Thursday, November 15, 2012

Europe in Crisis, Part 93814

Well, as you may have finally heard, Europe stopped teasing us with the prospect of recession and cut straight to the chase today, finally contracting by 0.4% last quarter and officially entering a recession. Although this new-found distinction is meaningless in the grand scheme of things since Europe's been on the ropes for years now, it gave me an excuse to write about it. Also, I'm doing a presentation on the Eurozone today and felt like sharing some of my discoveries.

My particular presentation is about the European Central Bank's (ECB) reaction to the crisis. Or is it crises, now? Anyways, up until Mario Draghi announced his unlimited bond-buying program, I've felt that the ECB's reaction to the crisis was incredibly inadequate. More specifically, I think that its monetary policy has been far too tight. I would say that there are probably two reasons for this:
  1. Germany's fear of/hatred of inflation in any and all forms.
  2. The price index that the ECB uses to gauge inflation has a fairly severe flaw.
The first reason is one that I've explained before, so I'll outsource on it:
"The Germans, of course, have an almost paralyzing fear of inflation, one which brings up images of wheelbarrows full of cash being used to buy bread, as well as the rise of Hitler and the Nazi Party. While the bit about wheelbarrows is true, the fact is that hyperinflation had little to do with the Nazi Party's rise to power. Hyperinflation ended in 1924 in Germany, and Hitler wasn't sworn in as Chancellor until January of 1933. Might there have been something happening during those nine years? Something of the "Great Depression" variety? Via Clayton White:
"Inflationary finance did not bring about the Nazis; mass unemployment did. Crushing debt burdens owed to foreigners did. Foreign mandates imposed in a beleaguered population did. THAT'S the kind of environment that leads to radical leaders whose messages of spite and hatred can take root."
Between 1924 and 1929, the German economy was pretty prosperous, by the way. So Germany ought to get its facts straight, lest the rest of Europe pay an even higher price just because the members of the Bundestag didn't pay much attention in history class."
The second reason is probably far more interesting (to me, at least). The ECB's inflation target is to achieve a yearly increase in consumer good prices of around 2% a year. That's fair enough, I suppose. Here's the issue though: the price index they use doesn't include house prices. There's an obvious problem with this, of course. You all might have heard a little something about housing prices plummeting around 2008. So what's the implication for the ECB's monetary policy?

Well, without including depressed housing costs into their price index, the ECB is overstating the overall level of inflation in Europe. This, in turn, has led them to be far more fearful of actually easing monetary policy, to the point of not even cutting interest rates to zero percent! So it isn't as if they can't ease at least a little bit more, it's just their fear of inflation which is exacerbated by their faulty price index. To help illustrate matters, here's a graph of two different measures of inflation in Europe, one with housing prices and one without them:

The graph below is also pretty informative, too. You'll notice that the Eurozone has fallen way below trend on inflation.

Of course, I'm not arguing that all of that disparity is due to housing prices, but you can't realistically deny that some of it is. 

All of this leads me to conclude that money in Europe during the crisis has been too tight. Sure, interest rates are low, but interest rates are fairly meaningless when they're not put in context. For example, interest rates in Europe were cut during the crisis, which means money was easier, right? If money is easy, you'd expect a growth in the overall money supply, right?

Exhibits A and B:

This is of course, not to confuse the difference between the monetary base and the money supply. Just as an aside, the monetary base is the total money "printed" by the central bank, whereas the money supply is all of the money in the economy. The point of using the total money supply rather than the monetary base here is to show that the central bank has failed to ensure stable money supply growth that is critical to economic growth. But I digress...

Anyways, if the ECB wanted easier money, shouldn't the money supply have started growing faster around late 2008, not slower? There's a notable shift to slower money growth there, which is really the only meaningful way to know the stance of monetary policy, as you'll see below.

And this graph, inspired by Clayton White does a great job of illustrating my point: interest rates fell along with the growth rate of the money supply. South Park best explains my sentiments on this:

Money is loose, they said! Interest rates are at historic lows, they said.

Friday, November 9, 2012

Do Guns Make Us More or Less Safe?

I know this is unrelated to what I usually talk about on this blog, but I had a flash of curiosity last night and decided to take a look at gun policy. As someone who doesn't really have a strong opinion one way or the other, I feel like I'm more impartial than your everyday NRA or Brady Campaign advocate. So, in the interests of pseudo "science," I ran a crude regression comparing data on gun ownership rates in the 50 states vs rates of firearm deaths in each state to see what I'd find. Well, here are my results, take them as you will (click to enlarge):

As you all know, correlation doesn't imply causation, but I was curious so I ran the regression anyway. Any thoughts on this?

Sources here and here.

Update: I've re-run the regression using more up-to-date data, you'll find the new sources above. Ultimately, the results are pretty much identical, but I thought I'd be more careful with the data. In my second run-through, I tried to find out if Excel could label the data points for each state, but apparently the only way is to manually input the labels, which is just horribly time-consuming. In any case, I've uploaded my spreadsheet with all of the data, for those of you interested in each individual state's data. Also, if you hate Google's formatting of the file online, you can go to the top right of the screen after opening up the spreadsheet and hit File > Download to open it on your computer.

Wednesday, November 7, 2012

Lessons From This Election

I'm sure all of you know by know who I've been rooting for to win in 2012. I'm also sure you know who did win last night. No, Barack Obama isn't my ideal candidate, but is anyone ever really? I'm sure the Republicans felt that way about Mitt Romney, who, had he run as the so-called Massachusetts Moderate, would have actually had a chance against the President, not to mention actually making my time at the ballot box a bit less of a no-brainer. In any case, I'm not here to gloat (mostly), I'm actually here to draw several lessons that ought to be learned from this election, and to give my insight on what's to come in America. (Hint: A socialist wasteland isn't at the top of that list.)

Anyways, first up is things I've learned from this election cycle. At the top of that list is that the Citizens United decision, which allows for unrestricted and undisclosed private contributions to political campaigns (think SuperPACs), has ultimately had little effect on the outcomes of a lot of races. Case in point: I live in Ohio, which Jon Stewart affectionately dubbed to be a "swing-state hell." Well, he was right. Outside of its importance in the Presidential race, Ohio also played host to a contentious Senate race between incumbent Democrat Sherrod Brown and challenger Josh Mandel. What ended up happening here is that SuperPACs supporting Mandel outspent those supporting Brown by five to one. Thanks for all of those ads, guys, really. Anyways, the point is that even with all of that big spending from the Roves and Kochs of the world, Josh Mandel still lost. Now, maybe if Mandel had been a better candidate he'd have had a chance, but the fact remains that huge amounts of outside spending didn't seem to actually move the needle one way or the other, especially if, you know, the candidate is well-liked by a lot of Ohioans.

Moving on then. The second big thing that you ought to take away from this election is that Fox News has the predictive power roughly equivalent to that of a crone reading goat entrails. No, but seriously, many people (including and especially the Romney campaign) came into this election cycle sure, just so sure that any challenger to Barack Obama would be a shoo-in for President. They were so sure that four years ago America had lost its collective mind in a bizarre torrent of hope-y change-y optimism and voted in a closet socialist. Not quite. This is probably the biggest mistake that those on the right made this cycle. Well, that and continuing to nominate people who are completely, utterly insane (see: Mourdock, Richard and Akin, Todd). Indeed, Fox News, as they so often do, perpetuated a kind of alternate reality in which Romney would sweep this election, no sweat, as voters overwhelmingly rejected Barack Obama's big government agenda and his tepid recovery. And people bought that story. I legitimately hope that this comes as a lesson to news organizations like Fox and the National Review. Being so utterly out of touch with reality will at some point come back to bite you. And so it has, on a grand scale: if Florida keeps going the way it is, Obama will have won every state he did in 2008 with the exception of North Carolina and Indiana. Oracles of Delphi, they aren't.

In any case, let me wrap this up with a few thoughts of what's to come in America. It is important to point out that with a split Congress, I'm not terribly confident that much will be agreed upon if Republican obstructionism persists as it has since 2009. Perhaps being roundly defeated in a presidential race they thought was a shoo-in will have jarred a few of them into being reasonable again, I hope so, but I guess we'll have to see. Rather, the most important things that will unfold under Obama's second term have already passed: the Affordable Care Act and the Dodd-Frank financial regulation. More importantly, as Matt Yglesias so wisely pointed out yesterday, whomever wins will preside over a growing economy and their policies will be vindicated. In this case, Barack Obama will be the one who is vindicated, and I'm not ashamed to admit that I'm glad of that.

With that, I leave you with undeniable proof of widespread voter fraud (From the movie Gangs of New York):

Thursday, November 1, 2012

My Voice, Talking at You.

Sorry to all you readers out there who have missed my commentary on the latest political and economic news over the past week or so. In an effort to make it up to all of you, I've got something of a special treat lined up. Drum roll please...Tomorrow evening, between 7-8 PM Eastern time, I will be on the radio, having a spirited, free-flowing debate with a Romney supporter on "The Pregame Show with Mike and Dan." It should be a lively discussion, and you all should definitely tune in to hear me (hopefully) translate my blogging skills into masterful debating skills.

No, but really, you ought to tune in and listen to the debate. It'll be a good one.

P.S. The link above goes live at 7 pm Eastern Time tomorrow evening and I'm told that the show will re-air at 5 PM EST on Saturday as well, in case you missed it the first time around. 

I assure you, this is what I look like on the air.