State Unemployment Rate

The September 2010 unemployment rates by state are out.  Not much change.  As for Michigan, we continue to just barely inch our way in a positive direction, coming in at a 13.0%.  California is creeping on Michigan with a 12.4% rate, while Nevada continues to be a black hole for employment.  This is not really a recovery.  

RIP: Efficient Markets Hypothesis – 70% of stock trades last 11 seconds or less

One of the economic theories that dominated a mainstream economic theory during the last few decades is Efficient Markets Hypothesis.  Essentially, an important part of the concept is that asset prices, such as stock prices on the stock exchange, accurately reflect all available information about the future earnings of the firm.  Further, it implies that stock price movements reflect changes in these perceptions.  There’s a lot wrong with the theory as is explained quite well in Zombie Economics by John Quiggin.  But let’s add this little bit from Washington’s blog and Naked Capitalism.

Washington’s Blog

The Fourteenth Banker writes today:

In the stock market, program trading dominates volume. I heard recently that 70% of trade positions are held for an average of 11 seconds.

He’s correct.

As the New York Times dealbook noted in May:

These are short-term bets. Very short. The founder of Tradebot, in Kansas City, Mo., told students in 2008 that his firm typically held stocks for 11 seconds. Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years, he said

Similarly, FT’s Martin Wheatley pointed out last month:

I know of one HFT firm operated out of the west coast of the US that boasts its average holding period for US equities is 11 seconds

And market analyst Peter Cohan writes at AOL’s Daily Finance:

70% of trading volume on the major exchanges is conducted by high-frequency traders who hold a stock for an average of 11 seconds.

The fact that the vast majority of stock market trades are held for 11 seconds shows that the stock market is not a real market with real traders governed by the law of supply and demand, and with no real price discovery.


Excess Bank Reserves: Theory vs. Reality

In the macro econ textbooks, the mainstream explanation for money creation is the story of fractional reserve banking where reserves limit the amount of loans made.  In the traditional theory, the central bank (The Fed in U.S.) controls the amount of reserves banks have through either reserve reqmts or open-market operations.  Commercial banks are supposedly limited in their ability to make loans until they have sufficient excess reserves to “loan out”.  These new loans are what creates new money (at least the M1 variety of bank-credit money).  A lot rides on this theory.  For example, the theory implies that the Central bank has the power to control the supply of money and loans to the economy as opposed to only controlling short-term interest rates.  The theory doesn’t really fit reality very well.  There’s lots of problems with it.  (follow the posts at Bill Mitchell’s blog  Among the problems are that, in many countries (and in the US for savings accounts) there is no reserve requirement.  Another is that operationally, banks aren’t limited by reserves.  They make loans, then find out how much reserves they have to borrow.  Not the other way ’round.

But a critical piece of the mainstream theory that underpins monetarist theory is that banks, being profit-maximizers, will always lend out their excess reserves.  Wrong.  Check this out:

The Election Campaign Con Game: “Tax Cuts Pay for Themselves”

Continuing a series to help voters and everybody else cut through the nonsense, lies, garbage, and con games that has become American electoral campaigns – at least with respect to economics. The claim up for consideration now is the claim that by cutting taxes now (particularly for the wealthy, very high income earners, capital income (as opposed to wages), and business taxes) we can both stimulate the economy and that the growth in the economy will increase the dollars collected, thus making the tax rates pay for themselves with no increase in deficits.  Just like magic.  Except that like most so-called magic, it’s just a con.  IT’S NOT TRUE.  Unlike the first con game (“I’ll cut the deficit“) which is an equal opportunity con between parties, the tax cut con does seem to be Republican focused.

This time, I’ll outsource the argument to Mark Thoma of Economist’s View:

Republicans are selling snake oil once again:

Some Republican Senate candidates have suggested that extending the Bush tax cuts — which are scheduled to expire at the end of the year — will actually be good for the country’s bottom line, as the economic growth that results will more than offset the trillions of dollars in lost revenue. “By extending tax cuts you pay down the deficit, you grow the economy by giving people more money,” said Colorado Republican Ken Buck.

Today, on Fox News Sunday, Pennsylvania’s Republican Senate nominee Pat Toomey joined this club, telling Fox’s Chris Wallace that “it’s not clear” that extending the Bush tax cuts — while also lowering the corporate tax rate — would increase the deficit…

But, of course, the Bush tax cuts did not even come close to paying for themselves. The Bush tax cuts cost us around $1.7 trillion in revenue from 2001 through 2008, in part because of weak output and job growth following the cuts (contrary to assertions about how the tax cuts would stimulate economic growth).

As for the cost of extending the tax cuts to the wealthy, the Tax Policy Center estimates that making all the Bush tax cuts permanent, as opposed to extending them only for the middle and lower classes, would cost $680 billion over the next decade.

The disappointing part is that the press still lets them get away with this. At best, the press generally says something like “some economists claim this isn’t true,” implying there’s a debate about this issue — that some credible economists think the tax cuts will, in fact, pay for themselves — when there is no debate and the answer is clear. Tax cuts don’t pay for themselves.

If the press won’t call them on this obvious falsehood, how can we trust them on anything? Instead of reflecting poorly on the press, this ought to bring the general credibility of the people making these claims into question. The press ought to ask something like, “Are you this ignorant about economics, in which case why should anyone vote for you, or are you deliberately misleading people? I’ll assume you aren’t ignorant, so here’s the question. If you are willing to make false claims about the revenue generated from tax cuts in order to promote them for the wealthy, what other falsehoods will you be willing to promote in order to serve political ends? If voters can’t trust you to tell the truth about tax cuts, how can they trust you on anything?”

The Election Campaign Con Game: “Cut the Deficit”

Here’s a series of posts in the next couple days to try to help voters and everybody else cut through the nonsense, lies, garbage, and con games that has become American electoral campaigns – at least with respect to economics. A lot of electoral campaigns have increasingly come to resemble common con games such as 3-card monte.

“It’s Time to Cut the Deficit” – NO, it’s not!

A lot of candidates, in fact most of them, are claiming that it’s time for government to cut it’s deficit. Tip offs:  These candidates claim loudly that “Washington (or spending) is out of control”.  They claim that if we only elect them, “fiscal responsibility” will return.  Don’t fall for it. It’s a con.

It’s bad policy.

First off, cutting the deficit right now and making it a priority is the WRONG thing to do.  It won’t help the economy. It will make things worse. Always does at a time like this with unemployment stuck near 10% and real growth at a crawl.  Even the very  conservative and austerity-favoring International Monetary Fund agrees, as Christina Romer notes in the NY Times:

Now is not the time. Unemployment is still near 10 percent in the United States and in Europe. Tax cuts and spending increases stimulate demand and raise output and employment; tax increases and spending cuts have the opposite effect. This is a basic message of macroeconomics and a central feature of public- and private-sector forecasting models. Immediate moves to lower the deficit substantially would likely result in a 1937-like “double dip” as we struggle to recover from the Great Recession.

Some advocates of austerity argue that, contrary to the conventional view, fiscal tightening now would lower long-term interest rates and improve confidence so much that the impact could be positive. But an ambitious new study in the World Economic Outlook of the International Monetary Fund confirms that fiscal consolidations — that is, deliberate deficit reductions — typically reduce growth substantially.

The study considers a wide range of advanced economies over the last three decades, so it doesn’t put too much weight on unusual episodes or focus on examples supporting particular conclusions. It also breaks new ground by looking specifically at times when governments changed taxes or spending with the aim of reducing deficits. Previous studies looked at summary measures of the budget situation, and likely included cases when strong economic performance caused lower deficits, not the other way around.

The recent experience of countries already carrying out austerity measures is consistent with the central finding of the I.M.F. study. Ireland, Greece and Spain have all had rising unemployment after moving to cut deficits.

If you are worried about the deficit and want to see the government move toward a balanced budget, then growth and improved employment is the only proven way.  Growth naturally leads to lower deficits as the automatic stabilizers (progressive tax rates, unemployment comp, etc) automatically cut spending and raise $ of taxes collected.  Personally, I don’t think deficits are a problem anyway unless they are increasing when the economy is at full employment (see my posts on MMT here).  But either way, increasing the deficit now will only make unemployment rise further and depress aggregate demand.  Businesses do not hire and expand when the economy itself is not growing or looking to grow.

The con.

Candidates who claim they will cut spending never tell you how they plan to do it.  They are full of talk about “detailed reviews” and “improved efficiency” and such.  But they never tell you how or what programs will be cut.  Government budgets aren’t secrets.  They’re public information. If they can’t figure out even a few specifics in the two years that they’re campaigning, why in the world would you think they’ll find it on the job when they’r busier? The reality is they don’t intend to cut anything.  At the federal level, they never do.  They may privatize some functions so as to enrich cronies (while lowering services). At the state level, the only cuts they propose are those that they don’t dare mention before an election, such as cutting education, police, fire, highways.

Another trick they use is to count on voters not knowing the difference beween million (1 with 6 zeros), billion (1 with 9 zeros) and trillion (1 with 12 zeros).  They may cite a few instances where the federal government apparently “wasted” 2-3 million dollars (although closer scrutiny rarely shows the waste) and claim that eliminating these items will save the hundreds of billions needed to balance the federal budget.  The math just doesn’t work, but they count on you not being able to do 4th grade math.

The switch.

Typically what such folks do once in office is to not “cut spending”, but rather to cut taxes.  In particular, they cut taxes on high-income folks, capital income (as opposed to wage income), and business taxes.  This, of course, only makes the deficit worse.  They have a con game for that too, but that’s another post.