Sunday, December 27, 2009

Econometricians Gone Totally Mad in Support of Tyranny

There has always been speculation among economists who apply a verbal deductive methodology to the science of economics as to why econometricians adopt a worshipful posture towards using equations when attempting to explain the economy.

One theory holds that it provides cover to bring about more intervention in the economy. A current proposal by Yale economist Robert Shiller provides an object lesson in how phony equations are created to advance government intervention.

In today's NYT, Shiller writes:
Corporations raise money by issuing both debt and equity, the latter giving investors an implicit share in future profits. Governments should do something like this, too, and not just rely on debt.

Borrowing a concept from corporate finance, governments could sell a new type of security that commits them to paying shares in national “profit,” as measured by gross domestic product.
Notice what Shiller is doing here.

He is taking a real concept, corporate profits and attempting to adopt it in a manner that is very different.

A shareholder in a corporation is actually a part owner of that corporation. Thus, his profits based on his percentage of ownership are entirely understandable. Where else would the money go?

The government is not a profit producing entity. There are no "profits" to distribute. But Shiller seems to imply there are. What the hell is he talking about? Here's where his worship of everything that can fit into an equation turns him into an apologist for state tyranny:
Historically, one impediment [to issuing shares that commits to pay a share of GDP] was the difficulty in accounting on a national scale: governments didn’t even try to measure G.D.P. until well into the 20th century.

Although G.D.P. numbers still aren’t perfect — they are subject to periodic revisions, for example — the basic problem has been largely solved. So why not issue shares in G.D.P. now.
Talk about seeing everything through cult like eyes of an econometrician. Shiller thinks a share of GDP "profits" haven't been issued before because it is only recently that econometricians have been able to measure GDP.

Of course, the real problem is that there are no "GDP profits" to distribute. GDP measures in a sketchy method "national production". If Joe creates shoes and exchanges them with Pete for a coat. They each gain, but there is no external profit that the government owns in this transaction. There are no shares in GDP to issue, despite how complex an equation the econometricians can design.

But Shiller sees it differently. Read the last Shiller paragraph I quoted, again:
Although G.D.P. numbers still aren’t perfect — they are subject to periodic revisions, for example — the basic problem has been largely solved. So why not issue shares in G.D.P. now?
What Shiller is really saying here, if we take an eye off his equations, is that the government owns all production and it's about time that the people realize this. Such a claim thus makes it easier for governments to raise money. Shiller is clear about this:
Such securities might help assuage doubts that governments can sustain the deficit spending required to keep sagging economies stimulated and protected from the threat of a truly serious recession.
Once he let's the cat out of the bag that it is about making it easier for governments to raise money, he quickly shifts into explaining in more detail the equation that will divide up the GDP:
In a recent pair of papers, my Canadian colleague Mark Kamstra at York University and I have proposed a solution. We’d like our countries to issue securities that we call “trills,” short for trillionths.

Let me explain: Each trill would represent one-trillionth of the country’s G.D.P. And each would pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation’s quarterly nominal G.D.P.

If substantial markets could be established for them, trills would be a major new source of government funding.
This is really all mad mumbo jumbo, except for the last paragraph.

Shiller is designing an equation based on exchanges where there is nothing spun off to create any ownership "profits." He intuitively must understand this, since he then tells us about trills:
Trills would be issued with the full faith and credit of the respective governments. That means investors could trust that governments would pay out shares of G.D.P. as promised, or buy back the trills at market prices. [Note: I am not sure what Shiller means by "paying out shares". In another part of his column he talks about paying out from "cash flow". Same thing with his comment as to buying back trills at market price. If it truly is a market price, why would it be necessary for the government to buy back trills, or important to even mention, since if it truly is a market price, they could be sold in the market? This indicates a very amateurish effort by Shiller in his entire proposal that doesn't appear to be even internally consistent.-RW]
He brings in the full faith of government because Shiller realizes that the only thing that brings value to trills is plain and simple, the power of the state to tax. That's what "backed up by the full faith and credit of the government" means. Shiller just covers it all up in mumbo jumbo about ownership in GDP.

Shiller then goes on to explain how a trill will pay out based on one trillionth of "the annual cash flow". Which is simply another way of saying that the interest on this type security will be variable based on nominal GDP, but it does so in a deceiving way by suggesting that somehow there is an annual "cash flow"to be divided. There is no such thing. There is simply the ability of governments to tax, nothing more, nothing less.

Shiller's equations do nothing but attempt to obfuscate this fact through fancy equations, so that it becomes easier for governments to borrow money that ultimately must be paid for through taxation or inflation. Nothing new here.


  1. Lol, this is the stupididiest idea I've ever heard of. Interesting however, that while Treasury Bonds give the government an incentive to inflate their currency, "trill bonds" would necessarily give the government an incentive to kill the entire economy with overtaxation, to be able to cover the coupon payments of said bonds. Because if you inflate - nominal GDP goes up and you find yourself in even more problems with coupon payments.

    I think that issuance of "trill bonds" is the national-economic equivalent of harikiri, because the only stable state once enough of these bonds have been issued is going to be GDP=$0, Trill coupon payment=$0, Taxes=100%. Sort of like the USSR, come to think of it ...

    With intellectuals like these, who is actually surprised that the Western world is going to hell in a handbasket??

  2. This is wrong on so many levels. The biggest mistake, as you said, is the implicit assumption that the government owns the whole country.

    But then there's also the problem that: In our allegedly democratic Republic, don't the citizens already own the government?!

  3. Look, they are going to need to do something because global warming is not going to work.....

  4. This critique was domination. I wish major publications would hire people like you and Mad Murphy.

  5. Shiller can't be as stupid as his article suggests. He must simply be a shameless thief via taxes.

    Hats off to Robert Wenzel for at least shinning a light on this scam.

  6. Hi Bob -

    Shiller figures on Huff Po´s list of best books of the financial crisis.
    I love to read these lists (which, of course, diverge considerably from what the financial community itself might consider the best books)..
    You get a sense of whom the MSM are going to promote..because their ideas are in synch with an expansion of government, more control by political elites and mandarins of various sorts..

    So, you see a very interesting revisionist history going on

  7. Sounds like a great idea to me. An idea like this should completely implode the U.S. economy and with a little luck cause complete failure of the government. Imagine all those stupid, stupid people - buying "equities" in "income" that is not owned by the issuer, and on which the issuer has doubtful ability to pay. It's essentially offering the parasites a chance to cannibalize each other, disguised as an opportunity to feed further on their typical victims.

    These kinds of idiotic schemes, like the old tale of the King who places his throne on the beach and orders the tide to not come in, properly separate would-be leaders from illicitly gained public respect.

  8. Great, so we can buy claims to future wealth that will be plundered from our countrymen. What could be wrong with that?