Lookin' For A Turnin' Point Here, Boss!

If you have visited this space from time to time, there are a couple of things that are fundamental in addressing the proposed policies of government. Things like, an understanding of microeconomic principles. Like, understanding that macroeconomic analysis is best when examined as a dynamic, rather than static phenomenon.

And, of course, there is a background in some pretty basic math.

In my experience, I have never known a politician that could tell what "it is" in the image above. Most politicians, in my experience, are borderline dyslexics. It is with this insight that I, among others, was unsurprised to find that none of the politicians that voted for the Stimulus Bill had read it. It is almost a certainty that no legislator reads the legislation for which he is going to cast his vote. There are elected officials and there is staff. They are all politicians.

Elected officials talk about things. Then they direct staff to write the language that would purportedly put the things that they talk about into law. This is why we spend billions of dollars each year on accountants. Most laws are so poorly written that they have no clear meaning. And since most of what accountants do is related to math, most mathematical discussions of policy end up trumping the policy makers. This, I hope, explains the Mad Magazine "Spy versus Spy" mentality of the Internal Revenue Service. The government hires guys that have math experience to go after guys who were complete geeks and nerds during their undergraduate years. If you were good at the numbers, do you think you'd make more as a CPA in private practise or as a Revenoor for the Gubbermint? Clearly, the guys at Revenue are tier two candidates. But they do get a reliably delivered check with reliably negotiated benefits.

Which brings us to our modern conundrum: What the hell are these guys thinking?

Coupla things happening this week.

First, our state's economist will be giving his Economic and Revenue Forecast.

You and I can already tell our state's legislators what that news is going to bring; the economy is in worse shape than was related in the last Economic and Revenue Forecast, and the amount of revenue coming into state coffers will be lower than was expected in the last Economic and Revenue Forecast.
Remember the graphic above? It's representative of a pretty simple math problem. With just a few variables. Can you imagine how many variables would have to be in a mathematical model of a states economy? What would some of those variables be? And which of those variables would be considered endogenous variables rather than exogenous?

Back in the '80's it was discovered that the state economist issued his Economic and Revenue Forecasts based upon on simple observation: what happened in the immediate past? If you're a gambler, you know about the predictive power of that observation. If you just won a hand of poker, chances are pretty good that you're going to win the next hand. The same is true of State Economists. If the economy is going into the toilet, chances are the economy is going to continue to go into the toilet. What gamblers and state economists have in common is that they're both looking for "turning points."

Statistically, hitting a hot streak is nearly impossible to prove if looked at as a mere theoretical. One of these precepts is held within the concept of the "fair deal." That is, if all possible variants of an actual deal are based upon the likelihood of certain cards being dealt to all the players remains random, the likelihood of any individual player having a greater likelihood of success is equal.

But as the game progresses, is that actually true?

Likewise for our state's economist, many of the assumptions that go into an econometric model that would tend to show statistical evidence for certain beliefs in economic outcomes must rely upon the randomness of the economic activities being observed. But, in neither case is this necessarily true.

Our Oregon Legislature, like a card shark, continually stacks the deck.

From forcing us to use dumb gas for our cars, to requiring the power company to invest in dumb energy to power our homes and businesses, to spending billions of dollars on dumb light-rail, our legislature continues to tax and spend their way into increasingly stupid economic conditions.

The worst tool of economic analysis out there has got to be Keynesian Economics, as taught by your local high school teacher. Since most public school teachers are severely math challenged, these public school teachers rely upon caveats inculcated during their undergraduate days. From psychology they pick up a little of Maslow. For economics, they pick up something called the "multiplier effect." And then they graduate. And then they start to teach new generations.

What passes for brilliant thinking, relying upon the Multiplier Effect, is that for every dollar spent by the government, five dollars in GNP is created. Or, words to that effect.

I noticed the other day a sign in the window of a downtown shop relating words to that effect when shopping for consumables. Something like, "every dollar you spend at our store increases the amount of money in our community by a factor of five. Every dollar spent at a chain store is money going out of the community and is lost." I paraphrase.

I went into the store and noticed that not a single product in the store was manufactured locally. So, I was totally at a loss as to what benefit would accrue to my community by my patronage there, rather than at the "big box" store down the street. The "big box" store employed more people. I rather suspect that they pay more in property taxes, too. All in all, I decided that if I really cared about my community that I would be better off paying lower prices at the "big box" than I would at a company that only claimed that I would be better off if my community shared the wealth of that store's multiplier effect.

This store owner forgot that the economy is dynamic, not static. The matrix upon which I base my decisions is not straight-jacketed by his pronouncement of the Multiplier Effect. If I got better service, maybe I'd patronize his store. If he had a better selection, I'd patronize his store.

But with higher prices and lower service, I'm better off at the "big box."

Politicians--as a class--seem to be stuck in the '40's with only Keynes' Multiplier Effect to hang their policy hats upon. They can't see that a dollar taken from the private sector is a dollar less the private sector has to improve productivity. That its a dollar less to provide employment, investment in new buildings and equipment. That's its a dollar less to provide better service.

They see taking that dollar as having a Multiplier Effect through their spending of that dollar.

And so they continue to depress the private market while increasing the public spending...all chasing that nebulous Multiplier Effect. All the while continually depressing the private sector. Because, somewhere, without the tools to inquire or verify on their own, they were told that the caveat "Multiplier Effect" was all they needed to know. And, like the dyslexic struggling in schools learning to overcome their deficiencies in reading with improved verbal skills, so to our political class continues to jawbone our problems without any fundamental concept of what it is they are doing, are continuing to do, and are committed to do.

And I, like you and our state's economist, are waiting for turning points.
I don't think we're going to get any during this session.