Is the Tesla Debt Payback Vindication for Crony Energy Capitalism?

K. Lloyd Billingsley says no. He notes that anyone who sees a company merely doing what is normal for borrowers--paying off their debt--as validation of the economic efficacy of government subsidies for "green" companies cannot see the forest for the solitary tree.

As he says,

The real news on the clean-energy front is the number of stimulus recipients who have gone bankrupt. In 2009 Flabeg Solar U.S. Corp. got $10 million in stimulus funds and another $9 million in job creation money. By April 2013 Flabeg had shut down its plant, laid off workers and will likely seek Chapter 11 bankruptcy protection from workers suing over severance pay. Flabeg is hardly alone.

Solyndra got $535 million in federal loan guarantees but went bankrupt in 2011. Stimulus recipients Evergreen Solar and SpectraWatt, both in the alternative energy business, also went bankrupt. And of course, Fisker Automotive Inc, is heading south despite $529 in federal loans to produce luxury cars built in Finland and selling for nearly $100,000. Tesla did better and paid back its loan but on balance the $800 billion American Reinvestment and Recovery Act, also known as the stimulus, remains more of a bust than a boost.

In fact the entire "green job stimulus" is one more example why, if we want to promote economic prosperity, government spending is less desirable than entrepreneurial investment.

The main economic problem with bureaucratic spending is that it is not predicated on economic profit-and-loss calculation. This was regularly illustrated by the two most-heard phrases during my years at the U.S. Bureau of Labor Statistics: 1) “Good enough for government work;” and 2) “That’s okay. We don’t have to make a profit.” Both of which are true. Because the government does not have to make a profit, it has little if any incentive to direct investment toward those areas that are sustainably productive.

Additionally, government spending creates a distribution process separate from production. In the market economy, wealth and income is not redistributed, because it is not distributed in the first place. Income is earned by providing productive services. It is earned by serving other people. Government spending, however, wastes scarce resources. It distorts the allocation of income away from efficient service to customers, because subsidies prolong the life of inefficient firms at the expense of efficient ones. Government spending, therefore, hampers the flow of factors of production to uses more in demand by consumers.

The bottom line is that, whenever the state gets into the business act, we get more of whatever government bureaucrats subsidize and less of what people value the most. Scarce resources are wasted. Capital is consumed. We become less productive. Our standard of living declines. Prosperity? I think not.

New Journal of Prices and Markets

David Howden informs us that a new economics journal is being published by the Ludwig von Mises Institute of Canada! This is good news. As Howden explains:

I proudly announce The Journal of Prices & Markets, a scholarly peer-reviewed journal published bi-annually in collaboration with the Ludwig von Mises Institute of Canada.

The Journal’s goals are straightforward.

First, it is an outlet for those interested not in the glossy superficial nature of events, but the real underlying phenomena shaping them. The journal is not concerned with overly elaborate constructivist plans to recreate the wheel. We don’t need to invent new prices or markets when the old ones no longer seem sufficient at serving their original purposes. What we need is critical analysis into why current events seem so dysfunctional.

Second, and perhaps more importantly, The Journal of Prices & Markets stresses the lost art of relevance. Economics is a beautiful science that should serve the purpose of enlightening us. Instead it has gotten to the state where it creates confusion. As the jokes go, economists predicted ten of the last five recessions, and if you want a second opinion on something, just call back the economist you originally asked. Economists cannot even seem to reach agreement amongst themselves on simple questions, and in a bid to convince each other of their correctness they seek ever more levels of complexity in their theories. Complexity is not necessarily a bad thing, but what should never be lost sight of is the original question.

I particularly like Howden's understanding that "economics is a beautiful science that should serve the purpose of enlightening us."

Read the entire announcement.

Important Affinities and Distinctives between Real Business Cycle Theory and Causal-Realist Economics

John P. Cochran has an excellent article discussing some similarities between real business cycle (RBC) theory and Austrian Causal-Realist explanations of recessions in general and the Great Depression in particular published on Mises.org.

Cochran notes that

some of the results developed by RBC proponents, can supplement the Austrian business cycle theory (ABCT), and add to our understanding of cycle phenomena and other fluctuations in economic activity (see “Capital-Based Macroeconomics: Recent Developments and Extensions of Austrian Business Cycle Theory” or “Capital Based Macroeconomics: Boom and Bust in Japan and the US”).

Note that he thinks that some insights from real business cycle theory can supplement--not replace--the Austrian Theory of the Business Cycle. This is because only the Misesian theory incorporates both money and the capital structure, the two things that integrate the entire social economy.

Therefore, real business cycle certainly leaves some things out and is therefore weaker for it. Cochran notes:

While business cycle phenomena may be caused by exogenous shocks or inappropriately tight monetary policy, much of the actual cyclical activity is best interpreted as the consequence of credit-created unsustainable growth. This type of cyclical activity is preventable with an appropriate monetary framework, but may be difficult to correct with short-run macroeconomic policy. A monetary policy based on the principle of sound — not stable — money would accommodate sustainable growth without generating endogenous instabilities and unsustainable growth.

Which Textbook? Foundations of Economics

In a brief post lauding his insights into the supposed virtues of inflationary expectations, Paul Krugman says, "As far as I know, among basic textbooks only Krugman/Wells even talks about the liquidity trap. . ." Actually Foundations of Economics talks about it, and explains some of its weaknesses as a theory.

I argue in part that:

The concern over the liquidity trap is only as valid as the liquidity preference theory of interest. What we have already learned about the interest rate should be enough to make us question the soundness of this theory. We have seen that the interest rate is not merely a monetary phenomenon, but a time phenomenon. It is the price of present money in exchange for future money. Therefore, the interest rate is determined by people’s subjective time preferences, not the stock of and demand for money.

Stock Investors Partying Like It's 2007

This strikes me as not a good sign. As Business Insider reports, "Cullen Roche of the Pragmatic Capitalism blog has noted that New York Stock Exchange margin debt, which is used to leverage up bets on stocks, is near all-time highs."

It was margin leverage that got the stock market in trouble in 1929 and in 2007-08.

Best Single Quote on Reinhart-Rogoff

By now most are aware that Carmen Reinhart and Kenneth Rogoff have come under attach for data errors in a 2010 working paper they authored arguing that too much debt is not good for the economy. It turns out that a graduate student attempting to replicate their study found a mistake in their original work. This, unfortunately, caused Keynesians and other statists amongst us to dance the "I told you so" jig.

Greg Mankiw had a good reasonable blog post on the issue of data error. The best single quote on the entire subject, however, comes from Caroline Baum in her most recent Bloomberg column "Reinhart-Rogoff Uproar Settles Nothing"

Forget the data for a minute. Imagine asking the average person on the street, Is too much debt a problem? Do you think you would get any negative responses? That’s the essence of Reinhart and Rogoff’s research. You don’t need a doctorate in economics to understand that you can’t spend beyond your means forever, or that piling on debt because it’s cheap to borrow isn’t sound policy.

HT: EconomicPolicyJournal

Did World War II End the Great Depression?

Tom Woods alerts us that the never-ending Robert Reich is still claiming that World War II ended the Great Depression. Woods has, on his Liberty Classroom page, a brief video explaining why Reich is wrong why it is a fallacy to think that the War got us out of the Great Depression. On the same page Woods posts a longer lecture by one of the greatest economic historians of our time, Robert Higgs. Highly recommended.