14
Mar
10

OBR – Round the Bend with Kevin Hassett

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My good people: it’s been a while and a day since the last time we inspected the fine work of everyone’s favorite Bloomberg commentator, economist and political calcumatrician, Lord Kevin Hassett.  There have been a terrible lot of articles between then and now, so identifying only the most golden nuggets from them is the order of the day, as well as the considerably lazy man’s way out.

And the dude was most certainly a lazy man.

In the substantial interim twixt the present and my previous hatchet job, Hassett came under fire from Robert Murphy at the Mises Institute, for some decidedly shaky reasoning:

Recently, when the GDP estimates for the fourth quarter of 2009 came out, many cynics dismissed the 5.7 percent “headline figure” as being mostly an “inventory blip” or an “inventory bounce.” Although he was not alone, AEI economist Kevin Hassett was the most forceful I saw on the topic, so it’s worth quoting from his Bloomberg article:

When is quarterly gross domestic product growth of almost 6 percent bad news? When it looks like what was reported last week.

US GDP increased 5.7 percent at the end of last year, with more than half of that growth — 3.4 percent — attributable to changes in inventories. This astonishing impact of inventory has ample historical precedent, and the bottom line has terrible implications for 2010.

Inventories are a remarkable corner of the economy. They are the goods and materials that companies keep on hand to make sure that their operations run smoothly. They are the boxes of food on shelves at the grocery store and the bins of metal parts sitting next to the assembly line in a manufacturing plant.…

Inventories are even more important during recessions. In [a] paper, co-authored with Louis Maccini in 1991, [Alan] Blinder found that 87 percent of the decline in GDP from the peak to the trough of the recession was attributable to inventories.…

Since 1970, there have been nine quarters, like the last one, when GDP grew by at least 3 percent and inventories accounted for at least half of that growth. The history of those quarters is hardly a favorable sign of what is in store. (emphasis added)

First, let us note the familiar problem with relying on conventional GDP calculations. Hassett talks as if inventories themselves have some power to steer the economy, as opposed to the human choices underlying changes in inventories. It’s a bit like saying 87 percent of fevers can be attributed to thermometers.

But when it comes to the discussion of last quarter’s GDP figures, the focus on inventory changes is particularly perverse. I bet those readers who don’t already know the answer would have been quite confident after reading Hassett’s article that inventories rose in the fourth quarter.

After all, it would make sense for someone to say, “Sure, production was up 5.7 percent in the 4th quarter of 2009 compared to its level in the 3rd quarter. But that spike in output is unsustainable, because 3.4 percentage points of the growth went right into warehouses. It’s not as if the final consumers picked up their spending by the full 5.7 percent.”

As I say, the above reasoning would be problematic because it presumes that spending green pieces of paper is the ultimate source of prosperity, but besides that, it would make a certain sort of sense.

Yet that’s not what happened in the fourth quarter of 2009. No, inventories fell, as the BEA’s press release makes clear.

BAM!  Well, at least Hassett missed the point forcefully.  When not mishandling national income accounting, Hassett found time to take us on a lighthearted journey into the pretentious world of wine investing—that would be investing in bottles of particular vintage that might be getting a little bubblicious.  Then in November, he discussed dollar fallout resulting from flight from U.S. government debt precipitated by high income and corporate tax rates unable to be raised any further coupled with ballooning government deficits.  The article seemed to miss that revenues were always predicated on a resumption of robust growth.  Although tax rates are important and the ones currently in place are hardly beneficial (probably removing corporate and income taxes entirely would be optimal), it is unclear that the U.S. could continue to pay future outlays even with an optimal Lafferite tax rate.  The Austrians also attacked some of the conclusions of Art Laffer and the supply siders back in 1980s.

Moving on!

From Atom Smasher Exposes Hole in Earth’s Defenses: “Right now, the world’s governments have no mechanism to coordinate rational thinking about these risks. If the U.S. wanted to stop the LHC experiment, it would have no recourse short of military action.” Yeah, like the time they should have had a body to think rationally about a preemptive strike on Iraq.  Oh right, there was that U.N. thing.  And most nations didn’t buy the reasoning.  And the U.S. went ahead and did it anyway.  So the U.S. can stop other countries from doing something batshit crazy, but it’s pretty clear other countries aren’t capable of stopping America from going full retard.

Next:  Calling Barack Obama a Manchurian Candidate.  His policies are intentionally retarded!  Regime uncertainty is abound in the halls of the Federal lawmakers, and it is most assuredly pernicious, but it is probably more accurate to regard them as merely blissfully ignorant.

But, hark, a decent suggestion: “We might consider institutionalizing the financial SWAT teams that performed the stress tests and regularly requiring firms to open up their books to them. Or, we could require firms to provide reports to the public that are similar in detail to what was required for the stress tests.   Democrats, one might suppose, would prefer the former solution, Republicans the latter. But either would irrefutably be a step in the correct direction.” But alas: “In an important speech last week, Federal Reserve Governor Kevin Warsh found something that both parties can agree on when it comes to fixing the financial system…The basic message from Warsh, who was appointed to the Fed in 2006 by George W. Bush.” Slow your roll, player, why does it matter who appointed—oh you were trying to score political points there.  Dick.

Obama’s Love for Labor Makes for One Unholy Union.  Wait, did he just make an end-around to a gay marriage joke?  I think I’m starting to read into things a wee too much.  Not a bad commentary, but although opposition to government privileged labor cartels is fair game, insinuating that they are controlled by the mob because the FBI says they are isn’t the most constructive form of argument.

In probably Hassett’s best article of the last few months, we find out that (a) economic models can be beaten prediction wise by simple extrapolations and (b) Hassett got his Ph.D from Penn.  Holy shit, really?  Maybe he is smarter than us all.

LET’S EXPERIENCE SOME MORE OF THE MAGIC:

As the U.S. unemployment rate surged to 10.2 percent in October, economists scratched their heads and puzzled over the job-creation failure of the biggest stimulus package in the nation’s history. Across the Atlantic in Germany, policy makers were high-fiving as their unemployment rate unexpectedly ticked lower for a second time after peaking at 8.3 percent in June and July.

Yah! Ve are not truly shitty!

While economic differences can be difficult to explain, the remarkable resilience of the German labor market is clearly and directly attributable to a specific economic policy. German policy makers have been innovative and clever. The Germans have discovered a secret medicine that can cure unemployment, or at least minimize its spread.

Is it blowjobs?

Americans would do well to take some.

It is blowjobs, isn’t it?

The policy in question is called “Kurzarbeit,”

Yes, efficient German blowjobs!  Or this could be the method of German coitus—only takes three strokes and guaranteed baby.

which translates approximately as “short work.”

Oh.

Firms that face a temporary decrease in demand avoid shedding employees by cutting hours instead. If hours and wages are reduced by 10 percent or more, the government pays workers 60 percent of their lost salary. This encourages firms to use across-the-board reductions of hours instead of layoffs.

This also assumes that reducing everyone’s hours doesn’t produce an unintended problem rather than just firing excess workers.  Would this even work operational perspective (i.e., would a work team be able to function if all the members could not work more rather than losing one member)?

The economic argument in favor of such a policy is powerful.

When a recession strikes, firms are faced with a dilemma: sales and profits are down, and many workers are idle. But finding skilled workers is costly and time-consuming, involving large fixed costs. If a firm fires workers, it may incur large hiring and training costs when the recession ends and sales turn back up.

This assumes that the firm hasn’t gone fucking bankrupt by the end of the recession.

Thus, a firm would prefer, all else equal, to hoard labor during a recession.

And another assumption using the ever popular ceteris paribus.  Now if only someone would offer them a subsidy to do so…

Firms might well prefer to respond to a 20 percent cut in sales by reducing everyone’s work by 20 percent. That way, employees remain part of the firm, and ramping up production is less costly down the road.

So firms don’t care if the workers are getting paid less, unless they can go somewhere, which they can’t…because it’s a recession.  So why don’t firms just cut hours if it is more beneficial for them to do so in order “to keep the team together” and reduce post-recession costs?

A number of factors discourage American firms from making that choice. The biggest is government policy. If a firm lays off workers, the government mails the unemployed a check. If the firm reduces work-hours, there is no government assistance, and employees are left to face the entire decrease in wages on their own.

Ah, so the workers have the incentive to just quit rather than work a short-term job in order to collect unemployment insurance.  But then, why not just get rid of unemployment insurance?  Wouldn’t that solve the problem?

A U.S. program based on Germany’s would be attractive to firms, workers and taxpayers.

It would subsidize

Told ya it was a subsidy.  FREE MARKETS!  ONLY SOME OF THE TIME!

firms as they hoard labor, enabling them to keep the best parts of their team even when sales dip. As the economy expands, firms will then be able to expand rapidly too, without sinking tons of time and resources into costly search.

Unless that business has failed in the meantime.

For workers, having a part-time job is vastly preferable to being unemployed.

Wait, so they wouldn’t quit their jobs if just their labor hours were reduced?  THAN WHY THE FUCK DON’T AMERICAN FIRMS JUST REDUCE EVERYONE’S HOURS?

What the entire analysis misses is that firms do not know if they will necessarily survive the recession.  They may have a fair assessment of their prospects but as uncertainty reaches its height during a downturn, firms become conservative and stringent, particularly concerning their costs.  Thus, cutting workers entirely may serve to reduce the uncertainty on the firm’s survival by bringing and potentially increasing the firm’s cash.  This analysis assumes that reducing all workers’ hours would have the same cash effect as reducing the headcount—it may or may not.  Additionally there is a point at which work hours cannot be further reduced without impairing the operations of a business.  Point being: there could be confounding factors in the German case—this policy may not be the sole, or even the primary, reason behind the difference in unemployment.

A Republican takeover of the House may be the only thing between the U.S. and the abyss.

Jesus titty-fucking Christ.

Yeah, totally, maybe we’ll only wind up invading something easy this time.  Like Bahrain.

Hassett is discussing here how expanding U.S. budget deficits could precipitate a panic, as what is happening in Greece.  And he tells the readers what is to befall the nation should the government not take immediate corrective action.

Syracuse University economist Len Burman, the modest and sober budget expert who was a top official in President Bill Clinton’s Treasury Department, told the Washington Post that according to a model he has developed to study the current situation, a “catastrophic budget failure” might happen.

Will it happen?  Maybe.  Possibly.  JUMPCUT TO BIG DADDY DREW: “Could Brandon Marshall be a success? I don’t know. Is he worth the sixth pick? I doubt it. MAYBE. Does he like throwing bricks at women? MAYBE. Has the US Army developed some kind of supergun made only of barley and flint? It could be, but I emphasize that COULD. A legitimate 40 percent chance of couldness.”

Burman added, “I try not to get too depressed, because if I really thought it was going to play out the way this model works, I would just move to a cabin in Montana and stockpile gold and guns.”

So even Len doesn’t think it’s actually going to happen.  Unless he’s knee deep in sheep shit in Cheyenne right now.

The worst need not happen, of course.

FUCK, WHY EVEN MENTION IT THEN?

Does Hassett want to nail Scott Brown?

Before and since Scott Brown locked up his Senate victory in Massachusetts, Democrats have tried to portray him as an economically illiterate radical.

Uh…

Senator Charles Schumer of New York distributed a fundraising appeal that called Brown a “far-right tea bagger,” an accusation that rose to a chorus after his election. Among serious followers of policy, it didn’t help Brown that he once posed nude for Cosmopolitan magazine.

Uh…

The special election in Massachusetts sprung on everyone so quickly that somebody crazy certainly could have slipped through the cracks. A look at Brown’s platform and economic statements suggests exactly the opposite.

If a nonpartisan, above-reproach economist

Hassett = not that economist.

were assigned to review the academic literature and design thoughtful and prudent economic policies consistent with the most persuasive findings available, he would produce Brown’s platform.

Now who wants to do some tea-bagging, Hassett?

Or the near-perfect economic platform would be Ron Paul’s.  The guy that ran in Republican primary in 2008?  The old guy, a doctor?  THE ONE THAT MADE GUILIANI LOOK LIKE AN ASSHOLE!  Yeah, that guy.  But getting rid of the Fed?  IRS?  The Department of Education?  THAT’S NOT SERIOUS ECONOMICS!

Personally, I like the liberty with logic Hassett takes here.  “I’m not saying that I’m the ‘nonpartisan, above-reproach economist’.  I’m just saying that this hypothetical entity would definitely pick Scott Brown’s platform.  How do I know this would be the case?  IT’S OBVIOUS.”  This may be the first case where someone creates a straw man to support an argument.

And now, some hope for the future.  IT’S OBJECTIVELY TRUE.  LIKE SCOTT BROWN’S PLATFORM:

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