Quote of the Week

...from The Economic Consequences of the Peace by John Maynard Keynes:

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”

“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

In this book Keynes discusses likely consequences of the peace treaty signed after World War I. Keynes shows remarkable foresight in recognizing that the burden of restitution placed on Germany and Austria-Hungary was so great that it would lead to further war in the future. There are many timely concepts within this book which are important for a peaceful resolution to the current European crisis. The passage above, however, is interesting given the recurring requests in the US for the Federal Reserve to implement higher inflation targets.

Although many people today may be quick to write off any ideas stemming from Lenin, this description of inflation is particularly telling and was accepted by Keynes. As I noted in Higher Inflation Displays Bad Economics, “it should be apparent that inflation encourages the accumulation of debt and benefits those possessing and producing goods.” A policy of higher inflation may therefore exacerbate the current wealth disparity that many proponents of this policy consistently argue against. Frédéric Bastiat, in Essays on Political Economy, observed that inflation is a policy for which the “immediate consequence is favourable, [but] the ultimate consequences are fatal.” Problems with the US economy clearly still exist, but I remain convinced that Inflation is NOT the Answer.

Points of Public Interest

1. Why Limiting Itemized Deductions (Still) Makes Sense - My former professor, Diane Lim Rogers, offers her support for a proposal to limit itemized deductions to a 15 percent rate. This policy will simultaneously increase the progressive nature of income taxes, substantially reduce total tax expenditures and raise revenue.
2. The Fed Is Misleading Congress About Europe - Warren Mosler, a founding member of Modern Monetary Theory, argues that the Fed’s dollar swap lines are unsecured lending and should therefore be the responsibility of Congress.
3. Philip Pilkington: Is QE/ZIRP Killing Demand? - Pilkington describes the counterproductive efforts of Fed policy. Milton Friedman also believed ZIRP (zero interest rate policy) would restrict demand as I outlined in Deflationary Monetary Policy.
4. The Liberalism of Classical Liberalism - Peter Boettke tries to correct some typical misrepresentations of classical liberalism with a good dose of historical background.
5. Show Me the Daylight 'twixt Sanction and Tariff - Samuel Wilson considers recent trade sanctions against Iran and China, and why the two are viewed in different lights by Americans.
6. The Future of Economics - Steve Keen, a leading post-Keynesian, makes a case for incorporating disequilibrium, dynamic modeling and emergent properties into the core of future economics.
7. The European Crisis Deepen - Peter Boone and Simon Johnson, former IMF Chief, explain why current optimism is likely unwarranted and how the realistic end may include a break-up of the Eurozone.

Don't Rush to Buy a Home!

During the past week a couple of my friends and family asked whether or not I was considering buying a home in the near future. To give a quick bit of background, I’m approaching (or in) my late 20’s and was recently engaged. I’m also fairly confident in plans to live within the DC Region for at least several more years. Given all of the discussion about home values, interest rates and the American dream, I thought expressing my own views on the current housing market would be helpful.

Based on conversations and reading over the past several months, the general opinion seems to hold that the current environment is the ideal time to purchase a home. As I understand the argument, home prices have fallen significantly and appear to be bottoming. At the same time mortgage rates are near historic lows, which makes servicing debt on a mortgage relatively easier. Both of these observations suggest that now is an opportune time to buy a house. If only the decision were that simple. Deciding if now is a good time requires determining whether or not those assumptions are valid. So are they?

Home prices have certainly fallen significantly in the last few years, but calling a bottom seems pre-mature. Many housing analysts will note that existing home sales have been rising, the supply of homes for sale is shrinking and the number of new homes being built is well below trend. The other side of the story, which often goes untold, is that new home sales continue falling to new lows, data on existing homes for sale is distorted by a potentially large shadow inventory of homes awaiting the foreclosure process, and household debt remains at very elevated levels (see top chart below). For those who have studied previous bubbles in asset markets, prices tend to undershoot historical norms on the downside as well (see bottom chart below). Public policy, to date, has worked hard to maintain home values at elevated prices to reduce any negative wealth effect on consumer demand and prevent greater losses to banks and GSE’s holding underwater mortgages. The future direction of housing policy and home values remains extremely unclear and one cannot rule out further declines of 10%-20%.


Moving on to interest/mortgage rates, it is also true that rates are at or near historically low levels. Mortgages with 30-year fixed rates are currently being offered around 4%. Rates on mortgages generally track the interest rate on US Treasuries with similar maturities, adding a small premium for extra risk of repayment and profit. The rate on US Treasuries is basically the average of expected Fed Funds (short-term) rates over the maturity of the bond (Treasury Yields Low for Good Reason). Determining the future of mortgage rates therefore relies on predicting the future path of monetary policy. On Wednesday the Fed announced expectations that the rate will remain exceptionally low until late 2014, based on forecasts of low inflation and high unemployment. Despite the multitude of people expressing fears about inflation and belief that the Fed will need to raise rates soon (these began in 2009), I continue to hold the view that disinflation remains more prominent in the US (Deflationary Monetary Policy). Based on my outlook for the economy (Predictions for 2012), I expect the Fed to hold interest rates near 0 until at least 2015. Under the corresponding economic environment, long-term interest rates may fall further but are very unlikely to rise. Mortgage rates may very well remain at historically low levels far longer than most people today imagine.

When deciding whether or not to purchase a home, there are certainly a whole host of factors to consider that were not discussed here (family, job security, income, savings/debt, location, etc). The purpose is to provide an alternative prospective to the seemingly common perception that now is the best time to buy and those who fail to act will miss a great opportunity. While I don’t rule out that possibility, I believe the outlook for home prices and mortgage rates suggests this window of opportunity will remain open for a few years. In fact, those who wait may be rewarded with lower mortgage rates and more house for their money. There is no rush to buy a home!

A Free Market in Education

“Skillshare is solving a serious problem in the world right now: an education system that isn’t speaking to its students or taking advantage of the passion and skill that our fellow community members possess. Skillshare’s vision is to democratize education by empowering anyone to be a teacher.”

-Danya Cheskis-Gold

Read it at Forbes.com
Those Who Can, Skillshare
by Jesse Thomas


A friend and former classmate, Danya Cheskis-Gold, was recently interviewed about a relatively new educational venture called Skillshare. With our traditional educational system often struggling to provide an innovation-inspiring environment, Skillshare seeks to vastly expand the educational opportunities for all ages. Encouraging individuals to both teach and learn unique skills is a fascinating market-based approach to improving education within our society. Definitely check out the website...you may find a class to take for free or make some money teaching!

Update: While the President attempts to stem the tide in rising student debt, a few professors from respected universities are providing an even better solution...free-online courses. Aswath Damodaran (NYU) is offering his corporate finance and valuation courses this semester to anyone online. The links and necessary info to register can be found here: My small challenge to the "university" business model. Separately, David Evans (UVA) and Sebastian Thrun (Stanford) are teaching computer programming and how to build an online search engine in seven weeks. Information for their course can be found here: Udacity.

Quote of the Week

...is from Russell Robert’s 2009 book  The Price of Everything: A Parable of Possibility and Prosperity

“Genetic mutation is random. Natural selection accepts the good changes and rejects the bad ones. Economic evolution isn’t random. Changes in products aren’t random. The knowledge and innovation come from entrepreneurs trying to anticipate what people want and what will survive in the marketplace. That makes it more focused than biological evolution. And you get progress, not just survival.”

In this novel, Roberts masterfully portrays the emergent order of our world and economics through a dialogue between a student and teacher. The story is very compelling and inspiring for anyone with visions of becoming a teacher. A great read for anyone with even a remote interest in economics.

Points of Public Interest

1. Money, credit and inflation - Sean Corrigan explains the difference between money and credit, highlighting the different nature of banks and individuals in creating credit. An often forgotten aspect of our current monetary system is that individual banks can create credit (which can turn into money) irrespective of Fed or Treasury policy. This unique ability generates the potential for inflationary and deflationary forces in the money supply outside of the federal government’s control.
2. Death by Wealth Tax - Richard Epstein argues against the proposal for a wealth tax on assets.
3. Trials and Errors: Why Science Is Failing Us - Jonah Lehrer details some failings in medicine stemming from the incorrect, basic “assumption—that understanding a system’s constituent parts means we also understand the causes within the system.” As Lehrer notes, centuries ago David Hume recognized a human desire to view the appearance of causation as an actual fact, rather than “fiction that helps us make sense of facts.” (HT: Russ Roberts)
4. Debt, Deficits, and Modern Monetary Theory - Bill Mitchell, a founding member of Modern Monetary Theory (MMT), outlines the difference between MMT and mainstream economics. These differing conceptions about public debts and very important to the public policy battles in the news today. (HT: Neil Wilson)
5. Peter Boettke on Austrian Economics - “Austrians want to talk about things like dispersed knowledge, heterogeneity, uncertainty – not just risk, but real uncertainty – and institutions, how institutions arise to allow us to cope with our ignorance and our uncertainty and to ameliorate the frictions that exist in the world.” Peter Boettke discusses contributions of Austrian economics and five books to read on the subject.

The Upside of Arguing

“Arguments continue after hours for the fun of it. This is an important factor in the proofing of ideas: because it is only through a process of rigorous and prolonged argument - with people not sympathetic to your ideological bent - that ideas are refined and matured. Or, sometimes, revealed to be riddled with flaws. Whichever it is, it's a valuable process.”

Read it at The Age
Intellectual substance abuse
by Parnell McGuinness


Parnell begins the piece by noting an important revelation: “both the right and the left care about creating a healthier, happier, more prosperous society.” This recognition is often forgotten in policy debates, as each side attacks the other’s goals, not realizing that the true differences lie in the means by which that end is realized. An unfortunate consequence of the technology age has been to encourage sound-bit advocacy, discouraging lengthy public debates about why certain policies will or will not most effectively create a better society.

Within my personal life I generally try to fulfill the message in the quote from Parnell at the top of the page. Although my family and friends may at times be frustrated by my efforts, I often try to engage in arguments with those holding different ideologies. Occasionally I will even attempt to make an argument opposing my own ideology, if I believe it will encourage a more rigorous discussion of the ideas. The purpose of these actions is not to argue for the sake of arguing, but to ensure the ideas I pursue are the most logically sound.

At the heart of this article appears to be a belief in the natural selection of ideas similar to either Darwinian evolution or Schumpeter’s “creative destruction.” Parnell seemingly hopes to inspire think tanks to engage each other in greater public debate instead of focusing on advocating policies to fit a political bias. I think Parnell offers a great lesson about learning and hopefully think tanks will adhere to some of his suggestions going forward.

Quote of the Week

...from A JOB GUARANTEE IS NOT A “PRICE ANCHOR”, IT’S A “PRICE BUOY” by Cullen Roche, of Pragmatic Capitalism:

“Modern day economists seek the holy grail of macroeconomics which has come to be price stability and full employment.  These two features of modern macro are held up on pedestals as if giving a person a job and a steady wage is all one needs to live a happy and prosperous life.  I say these goals entirely miss the point and steal the potential lives that future generations can live.  What we should seek is the way in which we maximize our living standards.  In doing so we reach the true holy grail of macroeconomics – the thing that every human seeks – the fountain of youth, hence, more TIME.  After all, it is only through increased productivity, innovation, creativity and ultimately higher living standards that we are able to attain this (see here for more).”


Over the past few weeks, a heated debate has been raging among individuals either subscribing to or interested in MMT (Modern Monetary Theory) economics. The discussion is related to the notion of a federal Job Guarantee (JG) to promote full employment, and in theory, price stability. As Cullen points out, while these are noble goals, full employment and price stability alone do not guarantee any sort of prosperity. Democratic and Socialist governments at different points in history have attempted and, for short-periods, even achieved full employment with generally disappointing results in economic growth and public support.

Peter Cooper at heteconomist.com expands on Cullen’s view in Opposing Visions of the Future. Apart from the JG, Peter considers a Basic Income Guarantee as a means “to undermine capitalism, particularly the wage labor relation.”

Points of Public Interest

1. Fundamental and Mathematical Case for Structurally High Unemployment for a Decade - Mish Shedlock exposes the declining labor force, despite population growth, as the main reason for the falling unemployment rate.
2. Bubbles and Beauty Contests – To What Extent is Keynes Relevant to Investors? - Philip Pilkington uses one of Keynes’ best passages from the General Theory to show how most investors’ fool themselves into poor decisions.
3. Why I’m feeling strangely Austrian - Gideon Rachman sheds light on some emerging trends in political/economic ideology (rightwing populist, social democratic-Keynesian, libertarian-Hayekian and anti-capitalist/socialist).
4.  A slightly off-center perspective on monetary problems. Saving isn’t “setting money aside,” it’s BUILDING CAPITAL GOODS - Scott Sumner deals with some misconceptions about the actual meaning of saving as it relates to economics and economic statistics.
5. European Identities Part II - Francis Fukuyama describes the real EU crisis as a lack of European identity. The relationship between people living in Kentucky and New York is far different than that of Greeks and Germans. He mentions the rise of populist governments as something troublesome to watch for in the years ahead.

A Shortage of Aspirin?!?

Pretty much everyone knows that the economic outlook for Greece has been poor for quite some time and getting worse. But who would have imagined that the Greek recession/depression would lead to a shortage of aspirin? Aspirin is cheap to produce and purchase, as well as easily transferable. Michael Munger of Duke University plainly describes how government price controls can lead to product shortages, even of aspirin.

Read it at Euvoluntary Exchange
Solve the Mystery! Why is There an Aspriin Shortage in Greece?
by Michael C. Munger


Note: Although some may regard this problem as specific to Greece (or Europe), Americans should recall that price controls (more popular in the 1960’s and 1970’s) led to gasoline shortages. While I wasn’t around back then, today it’s hard to fathom not being able to get gas from a gas station or aspirin from a drug store.

Predictions for 2012

With countless others offering predictions for the year ahead, I thought I’d take a chance and throw my own projections into the ring. Similar to Byron Wien and Edward Harrison, I mostly selected events that are widely seen as having a low probability (less than 33%) but which I believe hold a greater than 50% chance of occurring.

1) Greece leaves the Euro - As the year progresses the Greek economy continues to contract and unemployment continues to rise, surpassing 50% for youth. This combination of factors offsets attempts to reduce the budget deficit as the country repeatedly misses EU and IMF required targets. Despite potential for further bailouts, the Greek people finally decide the consequences of tied promises outweigh the benefits of remaining in the Euro. Greece defaults on all debts, returning to a heavily depressed drachma.

2) Italy and Spain lose access to credit markets - A Greek default raises concerns about the potential for creditors to face actual losses on EU sovereign debt. The ECB’s measured efforts are not strong enough to overcome fear and concern about future growth in Italy and Spain. Deep recessions take hold in both countries, pushing deficits higher.

3) The Eurozone enters recession - Practically the entire Eurozone falls into recession, including the likes of France and Germany. A deteriorating economic outlook causes deficit estimates to be raised across the board, facilitating credit rating downgrades. Agreements for greater austerity fail to stem the tide and other attempts to kick the can down the road are pursued.

4) China’s GDP growth falls below 7% - As exports to Europe contract, the busting of China’s housing bubble continues unabated. Expectations for massive monetary easing in Europe and the US, along with fear of flare ups in the Middle East sets a floor under energy and food commodity prices. Monetary easing and fiscal stimulus in China are applied too slowly to prevent growth from slowing below the supposedly necessary 8%. (Note: This will be not be considered a hard-landing, which I deem growth below 5%. That may come in 2013, but for 2012 most economists/analysts will be able to maintain expectations of a soft-landing.)

5) Oil prices will spike above $120, finish year below $90 - (Using WTI crude prices, currently ~$102) At some point during the year Iran attempts to block the Strait of Hormuz. Further attempts to overthrown governments in the Middle East, possibly some that only recently gained power, hit the headlines again. Combined with global monetary easing, oil prices will move higher and gasoline will once again hit $4 per gallon in the US. These higher prices will exaggerate the reduction in global demand for other goods and push growth lower. As fears of a global recession take over, oil prices will fall, finishing the year down more than 10%.

6) US enters recession in 2nd half - Despite higher 4th quarter GDP in 2011, the lower savings rate and energy prices are unlikely to add much growth in 2012. With Europe contracting and China slowing down more than expected, US exports will take a hit. Extensions of the payroll tax cut and unemployment benefits will help ensure the federal deficit holds above 8%. Housing prices will continue to fall (based on Case-Shiller) causing the savings rate to once again reach 5%. By the end of 2012, the US will be in a recession (although NBER may not confirm this until 2013).

7) Federal Reserve extends forecasts for ~0% rates until 2015 - As growth in the US weakens once again and the global economy slows, expected inflation over the next ten years (based on Cleveland Fed estimates) will fall towards 1%. With unemployment holding steady around 9%, the Fed will move it’s forecasts for the first interest rate hike out to 2015. (Some form of QE3 is also likely, but aside from promoting short-term speculation, the effects on growth are likely to be muted.)

8) President Obama will win re-election - Generally a weakening economy has been poor for incumbents but this time will be seen as abnormal circumstances. The troubles in Europe and high unemployment will actually spark desire for a more interventionist government. Given the choice between Obama and Romney, the President will win re-election by a slim margin (2% or less).

9) The US dollar rises over 5% - (Based on dollar index) In spite of QE efforts and another sizable deficit, the US dollar retains its safe haven status. As fears of European defaults spread and China’s slowing growth impacts commodity prices, the dollar will continue to trend higher.

10) Bonds outperform stocks - The consensus once again favors stocks, although US Treasuries have now outperformed stocks over the past 1, 10 and 30 year horizons. With global growth slowing, inflation expectations will fall. Before this bull market in bonds ends, 10- and 30-year Treasuries may reach 1% and 2%, respectively.

For some potential investment themes based on these predictions, I suggest taking a look at Gary Shilling’s 2012 Investment Themes.  

Trade Imbalances are Key

Michael Pettis logically explains the need for Germany and China to reverse their trade surpluses. Despite the seemingly obvious consequences of not pursuing this path, Pettis notes that the historic precedent is for countries not to undertake the tough road (short-term pain for long-term gain) but rather fight to maintain their trade surpluses. This discussion is one of the best I’ve seen yet about the difficulties facing the EU. It is largely based on the historical precedents mentioned that my expectations for any resolution to the European crisis maintaining the union are diminished. Pettis also mentions the possibility of China devaluing their currency, exactly the opposite of what most politicians are calling for. If this occurs, I fear the US might impose heightened tariffs on trade that sparks a bout of global protectionism.

Read it at CreditWritedowns.com
If no trade reversal now, then when?
By Michael Pettis

Regressive Tendencies

“The tax code, government’s favorite instrument for distributing wealth to favored factions, has been tweaked about 4,500 times in 10 years. Generally, the beneficiaries of these changes are interests sufficiently strong and sophisticated to practice rent-seeking.”

Read it at WashingtonPost.com
Government: The redistributionist behemoth
by George Will

Quote of the Week

The first installment of the Quote of the Week comes from Time on the cross: can fiscal policy save Japan?, by Paul Krugman (9/21/99):

“What continues to amaze me is this: Japan's current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do - even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy - the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance - are rejected as dangerously radical and unbecoming of a dignified economy.”

For the past few years Krugman has been vigorously promoting the Japanese strategy he had previously ridiculed. To be clear, I do not disparage Krugman for simply changing his mind on this issue. What I do question is whether or not his view of other economic models has changed.

Heterodox economics has been gaining recognition over the past couple years, including this recent piece in The Economist (Marginal revolutionaries). One of the noted economists in the article, Scott Sumner, drew my attention to this quote during a recent podcast with Russ Roberts (Sumner on Money and the Fed; listen to the whole thing for a better understanding of market monetarism and NGDP targeting). Sumner is a primary proponent of greater monetary stimulus, who is perplexed that the above quote is now playing out in the US. Meanwhile other branches of economics, namely post-Keynesianism, are working to encourage acceptance of models with multiple equilibrium (which had reasonable success in forecasting the previous crisis).  

During the next few weeks I will outline the strengths and weaknesses of several branches of heterodox economics. Hopefully by acknowledging different models, the benefits of each can be combined to better shape policy responses.

Points of Public Interest

1. What’s MMT About Anyway and is the Job Guarantee Crucial to the Project? - Pavlina Tcherneva discusses the subjective policy recommendations that necessarily give Modern Monetary Theory value and offers her view on the recent debate among MMTers about the importance of a Job Guarantee.
2. How Egalitarianism Increases Inequality - Bryan Caplan makes an argument for praising the 1%.
3. The Right Kind of Hope - John Hussman highlights the poor prospects for long-run returns across asset classes and provides an update on the continually worsening European crisis.
4. Does the free market corrode moral character? - Michael Walzer compares the effects of competition on moral character within politics and markets.
5. Bastiat's Insight on Government Inaction - David Henderson explains why disapproving of government subsidies for an action is not the same as disapproving of the action itself.
6. A Challenge for Libertarians Against Federal Recognition of Same-Sex Marriage - Steve Horwitz offers his view on why supporting same-sex marriage “is fundamental to classic liberalism.”

Update (1): Responses to Two Objections to My Challenge - Steve Horwitz responds to a couple comments on the above post.

Update (2): The Job Guarantee, Kleptocracy and Blogging - Edward Harrison posts a follow-up to Pavlina Tcherneva’s comments on the Job Guarantee.

A Fresh Start to 2012

Towards the end of 2011, the number of posts on this blog trailed off as my schedule became busy. Apart from finishing the second to last semester of my Masters in Public Administration program, I was working on applications for PhD programs (which I hope to begin next fall). During this time a couple major events in my life occurred as well. On a positive note, I got engaged to an amazing woman and enjoyed a wonderful vacation with much of her family. On a sadder note, my family lost an incredible woman with the passing of my grandmother.

The start of a new year presents an opportunity for a fresh start to blogging and a chance to add some new features to the blog. Beginning this weekend you will see the first installments of my quote of the week and a weekly post highlighting my top reading recommendations. As the year progresses I also intend to post some book reviews. Hopefully this year will provide greater freedom time-wise to increase the frequency of posts detailing my own thoughts and observations. As always, I encourage readers to either post comments or e-mail me directly with questions, comments or suggestions.

As I look to improve my own blog, the beginning of 2012 marks the return to blogging of Dr. Francis Fukuyama at The American Interest. Fukuyama has spent time at several “institutions dedicated to public policy: the State Department, the Rand Corporation and the Rand Graduate School, George Mason’s School of Public Policy, Johns Hopkins SAIS, and now Stanford’s Center on Democracy, Development, and the Rule of Law.” He has taken the past two years off from blogging, in part, to write the first volume of his book, The Origins of Political Order: From Prehuman Times to the French Revolution. Although getting through this monstrous book may appear a daunting task, the effort is very rewarding for anyone sharing an interest in the history of political economy.

While I encourage following Fukuyama’s blog, I want to specifically draw attention to his first post of the year titled “Why Public Administration Gets No Respect But Should.” Much of the information I read on blogs or in the media, and even comment on here, is more directly related to public policy. Discussions tend to revolve around which policy is best and, as Fukuyama points out, ignore how easily or effectively a given policy can be implemented. Sheer impracticality of implementation renders many of the most well thought out policies ineffective.

As I approach the completion of my Master’s in Public Administration and head towards a PhD, the importance of public administration is certainly a belief I share. Regardless of one’s political affiliation, I think most Americans (probably most people) will agree that government (on any level) could be more effective and efficient. Improving education in public administration and incorporating these topics into policy conversations will go a long way towards improving governance. I fully intend to be part of this effort in the years ahead.

Happy New Year!