Monday, May 31, 2010

A Wolf in Sheep's Clothing

Martin Wolf is one of the better print journalists writing today. I see his articles in the Financial Times – the salmon-colored daily newspaper out of London. He must have been really inspired because he wrote back to back articles on May 28 and May 29. Both articles are well-written and thoughtful. Together they illustrate a very broad range of policy choices available for today’s challenges. They also reflect a very soothing (the sheep) but potentially dangerous (the wolf) potion offered by modern day Keynesians.
In Friday’s article ( ) Wolf takes issue with the OECD’s current policy advice that countries soon begin fiscal consolidation and monetary tightening. Wolf appears to agree with the OECD but then wavers on the fiscal suggestion with respect to the UK. He likes the idea for the long-term but frets that engaging too soon would threaten the recovery. He suggests waiting until “recovery is assured.” Wolf then goes on to suggest that in the context of a fiscal consolidation, a loose monetary policy might not be effective. He says with respect to tighter money, “Why the OECD makes this recommendation is beyond me.” The upshot of his article is to control government borrowing but not too quickly. I am not sure what he is recommending about monetary policy since he seems to not prefer monetary expansion or contraction.
Wolf’s Saturday article ( scares the crap out of a fictional boy named Bobby using the idea that economic aftershocks are inevitable and will contribute to an unstable world economy. These aftershocks are the natural aftermath, according to Wolf, of excessive private and government borrowing. Combining this bad news with problems in transforming nations, China’s bubbles, and instabilities on the Korean Peninsula, Wolf concludes with this advice to Bobby, “It is going to be miserable. But you can learn Chinese and go east.”
Wow, I wonder what Wolf had for dinner Friday night! On Friday he was very unhappy with the OECD’s conservative policy advice but willing to consider a way out of the woods. On Saturday he seemed to indicate that developed countries don’t stand much of a chance. He recommends that we move to China. What’s up?
What’s up is what I have been saying for months – but I am not nearly as pessimistic as Wolf (before you call me a simplistic optimistic, please read the final line of this diatribe). The Whack-a-mole economy is a reality. Call it after-shocks or whack-a-mole – the story is the same. We went on a spending binge and now – now when we are at our weakest – the bill is coming due. While this situation is no cause for celebration, it is also not a reason to tell Bobby to pull up stakes and move to China.
Wolf’s problem is no different from the indigestion and confusion of other Keynesians. They live in a world of tradeoffs and zero-sum-games. They live in a world of seeming short-run political realities that offer only palliatives and no means to deal directly with real fundamental problems. The fundamentals are simple. People in the US spend and borrow too much. The cure is already in place. No one asked for a recession but the truth is that it sparked an awakening that is causing us to rethink the notion of debt-related risks. Wealth-ravaged consumers are already saving more. The government is discussing how to restructure. Just as saving was lost during the decades when we spent too much – now some spending will be lost as we reverse engines and save a little more. How can that be bad or worrisome? Wolf laments that it will cause another recession but that knee-jerk Keynesian reaction misses the boat.
How can it be wrong to point-out the true sources of our problems and directly address them? Would it really be better for policymakers to say they are going to fix the real problems sometime in the indefinite future? In the meantime instead of solutions we get speeches and weak populist-inspired temporary rebates that support and incent the very behaviors that landed us in this mess. It seems to me that the more governments credibly and quickly do something REAL about deficits and debt, the sooner people will be assured that things will get better. Those aftershocks or whack-a-moles will be minimized by market reactions that are based on credible policies that address what’s really wrong with this country. Convincing people that we are on an unwavering path to addressing our worst economic problems should send a message of optimism that can only create a climate conducive to economic growth. It might take a while, but it sure beats the hand wringing and negativism of Wolf and his fellow Keynesians.
Last line – before you call me names – please note that my optimism is based on policymakers doing the right thing… and soon. That is, my optimism is conditional. If our government and Fed continue to stall on the right policies, then I would suggest that we all move to Vietnam. It is cheaper than China and the beaches are beautiful.


  1. Been there done that and not so sure I want to go back to the Nam, I like the world just fine. When I was in Basic at Ft. Benning in May/June of 1967 St. Rucker informed the company we would not be going to VietNam. Instead the base was being put on alert due to the Six Day War in the Middle East.

    What does this have to do with your blog. Well you did mention instability on the Korean Peninsula. Not to dis the problem there, but it seems the Middle East whack-a-mole game is the gift that keeps on giving. At least we have not insulted the South Korean leaders and I doubt they would cancel a meeting with the prez like Netanyahu just did. Seems like the whole UN is bashing Israel now that the US/Obama are no longer defending them; while Korea is hardly a blip on the UN's radar.

    As if the possibility of war is not bad enough Congress seems intent on passing more spending bills and continuing to try and prop an over valued housing market. Not to mention energy issues related to some little oil spill in the Gulf of Mexico.

    My hope is that in November there will be enough of a shift in current political makeup to allow the kind of change you propose.

  2. Tom, I have been teaching a short-course for the State Bank of Vietnam in Hanoi for the last several years. I will go there again in October. I took side trips to Saigon and DaNang. It is a very interesting country....long and slender and with about 85 million people. Most young people don't even remember the war with America -- most of them prefer to hate the French!

  3. Larry, interesting thoughts. I've come to think that by the time November comes around, there will hardly be any "spenders" in Congress... they'll be talking up reigning in gov't spending, reducing the deficit, etc. But they'll be just trying to save their jobs more than anything else. So I am cautiously optimistic, like you. But I would be completely unsurprised if it ended up being just talk. They're politicians after all (i.e. their mouths are moving).

    I ran across this article about a move to replace GDP as the main macro measuring stick:

    What I found to be more interesting is the reference to Stanford economist Paul Romer's "New Growth" theory. It seems seems plausible enough. What sort of currency does his theory have on the world of macro?

  4. John,

    Thanks for the comments. If they do replace GDP with GDH (gross domestic happiness) I hope they get a lot good input from Zen Buddhist priests. As for Paul Romer, I am not up on his work but I believe he is a well-respected economist. New growth theory seems to add the impact of government policy on long-run growth. I have never been a big fan of growth models and therefore don't have much to add here. They do have one important function -- to explain why national saving is an important component of growth -- that is, a higher saving rate is a good thing. This is important since short-run Keynesian models generally conclude that more saving reduces output.

  5. Hi Larry,

    Let me rephrase my comment about not wanting to re-visit SE Asia. I agree prices are cheap. I just checked out prices for what is billed as the best hotel in Pleiku and weekday rooms in Oct 2010 are $US46 a night. Also checked out the current weather and it was just as I remembered; hot and humid with a constant chance of rain. No doubt it will be better in October, but not enough to get me there. Besides October (and March) are my favorite month(s) to visit Death Valley; a place I find much more interesting, along with Bryce and Zion.

    But vacation plans aside the point I was trying to make was that the the Middle East whack-a-mole game is more of a worry to me than the N/S Korea standoff; not to mention the seemingly current snubbing of Israel by Obama compared to good relations with S. Korea.

    Turning to economics I noticed Obama/Holder have just opened a criminal and civil investigation of BP, which is being blamed for another tanking of the stock market. Consensus seems to be that whatever the result of the probe energy costs will increase, something that can not be good for the economy. Bills dealing with union pension fund subsidies by the feds, and more federal dollars for education seem destined to pass; not to mention a pork laden defense spending bill. I see no indication that the current congress will cut spending money borrowed from China and Japan on projects many economists would view as of limited value to improve the economy.

    While I would like to say I agree with the young peeps in VietNam about the French that would not be true. I really don't see good reasons to hate anyone, less yet the whole population of a nation.

  6. My take on Romer was that he was basically rephrasing the old IBM blurb, "work smarter, not harder". He also has a touchy feely new age side that makes me wonder.

    What are your thoughts on Jevon's Paradox?

  7. Just had to post this link, if only because of this comment at the end of the article.

    "Wouldn't it be simpler to spread the rumour that holding government bonds and money would give you cooties?"

  8. Tom -- you were busy last night! Let me try to respond to some of your points. (1) That Delong article almost killed me. Whew -- but he is right to criticize Kocherlakota. Trouble is his recipe is almost undecipherable and possibly wrong. He talked about the Treasury buying assets from the private sector. He says that won't increase the government debt. I don't get it -- unless the Treasury takes over the money producing role of the Fed. Very confusing!(2) Jevons' Paradox is fine as far as it goes. I think it is the basis for the way we teach supplyside economics. If we get a positive technology shock that increases capital efficiency, that leads to a reduction in the price of the capital -- and increases it demand. The demand for all inputs might increase as the fall in the price leads to an increase in the demand for goods and services. Did you have an issue with this paradox? (3) My point about the French is that they occupied Vietnam for about a century and these colonists weren't especially nice to the Vietnamese. The memory lingers. I accept your point that "hate" was a bad word to use. Thanks. (4) While I agree that there are no clear signs that our US government is serious about attacking fiscal problems it is also true that the world's attention is temporarily diverted to other places. That won't last. There will be another time in the next year when the attention comes back to our own deficits and debt and the bond vigilantes will begin to wreak havoc. Let's hope that someone in government understands this and will get the process going before these vigilantes do too much harm.

  9. Hi Larry,

    Last night I was catching up from not being on the internet over the holiday weekend. If you think I posted a lot here check out how many new facebook pix I posted.

    I was not endorsing Delong, just saying I was amused by the comment about getting cooties from holding govt bonds and money.

    Jevon's Paradox is well accepted by tec guys like me, and it seems to make sense from an economic sense; the more efficient it is to use a resource the more demand for that resource.

    In my travels I have not noticed a lot of standards I can apply to most groups. I am sure some peeps in Vietnam dislike the French, but some like them. At one time children from Vietnam women and black US soldiers were shunned, but from what I have read the US has a more positive image there now. Vietnam would not be my first choice as a travel destination, but some of my internet friends are planning to go there

    I have mixed feelings about vigilantes. The do serve a purpose of setting a market interest rate on money if govts try to impose an unrealistic interest rate, which could be viewed as doing good. On the other hand they can mess up govt plans to better manage the economy.

  10. Tom, Our conservative friends might have some fun with your last comment, "On the other hand they can mess up govt plans to better manage the economy."

    An interesting argument concerns the extent to which these vigilantes are right or wrong. For example, recall where (I think) the word comes from. Vigilantes formed when they felt that the government was either to weak or too corrupt to enforce the law. The vigilantes took the law into their own hands. In the case of bond vigilantes, if they are really punishing bad governments only, then we needn't worry too much about them messing up good govt plans. Mostly they are bringing to the forefront bad effects that were going to come later....Of course, if vigilantes are not so correct or honorable, then I agree with you. Isn't this more fun than Facebook?

  11. I suspect our Libertarian friends might have more fun than conservative friends with the comment.

    My take is that the prime directive of the bond vigilantes is to make money. It is not important to them that good or bad govts get harmed or rewarded. They do not care if they are correct or honorable.

    Since the prime directive of many, if not most, pols is to get re-elected it never surprises me when the govt plans to better manage the economy are in reality simply vote buying schemes.

    So as far as I am concerned vigilantes and pols deserve each other. I just try to fly under the radar and not make too many waves.

    It is more focused than facebook, which often has a lot of noise.

  12. Thanks for participating! It is good to have the chance to get to know you better. As for your last points -- two points. I agree that vigilantes are driven by the desire to make money. But they make the most money when they guess correctly. So this is a case when personal motivation can lead to social benefit. If pols are messing up and vigilantes hasten the inevitable negative result -- they make money and the country knows they need to replace the pols. Don't you feel all warm and fuzzy now? :-)

  13. Several blog entries ago you posted something about not wanted to say the stock market (and by implication bond and commodity markets) being some type of a gamble, or at least require some type of guessing correctly to make money. I still have not figured this one out

    I don't think Goldman has any excuse but blind luck. I also suspect that this has happened to bond vigilantes. But sometimes being lucky is better than being good.

  14. I think this blog is awesome because Larry is good at making metaphors that use one universally understood word to save a paragraph (like whack-a-mole or one-club-in-the-golf-bag). The answer to our economic uncertainties lies in educating the 95% of this country that has little understanding of economics... and I'd put myself in that 95%... understanding economics won't make the problems any easier, but I'm convinced it would smooth out the wide-swinging bullwhip that seems to be erratically spraying like an unmanned hose, as masses of people actually take the whack-a-mole baits and switches.

    To end with a Davidson-esque analogy, I think these wild swings are like a huge school of fish that dart from place to place after one fish gets snagged out of the pack from what looked like healthy bait. The early fish clean a few hooks and get lucky, the late fish get snagged, everyone gets confused.

    Economic education might help the fish ignore the worst bait, because they can learn to see the boat, the line, the hook, and why all those pieces are there, and what the alternatives are. Right now, most people don't know the difference, and have lots of holes in their mouths, and they're about ready to stop eating and swimming altogether. Educated and uneducated alike.

    Keep making metaphors, keep making these debates simple to understand and fun and localized... then gradually widen that circle of limited sympathy... it will indeed make the world better and everyone's lives a bit more comfortable, in my humble opinion!

    Keep up the good work Larry!

  15. Geez -- what a nice comment. You made my day. My mother couldn't have done better! But your comment does make me hungry for a McDonald's fried fish sandwich!