Junk logic meets junk science in Paul Krugman’s NYT Blog

In stating that he is working on a climate-related project, Paul Krugman gives a hint that he will be offering up some “global-climate-change alarm” in his title, “Very Scary Things”.

Given the embarrassments surrounding claims by some climate scientists, Krugman seems to have sought gravitas by linking a paper by Marty Weitzman on extreme uncertainty.

In that paper, Weitzman cites the Paleocene–Eocene Thermal Maximum (PETM) when temperatures rose about 6C over 20,000 years & was accompanied by mass extinctions.

I wonder if Krugman even read Weitzman (a scholarly Harvard prof) who points out that he relied upon the Wikipedia entry for PETM.

And I have to wonder if either of them read the Wikipedia entry…?

As it turns out, the mass extinctions that supposedly would have occurred 55.8 million years ago. But the species lost were in deep seas while mammals successfully radiated at the same time!

relying on their own chosen references, a warming climate puts stress on some species but not on others. Okay, well, then what is the point.

One thing made clear is that junk logic & junk science are intertwined.

Interesting read

As I am lecturing a course on strategic management & multinational companies, I found a very interesting book that deals with different governance systems that affect business management & operations. It offers useful insights into how efficient institutions emerge through private agreements when publicly-imposed rules are either absent or ineffective.
He argues that relation-based governance arises out of a cost minimization strategy that is influenced more by stages of development of institutional infrastructure than by cultural settings.
The author follows along similar lines to Douglass North’s contributions (whom he cites) & Elinor Olstrom (whose contributions he does not cite).
LI Shaomin. Managing International Business in Relation-Based versus Rule-Based Countries. Business Expert Press, New York, NY: 2009.

Psycho babble & bubbles

Economist lacking a sound understanding of how markets function tend to rely on psychological explanations for asset “bubbles” like those that preceded the current spate of economic & financial turmoil.

Most famously, John Maynard Keynes (General Theory of Employment, Interest & Money, 1936) alluded to “animal spirits” whereby people act impulsively & spontaneously without regard to rational calculations. More recently, Robert Shiller revived Keynes’ psycho-babble by making a cottage industry out of writing about “irrational exuberance” that can lead to financial ruin

In one sense, their point is banal in being a simple truism. Rash judgments can lead to unhappy ends. But serendipity might also lead to large gains.

What Keynes & Shiller & others worry about is that that “animal spirits” introduce a systematic tendency for markets to be unstable & prone to recession such that the negative impacts are widespread. Accepting this assertion invites the conclusion that government can & ought to intervene to restore sanity to markets.

It turns out that there are perfectly good economic explanations for recession that do not lead to conclusions that support an expansion in the role or actions of government.

In general, markets do NOT have an inherent tendency for wide swings in business cycles. This is because under normal conditions, “bulls” (optimists that believe value will rise) tend to be offset by “bears’ (pessimists that expect declining values).

Indeed, all (voluntary) market transactions require that people on opposite sides of the trade have differing views on the value of the object being exchanged. Otherwise, no trading would occur. Yet this seldom leads to financial collapse or economic distress.

Recessions or “busts” are almost always preceded by periods when most people are bullish & confident that values will continue rising.

If this happens in one sector of an economy as occurred during the real estate bubble in the US, values in other sectors must fall UNLESS more liquidity is pumped into the financial sector, an action primarily left to central banks.

As it turns out, bubbles & artificial “booms” throughout history can be traced to some form of monetary promiscuity. In modern times, central bankers artificially lower interest rates to reduce the cost of credit to households & businesses reduces the incentive to save & lowers the perceptions of risk.

Remember the fairy tale character of the Pied Piper of Hamelin that lured rats over the cliffs with alluring music? Consider central bankers as releasing paper money as a lure that induces otherwise sensible people to over-extend themselves before falling off a financial cliff.

Keynes’ & his followers fail to understand that the apparent “herding” behavior of home buyers & businesses becoming over-leveraged is driven by government policies that create distorted market signals.

It was once said that real men do not eat quiche. I am unconvinced that masculinity is challenged on the basis of food preferences. But I do believe that REAL economists must DO economics & that psycho-babble is for intellectual sissies that cannot grasp the elementary functioning of markets.

Taxing “speculators” is another power grab by greedy politicians

As noted in an earlier entry, Robin Hood should be remembered for staging a tax revolt. But some of those that mischaracterize him as a promoter of forced income redistribution are now egregiously defaming this hero by naming a tax after him!

A proposed “Robin Hood Tax” is being considered in many quarters that would assess a fee of 0.05% on what are said to be “speculative” trades in foreign currencies, shares & other securities.

Poor old Robin must be rolling over in his grave!!!

For their part, Gordon Brown, Angela Merkel & Nicolas Sarkozy have expressed support in anticipation of a vast windfall of new tax revenues. And they have been joined by a large growth of economists, including Nobel Laureate Joseph Stiglitz. Even Warren Buffett & George Soros have joined this chorus that seems tone deaf to how markets work.

Well, who could oppose such a tiny tax on such odious people like bankers!

Critics of speculative activities as if they were anti-social are ignorant of fundamental economic logic or are wielding crass demagoguery & populist pandering to expropriate lawfully-earned income.

Most people would define “speculation” as actions involving securities or commodities being bought solely for rapid resale or sold with the intent to rapidly repurchase them. Critics condemn such behavior either as having no “socially redeeming” quality or as being detrimental to other economic or financial activities

But the truth is that speculation is socially beneficial. since when correct guesses are made about future movements of prices, these actions tend to stabilize markets by reducing volatility of price & availability.

The most basic aspect of speculation involves buying at low prices to sell later at higher prices. But a similar strategy involves selling at high prices to buy back later at a lower price (known as “short selling”).

Consider buying early at low prices to sell later after prices rises. This means that more was sold when prices were low & more made available for sale when prices are going up. And buying at low prices will moderate further price declines while selling when prices go up will moderate further price increases.

Following the same logic, we can see that short selling also has a stabilizing effect. Selling at a high price in anticipation of lower future prices & buying back later after prices fall means more can be sold when prices are high & more purchases made when prices are going down. Selling when prices are high helps moderate further price increases while buying when prices are going down will moderate further price declines.

Speculators are worthy individuals that merit more acclaim than government officials with insatiable appetites for power & revenues or “do-gooders” that would impose taxes on activities so valuable to the functioning of society.

Inconvenient realties are unsettling to “settled science”

An interesting anomaly: 2001-2010 was the “snowiest” decade on record.

Even so, a staffer at the UK’s Meteorological Office (MET) says this will be “warmest winter in living memory”.

It turns out the Met Office looks at 15 HIGHEST temps from November to March rather than the “meteorological winter” of December through February that will put an upward bias in their report.

Another news item reveals the head of the Met Office received a 25% pay rise despite woefully incorrect forecasting. Surely this is one of the primary functions of his team. But there was none of the (justifiable) outrage expressed as there is over bonuses paid to private-sector managers whose companies fail to perform!

Who would Robin Hood hang with? Tea Party folks or “limousine lefties” at their coffee klatch?

It is bad enough that redistributionist “progressives” rely upon dubious economic arguments to promote polices to confiscate the income or wealth of some to be given away to others. But they also willfully & shamelessly corrupt the historical record to concoct sympathetic characters to support their schemes.

In particular, supporters of income & wealth redistribution often rely upon a misrepresent Robin Hood as someone that took from the rich in order to give to the poor. A more correct interpretation of the motivations & actions of this heroic figure was an opposition to an overbearing & acquisitive government overseen by venal, corrupt rulers.

His actions against the Sheriff of Nottingham were to take from the tax man what had been unfairly wrested from hard-working citizens. As such, Robin Hood targeted the “ruling class” of political leaders & their henchmen to reduce an onerous tax burden on those in the productive class.

In this sense, Robin Hood was a key figure in an early tax revolt. In contemporary terms, he would be more likely to keep company with members of the Tea Bag movement in the US rather than consorting with those seeking higher taxes to maintain or expand a welfare state.

Crises? What crises?

Politicians, international bureaucrats, & pundits in the mainstream media opportunistically use the term “crisis” to describe conditions of economic turmoil as that is currently being experienced. In turn, the world seems to be constantly threatened by a tsunami of “crises” that invite more interventions by public officials.

For their part, politicians use images of impending doom to frighten citizens into accepting restrictions on their freedoms or acquiescing to increased taxes. Indeed, politicians seen as “doing something” legislatively, even if what they do is costly & ineffective, tend to lauded.

But the good news is that economic & financial “crises” are not what they used to be. Or perhaps better said: they never were.  As it is, using “crisis” to describe economic turmoil is a misnomer since it implies catastrophic collapses of national, regional or global financial markets.

It turns out that financial markets are increasingly less fragile due to structural adjustments in emerging economies & reforms in advanced economies that offset possibilities of systemic failures. Similarly, financial instruments like derivatives spread risks & costs that can improve the quantity & quality of financial data from domestic capital markets so global capital markets operate more efficiently.

Now, global investors have access to better data that is both rapidly & widely available so they can assess risks associated with investments in far-flung reaches of the world. But problems arise from central bankers undermining the concept of risk by flooding markets with excess liquidity & artificially-cheap credit.

In the end, financial shocks are not necessarily a cause for alarm. That is unless they lead to precipitous actions by public-sector officials such as nationalization of the debts of Fannie Mae & Freddie Mac.

Greece & the euro–tragedy becomes farce

Revelations on Greece’s fiscal improprieties came as no surprise to any honest observer of the political sham of European monetary relations. In published comments I made on the emergence of the euro, I raised questions about the Stability and Growth Pact that set debt & deficit limits on euro-zone governments.

At that time, I pointed out that torturous accounting gymnastics were being employed to allow high-debt countries to fake their way into the European monetary union. These included Belgium, Greece and Italy with public-sector debts exceeding 100% of GDP, far higher than the 60% limit. (France, Germany, and Italy exceeded the 3% limit on the deficit-to-GDP ratio upon their accession.)

Of course, no public officials will be brought to book for fraud or falsification of documents that would have surely led to prison terms if carried out managers of a corporation. Nor will be any Eurocrats be held accountable for willfully ignoring the ugly realities of Greece’s serial violations.

Radical solutions like default or leaving the euro-zone to allow devaluation of a new currency or using currency debasement to reduce public-sector debt (“inflation”) seem unlikely. And sensible solutions that involve deep cuts & real curbs on public-sector spending are probably impossible.

Instead, the Greek fiscal mess is likely to be resolved through subsidies & loan guarantees from the European Union or handouts from the International Monetary Fund or both.

But providing taxpayer-funded remedies rather than market-based corrections will put additional burdens on the private sector while the public sector remains overstaffed & inefficient. And to add injury to insult to the private sector, the Greek government will be heralded as acting responsibly if it imposes new taxes or raises rates on existing taxes.

Alas, none of these steps will boost growth or increase jobs in the private, productive sector. And so it is that this Greek tragedy will become farce.