“Prices Must Be Free To Tell The Truth”

by Mario Rizzo

I am not sure who first said this but I believe it was the economist Benjamin Anderson (although Arthur Marget has been credited). In any event, Henry Hazlitt promoted the statement.

I think the very interesting opinion piece by our regular guest-blogger, Jerry O’Driscoll, in today’s Wall Street Journal is in the tradition exemplified by this post’s title. But there is something more. The article shows that falling prices (both absolutely and relatively) in particular markets are not a bad thing for the recovery process. Naive Keynesians get upset anytime an important price goes down. Oy gevalt! What will happen to aggregate demand? There will be a cumulative decline, and so forth.

Recovery doesn’t mean maintaining or going back to unsustainably high prices. (I offered my two cents in the Freeman.) It must involve readjustment of relative prices as a result of the credit-boom and bubble generated distortion of relative prices. Jerry’s article reminds of us all of some basic truths.

Tracking Obscure Quasi-Public Govt Agencies

by Bill Butos

In December 2008 Princeton economist Alan Kreuger suggested “paying close attention to warnings concerning obscure, quasi-public agencies known by their abbreviations” and their “dull but critical functions”

Consider what follows a short “update” on one such quasi-public government agency that caught my attention.  In a little noticed article in the Wall Street Journal on July 23, the Pension Benefit Guaranty Corporation (PBGC) agreed to assume responsibility of “$6.2 billion in pension liabilities …from Delphi Corporation.”  Delphi just happens to be the holder of GM’s pension funds.

Tribal Healthcare

by Mario Rizzo

The healthcare debate is bringing out some interesting ideas. Consider what the philosopher Peter Singer (Princeton) had to say in the New York Times:

“The death of a teenager is a greater tragedy than the death of an 85-year-old, and this should be reflected in our priorities.  

Neither Truth Nor Charity: The Destructive Influence of a Papal Encyclical

by Mario Rizzo  

Recently Pope Benedict XVI issued a papal letter (“encyclical”) called “Caritas in Veritate” [CV] or “Charity in Truth” which is largely about economic issues relating to globalization. While there have been some commentaries on it, two prominent ones (here and here) in the Wall Street Journal do not reveal how truly bad it is. It may be that the pressures of journalism are such that people read such documents too quickly. I am being charitable.  

Thank You, Alfred Marshall

by Mario Rizzo  

This is not the whole story. But it is reassuring to see that the Great Recession has not repealed the elementary Law of Supply and Demand.  From the Christian Science Monitor:

“Sales of new homes in the United States rose to their highest level in seven months, providing one of the strongest signs that the decline in the residential construction industry may be over.

But to achieve that stabilization, home builders are continuing to lower prices to lure new buyers – a phenomenon taking place in real estate markets around the world.

In June, the sales of new US homes jumped a higher-than-anticipated 11 percent from the level in May, the Commerce Department reported  Monday. The new report suggests that the home-building industry is nearly halfway back to its June 2008 level of sales, after hitting a record low in January (seasonally adjusted).

The problem is that the sales prices continue to fall. In June, the median price of a new home fell back to $206,200, down from $219,000 in May and not much better than the multiyear low of $205,100 in March. Prices for new homes haven’t been this low since December 2003.”

 

Hello from Abroad!

by Gene Callahan

I’m writing from Zurich with two queries:

1) Having just paid about $4.50 at a tacky cafe for the smallest cup of coffee I’ve ever had, and $20.00 for the smallest can of spray for athlete’s foot that I’ve ever seen, I wonder, does anyone understand how these prices are sustainable? I feel like I could fly back to the US, load up a suitcase with anti-fungal spray, fly back, and make a profit re-selling it here. And don’t they make pharamceuticals here in the first place?! Does the law of one price not apply to Switzerland?

2) Driving through the airport on the way here, I passed under a sign reading ‘Use Both Lanes.’ It struck me as a misguided directive, for to whom is it directed? It isn’t helpful or even legal for the individual driver to ‘use both lanes,’ so apparently it is directed to the collectivity of drivers passing under the sign. But this collectivity has no decision making power: only individual drivers can decide to use one lane or the other, but no one whatsoever has the power to decide ‘Let the drivers evenly distribute themselves amongst the two available lanes’ — which is clearly the aim of the sign. The sign strikes me as a case of mistaking a spontaneous for a planned order.

Any comments?

Healthcare Tax Gimmick

by Chidem Kurdas

Yesterday at a news conference  President Obama laid out his view of the healthcare bill being hammered out in Congressional committees. One could question many of his statements—although the members of the press picked to ask questions did not. So as not to write a post of inordinate length, I’m will focus on just one point.

Mr. Obama says that savings will take care of about two-thirds of the cost of the new entitlement program. “The remaining one-third is what the argument has been about of late,” he says.  For the sake of the argument, let’s stay with that.

The one-third of the money is to come, in one form or another, from the rich—or those so defined. The President says he’s OK with the House proposal to add a surcharge  to families with a joint income of a million dollars. He emphasizes how important it is that the middle class not be saddled with this additional burden.

Why Only Fed Transparency?

by Bill Butos

Fed independence has come to mean the absence of operational control by non-Fed entities in designing and implementing monetary policy. It also means a presumption (long asserted by the Fed) that its effectiveness in conducting “business” justifies that it operate under a cloak of secrecy, although one that for several decades has adapted to Congressional and “freedom of information” pressures for greater transparency.  The call for greater transparency is a public concern because government and its agencies have the ability to affect us directly and massively.  But it does not address the more fundamental question of choices in monetary regimes.   Transparency matters only because we have central bank.

Should Economists Think About What They Do?

by Mario Rizzo  

Believe it or not, this is a controversial question!

Brad DeLong has argued that the profession seems to know less today about macroeconomics than, say, Keynes did. Paul Krugman has expressed similar sentiments. They see a kind of collective or professional unlearning in the past thirty or forty years. They are right.  

Ben Bernanke: Ipse Dixit

by Mario Rizzo

Today’s Wall Street Journal has an opinion piece by Fed Chairman Ben Bernanke. He assures us that the Fed has the tools and the willingness to restrain inflation when that is appropriate (not now). He recognizes it is all about timing. But everything is under control:

“Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period. We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability.”

How good are Bernanke’s abilities as a forecaster? Thanks to YouTube we have evidence (HT: Bob Murphy).