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Archive for June 28th, 2010

Readers of this blog know that I share very little in common with Keynsians. I think that the whole premise of government stimulus is built on a false premise called “aggregate demand”. Simply put, Keynes believed that there was an “aggregate demand” in an economy that could be described by the following equation:

GDP = C + I + G + (X-M)

C-Consumption, I-investment, G-Gov’t spending, X-Exports, M-Imports

This equation is a good one and most entry level economics courses spend a lot of time focused on it. Just like most elementary chemistry courses talk about the equation to calculate the number of molecules in a volume of gas. However, in chemistry the students are told that this equation only holds for standard temperature and pressure. If either of those changes, the equation must change. The benefit that chemistry has is that you can run controlled experiments at standard temperature and pressure to analyze your results.

For economic analysis, you can’t hold variables constant and run the experiment. I can’t go back to the late 1990’s and change the Clinton Administration policy to make low income household homeownership a key policy and analyze the impact in 2007. GDP is not a stagnant number. It changes minute to minute, second to second. “Aggregate demand” is a useless number for setting policy — as the world is now recognizing.

So, with this as a back drop, it was nice to see Friedrich Hayek getting some ink in the Wall Street Journal, today. The Op-Ed can be found here (subscription fee may apply). The following quote from the piece I find particularly accurate:

First, he and fellow Austrian School economists such as Ludwig Von Mises argued that the economy is more complicated than the simple Keynesian story. Boosting aggregate demand by keeping school teachers employed will do little to help the construction workers and manufacturing workers who have borne the brunt of the current downturn. If those school teachers aren’t buying more houses, construction workers are still going to take a while to find work. Keynesians like to claim that even digging holes and filling them is better than doing nothing because it gets money into the economy. But the main effect can be to raise the wages of ditch-diggers with limited effects outside that sector.

Not too mention that the government must issue debt to pay the ditch-diggers. That debt is a tax on the future. Consumers are smart enough to know that taxes will be rising and so future consumption will take a hit. The result is to reduce spending today to prepare for the future.

Need proof? Just look at the economic indicators — reduced business investment, reduced employment, low levels of personal spending, etc…

The last point I’ll make regarding Hayek focuses on crony capitalism, which has seen a huge step up in the US in the last few years. Look at GE, and how it uses NBC to promote policies and stroke egos that it needs to grow its bottom line (and stock options for insiders)…

Even when the state tries to steer only part of the economy in the name of the “public good,” the power of the state corrupts those who wield that power. Hayek pointed out that powerful bureaucracies don’t attract angels—they attract people who enjoy running the lives of others. They tend to take care of their friends before taking care of others. And they find increasing that power attractive. Crony capitalism shouldn’t be confused with the real thing.

Look at Delaware’s Strategic Fund (which is getting a huge influx of fresh taxpayer cash) to see this point played out in little Delaware. Or look at the Escheat Process and the deals cut to balance the budget and spread the “goodies” around in a completely non-transparent way.

Hayek rules!!

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This is classic Joe.    During a photo op at Kopp’s Custard Stand in Wisconsin, our VP and the manager have a little exchange:

“What do we owe you?” Biden is heard saying in footage captured by WISN-TV.

“Don’t worry, it’s on us,” the manager replied. “Lower our taxes and we’ll call it [the custard] even.”

“Why don’t you say something nice instead of being a smartass all the time?” Biden said a few minutes later.

Here’s the video and the interview with the custard stand manager:

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The bailout date for Bluewater/NRG to get out of the contract with Delmarva without having to pay a penalty ($3 Million if I recall) was right around this date. I think that it is June 30 but it may have been the 23d.
So, unless NRG has some other use for Bluewater, it looks like the rest of the windpower industry was wrong. Maybe they think that they can deliver offshore wind for under 13 cents. I doubt it, but they are betting millions.
Anybody heard whether Delmarva received the “written Notice of the final Project Capacity” as required by the same date?
Just keeping track.

Here is the section of the contract:

2.4 Seller Early Termination and Declaration of Project Capacity.
(a) During the period that begins on the Execution Date and ends on the twoyear anniversary of the Execution Date, on thirty (30) days prior written Notice, Seller may terminate this Agreement in its sole discretion if it is not able to find satisfactory purchaser(s) for the Excess Products, or determines that it is otherwise not prudent to continue to develop the Project. If Seller terminates this Agreement in accordance with the provisions of this Section 2.4, Buyer shall refund to Seller the full amount of the Development Period Security posted by Seller within ten (10) Business Days of such termination.
(b) On or before the second anniversary of the Execution Date, Seller shall provide Buyer with a written Notice of the final Project Capacity, which amount must at all times equal or exceed 200 MW (except with respect to reductions in Project Capacity
permitted under Sections 3.1(d), 5.4, 5.7 and 12.4) and be no greater than 600 MW, and which amount can only be modified pursuant to Sections 3.1(d), 5.4, 5.7 and 12.4.

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The following statistics come from a friend of mine in Financial Planning:

Recent surveys by national and state medical societies have found more doctors limiting Medicare patients.  The American Academy of Family Physicians says 13% of respondents didn’t participate in Medicare last year, up from 8% in 2008 and 6% in 2004.  The American Osteopathic Association says 15% of its members don’t participate in Medicare and 19% don’t accept new Medicare patients. The American Medical Association says 17% of more than 9,000 doctors surveyed restrict the number of Medicare patients in their practice. Among primary care physicians, the rate is 31%.

Add to this the difficulty that Congress had in passing the “Doc Fix”, which only extended the higher payments to doctors for 6 months, and now the G-20 has announced that we will be cutting our government debt by 50% by 2013, medical reimbursement rates will need to be slashed for both Medicare and Medicaid. (NB: The Obama Administration has no intention of stopping the spending or reducing the debt, but that still won’t affect the rapid reduction in the number of physicians using government programs).

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