If you want to get my attention, post a graph

Thursday, October 22, 2009

H/T to Tao

For those of you who get bored very quickly with graphs and econ-speak, please stop reading now. I rarely write and indulge in the following types of discussions on my blog, because no one understands it, it can’t be explained without boring people to sleep, and most people don’t care. If you aren’t interested, just skip to the next post.

However, my good friend Tao had an interesting post a week or two ago and I’d be crazy not to mention it since it made the economist section of my brain cringe in pain. Anything that awakens my desire to engage in an economic discussion is worth mentioning. To date, Tao is the only one aside from President Obama who has been successful in doing so. Congratulations Tao (I apologize for the delay in this post)!

Below is a graph posted by Tao last week in his post “Back to the Farm” It shows Year-to-Year changes in Real Private Investment in Software and Equipment.



From it, two things can be learned. First, if you want to get my attention, post a graph. After living in the economics world for so long, I love graphs. Second, according to Tao:

“The 1990s saw a remarkable period of sustained, high levels of investment in equipment and software. In contrast, a sustained period of very low interest rates during the current decade was barely able to coerce firms to invest in the high single digits. This, is a critical problem, reflecting low expected returns to capital investment.”

I’m on board. This makes sense! But, in classic Tao-Conservative Generation paradox, we agree on premise and come to two totally different conclusions.

“If you are not making investments in equipment and software you are basically saying that current productive capacity is good enough for the future. This should have been a sure sign that there was trouble ahead.”

Tao goes on:

“You see, during the Bush Administration you had very low interest rates and very low taxes and still you could not entice people or companies to investment in equipment and software to grow their own capabilities. Thus, as long as investment growth remains constrained, as we have saw throughout this decade then withdrawing monetary stimulus would be a significant policy error. In fact, it would lend additional credence to reports that the Fed needs to do much, much more - a massive, unsterilized expansion of the balance sheet - should they even hope to stimulate sufficient investment demand to absorb underutilized labor.”

My guess at Tao’s conclusion, which is murky, would be; Since investment has not been sustained over the last decade, companies are either obtuse in failing to invest or unable, in which case big government/big bank Fed should come in and save the companies from their stupidity or immobility or maybe even replace private investment with government investment. This is pretty much the standard song and dance from the planned economy crowd. However, our recent economic situation is telling us something completely different.

One of the biggest problems with Tao’s argument is that it fails to take into consideration a recent nuance with regard to interest rates and big government spending, which is most likely the result of a common misunderstanding between how the Fed controls long term and short term interest rates.

When companies invest in capital it is through long term interest rates and not short term. When we hear that the Fed has cut interest rates, they are cutting short term interest rates, the result of which generally has no effect on the long term rate. The Fed often tries to influence the long term interest rates through open market transactions by buying and selling stores of US treasuries. Treasuries are a major factor in long-term rates since they represent the risk-free portion of the rate of interest. Generally speaking, when the Fed buys securities, the long term rate drops and when they sell, the long term rate increases. This is the general rule when you don’t take into account the current fiscal/monetary policy. The problem with our current situation is the massive and unhealthy fiscal spending coming out of Washington, which, if left unchecked, can and will crowd out the market, negate the Fed’s ability to influence the long term rates and send interest rates soaring.

Oh, before I forget…Tao, there was something missing from your CBO graph the day before this farm post. It was President Obama’s fiscal policy, so I decided to give the full picture below.



Don’t worry folks, Obama’s definitely not as bad as Reagan or Bush or 40 years of past President’s. He’s way beyond worse. I suppose my concerns are irrational and motivated by my conservative bias. It has nothing to do with the graph above, so don’t even look at it.

President Obama’s fiscal policies leave us with a “do one of two things” dilemma. Either we don’t pass a ton of massive spending increases finally giving the little guy what he deserves and repeal the joke of stimulus Obama signed into law so that we can open up private investment in capital, or we can have government investment in capital. Please, note that this is not a short term decision. If the US government crowds out the market with high interest rates, we are not likely to see a rebound in private capital investment for years. For those of you who have faith in government capital investment…I agree, a more mobile turtle force is going to bring us into the 21st century!

Another issue that Tao, Keynes and many other economists often neglect is the company’s second source of capital funding, equity financing, which is also known as “selling stock.” Below, is a side by side comparison of the change in the S&P 500 and the change in Real Private Investment. Looks similar, doesn’t it? This is why many, including Larry Summers, have argued (and yes many have also disputed) that lowering the capital gains tax can boost Real Investment, but that would require a “lower taxes” kind of solution that just makes the rich, richer.



In short, Tao is right! There is no way us smaller-government, lower-taxes types have any solutions to grow Real Investment. Central planning is doing a great job. Especially, with turtle mobility! How silly can we be? I’ll just sit here and wait for President Obama to assign me to my farm. Like the many philosopher-king types, I look forward to the return of serfdom.

Quick note to Tao: I’m not sure where your investment graph came from, but when I pulled the data from govstats.org, I could not reproduce the same large double digit changes in the 90's. Not sure if the problem is my data or yours.

10 comments

so which comes first in the second graph above..the drop in revenue or the increase in spending?

October 22, 2009 at 9:24 AM
TAO said...

Well, glad I could see that one, I am in the same leaque as Barack Obama and two, that we might actually turn blogging into something other than a mudslinging fest...

First off, you jump to one big conclusion, and that is where you say, "My guess at Tao’s conclusion, which is murky, would be; Since investment has not been sustained over the last decade, companies are either obtuse in failing to invest or unable, in which case big government/big bank Fed should come in and save the companies from their stupidity or immobility or maybe even replace private investment with government investment."

Actually, Tao believes that what we see today is directly related to our economic policies of the last 29 years and to understand today you must study the past.

I personally believe that this country and its future has been mortgaged for the benefit of Wall Street and the concept of us being an economic 'superpower.' We have turned a quasi capitalist economic system into a fuedalistic serfdom.

Which means any assumption of my economic philosophy a misconception.

Otherwise, I will respond to your post in detail and I will email it to you because obviously trying to respond via a comment is going to be impossible...and then you can decide how to post my response.

October 22, 2009 at 10:07 AM

Kook - they are not dependent upon each other with our current or past administration. The point is to spend no matter what :)

Tao - I hope you wouldn't be offended if I told you that Obama actually makes the economist part of my brain cringe more?

I look forward to your email! I agree, blogging is a horrible medium for exchanging ideas, especially when you disagree on various nuances.

My guess is that I will agree with all of your premises, but not the conclusion. Tradition is hard to overcome!

I apologize for the missed assumption. I'm more of a "don't understand the left's point of view" and I believe you can admit that there were likely more than one person on the left that read your post and came to the line of thinking I wrote about.

October 22, 2009 at 12:32 PM
TAO said...

When you claim "don't understand the left's point of view' you assume that one's political beliefs, whether 'left' or 'right' also determine ones economic beliefs.

To accept the fact that there are only two points of view is to reaffirm a two party system: Democrat and Republican.

You yourself bristle everytime I throw Bush at you because you claim to have 'issues' with his policies but the reality is he does and did represent this thing called "THE RIGHT."

If you consistently attempt to see everything from the prism of 'the left' and 'the right' then you have killed any chance that Ron Paul and or Rand Paul have. Because this thing called "The Right" to you has to include social conservatives and neoconservatives both of which groups detest the Pauls...

Nor can you argue against the bailout and or the stimulus because both of those programs support the behind the scenes supporters of the Republicans (ask LCR...he documented in a post just yesterday).

I know it is hard, but even economists have to think outside boxes from time to time...

October 22, 2009 at 1:35 PM
CJ said...

Generally speaking, when the Fed sells securities, the long term rate drops and when they buy, the long term rate increases.
Isn't this backwards? Don't prices increase (i.e rates decrease) when the Fed buys Treasuries?

October 22, 2009 at 3:08 PM
CJ said...

If the US government crowds out the market with high interest rates, we are not likely to see a rebound in private capital investment for years. For those of you who have faith in government capital investment.
Right now, though, rates are low. The scenario you're talking about may happen, but it has not happened yet. Government could stop borrowing once we see rates starting to rise.

It also seems the question of investment is another issue. The stated goal of the stimulus is to bring unused production capacity into use. Investment is about creating future production capacity. Proponents of fiscal stimulus are not arguing that gov't is superior to the market at allocating capital to investment.

I have personally been against the stimulus from the outset, but I am reconsidering b/c rates have not risen as I thought they would. I'm starting to buy this argument that gov't money can ease the pain of deleveraging.

October 22, 2009 at 3:47 PM

Tao - It is true that when I generally refer to the left and the right, I refer to them as ideological terms and not what members representing the ideologies has made them. My political scale is centralization of power vs decentralization. Private ownership vs public.

Unlike the academic political spectrum, I do not see fascism as a right leaning economic theory nor theocracy a ruling structure on the right.

Long story, but I think you get the picture. I am for things that make sense. Those with power currently do not make sense and so I'm here to point it out.

CJ - What do you mean wrong? JK, thanks for pointing it out. I corrected it. That was close...almost had the wrong explanation up on the web...forever...

As to your other comments.

As the great Arthur Laffer said, "there is no such thing as precision monetary policy." If there were, Volker's 20% interest rates would have stopped inflation in it's tracks 30 years ago. Seeing government stop borrowing would be an interesting trick. I'd love to see it.

Stated goal by whom? Obama assured me that we were investing to create long term sustainable jobs. Is there some other President you are listening to? Also, are you saying that Keynesian stimulus' goal is not to generate investment or consumption? If reducing unused capacity was the goal it was not how it was sold nor how it is working. Also, my post was more of a critic on my buddy Tao and as such I wrote from the premise that we should be seeking an increase in investment and

I will admit, that TARP has been effective in the short term. We'll have to see the effects down the road. Also, I believe they have increased the likelihood for many many more too big to fail scenarios. However, I'm still waiting to see any real tangible evidence for Obama or Bush's stimulus having any sort of positive effects. If you've got one, I'd love to know.

October 22, 2009 at 9:28 PM
CJ said...

Stated goal by whom?
This was a poor choice of words on my part. I'm saying the Keynesian goal, as I understand it, is to decrease unused production capacity, not to increase investment.

I agree it was sold as being related to jobs. They're selling environmentalism the same way, even though it's an extreme stretch.

I was against the stimulus for the reason you said: Let's see us turn this off and do an anti-stimulus when things get overheated. I agree with Keynesian economics, but I don't agree with the stimulus unless it comes with an anti-stimulus during the next expansion. That's obviously not going to happen.

October 23, 2009 at 11:16 PM

CJ - You must be one of the most reasonable persons I've ever met.

I agree. I don't fit into the Keynes is always wrong crowd. Instead, I think different tools work well at different times. I'm not sure Keynes was the right approach in this situation though.

Take a look at what analysts are saying about the UK. I can't get credit insurance for my corporation to do business with UK companies because of their massive monetary/fiscal policies. We are only a step behind them.

Yet at the same time, are the critics of Keynes dead on as far as the guaranteed negative outcomes of Keynesian policies? I'm not so sure anymore for the reasons you've indicated. I felt fairly certain, that with China dumping treasuries, we'd be in big trouble. It hasn't happened yet, but it is also too early to judge the long-term effects.

October 24, 2009 at 7:39 AM
theCL said...

My 2 cents ...

... then withdrawing monetary stimulus would be a significant policy error. In fact, it would lend additional credence to reports that the Fed needs to do much, much more - a massive, unsterilized expansion of the balance sheet ...

TARP, stimulus, et. al., you can blame it on whatever crook you want, you can call it monetary policy if you like too, but in reality, it's nothing but counterfeiting.

If it's somehow "good" for the economy to print (counterfeit) money, that somehow this makes the economy grow ... Then we should all buy good printers and quit our jobs.

Seriously, why do we need the Fed to do "much, much more," when each one of us can simply start printing dollars ourselves? The Fed does not have in its possession a magic fairy dust that gives their printed dollars any more value than the dollars we could print for ourselves at home.

This is the fundamental flaw in "stimulus" and Keynesianism in general - counterfeiting money is destructive to wealth.

Tao is right that our future has been mortgaged for the benefit of Wall Street and others. Washington DC is a crime syndicate!

And no, none of this was caused by "supply-side" economics. There is no such thing. It's nothing but a political label thrown about.

October 25, 2009 at 5:40 PM

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