Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

“They will come to learn in the end, at their own expense, that it is better to endure competition for rich customers than to be invested with monopoly over impoverished customers.”     Frederick Bastiat

June 7, 2011

How To Deal With A Stalled Economy

by Brad Warbiany

I’ve been spending an inordinate amount of time reading 74 pages of forum posts on an pilot’s message board discussing the crash of Air France flight 447 several years ago. Fascinating stuff. It’s the tale of pilots faced with a situation of mechanical failure, but even worse, a situation which they misdiagnosed and thus took the exact wrong course of action. The basics:

It was at this point, after autopilot turned off and they worked to change their course, that a stall warning sounded, meaning that the airplane wasn’t generating enough lift. The report notes the co-pilot grabbed the controls and lifted the plane, which, according to aviation experts is contrary to normal procedure during a stall, when the nose should in fact be lowered. During the lift, the speed sensors plunged then spiked in an apparent malfunction, the report shows. “So, we’ve lost the speeds,” the co-pilot noted.

For nearly a minute, as the speed sensors jumped, the pilot was not present in the cockpit. By the time the pilot returned, the plane had started to fall at 10,000 feet per minute while violently rolling from side to side. But the BEA notes the crew acted in accordance with all procedures, frantically attempting to command the plane as it pitched and rolled in the sky. The plane’s speed sensors never regained normal functionality as the plane began its three-and-a-half minute freefall.

The report shows the flight remained stalled throughout the drop, with its nose pointed up 15 degrees in response to the pilots’ attempt to generate lift. The flight plunged into the Atlantic nose-up, killing all 228 on board.

Granted, those 74 pages of pilot posts suggest that there are likely some very reasonable explanations for why the situation was misdiagnosed. But key is that it doesn’t appear [from what has been released to date] that the pilots understood — at the point it became critical — that the aircraft was stalled and thus did the exact wrong thing. What they did seems (to non-pilots) to be an intuitive response; if you’re quickly losing altitude, you should try to climb. But this is exactly the wrong approach to a stall. In a stall, your airplane is behaving like an expensive rock, not an airplane. Despite losing altitude you must point nose down until you get enough airspeed over your wings for the airplane to become an airplane again. I’m not a pilot, and I understand enough about aviation to know that.

So why am I posting about such things on a political blog? Simple. Our economy isn’t behaving like an economy, it’s behaving like a rock. We’re stalled. Yet our politicians are trying to do the same thing the pilots of AF447 did to get us out of it: pull back on the yoke [subsidies & intervention] and goose the throttle [monetary and fiscal stimulus]. We’ve got inexperienced pilots at the controls, who know more about flying a plane in Keynesian theory than in Austrian reality.

What happened? Well, previous rounds of throttle [low interest rates / shoddy lending standards of Fed & banks during Bush administration] and pitch [national housing bubble] put our economy up in the realm of “coffin corner”, where seemingly minor changes in AoA or airspeed cause an aircraft to exceed its flight envelope in rapid fashion. I can’t claim that the Obama administration was handed a very easy situation. But that doesn’t begin to excuse them for adopting the exact wrong strategies to dealing with it.

America’s economy is stalled and not responding to your stimulus. It’s rapidly heading groundward and yet everyone in charge can’t seem to explain why pulling the nose up with fancy rhetoric isn’t fixing the problem. The answer is not for the government to try to fix the problem. It’s for the government to stop worsening the stall, get the hell out of the way, and let the economy start behaving like an economy again.

TrackBack URI: http://www.thelibertypapers.org/2011/06/07/how-to-deal-with-a-stalled-economy/trackback/
Read more posts from
• • •

14 Comments

  1. Excellent analogy.

    Comment by Akston — June 7, 2011 @ 8:33 pm
  2. Ridiculous comparison. Brad is simply using the ongoing mystery of an airplane crash to bash GWB. And he’s wrong about the economy.

    We Americans consume 20 million barrels of oil per day. Half of that is imported. When the price of oil skyrocketed up $100 (from 40 to 140) a few years ago, $1 billion dollars per day more than we anticipated left our economy (10 million BPD x $100/bbl = $1 billion per day). In comparison, the ongoing wars in Iraq cost $0.25 billion per day but most of that stayed in our economy. It paid soldiers salaries and paid for US goods and services. In addition, since oil is a precursor for plastics, and since everything from food storage to TV’s to CD’s to credit cards to grocery bags to automobiles is made from plastic, every goods and services in our economy increased in price as well. The real cost will probably never be known but can be roughly estimated as $130 dollars per bbl increase ($100/bbl + 30% conversion costs to other products). So cost passed on to us consumers was about 20 million bbd x $130 per bbl = $2.6 billion per day. Since we have about 120 million households in the US that equates to $22 per day per household or about $660 per month net or about $1000 per month pre tax. When the price of oil increased, since we all use it approximately equally in our everyday lives, each and every household in the US took approximately a $12k/yr salary loss. The average household income is only about $46k/yr meaning the average american income instantly dropped %26.

    We Americans counted on that income to pay our credit card bills, mortgages, and car payments. When it suddenly disappeared, we were left with a choice. Buy gas and food or pay our creditors. Guess which one we chose and what effect it had? We stopped buying durable goods and services, and as a result, banks and other businesses failed and unemployment increased.

    Supporting evidence is the record profits by the oil industry (which converts oil based on a fixed profit margin and passes increased fuel costs on) and the correlation of economic indicators with oil prices. You did notice our economy recovered slightly when oil returned to $70 per bbl a year ago but now that it’s back to $100 per bbl and suffering again.

    Next time you want to bash GWB, Brad, get it right. Don’t just keep reiterating internet bunk like “inadequate lending rules implemented by GWB”. Write this instead. Neither GWB nor Obama nor any other politician did or is doing anything to address the immediate and super critical problem of escalated oil prices.

    Comment by MNIN — June 12, 2011 @ 5:02 am
  3. Brad is bashing both the President Bush and Obama administrations for heavy unchanging hands on the wheel.

    Just like the mystery of Air France flight 447, there are a huge number of variables and no one knows (or probably will ever know for sure) what was the singular primary cause, if such a thing meaningfully exists. There were certainly several contributing factors.

    On the American economy side of the analogy another contributing factor was the rise in monetary base, soon to be a rise in the monetary supply, which will add more inflation. Oil is priced in dollars. Dollars are dropping in value due to stimulus and quantitative easing.

    Another contributing factor is massive regulatory changes of still uncertain effect rippling through an already stunned economy.

    Another is the moral hazard of bailing out failed business models rather than allowing the normal flow of bankruptcy and reallocation or resource to have taken place.

    Far from being a ridiculous comparison, Brad’s analogy suggests that the massive stream of variables coming in about something as complex as jumbo jet in flight, or a national economy can suffer greatly from faulty information gathering, extreme compensations which don’t seem to be yielding the desired result, and attempts to override the basic principles of flight or markets.

    In fact, given that an economy of 300 million people interacting with nearly 7 billion others is so many magnitudes more complex than a jumbo jet in flight, the need for lighter hand (if any) on the wheel is even more crucial.

    Comment by Akston — June 12, 2011 @ 8:42 am
  4. That isn’t how I read Brads article Akston. Perhaps Brad could clarify what he meant by “low interest rates and shoddy lending standards under BUSH administration put our economy in a coffin corner” and “I can’t claim Obama was handed an easy
    situation” and “that doesn’t excuse them from adopting the wrong strategies.” And “get out of the way and let the economy behave like an economy again”.

    Because I read that first quote as Brad is stating GWB was responsible for banking deregulation which was the major cause of our financial meltdown. That makes about as much sense as claiming Obama is responsible for banking deregulation. The last major bank reforming act (GLB)was passed in 1999 under Clinton. Nor was that the cause of our coffin corner. Our dependency on oil and the OPEC oligopoly put us in the coffin corner. The thunderstorm was the nearly quadrupling of oil prices caused by speculative investors.

    I read the other three quotes as Obama has a tough job and he’s trying but isn’t doing the right things. His stimulus package didn’t work. So he should try this instead. Do nothing. Get out of the way and let things happen on their own. Clearly a better solution right? If you were a passenger on flight 447 would you want the pilots fighting to control the aircraft to the very end or would you want them to walk out of the cockpit and say “we give up. We’ve decided to let the aircraft do its thing.”?

    As to your statements about the intricacies of the market and dollar fluctuations versus oil prices, do you really think the value of the dollar has changed enough to warrant a 3x increase in oil prices?

    Do you not see the increase in oil prices has created a nearly 3 billion per day drain on American wallets? How much is that per year? What percent of our national debt is that on an annual basis? Do you think Brads idea of “get out of the way Mr President” is going to close that drain?

    Why are you and Brad ignoring this problem and focusing on “GWBs” banking deregulations? Why isn’t every politician both Republican and Democrat making this their top priority? Obama says “I feel your pain at the pumps” (he’s apparently missing the bigger impact). If that’s true them DO SOMETHING ABOUT IT Mr President! So far Obama has taken Brads approach with oil. Get out of the way and let whatever happens happen. Is it working?

    Comment by MNIN — June 13, 2011 @ 5:04 am
  5. Brad has once referred to himself, and not joking, as the “Cassandra” of economic news here on the blog. I’ve warned him of how naive he was on such macro-economic subjects.

    Comment by procopius — June 13, 2011 @ 6:02 pm
  6. I’ll be happy to let Brad speak for himself about his original intentions of his post. I would only suggest you scan a few other Liberty Papers posts. Mr. Warbiany does not have a tradition of being a regular booster for the policies of either President.

    I’d agree that there are several components to higher gasoline prices, including unrest in the Middle East, many OPEC nations beside Saudi Arabia unable to run at capacities much higher than current rates, increasing demand from China and India, substantial taxation by Federal and State governments in the U.S., and limiting domestic production. The fact that there are these factors and so many others underscores how difficult international economies are to fully understand, let alone attempt to manage.

    And here is where the scale of the issues might strain the analogy. One can master enough variables to steer a jumbo jet (though direct pilot involvement is declining). I’d maintain that any group of 537 citizens cannot possibly manage the market of interactions of hundreds of millions of their fellow citizens as effectively as those citizens themselves. Though I’ll concede that, just as electronics and hydraulics have a role in maintaining the linkages between pilot (or computer) and control surfaces in a jet, government certainly has roles in making sure the linkages between market participants in a national economy remain intact. Linkages in an economy are issues like the rule of law, contract enforcement, secure property rights, prosecution of fraud and civil suits etc.

    In a complex modern economy of several millions, any small group attempting to “pilot” the outcome in a given direction can be assured of the normal historical outcome of any centralized command economy: Failure. Recent decades of experience have certainly cemented that conclusion.

    Still, the original analogy runs very true for me. Over-correct a jet or an economy and the odds of a stall are much higher – especially if bad information is prompting the one in control to correct in exactly the wrong direction. Does America have to hit the ocean before those 537 stop pulling up?

    Comment by Akston — June 13, 2011 @ 7:10 pm
  7. You should not need to run such in-depth interference, or buffering, for him.

    Comment by procopius — June 13, 2011 @ 7:29 pm
  8. And what I personally see as a recurring theme between both and Brad, is a one-eyed focus on central bank policy remedies to a structural employment problem.

    It’s kind of like the “Hi, I’m going to stand in for Your Local Economics Guru Because I Have A Nice Job, And Yay CISCO”

    But it turns out, that other people, even un-employed, can discern structural employment pyramids, the concept of productivity, have access to global job growth statistics, and can draw their own conclusions.

    The thing about Brad is that he works for Cisco, a corporation that for the record cannot wait to put every Internet user on a complete identity leash. And Brad is either willfully ignorant of this or is incredibly naive… but..

    But in his spare time, he’s going to try to fail at distinguishing Federal Reserve policy response while taking corporate tax rates in a completely different conversation, unless you have the encompassing intelligence to segway the two.

    Comment by procopius — June 13, 2011 @ 7:38 pm
  9. You should not need to run such in-depth interference, or buffering, for him.

    I see it less as running interference, and more as agreeing with him on the analogy.

    Comment by Akston — June 13, 2011 @ 7:55 pm
  10. Akston, you appear to have no problem putting words in Brads mouth and defending the inabilities of our beloved politicians to reign in our economic problems with your rather tedious statements. Yet you ignore my point.

    Brad, in his article, incorrectly blames our economic problems on GWB’s banking reform and suggests we “do nothing” to fix it like an airplane in stall.

    My point is he is wrong and his suggestion won’t help at all. There is a super critical economic problem we Americans are facing today. Elevated oil prices. That is the cause of our economic problems. No politician is addressing that issue. Why not?

    And in your rhetoric, you implied that the price of oil is complicated and that 537 people can’t resolve our woes. To that I say, didn’t we hire those people to do just that? Isn’t the president of the US our chief economist? We have 300 million smart people in this country are you saying we can’t figure this out?

    I’m not ready to throw in the towel yet. I’ll vote for anyone who makes this a priority and has a plan to deal with it. No on will get my vote who says “GWBs’ policies are the problem. The solution is to let the economy crash and burn”.

    Comment by MNIN — June 13, 2011 @ 8:58 pm
  11. procopius,

    I’m not sure where you’re getting your information, but I *don’t* work for Cisco.

    Before responding to the substantive points here, I just want to make that clear.

    Comment by Brad Warbiany — June 13, 2011 @ 9:30 pm
  12. MNIN,

    Upon re-reading my post, I can see where you misinterpreted me. It’s my mistake, I was not as clear as I should have been.

    In the third-to-last paragraph, where I refer to the subsidies & intervention, and the fiscal & monetary stimulus, I was actually referring to the Obama / Bernanke / Geithner policies. I didn’t explicitly state this, which was a mistake, as people who aren’t regular readers (as I suspect of you) could all to easily misread the point.

    I was trying to suggest that Bush’s policies were bad and got us near the edge, and that Obama’s policies when we’d crossed the edge were the exact opposite of what we needed to do.

    That being said, I don’t think “doing nothing” is necessarily the answer. “Getting the government out of the way” can also mean doing things like temporarily reducing income & payroll taxes, or perhaps allowing corporations to repatriate foreign earnings at advantageous tax rates. When you deal with a stalled airplane, you have to actively work to get that airplane back into flyable condition. This might mean temporary fiscal nose-down (deficit) inputs in order to gain the airspeed necessary to fly again. If throttle-up inputs actually did restore airspeed, we might debate which is better. But it doesn’t, so nose-down has to be the option.

    You don’t let the economy crash and burn. In fact, that’s the end result of Obama’s policies. Bush doesn’t get let off the hook, but it’s not his plane to fly any more. The key is to perhaps let the government crash and burn for a year or two while the economy recovers, and then worry about regaining altitude for the government at a later time. Save the economy FIRST.

    Comment by Brad Warbiany — June 13, 2011 @ 9:43 pm
  13. “…defending the inabilities of our beloved politicians to reign in our economic problems”

    Is stating that they are unable to successfully manage the economy the same as defending that inability? Perhaps I should clarify: No group can do that. No group should try. No group is authorized to do so.

    “[537 people can’t resolve our woes.] To that I say, didn’t we hire those people to do just that? Isn’t the president of the US our chief economist?”

    No. The President is the chief executive of the federal government. He is “Commander in Chief of the Army and Navy of the United States, and of the Militia of the several States, when called into the actual Service of the United States.” He is not commander in chief of the economy.

    There is a super critical economic problem we Americans are facing today. Elevated oil prices.

    I agree. So is a national debt accruing liabilities of around $50,000 per second.

    You may want to reread the original post (especially the penultimate paragraph). This post is not a partisan one. It’s not about which administration is most to blame. It’s about methods that aren’t working.

    Comment by Akston — June 13, 2011 @ 9:47 pm
  14. MNIN,

    Regarding oil prices, again it’s a complex issue. We’ve got structural supply/demand issues where global demand is increasing faster than global supply. We also have — and this is one of the downsides to the Obama monetary stimulus — a devalued dollar that is leading to a potential speculative bubble in oil prices.

    You ask:

    As to your statements about the intricacies of the market and dollar fluctuations versus oil prices, do you really think the value of the dollar has changed enough to warrant a 3x increase in oil prices?

    Were government actions and a devaluing dollar enough to cause a 2-3x increase in home prices in markets such as SoCal (where I live) and 2x or so nationally? Don’t know whether you want to blame government for all of it, but it certainly wasn’t market fundamentals that did it.

    Regarding home prices, you had some government action which started the bubble forming, then (as is typical in a bubble) you had a lot of outside money chasing the “hot” sector further inflating the bubble.

    I think there’s some similarity between this and oil — you have an administration that is anti-drilling and has expressed desires in the past to reduce overall US energy consumption for environmental concerns. You have monetary stimulus which has devalued the dollar and made oil (a fungible asset sold on world markets priced in dollars) shoot up in value much more quickly in dollar terms than most would think. And then with all the news on rising oil prices, you get outside speculative dollars jumping into the market.

    Do I think it’s sustainable? Not really, because although the long-term fundamentals of oil support rising prices, I don’t think the fundamentals support the price rises we’ve seen. Do I blame either the Bush or Obama administration for oil? Sure, to the extents they were involved (devaluing the dollar and intervening in Iraq and Libya), but frankly I think they don’t really control the forces that are pushing the “fast money” into commodities rather than other sectors.

    What would Obama need to do to start bringing down oil prices?

    1) Open areas to drilling — this removes one of the “emotional” arguments to support the idea that oil prices will rise indefinitely.
    2) Stop bombing Libya and start actively reducing our military presence in Iraq and Afghanistan.
    3) Actually show a firm commitment to solving our fiscal issues so that American inflation expectations reduce, sucking money out of speculative commodities markets.

    But I don’t expect Obama to do any of those things; I expect him to do the opposite. To the extent that oil prices might *still* drop (as I think they very well might), it’ll be more due to a general improvement in overall economic health that draws speculative money currently in commodities markets back into other economic sectors.

    Comment by Brad Warbiany — June 13, 2011 @ 10:20 pm

Comments RSS

Subscribe without commenting

Sorry, the comment form is closed at this time.

Powered by: WordPress • Template by: Eric • Banner #1, #3, #4 by Stephen Macklin • Banner #2 by Mark RaynerXML