Use natural gas to manufacture fertilizer, scour the earth for potash, irrigate the deserts. You get the picture. But without a big surplus of cheap energy, none of these methods for expanding nature's bounty are all that feasible.

Even all the efforts to reduce our dependence on oil (metal wind turbines shipped halfway around the world, massive concrete dams with 1000's of miles of transmission towers, etc.) depend on significant amount of cheap energy to build and maintain.

Will we inevitably find a better replacement for oil as supplies run low? Can we maintain a global population this large and the current Canadian lifestyle with dwindling supplies of easily accessed oil and gas? These are questions we don't have an answer for yet.

2) At a certain point, ingenuity is overwhelmed. Even the most optimistic cornucopian would admit that an earth which has one person per square foot of land wouldn't be a pleasant or sustainable place to live. The question is, is the current 8 billion and counting already past that point? Lately the global problems suggested we've overshot our carrying capacity seem to be piling up faster than we can solve them and few think that the world could sustain everybody living the way people in Canada currently do.

We’ve seen the problems from acid rain, we've had (and have ) the depletion of ozone in the atmosphere. The steady collapse of fisheries around the globe as we move further and further down the food chain. Dead zones in the sea due to agricultural runoff. Climate change(pdf) due to greenhouse gas emission. Deforestation. Loss of biodiversity. Acidification of the oceans. Etc.

Of course we will take action to try and mitigate these problems but each one will be a battle that will absorb resources, and many of them can only be partially mitigated, some hardly at all, and as long as we try to maintain global population and consumption at ever increasing levels, or even maintaining the current levels, these problems are just going to come harder and faster. At what point are we spending most of our resources just mitigating the negative effects of our existence, and few trying to improve it. At what point does even devoting all of our resources just trying to preserve the status quo prove inadequate? Are we past that point already? Again questions we don’t know the answer to.

So, 2009. The environmental problems will continue to harry us, but it’s still early days on that front (I hope!). After helping to blow up the global economy in 2008, oil prices and commodity prices are a big question mark for 2009. Absent some of that old human ingenuity, we currently seem stuck alternating between growth that drives up commodity prices because we don’t know how to get them cheaply any more or high commodity prices that kill growth because the inputs to everything get too expensive. I suspect that they will generally stay low for most of the year as the economic news gets grimmer and grimmer.

And on the financial front, while I predicted that financial problems would be the primary unpleasantness in 2008, even a pessimist like me underestimated just how bad things would be for the financial world last year. It will be more of the same in 2009, I suspect, namely trillions of dollars in government money given to banks to try and preserve the unpreservable status quo of a high leverage high debt economy.

There is no shortage of question marks surrounding the fate of the financial world in 2009, with seemingly plenty of smart people on both sides of every one. One of the questions I see asked most often is whether we will have deflation or inflation (likely deflation in 2009, followed by inflation at some point in the future). Another is will the U.S. dollar serve as a refuge as part of a flight to safety, or will people lose faith in the future value of U.S. dollars leading to a sudden, rapid plunge in the value of the U.S. dollar (beats me, either seems very possible - but sooner or later the bubble in U.S. debt will pop).

As for Canada, in 2008, the commodity boom that marked the end of the last debt fuelled boom, combined with the delayed collapse of our housing markets relative to the rest of the world helped cushion Canada from the economic troubles affecting the rest of the world. Now its 2009 and our housing market is falling and commodity prices are fallen and the last bits of Canadian smugness that suggest that, even if its not different this time, its different here will be wiped away by year's end.

Still in a world of 8 plus billion people, where resources of all kinds are likely to be in short supply, a place like Canada with a (relatively) sound financial system, a (relatively) stable political system, a placid population and a high ratio of useful stuff to people should be able to do better than most places over the medium haul. Sadly, doing better than most places in 2009 is likely to be a very low bar.

A friend who's been through a few recessions in his day suggested in a recent email that this might be a good time to 'keep your job, save some money for a pinch and ride out the impending hard times.'

Sounds like good advice to me.

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Monday, January 19, 2009

Obama Takes Charge

Worst Case Scenario: Obama = Bush
Most Likely Scenario: Obama = Clinton
Best Case Scenario: Obama = Hadrian
What's Needed: Obama = Hari Seldon

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Thursday, January 15, 2009

Idle Speculation

Back in July of 2007 I predicted that, "prices will peak in Vancouver before end of 2008."

What's my point? None really, just that I was right.

Anyways, while I'm on the topic of speculation, here's an amusing marketing flyer release from a local real estate developer (via Vancouver Condo Info).

From the flyer:

"$150 million portfolio of prime completed real estate located throughout the Lower Mainland will be sold, at prices far below market value."


"What are the homes being discounted??
Aggressive speculators lined up overnight at launches to scoop up prime units and then could not flip them before completion. Many could not afford to complete and lost 15% deposits. Much of the available inventory is made up of these homes."


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More Humpty Dumpty Issues

Recently, I noted the confusions caused by the fact that two very different groups of people, 'newspaper economists' and 'academic economists' both go by the same name of 'economists'

Today, let's talk about another word that causes confusion due to being used to mean different things by different people: 'recovery', or more precisely, 'the recovery'.

You'll often see people, in particular economists, suggest in the newspapers (or wherever) that they expect 'the recovery' to begin at a certain point in time. The tricky part is that by 'the recovery' they mean the point at which GDP growth (shrinkage) has bottomed out and begins to improve again. But for the average person, recovery does not really happen until the job market improves.

For example, in the recession of the early 1990's, GDP growth bottomed out in either 1990 or 1991. But the job market was still terrible in 1994 and only really began to improve through 1995 and 1996.

I was planning to write more about this gap in nomenclature / expectations, but Jim Stanford over at Relentlessly Progressive Economics beat me to the punch by a few days, so I'll direct you over to his well worth reading post instead of going on further.

Just something to keep in mind when you read something about 'recovery' in the newspapers - it may not mean what you think it does.

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Tuesday, January 13, 2009

Sphere of Deviance

Via Atrios, an interesting piece by Jay Rosen at Pressthink on the role of the media in defining the boundaries of accepted, acceptable and unacceptable debate, and how the internet erodes the control of the media by allowing individual citizens and groups to connect directly rather than being passive receivers of the mainstream media.

With the provincial election coming up in May, and another referendum on changing our electoral system from the obsolete first past the post system to the single transferable vote system proposed by the Citizens Assembly, it made me think about the role the media plays in the debate on electoral reform.

One of the things I've always been unable to understand is just why the media is so opposed to electoral reform. In fact, one of the first posts on this blog (back in 2004!) concluded by asking, "What is it about PR [proportional representation] that leads columnists to write such absurd things? What are they afraid of?"

The reason I asked was because despite being opposed to electoral reform, most of the folks in the media seemed unable to put together a coherent explanation for *why* they were opposed, seeming to come to a conclusion first and then go looking for supporting arguments, much in the way of drunkards and lampposts.

Some of the journalists /columnists who oppose reform, Bill Tieleman comes to mind, are simply partisans who feel the reform will hurt their party and argue accordingly, but many of them seem to just have some instinctive reaction to defend the status quo.

After reading Jay's piece, I can see how in some ways that [defending the status quo, or the views of the establishment], is one of the most important functions the media has, but they're not aware of it so they do it instinctively, without even realizing what they're doing or why. I don't know if this insight can help the STV (Single Transferrable Vote) proposal get less hostile media coverage this time around, but maybe the greater strength of the internet (where support for reform is high) vs. the media now vs. 4 years ago will help shape the debate in terms more favourably towards reform.

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More on stimulus

Ian Welsh lays out some principles for a good stimulus plan. As always, what he say to say is worth listening to.

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Monday, January 12, 2009

Be Afraid...

Few things could scare me more than headlines about walking disaster, failed to the top, finance minister Jim Flaherty wanting an 'extraordinary budget' with 'extraordinary measures'.

Maybe he'll prove me wrong, but given that I still haven't had time to criticize the full list of boneheaded ideas in his last fiscal update, I'm not optimistic.

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Saturday, January 10, 2009

Canadian Stimulus

Let's accept, for a moment, that what would benefit the economy in Canada most at the present juncture, would be a stimulus plan where the federal government runs up a big deficit.

What would be the ideal form of such a stimulus?

1) You'd want to make sure that the stimulus was temporary because otherwise you'd be setting yourself up for recurring deficits when (if) the economy recovers.

2) You'd want to make sure the stimulus money was spent, because otherwise it wouldn't do much stimulating

3) You'd want to make sure the stimulus money was spent *in Canada* because we're not so altruistic that we want to run up our debts to stimulate other countries economies

4) You'd want the money to be spent during period in which the economy (GDP growth, employment) is in a downward trend. Otherwise you won't mitigate the magnitude of the downturn.

5) You'd want the money to be spent productively so that once the stimulus is done, there is something to show for the money spent, ideally something that can support future productivity gains to help pay back the money borrowed.

So let's consider some two of the main options being considered for a stimulus, tax cuts and infrastructure spending, starting with tax cuts.

Tax Cuts

1) Temporary? Fail. More than any other government policy, tax cuts are likely to be the hardest to undo when times change because of the powerful opposition to raising taxes.

2) Will be spent? Fail. Will vary depending on who gets the tax cut, but there's no way to ensure that the money given in tax cuts is spent, and the experience with the U.S. stimulus package suggested that much of it wasn't.

3) Will be spent in Canada? Fail. Money given in tax cuts will presumably be spent in Canada at the same proportion as income is currently spent in Canada, no more. And if you've ever been to a store, you'll notice that a lot of what we buy is manufactured abroad (although shipped, wholesaled and retailed in Canada).

4) Spent during the downturn? Pass. Tax cuts / rebates can be timed to occur when you want them to pretty precisely with little lead times.

5) Will the money be spent productively to leave future assets in place for future growth? Fail. Obviously some of the tax cut money may be invested but a lot of it will simply be consumed. Some may argue that lower taxes will always lead to stronger economic growth, but unless they can provide a shred of empirical evidence for this claim, I'd be inclined to discount it entirely.

So, 1 for 5 for tax cuts.

Now, let's consider infrastructure spending.

1) Will be temporary? Yes. Once the projects funded are completed, the funding will naturally cease.

2) Will be spent? Yes. The government can ensure the money is spent.

3) Will be spent in Canada? Yes. Obviously some components of infrastructure projects will be imported, but a higher percentage of the spending seems likely to occur within Canada for infrastrucutre projects vs. tax cuts.

4) Spent during the downturn? Fail - at least that it was opponents of infrastructure spending will warn. Personally, I'm not so sure, but more on that later.

5) Spent productively? Pass. Infrastructure is what makes this country work. Better roads, rails, power generation, communications, etc. will all enable better economic growth when (if) the economy recovers.

So the only argument in favour of tax cuts is a timing argument. But is it really true that government can't ramp up infrastructure spending quickly (or that the downturn will be so short that we have a short window in which to act).

Take the Dokie Wind Project, for example. What could be better for preparing Canada for the future than a project which cuts our greenhouse gas emissions, diversifies our power sources, lessens our reliability on fuel sources with potentially volatile prices and a limited supply? Yet the construction of the project is on hold due to a lack of financing. How long would it take for the government to step in with enough financing support to ensure the project can continue? Not long.

Also, I hear that the city of Vancouver has an opening for an infrastructure stimulus, sure to be spent before 2010...

Aside from the availability of lots of short term infrastructure spending options, we might also want to consider that this recession is likely to be with us for a long time so there might not be as much need for haste as people seem to think.

To me, the case for infrastructure spending over tax cuts is pretty much a slam dunk for anyone who's not a marketthink zombie, and that's not even considering that government needs to build / repair infrastructure at some point, so doing it during a recession when labour and material is cheap just makes sense (see the NDP construction of the 407 in Toronto during the 90's recession for example, their investment was likely worth 4 times what they spent less than a decade later, even without counting all the spinoff benefits from reduced travel times around the area.)

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Friday, January 09, 2009

The Trouble With Economists

So many disagreements and misunderstandings seem to arise from people using different definitions for the same word.

Take 'economists' for example. A little while back Stephen Gordon, himself an economist as far as I know, wrote a post entitled "Economists' fatal flaw: Diffidence". It's a short post which argues that economists didn't point out the housing bubble because it didn't fit their models and when the data doesn't fir their models, economists just stay quiet. He concludes by asking, "I wonder to what extent the world would be a better place if economists were as arrogant as non-economists claim they are."

Meanwhile, the other day saw a big headline in the Globe and Mail, "Economists' advice to Flaherty: cut taxes now"

The article starts,
"Canada's top private-sector economists have a message for Jim Flaherty as the federal Finance Minister prepares his critical recession-fighting budget: Cut taxes now, rein in spending later."

and later on...

"Mr. Drummond and others added that tax cuts now would have to be balanced in 2010 and beyond by a tightening of program spending, which throughout this decade has consistently grown faster than inflation and the economy.

"We do have to see these permanent tax cuts - that's really the only thing that will influence behaviour in the economy," agreed Craig Wright, chief economist at Royal Bank of Canada. "But in the out years, when we hope and think the economy will be in a recovery mode, then you can rein in program spending, because that's something that has been running quite rapidly."

The claims about rising federal spending that are made by these economists are easily refuted (for anyone who doesn't do business reporting for the Globe and Mail, at any rate) nonsense, as Erin Weir points out over at Relentlessly Progressive Economics.

But how to square this article with Gordon's theory of the diffident economist? How to square the group of economists in the front pages of the paper offering a series of right wing prescriptions supported by neither fact nor theory with the economist unwilling to point out a housing bubble because it doesn't fit his models?

You can't reconcile these two groups, because these are not the same economists. On the one hand, we have what we might call 'newspaper economists' who seem to function primarily as big business shills and see tax cuts, interest rate cuts and spending cuts as the solution to every problem whether it be boom or bust, surplus or deficit. On the other hand, we have 'academic economists' who take on the thankless and to date mostly unsuccessful (in macroeconomics, anyway) task of trying to understand economics well enough to build a theory of economics that will actually prove useful, occasionally blogging but generally leaving the public stage to the corporate, newspaper economists (although certainly the biases of the media towards simplistic partisan answers doesn't help with the relative coverage the two groups get).

There are a few exceptions to this paradigm, in particular Paul Krugman, but they're more of the exception that proves the rule than the norm.

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Thursday, January 08, 2009

American Stimulus Plan

XKCD provides a handy metric reference table for Americans.

Switching to metric would certainly involve a lot of money spent and employment provided. What better time than now?

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Monday, January 05, 2009

About that Green Shift

As a follow up to my post below, I wonder if Stephen Harper read this New York Times Op-Ed by two prominent right-wing economists calling for the U.S. to adopt a green shift and wondered why his ideological allies were trying to destroy the economy of their own country, or why they referred to the green shift policy Harper had demonized so thoroughly as a 'no-brainer' or why they referred to Harper's own chosen policy as a 'an enormous, hidden, tax increase'.

Update: Credit to Gillian Steward in the Star for picking up the same point. Maybe there is hope for the print media after all ... nah.

Update 2: I almost forgot, in addition to destroying the American economy, the Green Shift proposed by the right wing American economists in the New York Times will also threaten American national unity.

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Down With The Print Media

One of these days, I may or may not get around to writing a post on the ongoing decline of the newspaper industry covering topics such as, will newspapers disappear in their current form (yes) and will it be a good thing (probably).

A year ago, I likely would have been more favourably disposed towards the print media, but, as impossible as it might have seemed 12 months ago, the most recent year has lowered my opinion of them significantly.

Two of the main catalysts for this change in attitude were the media treatment of the coalition government (when the media was scared into showing its establishment roots, fronting absurd push polls, calling the NDP commies and screaming for daddy figures to ride to the rescue) and the media coverage of the Green Shift.

For example, consider this from the Globe and Mail's year end / next year look-ahead editorial, "The Liberals were all too happy to accuse the Tories of inaction [with respect to the economic crisis], but did not offer alternative policies so much as the promise of consultation, and refused to move away from their Green Shift plan despite how ill-timed a risky wealth transfer would have been."

"a risky wealth transfer" So, in what way was it risky? In all its coverage, did the Globe identify a single risk from the plan? What might such a risk be? We've had increases in gas taxes over the last 30 years many times, we've had cuts to income taxes many times. As far as I know there hasn't really been any particular risk to such moves.

And also "ill-timed" Why was it ill-timed? Because carbon prices were plunging? But wouldn't that be the ideal time to implement such a shift, to preserve the incentives to conserve? Because the economy was deteriorating? But what difference would the source of taxation matter to the economy - and to the extent that the shift was progressive in nature, wouldn't it mitigate the economic slowdown by putting more money in the hands of those likely to spend it?

The truth is, the person writing the Globe editorial didn't consider these questions. It never occurred to them that to use words that had an actual meaning in reality, they simply were looking to criticize the green shift, didn't want to point out that it was good policy supported by anyone who understood the issues and was unpopular thanks to demagoguing politicians who were amply enabled by the media, and simply picked a few empty words to fill in their sentence such as "ill-timed" and "risky", before moving on the next point.

Consider that this is the Globe and Mail, arguably one of the better newspapers in the country (it's a relative measure), and in their year end summary they have nothing but a few words of offhand, meaningless bs to offer with regard to one of the most important policy debates we faced this year.

As I said, this topic needs a more thorough coverage - I haven't really explained my full thought process in this post, I'm just typing out my impressions. It could be that this is all just sour grapes on my part that a policy I think is a good one was treated with disdain by the media. And maybe newspapers contribute enough of value that they're worth preserving (any suggestions what that value might be?). Or maybe whatever might fill the vacuum if they disappeared (crap like this) would be worse. But more and more I'm convinced that newspapers do more harm than good and that it will be a cause for celebration when they are delivered for the last time.

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Symmetry Watch #2

Mohican links to the end of year press release(pdf) from the Vancouver Real Estate Board. It is headlined, "2008 brought improved housing affordability to Greater Vancouver"

Somehow, even though prices rise most years, I doubt they have ever titled their year end report, "Year X Brought Deteriorating Housing Affordability to Vancouver!"

To be fair, nobody says the real estate board has to be objective about real estate, improved housing affordability is legitimately a good thing, and it's not a bad press release as these things go.

Anyways, sales were down 35.3% (to 24,626) in 2008 vs. 2007 while listings were up 13.9% (to 62,561).

The average one year change in prices for the greater Vancouver benchmark property was -10.9%, which isn't very good when you consider that prices were still rising one year ago, so the drop from the peak would be that much higher.

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Paul Wells has been doing a good job of telling it like it is over the last little while. In his most recent post he takes the Conservative government to task for their failure to appoint someone to head an inquiry into the deaths caused by listeriosis, linking it to a pattern of incompetence and inability to follow through shown by the Conservatives.

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Zeno Has Nothing On These Guys

The Globe Editorialists ponder an apparently perplexing paradox: On the one hand, Canadians have a higher propensity to save then Americans. But on the other hand, Canadians have more savings than Americans. A tough one, I know.

In the Globe's words,

"The difference here is not huge, but it is consistent and significant. For example, Canadians and American consumers are four percentage points apart when asked whether they intend to spend less in 2009; in Canada, 62 per cent said yes, as against 58 per cent in the United States. Other questions yielded similar answers.

The contrast is striking not only in the light of the comparative health of the Canadian economy as a whole. When, more specifically, the economic conditions of households in these two North American countries are considered, levels of debt and net worth are more favourable in Canada than in the U.S., which means that Canadians are paradoxically better able to spend, but less willing to do so."

It's a puzzler all right, we might need to invent another branch of mathematics to solve this one*.

This is part an editorial where the Globe chides Canadians for not doing their rock and rollpatriotic duty by taking on more debt and spending more money in order to keep the economy growing.

Says H & Mthe Globe,
"Canadians should spend wisely, but spend nonetheless. They might reasonably cut back on some immediate pleasures, but they should think seriously about taking advantage of lower or stable price levels. Pleasure may be compatible, however, with quality and durability; consider women's clothing, for example, the prices for which fell in 2008 in Canada."

I'd respond but someone has already said all that needs to be said in the comments,

"Wait a minute ... Americans basically CAUSED this worldwide problem by being too willing to spend more money than they had, getting into unsustainable levels of debt, and now it's a problem that Canadians are more cautious in their spending than the most reckless consumers on the planet?


On a final note, is it too early to nominate 'paradox' as one of the most overused words for 2009? It's been a perfect storm of paradox references in my recent reading.

* It took the development of calculus to solve many of the paradoxes posed by Zeno in ancient Greece.

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Speaking of Monopoly....

If I ever had the motivation to write a 100,000 word post about why intellectual monopoly (intellectual property, to some) does more harm than good, and should be scaled back dramatically, if not eliminated outright, it would look a lot like this, a book by Michele Boldrin and David Levine called 'Against Intellectual Monopoly'.

The short version is that patents and copyright cause more harm by hurting consumers via the restriction of the sharing of knowledge and contents that they create benefits by encouraging people to create more new copyrightable or patentable ideas/content, and that there are better ways to encourage innovation than granting perpetual (or near perpetual) monopolies to creators of such things.

Via Ezra Klein.

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Sunday, January 04, 2009

The Economy in 2009, Becuase We Don't Get Nine Lives, Nor Do We Always Land on Our Feet

A summary for the entire dogalogue of problems we are likely to see this year:

* The dogalyst of our financial problems: Too much debt backed by too little actual currency.
* A more indirect dogalyst of our troubles: Inability of our society to enforce the dogegorical imperative.
* Best description for the economy in 2009: A dogastrophe
* Next best description: Dogaclysmic
* Likely state of investors by end of 2009: dogatonic
* Sound made by any non-dogatonic investors: dogerwauling

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Friday, January 02, 2009

The Name of the Game is Right There on the Box

Before I take on the bleak prospect of considering the outlook for 2009, first a quote from perhaps the last person in the world you would want to play monopoly with,

Benjamin Powell, of the Von Mises Institute, writes, "What's Wrong with Monopoly (the game)?"

"The pervasiveness of monopolies in the game does not represent the situation in the real world. Every piece of property on the game board is essentially a monopoly; once the dice roll determines where a player lands, there is only one seller who the consumer must purchase from. The monopolies are easily obtained by purchasing land from the bank or another player. In the real world, however, consumers are rarely compelled to purchase goods from a seller—or if one seller exists it is because it has out-competed others over time. Even with one seller, consumers can always switch to substitutes or abstain from purchasing completely. That is not the case in Monopoly. Again, this is not a small matter. The game is wrong on the central point of economic decision making: who is in control of what is produced and how?"

I think any further comment on my part would be superfluous.

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