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Hurricanomics: Keynesian Stimulus Or Captain Facepalm
Submitted by Jared "The 10th Man" Dillian via Mauldin Economics,
An old friend from the Coast Guard visited me over the weekend. He is retired and now works as an emergency planner.
If there’s one thing government folks do, it is plan. But many times I’ve seen plans go out the window when emergency strikes and people start to improvise. Or maybe the planned-for emergency never materializes. Maybe you get a different emergency you didn’t plan for. The anarchist in me says that plans are useless. But I agree that it’s good to think about these things ahead of time.
So my friend and I got to talking about hurricanes, which is a specialty of his. He told me that no hurricane has ever scored a direct hit on my piece of the South Carolina coast (I live just a few yards away from the beach). Hurricanes have hit north of me and south of me, but in the recorded history of hurricanes, none have ever hit here, at least, not a direct hit by one of the big ones.
I’m not sure if that makes me feel good or not. If my house did sustain a direct hit, smell you later.
But it got me thinking about when I was working at Lehman Brothers in 2004, when Hurricane Katrina hit. Were you active in the markets back then? If so, you probably remember that stocks ripped to the upside, particularly energy and construction companies that would have to repair all the damage. Of course, the insurance stocks got killed.
I was 30 years old back then and not really steeped in economic thought. None of us were. We were traders, not philosophers. But we were all sitting around wondering why the stock market was ripping when the hurricane was clearly going to wipe out a huge city. Made no sense.
My answer was that the winners from Katrina were probably publicly traded, while the losers weren’t.
But does anybody win from a hurricane in the first place?
The Parable of the Broken Window
You may have heard of the “Broken Window Fallacy,” where a boy throws a rock through a storefront window, breaking it. The shopkeeper must hire the glazier to come fix the window. He pays him 50 bucks, thereby stimulating business in town.
Everyone sees this and says, “Gee whiz, a kid breaks a window and suddenly there’s 50 bucks in circulation. Hey kid, why don’t you run around town and break the rest of the windows?”
If this sounds familiar, it’s because you’ve heard it before—from an economist named Frédéric Bastiat.
Bastiat basically comes up with the ideas of opportunity cost and unintended consequences simultaneously, when he observes that if the shopkeeper did not spend 50 bucks to fix his window, he might have spent it on something else more productive. What, we don’t know. But we can assume that he knows best how to spend the 50 bucks, at least better than the kid who broke his window.
Bastiat is one of the forefathers of libertarian/Austrian economics, and he often talked about the things that are unseen in finance. A good example is the minimum wage debate, which we talked about briefly in last month’s issue of Bull’s Eye Investor.
The layman thinks if you raise the price of labor to $15/hour by fiat—yay, people are making $15! But generally what happens is that some people will see their wages drop to $0/hour, because the bossman had $150 to spend on labor to begin with, and he can either hire 20 people at $7.50/hour or 10 people at $15/hour.
If you think the bossman should somehow operate at a loss to accommodate everyone at the higher wage, then we can have a nice discussion on the role of profit in society.
Bastiat is the reason I come to work every day, because there are so many people who have believed, and will always believe, that you can fix the price of something at x just because 51% of the voters said so.
Keynesian Stimulus
One of the great tragedies of the financial crisis was the $780 billion we shelled out for the giant stimulus package. Wow, was that bad, for a lot of reasons.
I remember driving around and getting stuck in construction and seeing these stupid signs everywhere:

So back to Bastiat, why was the stimulus bad? We spent $780 billion basically paving the same roads over and over again. It was one step up from digging holes and filling them back in. And just like in the broken window example, sure, some people got rich off it.
But what would the taxpayers have done with $780 billion, aside from paving roads? Probably some pretty interesting stuff. Possibly they could have thought of better things to do with it than paving roads. Even if they had saved it, that’s $780 billion less the government would have had to borrow, which would have lowered interest rates and increased credit availability for private borrowers.
The counterargument is that if you go back to the 1930s when we did all this Keynesian stimulus (the Hoover Dam, etc.), that it worked in getting us out of the Great Depression. Did it? Maybe it made the depression worse. You can’t go back in time and not have the Keynesian stimulus and see what happens.
In US history classes over the years, FDR has generally gotten credit for ending the depression, but more and more scholars are beginning to challenge that idea.
Captain Facepalm
I think these things are pretty obvious. I can’t figure out why people have such a difficult time seeing them. I can’t figure out why Nobel Prize winners can’t see them.
Any economic intervention, no matter how slight, causes unintended consequences. There are things that you cannot see, that the planner cannot anticipate. There are also easy ones. If you cap the price of a good, there will be a shortage. If you put a floor on it, there will be a surplus.
If you make it hard for people to trade swaps, you might reduce liquidity and push people into other, potentially more risky products.
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Sadly, Captain Facepalm does not exist in the Socialist world. Socialists see only their wonderful utopian grand schemes... they are blind to consequences.
I pity the fools who believe there is no reward for all of this evil they are causing...
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I'd say all of that was pretty obvious.
If the gov't was hell bent on spending that 780 billion, they could have plowed it into new technology for the propulsion and other systems of spacecraft. Probably would have had the same economic effect, would've been a hell of a lot more interesting, and might, just might, have sparked something great.
just think what giving $7000 to every household would have done for the economy instead.
https://www.youtube.com/watch?v=Fg6J1Skptbs
I'm not sure paying the couple hundred people qualified to do that work $4B a year each would really help the economy all that much; fact is, most people who have those skill sets have been employed full-time since 2008 anyway.
Bastiat would be required reading for high schoolers in a saner world.
It also reminds of the famous "use spoons, not shovels" remark, which I always thought was Hayek, but apparently not...
http://quoteinvestigator.com/2011/10/10/spoons-shovels/
Bravo!
Liberty is a demand. Tyranny is submission.
you are sooo naive in your analysis of markets that you should go back to understanding not Bastiat but what monopoly markets are about.
If free markets existed you would not have oversupply and bubbles. We only have monoply markets as what is older than Bastiat is human nature. And Keynes did NOT precede the hubris of WW1 and Treaty of Versailles, nor the exuberance of 1929; he followed on and tried to find a mechanism to avoid that greed and hubris run the economy.
So Bastiat is a relic of a dream that never came about. Like Thoman Moore and Utopia.
And Human nature is house of Atreus. Thats how old greed is !
Keynesian stimulus now is like playing with the clitorus of an 80 year old prostitute.
Useless.
Well done article, Mr. Dillian. It's a shame that the history classes show FDR as a good guy. Bastard rigged gold prices in London every morning after deciding the numbers for the day, often random, with treasury secretary Henry Morgenthau and Cornell professor George Warren.
Last i checked a huge part of that 700b+ stimulous bill (300b) WAS a tax cut that did go directly to people to spend. Your description of that bill isnt even close to accurate. http://www.washingtonpost.com/wp-dyn/content/graphic/2009/02/01/GR200902...
We are entering turbulence and there isn't anybody in control. At times like these I prefer to jog in the rain.
Keynsian Fiat Keynsian Fiat Keynsian Fiat Keynsian Fiat Keynisan Fiat.....Yawn
It gets old hearing the trigger words. Also hypnotists trying renorm history into something it wasn't, gets old.
Gold isn't magick because its shiny; and markets are not GOD.
All money is law.
You are easily bored. Ongoing insanity is older.
- Ned
And all law derives its power from the barrel of a gun.
OT. I have been reading Doug Noland's "CreditBubbleBulletin" for years and have enjoyed his critical analysis of the role that uncontrolled expanding credit has had in bringing the global financial system to the brink of collapse. While some of his analysis has often been above my comprehension, I have seen much of it lead up to the current crisis that we are experiencing. But his commentaries have been absent for the past several weeks and I had recently become concerned that something unfortunate had happened to him.
Fortunately, that is not the case. He has decided to move back to his birth state of Oregon and try to recapture some of the fundamentals of the work ethics that built a strong economy among 50 separate, sovereign states before the Federal government stepped in to tear it all down (my words, not his). While he made mention of the coming collapse, his attitude has shifted to one of surviving the outcome (prepping) for himself and his family. He has clearly accepted that we are in the end game and it is going to be ugly. I hope him well and look forward to his future financial analysis as the collapse unfolds (if the internet remains available).
Even if they had saved it, that’s $780 billion less the government would have had to borrow, which would have lowered interest rates and increased credit availability for private borrowers.
The article gets Bastiat but doesn't get money.
Money is a promise to complete a trade. Interest is a collection to recover money defaulted on a trading promise. Interest should not go up because more people want to trade. It should only go up if people default on their trading promises. Alternatively, interest should not go down if fewer people want to trade. It's not trading volume that drives interest. It's trading defaults.
And what one person chooses to save has nothing to do with a trading promise another person wants to make ... unless you believe in capitalism. That's a contrivance of capitalism that allows them to throttle trade and conduct their farming operation. If a trader wants to make a trading promise and he delivers on it, what a capitalist thinks about it is of no import at all when you have a properly managed MOE.
In a properly managed MOE, traders are always free to get their promises certified. The only thing that impedes that is their own integrity. If they fail to deliver, they incur an interest burdon ... and that makes everybody sharpen their pencils a little bit more. If they fail to deliver consistently, they are interest collectioned (new word) out of the market.
Pretty simple stuff. Easy to get flat wrong ... just like the people and the broken window.
Raising minimum wage is a distributed cost/benefit. One which can intervene at the first level, of the distribution of profit. This article as do so many others that oppose decent basic wage levels, simplifies the interactions to laying off workers, to pay fewer workers more.
Here is how it really works.
Minimum wage is increased. Only a certain number of wage payers are affected at first. To various fractions of their overall wage payments. Not all wage payers are the same distance from the new minimum. Not all pay the same fraction of their employees the minimum wage. There are various actions available. Some have more options than others.
Scenario one. A small business employs a person that is almost superfluous. Having that person makes things work better. But others can take up that work. Obviously there was enough profit to pay that person, even though they were not indispensable. The cost benefit may be very close either way in this case. An employer with a long range, wide view, should keep this person. For many reasons. Happiness of other employees, customer service and production capacity, flexibility. Also, certain moral reasons that the employer may have.
Scenario two. A small business has razor thin profit. Few employees. Each employee is a large fraction of operating cost, is a large fraction of the labor. The rise in wages will actually make profits negative. The employer can fire an employee. Negatively affecting many things. The profit goes negative. The employer keeps all employees. The profit goes negative. This business goes under. As it should have anyway. It was on the edge. For whatever reasons, this business was not healthy. The business in scenario one, or some other business, may get this businesses customers. Then may hire extra employees to supply their increased customers.
Scenario three. A large business with many employees at various wage levels. There are also share holders. Some high level employees have share options, most don't. The business has government contracts. Contributes a lot of money to politicians and lobbyists. It colludes with other businesses in the same situation. There is no real competition to it. The minimum wage increase will have no effect on it, as it's low level workers are all overseas, working for a few dollars a day. It will still spend money to defeat a minimum wage increase. On principle.
Scenario meta. If your business cannot survive while paying your required employees a wage that allows them to live in and contribute positively to the economic realm you are doing business in. You are doing it wrong. Fold and let a better business do it right. If minimum wage is not enough for food, shelter, some joy, some positive contribution by existing and working, then it needs to be higher. The economic framework needs to balance. If eight hours a day, five days a week, can't keep you alive, wanting to be alive, can't keep the economy alive. We are doing it wrong.
A lot of words to state the obvious. Inequality. Graft. Greed. The market can work. But it can be bought. And it has been bought. It is being drained. Drained into bank accounts that do nothing. Not even invested, put to work. Too much money is being converted into penis measurement units. Money for nothing.
So many charts and statistics are shown and debated here on Zero Hedge. I have to admit, I like how this site illustrates how all the various points of view interpret them, for or against their ideas and ideology. But I note that it all seems to ultimately point to the overall downward trend.
In closing. Minimum wage. It is the name of it. Not the interpretation. It is the market. Add up the pay, subtract the costs. The minimum wage has no Pacs, lobbyists, loopholes. Minimum wage is the minimum, honest, in the moment, economic indicator, of our economy. The minimum wage worker is the only one who faces the real economy, naked. I think they are THE economic indicator.
They also vastly underestimate the unintended consequences of under-paying society on average: increated crime rates, poor quality control (you pay for what you get!), and smaller market caps.
Minimum wage is another restraint of trade, set about by the progressives of a century ago, here in the Commonwealth it was progressive Repubz that brought us Hoover.
Keynesian Stimulus incites latent homosexual tendancies.
Every economy with broken feedback loop will share the fate with Soviet. Even if presumed altruistic central planners existed (which goes against all known evidence), broken feedback destroys all foundation for rational decision making. Furthermore information starting from grassroots is often systematically corrupted by people, who fiddle with results in favour to meeting their quotas to "102%". This is collected and processed on the next level, which of course garnishes the cooked books with flavours of own political ambitions and there could exist even second such a middleman with own spiking before the shit reaches the central committee.
Similar is happening now in China too, but to a what extent, it is difficult to tell.
The current gigantic economic experimentation in the West differs from this only on two accounts. The system openly and unashamedly shovels money to its cronies, who in their monopole middleman positions are predestined to gain, whatever direction money moves into. Secondly private money creation by cronies is allowed, which in other cases was a serious crime. Had this been exercised e.g. in Soviet and in today´s proportions, the death penalty had applied and even in two zero lesser cases. Of course some high political figures always will remain exempted untouchables.
Looking forward to Dr Guillotines next coming back on earth.
HILARIOUS BULLSHIT AND BAD CRITICAL THINKING!
The layman thinks if you raise the price of labor to $15/hour by fiat—yay, people are making $15! But generally what happens is that some people will see their wages drop to $0/hour, because the bossman had $150 to spend on labor to begin with, and he can either hire 20 people at $7.50/hour or 10 people at $15/hour.
IF BOSSMAN NEEDS 20 PERSON-LABOR TO MAKE BUSINESS FUNCTION,
THEN BOSSMAN GONNA HIRE 20 @ $15 HR. PERIOD.
AND BOSSMAN GONNA RAISE PRICES TO PAY LABOR.
BOSSMAN NOT GONNA KILL BUSINESS WITH 50% LABOR CUT.
"Bossman" [sic] will go out of business if he has to sell a $3.50 burger for $7.50 to cover arbitrarily elevated labor elevated labor expenses, not reflective of the laborer's skill level or productivity output.
Ah, yes, the excluded middle fallacy where there is nothing in between paying decent wages and insolvency. Let's be honest shall we? What we're REALLY talking about is how much PROFIT will not end up in the owner's pocket. If your margins are really that fucking thin, you were going to go out of business at the first blip in the economy anyway so why protect businessmen who are running their business in an assinine fashion at the expense of society?
Most grocery stores are running on <1% GM and making it up on inventory turns. That, UnScientist, b thin.
And what is this "society" that you are expensing? You don't get out very much, do you?
- Ned
MAUDLIN IS SO ANTI-KEYNESIAN, HE NOW THINKS LIKE A FOOL.
ANY BUSINESS WILL OPERATE AT WHATEVER LABOR FORCE
IS NEEDED TO FUNCTION PROPERLY
AT THE HIGHEST PROFIT POSSIBLE.
PERIOD.
20 PERSON @ 15 HR
10 PERSON @ 15 HR
ITS THE LABOR NEEDED TO OPERATE -- NOT WAGE
IF MCDONALDS NEEDS 20 PERSONS
TO STAFF COUNTERS AND COOK STATIONS
TO SELL FOOD AND MEET CUSTOMERS DEMAND
THEN MCDONALDS WILL HIRE 20 @ $15.
PERIOD. END DISCUSSION.
IF MCDONALDS NEEDS ONLY 10 PERSONS TO OPERATE
THEN MCDONALDS WILL HIRE 10 @ $15
Let's see here, this post has "bold", "italics", and "all caps". By chance was there any drool streaming down the side of your mouth and were you panting heavily when you made this post?
"Any business will operate using the minimal labor necessary at the lowest labor rate possible to ensure maximum profitabilty." -Fixed it for you. And FYI, this concept has been around about 3750 years (Ref. Hammurabi).
Or they implement order-taking kiosks or buy automatic burger machines. You know, substitution.
Or in other words, "IF they need 0 @$15 they will hire 0 @ $15"
Sssshhh... you're ruining the whole "Job Creator" mythology for the idiots who keep lining up to vote against their self-interest in the name of their religious dedication to trickle down.
A great deception that has been put over on us is the idea that wages are a major expense to business and have caused off shoring. That is simply not true. Wages are fairly minor. The real expense is the taxes, regulation and the cost of compliance. It's just not fair, or accurate, to say that workers have caused the problem by earning too much. At worst, what they earn is recycled into the economy.