[jmherbener]

The federal government provided bailout funds to AIG of $182.3 billion starting in September 2008. These funds were used to buy toxic assets from AIG and its counter parties. In the initial bailout of $85 billion, $62 billion went directly to counter parties.

http://www.washingtonpost.com/wp-dyn/content/article/2010/01/23/AR2010012302832.html

As a condition of the bailout loan, the federal government demanded an 80% equity position in AIG. When AIG paid back the loan (and the warrants were exercised with the higher share price, if they were exercised) the federal government received $22.7 billion.

http://online.wsj.com/article/SB122156561931242905.html

So the “return” of $22.7 billion on an investment of $182.3 billion is 12.5% over four years. Private entrepreneurs, like Tim Cook, did much better. Society at large would have been better off if the government had left the $182.3 billion in the hands of private capitalists.

[jmherbener]

The argument against bailouts is that they supplant entrepreneurial decision making about production in society with political decision making. Entrepreneurs must economize for society at large to earn profits and avoid losses. By turning production decisions over to politicians, standards of living suffer, since their decisions are not subject to the test of profits and losses.

If the government had not bailed out AIG, then the inferior entrepreneurs who drove AIG into bankruptcy would have been supplanted by superior entrepreneurs who built and maintained their capital. Capitalists are the ultimate entrepreneurs in the market economy, funding superior entrepreneurs who earn profits and avoid losses and withdrawing funding from entrepreneurs who do not earn profits and suffer losses. The decisions of the superior entrepreneurs (who would have been put in place by the capitalists) would have been more profitable than the decisions of the inferior entrepreneurs (who were left in place by the politicians).

A rising stock price is no more evidence of a successful bailout than the creation of “green” jobs is evidence of the success of government subsidies to electric car manufacturers. To pass the test of profit and loss, a decision must generate more value in the chosen alternative than the value of the alternative given up.

Finally, the taxpayers will not receive a penny of the $22.7 billion. It will go to politicians who will use it to bid resources away from economizing uses by entrepreneurs in the market into their own inefficient political decisions.

[jmherbener]

1. The demand for money is the demand to hold money. People are building up their cash holdings by selling other assets and reducing their disbursement of income on spending. Demand to hold money does not affect interest rates. Along with the stock of money, the demand to hold money determines money’s purchasing power.

2. Yes, federal government borrowing has increased, but the net increase in demand for credit has been relatively small. The Fed has increased its holding of Treasury Securities from less than $500 billion in 2008 to almost $1.7 trillion today and it is adding $45 billion a month. Foreigners, mainly central banks, have increased their holdings from $3.3 trillion in 2008 to $5.5 trillion today.

My quote that you cite is not referring to the demand side, but to the supply of credit by bank fiduciary issue. I didn’t say there was “no demand” for credit, but only that demand for credit hasn’t increased sufficiently to start pushing up interest rates.

3. The Fed can directly manipulate only the Federal Funds Rate. It does this by providing more reserves to banks. For other interest rates to be affected by expansionary monetary policy, the banks must issue fiduciary media and create credit and supply it into the various credit markets. In normal times, banks do just that with additional reserves they obtain. But, in depressions they tend to hold reserves and restrain from issuing fiduciary media and creating credit.

[jmherbener]

Anyone who thinks that data can verify or falsify economic theory doesn’t understand what economic theory is (as Austrians conceive of it).

Economic theory demonstrates that if the money supply is larger with money demand the same, then the purchasing power of money would be lower. So there are two possibilities in the current situation. First, the monetary base is only part of the money stock and the relationship between the monetary base and the overall money stock is not mechanical, but depends on the actions taken by bankers. Since the crisis, they have been selling assets to the Fed in exchange for reserves (which are part of the monetary base) and holding the reserves in excess of what the Fed requires. As a result the money stock has not dramatically increased. Second, money demand has risen. People tend to hold more money during a depression to bolster both their liquidity and solvency.

[jmherbener]

First, he seems to suffer from a mercantilist fallacy, that money is wealth or spending equals prosperity, which is the Keynesian version of the fallacy. Prosperity depends on our physical productivity (which depends on our resources, technology, capital capacity, labor skills) and not at all on our aggregate spending.

He gives no account to how the market adjusts to changes in people’s demands. If people’s time preferences fall and they reduce their consumption spending (save) in order to increase their investment spending, then resources would shift out of producing consumer goods and into producing capital goods with no ill effect on the overall economy. If people increase their demand to hold money and therefore reduce both their consumption and investment spending, then prices of all goods, both of outputs and inputs, will decline. The smaller amount of aggregate spending will still be sufficient to buy all the goods produced. The profit of production processes will be unaffected.

Second, he denies scarcity. He claims that government spending creates more total employment (and presumably, more materials and more machines and more factories for the workers to work with). In reality, resources shift away from other alternatives and so there is no net increase. Even in depressions, there are reasons why owners of producers goods are holding them back from immediate employment in order to put them to other employment in the future. Robert Higgs has a famous paper on this point:

http://www.independent.org/pdf/tir/tir_01_4_higgs.pdf

Total spending on infrastructure is a fraction of the government’s budget. In 2011, the federal government’s spending was $3,600 billion. It ran a budget deficit of $1,300 billion. Spending on infrastructure (highways, streets, transportation, power, water, and sewer) was around $130 billion.

Moreover, infrastructure projects are notoriously wasteful. If half the money government spends on infrastructure is wasted (paid to workers to stand around watching) how does it make us more prosperous? Private entrepreneurs could have produced goods twice as valuable with the same money expenditures.

Third, he denies the economic theory demonstrating the efficiency of entrepreneurs making production decisions and the inefficiency of government bureaucrats making production decisions.

He misdirects attention from the primary to the secondary effects of debt. The primary effect of debt financing of its expenditures by the government is that command over resources is transferred from private hands to the government right now in the present when the debt is sold by the government. Decisions over the use of resources are no longer made by private entrepreneurs but by government bureaucrats. Prosperity suffers. The secondary effects of who winds up holding the debt and what happens when the debt is paid back are less important.

[jmherbener]

Mises has a broader conception of rationality than the typical neoclassical economist. Action is by nature rational for Mises. But neoclassical economists accept the narrower concept of the rational choice model.

http://en.wikipedia.org/wiki/Rational_choice_theory

[jmherbener]

I’m saying that the burden of proof is on the proponent of statistical analysis. He must demonstrate that Mises’s criticisms are incorrect and that statistical analysis of the data of human action renders better understanding of historical events than what Mises called specific understanding. On the latter, look at Mises’s Theory and History:

http://library.mises.org/books/Ludwig%20von%20Mises/Theory%20and%20History%20An%20Interpretation%20of%20Social%20and%20Economic%20Evolution.pdf

[jmherbener]

When mainstream economists use the phrase rational self interest they usually mean that a person uses suitable means (that’s the rational part) to attain ends that he perceives as beneficial (that’s the self interest part). Adam Smith famously postulated that we owe our supper not to the benevolence of the butcher or baker but to their self interest. In other words, in the market people act to benefit others out of regard for their own benefit.

Mises pointed out that this distinction between self interest and other interest isn’t relevant for the economic theory of human action. All we need is the distinction between the higher value of the chosen alternative and the lower value of the alternative not chosen.

Take a look at the section in Human Action on Rationality and Irrationality, pp. 18-21.

http://library.mises.org/books/Ludwig%20von%20Mises/Human%20Action.pdf

[jmherbener]

I agree with Mises’s criticisms of econometrics. He makes two main points. First, it isn’t possible to formulate economic propositions as mathematical functions because there are no constants in human action. Everything is a variable. So it is a mistake to postulate C = a + bY for example. Second, human action is subject to case probability, which has no numeric expression, and not class probability.

It seems to me that the burden of proof is on those who claim that econometrics renders either theoretical or historical truth.

Here is a recent example of insightful historical analysis without econometrics:

http://mises.org/journals/qjae/pdf/qjae15_1_1.pdf

[jmherbener]

Here is an Altman NYT piece on the wealth tax:

http://www.nytimes.com/2012/11/19/opinion/to-reduce-inequality-tax-wealth-not-income.html

He seems to be arguing that inequality of wealth polarizes the social classes and that can lead to reduced productivity. The evidence he cites for this is over the last twenty years wealth inequality has risen dramatically (while income inequality has not) and economic production has stagnated. What he doesn’t admit is the reason that income inequality has not change and wealth inequality has is the Fed induced asset boom. The rich hold much bigger investment portfolios than the middle class or poor and so their wealth explodes during booms and collapses during busts.

Also, he claims people in the middle class would not pay anything under the wealth tax and so they would be in a better position be productive under a wealth tax compared to an income tax. So, he would say that the wealth tax will make the pie bigger than it is with an income tax.

The big mistake in the argument he makes in the NYT piece is his claim that “wealth inequality distorts economic opportunity.” Regardless of a person’s circumstances, his economic opportunities are always greatest if the market is unhampered. Then he is able to buy from sellers who are willing to offer the lowest prices and sell to buyers who are willing offer the highest prices. People in a market live comfortably We all live comfortably because of the capital structure that has been built up over the decades by the saving of capitalists and investing of entrepreneurs. The bulk of the greater productivity rendered by working with capital goods goes to workers, not the capitalists or entrepreneurs. Roughly 70% of National Income goes to labor, 4% to capitalists (interest) and 15% to entrepreneurs (profits):

http://www.gpo.gov/fdsys/pkg/ERP-2012/pdf/ERP-2012-table28.pdf

In 2011 IV quarter at an annualized rate (billions of $):

National Income = 13,430.9
Employee Compensation + Proprietors Income = 8,250 + 1,113.7 = 9,363.7
Corp. Profits = 1,970.1
Interest = 535.7
Rents = 406.3

[jmherbener]

Here are a few sources to consult:

http://library.mises.org/books/Murray%20N%20Rothbard/The%20Origins%20of%20the%20Federal%20Reserve.pdf

http://library.mises.org/books/Murray%20N%20Rothbard/Wall%20Street,%20Banks,%20and%20American%20Foreign%20Policy.pdf

Also, James Grant’s book, Money of the Mind.

[jmherbener]

What Adam Smith was trying to illustrate with his metaphor of the invisible hand was that it doesn’t matter if businessmen have no intention of helping other people. To succeed in the market and thereby help themselves, they must help others. He softened the view of Bernard Mandeville in his Fable of the Bees in which Mandeville argued that private vice is necessary for provision of the public good. “Greed is a necessary evil” as you put it.

Greed is certainly not a necessary evil in society. The market economy operates fine whatever motives people have. They can be greedy, like Donald Trump, or altruistic, like Mother Teresa. All that is necessary for the market economy to function is that we are able to give each other monetary incentive. Consumers do this by buying or refusing to buy products. Entrepreneurs do this by offering or refusing to offer monetary compensation to acquire producer goods. Monetary incentives, as opposed to barter trade, are necessary for economic calculation, But the motive to pile up money, i.e., greed, is not.

Consider historical examples. The fastest growth in the American economy was in the late 19th century. But Americans were certainly less greedy and materialistic back then than now. The fastest growing economy in the world over the last thirty years has been the Chinese. But nobody claims that what happened to spur this grow was massive greed overcoming the Chinese people. Instead, a better performing economy comes as a result of a more market oriented economy.

[jmherbener]

Public utilities are creatures of the state. It’s unlikely private enterprise would have built them in their current configuration. So it’s not a failure of the market that they cannot operate as a normal business. The same is true of many government supported enterprises, e.g., central banks and fractional-reserve commercial banks.

Here is a brief history of regulation of public utilities.

http://www.nber.org/chapters/c9986.pdf

That issue aside, the unstated premise of your inquiry seems to be that it would be socially harmful if private enterprise resulted in a single seller of a gas or electricity in each local area. But that’s not true. The market doesn’t exist to favor consumers over producers, The market is concerted effort, the attempt of all of us to arrange a division of labor to best satisfy our preferences. If a single enterprise supplies the entire demand for some good profitably, then that arrangement is efficient. Even if one can imagine other arrangements that favor buyers more than sellers or sellers more than buyers,

The way the division of labor might have emerged in power generation within the free market goes as follows. There is a group of capitalists and entrepreneurs who want to build a power generating facility and sell the power to customers in a small community. Currently the customers generate there own power or appeal to other market produced sources of power. For example they chop down trees and burn the wood to heat their homes or they power their lanterns with kerosene produced by a company. To transmit the power produced in the generating facility, the entrepreneurs have to buy land for the facility preferably in the most advantageous location and lay transmission lines to customers’ homes. To do so, they must pay the owners of the land upon which they plan to build and they must pay to obtain permission of the owners of the land upon which they plan to to lay transmission lines. The owners of the land can then negotiate favorable terms for the price of electricity since the power company cannot sell to them without transmission lines.

The same principle would apply today if power generation was privatized. Homeowners would then own the transmission lines on their property and be able to negotiate favorable terms with power companies. If power generation were still enormously profitable, then entrepreneurs would have monetary incentive to develop alternative technologies that could generate power onsite at each house, like hydrogen fuel cell electricity or propane powered heat.

Undoubtedly, if the state had stayed out of power generation, the system would look much differently than it does.

[jmherbener]

The demand for credit has fallen but the demand for money has risen. This is the tendency in every bust. People borrowed too much during the boom and so their demand for credit declines. At the same time people anticipate a decline the price of assets they acquired during the boom and so their demand to hold money increases. The effect is both low interest rate (from the reduced demand for credit) and low price inflation (from the increased demand to hold money).

As you say, the Fed’s QE1, QE2, and QE3 have been bailouts to financial institutions. The Fed bought their bad assets (or claims to assets) and paid with cash (technically, checking account balances at the Fed). This made the financial institutions both more solvent and more liquid. If banks use their excess reserves as the basis of issuing fiduciary media, then the money stock will explode and serious price inflation will result. But until banks use their excess reserves to increase the supply of credit by issuing more fiduciary media, the conditions in the credit market have not changed.

[jmherbener]

Indeed, that’s correct.

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