Preposterous Pork from the Stimulus Bill I
by Johnny DebacleOne of the silver linings in living in crazy times, with crazy governments proposing crazy ineffective solutions to crazy problems is that it does the writing for you. In fact, satirically speaking, Long or Short is being crowded out by the government in the entire satirical abstract financial space. So we plan to roll with it. We will post each bit of preposterous pork that falls out of this stimulus bill. This feature will probably not end until 2017, given how money from the bill is being blown through money tubes to states and their representatives as we speak. We will keep track of the amounts so we can release tallies from time to time. We encourage readers to submit anything they come across that would be appropriate.
Preposterous Pork From the Stimulus Bill I
Line Item: $198 million for Filipino veterans of WWII
Source: NY Times –> Filipino Veterans Benefit in Stimulus Bill
Rationale: These veterans fought under US command in WWII and it was implied they would be compensated, yet haven’t been.
Preposterous?!: “Supporters of the provision, originally inserted by Senator Daniel K. Inouye, Democrat of Hawaii, said that they did not expect the payments to do much to stimulate the economy, but that it was a way to bypass opponents who had blocked payments in the past.”
Paying these Filipinos is likely just, but the timing is inappropriate and will have negligible stimulative impact. This is an example of the mega-tarp effect in action — every and any pet project can be thrown under this bill. It will be adverse selection, wherein every earmark that shouldn’t, and couldn’t, have passed in normal times will get pushed through under the guise of how critical this entire bill is to the country. This sucks.
HT to an anonymous Dealbreaker commenter
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Think I might have to disagree on that – these guys are presumably not well off, and so they’ll spend their payments rather than saving them, which is what you want for a stimulus, right?
God damn it you can’t have “pork” in a stimulus bill. The whole fucking point is to throw money at people. It doesn’t matter who or what per se. We could pay people to print money and then burn it! Actually, we ALREADY pay people to burn money!
Has the whole world gone crazy? Crowding out only occurs at full (satirical or otherwise) employment! Clearly your wits are being under employed.
Vol, you are hilarious (that was satire, right? B/C generally speaking you pretty much either have to print money and cause inflation – Zimbabwenomics – or you have to confiscate money from wealth producers – discouraging wealth production – to give to wealth destroyers. It’s stimulative alright, but it doesn’t generally stimulate the things you would consider positive.)
I’ve got a few pet projects, so-to-speak, that could benefit greatly from some well-diverted stimulus funds…
Size:
Yeah that’s right you have to print money and cause inflation. (un)Fortunately for us massive deleveraging in the economy is causing us to enter a deflationary spiral / liquidity trap. So the whole point is to cause inflation to start back up so people’s debt increasing in size in real terms!
The problem is that people seem to think the economy is going to exit this recession on it own, it may, but it may take 20 years to do so. There’s no reason to think it will be a 3 or 4 quarter long recession. There’s certainly no reason to think the american consumer is going to lever back up and resume their consumption pattern, even if they could get the credit lines to do so they wouldn’t, and they can’t get the credit anyway.
Vol, if printing money is such an awesome way to exit a recession, then why is Zimbabwe still in deep shit? Why did the Weimer Republic not prosper?
You are deeply confused. A fact of economics is that in the long run, you cannot consume more than you produce. Credit changes the timing of consumption but doesn’t change that reality. The reason nobody can get credit at the same level as before is because we all suddenly realized that we have already borrowed too much against future production.
It is not not additional consumption that we now need to further tax and discourage future production, but more production – which the government is discouraging with alarming intensity – so that we may pay our existing debts and have a prayer of returning to a higher level of consumption in the future.
Every economy has always exited recession on its own. Christine Romer is the head of Obama’s economic council. Her own research on the Great Depression shows that government programs contributed virtually nothing to economic recovery. And she was being generous. Before the Great Depression, depressions (or “recessions”, in modern parlance) lasted months or a couple of years. The Great Depression was the first time government interfered heavily in the economy and caused that depression to last over a decade. In fact, the economy didn’t recover until after much of the Depression era programs designed to lift the economy out of depression were rolled back.
There is absolutely ZERO evidence that without intervention, recessions last longer. Your claim is without merit. And there is zero evidence for the Keynesian liquidity trap. You do not differentiate between Keynes’ proposed hypothesis and empirically tested theory.
ugh i don’t really have the energy for this. But. Neither Germany nor Zimbabwe are/were in a deflationary spiral. There are two things that could be taken away from the lack of recovery due to the new deal. 1) it didn’t make things better OR 2) it kept things from getting worse. HELLO!!!
The problem was the stimulus was smaller than the drop in consumption.
There’s no evidence of a liquidity trap? How about Japan?
You’re right that you can’t consume more than you produce, but the problem is in ascertaining the value of past consumption and future production. To the extent real debts increase in value the corresponding fall in future consumption (savings) will, in aggregate increase the real value of debts incurred in the past. Paradox of thrift my friend.
obviously hopefully you use stimulus to invest in things (high speed rail, fiber to the home, ect) that increase productivity so that you don’t have to inflate the debt away but rather the economy grows faster as a result and decreases the value of the debt incurred as a % of GDP.
Some combination of inflation and increased productivity however, are more likely.
Japan was not in a liquidity trap. Japan did just what we’re doing – taxing away wealth from wealth creating enterprises and flushing down the toilet of zombie companies (banks, in Japan’s case).
The market has ascertained the value of future production and past consumption. Are you saying that government wonks know more than all the market participants combined?
The stimulus to invest thing is also predicated on the same false assumption: the government can create wealth by allocating resources more efficiently than the market. Market participants have done their valuations and don’t see too many positive NPV projects, so they have pulled back. The government using stimulus to “invest” is saying either a.) All the hundreds of millions (perhaps billions) of market participants are wrong and we know that there are vastly more positive NPV projects out there or b.)Government is willing to confiscate from the remaining wealth producers to invest in negative NPV projects for political gain.
BTW, you can always claim the Great Depression could have been worse because there’s no way to measure that. It’s like Obama’s “create and save” jobs thing. There’s no way to measure “saved” jobs, so he can always claim that “things could have been worse”. The plain fact is that the Great Depression was the first time government involved itself heavily in a depress and it was the first time a depression lasted more than a decade vs. a few months or a couple of years. You ignore that point.
Vol,
We’re going to continue to disagree on this, if for no other reason than the following:
Even assuming that Keynes is correct, you’re assuming that government is capable of achieving these ends effectively. That means you believe that government is benevolent and all knowing.
I believe that government is in the hands of self-interested people with a variety of individual political ambitions which are completely at odds with the liberty and rule of law that is necessary to unleash the potential of each individual in the country they rule. I also don’t believe the very few, unremarkable, non-experts in government have more knowledge than the hundreds of millions of other market participants combined. If government is as benevolent and efficient as you think, then North Korea and the Soviet Union would have been economic powerhouses instead of the hell that they are/were.
As long as that fundamental difference between us persists, we will disagree.
Size,
Of course saying the great depression could have been worse is not falsifiable but neither is your assumption that it wouldn’t have been worse, its the exact same argument.
I’m saying in aggregate the market participants don’t know anything, so it is possible that government knows more. Markets are not smart, they are very very stupid. As with Soros, my assumption is that the market price is always wrong, it serves me well. While in general the market allocates capital better than government, they are incredibly short sighted and it is possible for the government to allocate capital more efficiently. In the boom, market participants are too optimistic and see too many “NPV positive” (discounted cash flows are bull shit, so this NPV positive nonsense is useless anyway but whatever) projects and during the bust too few. Such herd behavior actually creates self reinforcing cycle which creates the very situation they “predict”. But the participants aren’t predicting anything, but rather causing the down turn to persist with their own aggregate actions.
I certainly don’t think the government is all knowing, and i don’t think any one is benevolent. I just think that individuals in the government acting in their own self interest can achieve a positive result all. … i know i’ve heard that before… some where.
Also it remains to be seen if we do what Japan did. If we don’t let corporations fail and leave these zombie banks in place then you will be right.
Vol,
You cannot claim this:
“I’m saying in aggregate the market participants don’t know anything, so it is possible that government knows more.”
And also claim this”
“I certainly don’t think the government is all knowing…”
Because by claiming that hundreds of million of market participants know less than a single market participant means that the single market participant (government) knows ALL that they know plus MORE. That makes the government all knowing. If the government doesn’t know all the market knows plus more, then it is not capable of achieving a better result than the market – by definition. So, which is it?
Markets are not smart, they are very very stupid. As with Soros,…
Ah! Now we’re getting to the meat of this. You and Soros are smarter than everyone else in the market because in order to say “my assumption is that the market price is always wrong” means that your assumption is that you are ALWAYS smarter and more knowledgeable the ALL of the other people COMBINED who trade the same product you trade. They are all idiots and you are the lone genius. For your sake, I hope you rethink this because that is a breathtaking amount of hubris.
Soros has this belief about himself because he has made a lot of money. He now has the hubris to believe he can run strangers’ lives better than they can. Soros is a monkey. Nassim Taleb pointed out that if you get a large group of monkeys picking stocks with even odds, decades later you’d have one or two monkeys who survive by sheer luck. Given Soros’ “go big or go home” trading style, I’m going to need some evidence that he’s not just a lucky monkey. I’ve been looking for that evidence since his incredibly droll “Alchemy of Finance” and I’ve yet to stumble across it. Thus, the fact that you’re still making money is unimpressive.
As a caveat, extremely illiquid markets can deviate from fair value fairly often ad by fairly large amounts. Those markets are few and far between (which is why alpha capture is just so damn hard).
The toughest trainees have been young traders who are making money by getting lucky. They think they’re geniuses and they don’t believe a thing you say to them until they have to puke a huge position.
I don’t know what beef you have with NPV. Your in depth analysis consisting of “its’ bullshit” is insufficient to convince me that you are in possession of a superior metric.
While in general the market allocates capital better than government, they are incredibly short sighted and it is possible for the government to allocate capital more efficiently.
How does that sentence even begin to make sense to you? Either imperfect markets allocate better than an even more imperfect government or an imperfect government allocates capital better than markets. Ostensibly, government can allocate capital better because it’s missing the shortcomings of the market – it’s not short sighted, it’s not politically motivated and is not capable of valuation mistakes. If that’s so, then why is it everything government touches turns to shite? Why is the post office a financial black hole? Why is the DMV? Why does the military buy hammers for $700? Why has every country where government allocated capital (or a significant amount of capital) experienced economic collapse or a decline in economic activity? How can that be if government can allocate capital more efficiently? Or is it that it can’t and you need to read material that isn’t written by Soros.
Of course saying the great depression could have been worse is not falsifiable but neither is your assumption that it wouldn’t have been worse, its the exact same argument.
It’s not the exact same argument. I presented evidence to back my argument. While it’s certainly not conclusive, it’s worlds better than what you provided: aggressive assertion. I did not ask you for a conclusive argument (there isn’t one). I asked you for evidence for your argument. Aggressive assertion is not evidence.
Now we’re getting to the meat of this
Indeed. You think markets are efficient. They are no where close. In fact it is impossible for them to be.
I don’t know what beef you have with NPV. Your in depth analysis consisting of “its’ bullshit†is insufficient to convince me that you are in possession of a superior metric.
You need to reread Taleb as well as Soros. Why would I need a superior metric? Why would I need any metric at all? I don’t need to value assets, I don’t believe they have any value. The future cash flows cannot be estimated withing sufficient confidence intervals, nor the cost of capital, none of your “assets” have any objectively ascertainable value.
Soros is a monkey.
Taleb also calls Soros and Jim Simons the only market participants who are verifiably non-lucky. Soros spelled out exactly how he would make his famous currency trade before hand in the Alchemy of Finance. Soros is no monkey. He is the only one who actually understands how markets work outside of Taleb.
In assuming that the market is wrong that doesn’t mean you are necessarily smarter than the market. The problem relates to the difference between perception and knowledge, as Soros notes. Because there is no verifiable way to ascertain what is and is not true the market relies on the collective inferences of its participants. Those inferences may or may not be “accurate”. If the market in aggregate perceives the price of something will rise, the price will rise whether there is sufficient “real” demand for that asset or not. The market creates its own demand. The market is simply one self reinforcing feedback loop.
So one can assume if a price goes up either the market is “correct” and the new price is the correct price or the price will change either going up further or going back down. This is how one trades volatility without having a view on the price of the underlying, or what realized volatility will be. I don’t assume I know anything about the underlying simply that the current price will change. Like Mandelbrot I think the variance of the underling is infinite, but realized volatility probably will not be.
Either imperfect markets allocate better than an even more imperfect government or an imperfect government allocates capital better than markets.
No. Both of those things can be true. The market generally allocates capital more efficiently than the government but only within bounds. The market overreacts to both to the upside and the downside. During bubble the government can act to reserve capital in order cushion the inevitable bust. And during the bust the government can deploy capital to improve productivity and lay the foundation for a recovery. Because during a bust there is a need of individual participants to perverse their own capital this leads all projects to appear “NPV negative” the government has a role in investment during that limited domain.
It’s not the exact same argument. I presented evidence to back my argument.
You’re not presenting evidence. Absence of improvement is not evidence of that new deal did not work. Because IT COULD HAVE BEEN WORSE. Unemployment did decline after, the banking system did not cease to exist, the country did not dissolve. Why you think these alternative possibilities are any less relevant than what happened to occur is beyond me. What is relevant is the set of all possible outcomes not simply the one that occurs. By your logic it makes sense to play Russia Rollette for $1,000. If you live to tell the tale then anyone who tried to stop you would have “advocated an ineffective policy”, I exaggerate, but you see my point.
We see the world from completely opposite perspectives. I see one of Knightian uncertainty, with markets composed of participants who cannot possibly be rational (there is no such thing as rational after all), prices with infinite variance, and useless theories like CAPM,NPV, BSM and MPT. I fear n’er the twain shall meet.