Nathan Scandella (personal)

Open Note to Karl Denninger

I am a regular reader of Karl Denninger's blog, The Market Ticker. Denninger presents a viewpoint not well-captured in the mainstream media, as well as some in-depth quantitative analysis of financial markets. The blog is worth a read.

That being said, he spends a good portion of his time not merely in quantitative finance, but also soapboxing about social/political/economic issues. This is where he reveals himself as a giant windbag, and this is where I'm taking him to task today. One of Denninger's recurring themes is how lack of transparency in government has helped ruin our financial system. His blog aims to expose what the government would like you not to know. And yet, this monstrous conservative hypocrite censored one of my forum posts last week, so I'm using my own website to call him out.

The original post was entitled Open Note to Time Geithner. Essentially, it was simply the following quote about the Great Depression:

Treasury Secretary, Henry Morgenthau, angry at the Keynesian spenders, confided to his diary May 1939: "We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and now if I am wrong somebody else can have my job. I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started. And enormous debt to boot."

with the commentary from Denninger that we apparently need to repeat history to learn from it. This entry sparked my response, which was essentially this (I can't tell you exactly what it was, because Denninger deleted it about 5 or 10 minutes after I posted it - it was up briefly, however):

Uh, actually the New Deal helped unemployment during the Great Depression quite a bit. If you're going to use a quote to make your point, don't pick one that is proven wrong almost immediately after it's made. By 1939, unemployment increases had completely stopped, and employment had actually started to rise again. Within the next two years, unemployment dropped dramatically.


To look at the issue another way, see this chart of unemployment since WWII:

http://en.wikipedia.org/wiki/File:Us_unemployment_rates_1950_2005.png

As you can see, during every Democratic president's term, unemployment decreased, or in one case, stayed the same. During every Republican president's term, unemployment increased, or in one case, stayed the same. Carter and Reagan both had essentially the same level of unemployment at the start, and end of their terms in office.

This site is full of a bunch of people who used to be Republicans, at least up until they got routed in successive elections. But, the only difference between Republicans, and these born-again Libertarians, is the lack of medieval social ideals, not in their understanding of how the economy actually works. If all this Keynesian stuff is a load of bollocks, then you have one hell of a statistical anomaly to explain in the previous chart.

Who exactly isn't learning from history?

That was it. Fairly insightful, certainly on topic, albeit pretty insulting. Maybe Denninger censored me because he wants to keep his site squeeky-clean, and uncontroversial. Except that his blog is entirely about rejecting group-think, being controversial, and hurling insults in every direction (left, right, etc.). He curses in his blog, frequently depicts icons of cows defecating, and likens economic events to acts of sodomy, and the like. So, maybe we can throw out the part about keeping it clean, and just expose him for being a huge hypocrite.

For the few minutes during which my post was online, it clearly was read by a few people, in addition to Karl. One brainwashed reader named Tesla (obviously not the one of electricity and magnetism fame, nor the inventor of the electric Ferrari) made the following comment, in response to my post:

Get back to me when you do a study of the private economy vs the government sector. I think you'll find your answer there.

Oh, and remove the bias of the way they have changed the unemployment calculation over the years.

Right. Because there is actually a separate "Private Economy" and public economy. The last time I checked, they both used dollars, and workers in one economy are allowed to spend their dollars in the other. Of course, during the Great Depression, many of the jobs added were Government jobs. That's what Keynesian stimulus is. When the private sector isn't willing to create jobs, but the government knows that doing so is in the best interest of society, it will add jobs. Nobody is saying that should be the steady-state solution, but when the economy collapses, it's an appropriate solution. As a result of the New Deal, we were left with actual residual value created by those jobs. Many of those projects were not projects that should be funded on an ongoing basis, decade after decade (e.g. new national parks). But, in a time where government stimulus is needed, these projects can leave us with persistent value, that increases productivity (or does not require us to sap productive labor during economic expansion). Some of this is what's referred to as "infrastructure", and it is absolutely a requirement for maintaining a productive economy. It's also frequently comprised of projects that the private sector will not fund on its own. So, the implication that Democrats add jobs, but those jobs are purely overhead, is nonsense.

Secondly, to the person who has the government job, especially during a recession, they really don't care that it's public vs. private. They get paid in dollars, and can spend their dollars into the private economy if they so choose. This spending power helps the private economy grow, at which point, recently-added government jobs can migrate back into the private sector.

Thirdly, when government spends stimulus dollars, it doesn't necessarily mean it's all spent on government jobs. The government can either spend tax revenues, or use deficit spending, to pay private contractors. The government is merely deciding to spend the money, but the work is still often done in the private sector. The bulk of my career earnings have come this way (working for government-funded private contractors). So, the idea that all this money is simply burned up by government bureaucrats is more nonsense.

Many even go so far as to argue that government jobs create no wealth, and exist purely as overhead. Well, I have a bit of news for those folks: many private sector jobs fall into the same category. Where is the wealth created by the financial services sector, that at its peak a couple years ago, represented 25% of the S&P500 market cap, or 40% of all corporate profits? Even overhead functions are needed (in reasonable quantities), in order to allow the "productive" sectors of the economy to do their jobs. Left alone, the infrastructure, and regulatory oversight, needed by these industries would not be accounted for, and the economy would devour itself (as has happened recently in parts of the financial sector).

Now, I am the first one to agree that all government spending is not equal, and not all is beneficial. But, to make the blanket implication that public sector job creation is purely a drain on The Real Economy is absolutely absurd.

The second argument in Tesla's response is about revising unemployment data. Yes, unemployment statistics have been revised multiple times. But, if he means that somehow, Democrats have revised history to make Democratic presidencies look better, and Republican presidencies look worse, that's silly. Republicans have been in power for most of the last 30 years. Are we really to believe that they've left alone previously-doctored unemployment data simply to take the high road? C'mon. These are the kind of tinfoil-hat-wearing nutjobs that Denninger attracts. They may rule his website, but this one's mine!

Posted at 09:43PM Jun 08, 2009 by Nathan in Economics  |  Comments[2]