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How to Reduce Inflation to Zero

Kevin Williamson’s Welcome to the Paradise of the Real was written over two years ago and I still refer it to readers.Sneaky Inflation is equal to that piece in bringing sound economic thought to bear on current issues with an engaging style.  Both pieces are in National Review.

An excerpt from Sneaky Inflation:

You see the same economics at work across all government activity. As Andrew Flowers reports at FiveThirtyEight, in 1998 about 60 percent of TANF (Temporary Assistance for Needy Families) spending went directly to poor people; today, that figure is only about 25 percent, with the rest of the money being diverted to other programs, many of which benefit important political constituencies rather than actual poor people. Medicaid isn’t a program for poor people, but a program for large, profitable, politically connected firms bidding on contracts worth hundreds of millions or billions of dollars.

The strange fact is that we are not seeing very much inflation at all except in those areas in which the government is trying to make things more affordable. We could probably get the inflation rate down to practically 0.00 percent — if only Washington would stop helping.

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Economics, Science and History

hko in Israel

Economics is a bit different from history by the use and study of certain underlying principles. It is  not a physical science but a  social science using scientific methods to analyze and understand. There are certain principles that are quite useful to explain and to in some sense predict inflation, unemployment, economic growth, trade deficits, unintended consequences, recessions, etc. But being social sciences these predictions are more meaningful in the long term than seeing changes by the month or quarter. These principles are useful to explain what happened even if it was not clear beforehand.  Keynesians predicted low interest rates would stimulate the economy, foes predicted inflation. Both were wrong. Monetarists did not foresee the drop in velocity.  Keynesians did not foresee that the accumulation of  higher fiscal friction costs would offset monetary stimulus. (Keynes, himself, was quite aware of this possibility and warned FDR accordingly.)  A lot of economists got pieces of the puzzle correct, but missed the picture.

But this experience like the Great Depression, and the Great Stagnation are great additions to the body of economic knowledge; like every plane crash makes flying safer.  Economics is still a very young “science”.

Economics began as a school of philosophy which was what Keynes earned his PhD in.  During this last collapse, we witnessed Wall Street surrendering its old philosophical understanding  of risk for a delusional mathematical certainty.  (PhD quants were becoming popular additions to trading organizations.)  The most notorious result was the record collapse of Long Term Capital -  a loud warning of what was to come that no body heard.)   Modern economics is guilty of the same.

Economic models are useful 90% of the time, but become quite useless in extreme circumstances, inflection points. Such points have also been the source of new discoveries in the physical sciences.

Woodrow Wilson was guilty of  seeing history as a predictive science, with an inevitability that defies… well, history.  Remnants of this flawed thinking remains whenever we hear of our political intellectuals speak of being on the right side of history.

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Transcending Ideology

From The Weekly Standard, The Roots of Campus Leftism by Warren Treadgold

The absence of reasoned argument is in fact one of campus leftism’s sources of strength. Refusing to supply ideological definitions leaves the impression of a viewpoint that depends not on arguments that in theory could be refuted but is instead so obvious to every decent person that it needs no support from logic or reason. The implication is that campus leftists favor a set of principles that transcend ideology, for which the appropriate name is simply “social justice” or “the truth.” Campus leftism is more a matter of feeling than of thought and is based more on passion and outrage than on reasoning. Counterarguments are shouted down on the ground that they offend or discriminate against favored members of the campus community, while disfavored members of the community receive no sympathy if they claim to be offended or discriminated against.

Although it may seem pointless to look for intellectual content in campus leftism, it really is an ideology, and it has intellectual roots. Its guiding principle is the Marxist concept that people are divided into classes of oppressors and oppressed. According to classical Marxism, the oppressors are the exploiting capitalists or landowners, who represent the “class enemy”; their victims are the working classes, otherwise known as “the people,” with the implication that their class enemies are less than human. The oppressors must be resisted, and the oppressed defended, by any means necessary. While Stalin, Mao, and Pol Pot killed large numbers of supposed oppressors, less extreme Marxists believed the job could be done by limiting the oppressors’ legal rights, including their right to free speech. In the case of universities, in most Communist countries people from the wrong class background were either denied admission to higher education or allowed only restricted access to it, while those from the correct class backgrounds received preference in admissions and hiring.

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“Talents for Low Intrigue”

from Mona Charen at National Review, What Are the Checks and Balances:

The Founders included the Electoral College in the Constitution to guard against demagogues, or in Alexander Hamilton’s words, men with “talents for low intrigue, and the little arts of popularity” but lacking the requisite “ability and virtue.” The Electoral College, as originally envisioned, is a dead letter today. So much for that guardrail.

Is the press a check on abuse of power? Will it cover a Hillary Clinton presidency the way it covered Bill Clinton’s (aggressively) or the way it covered Obama’s (pusillanimously)? I’d guess the former, but who knows? Also, the press is held in such low regard by the public that it may not even qualify as a guardrail.

HKO

The best that may come out of this election would be a reflection on how we got here and an examination of these guardrails. One guardrail was an elite that understood their fellow citizens, their values and their virtues.  Now they hold the common brethren in contempt and this is guiding the reckless populism. Ultimately the voters are accountable but their choices have been severely limited by a dysfunctional nominating system.

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Regulatory Rent Seeking

from David Goldman at The Asian TImes, Deplorably, Trump is going to win

That’s not why Trump crushed the Republican primaries. He won because Americans are tired of an economic elite that ignores them. Americans know the game is rigged against them. For generations Americans could make there way from the bottom to the top of the heap by starting businesses. In some periods more of them succeeded than others, but everyone knew someone who got rich more or less honestly. That came to a crashing end during the Obama Administration. There were fewer small firms with fewer workers in 2013 than there were in 2007.

Corporations are making money by gaming the regulatory system rather than deploying new technologies. Close to half of the increase in corporate profits during the past decade can be attributed to regulatory rent-seeking by large corporations, according to a June 2016 study by Boston University economist Jim Bessen. Bessen concluded that “investments in conventional capital assets and R&D account for a substantial part of the rise in valuations and profits especially during the 1990s. However, since 2000, political activity and regulation account for a surprisingly large share of the increase.”