The last gasp of a fading fool

I’m not sure if anybody takes Gerry Jackson seriously. I know I shouldn’t waste my time on him, but his articles are just so jaw-droppingly dishonest and absurd that he deserves another kick in the pants. There is a distinct possibility that he doing a parody of an ignorant old fool. If so — it’s a very good likeness.

In his latest rambling rant Gerry tries to defend his monetary confusion. And fails miserably.

After constantly attacking other free-market thinkers such as Davidson, Lindsay, Berg, Manners, Evans, Moore and many others, Gerry starts his article (as he usually does) with a whinge about how nobody is nice to him. Don’t worry Gerry, Bird and Mad-Doug still love you.

Amusingly, his first actual point is a straight out lie:

“…an overvalued currency acts like a subsidy on imports and a tax on domestic production. Humphreys states this is not possible where floating exchange rates are the rule.”

I never said this. Indeed, I directly said that the reserve bank could over-value the exchange rate by running a contractionary monetary policy. He is either grossly dishonest or unbelievably stupid. Or both.

After starting with this howler, Gerry references Ricardo and Thornton to make the obvious point that government policy influences comparative advantage. Of course, nobody denied this. Presumably, Gerry thinks he has made a point. He hasn’t.

The point I made was quite different. I pointed out that you can’t simultaneously have expansionary and contractionary monetary policy. Gerry complains that monetary policy is leading to inflation (expansionary monetary policy) and also to an overvalued exchange rate (contractionary monetary policy). He is contradicting himself and proving that he’s not an economist. His incoherent response was:

“In such a world [non-gold standard] a loose monetary policy can go hand-in-hand with an over-valued currency. In other words, ours becomes a world of undervalued and overvalued currencies in a continuous state of flux and thus the tacit assumption that monetary policy cannot cause distortions because exchange rates are flexible does not hold.”

This is a non-answer. At any point in time a currency can only be overvalued (hurting exports) or undervalued (leading to inflation). It can’t be both. Further, loose monetary policy leads to currency devaluation, not appreciation. And finally, there is no assumption that monetary policy cannot cause distortions. Gerry has simply made that up. It is clear he doesn’t understand the first thing about standard monetary economics.

If people took Gerry seriously, this would be worrying. But given how important he isn’t, we can afford to simply laugh at the old coot.

Gerry thinks that we all laugh at him because he responded to my article on a carbon tax. To rehash this old issue — Gerry’s point was that a carbon tax was bad for the economy. Of course, I have always said that a carbon tax would be bad for the economy, but that offsetting tax cuts would be good for the economy. I pointed out that if you increase one tax and decrease another tax then you get ambiguous results, depending on the nature of the tax swap. Gerry can’t understand this.

When he is confronted with these simple facts I get a mental image of Gerry’s face going bright red and starting to huff, and then he puts his hands over his eyes and starts chanting “take me to a happy place… take me to a happy place”. Poor guy. And then when he calms down he simply declares victory and Mad Doug believes him.

I destroyed all his carbon tax idiocy here, with several examples of how he blatantly lied. That was the point when Gerry lost all credibility. Today was the day he went into negative.

UPDATE: At the suggestion of Mark Hill, and to show what a magnanimous chap I am, Gerry is invited to write anything free-market and coherent and we will publish it here at the ALS blog. I’ve always said that I will treat him with respect once he learns to treat others with respect. That is an open offer.

22 thoughts on “The last gasp of a fading fool

  1. You should take a chill pill dude. You regularly say things that are completely wrong but I still love you and would never call you an old coot.

    [JOHN: I don’t mind it when people don’t understand what they’re talking about and are nice about it. And I don’t mind it when people are arrogant, but have a good argument. But when angry old men manage to combine stupidity, dishonesty, arrogance and abuse… then I feel justified in giving him a bit of a slap-down. Anyway, I’m far to young and charming to qualify as an “old coot” in any scenario. Though you have used a variety of other adjectives… normally as I’m taking your poker money :)]

  2. I know this post is about the integrity of Gerry but I’m not going to pass up the opportunity to labour my views about monetary affairs.

    I obviously agree with John that you can’t have a currency that is overvalued and undervalued at the same time. As something of a gold bug I tend to judge the value of a currency by how it sits in gold terms relative to it’s ten year average. So if the average value of a currency over the preceding ten years was 40 milligrams of gold and it is currently worth 50 milligrams of gold I’d judge it as being too strong and regard monetary policy as too deflationary (I won’t call it contractionary because that would concede too much to the keynesian view of money). Likewise if it was worth 30 milligrams I’d judge it too weak and regard monetary policy as inflationary (I won’t use the term expansionary). Whether the consumer price level is moving up or down at that instance in time may not correlate simply because some price decisions are embedded in production decisions made many years prior.

    I do however think that the monetary stance can be inflationary and credit too expensive. Or the monetary stance can be deflationary even whilst credit is too cheap. The solution is to allow credit prices to float according to supply and demand without capital controls or interference from the monetary authority. Meanwhile the value of the currency should be directly fixed to gold or to some suitable natural reference for value.

    If we were going to fix to gold the fix point matters. Fixing at the prevailing market rate is usually folly. The correct fix point is usually somewhere between the one year market average and the ten year market average. No specific fix point will entail a perfect return trajectory for every industry. Obviously fixing at a value a bit too low rather than a bit too high will entail less political grief.

  3. “I obviously agree with John that you can’t have a currency that is overvalued and undervalued at the same time.”

    That alone turned me off Gerry’s previous argument.

  4. Hang on a minute.

    Gerry Jackson has written some of the best defences of free labour markets and consumer society I have ever seen.

    You guys should kiss and make up, and invite him to write about labour economics and resource depletion.

  5. I think you guys are yelling past each other and not wanting to listen to what the other has to say.

    John… your carbon tax/income set off is the best possible solution to what increasingly look like the non-problem of AGW.

    I think Gerry does have a point to make about the effect of swapping to a tax on capital as already several utility companies have said they were going into a basic repair mode and not looking to upgrade as the political risk is too high.

    You guys are talking past each other.

    And I agree with Mark, Gerry has done some really good stuff on Labor markets and consumerism.

    Final point…..

    On the issue of overvalued/undervalued exchange rates/inflation.

    I’m not sure it’s as easy as what has been said. Markets these days are acting quite perversely..

    A loose monetary policy can actually see an exchange rate appreciate nominally as capital goes chasing higher nominal returns. So you have the situation where an exchange rate rises with loose policy and falls with contractionary policy.

    The Japanese Yen in the 80’s is a prime example of a currency rising when monetary policy was loose.

  6. The other thing is that there people who say manufacturing doesn’t matter….. and that we shouldn’t support it.

    We shouldn’t support it, but there is a good strong , solid economic argument why our current policy mix is detrimental to manufacturing and literally destroying the sector.

    It’s also pretty silly to imply that we can rely solely on services etc. That’s like Greens argument with respect to logging in Tasmania. The suggestion that ex-loggers are going to move into the eco-tourist industry is laughable if it wasn’t so tragic. That of course leaves the issue of where the timber is going to come from an open question.

    We’re getting hollowed out because our tax and labor market policies are unworkable in the country to allow for a competitive manufacturing sector. The ATO decides issues like deprecation allowances when industry itself ought decide how it treats its own depreciation at the outset.

    Labor market policy has basically wrecked manufacturing to the extent where the only things left are big union, subsidized car makers and a couple of component makers. Add to that the fact that we have one of the highest corporate tax rates in the region and the OECD and we can then begin to figure out why manufacturing is a dead issue here.

    Manufacturing has much bigger capital outlays to consider.

  7. JC — income tax is also a tax on capital. So is the fuel tax. So is company tax.

    I have heard exactly what Gerry has said. A carbon tax will hurt the economy (including current capital owners). Poor tax & monetary policy can hurt the economy (including our tradable sectors). Yes, yes, yes… I’ve never said otherwise.

    Exchange rates are influenced by many things, not just monetary policy. The impact of monetary policy is clear enough though: Inflationary = lower dollar & Contractionary = higher dollar, if all else is kept equal. Of course, all else isn’t kept equal in the real world, so you sometimes see exchange rates jumping around. But that doesn’t undermine the nature of the relationship between monetary policy and exchange rates.

    I have commented before on how Gerry has done some good stuff in the past… but if he is going to continually attack good free-market thinkers and groups, then he can’t expect people to hold his hands as he drops into senility.

    ===========

    As for manufacturing v services, I don’t argue for either. The best solution is to get the government out of the way and let the market decide how resources are allocated.

  8. John;

    An income tax is not a tax on capital. Capital hasn’t been formed and it’s not the first derivative of income. It may be but it’s the wrong assumption to take at the outset.

    A carbon tax is a first derivative tax on capital which in this case is a tax on capital formation in the energy sector.

    Having said that your carbon tax idea is the best possible solution other than leaving people alone.

    inflationary = lower dollar & Contractionary = higher dollar, if all else is kept equal.

    Not at the outset and not always for a material period of time. Inflation has many effects and one of them is to cause a mispricing in asset markets. These days in particular portfolio shifts have a far larger effect on capital/exchange rate movements and if capital is chasing nominal returns, exchange rates can appreciate by sheer weight causing mis-alignment.

    Ultimately PPP is the real determinant however you could go broke following the hamburger index :-).

  9. As for manufacturing v services, I don’t argue for either. The best solution is to get the government out of the way and let the market decide how resources are allocated.

    I would argue that manufacturing is being particularly punished. Compared to the retail sector it has far larger risk and the odds are stacked up against it with inappropriate tax and labor market policies. In other words the burden falls much harder on this sector than many others.

    The idea is to create an extremely healthy jobs market where employers are falling over themselves to hire people. Any unemployed person as a result of bad policy is a tragedy

  10. All tax harms capital. The tax doesn’t need to apply directly to a piece of capital to have a negative consequence. Though I agree I could have picked some better examples. How about CGT & Superannuation tax to add to fuel tax and company tax.

    There is nothing special or unique about a carbon tax. It will create a slightly lower rate of return for some capital. But so does alcohol tax create a slightly lower rate of return on the capital used to create, distribute and sell alcohol.

    A wrong judgment about inflation will soon be corrected. It could not maintain an over-valued exchange rate in Australia for decades. Especially as our inflation has not been significantly higher than most other countries.

  11. True enough john, however although alcohol may be the most important thing to an alcoholic I think energy is actually the most important thing to you, me and nearly everyone else in modern industrial civilization. It’s a horrible choke point to be placing a tax, however I must say again your proposal is the lesser evil by a Texan mile.

    —————

    It’s correct that an exchange rate doesn’t stay overvalued for decades when there is a higher rate of relative inflation however it can stay up for an awfully long time.

    For those that think inflation can’t create an overvalued exchange they would need to prove there’s no such thing as asset price inflation, that portfolios don’t change higher nominal rate of return and that it can last a long time.

    You don’t need decades of an overvalued exchange rate to knock out a manufacturing, as 3 to 5 years will do it. In fact the belief we will continue to have inappropriate monetary policy will be enough to knock it out.

    I know this from the coal face as my family is involved in manufacturing which doesn’t even compete overseas businesses.

    Their depreciation allowances from the ATO are basically a form of wealth transfer to the public sector. The machinery they use needs to be replaced every 3 years yet the tax office demands 7- 10. The overall effect is that you slowly begin to accumulate inefficiencies and a fall off in profitability if you decide to replace the machinery prior.

    Now combine inappropriate depreciation policies, a high tax rate regime, centrally controlled labor laws and an inflationary monetary policy that pays havoc for those that compete with or in overseas markets and you end up with a hollowed out industrial base.

    Let’s be quite clear, we don’t really know if we’re very competitive in the manufacturing sector as government policy does everything to work against it.

  12. JC — we do know that some forms of manufacturing are labour intensive, and that our wages are relatively high compared with some other countries. But this is all idle speculation. If we know exactly how the market was going to work, we wouldn’t need the market.

    Also, when talking about comparative advantage you have to consider what other countries are doing. I don’t think it’s fair to say that most other countries have pursued libertarian tax & monetary policies (I know you didn’t claim this). By some accounts Australia has one of the freest economies in the world.

    =============

    Of course energy impacts more people than alcohol, but that is a different issue. The “capital” complaint is that tax undermines capital. True enough… but that’s true of lots of taxes. A second (perhaps more important) complaint is that a carbon tax will drive up the price of energy. True enough (as I have always said), but then so does the GST. And the fuel tax drives up the price of fuel, which is another vital input into production.

    This debate isn’t about whether a carbon tax is bad for the economy. I’ve said that approximately 814.6 times. But it is not some new-fandangled, super-special, extra-evil tax. It’s bad. But Gerry is getting carried away.

    =================

    Portfolios chase real rates of return, but you have a point that sometimes people make financial mistakes because they mistake inflation for a real change. But those mistakes don’t last for long, and there is little evidence that they have dominated in any period of Australian history.

    The empirical link between the govt increasing interest rates and exchange rate going up, and vice-versa, is strong. And this is understood in Austrian economics where they predict that inflationary monetary policy will lead to a currency collapse.

  13. I think it would particularly unlikely we could have or even desire a labor intensive manufacturing base. However we could have a capital intensive one. at the very least we shouldn’t have policies that dissuade people from trying.

    Australia may be one of the freest, however it’s policies actually dissuade capital formation in the manufacturing sector.

    Don’t forget it was only about a decade ago when someone finally took a wrench to the yobbos on the water front.

    ——

    I’m not sure portfolios do chase real rates of return, as I think there is an argument to be made they are really chasing nominal returns. The results of a portfolio is never measured against the real rate; in fact I’ve seen it like that even for very long term rates of return.

  14. I agree that our policies should be a lot better, and that would encourage a range of new businesses. If some of them were capital-intense manufacturing (and probably some would be) then I’d be very happy. I think we pretty much agree here.

    (And you shouldn’t insult Yobbo by likening him to those economic vandals on the waterfront.) 🙂

    ===========

    I think we may just be using slightly different language to say pretty much the same thing. With regards to investing in a foreign country people are concerned with the nominal return for that currency, and the exchange rate will represent the difference in inflation expectations between the two currencies, and then people will adjust for the inflation that they face.

    The inflation differential adjustment happens via the exchange rate, which is one reason why lower interest rates (expected to lead to higher inflation) causes lower exchange rates.

  15. At the suggestion of Mark Hill, and to show what a magnanimous chap I am, Gerry is invited to write anything free-market and coherent and we will publish it here at the ALS blog. I’ve always said that I will treat him with respect once he learns to treat others with respect. That is an open offer.

    You’re opening yourself to a charge of indirect discrimination. 🙂

    If he does show up be sure to keep comments open.

  16. “A loose monetary policy can actually see an exchange rate appreciate nominally as capital goes chasing higher nominal returns.”

    jc, you dirty carry-trader. Don’t you respect the basic laws of economics?

  17. “True enough john, however although alcohol may be the most important thing to an alcoholic I think energy is actually the most important thing to you, me and nearly everyone else in modern industrial civilization.”

    I dispute that. Alcohol is far more important.

  18. jc, you dirty carry-trader. Don’t you respect the basic laws of economics?

    Joseph, economists have a lot to learn from traders 🙂

  19. “Joseph, economists have a lot to learn from traders”

    Agreed. I think the most important lesson is that training in economics is not sufficient to qualify as an expert on financial markets.

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