Greece & “Liquidationism”

I should of thought of this during my previous post on “liquidationism,” but Greece might be the best example of Austrian Economics recovery policies in action.

Greece has hard money in the form of Euros that it cannot inflate, it’s government has been forced to decrease spending, and the government has allowed massive amounts of companies to fail.

So how is that working out for the Greeks? Fortunately the New York Times recently wrote on how the Greek Economy is performing under the Austrian prescriptions of austerity:

The Greek economy posted its 20th consecutive quarterly decline in the three months through June, government data showed on Monday, but a slower pace of contraction provided a glimmer of hope for beleaguered Greeks.

Gross domestic product shrank by 4.6 percent in the second quarter compared with the same three months a year earlier, the official Hellenic Statistical Authority said. That was an improvement from the first quarter of 2013, when the economy contracted 5.6 percent compared with a year earlier.

The horrific results austerity on the Greek economy would not be complete without a look at the unemployment rate.

Eurozone Job Headwinds

The results speak for themselves: “liquidationism” and austerity are not policies that should be considered for reversing a recession.


Boudreaux on “Liquidationism”

Don Boudreaux from Cafe Hayek riffs off a discussion on Hayek’s views on macroeconomics to discuss “liquidationism”. At the end of his post he makes the following statement:

Most people understand that a proper and useful Chapter 7 bankruptcy proceeding involves the liquidation of the firm’s assets.  And they understand that, for the larger economy (if not for the owners, creditors, and workers and other suppliers of the firm) such liquidation is good.  Delaying it is harmful.

So why do so many people fail to extend this understanding to the larger economy?  If a particular firm can be a collection of mal-invested assets – a production plan that must be abandoned – capital goods, inventories, contracts, workers’ skills that are wasteful as currently fitted together – why cannot the same be true for many firms?  At what point do we conclude that inadequate aggregate demand necessarily is the cause of too many businesses operating at full capacity to be unprofitable?  Why is it so contemptible to point out at least the possibility that the economy currently has an unusually large amount of assets devoted to production plans that are not all sustainable over time?  Why is it, therefore, so unacceptable to suggest at least the possibility that an unusually large number of existing incarnations of production plans (firms, parts of firms, perhaps whole industries) be liquidated?

The problem with allowing a large amount of firms or whole industries to liquidate at once is the economic shock that would ripple through the economy.

If you accept the premise of their argument, that firms need to fail after a period of mal-investment, then what the Austrians fail to see is it would be far better for the economy to have these firms fail over a period of time. Thus the worst firms would fail no matter how low the Fed sets interest rates, then as the Fed raises rates, the “stronger” weak firms would begin to fail and finally when rates are back to the “normal trend”, all the mal-invested firms would have failed, and the mal-investment would have been purged from the system.

Except unlike what Hayek and other Austrians proposed, this wouldn’t occur all at once, but over a period of time to allow the economy to adjust better.

How can the Austrians fail to at least consider the possibility that this is better than mass liquidation?


PS: Yes, I’m purposely ignoring the Austrian claims of mal-investment that would occur during the low interest rates, because frankly that argument against monetary easing never seemed very strong. Perhaps another post for another time.

Nitrogen Fixation Technological Breakthrough

According to this press release Dr Edward Cocking of the University of Nottingham has developed a means for plants to harvest nitrogen directly from the atmosphere. And the technology is supposed to hit the markets in two to three years.

Nitrogen fixation, the process by which nitrogen is converted to ammonia, is vital for plants to survive and grow. However, only a very small number of plants, most notably legumes (such as peas, beans and lentils) have the ability to fix nitrogen from the atmosphere with the help of nitrogen fixing bacteria. The vast majority of plants have to obtain nitrogen from the soil, and for most crops currently being grown across the world, this also means a reliance on synthetic nitrogen fertiliser.

Professor Edward Cocking, Director of The University of Nottingham’s Centre for Crop Nitrogen Fixation, has developed a unique method of putting nitrogen-fixing bacteria into the cells of plant roots. His major breakthrough came when he found a specific strain of nitrogen-fixing bacteria in sugar-cane which he discovered could intracellularly colonise all major crop plants. This ground-breaking development potentially provides every cell in the plant with the ability to fix atmospheric nitrogen. The implications for agriculture are enormous as this new technology can provide much of the plant’s nitrogen needs.

Currently agriculture uses fertilizer developed from fossil fuels to provide the nitrogen needed for plants to grow. Nitrogen runoff from this fertilization is a significant ocean and waterway pollution problem.

Wisdom of the Crowds: Mindblowing Recent Advancements

Highlights from the Reddit thread “What are the most mindblowing recent advancements people still don’t know about?”:

Nanotube Salt Filters:

Nano[tube] salt filters. Once they bring the price down, living near the ocean will mean limitless virtually free fresh water, for the first time in human history.

This will completely change the world

one scientific source [on nanotube salt filters] is here but might not be open access. The reason that it’s hard to find is because they’re not nanofibers, the whole idea is they’re tubes. Here is a more popsci summary

Liquid Fluoride Thorium Reactors:

Nuclear reactors. Specifically, molten salt reactors (MSRs). MORE specifically, Liquid Fluoride Thorium Reactors (LFTRs, pronounced “lifters”).

Imagine a nuclear power plant that

  • can’t blow up
  • can’t have fuel stolen to make a nuclear bomb
  • produces zero carbon emissions
  • produces almost ZERO nuclear waste
  • of the waste it produces, it lasts on the order of 100 years (as opposed to 100,000 years)
  • the byproduct of mining the fuel for this reactor is precious earth metals used in solar cells and wind turbines (and currently bought from China, who owns >80% of the world’s supply of rare earth metals)

This is the future. MSRs have been proven to work since the 1960s (the MSRBE [Molten Salt Breeder Reactor Experiment] at Oak Ridge National Laboratory in Tennessee). The first LFTR may go online in 3-5 years in Alabama.

Edit: Probably should have realized the bee’s nest I poked with this comment. I’ll try answering questions to the best of my abilities! I’m not a nuclear engineer, but I have experience/degrees in health physics (radiation protection) and a little bit of nuclear environmental engineering. I’ve also done a few specialized research proposals on MSRs, but if other NucEs want to step up they can.

Double Edit: /u/ProjectGO commented below about the “can’t blow up” portion of MSRs/LFTRs (also known as “passive safety”). I’ve copied his post verbatim here, but if you find it interesting please make sure to upvote his comment appropriately.

At the bottom of the reactor chamber, there’s a plug made out of salt. The plug is constantly cooled by pipes running refrigerant around it. If anything happens that causes the plant to lose power (for example, getting hit by a tsunami) the cooling system stops working. The molten salt in the reactor melts the plug, and drains out into a number of storage tanks, all sized to hold too little fuel to sustain the reaction.

I believe the term for it is “walk-away safe”, since you could literally walk away and it would safely shut down on it’s own if something went wrong.

HT: Tyler Cowen

Henry J. Aaron: Health Insurance Exchanges and the Affordable Care Act: What To Expect on October 1

Henry J. Aaron has what is probably the most realistic take on implementation of the Affordable Care Act that i have seen.

Health Insurance Exchanges and the Affordable Care Act: What To Expect on October 1:

Republicans are vociferously predicting that implementation of the [Affordable Care Act] will fail and simultaneously doing all they can to produce that outcome. They seek to stop spending to implement the law…. A state legislator in South Carolina even proposed that the state give tax credits to help defray any penalties state residents might incur from defying the federal law.

At one level, this effort will fail. Previously authorized spending will continue. The law will be implemented. But it will probably succeed in blocking additional funding that would smooth the roll-out of an admittedly complicated law.

So, what should Americans expect on October 1 when the health insurance exchanges, or marketplaces, open for business and individuals and small businesses try to buy insurance through them? Success or failure?

The not-so-simple answer is: Both! And everything in between….

Massachusetts proved [the process can work] when it implemented a law much like the Affordable Care Act. A Republican governor and a Democratic legislature, working with business and labor, showed that close-to-universal health insurance coverage is possible….

There is every reason to believe that similar successes will mark the roll-out of the Affordable Care Act in several states. To be sure, even the best efforts will not have eliminated bugs from the computer software…. As with any large-scale start up, plenty of errors will be made. But with a bit of time and patience…things can—and will—be made to work.

But not everywhere. Some state governments oppose implementation or are “slow-walking” measures they need to take to make the new law work…. [In the states] which opposition to the Affordable Care Act is widespread, 20 percent or more of the population is uninsured. In contrast, fewer than 10 percent of the populations are uninsured in [many of the states] which have set up health exchanges.

I hope I am wrong, but I fully anticipate that in many states, the roll-out of the Affordable Care Act is going to be marked by confusion, error, and legitimate complaining—most of it unnecessary. Some errors and complaints are inevitable when millions flood a new agency….

The spirit with which the inevitable problems of implementing a major new law are confronted is critical. With good will, various stake-holders will pitch in, pinpoint the problems, and, with time and patience, [will] fix them…

But it is not what will happen in those states where officials who have staked their reputations on predictions of failure…. Observers should keep in mind that when millions of people are applying for coverage, thousands of mistakes are inescapable. They should not lose sight of the fact that many of those mistakes will result from the uncooperative and obstructionist efforts by those who have refused to recognize that the Affordable Care Act is the law of the land and that law-abiding citizens obey the law.

Paper: The illusion of predictability: How regression statistics mislead experts

Emre Soyer and Robin M. Hogarth: The illusion of predictability: How regression statistics mislead experts:


Does the manner in which results are presented in empirical studies affect perceptions of the predictability of the outcomes? Noting the predominant role of linear regression analysis in empirical economics, we asked 257 academic economists to make probabilistic inferences given different presentations of the outputs of this statistical tool. Questions concerned the distribution of the dependent variable conditional on known values of the independent variable. Answers based on the presentation mode that is standard in the literature led to an illusion of predictability; outcomes were perceived to be more predictable than could be justified by the model. In particular, many respondents failed to take the error term into account. Adding graphs did not improve inferences. Paradoxically, when only graphs were provided (i.e., no regression statistics), respondents were more accurate. The implications of our study suggest, inter alia, the need to reconsider how to present empirical results and the possible provision of easy-to-use simulation tools that would enable readers of empirical papers to make accurate inferences.

HT: Brad Delong

Prostate Cancer Self Referals

Austin Frakt with a chart on the increase in self-refering for Prostate Cancer IMRT treatments among Medicaid patients:

Some other facts from the GAO report:

  • Providers are not required to disclose that they self-refer.
  • IMRT is one of the more costly prostate cancer treatment options, but not clearly superior.
  • Other work has documented that physicians play a large role in determination of a patient’s prostate cancer treatment approach.
  • Other work has also suggests financial incentives may influence treatment decisions.
  • Differences between self-referring and non-self-referring providers shown above could not be explained by differences in age, geographic location, or health.

Prostate IMRT Services Performed by self-refering and non-self-refering

It looks like Stark Law has a restriction against self-refering for Medicare & Medicaid patients, but it looks like there are plenty of loopholes in the law. Clearly the law is failing in its intent, and I would hope that any future rewrites would include all patients in a self-referal restriction.

Justin Fox: Why Retirement Risks Are Best Shared

Justin Fox: Why Retirement Risks Are Best Shared:

It’s been a tough few years for the Dutch pension system, long praised as the best in the world…. Yet from outside the country’s borders, the Dutch system still looks pretty spectacular. Its average ratio of assets to liabilities is 104%, more than 90% of the workforce belongs to a pension plan, benefits are generous by global standards, and costs are low…. Here in the U.S., which came in ninth of the 18 countries ranked in the Melbourne Mercer survey, things look a bit different. State and city pensions are in deep trouble–with Detroit’s currently tied up in bankruptcy court and The New York Times reporting this week that Chicago’s much-bigger system might be next in line for a funding crisis. Corporate pensions, once a major pillar of the retirement system, are disappearing, and their replacement, the 401(k), is turning out to be a woefully inadequate source of retirement income for most workers. Social Security… [is] the strongest pillar in the system. And remember, the U.S. is in the middle of the global pension pack. Most of the countries that scored lower than it on the Melbourne Mercer Index (France, Germany, and Japan among them) did so because they’ve set aside far too little to cover the big pension promises they’ve made.

So what distinguishes good pension systems from bad ones?… I can suss out two basic principles behind the pension systems that work:

  1. Pension risk ultimately has to be borne by pension recipients. Attempts to transfer that risk to others–shareholders in the case of corporate pensions, taxpayers for all the rest–are generally destined to end in tears.
  2. That risk should be shared across a lot of pension recipients. Having every worker shoulder the risk individually is not just, well, risky–it’s really expensive, too.

This first principal is now widely understood, although it remains political dynamite….

The 401(k) shares the characteristic that poor investment returns don’t result in funding crises or taxpayer bailouts. That’s a good thing. But beyond that, it’s been a pretty disastrous failure…. Most workers haven’t put aside nearly enough money… myopia… wages have been stagnant… employers stingy… higher fees and worse investment performance…. And finally, it takes much less money per person to guarantee an adequate retirement income when that guarantee is spread across a bunch of people.

This last one deserves extra emphasis. If you’re 65, and don’t know if you’ll live to 75 or 105, you need a huge stash of money to ensure that you won’t run out. Guaranteeing retirement income for 10,000 65-year-olds costs a lot less per person, because you can be sure that most of them won’t make it to 105. Traditional pensions work on the latter principal; 401(k)s the former….

The Dutch pension alternative is markedly more free-market-oriented than the French one, which consists mostly of (underfunded) government-run plans. It is also markedly less free-market-oriented (or, to put it another way, more collectivist) than the American 401(k) system. And it is markedly better than both.

A few comments on pensions:

From an efficiency perspective, it is undeniable that retirement funds are best shared. But I don’t see any retirement/pension overhaul for the private sector being passed in this political environment anytime soon. So we are stuck with 401Ks and the like for the time being.

I think there needs to be some sort of oversight for our current public pensions, whether it is like the Dutch system where the central bank is in charge, a Federal Pension Insurance program, or something else.

It would be an interesting public policy design problem to create a workable government-sponsored private pension system….


HT: Brad Delong (which is where the summary came from too)

Noah Smith: Conservative Econ Proposal Track Record

In an attempt to keep derp from taking root, Noah Smith wrote a post on conservative economic arguments since the crisis, where he analyses a popular conservative position and sees how accurate it turned out.

After plowing through six argument, Noah (correctly) judges that the conservatives have an awful track record with economic predictions. Which is rather unfortunate for the country.

You should read the post in full.

I do however, think that Noah was a bit too nice in awarding 50% accuracy rating to the “deficits must be cut in the crisis” argument, as Europe’s brush with austerity has pretty conclusively shown deficit reduction to be a horrid idea in a crisis. But I suppose Noah wanted to throw conservatives a bone by looking further into the future, where after the economy has completely the conservative position of deficit reduction would be be in accordance to Keynesian fiscal policy,


Also, I might also be a bit more lenient on the conservatives with the “Fannie & Freddie cause the crisis” argument, since while they were not the causes of the crisis, the government had to bail them out.

Three Reasons why Rand Paul Should Never be President

They take the form of three answers to questions in a recent Businessweek interview:

Who would your ideal Fed chairman be?
Hayek would be good, but he’s deceased.

Nondead Fed chairman.
Friedman would probably be pretty good, too, and he’s not an Austrian, but he would be better than what we have.

Dead, too.
Yeah. Let’s just go with dead, because then you probably really wouldn’t have much of a functioning Federal Reserve.


Just to be clear: The reason why Paul’s answer of Friedman is also a reason not to want him ever appointing a Fed Chair as President is because Paul chose him since he’s dead. If Friedman were alive, Paul would not like him as chairman, since Friedman wouldn’t fall into the “low interest rates equals easy money” fallacy, and would probably want the Fed to do more than they currently are. Friedman would probably make a good Fed Chairman.

HT: Brad Delong