Accounting Magic: Double Economic Growth Overnight, Nigeria Edition

All it takes for Nigeria to magically double the size of her economy is to apply some accounting-statistical trickery.

From Simon Black at the Sovereign Man (bold mine)

Over the weekend, Nigeria’s government made an accounting adjustment in how it calculates its GDP statistics.

By changing the base-year in GDP calculations from 1990 to 2010, Nigeria increased the reported size of its economy by 89% over the weekend.

So with a stroke of a pen, the West African nation leapfrogged South Africa to become the continent’s largest economy.

And in doing so the country’s debt-to-GDP ratio fell below 20%. The ratio of bad loans in the banking system when compared to the overall size of the economy also dramatically declined in proportion.

The same thing happened in Poland last year when the government there made a grab for private pensions, then counted those new assets against government debt.

It was just another accounting scam. But it dramatically lowered Poland’s debt-to-GDP ratio on paper, even though the government had not actually gotten any ‘richer’.

And how the same accounting-statistical manipulation can be seen applied to the balance sheets of the ECB and the US Federal Reserve. Again Mr. Black

Just hours ago, the European Central Bank released its 2013 annual report, showing a massive 44% surge in profits.

Diving into the numbers, though, it turns out that most of the ECB’s profits come from funny accounting tricks—revaluing a permanent swap line they have with the Federal Reserve, and moving funds from the “risk provision” column into the profit column.

I’m also reminded of the Federal Reserve’s own admission that they had $50+ billion in ‘unrealized losses’ due to the erosion of their portfolio of US Treasuries.

This is almost as much as their entire capital reserve… meaning that the Fed is practically insolvent by its own admission.

Not to worry, though. The Fed gets to employ its own accounting tricks to make these losses disappear, marking the assets on the balance sheet at their much higher ‘book value’, rather than the much lower ‘market value’.

Of course, the US government does exactly the same thing… often conveniently leaving out huge portions of its total debt such as the non-marketable securities it owes to the Social Security trust funds.

All of this really just goes to show how absurd it is to rely on these numbers conjured by politicians and central bankers.

And I’ve been repeatedly saying that since government issues all the accounting based statistics they will show what they want to show rather than what really has been.

To give you more example of fallacies of mainstream statistics,  the great dean of the Austrian school of economics Murray N. Rothbard exposed on the flagrant errors of the Keynesian multiplier. Mr. Rothbard’s case more lucidly explained by Professor Steven Landsburg: (bold orginal)

If you studied economics from one of the classic textbooks (like Samuelson) you might remember how this goes. We start with an accounting identity, which nobody can deny:

Y = C + I + G

Here Y represents the value of everything produced in (say) a given month, which in turn is equal to the total income generated in that month (because producing a $20 radio allows you — or perhaps you and your boss jointly — to earn $20 worth of income). C (which stands for consumption) is the value of the output that ends up in households; I (which stands for investment) is the value of the output that ends up at firms, and G (which stands for government spending) is the value of the output that ends up in the hands of the government. Since all output ends up somewhere, and since households, firms and government exhaust the possibilities, this equation must be true.

Next, we notice that people tend to spend, oh, say about 80 percent of their incomes. What they spend is equal to the value of what ends up in their households, which we’ve already called C. So we have

C = .8Y

Now we use a little algebra to combine our two equations and quickly derive a new equation:

Y = 5(I+G)

That 5 is the famous Keynesian multiplier. In this case, it tells you that if you increase government spending by one dollar, then economy-wide output (and hence economy-wide income) will increase by a whopping five dollars. What a deal!

Now, though I cannot seem to find a reference, I have a vague memory that it was Murray Rothbard who observed that the really neat thing about this argument is that you can do exactly the same thing with any accounting identity. Let’s start with this one:

Y = L + E

Here Y is economy-wide income, L is Landsburg’s income, and E is everyone else’s income. No disputing that one.

Next we observe that everyone else’s share of the income tends to be about 99.999999% of the total. In symbols, we have:

E = .99999999 Y

Combine these two equations, do your algebra, and voila:

Y = 100,000,000 L

That 100,000,000 there is the soon-to-be-famous “Landsburg multiplier”. Our equation proves that if you send Landsburg a dollar, you’ll generate $100,000,000 worth of income for everyone else.

The policy implications are unmistakable. It’s just Eco 101!!

See how accounting identities can create a paradise for everyone?

Quote of the Day: Why using moral suasion as a policy tool is a bad thing

When you cast policy issues in moral terms, you degrade the character of public discourse. You lead people to see conflicting priorities as an occasion for battle, rather than an occasion for compromise. You send the message that policy is best decided by appeals to one’s inner conscience (or, more likely, to the polemics of demagogues), rather than by appeals to impersonal cost-benefit analysis. And this is a very bad thing… 

If we’re determined to instill blind moral instincts that make people behave better most of the time, I’d like to nominate a blind moral instinct to respect price signals and the individual choices that underlie them—an instinct, for example, to recoil from judging and undercutting other people’s voluntary arrangements.

This is from Professor and author Steven Landsburg at the Cato Unbound in a debate over recycling. 

Populist-personality based politics have almost always centered their policy discussions based on the moral "feel good noble sounding" context. The appeal to the moral is practically an appeal to the emotion; no matter how coercive, impractical or how short term oriented policies can lead to long term pain. That's the reason why the use of "moral suasion as a policy tool" signifies as "the polemics of demagogues".

Quote of the Day: The Benefits of Population Growth

The benefits of population growth come from the fact that the more people there are in the world, the more people you have to interact with, the more potential friends you have, the more potential mates, the more potential business partners, customers, employers, employees. But even more than any of that is the fact that we all free ride on each other’s ideas. Virtually all of our prosperity comes from the fact that each generation free rides on the ideas of the previous generation, and improves on them — not just uses those ideas in and of themselves, but uses them to inspire the next generation of ideas. We use them to build on and to make the world a more prosperous place. A lot of that is invisible. You have all this technology around you and you tend to forget the fact that had there been half as many people, there would have  been half as many ideas — probably fewer than half, in fact, because  ventures actually inspire each other, so there’s a more than linear buildup of ideas as the  population grows.

I like to say that when you’re stuck in traffic on a hot summer night, it’s very easy to remember that the guy in front of you is imposing the costs, and, unfortunately, you also easily forget that the guy who invented air conditioning has conferred on you quite a benefit. You remember that if the guy in front of you had never been born, your life would be a little easier right now — but it’s also easy to forget that if one less person had been born it might very well have been the guy who would’ve invented air conditioning, not the guy who’s in front of you. So, the real way in which people get this wrong, I think, is that the mind immediately goes to the fact that there is such a thing as too large a population. And there is such a thing as a population so large that the earth cannot support it — we all know that. But that does not address the question of whether the current population is too large or too small. And somehow people often confuse one of those questions with the other. I’m not sure why, but I’m out to unconfuse them.

(bold mine)

This excerpt is from the interview of author, blogger and professor Steven Landsburg by the Richmond Federal Reserve (hat tip Bob Murphy)

Quote of the Day: Nobody is More Generous than the Miser

In this whole world, there is nobody more generous than the miser—the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer—because you produced a dollar’s worth of goods and didn’t consume them.

Who exactly gets those goods? That depends on how you save. Put a dollar in the bank and you’ll bid down the interest rate by just enough so someone somewhere can afford an extra dollar’s worth of vacation or home improvement. Put a dollar in your mattress and (by effectively reducing the money supply) you’ll drive down prices by just enough so someone somewhere can have an extra dollar’s worth of coffee with his dinner. Scrooge, no doubt a canny investor, lent his money at interest. His less conventional namesake Scrooge McDuck filled a vault with dollar bills to roll around in. No matter. Ebenezer Scrooge lowered interest rates. Scrooge McDuck lowered prices. Each Scrooge enriched his neighbors as much as any Lord Mayor who invited the town in for a Christmas meal.

Saving is philanthropy, and—because this is both the Christmas season and the season of tax reform—it’s worth mentioning that the tax system should recognize as much. If there’s a tax deduction for charitable giving, there should be a tax deduction for saving. What you earn and don’t spend is your contribution to the world, and it’s equally a contribution whether you give it away or squirrel it away.

 This is from author and University of Rochester economics professor Steven Landsburg on the virtue of savings.

Quote of the Day: Economic Value of Politicians

By what insane calculation is a congressional candidate more representative of society than an entrepreneur, a corporate director, or a taxicab driver?

I am sharing Cafe Hayek's Professor Don Boudreaux quote of Steve Landsburg’s 1997 book, Fair Play (original emphasis) page 35

This quote reminds me of a popular and controversial media personality who recently said in a radio show that for a particular case, he only helps retired public officials because they have done “public service” to society and won’t do the same for civilians.

The announcer seem to have forgotten that that the food he eats comes from the private sector, the clothes he wears comes from the private sector, the car he drives comes from the private sector, the mobile phone he uses comes from the private sector, the microphone and sound system he uses to air his self-righteous junk comes from the private sector, the bed he sleeps on comes from the private sector…practically everything he does (directly and indirectly—even government roads may have been subcontracted to the private sector or at least sources their raw materials from the private sector) comes from the private sector which he so belittles.

And what of public officials? Public officials live off from the resources generated by the private sector to supposedly do some “public service” which in reality the private sector can provide. In short, public officials exists because of the private sector from whom the former forcibly extracts resources from the latter.

In the world of politics, what is self-evident can hardly be seen. Moreover, people are seduced to noble sounding economic naiveté themes, as well as, to morally bankrupt idea of collectivism (nationalism) or to the servitude to the state.

Why Macroeconomics as Policy Tool Shouldn’t be Trusted…

…especially of the Paul Krugman strain.

Writes author and University of Rochester professor Steven Landsburg, (bold original)

Supply and demand (and, especially, triangles of welfare loss, etc) are not entirely rigorous, but they’re good useful simplifications that actually give useful (though approximate) answers to important policy questions. Sort of like Ohm’s Law for electrical circuits.

But IS-LM is not like that at all, because IS-LM does not even address the key policy questions in macroecomics. IS-LM can tell you, perhaps, how to fight a recession, but it can’t tell you whether the recession is worth fighting — not even loosely, because the model contains no individual utility functions and no social welfare function. It therefore does not allow you even to formulate the question of whether a given policy is worth its costs, because it provides no framework for weighing costs against benefits.

Analyzing policy via supply and demand is like analyzing electrical circuits with Ohm’s Law. It answers questions, and over a fairly wide range of situations, it answers them with tolerable accuracy. But analyzing policy via IS-LM is like analyzing electrical circuits with a barometer.

Quote of the Day: Care about the Future? Reduce Capital Taxes

There are only three things you and I can do to make the future world a better place.

First, we can consume less, leaving more resources behind. Second, we can work harder, planting trees, building factories and writing poems that will live on after we’re gone. Third, we can innovate, advancing science and technology so that our children’s children’s children can make better use of the resources they inherit.

As it happens, there’s one key policy variable that drives all three of these things, and that’s the tax rate on capital income (which includes interest, dividends, corporate income and capital gains). Capital taxes are a disincentive to save, and when people don’t save they consume instead. Capital taxes are a disincentive to work and a disincentive to innovate.

This is not a plea for lowering taxes in general, and it’s not a plea for making the tax system either more or less progressive. (If you want to soak the rich, there are plenty of things to tax besides capital.) As a matter of fact, this isn’t even a plea for lowering taxes on capital. It’s simply an observation that if your goal is to leave a better world for our descendants, then your best bet is to support lower capital taxes.

This is from author and professor Steven Landsburg at the business.time.com.

Professor Landsburg is being coy or attempting to be apolitical at this. Let me improvise: ABOLISHI capital taxes, if your goal is to leave a better world for our descendants.

One more thing to make a better place, spread the truth or educate the public about the political economic inequality between the repressive state and the oppressed individuals.

Quote of the Day: The Religion called Environmentalism

The hallmark of science is a commitment to follow arguments to their logical conclusions; the hallmark of certain kinds of religion is a slick appeal to logic followed by a hasty retreat if it points in an unexpected direction. Environmentalists can quote reams of statistics on the importance of trees and then jump to the conclusion that recycling paper is a good idea. But the opposite conclusion makes equal sense. I am sure that if we found a way to recycle beef, the population of cattle would go down, not up. If you want ranchers to keep a lot of cattle, you should eat a lot of beef.

Recycling paper eliminates the incentive for paper companies to plant more trees and can cause forests to shrink. If you want large forests, your best strategy might be to use paper as wastefully as possible — or lobby for subsidies to the logging industry. Mention this to an environmentalist. My own experience is that you will be met with some equivalent of the beatific smile of a door-to-door evangelist stumped by an unexpected challenge, but secure in his grasp of Divine Revelation.

This suggests that environmentalists — at least the ones I have met — have no real interest in maintaining the tree population. If they did, they would seriously inquire into the long-term effects of recycling. I suspect that they don't want to do that because their real concern is with the ritual of recycling itself, not with its consequences. The underlying need to sacrifice, and to compel others to sacrifice, is a fundamentally religious impulse.

That’s from Professor Steven Landsburg, from his book "The Armchair Economist," (source Professor Mark Perry)

It’s The Spending, Not Debt Stupid!

In excoriating mainstream media’s miasmatic logic, author and Professor Steven Landsburg eloquently explains why government debt isn’t the problem.

Instead, government spending is.

Writes Professor Landsburg, (bold emphasis mine)

This is economic illiteracy in spades. The fact is that every single dollar of interest we pay on the national debt comes right back to the pockets of American taxpayers. If you don’t understand that, then you’re not thinking clearly about the national debt.

Suppose the government owes $100 and pays $3 a year in interest. The alternative to paying that interest is to raise current taxes by $100 and pay down the debt. If you do that, taxpayers are going to have $100 less in assets, and will therefore earn less interest on their savings. That costs them (roughly) the same $3 a year.

In other words, the damage was done back when the government spent that $100 in the first place. (Of course, if the $100 was spent wisely, the damage might have been worth doing. Or not.) Once that $100 has been spent, the taxpayers are out $3 a year forever regardless of whether the debt is ever paid off.

That’s why I say that the government’s interest payments come right back to the pockets of American taxpayers. The government pays $3 a year as an alternative to taxing you $100 and paying down the debt. The choice to do that puts an extra $100 in your savings account, which earns you $3 a year. There’s the $3 a year coming right back to you. Notice that it comes back to you regardless of whether the government makes its interest payments to Americans, Chinese or Martians. All of the benefits come back to American taxpayers.

Of course, you might choose not to save that $100 the national debt is saving you. That’s fine. Then presumably you’re spending it on something that you value more than an interest flow of $3 a year. Congratulations. You’re a winner.

Or you might grumble that you have no savings vehicle that will pay you the same rate as the government’s paying on its debt. That’s where you’re wrong. You can save by buying government bonds. That will get you exactly the same rate the government’s paying on its debt.

Bottom line

Again Professor Landsburg,

If the government borrows an extra $10 trillion dollars tomorrow in order to cut taxes by $10 trillion, it will have to make, say, an extra $300 billion a year in interest payments (for which we are collectively responsible) and at the same time, we’ll collectively earn an extra $300 billion on our savings portfolios. No favor to the taxpayers, but no harm done either.

It’s important to understand this in order not to be bamboozled by tricksters who try to misdirect every conversation about government spending into a conversation about government debt. It’s spending, not debt, that can impoverish us, and that’s what we should be talking about.

This serves as another vivid example of how the mainstream (deliberately or unwittingly) misreads the effects as the cause, and of ignoring the alternative paths or choices of action (here taxes versus borrowing). For the latter, it has been a predilection for most to focus on the tangible (debt) and dismiss the intangible (tax). Unless you are aware of it, this part of our mental heuristics.

Applied to financial market analysis, this is a fundamental reason why many celebrity gurus got it so bad—most of them misread debt as the primary driver of people’s action via the “aggregate demand” channel. They ignored or underrated money's non-neutral role and the impact of globalization.

Of course, the Landsburg lecture on borrowing and taxation is universally applicable, which means such tradeoff applies to the Philippine government as well.

To paraphrase the famous US Bill Clinton quote, It’s the spending, not the debt stupid!

Economic Freedom Is Key To Prosperity

Great stuff from Professor Walter Williams, (bold highlights mine)

Poverty in Egypt, or anywhere else, is not very difficult to explain. There are three basic causes: People are poor because they cannot produce anything highly valued by others. They can produce things highly valued by others but are hampered or prevented from doing so. Or, they volunteer to be poor.

Some people use the excuse of colonialism to explain Third World poverty, but that's nonsense. Some the world's richest countries are former colonies: United States, Canada, Australia, New Zealand and Hong Kong. Some of the world's poorest countries were never colonies, at least for not long, such as Ethiopia, Liberia, Tibet and Nepal. Pointing to the U.S., some say that it's bountiful natural resources that explain wealth. Again nonsense. The two natural resources richest continents, Africa and South America, are home to the world's most miserably poor. Hong Kong, Great Britain and Japan, poor in natural resources, are among the world's richest nations.

We do not fully know what makes some societies more affluent than others; however, we can make some guesses based on correlations. Rank countries according to their economic systems. Conceptually, we could arrange them from those more capitalistic (having a large market sector and private property rights) to the more socialistic (with extensive state intervention, planning and weak private property rights). Then consult Amnesty International's ranking of countries according to human rights abuses going from those with the greatest human rights protections to those with the least. Then get World Bank income statistics and rank countries from highest to lowest per capita income.

Having compiled those three lists, one would observe a very strong, though imperfect correlation: Those countries with greater economic liberty and private property rights tend also to have stronger protections of human rights. And as an important side benefit of that greater economic liberty and human rights protections, their people are wealthier. We need to persuade our fellow man around the globe that liberty is a necessary ingredient for prosperity.

Professor Steven Landsburg shows 3 charts that arrive with same conclusion: Economic Freedom supersedes civil liberties or Political rights. In other words, democracy is only second to economic freedom.

Says Professor Steven Landsburg,

Political freedom and civil liberties are good things. I endorse them. But as far as human happiness goes, capitalism is an even better thing

Quote of the Day: You Can’t Eat QE 2.0!

From Professor Steve Landsburg,

You can’t make the world a richer place just by creating dollars. Dollars are claims on wealth, but they’re not wealth. You can’t eat them, you can’t drive them, you can’t live in them.

If printing money is all what it needs to solve the world’s economic ills then why pay taxes (picture form Gary North/lew rockwell.com), or more importantly, why even work at all?!