Shiller Op-Ed Wants Big Government to Reach for the Unreachable Stars

Now that the Left has achieved its long-sought goal of nearly complete control over the delivery of medical services in the United States, it looks for the nonce like a spent force. Evidence of this comes today from the electronic pen of the Yale economist Robert Shiller. In an op-ed for the New York Times titled The Survival of the Safest, he goes into a tiresome and partly inaccurate discussion of labor markets being inflexible re wages, wanders around with some irrelevant anecdotes, and then demonstrates that he has no real ideas anymore by suddenly saying only at the very end of the piece:

Sometimes the private sector needs help from the government, and this is one of those times. We need to break the cycle of protracted unemployment and sagging morale through big government programs to create millions of jobs.

I read the article looking for insights and facts. When I came to that end, I gave a mental "Huh?". I was disappointed. I want icons such as Shiller to come up with brilliant ideas that challenge my (different) philosophy. That's how societies improve themselves, with the honest exchange of ideas on how to improve matters.

One of FDR's accomplishments was that his team came up with specific projects that benefited the country, whether it be post office (re)construction, electrification projects, and whatever else. There was not a lot of non-welfare payment to people to just sit there, complaints of payments to wasteful leaf-rakers by critics notwithstanding.

Dr. Shiller echoes the Obama "stimulus" lead by vaguely proposing that big(ger) government will help save our economy. But where are the specifics, Dr. Shiller? Do more roads urgently need repaving? Should government put more unemployed auto factor workers back to work making more autos that American buyers are too tapped out to afford? He does not say. If he had some great ideas, such as inventing the Internet or creating an Interstate Highway System, he would say so. He doesn't, and thus we conclude that he is bereft of any ideas other than that the "aggregates" would sure look better if big government got even bigger.

Dr. Shiller co-authored the book Animal Spirits last year with George Akerlof (Janet Yellen's husband), who is a Nobel Prize winner in Economics. I reviewed this popularized collection of Keynesian thinking for Naked Capitalism. Among many other liberal tropes, the book repeats the idea that workers are still in the habit of falling for the "money illusion"- that they are happier with, say, 4% raises (taxable) and 3-4% inflation than no raises and no inflation. Haven't economists realized that we're wise to that game? It only works when people expect prices to revert to normal (flat to down due to productivity gains), as was common under a gold standard. I Emailed Dr. Shiller for the evidence that this money illusion actually is valid; unsurprisingly I have not heard back from him.

In 1994 and for a few years thereafter, Republicans seized the Perot mantle and delivered balanced budgets and welfare reform. They then ran out of ideas, proved that their term limit cause was a sham, and joined with the Clinton-Rubin axis to begin looting the country. The Democrats swept to Congressional power in 2006 in good measure by pointing out Republican corruption. Since coming to power they have also proven themselves feckless. Now they are reduced to stalwarts such as Dr. Shiller fooling no one but the Party faithful by hiding his key policy point till the last sentence of an op-ed in the liberal party's #1 newspaper of record. Somehow I don't think many votes were swayed by this piece.

The current political woes of the Dems are compounded by the publication of "Obama's War" by Bob Woodward. As this blog has been pointing out for many months, the Pak-ghanistan War is going badly for the U. S. Unlike the Viet Nam War to which it has so many parallels, it is being ramped up in difficult economic times with the warring country (us) in a deteriorating fiscal position. The time-honored way to pay for wars even in good economic times such as the 1960s is with inflation; in worse times, it's a no-brainer.

So we look to a have an LBJ-type president, though without either his outsized persona and knowledge of Washington. We have both big social changes and a deteriorating surge in Asia. And now we look to have the other party getting close to being able to demand a bigger piece of the spoils. Both parties want to point to greater employment, and absent another major economic downturn, they want the private sector to accomplish this. Thus both parties want a weaker dollar, and will swallow higher inflation, which they will blame on OPEC, hot Russian summers, the gods, and anyone but themselves and their order-takers at the Fed.

I'm therefore looking for stagflation within the setting of a chronic mild depression for the middle class. In other words, back to the 1940s (without WW II) and the 1970s. Not that the markets haven't moved in that direction already. From an interest-rate standpoint, we're in the late 1930s or 1940s; rates are low and have yet to trend upward on a long-term chart.

On this reasoning, I have expanded my weak-dollar-themed investment purchases to include oil. Given that growth is strong in many parts of the world, I purchased two long-favored stocks, Apache (APA) and Helmerich & Payne (HP). These companies' charts are relatively trendless. Time will tell.

The ancien regime in Washington has lots of life left. It controls the press (the media) and more importantly the printing press and the enablers of said press, namely Big Finance. My speculation is that the era of Big Government is peaking for a while, but the era of big spending and big-time money printing will continue until the foreign military adventure(s) cease and the neo-Perot balanced budget movement gains traction, which is quite a big "maybe".

Individual investors who simply want to secure a reasonable financial future have been reduced to speculators by the influence of inflationists such as Dr. Shiller and his Krugmanite cohorts, who appear never to have encountered an economy that does not call for bigger government, with increasing cumulative deficits as far as the eye can see, and far beyond. As Ralph Kramden might have said, Ad astra, Alice; we're leaving the moon behind!

Copyright (C) Long Lake LLC 2010

Prices Surging in Britain Likely Foreshadow the Same in the U. S.

Bloomberg.com reports that U.K. March Inflation Accelerates More Than Forecast. Here are some details:

Consumer prices climbed 3.4 percent from a year earlier, compared with a 3 percent increase in February, the Office for National Statistics said in London today. . . On the month, prices increased 0.6 percent. . .

“We have upward pressures from commodity prices and we have yet to see full impact of past weakness of sterling filtering through,” Nick Kounis, chief European economist at Fortis Bank Nederland NV in Amsterdam and a former U.K. Treasury official, said in a telephone interview. “We’re going to see above target inflation persisting in coming months and our base case is for the Bank of England to raise its rate in August.” . . .

Inflation accelerated due to higher prices for gas, fuel, air transport and food, the statistics office said. Transport costs rose 11.3 percent in March from a year earlier, the most since the series began in 1997. Overall inflation has exceeded the central bank’s 2 percent target for the last four months. . .

Core inflation, which excludes costs of energy, food, alcohol and tobacco, unexpectedly accelerated to 3 percent in March from 2.9 percent in February.

The U. S. has been following the same policies following the same sort of housing-centric financial bust as the U. K. The U. S. leading economic indicators were reported yesterday to be at a record, and up more than anticipated. Fed and Federal economic policies remain pro-growth. Why should we not expect the same sort of price increases here that Britain is now seeing?

To that end, gold is rebounding on schedule from its options expiration swan dive two trading days ago. Growth precious metals such as silver and platinum are up more than gold on a percentage basis. Over a full boom-bust cycle, structurally gold is signaling that it will end up stronger than those metals, which are already up much more from their 2008 lows than is gold. Short-to-intermediate term, however, gold:silver and gold:platinum ratios on a 5-10 years trading basis favor silver and gold.

In the 2009 book "Animal Spirits" by Akerlof and Shiller (Democrats), these noted economists continue to promote the benefits of price illusion in keeping the proletariat content. In other words, a wage increase of 2% with general price increases of 4% is supposed to be better accepted by the great unwashed than a wage decrease of 1% and a general price increase of 1%.

This is of course absolutely true for debtors when the principal is unadjusted for inflation. The problem of course is the floating interest rate and the general need of U. S. debtors to stay in debt; thus in effect the principal tends to float as well.

The main point though is that government policy is favoring inflation from a variety of directions. Interest rate increases are coming. The longer they are delayed, the more the precious metals have a tailwind.

Copyright (C) Long Lake LLC 2010

DoctoRx Reviews "Animal Spirits" on Naked Capitalism

Readers may wish to visit http://www.nakedcapitalism.com/ and scroll down to find a guest post by me on the book "Animal Spirits", or click directly to that post by clicking here.

This invited guest post is a follow-on to the May 10, 2009 EBR post titled Yves Smith, "Animal Spirits", and the Big Lie Technique.

Yves Smith, proprietress of Naked Capitalism, requested that I not comment on her in this book review she posted today; therefore the reworked version that more thoroughly focuses on the book rather than a theme.

I am beginning a review of "Wall Street Under Oath", by Ferdinand Pecora, with a focus on the current financial crisis rather than on the 70-year old book per se, and anticipate that this may also receive an airing on NC.

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Yves Smith, "Animal Spirits", and the Big Lie Technique

One of the important moments in the financial blogosphere occurred at the end of a lengthy and impassioned post by Yves Smith at Naked Capitalism, where she opined:

The dishonesty of this crowd is just breathtaking. The Bushies were blatantly high handed, while Team Obama prefers the Big Lie and assumes we are all too dumb to see through it.

Unfortunately, the financial and business has become political. Yves is hardly a right-winger; for her to use that terminology for a candidate who she fervently hoped would do the correct things is sad and shocking. (And appropriate!)

In that context, please consider the points made in a supposedly important book by two noted economists: a Nobel Prize winner- George Akerlof- and the even more famous Robert Shiller- in the popular book "Animal Spirits".

The book's subtitle is "How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism". Allegedly this is an Important work (for a popular economic tome). Perhaps within academic economics, it is worth reminding one's colleagues that Adam Smith and other empirical economists such as Keynes, who all theorized in words (not that Keynes did not also reduce his theories to equations) that at the root of economic actions are humans with emotions and non-rational expectations etc. etc. To non-economics such as a physician, however, this "insight" is jejune. of course individuals make non-rational decisions. How could one think otherwise?

The point of this post is how political "Animal Spirits" is, how mainstream it is, and how misguided it is.

Let us get right to the point. The book praises Asian economies for emphasizing saving. It ascribes the amazing long-term growth of the Singaporean economy to forced, massive savings. Yet it discusses the current American economic difficulty with a complete disregard to this philosophy:

The overwhelming threat to the current economy is the credit crunch. It will be difficult and perhaps even impossible to achieve the goal of full employment if credit falls considerably below its normal levels. (P. 86)

DoctoRx here. It's not clear if the authors are referring to the absolute level of credit or the growth level of credit.

The authors then go on to ascribe the current alleged credit crunch- which as I have previously blogged (citing such sources as the New York Fed to prove my point), only exists in relation to the loosest, most irresponsible granting of credit in generations- to a loss of animal spirits:

The segment of the financial system that initiated loans, and then passed them on, was fragile. It fell. In terms of our animal spirits, confidence disappeared. People became suspicious of transactions that they had previously undertaken to the tune of trillions of dollars. (P. 90)

DoctoRx here. The context of this passage makes it clear that government must cure the populace of this decline in animal spirits, of loss of confidence. How? With a hair of the dog strategy:

On pages 90-92, the authors have effusive praise for the Fed/Treasury solution of the Term Asset-Backed Loan Facility (TALF). They say (P. 92):

More generally, TALF shows us that there are two sides to creative finance: It may have gotten us into this crisis. But its genius may also get us out of it. (Emph. added; P. 92)

What is the "genius" of TALF? Basically, banks get to make a great deal of money with minor downside, with the Fed and Treasury taking substantial risk for limited upside. This is "genius"?

Now we get back to the beginning of this post. The entire set of actions of the government, which has really included the formerly-independent Fed ever since the Bear, Stearns/JPMorgan Chase bailout of March 2008, has been based on the combination of "high handed" and "Big Lie" tactics.

Why do I pick on Shiller and Akerlof? Well, consider that Dr. Akerlof is the husband of Fed Governor and Democratic stalwart Janet Yellen, and the authors have a classic 1960's Tobin-type liberal bias:

This had been the vision in prev ious generations of those who established central banks: the role of central banks is to insure the credit conditions that enable full employment. (P. 90)

Having recently finished reading Niall Ferguson's "The Ascent of Money", I would have to call that statement a Big Lie as well. The evolution of the Bank of England into a central bank was most assuredly not to insure full employment for the subjects of the Crown. It was much more to help finance wars, imperialistic expansion, and other matters. Similarly, while the origins of the U. S. Federal Reserve are a bit controversial, full employment in the U. S. was for the most part a given before the Great Depression (though the level of wages was another matter). The country in those days was much to busy growing and much too rural not to use more workers somewhere to do something. From the New York Fed itself on the creation of the Federal Reserve in 1913:

The Federal Reserve Act presented by Congressman Carter Glass and Senator Robert L. Owen incorporated modifications by Woodrow Wilson and allowed for a regional Federal Reserve System, operating under a supervisory board in Washington, D.C. Congress approved the Act, and President Wilson signed it into law on December 23, 1913. The Act, "Provided for the establishment of Federal Reserve Banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes. (Ed: This post from the NY Fed lacks a close to the quote mark; alert readers who noticed the missing "end quote" should complain to the Fed!)

Akerlof-Shiller's "full employment"? Think Humphrey-Hawkins, doctors, not Nelson Aldrich and buddies.

From bogus "stress tests" and overvalued "legacy" securities, extending to the noted academics Robert Shiller and George Akerlof, we are besieged by lies large and small and political agendas everywhere.

The good government types found on the blogosphere, such as Yves Smith and many other such as Mish, Barry Ritholtz, Jesse and Simon Johnson, are powerless voices in the wilderness. Even the President who they by and large supported as a candidate has dissed them, saying that his administration pays no attention to (mere) bloggers.

And so Big Finance continues its primacy, and the culture of Serfing USA, with a government insistent on more and more debt even as the citizenry tries to escape its own personal debt, uses every tool of modern persuasive communications up to and including the Big Lie technique to continue to enrich the Merchants of Debt even as those companies such as auto manufacturers that actually make useful physical products are left to die and ordinary people who believed the Big Lie that house prices never decline and were therefore placed in overpriced homes by the Merchants of Debt are sent to tent cities to rot with no help from the Party of Franklin Delano Roosevelt and while the financiers of this disaster not only keep their estates and fine art purchased with the proceeds of these nefarious transactions but continue to receive all the fruits of this productive nation that Washington, D.C. can provide.

Can all this really be occurring for some paltry campaign contributions?


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