Flit(tm)

The Elephant in the Room

The dead weight loss of stupid regulation and poor state activity is the elephant in the room regarding the current recession. Megan McArdle's recently blogged car tribulations where she finally managed to register her car bought August 3, 2008 on January 10, 2009. The delay is due, in large part, to PA state bureaucrats misapplying state law and putting a national hold on McArdle's ability to get a drivers license. There is no left wing or right wing justification for this. Nobody particularly supports the practice of the government making regulations up as they go along and then quickly retracting their claims when somebody calls them on it.

So why does this sort of thing persist? Two reasons spring to mind. Once you've caught them, correcting the problem for everybody looks so daunting and fixing it for yourself looks so cheap that the vast majority of people just fix their own paperwork and get on with their lives. The second is that there seems to be no political advantage to undergo a crusade to fix this sort of stuff.

But sometimes the waste is just sitting right in front of you and nobody even notices. Sean O'Neill wanted to see his travel dossier so he did a FOI request. The response was mailed, twenty pages. Sending paper is more expensive than sending bits. It's slower, too.

An agent from U.S. Customs and Border Protection can generate a travel history for any traveler with a few keystrokes on a computer.

A well thought program development effort would have rated each data field whether it needed to be censored in an FOI request and enabled a "few keystrokes" report that automatically generated an electronic version that had the appropriate black boxes where sensitive data would otherwise be. Instead we have a print, a manual black box strategy (the sample page from the record has the black boxes tilted off of horizontal by a couple of degrees), and unnecessary paper mailing. Multiply this by thousands of FOI officers throughout the federal government and hundreds of thousands of requests every year and you get a system that is slow to respond and expensive.

And that's the problem of dead weight loss in a nutshell, government that is slow and expensive even when it isn't being capricious and not following the law. We can do better.

Time to Start a Bank

Reading a Main Street v Wall Street piece by Ed Cone reminded me of that old chestnut of capitalist wisdom "when blood's running in the streets, the greatest profits are to be had." Well, the financial streets are running with blood and major profits are to be had. Good deals are left on the table that will provide great profits at reasonable risk rates because the incumbents all lost their minds in the preceding expansion and badly invested their depositors money. With only projects that would get funded in any economy currently being looked at by many banks, the financial players willing to look closely and invest in a great story have been winnowed down to near zero.

This is where the previously prudent can make a killing by funding those projects that almost qualify for bank financing and would have qualified even under the normal scrutiny of 20 years ago but do not qualify today. These sorts of ventures will not make any headlines. Why should they? The more they draw attention to themselves, the more competition they will have from other groups. But those seeking capital will find them and be quite happy for their discovery.

Bear Stearns By the Numbers

E J Dionne's fatuous analysis of Bear Stearns led me to take a look at their stock chart. Bear Stearns has 118.1M shares outstanding. A month ago they were valued at 80 dollars a share. Over the weekend the Fed forced a sale at 2 dollars a share to JP Morgan/Chase. That's a haircut of 97%. Essentially Bear Stearns stockholders are being told that their thrashing around bleeding cash is worth a "go away" payment of 3%. For E J Dionne, that's Wall Street turning into "a bunch of welfare clients".

The real story is that Bear Stearns executives do seem to have tried to mau mau the Fed but the Fed instead forced a sale whose terms are so harsh that Bear Stearns shareholders may not approve, a threat realistic enough that bondholders (who make out better in the Fed forced deal) seem to be buying up stock and bidding BSC's share price to 5 dollars Monday and almost 6 dollars Tuesday.

It's going to be an interesting episode in managed capitalism but educational only if you pay attention to the details, especially the numbers.

Big Oil Being Squeezed?

Tom Barnett makes this interesting observation:

NOCs, or national oil companies, directly control less than 40% of global reserves currently, but by 2030, according to the IEA, they’ll directly account for 75% of all production, meaning “big oil” companies are being slowly squeezed out of the picture, with investors increasingly looking at the NOCs and bypassing the remnants of the so-called seven sisters.

If the IEA has gotten this right (and I have my doubts about them as an organization due to their oil price predictions) it's in the fiduciary duty for Big Oil to do two things, muscle out the NOCS by eliminating as many national oil monopolies as possible (allowing Big Oil entry into more fields) and seriously adding alternative sources of energy to their portfolio so that their shareholders can escape the effects of the NOCs squeezing them out of oil market influence.

Big Oil has long been exhibit A in the amoral tendency of big companies to enter into corrupt bargains with national governments to limit competition. They have been implicit villains for quite some time. We're now entering the predictable long-term end game with Big Oil itself so excluded that it's losing influence in its core market. There's always somebody's cousin who's going to be able to out corrupt the foreigner. If Big Oil has finally figured this out, that turns them into a long-term friend of capitalism. If they haven't, isn't it time some shareholders taught them?

The 2nd implication is also interesting. It provides a very real motivation why Big Oil is really going whole hog on alternative fuels. They want to expand the energy pie so that they can control enough of the market no matter how many NOCS there are and how many oil fields they are excluded from. This provides stock price stability and a safe long-term path to corporate growth isolated from political risk. That's a rationale that will make sense in the boardroom but not one that has penetrated into the general public's consciousness.

Apres Ahmadinejad, le deluge

So, according to this, Iranian interest rates were set in two tiers. State banks were offering interest at 14% while private lenders were offering money at anything between 17% to 28%. Officially, inflation is at 15% in Iran, but is believed to actually be much higher. Based on the higher private rates, it's probably bouncing around the 20-23% range with a 5-8% risk premium. Rates under the actual inflation rate were for the well connected who wanted their bribes couched as sure ways to make money.

But now Ahmadinejad has taken Iranian interest rates and lowered them, King Canute style, to a 12% fixed rate for both state and private institutions. The result is predictable. Lending will collapse, capital will flee, the economy will tank. So why do such an ill conceived, desperate maneuver, straight out of the Nixon economic playbook? Unlike Nixon, Ahmadinejad already knows that this is a bad idea. He bucked his domestic economic experts to issue this decree who no doubt explained to him how painful this is going to be for the economy. There is no rational reason to do this unless you're at the end of your rope and you want to stave off the revolution for a few months longer.

Of course, that isn't what the mainstream media is talking about. It isn't even what the alternate press is talking about. No doubt I'm off my head and there is some cunning plan for creating large negative interest rates by political decree. I'd love to hear it. It's a pity that nobody's supplying any sane reason.

HT: Instapundit

Wealth

Prof. Howard Gardner is Hobbs professor of cognition and education at the Harvard Graduate School of Education so it's really not appropriate to call the man a moron but one is left struggling for a better word when reading the tripe he wrote in Foreign Policy magazine who somehow thought that a paleolithic socialist screed was fit to be called one of "21 Solutions to Save the World".

There are two modest and generous ways to change this situation. First, no single person should be allowed annually to take home more than 100 times as much money as the average worker in a society earns in a year. If the average worker makes $40,000, the top compensated individual may keep $4 million a year. Any income in excess of that amount must be contributed to a charity or returned to the government, either as a general gift, or targeted to a specific line item (ranging from the Department of Veterans Affairs to the National Endowment for the Arts).

Second, no individual should be allowed to accumulate an estate more than 50 times the allowed annual income. Thus, no person would be permitted to pass on to his or her beneficiaries more than $200 million. Anything in excess must be contributed to charity or donated to the government.

To those who would scream “foul” to such limits on personal wealth, I would remind them that just 50 years ago, this proposal would have seemed reasonable, even generous. Our standards of “enough” have become irrationally greedy. Were these proposals enacted, I predict that they would be accepted with amazing speed, and individuals would wonder why they had not always been in effect.

Let's start with a fundamental truth. There is no actual standard, neither today nor 50 years ago called "enough wealth" in law. This is a fiction upon which the whole sad edifice of this piece is based on. While socialists have advocated such schemes their effects where they have been tried have been universally pernicious. The capable flee such regimes or slide into sloth once they have hit the societally permitted maximum and society loses the hard work and inventiveness that they otherwise would have contributed. A century ago, you might have some argument for trying it out, "just to see". But we've seen and the results all over the socialist bloc (both hard and soft) are disappointing, sometimes devastating.

Absent throughout this piece is any real examination of why wealth limitation for honestly earned income is a good thing. The closest he comes is a throwaway line that "it is as likely that there will be clear winners and losers, as that all will benefit from a market economy". This is simply not the case. You can certainly find societies where the rich rig the markets and it is impossible to get into the club because the politicians have been bought by the oligarchs. But this is not a market economy but rather one with fairly heavy state intervention in favor of the existing rich to the detriment of the hard working "would be rich" who are artificially kept in poverty.

Where such political market rigging is absent, inventiveness, hard work, and luck all play a role in a continual shrinking of the poor as they rise to the middle class and even become rich. Sloth, unimaginativeness, and luck also create downward mobility for the rich. Poor investments, a lack of diversification, simply not paying proper attention has led to the fall of many an obscenely rich family as fools and their money are soon parted.

This is a singularly poorly thought out essay and that it was written by such a prominent professor and published in such a prominent elite magazine makes me shudder. It is as if the elite were trying to talk itself out from the realization that socialism just doesn't work, that all the death and destruction of the marxian experiments meant nothing.

At heart there is some sort of unspoken moral case here, one that I see time and time again that concedes the moral ground to the socialist and (so far) only grudgingly recognizes capitalism for its practical effects at production efficiency. Regarding this situation, Rand was right that there must be a moral underpinning to capitalism for the system to be sustainable in the long term. I'm not a great fan of her particular take on how that morality should be but essays like this prove her point. Until people like Prof. Gardner are shamed not only for their practical economic illiteracy but also for their immorality this is just never going to end.

Shame on you, Prof. Gardner. You've not only written bad economics, but your position is inherently immoral. It is simply immoral to punish talent.

The Foolish Economics of Conservation

Two of the silliest things that one can do in looking at the world is to assume that a particular factor is a variable when in reality it is a constant and vice versa. It is especially bad in the prediction business as Victor Davis Hanson shows in his recent analysis on oil. It's quite poor.

First the good:

What it does mean, though, is that the vast imported-petroleum needs of the West, India and China, and the resulting huge profits that pour into oil-exporting states, have super-sized the Middle East’s problems.

Currently, much of the Islamic world is struggling to come to grips with modernity and globalization. Yet while the West pays little attention to disenchanted Muslims in India, Indochina or Malaysia, we focus our attention on Iranian and Arab radicals. They alone, thanks to oil, have the cash to fund jihadists and hate-filled madrassas.

Then the bad:

If the United States could curb its voracious purchases of foreign oil by using conservation, additional petroleum production, nuclear power, alternate fuels, coal gasification and new technologies, the world price might return to below $40 a barrel.

That decline would dry up the oil profits of those in the Middle East who now so desperately use them to ensure that their own problems must also be the world’s.

The ugly truth is that the US is a mature economy and conservation is really only going to affect the marginal demand on petroleum. It might slow down the increase. But there are literally billions of new sources of demand in the form of the chinese and indian consumer out there and their basic needs for a high energy lifestyle have not been met. High petroleum prices have been and will continue to slow their entry into the market but conservation that lowers western consumption will allow marginal asian consumers to enter into the market and the demand overhang is huge. No reasonable level of conservation of 300 million americans will offset the demand of 2 billion indians and chinese (leaving off the vietnamese et al who are also coming on-line). High prices will remain until the overhang of consumers is settled.

Shifting to a multi-fuel economy where energy inputs like bio-fuels, petroleum, wind, solar, et al. go through an energy middleware transformation (electricity and hydrogen are the two major contenders) would have a much more profound effect as the barrier to entry of new producers all over the world would dilute OPEC producer power. The increase in possible energy sources and overall usable energy will reduce the potential consumer overhang much more rapidly than any possible conservation measures could.

But beyond speeding up the day when energy prices can start coming down again, enlarging the producer pie reduces OPEC influence by making the removal of any particular OPEC member from the markets a sustainable enterprise. Right now the Kingdom of Saudi Arabia produces so much of the world's transport energy that a regime change would be catastrophic. If the percentage of world supply satisfied by KSA drops below a certain level, they lose their "get out of jail free card" and their behavior in supporting terrorism through the madrassas they fund will end, one way or another.

Worldwide demand outside of the US is not a constant. It is a variable and one that is significantly changing year to year, mostly in Asia. The very good changes in India and the PRC, liberating the free market in both countries will put (in fact are already putting) huge pressure upwards on prices. All we can do is figure out how to increase the supply pie in like fashion. Conservation will simply not get us there.

Israel's Pipeline Revisited

In 2003 I wrote about Israel's potential as a transshipment point from the Mediterranean oil market to the Asian oil market. I viewed it as a potential for Russia to arbitrage away the up to $3/bl "Asia premium". Today, it seems that the project still lives but the rationale and players have changed. Russia has stepped back and Turkey has stepped up. Now it's not just an anti-OPEC move but also an anti-Russia move.

The appeal of the Israeli pipeline is obvious. It's just a matter of who is going to take advantage of the geographic facts.

Discounting software

I was looking for a way to upgrade my current email to a .mac family pack. Surprisingly, there are certain restrictions on converting accounts but even more surprisingly to me, the service is highly discounted. It appears that discounts go up to 50% if you go through one of Amazon's associated resellers. You can only find Amazon's price if you start going through the motions of buying it.

Apparently there's agreement that Amazon can sell for what it likes but it can't advertise what it likes. There's some sort of "minimum advertside price" (MAP) that they get around by simply teasing you with the idea that you have to put it in your cart to find out the price. Odd, a timewaster, and it must increase the number of abandoned carts that Amazon's software has to deal with.

An Interesting Blog

Dr. Housing Bubble provides a sort of train wreck comic relief look at the Souther California housing bubble. It's too late now but so many low to mid income homeowners could have cashed out, reduced their costs by moving someplace that *wasn't* in a bubble and gotten their families a more decent life outside the difficult suburbs outside Los Angeles.

Global Warming Financial Illiteracy

Some cases for global warming are reasonably plausible. This case for global warming is embarrasingly stupid. Putting aside whether $1.6T in 2006 spending will actually save us $11T in foregone growth in 2100 there's the whole question of whether the expenditure is worth it. Spending $1.6T now to avoid $11T in expenses in 2100 means that the Present Value of $1.6T has to be less than $11T in 2100 and we have to assume that science will not produce any surprises that lower the future expenditure, the economic cost of not preventing warming incurred in 2100. If we gain sufficient economic growth in the meantime, it would not be worth spending the money even if (and this is disputed) the study is correct about the financial consequences.

One of the key factors is economic growth. If worldwide economic growth is high enough, $1.6T turns into $11T by 2100. The economic growth rate to achieve that turns out to be 2.07213%. Current economic growth is 4%. Economic growth from 1950-2003 is 2.1%.

If you assume that we're headed for more of the same, spending the money now means over the next century, you've lost $40.5B or $431.3M annualized. If you think that we're entering a new era where 4% worldwide economic growth is going to be the norm, the losses are $1.3T or an annual loss of $14B. In other words, the financial numbers don't make any sense even if you take the most pessimistic assumption that the lab boys aren't going to figure out how to make cleaner energy over the course of the 21st century. It also assumes that present trends towards freedom and higher economic growth won't continue upward so these damning numbers are really quite conservative.

Ah but what about biodiversity? We could be losing species! While this is true, we could also be gaining them. Historically biodiversity is much greater in warmer climes than in cold ones. Life is tough in the cold and few species (relative to warmer climes) can adapt to harsh conditions. Warming is going to be tough for cold weather specialists but it will be a boon for warm weather ones.
Update: (just a note, I calculated it all in Excel using the PV formula)

Why So Little Fischer Tropsch So Far?

One of the great mysteries of energy, for me, has been why on earth have we had $70+ oil when we can make $32 diesel from coal. Sure, the investment is stiff but with that much profit on tap going forward, this is a no brainer. Today, the clues came together

First here:

I absolutely get the idea that actual costs matter, but you know, maybe I can explain what I mean by "population response" by looking back at Toyota and GM. The future we got (Ford and GM in various states of trouble) came not from actual prices, but from those players inability to predict (or accept) them.

I saved a link from back in July '05 when a GM spokeswoman said something astonishing:

"Our indicators show that oil will go down, not up," she said, pointing to information she gets from the federal Energy Information Agency, which is part of the Department of Energy.

By 2010, the agency expects a barrel of oil to fall to $26, she said.

Now, I get that CTL and GTL will be driven by actual prices ... but will also be driven by who's believing the EIA's $26 estimates, yes?

So off to the EIA which publishes yearly estimates of energy prices. Their current 2010 estimate for crude oil prices is $47.50 (averaging their high and low estimates). That's a huge difference, the difference between very good profitability and going bust on an enormous capital investment. Looking back at the previous year's estimates, I couldn't find high and low numbers and the estimate wasn't actually $26. It was $25.

But even today, the EIA's low price estimate drops down below $32/bbl in 2013 and stays there through 2030. That means that there's significant risk that a plant built today might turn unprofitable prior to making a decent return on the investment. For that risk to go away with today's numbers, FT synthesis cost would need to drop below $28/bbl to shake loose the most conservative of investors.

Then again, EIA issues numbers every year. Next year's low price projections might be beyond $32.

EU Specialization in Trade Negotiation

Well, Doha not only appears to be dead, the EU wants to point fingers. To recap, the Brazil led developing bloc wanted deep cuts in agricultural subsidies. The EU wanted to give in the least and the US took the middle ground position between the two. The talks break down and now we have Peter Mandelson blaming the US for the collapse of the Doha round because the US would not be sufficiently flexible with the EU position. What is this guy smoking?

Mandelson's engaging in a long-time EU specialty, finger pointing. It doesn't matter that they've scuttled the talks. What really matters is that the right people get the blame.

Gasoline Lying

I just tripped across an almost textbook case of lying through statistics. This one's from the PRC and it's a brazen attempt at minimizing how the PRC is a major contributor to the world's oil crisis.

Oil is usally measured in barrels (32 barrels to the US gallon) and priced in dollars, the PRC raised the allowable sell price on gasoline 300 yuan per ton (most likely metric ton) at the retail level. It sounds impressive but let's move that back into the currency that oil gets traded in and it's $37.50. How many barrels in a metric ton? It depends on the specific gravity of gasoline. here's how to do the calculation for crude oil and plugging in this page's figure for vehicle gasoline (0.74 instead of 0.88) you get 8.5 barrels of gasoline per metric ton. Divide the price increase of $37.50/8.5 and you get $4.111 rise per barrel and $0.129 per gallon increase.

Prior to the hike, gasoline was $43 a barrel which translates to $1.344 per gallon ($0.355 per liter). After the price hike we're all the way up to $1.473/gallon ($0.389 per liter) at a price set by the State. Great gasoline prices, if you can get them.

So who can get them? Certainly the people of the PRC can get them and so can the businesses relocating to the PRC. The energy subsidy is an important factor in relocation considerations, especially as labor costs in the PRC are rising.

Now it's obvious that the PRC government can't subsidize gasoline costs to this extent forever. It's also obvious why the market for gasoline isn't reacting normally. There's at least one huge, inefficient, market participant that is choosing to subsidize the price of gasoline to the point where there is greatly reduced pressure to improve efficiency and cut demand.

Now here is a WTO complaint I can really get behind. 40%-50% retail gasoline subsidies supplied by the state is a huge government subsidy that distorts economic relationships across the board and makes economically profitable operations that should simply not be in business. The longer that it goes on, the worse the eventual crash is going to become. The PRC is now large enough that we're going to feel that crash when it comes. The only question is when and how.

China Peak II

A year ago today, I wrote about the PRC's coming labor shortage, linking to a story in the NY Times a day before. Here I am, exactly 1 year later, linking to another NY Times story, itself a year after the prior one, examining how the PRC's labor shortage is growing. They're starting to have to recruit for labor, increase wages, provide better working conditions, offer improved benefits, and are still having trouble meeting their labor force needs.

This is an economy that is moving into the frothy part of the business cycle. A year or two of labor shortage, businesses making worse and worse decisions in order to keep the labor pipeline going, and the inevitable crash will start.

The government is terrified of this, of course. In fact, all governments are terrified of this. When the PRC crashes, it's very likely to land hard. The PRC government will want to avoid the creation of all those angry, newly unemployed workers that a recession would cause so they're very likely to worsen the crash by trying to delay it, making the eventual dislocation even worse.

If you can, save. If you can't, save anyway. It's going to be bad.

HT: The Glittering Eye

Laffering All the Way to the Bank

Every year, the CBO estimates how much money is going to come in. It changes those estimates based on changes in the tax law and will also research speculative estimates when legislation is under consideration. Donald Luskin reports that the 2003 capital gains tax cut turned the prior CBO estimate of $125B in revenue for 2004-2005 into one of $98B. The actual figure for capital gains tax revenue is $151B for those two years.

In other words, we have $26B in the US Treasury that we wouldn't have had had we kept prior tax policy. We gained actual money by lowering tax rates on "the rich".

This is a very good thing for the country. It also happens to vindicate standard conservative economic theory, specifically the Laffer Curve. I do wonder if Democrats will take note?

Securing Against EMP

All I could think of when I read this scare story regarding an EMP attack is "Why aren't people insuring themselves against this?" and I still can't imagine why not. It's not really that hard to set up a reasonable scheme. You talk to manufacturers and get them to license the production of certain replacement components in their current lines, the ones that would be vulnerable to EMP blast. Your license to produce only kicks in after there has been an EMP attack so their current supply chain has no problems with this new arrangement. Even if their equipment would survive, there's no way they could deal with the surge in demand at the time so they're not really losing anything.

You offer EMP insurance for reasonably low prices in the form of guaranteeing the existence of hardened production facilities to create the parts needed to replace EMP damaged components and granting the right to buy when an EMP blast goes off. You have a small factory that is created to produce very short runs of electronics quickly with stock sealed to prevent EMP damage. Under normal conditions, such a plant is uneconomic but if nobody is operating due to component failures, such a plant is worth pure gold in restarting factory lines or in replacing hard to find, discontinued parts.

Alternatively, you offer safe, secure storage for the necessary parts in bunkers designed to withstand any EMP blast and simply store these parts for your clients, something like a safety deposit box. It's a reasonable solution for larger institutions like UPS that might need thousands of truck computer replacements to get their fleet back up to snuff. A secondary line would be selling off that inventory of replacement parts for your clients when they change equipment models and no longer need the parts they had been storing.

Prime customers would be the very SCADA system managers that the authors fear would lead to cascading societal failure. However, if the system could be made efficient enough, paying insurance to maintain idle, expensive, hardened production capacity might be a fairly standard rider offered by all sorts of existing property insurance, such as renters, auto, and home insurances as well as part of extended warranty offers on lots of electronics.

A Small Thought On Inversion

Rates have recently started to flatten and even started to invert. This means that it costs less to borrow money for the use of the US government for 10 years than it does to borrow it for 3 months. Considering our mammoth debt, why would we issue *any* short term paper at all? Why not just issue only 10 year notes or longer, pushing up the long rate with extra supply and lowering it on the short end with lower supply?

It's something of a puzzle.

Medical Price Controls

Next time you are waiting for a doctor in the US, you might pass on the outdated newsweeklies and ask a bit about how prices are determined. The results should shock you. For the vast majority of medical practices, their prices are set for them the institution ultimately setting them is the federal government. The entity doing it is called HCFA, commonly known as Medicare. They don't do it alone but they do the heavy lifting. The American Medical Association (AMA) defines a long list of numeric codes for each mainstreatm recognized medical procedure. Medicare then takes each of those procedures and assigns both an resource value unit (RVU) and a price for each of those CPT codes. You are, by law, not allowed to charge patients more than those tables permit whether you participate in the Medicare program or not. Your doctor's participation only moves him from one reimbursement column to another.

Since a huge chunk of medical dollars are run through the government, that's a socialist pricing model that has broad influence. But the RVU system is far more pervasive than that in its real-world effects. Most health insurers do nothing more than take the Medicare RVU values and blanket raise or lower them by a set percentage. This means that if a government bureaucrat misprices a procedure, every private health insurer will also misprice that procedure.

This, in short, is insane. The longer version is that nobody has ever successfully allocated resources via government pricing in any field and there is no reason to think that medicine is priced correctly. Our only salvation is that our systemic transparency makes the insanity clear a bit earlier than most other countries that adopt socialized medicine and spend a great deal of effort in propagandizing in favor of the system and hiding the inequalities and injustices of government pricing.

This propagandizing/hiding function can have drastic, real world consequences. The timing of the invasion of Poland has been alleged to have been at least partially driven by the need to hide the coming collapse of the Third Reich's disastrous economic policies Germany, under Hitler, made tremendous strides by eating up its seed corn and juggling the books in the most shameless ways. You can't hide that forever but you can hide it a lot longer if you start invading other countries and robbing them of their wealth.

Germany's present day malaise can largely be explained by its political class being unwilling to be honest with the German people and explain exactly how much past administrations of all parties have robbed future generations of a decent standard of living. The same can be said of all the european social-model states on the continent. Fortunately, their malaise extends to their militaries and thus the old solutions of the last century are no longer practical. But nobody seems to have a better solution than to kick the problem down the road and hope for a miracle.

A major driver of that future impoverishment across the 1st world is the state provision of healthcare. It's not the only one, state pensions are also a huge problem. Healthcare is the largest component of the problem and even though President Bush was willing to try to reform Social Security, his contributions to healthcare reform have been very modest indeed.

Get $50 a Barrel Oil, Today

You can buy $50 a barrel oil today. There's just one catch. It's in the PRC. The PRC is forcing a $20 per barrel domestic subsidy on fuel. It's completely unsustainable. There are gasoline shortages. Refiners are threatening the government. There are strong worries about civil unrest if fuel prices rise to market levels. There are strong worries about civil unrest if fuel shortages persist.

In short, it's a complete mess, unsustainable over the long run, and a good candidate for the reason which will eventually take down the PRC's ruling party. For those of us who remember President Carter, the gas lines and unhappy people are pretty much what we all expect but it's been 25 years and a lot of people don't remember the '70s as something they personally experienced. Now they can get cheap gas in the PRC along with long lines, closed stations, and very angry people. And to think, yesterday I listened to Michael Savage actually call for gasoline price controls.

God save us from idiots and worse.

The Non-Breaking Point

I just got through the NYT Magazine article The Breaking Point about the problem of managing an oil economy. A long article, it had a little bit of everything in it, the scary apocalyptic chicken little, the former oil executive who is quietly pessimistic, and the PR flak who smiles and assures that all is well. What it didn't have was any sort of information about what the switchover points would be to something else.

The baseline assumption of almost the entire article was that there would be no significant switching over to alternative fuels. This is economic illiteracy at its worst. The apocalyptic, Simmons, completely ignores the idea that indirect competition will lead to substitution and predicts triple digit oil prices, and not "low triple digits", either.

What if natural gas shifts to become the fuel of choice, whether burning it or using it as feedstock for fuel cells? What happens to oil demand projections? They get thrown away as the new energy demand is fulfilled by cheaper alternates, primarily natural gas, but not exclusively. A growing portion of the machinery running the global economy will be multi-fuel friendly fuel cells starting the end of the decade. Indirect competition to gasoline and other petroleum products will largely become direct competition in a hydrogen economy.

It would be extremely obtuse to think that oil executives don't closely follow their indirect competitors. The article even says that a switch to alternatives is a fear of all the oil executives. But nowhere are the questions asked, "What is your most formidable alternative energy competitor in the medium to long term? What was the price point at which switchover would happen five years ago? What is the price point today? What will it be five years from now?". All in all a long, interesting read for a Sunday that is a huge missed opportunity for those who wanted serious insight into what's going on with oil.

An Opportunity For Profit

Here's an Austin Bay guest blog for Glen Reynolds that got me thinking:

"What's the biggest problem plaguing corporate America?" he asked rhetorically. “Weak corporate boards that fail to protect shareholders rights."

One of his indicators of weakness: the prevalence of “golden parachutes” for executives.

“There's no penalty for executive failure,” he said. “The board members think it’s easier to cave in and pay off a failed CEO. Shareholders lose.”

So if shareholders financially lose by irresponsible corporate behavior in pay and perks, why isn't the behavior measured and corporations ranked on it? It seems that if shareholders pay for it and lose out in unrealized profits, investment money would be wise to steer itself towards companies that do a bit better in compensating for performance, not for mere presence in the executive suite.

The Cell Phone that Doesn't Ring

Like Holmes' famous dog that didn't bark, Tom Friedman's cellphone that doesn't ring is interesting because of what isn't happening. What isn't happening in the NYC subways is that small, innovative upstarts aren't jumping in to provide service in little patches. It's not like there isn't space down there. I'm sure the magazine seller in xyz station wouldn't mind at all if somebody provided a regular, stable income for him by renting out a small portion of his kiosk. So why isn't it happening?

I would guess that microtowers don't happen because the regulatory environment doesn't let it happen. The FCC would have to approve as well as the various transport bureaucracies in the NYC subway. Somewhere along the line is a group of bureaucrats who don't look kindly on upstarts and is adept at squashing them, so adept that people have stopped bothering to try.

So, is a government program the answer? Only if you want increased inefficiency and poor service. The real solution is to identify the blocking government action, remove it, and let the free market fix the problem.

Another Job Germans Won't Do

I think that David's Medienkritik is spot on in lambasting German Leftist xenophobia by IG Metall, Germany's largest union. It really is a rerun of the classic german anti-capitalist propaganda from the '30s. But David misses a trick in that he doesn't answer the question, where are the Germans?

In any economic biosphere there are producers and decomposers. The decomposers are essential to sustainable growth and stability in the system. By taking out firms that are sucking up inordinate amounts of capital and not performing, such economic actors as "Blackstone, KKR, Investcorp" serve the same essential purpose as fungi, earthworms, and bacteria in the worldwide biosphere. They unlock essential resources and make them available for use by other actors.

So where are the Germans? Why is their domestic "decomposer" sector inexistent or so anemic that it is being shouldered aside by the American "bloodsuckers" (IG Metall's term)? Is this highly paid, lucrative, essential economic role work that Germans just won't do? What's wrong with German financiers?

Letter to the Paper ILV

John Cole decides that normal economics doesn't apply when it's all about the evil drug companies. I'm not particularly happy with using fascist economics to counteract communist economics but it's somewhat better than the "Atlas Shrugged" alternatives of just letting the companies go down the tubes.

To say "without the current drug companies, there would be new drug companies" is nonsense. That's functionally saying that without the current railroad companies, we'd just have new ones. We proved the latter wrong at the creation of Amtrack because there were no private companies left to take over the bankrupt ones. The prior century's idiotic railroad regulation made sure of that.

Drug companies are the creation of bright inventors combined with capitalists who think that, globally, they can achieve at least an average return. Globally, they have to accept a below average return in most markets.

The US is the last major holdout in free market pricing and the one reason keeping the capitalists from withdrawing their capital and redeploying it elsewhere. For the green eyeshade types that invest the bulk of money everywhere, they go to jail if they purposefully deploy capital at lower returns for non-financial reasons. This is called fiduciary duty. It's not reasonable to expect somebody to go to jail just because your particular disease hasn't got a cure yet.

If you have globally above average returns, you attract new capital and you get new companies entering into the market. If you have below average returns or government mandated losses, people won't invest and you won't have new company formation.

Generic producers aren't affected by this reasoning. They make their money off of production, not new pills. We won't lose our current crop of cures. What we will lose is the financing to push forward our new ones. That is likely to cut down the introduction of new drugs by about 50% (public research will still be around).

We can only hope that our neverending race against the drug resistance is winnable with the remaining 50%. If it's not, you can add advocating mass casualties in a pandemic to the current sin of bad economics.

America's Natural Rate of Growth

For decades, the natural rate of growth of the US economy was 3%. In a decidedly mixed article The Economist pegs it at 3.5%-4%. This is a huge difference. At 3%, the US started surpassing western Europe as their soft socialism sclerotized their national economies. If we're truly entering an era where our economy naturally grows even faster, the gap will not only persist, will not only keep growing, the gap's growth will accelerate.

I do wonder if this natural growth rate estimate is real. The Economist's pessimists would have nothing to hang their hat on regarding the most recent quarter's growth. At 3.1% it is slightly above the decades long postwar consensus on the US' natural rate of growth. It's only against this new, higher estimate that it falls somewhat short. The preceding quarter's growth figure, which was preliminarily estimated at the same 3.1% generated similar concerns until it was revised to 3.8% as better data came in.

So, is the US economy just in an unusual growth spurt that will settle back to the old 3% figure over the long haul? We're certainly in an era of longer cycles. I recall earlier articles in the conservative press worrying that we were headed toward an era of 2.5% long term growth. Those overly pessimistic articles might be matched by overly optimistic estimates today. In any case, it's useful to keep the long-term history in mind when reading the latest "are we falling behind" article.

Shrink the Gap, Shrink the US Trade Deficit?

Robert Samuelson argues that a global glut of savings is behind the US trade deficit. The fiscal imbalance caused by all that money pouring into the US creates a situation where we don't save much ourselves, our currency becomes overvalued, and we import an awful lot while exporting relatively little. What Samuelson doesn't examine is the effect that adding new countries into the mix of decent homes for FDI. The US would get less FDI as more opportunities for investment became profitable in India, the PRC, Angola, or Libya. We would sink into a Red Queen economy where we had to work harder, export more, just to tread in place as a destination for FDI.

In other words, gradually improving our security picture gradually undoes the investment imbalance. There are both opportunities and perils in that. There are also important lessons to learn for our allies and adversaries. Because military action ties back into a pretty ticklish economic situation for the US domestically, we are likely to neither go "faster please" in bringing the Gap to an end, nor are we likely to give up the project entirely.

We'll work moderately to shrink the Gap but not so fast that we suffer a domestic economic crisis as the new investment opportunities we have created suck up the capital necessary to make a smooth adjustment out of our unsustainable economic course. In other words, the use of geopolitical dynamite that characterized the Iraq big bang is not likely to be repeated, or at least repeated quickly.

Germany's Labor Disaster

German unemployment is so high in the former DDR that german workers from there are poised to outnumber Turks as guest workers in neighboring Austria. It's so bad that unemployment in the territory of the former DDR is topping 25% with FRG unemployment as a whole, a nasty 12%. So, why do easterners simply drive down wages and provide cheap labor for W. Germans? Germany's inflexible labor laws and social democracy make it impossible.

Instead, you get international labor mobility and desperate germans on the move across Europe looking for work. The FRG can no longer afford to pay them to stay home and do nothing and is cutting benefits thus setting the visible crisis in motion but the problems have been gathering for decades.

Germany, if it doesn't get its act together is going to end up in a decade or two feeling weak, humiliated, and looking for alternatives. It's even money whether those alternatives will come in the form of nationalist extremism or free market policies. If we get to that point, batten down the hatches.

HT: NoonShadow

Japan Inc. Redux

Thomas Bleha must love the movie Rising Sun. There's an awful lot of Japan envy in that film, with bumbling Americans always one step behind the wily Japanese. There was a lot of that sort of thinking in the 70s and 80s. Japan was cleaning our clocks, their bureaucrats were promoting key industrial players, managing competition, and increasing efficiency. We were doomed to play second fiddle to the land of the rising sun.

It didn't work out that way.

Here's an article that fits right in with those pessimistic times. The Japanese are picking winners, subsidizing broadband, and will reap the fruits of all that fiber in the ground to gain a new broadband future with lots more economic growth. And you know what? He might be right. The managed competition method, like a stopped clock, does work every once-in-awhile. The benefits of the model are and have always been highly visible. It's the costs that are hidden and remain hidden.

The costs of subsidizing bandwidth vary by population density and the US has one of the lowest population densities of the entire 1st world. Australia beats us out but nobody really talks about their amazing broadband national coverage and it's for the same reasons.

Aside from a throwaway line ("The United States' vastness no doubt complicates the task, but it is no excuse for not undertaking the job") the problem of wiring the US remains largely unexamined. Canada has the happy circumstance that its population is largely concentrated in a band on its southern border. US population is concentrated in several noncontiguous megalopoli, the NE corridor that starts around Boston and runs along the coast to around DC, the West Coast Megalopolis that runs largely between San Francisco and Los Angeles, The Great Lakes megalopolis starts in Wisconsin and stretches all the way to western NY. There is also a South Florida one and several other wannabees like the emerging Texas "Triangle Cities" one.

With clumpy population separated by large distances, the cost of wiring a national infrastructure goes up while the relative benefit goes down. Network effects mean that the larger your network, the better your results. We're trying to cover 10 times the area to gain twice to three times the population node connectivity of Japan. That means that the cost to benefit ratio is somewhere between three to five times better for them.

The natural result of this is that we're going to lag. We're going to wait for costs to drop and use cheaper networking methods as they arrive as our . Goosing progress by dumping money into a national network infrastructure initiative is not only risky in that it will tend to give us bad habits, it is also going to cost us more for less benefit.

The geography of our nation, the distribution of our population, all mean that we're forced to play the "second mover advantage" game when it comes to broadband, at least until we figure out how to take a couple of zeroes out of lift costs per kg or some other sort of way to get data networking platforms up above us cheaply.

We can go expensive now or we can adopt a multi-platform competitive approach and try to encourage new entrants so that they quickly improve the cost to deploy and maintain bandwidth infrastructure. This, essentially is our current position with the FCC trying to spur innovation so that a national broadband rollout makes sense. Waiting patiently has never been a US strong suit but we're doing it now and actually playing the game pretty well. It would be a shame to ruin things and merely imitate solutions that do not scale to our particular density profile.

Should Oil Wheeling be Illegal?

Imagine three people in a line, A, B, and C. A and B both have a commodity that C wants. A has three units and needs to use one, B has one unit and needs to use two and C has zero units and needs one. Let's further say that it's cheaper for B to sell C his unit and buy two from A than for C to buy from A and B to buy from A. Should B be allowed to make the more efficient deals?

Illegalizing that sort of trade seems to be what Sen Ron Wyden is after. The US can sell Alaskan oil to Japan for less money than Japan can get it from the Gulf. The US then increases imports from Venezuela to make up the difference, saving on net shipping costs. Japan saves money, the US makes a small profit on the deal, and Venezuela sells its crude closer to home instead of shipping to further off customers.

No doubt, if we were to get into some sort of national crisis, we'd keep our oil home and the Japanese would have to pay the Gulf States' "Asia premium" of up to three dollars on each barrel. So who should get the extra money? Gulf producers or should US oil companies split the money between them and worldwide consumers?

Unfortunately it takes 2-3 paragraphs to explain why such trades are a good idea and only one sentence or two for demagogues to argue that they're against the national interest, crying economic treason.

China Peak

It looks like the labor threat from the PRC is peaking. If we can just survive a few more years, rising wages will reduce the threat from the PRC and US manufacturers will no longer be swimming against impossible competitive conditions.

I've lived this story before. In the 80s it was the Japanese who were supposed to do us in with their unbeatable system of a manic workforce with industrial planning from the MITI led top. The Japanese threat receded, the PRC threat is about to. All that is left is greater creativity, greater production, lower prices, and a more varied culture commercially available all over the world.

Before I shuffle off this mortal coil, I expect to hear this story again but the PRC and India were the big ones. No other possible rising power can swamp globalization by putting so many money starved workers on the world market and caused the developed economic Core to recoil in horror, replicating the pre-WW I withdrawal from globalization's promise.

It's a very good year.

Scary EuroSoc Fact of the Day

The Telegraph, writing about the EU's sad joke of a process to liberalize service employment buries this bombshell on paragraph 13

Last Monday, Sweden's largest trade union admitted that the official 5.5 per cent unemployment rate is hiding a "real unemployment" of 20 to 25 per cent, which includes those claiming long-term sick pay or having taken early state retirement.

I can't even begin to imagine what a 25% unemployment rate would do to this country. This is depression level unemployment in any normal context but for Sweden, it's just another day of eurosocialism business as usual.

The really infuriating part is that you can still find people that, to this day, claim that Sweden is a model society pointing the way towards a peaceful implementation of socialism.

25% unemployment, amazing.

HT: Marginal Revolution

Chaos Investing

Russ Nelson is unhappy with historical economics, or using past data to make predictions of future stock price moves. I'm 90% of the way with him but I do have a 10% caveat. Stock prices, as part of a complex system, are chaotic, in the sense of Chaos theory. In that sense, finding whether there are attractors or strange attractors should be able to increase your profit potential based on past data analysis. The patterns won't entirely hold but even small increases in predictability can lead to large increases in profit. Chaotic patterns don't hold, but they almost do, and almost may well be good enough to increase profitability over strict fundamentals investing.

Copyright Musings

Tyler Cowen steps into the copyright debate, prompted by the Supreme Court's addressing the issue of P2P. He decides to take an economist's point of view. Or does he?

His first point (of three) is puzzling.

In ten year's time, what will happen to the DVD and pay-for-view trades?  BitTorrent allows people to download movies very quickly.  Note that DVDs already account for more than half of Hollywood domestic revenue.  Furthermore the process will be eased when TVs and computers can "talk" to each other more readily.  Yes, I am familiar with Koleman Strumpf's excellent work showing that illegal file-sharing has not hurt music sales.  But a song download can be a loss leader for an entire CD or a concert tour.  Downloading an entire movie does not prompt a person to spend money in comparable fashion.

First, bemoaning the death of an industry because new technology destroys its business model is very rarely economic thought. You might as well bemoan the decimation of the buggy whip industry with the coming of Ford's Model T. The creation of IP has little to do with the DVD or pay-per-view trade. If content creators can find a way to make more money via new methods, the passing of intermediary mediated pay-per-view will not be a tragedy.

It's simply not true that movies prompt no further sales. Some do so today and quite shamelessly as any parent knows. If you knew that every bit of clothing, furniture, or other items that appeared in a movie were available at the movie's website for easy purchase, a significant revenue stream would be had, for instance. If the ancillary revenues from selling products placed in the movie were enough, free distribution would increase revenues to the producers of the movie. While this would shake up the distribution industry, perhaps even as much as the buggy whip manufacturers were shaken up by the introduction of the model T, it's no loss that an economist should be crying over.

Tyler Cowen's 2nd point is betterr, but not by much.

Perhaps we can make file-sharing services identify (and block) illegally traded files.  After all, the listeners can find the illegal files and verify they have what they wanted.  Grokster, sooner or later, will be able to do the same.  Yes, fully decentralized and "foreign rogue" systems may proliferate, and any identification system will be imperfect.  But this is one way to heed legitimate copyright suits without passing the notorious "Induce Act."

This is half right. Any economist worth their salt should know in their gut that there are at least two solutions to most problems, one major being the stick of legal enforcement, another being the carrot of superior product/service tempting people to do the right thing. In this case, Tyler lays out some "stick" related reasoning but entirely ignores the possibility of carrots. Apple's iTMS shows the way here. Price your product reasonably, make it easy to get, and you'll explode the available market. Here's a case in point. The 2003 Galactica pilot is available on DVD for about $20. I'm not paying $20 for it, the price is too high. If it were available at Hollywood Video I'd rent it for a buck or two. If it were available as a download, I'd probably pay $5 because it's worth $3-$4 to avoid the hassle of ripping. You price your wares too high, you use distribution chains that are too expensive and your market shrinks.

So which model is right, the carrot or the stick? That's an entirely other question but it's a good bet that both have their uses. The stick works an awful lot better when there are plenty of pleasant, legal carrots around to munch on and carrots increase their appeal when a stick is handy to discourage the use of illegal alternatives.

Turning to Tyler Cowen's 3rd (and final) point, he goes downhill again.

I question the almost universal disdain for the "Micky Mouse" copyright extension act.  OK, lengthening the copyright extension does not provide much in the way of favorable incentives.  Who innovates with the expectation of reaping copyright revenues seventy-five years from now?  But this is a corporate rather than an individual issue.  Furthermore economic research indicates that current cash flow is a very good predictor of investment.  So the revenue in fact stimulates additional investment in creative outputs.  If I had my finger on the button, I still would have pushed "no" on the Mickey Mouse extension, if only because of the rule of law.  Privileges of this kind should not be extended repeatedly due to special interest pressures.  But we are fooling ourselves if we deny that the extension will benefit artistic output, at least in the United States. 

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One of the major problems of the copyright extension act was that it actually stopped the flow of product from protected to public domain. That means that the creative "watering" that new public domain material provides is gone from the US scene for the next 20 years for any extended product. Extension could have been done 6 months every year for the next 40 years and achieved the same eventual length as the actual legislation but it wouldn't have dried up the well completely. Of course, such legislation wouldn't have been nearly as popular. That change in popularity would have been telling.

The truth is that the people have suffered a taking without compensation and we're in danger over the next two decades of forgetting the original intent of the system, temporary protection and eventual shifting to public domain, reasserting the fundamental right to copy, in exchange for increased creative product on average. When, 15 years from now, the next extension bill wends its way through Congress, an entire generation will be out there that will not have felt and understood the utility of public domain intellectual product. That's a danger to our constitutional system as corporate interests try to creep us back to the old English system of permanent IP protection. That system is gone because it led to stagnation. If economic analysis doesn't fit the historical data, there's something wrong with that analysis.

Sinclair and Shareholder Primacy

Professor Bainbridge wrongs the cause of shareholder primacy in his analysis of Sinclair over the showing of Stolen Honor.

Bainbridge quotes Tom Smith extensively on the matter to the effect that the Sinclair effort is a textbook case of shareholder activism gone amok. In fact, it is just the opposite.

The threat that Bill Lerach and the NYS controller issued was, essentially, to beat down Sinclair's share price via politically motivated selling and judicial action below Sinclair's normal market clearing price. This is a profit opportunity in big screaming capital letters. Yet nobody came to Sinclair's rescue to the benefit of their investors.

No similarly sized market player came and announced that they would be glad to take the money of the pensioners of the State of NY in favor of their own fund holders at bargain prices. If the pension funds of TX, OK, and GA did that, the NYS pension fund threat would evaporate and people in the pension system in NY would start complaining that their agent, the controller of NYS was not acting in their interest. In a better world of shareholder activism, significant chunks of the pension system funds would be taken from the controller's control over the affair.

The Lerach threat of lawsuit was toothless as Prof. Bainbridge himself noted except as an invitation to actual shareholders to sell stock. With a major seller appearing and preannouncing a major sale and no major buyers stepping up to the plate, Sinclair capitulated. But it is the imbalance between activist sellers and activist buyers that caused the problem, not the existence of sellers and buyers acting outside their obvious economic interests. Furthermore, the entire affair is mischaracterized as a war between agents and shareholders but it was not because the true owner of the money isn't the state of NY but rather the pension holders who have imperfect control over their own agent. It was a fight between one form of agent (corporate directors) and another (fund management directors).

Shareholder activism is imperfectly done in the US today and there is a political imbalance among activists that is of concern. That imbalance is at least partially caused by Prof. Bainbridge and others like him who, I suspect, get a much more favorable hearing on the right than on the left.

No matter how much people tut tut over the crass shareholders exercising their rights to buy and sell as they please, some are going to do it on non-economic grounds. It would improve things if we institutionalize the practice and have activists on all sides in that fight. Otherwise we are going to get repeat after repeat of this sort of browbeating from the left.

The Little Guy

Amy Ridenour stands up for the little guy getting ahead by serving the fat cats who attend the inauguration. It's a transfer of wealth, not a waste of it. Her post reminds me of the old "luxury tax" that was imposed years ago. Democrats put it in as a blow against the rich but took it right out as ordinary people who built yachts and other luxury items for the rich saw their incomes evaporate as the tax kept rich people's money inside their wallets.

The argument is similar here. Spending your wealth increases economic mobility as the rich slow their rise or move down a bit in wealth and the ordinary service workers maybe get enough extra money to work on that nest egg to start their own businesses or expand.

But this kind of wealth transfer doesn't have the State involved so it's not to Democrat government unions' liking. They don't get their cut and that makes it illegitimate in their eyes.

So sad.

Free Electricity

I just read a fascinating interview of Paul Wolfowitz in Prospect Magazine. The entire article is worth a read but I learned a key fact about Iraq in it that absolutely left me shocked. Electricity is not metered, not even charged for in Iraq.

I can't think of a single country where free electricity wouldn't cause shortages in capacity, not one. Yet in over a year of reporting on electricity shortages, I never heard anybody ever mention the fact that Iraq prices electricity at $0.00 or lists that as a cause of the shortages. That includes both US and international press. It's scandalous that nobody even mentioned it. It's basic economics 101 that if you artificially set the price low, you'll get shortages. Toss in a war, infrastructure sabotage, and pre-war infrastructure negligence and it's a miracle that the electricity system is as functional as it is.

It all really makes me question how much else I've missed on Iraq.

Libertarian Clueless II

Tyler Cowen grumbles about the idea of private forced savings accounts. The problem is that he takes the marketing job much too seriously. The reality of forced savings accounts is that they provide savings for those who would not otherwise be able to save due to their payroll taxes sucking up so much of their disposable income. Thus in the real world, you're replacing some government taxation with money that is conditionally yours but has restrictions on it so you don't end up on the dole.

For those who are richer, a different effect than providing a private pension out of what would otherwise be tax dollars kicks in. These are people who are already saving privately both in tax advantaged and taxable accounts. The net effect of the new system (post transition) is that the amount of tax advantaged savings is increased so for the vast majority of us who do not think that government pensions are enough, this is merely a new account we can dump our savings into without paying the tax man.

A world with private retirement accounts would be a world that is better than today's where leftists still get away with an awful lot of mindless tripe about how the average person is incapable of planning their own retirement. With the creation of private accounts the battleground shifts to an examination, in minute detail, over each regulation that prevents irresponsible speculation. Over time, we are likely to see successive, small shifts toward true ownership without restriction until the remaining regulations are mostly symbolic, low impact rules, that are more trouble to remove than they are worth.

Removing the debate over retirement to the question of how financially responsible people are versus whether they should have any responsibility whatsoever, fundamentally moves the political debate in a very libertarian friendly direction. The battle of how responsible people are with their own money is something that can be measured, improved, and is likely to generate a string of libertarian policy wins. Libertarians should be on board for that process as the Bush administration kicks off the first draft for market reform.

HT: The Bit Bucket

Kuttnerian Idiocy on Flu Shots

Robert Kuttner embarrasses himself in a recent article on the US flu shot availability problem. It's a mix of bad economics, anti-capitalist agitprop, fear mongering, and most amazingly pro-indentured servitude. Talk about a target rich environment for criticism.

First things first, the reason we have a shortage of flu shots and other countries do not is that the FDA has higher standards for flu vaccines, thus fragmenting the market into "vaccine good enough for the US" and everybody else. The extra regulatory burden isn't trivial to meet so you can't just swoop down and buy from the rest of the 1st world when something goes wrong here anymore than you can ship gasoline into Chicago from out of area when the local refinery has a hiccup and prices soar (thank the EPA for that particular market fragmentation). Canadians do not have a flu vaccine shortage because they didn't adopt absurdly high standards over other first world nations and not "thanks to their national health system". If they were to suffer a vaccine production mishap, they can dip into the wider market in a way that the US, with its extra high standards cannot.

What profits are to be had in the US vaccine market are largely soaked up by legal bills as trial lawyers have circled the industry picking off one participant after another. Here is Kuttner's one good idea, cutting down the lawsuit opportunities by act of Congress.

But even here, Kuttner gets it wrong as out of control torts are sucking the lifeblood out of America across the board. Their pernicious effects regarding vaccines just happen to be more visible. His idea would only apply a one issue band aid on a very deep wound in our legal system. General tort reform has long been a Bush administration goal but no credit is given here by Kuttner to Bush administration foresightedness and trial lawyer pig headedness. The trial lawyer-in-chief in Congress is, of course, Sen. Edwards who is the number 2 on the Democratic ticket this year.

Things go downhill from this bit of half-right thinking. Kuttner wants to force companies to participate in making vaccines. He wants to be able to compel their labor and force them to sell at a particular price. He labels this level as a "normal profit", something that is likely to neither be normal or profitable.

But imagine the precedent here. Just because there are insufficient market participants in markets on which people's lives depend, the government has the right to compel labor from companies engaged in related production. You might as well say that software coders could be forced into defense production work at "normal profits" or "normal wages" no matter that they have no interest in the field nor would the money be equivalent to what they are making elsewhere for the same effort. Doctors could be forced into the VA system, whether they liked it or not. After all, just like the pharmaceutical companies, without public research and government licenses, Doctors wouldn't be where they are today.

But wait, there's more. In an early paragraph the specter of avian flu makes its appearance. It has nothing to do with this year's flu crisis but casually tossing around the idea of mass human casualties after railing at Bush administration incompetence is about as subtle as interspersing pictures of jews and rats. It's just vile.

The bad economics shows up in the staggering assumption that government is a superior allocator of scarce resources than the private sector. The fact that this has been disproven time and time again for decades does not seem to have made an impression on the writer who seems to be in an economic time warp back to the interbellic years when the Reds were on the march.

He also plaintively asks "Do we really need Cialis, and Levitra and Viagra?" as if price competition created by new market entrants were an entirely foreign concept to him. In fact, yes, we do need them for both health and economic reasons.

The economics I've covered above but there are people who have a real need for help who cannot take one or two of these drugs without dangerous side-effects that do not show up in the third. Some small number can't take any of them safely and effectively and await further new entrants into the market for their conditions to be relieved by the pharmaceutical revolution.

Robert Kuttner doesn't care about these people. They're a minority of sufferers interspersed throughout the healthcare population and are not very united. Kuttner doesn't care about who he'll delay cures for as long as the choice of where pharmaceutical research money gets to be more politicized, more socialized, more nationalized.

Can we have a rousing verse or two of the Internationale? Go ahead, start without me. I'll just be off to the side being sick. Don't mind me...

Sinclair and Shareholder Primacy

Professor Bainbridge wrongs the cause of shareholder primacy in his analysis of Sinclair over the showing of Stolen Honor.

Bainbridge quotes Tom Smith extensively on the matter to the effect that the Sinclair effort is a textbook case of shareholder activism gone amok. In fact, it is just the opposite.

The threat that Bill Lerach and the NYS controller issued was, essentially, to beat down Sinclair's share price via politically motivated selling and judicial action below Sinclair's normal market clearing price. This is a profit opportunity in big screaming capital letters. Yet nobody came to Sinclair's rescue to the benefit of their investors.

No similarly sized market player came and announced that they would be glad to take the money of the pensioners of the State of NY in favor of their own fund holders at bargain prices. If the pension funds of TX, OK, and GA did that, the NYS pension fund threat would evaporate and people in the pension system in NY would start complaining that their agent, the controller of NYS was not acting in their interest. In a better world of shareholder activism, significant chunks of the pension system funds would be taken from the controller's control over the affair.

The Lerach threat of lawsuit was toothless as Prof. Bainbridge himself noted except as an invitation to actual shareholders to sell stock. With a major seller appearing and preannouncing a major sale and no major buyers stepping up to the plate, Sinclair capitulated. But it is the imbalance between activist sellers and activist buyers that caused the problem, not the existence of sellers and buyers acting outside their obvious economic interests. Furthermore, the entire affair is mischaracterized as a war between agents and shareholders but it was not because the true owner of the money isn't the state of NY but rather the pension holders who have imperfect control over their own agent. It was a fight between one form of agent (corporate directors) and another (fund management directors).

Shareholder activism is imperfectly done in the US today and there is a political imbalance among activists that is of concern. That imbalance is at least partially caused by Prof. Bainbridge and others like him who, I suspect, get a much more favorable hearing on the right than on the left.

No matter how much people tut tut over the crass shareholders exercising their rights to buy and sell as they please, some are going to do it on non-economic grounds. It would improve things if we institutionalize the practice and have activists on all sides in that fight. Otherwise we are going to get repeat after repeat of this sort of browbeating from the left.

Revising Poverty Statistics

There seems to be a new understanding that poverty is becoming disproportionately a problem of the recently arrived. The large amounts of new immigrants coming to the US are driving down income statistics and masking real improvement among those who have been awhile.

Why not add a simple question to the income stats asking how long you've been in the country? It would allow researchers to track how incomes improve as immigrants integrate into the US economy. It would allow progress in resident incomes to show up even if an influx of poor immigrants swamps the overall income statistics. After all, if you're investing in new entrants who will get jobs and rapidly climb the economic ladder, their initial income statistic effect should not weigh as heavily as the poverty of a permanent underclass that has little mobility, year to year.

Pessimist Propaganda on Hydrogen

Nature has picked up a paper(pdf) by the Oswald brothers published in the journal Accountancy.

I can't recall the blog I first read describing the paper but it looked fishy enough to write and protest that the numbers weren't right. Jim Oswald did respond and his response made it very clear that whatever they were talking about, they were not talking about the hydrogen economy as most people conceive of it.

1. The calculations are for hydrogen burned in internal combustion engines (ICE), not hydrogen fuel cells. Virtually everybody views the hydrogen economy as a fuel cell economy with hydrogen run through the cells to directly create electricity, not burnt in cylinders that drive pistons, that turn a wheel or drive a generator.

2. Like all other ICE type motors, hydrogen ICE are limited in efficiency as they are Carnot heat engines. At realistic temperatures, fuel cells can have 3x the efficiency of ICE. This means that even with hydrocarbon created hydrogen, you lower pollution with hydrogen as everybody except the Oswalds in this scenario look at it.

3. The Oswalds deliberately and artificially narrowed the available sources of hydrogen to nonpolluting sources that are commercially viable today with no technological progress allowed for, nor any thought to how rising petroleum costs would make other sources of hydrogen become viable as energy prices rose.

4. Energy is lost in transportation with the shorter you go, the less you lose. Hydrogen is likely, on average (and certainly for the US & UK) to be produced closer to home than our current oil supplies. This effect is unaccounted for.

When all the constraints and fudges are made explicit and clear, the Oswalds' paper is a somewhat useful teaching tool to drive home the point that a totally clean hydrogen economy is going to be hard work. But that's not how Nature interpreted it and it's not how most people will read it who know nothing but the buzzwords of a "hydrogen economy". While the Oswalds are honest enough to freely admit their constraints when asked, they're not doing their duty to the truth in bludgeoning even science journalists to get the story right about the narrowness of their actual claims.

Iraq Insurance Market

According to Iraq The Model, for the past 10 years prior to the invasion there was no life or theft insurance available. You couldn't get your car insured, nothing. Premium income just wasn't enough so the state owned insurance company just stopped insuring things and shut down. Well, now in the "unstable", "dangerous", "chaotic" Iraq, insurance policies are once again being issued and honored.

Kerry's Unemployment Distortion

The Jawa Report has an excellent analysis of Kerry's oft repeated untruth that GWB is the first president since Herbert Hoover to lose jobs. Apparently, of the 14 post WW II presidential terms, 7 were net job gainers and seven (including the current one) were net job losers according to the Bureau of Labor Statistics.

Now it's not very flattering to be among the 7 negative job growth presidents but it's certainly better than being the first since Herbert Hoover. With current trends continuing, a reelected GWB would replicate Reagan's record of having a net positive jobs record by presiding over a boom in his 2nd term, sufficient to erase the job losses of his first term.

Global Capital Shortage

In comments in the recent thread An Interview With Dr. Barnett the subject of capital shortages came up and it's gotten to the point where I think it's better broken out as an article in itself.

First of all, there is no such thing as a capital shortage apart from a specific project. Capital is a particular good that has a supply. In a perfect market, you list all projects in order of ROI, you allocate your capital until you run out and you find your market clearing level of capital using economic projects. If capital supply shrinks, you need a higher ROI to get funding at the new market clearing point. All projects that do not meet ROI requirements see a "capital shortage" but it's just an artifact of their not being profitable enough to make the cut.

When you have a project like shrinking the Gap in order to avoid more 9/11s (and worse, the loss of entire cities) things change. The ROI of not losing Chicago is huge but the connections between that and a water project in Afghanistan are too diffuse to meaningfully assign even though driving average income in Afghanistan above the $3k per year level would likely take that country out of the Gap and could prevent just such a city loss 20 years from now.

The problem is that taking one nation or another from the Gap doesn't really solve the problem. It just makes monitoring the rest of the Gap nations easier as you have less and less territory and population to cover. Instead of using Sudan as a headquarters, Al Queda moved to Afghanistan. Further moves are likely from Gap nation to Gap nation. So you have to tote up the price tag of doing all of them. Instead of a global list, you make up a list of individual Gap nations and projects that would economically benefit them (again in ROI order but this time by country). You draw the line at how many projects would have to go forward to raise incomes to the $3k level at which point you start to see significant middle class formation and internal civic society strength reaching the point where a critical mass wants into the Core and has the resources to get that wish into national public policy.

Once you create those lists and tote up the total costs, you see that there just isn't enough money out there to elevate all these Gap nations out of the economic danger zone, not enough troops to remake the political apparat in the nations who don't want to get with the program and certainly not enough willpower in the international community to starve Core economies of more profitable uses of capital locally in order to ship money to Gap nations so they can graduate to the Core.

We end up having to take what money is available and concentrate them on high value targets, such as the axis of evil countries where you have the worst of the security risks grouped. You end up driving the terrorists from base to base that way but doing that reduces their ability to attack in the Core while you shrink the Gap as fast as you can.

That's not the best strategy there is out there. It's the best one we've got as long as a capital shortage constrains our action in bringing all nations in the Gap into the Core.

Front v Back Loading

While reading an IBD article meta-analyzing a Washington Post analysis of Bush spending plans it became clear that the bulk of Bush spending, as scored, were in transitional costs to avoid the impending insolvency of Social Security.

John Kerry's proposal is not to cut benefits and not to privatize. That leaves raising taxes (the amounts are too huge to politically support) or borrowing the money. Since the crisis won't happen in the next 10 years, Kerry's spending score on this issue is much better than Bush's. The problem is that by back loading the expense, it makes the adjustments more rushed, more painful for all of us when they come, and it makes it that much more likely that the political pain at the time will see the end of Social Security and the loss of a decent sized chunk of an awful lot of people's retirement plans.

Front loading any large entitlement fix is the fiscally responsible and compassionate thing to do. George Bush is doing his part, and getting punished for it.

Defending Bush Economics

I have a great deal of respect for Russ Nelson "The Angry Economist" but I can't really go along with him on his anti-Bush economics rant. I have two reasons, both sufficient by themselves.

The first is that security has an economics component. A US that is not secure, that has decided to allow an "acceptable" amount of casualties from terrorism because it can't be bothered to really fix the problem also ends up with a worse economy. There ends up being a security tax on everything and I'm sure that Russ would agree that a tax increase is no way to promote good economic times.

The second reason is a bit more directly economic (more specifically politico-economic). George W Bush is something that we haven't seen since before WW II, a conservative politician who is confident of a durable conservative majority. Ever since FDR broke the back of conservative confidence and political dominance in the US, whenever conservatives gain power, it's been in short spurts and progress is measured by how much you can get done in a rush before the inevitable reassertion of the liberal majority. Imagine it as hit and run raiding tactics.

But the Congress, absent self-interested party switchers, hasn't been in Democrat hands since January 1995. It's quite likely that we're entering another period of conservative dominance and it's about time we started to act like it because some of the big reforms just don't work well if done in one fell swoop.

Given the Bush administration's razor thin Congressional majorities, maintaining those majorities, and being able to use them to forward your agenda is a very ugly process, necessitating a lot of smiling and insisting you wanted it after taking it in the shorts.

The core of Bush's contribution to furthering free market economics in his first term is that he has insisted on measuring the results of policies. Over the long haul, what drives economies into the ground is not a mistake here or there in policy. What destroys national economies is when the law creates a system where the normal measurements and feedback loops are either wildly distorted or removed by government fiat. George Bush, while giving in on a variety of here and now issues, has consistently insisted on measuring the results of these systems, starting the process of bringing the 'drunk' (power drunk government in this case) to that crucial moment of clarity where all serious reform starts.

The political history of the modern free market movement in the US is littered with all sorts of failed projects which were tried without adequately preparing the political ground. In a highly challenging Congress, George Bush is steadily reestablishing broken feedback loops so that people can once again start seeing the maddening consequences of government intervention in the economy.

If you want to challenge George Bush's economic compromises, you have to ask whether you think the same compromises would have been made with 5 more conservative members of the Senate, 20 more conservative House members. If George W Bush is such a protectionist, why were the steel tariffs withdrawn?

With prescription drug funding, it is important to remember that surgery costs more than pills. The system prior to getting this bill passed subsidized elder care surgery while leaving pills unsubsidized. This made tremendous perverse incentives and was just one example of a hugely distorted market. The healthcare market is distorted to the breaking point and the forces of stasis, of keeping the dysfunctional system running just a few more years has been a powerful actor for decades in this market.

The current situation, like it or not, is going to see several more bills come out in the near to mid future correcting the problems in the prescription drug bill. We're going to see greater costs on pills but be surprised that surgery costs will drop. The unspoken truth is that dynamic effects in medical care aren't measured by the government any better than dynamic effects in tax policy. Where will we end up net? We don't know yet but a pernicious incentive towards more expensive surgery has been removed and some good measurement systems have been put in place so that the data will favor the free market reformers in the next round.

Health Savings Accounts (HSA) are a tremendous advance. In areas with significant HSA usage, doctors will be able to actually set up true free market practices where they set their prices via a market, bargain, watch their pennies, and even offer discounts and sales in ways that they are currently prohibited from doing by their insurance company provider contracts.

As free market medicine reappears on the american scene and shows that it's a superior alternative, the combination of measurements showing the failure of state alternatives and free market medicine's reappearance will create a long term majority in favor of unwinding our current healthcare policy mess. But the first step always was breaking the decades old logjam halting reform of any type. George W Bush accomplished that and he should be proud of it.

The free market often looks to be cruel, heartless, and just plain mean when a plant closes down, when real wages drop, when any of a hundred different unhappy economic events happen to good people. What sustains the belief in the free market is that these painful adjustments, freeing labor to be repurposed to other uses over the long haul creates a superior long term result. It's disappointing that some free market advocates aren't taking a properly long view on the Bush economic record.

Iron Blog Subjects: Balanced Budget

The concept of a balanced budget in government finances is intimately tied together to the concept of what is government good for. If you accept, a priori, that you are providing services to the population of today that cannot be accomplished as well privately and you are building things for tomorrow that, again, cannot be better provided by the private sector, you agree to the same sorts of calculations of national interest that families do around their kitchen table when they plan on buying a house or taking on other major expenditures.

Some things are just unaffordable, some things aren't worth doing even if you have the money, and some things are worth going into debt over. To be a fetishist over a balanced budget means that you think that there is nothing so important that it isn't worth going into debt over.

Now, as a libertarian, the list of things that I think the private sector can't do better than government is a lot closer to zero than your everyday average centrist. But it's not zero. Financing a war is probably the most common and biggest effort that is a justifiable reason to run a deficit. Military related expenditures like GPS satellites are also on the list.

Expansion expenses, such as purchasing from sovereigns who would not sell to any but a national entity is another legitimate expenditure. I don't find the Louisiana, Gadsen, or Alaska purchases to be illegitimate and certainly they have paid off over the years. Expenses undertaken to establish law and legitimate security operations in new territory also fit the bill.

So even in a libertarian world view, it's legitimate to go into debt. The expenditure must be for the survival of the country or an investment that cannot be done privately and will benefit the general public over the long haul.

Bargain Hunters

Just did a bit of shopping for a client (Macromedia Studio MX with Flash) and it really is amazing how Amazon is willing to undercut its own software sales by listing new products and 3rd party sales at vastly lower prices on the same page. What's more the 3rd party sales are guaranteed by Amazon.

Where Bush's Immigration Strategy is Coming From?

Global Transaction Strategy is the title of an older Dr. Barnett article. There's lots of good stuff about how the world is shaping up and how it needs to continue for us to all survive this dangerous time. One of the neat things about broad thinkers is that you can go back and find nuggets that you didn't notice the first (or the fifth) time you read a piece:

In effect, emigration from the Gap to the Core is globalization's release valve. With it, the prosperity of the Core can be maintained and more of the world's people can participate. Without it, overpopulation and under-performing economies in the Gap can lead to explosive situations that spill over to the Core. One hopeful sign of the future: The Philippines has demonstrated that such flows can be achieved on a temporary deployment or "global commuting" basis without resorting to permanent emigration or generating increased xenophobia in host nations.

I can't think of a better description of President Bush's worker visa proposal than a real attempt to put the above paragraph into policy for the US to create a real pressure release valve. Politically, the guest worker visa program never has made much sense. What xenophobes there are in this country are disproportionately on the right side of the political spectrum which means when they're not voting fringe, they'll tend to vote Republican. So why would President Bush take the political risk that this portion of his voting coalition will sit on its hands come November?

Business interests don't mind the current situation too much. Plenty of labor moves into the country in the current situation and they aren't hounded by 'la migra' as in the bad old days of mass immigration raids which shut down business and could decimate a workforce. A minor tweaking of some specialized skills categories would have made business pretty happy without rocking the boat too much.

It's only when you look at it as a national security issue, providing a safety valve while you thin out the infrastructure of illegal border crossing does this initiative make any sense and Bush apparently feels strongly enough about it to risk losing some of the immigration averse vote that he might otherwise have.

To Gamble or Not To Gamble

My cousin is taking very imprudent bets. He offered 3:1 for Kerry to win in November to a roommate. He doesn't even like Kerry, he just is convinced that he's going to win. He was taken aback at the idea of Tradesports with its politics contracts currently running at 26:24 in favor of GWB. His roommate could bet on Bush at Tradesports, laying off the risk of the bet entirely, and make a profit no matter who won the election.

We banter back and forth on this idea that Kerry's got it in the bag so he got fed up and offered me 2:1. Now I've got to figure out whether I want to truly gamble or just take the guaranteed profit. What do you folks think?

On a broader note, Internet betting on anything is likely to kill the medium to long term amateur betting phenomenon because if you run out of alignment with what the experts are offering (in either direction) you're just giving your betting partner free money. Or maybe not, Vegas, after all, hasn't dried up yet.

Making the World Love Us

After a night's sleep and a bit of reading, I think I know what the price will be for a Kerry success in making our traditional allies love us again. As I've noted in the past one of the major player factions on the global stage is a group of people who thrive on monopoly/monopsony profits, providing the spider thin controlled connectivity that most Gap states have to the Core in order to supply the elite's whims for expensive cars, jet setting travel, and PS2s.

The US has played along with this game in the past but the major unforgivable sin of this Bush administration in old Europe has been threatening all these sweet, cosy deals by wanting to open connectivity wide and bring in all the world's major players into these countries, bringing prosperity and freedom to the Gap while costing the established players their ultra-fat profits.

This is the heart of France and Germany's beef with us, the reason why they are so implacable in their enmity. Major contracts are threatened, established relationships would largely be rendered worthless, and a high amount of unpredictability would ensue with US firms winning an awful lot of those new opportunities. The problem is that Bush wants to bring too much competition, too much free market, too much rule of law into the Gap. Pace, Dr. Barnett this is not a neo-marxist critique but rather a very capitalist one.

Kerry has an opportunity to reestablish peaceful relations with Germany and France, Russia and the PRC by letting them maintain and expand their network of spider-thin connectivity webs, by running the GWOT as a war without Gap shrinking. Satisfy these established powers, don't force rule set resets in the Gap, and all will be right with the world. We will have glowing press releases. The UN will bless our military endeavors. All we have to give up is any hope of ending the war by appeasing the implicit villains.

We would end up in an Orwellian nightmare, 1984 writ more complex with a kaleidoscope of ever shifting enemies in the Gap, reaching out and striking us in unpredictable, bloody ways but with us unable to do much more than we did in the Clinton administration. The major difference is that the tents will not be empty, individual terrorists will be killed. The only problem is that we will be accelerating their creation with every strike.

If the opposition we're encountering in old Europe is truly centered around the hidden villains, Kerry's boxed himself into authorizing a perpetual war. It'll be containment v. rollback all over again with GWB being the early rollback guy and Kerry accepting aggressive containment as the best we can do without losing France and Germany again.

Do we really need another four decades of continuous cool war before another heir to Reagan comes along and rolls back the Gap? I certainly hope not.

Iron Blog Subjects: Alternative Energy

Going through the Iron Blog topic list:

There was a day when petroleum seeps were an alternative energy source. Then the supply curves radically changed, the price at which you could get petroleum in large quantities became affordable and the age of oil began. Today, there are lots of other ways to get energy. Like petroleum, before modern drilling and extraction techniques revolutionized things, these alternative energy sources are generally expensive, in short supply, and only feasible in limited application or with government subsidy.

Nobody can really predict when we're going to have our next eureka! moment but the incremental progress that is being made shows that it will quite likely be within our lifetimes. The question of alternative energy really is what role should government play in encouraging things, moving technologies ahead with subsidy and with R&D funding? The day you can run some new motor running on another fuel cheaper than petroleum burning internal combustion engines at every conceivable practical price of oil is the day that a massive switchover will start to occur naturally. The free market will switch over the world without a great deal of state intervention because switching over will be cheaper than buying new ICE equipment.

Most government support is likely to be counterproductive because the money too often goes to the best proposal writers instead of the best avenue of inquiry and those government money fortified R&D boys develop an instant dislike to all their potential competitors for the brass ring of replacing ICE burning petroleum and they tend to express that dislike in efforts to bury their competitors. We only do energy source changes very infrequently. We need to ensure that the best alternative will win out for the next energy age. Throwing in government subsidies is not going to help us get to that point.

Chaos Theory & Economics

SDB's recent wide ranging post on chaos theory got my creative juices flowing as I also have long been fascinated by chaos theory. In the pedantic column, the base of chaos theory is rightfully included in mathematics (I believe) though people seem to have discovered it in observing various disparate phenomena, from weather prediction to stock market behavior, to economics. The formulas they derived to talk about it really don't vary so a base science like math is a good place for it. Your mileage may vary.

One of the things about chaos theory and economics that I find highly useful in policy is how chaos theory affects statist economics. The natural order of things in economics seems to be a slow, secular form of progress with high variation, the boom and bust cycle. The busts, in particular, have very cruel and nasty results and a major form of human effort into the science of economics is how to ameliorate or end the bad effects of the busts. One of Marx's basic predictions regarding capitalist society is that the boom/bust cycle will grow ever wilder, to the point where the whole societal system cannot stand the magnitude of the economic perturbations and something else will arise to take its place, that something else being communism.

This kind of chaotic system perturbation is seen in biology in the way that heart attacks happen. Of course, like heart attacks, this is something that you want to avoid.

The empirical reality of a century of various economic experimentations across the world has given us a body of knowledge that demonstrates that Marx's analysis was fatally flawed. Any interference in correcting the busts seems to have two side effects. It reduces the booms, and it lowers the slope of the secular path in an unpredictable manner. You manage things too much, too long, and the secular upward path turns into a secular downward path and the natural virtuous circles of the economy turn into vicious circles as the country goes down the drain.

But "there is a lot of ruin in a nation" and free market advocates have long had poor records of predicting when, exactly the bad effects will come out. This is because, like everything else in the system, the side effects appear chaotically. But appear they will and it is a remarkable betrayal of the intergenerational societal compact to just kick the can down the road.

But we're all guilty of doing it.

We've fairly well enough established that total government control of the economy leads to horrendous negative effects. The two ideas left are lassez faire economics buttressed by a private charitable safety net and lightly managing the economy in order to pluck the economic goose but still get enough golden eggs to maintain the secular upward trend.

The problem is that politically, the temptation is always to pluck just a bit more in order to gain political advantage over your electoral rivals. Inevitably, this intersection of political interest and economic danger leads to US style stagflation and today's eurosclerosis.

For today's budding statist, the trick is to push out the economic bad news until after your political career is over. FDR's new deal is breaking down decades after he passed away and was enshrined as a great president. LBJ's great society ended up being a net negative to poor people sometime around Ronald Reagan's second term. Few curse him for the harm he has done to the poor and disadvantaged of today and tomorrow. The distance between cause and effect are too much for political purposes but the link is real.

Burch on Lutas on Burch on Energy

B-)

Greg Burch answers my critique on the idea that Beijing will quickly become cleaner thanks to the birth of the hydrogen age. He rightly points out that the PRC government has enormous resources to dump into a vanity project to clean up Beijing smog. This is the option of virtually every totalitarian government out there. They can always rob 5 peters to pay 4 pauls.

What I had left out of my prior analysis was a very big assumption that, being implicit, might have been missed. The assumption is that the PRC leadership is in a huge bind, racing somewhat ahead of a disaster of popular disappointment and revolution. The problems of their rotten banking sector, pervasive corruption, lack of jobs, huge economic drains of State Owned Enterprises, and just general lack of legitimacy makes the exercise of shifting money out of current uses to a pollution cleanup that doesn't make economic sense very dangerous to regime stability. The PRC apparatchiks are already juggling just as many balls as they can handle and I think they're just about out of the ability to add more glamour projects that don't make economic sense.

As the PRC grows rich, clean technology will become worth it for them. Until they get rid of their unemployment problem and/or other regime threatening crises, it isn't likely to happen.

Clean Energy Won't Clean the Third World (Any Time Soon)

Greg Burch is in Beijing and notes the ungodly pollution in that city. He links finding a replacement for oil, a new source of energy, with cleaning up the city. Here he's in error. Beijing will become clean as it becomes rich, not as new sources of energy come on line. The reason is that the rich are the leading edge and the poor form the trailing edge in the adoption of just about every technology. Very new technology has yet to recoup its R&D costs so it is invariably expensive. It often also requires ancillary expenses (in this case a new energy distribution system) that make its adoption even more likely to be concentrated among the rich.

Even if hydrogen with fuel cells were to cross over and become cheaper than oil used with internal combustion engines (ICEs) ICEs would still abound. As long as it's cheaper to continue to operate old equipment rather than purchase new equipment, the old polluting stuff is going to stay in service. Even new purchasers in poor countries that can afford the new technology will be leery of being an early adopter because they know very well that they are living in a trailing edge country and that their maintenance expenditures are going to be sky high for much longer than they would be in the first world.

Thus, you're going to see adoption first in the 1st world and then a filter down effect. Since energy competition is going to be a major factor in the transition period, we're going to see progress on price in one area creating a ceiling on prices in the other. As hydrogen drops, oil for ICE producers will find that there is only a certain amount they can charge without losing major customers to hydrogen fuel cells, customers who will never return. This shrinking market will constrain their ability to raise prices and we should see gasoline prices trend downward along with hydrogen as new energy comes on line (pace energy pessimists, I know you don't believe it's going to happen, but for this scenario, it's an assumption that it will).

Cheaper gasoline will reduce the incentives for those on the trailing edge to move to hydrogen. In short, Beijing and 3rd world capitals are going to be the last to be clean because they're going to be the last to adopt the new technology.

Public Domain Follies

Tyler Cowen blows it when he analyzes the idea of perfect copies of paintings. He quotes a piece speculating on the results:

Economically, I assume that the acceptance of copies would devastate the resale value of originals of everything except the first-tier work. But for the first-tier work--the owners of which would have the exclusive right to reproduce it--the amount of money to be made selling copies might well rival current market value.

Tyler Cowen suggests that people prefer the inferior artworks that they are using as wall decorations right now. What he misses is that intellectual property is not true property. You don't have permanent reproduction rights and most great art works predate the 20th century. Reproductions without controls are inevitable for public domain pieces, the more famous the greater the likelihood.

Perfect duplication of the genius of times past will always be popular, though what is viewed as genius will change with modern sensibilities and taste. Public domain, though beaten down by modern commercial interests, is still a powerful force. It was a missed opportunity not to take it into account.

US Agricultural Mafia

Tyler Cowen notes a remarkable story. A lobbying group is pressuring academics not to provide their expertise in WTO court cases when their consistent free market ideology stands in the way of US agricultural protectionism. Daniel Sumner, a Bush 41 administration member, is turning into a living demonstration of the proposition that the current worst enemies of capitalism are capitalists.

The truth is that 1st world agricultural market barriers (which raise food prices domestically) are a huge impediment for the 3rd world. The 90%+ of the population outside the farming industry benefit every time that subsidies are cut and quotas are lifted. Yet the agricultural lobbyists cry treason when a free market economist goes out and speaks the truth because his academic position is with a public university.

It's very simply unamerican, what the lobbyists are doing. Shame on them.

Tyler's Right, Parapundit's Wrong

Tyler Cowen is right that increased PRC demand for oil does not impoverish the US. And Parapundit is wrong in thinking that higher prices will necessarily enrich current OPEC nations at oil consuming nations' expense.

The secret is in the difference between oil reserves and oil endowment. We are currently ending an era in the oil market where Saudi Arabia (SA) has kept a great deal of its production capacities off-line so it could serve as a swing producer. This kept high cost producers off the market because SA could, at will, make them take a loss for as long as SA wanted, bankrupting anybody foolish enough to bet against the Saudis. But SA has announced that they don't have any more significant unused production reserves. They're going flat out like most everybody else. This means that marginal, high cost producers like Canada's oil tar sands operations can expand in economic safety. Nobody's going to drop the price of oil below their $12/barrel production costs. Thus, high prices will increase supply and we will all come to a new equilibrium with Canada becoming a major oil supplier.

In fact, a bunch of countries that are outside of OPEC have huge endowments of oil that are not counted as reserves because they fail the test of being economical to extract at current prices. Sure, PRC demand will raise energy prices but it will also enlarge the economy. On net, it will be a boon to the world, including the US, for the PRC to grow rich (and hopefully even free). To say otherwise is to say that for every economic winner there must be a loser and trade of any type is at most a necessary evil. This is foolishness on a grand scale.

Budget Good News Watch

We could end up seeing a remarkable turnaround in budget numbers. Based on actual payments to the treasury, Citigroup has just put out a new study estimating that the budget deficit will be $377B, down from an OMB (White House) peak estimate of $521B. That's likely to put a crimp in the supply of new Federal Government bonds and ease the feared upward pressure on interest rates. We'll see how things go but we may have just turned the corner on the vicious circle of recession and started a new virtuous circle of improving economic news turning into improving tax receipts and improving government budget numbers, freeing up more cash for more investment and more job creation.

HT: Instapundit

US Oil Tragedy

I've been looking at a Stratfor front page item for a few days now, trying to figure out whether to write about it. Since it's likely going to scroll off, I'll just quote below:

Greenspan: Energy Prices Going Up and Staying Up
Apr 30, 2004
U.S. Federal Reserve Chairman Alan Greenspan warned this week that the global economy has entered an era of permanently higher crude oil and natural gas prices. This will force U.S. producers and consumers to rethink how they use energy. In the near term, it implies higher costs that would impact business investments and consumer spending. In the longer term, the U.S. economy will benefit disproportionately.

Normal economics generally ensure there is no such thing as permanently higher prices and Greenspan is no Malthusian wacko or socialist. He's an objectivist. So what's going on here? A little news googling and a Washington Times piece jumps out with the answer:

Kyle McSlarrow, deputy U.S. energy secretary, took issue with the Saudi's statement and said high crude prices also are to blame for high gasoline prices. He noted that oil prices have been well above OPEC's target range of $22 to $28 a barrel all year.
    "Refineries may be an element of it, fuel specifications may be an element," he told the conference. "But we think the overwhelming factor here is crude oil prices," which are so high that U.S. refiners have avoided adding to their stockpiles.
    But with U.S. refineries operating at 90 percent of capacity, Mr. McSlarrow admitted more refineries are needed.
    "We, of course, welcome investment in the United States," he told Mr. al-Naimi. "If you can figure out the regulatory regime and get something permitted, good luck, and let us know how you did."

The US has not had a new refinery permitted since the Ford administration. No doubt this is good news for those who hate energy use but for the other 95% of the country it's horrible. It's also political and explains the original Greenspan statement. It isn't that the law of supply and demand are being suspended when it comes to oil. It's that we've created a balkanized, creaky, refinery regime that via government fiat ensures that economics becomes less and less dominant a factor in gasoline price setting.

For the rich, it's a nuisance. For the middle class, it's a burden. For the poor, it's a tragedy. Perhaps both campaigns can get off the Vietnam nostalgia kick they're on and address the problem?

Economic Debunking

Tyler Cowen talks about the sad state of economic knowledge in the US over at Marginal Revolution. The idea is being batted around for economists to collectively concentrate on removing economic illiteracy regarding topics that a broad majority have reached a consensus on. Tyler Cowen isn't so fond of the idea:

I have mixed feelings toward this attitude. Even if more instruction would improve economic performance, I am concerned it would damage our long-run ability to track truth. Plus for me it would make economics less fun. I, for one, would not devote my life to being a missionary for the theory of free trade and comparative advantage.

What he's missing is the idea of attacking economic illiteracy in the same way that junk science is being addressed. You don't need to devote an awful lot of man hours because economic errors tend to come in recognizable varieties and types. There's no real need to craft individualized debunkings, just a Frequently Debunked Idiocy (FDI) list that is maintained and done clearly and entertainingly. Like good economists, there could be a division of labor with each economist participating in the project just taking their usual low level efforts at debunking and submitting them for inclusion into the FDI list. After awhile, you don't even have to do the common debunkings anymore as there will be dozens of relevant ones on most topics available.

Another Reverse Acquisition

Everybody who's looked at the Apple/NeXT deal knows that it was NeXT that really acquired Apple. Apple had the better brand viability so it says Apple on all the business cards but the executives, the philosophy, the code, they very much scream NeXT computer Corporation.

Now it looks like this 'reverse acquisition' started a mini-trend with the same thing happening in the Gateway/eMachines deal. The cow style boxes will stay but the stores are all closing, the executives show a distinct tilt towards old eMachines alums and the headquarters is moving to Irvine, where eMachines used to work out of. Appearances are deceiving. Who buys who is going to be less clear at closing in the future I think.

The Coming Opportunity of Cheap Farm Land

Since agricultural products are no longer protected under the WTO under special rules as of December 31, knowledgeable observers have been waiting for the other shoe to drop. The first clatter has just occurred. The Wile E Coyote moment has ended and now the developing nations are likely to come at the WTO fast and furious with cases of excessive subsidies and protection.

But all the land that is under the plow in these rich countries today has a market value that is, in part, a reflection of these rich subsidies. With subsidies likely to be eviscerated by the WTO, agricultural states will either have to realign their crops to more profitable, specialty ones that are suited to the climate or they are going to go fallow, not being worth the energy to cultivate.

So what do we do with that land when the price craters?

Nitpicking the Angry Economist

Healthcare is the Angry Economist's current rant. And unfortunately, he doesn't quite nail down the nature of healthcare. Healthcare is largely an economic good but it is a very special kind of economic good, not readily comparable to blue jeans and hot dogs. Bad hot dogs don't rampage across town corrupting the good hot dogs and making your life miserable even though you avoid them. Communicable diseases and antibiotic resistance are two specific factors that make healthcare different. This is why I would support subsidized vaccinations and base level emergency care including measures to stop antibiotic abuse. Multi-Drug-Resistent tuberculosis is a major pain in the butt and is significantly caused by poor people poorly exercising their free choices in the area of healthcare.

So yes, I'm in favor of the free market. I'm also in favor of describing things accurately so the free market solutions we devise actually solve the problems we face better than government. Treating healthcare purely as an economic good much as a regular consumer good doesn't get us good outcomes. We need something better. I just have little confidence that this better thing will be government.

Economic Consistency

There's a delightful post over at Cafe Hayek regarding Keynes' oft repeated barb "in the long run, we're all dead." I hadn't thought it through much but he's absolutely right that environmental policy, deficit reduction, and pensions in general are all instances where nobody seriously thinks this is a good idea. But it's not just these three that are out there, education is a long-term benefit with short-term costs (opportunity costs, tuition costs). In fact pretty much all basic sciences research can also be dismissed. Transistors, the Internet, who needs those? Remember it was 1957 when the Internet was conceived but the public at large didn't really see much benefit until the 90s.

No, no, no, this won't do at all. Either Keynes' utterance should be tossed over the side or you should disconnect your modem and back away from your computer. It's the only consistent thing to do.

HT: Marginal Revolutions

We Need a Manufacturing Jobs Counter

Actually we need a series of them. The first one would be global, the total worldwide number of manufacturing jobs. The second would be a series of counters of manufacturing jobs in the US. You would have the total number of jobs, the number of jobs that we would have if we kept even in our percentage of worldwide manufacturing jobs and how much higher or lower we're trending from neutral.

If (as I think is true) manufacturing jobs are shrinking worldwide, we should be losing jobs right along with everybody else, and in fact we're losing fewer than our fair share of manufacturing jobs, then not only would the counters illustrate that, they would put a stake in the idea that we're in some sort of manufacturing crisis caused by poor policy at the national level. I could probably cobble together such counters. The necessary script isn't that complicated. The only problem is I don't know where to get the raw data. Any economists out there want to help me out? If you don't see an update at the bottom thanking someone for stepping up to the plate, I still need the data.

Buy American

The ASI blog has a story on the stupidity of 'buy american' campaigns and by extension patriotic buying programs worldwide. They're mostly right but there is, I believe, one circumstance in which they are somewhat justified, when a domestic industry is taking real measures to improve quality, there is a lag time between improved products and regained customers. A patriotic buy program at that point would not be the normal boondoggle. The difficulty, of course, is that the number of people actually making improvements is usually swamped by the number of people claiming to make improvements but are actually just looking for a handout from the state. I put the following in their comments:

There is a circumstance in which 'buy american' does do some good though I doubt that the effect dominates. Some people do not investigate the quality of goods and tend to buy on reputation. The auto industry lost a lot of these customers as their reputation hit the toilet and Japan's autos grew in reputation. When US quality improved, the poor and newly monied driver tended to buy american at higher rates than the older, more afluent, more established money because the latter would buy on reputation and the former would do their homework.

A buy american campaign combined with real improvements in quality would speed up the resolution of a bad reputation that is no longer deserved. Thus a buy american campaign only makes economic sense if you have a parallel campaign to "make it worth buying american" among manufacturers and their employees.

Canada, the Oil Giant?

Alexander's Gas & Oil Connections is one of the industry's bibles. It covers who's who and what's what in an accessible way. While this is an older article from there, it contains an important gem that I was unaware of. The price for extracting a barrel of Canadian tar sands is now $12 per barrel. That puts them at a competitive price with Siberian crude. Congratulations, Shell corp., you've solved the upcoming energy crisis, at least when you can get the water requirements down.

The age of the article shows when it talks about the pricing problem of Saudi Arabia which can swing production to crash oil prices, dropping them to $10 at will and bankrupting expensive producers if they become too large a threat. This is no longer true as the Saudis are running at capacity now and will likely stay like that in future.

As soon as the water supply problem clears up and the dirtiness of the production problem is addressed, the US is going to have another oil power on its border, this time to the north and Canada will become the world's new swing producer, with the political power and responsibility that this position implies. The Middle East will still be important, but its importance will no longer be outsized because of its control of world energy markets.

The problem of getting sufficient water to the fields to inject them is not a trivial one and transporting sufficient water from other sources may balloon prices back up beyond economic viability but Canada has to be treated seriously now when discussing the oil situation. Tar sands (which occur in many nations besides Canada) have to be treated seriously, especially where they are combined with large sources of nearby water.

The very fact that Saudi Arabia can no longer peak its production and bankrupt high cost oil suppliers like the tar sands producers in Alberta is a revolution. In the coming years, we're likely to see a lot of fallout from that and a big positive for Canada.

Oil Alternatives

The boys over at FT putting on the blinders and putting forward the same old conventional response to any oil price difficulties. It would all be better if we just raised taxes, they sadly say. Hogwash!

Given its domestic oil output is in long-term decline, the US needs to focus on curbing oil demand, and here Mr Kerry has so far failed as badly as Mr Bush. He dare not substantiate the tax accusation by proposing a rise in the federal gasoline tax (all of 18.4 cents per gallon, though state excises usually double the total tax). He is soft- pedalling his previous call for tighter fuel efficiency standards, because he wants to carry car-making states. Yet only by showing that it could make do with less Opec oil will the US ever increase its leverage on the cartel.

There are several missed points here. The first is that the actual objective is to secure energy (not necessarily oil) supplies over the long term at reasonable prices to ensure that economic growth will not be energy constrained. Gaining influence over the OPEC cartel is, at best, a tactical goal in a larger strategic plan. It can be important, but making it the be all and end all of your energy policy is just stupid.

Decreasing demand and threatening to impoverish OPEC nations is simply not very smart geopolitics. Sure, efficiency gains should be adopted as they come online but there are several other ways to work the supply side.

1. Increase non-OPEC output: This can be done by providing security and technology to non-OPEC producers.
2. Reduce OPEC membership: If Iraq were to pull out of the cartel, it would strike a severe blow to the cartel's ability to control prices
3. Reduce transition costs to new energy types: Put simply, the hydrogen economy takes all energy inputs and gives them a common form that they can transfer to. This provides a much larger sphere of indirect competition to OPEC oil as a multitude of potential competitors no longer have to build their own distribution systems to come on line.
4. Technology spending to bring new energy sources to market: orbital and lunar solar, core taps, tidal generators, etc. are all possible new sources (and the list is by no means exhaustive)
5. Separate nuclear fear mongering from nuclear reality: nuclear pebble bed reactors that physically cannot melt down need to be separated in the public's mind from old style designs with different problems. Nuclear waste needs to finally start being put into permanent storage

But raising taxes is a much simpler (and simplistic) "solution" to the problem of OPEC. After all, it's worked so well for Europe. Oh, you mean it hasn't? What a surprise, that the EU's experiment in high oil prices hasn't turned the trick after all these years.

Mandated Telecom Competition

The Bit Bucket fires off at the idea of mandating competition in private telecommunication infrastructure. While that's all well and good, it's a blinkered approach to what has been a long-standing problem. We need to go back to the root cause to understand why the free-market community seems to be divided up between pro-managed competition and anti-managed competition factions regarding telecommunication.

The original problem is the monopoly that companies have to use public lands to string up their wires. Once you grant such a monopoly, all sorts of bad things follow and government attempts to undo the damage by 'mandating competition'. The long-term cure is to undo the monopoly and allow multiple vendors to string their cables wether copper or glass.

But building networks takes time. How do you provide relief from the bad consequences of monopolies sometimes granted over a century ago? I don't think that mandated competition is a great idea but as a phase in the transfer over to fully built out competitive networks, it's not an abhorrent transition phase.

The key in these transition phases is not whether they are good solutions, by definition transition phases must only be less bad than the previous phase and facilitate the next phase which will be even better. So what is the prior phase, what is the subsequent phase, and does this transition phase meet the criteria of a good transitional solution? It's this sort of comparative examination of incremental solutions that marks the difference between the practical politician and the impractical ideologue.

The pro-managed forces believe that this will be a useful stepping stone up from the current state and allow companies to get revenue and profit which will be plowed back into the creation of the parallel networks that need to end up being built. The anti-managed group thinks that we're going to get stuck here forever in this bastard middle ground between socialism and the free market whose closest historical antecedents are fascism.

In the end, I think the incumbent carriers and their technical tricks will drive their competitors onto their own networks. When a customer is getting service from a provider without a network, he's getting a lower class of service because he has to guess which provider is at fault with every outage. Is it the physical line provider or the network provider running over the line? But the anti-managed competition group gets a lot of good points in along the way and any managed competition plan should seriously address the problem of enforcing the movement off the shared network route to parallel networks.

I would suggest that a forced savings plan be put into effect for companies using shared networks and that money be put into private accounts and when a sufficient amount has been gathered, they virtual network companies are required to build out their own network.

Voting to Kill Canadians VII

National Review has a good article drug reimportation that goes into a lot of the political ins and outs of the issue. John Graham is absolutely correct when he describes the issue as a stalking horse for those who would want drug price fixing in US law.

One thing I hadn't noticed that I found intriguing is that lawmakers could quickly, and successfully establish the same effect on drug pricing that would occur by reimportation by making provisions that prevent domestic price arbitrage. Hospitals and other large pharmaceutical buyers have lower prices than retail pharmacists can get. Contractually, it is illegal for wholesalers to leverage that price difference and arbitrage away the price difference.

So why don't the politicians do it? Well, because if they did, the hospitals would find drug shortages and rising prices on their menu as volume based price tiering disappeared. It would quickly become very expensive to be hospitalized as hospital costs soared. The wrath of the voters would be upon any politician who would be stupid enough to try reimportation style legislation when everybody involved could vote in his reelection. If this were not true, it would be much easier to do this without an international border and treaties to get in the way and it would already have happened.

Invalidating certain contract clauses is not a violation of interstate commerce. Some states, for example, allow companies to disclaim implied warrenties. Others make such contractual language inoperative in those states. It would be no different for, let's say Rod Blagojevich to propose a bill to do just that for Illinois hospital contracts. The little guy who doesn't have the big negotiating power of Cook County, could simply go through a wholesaler instead of a retail pharmacy and bam! problem solved.

There would be a Republican Governor and Legislature after the next election.

Problem solved indeed.

Antitrust v Fraud

Minarchists don't particularly like antitrust law. There's no reason for it other than to punish bigness and all the bad things that companies get away with doing are either grossly destructive of shareholder value (selling below profit to destroy a competitor) and thus a violation of fiduciary duty or are achieved through fraud or other crimes which prosecutors simply do not take on because they are either afraid or bought.

Unfortunately, the regular prosecutorial system has failed us in the case of Microsoft and so I'm, reluctantly, not so mad about the recent EU antitrust decision as some business groups are. It's a case of a bad actor deserving what little punishment they get.

I don't disagree that Microsoft has been a godsend for an awful lot of people. But when their developer community was promised that they would have an even playing field with internal developers, it tilted the entire industry toward Microsoft. Later, when Microsoft admitted that this was a lie, people should have gone to jail. The amount of money that shifted into Microsoft's pockets from this one illegality, this fraud, far eclipses the sins of Enron and Arthur Anderson, both companies that could likewise point to doing an awful lot of good but were destroyed for their sins.

When Microsoft issues an operating system, there is a promise made to their developer community that Microsoft is a partner. You pay them money for the tools to develop your software and there is an understanding that both sides will work together to interoperate as well as possible. Microsoft has violated this trust in the past, purposefully changing their operating system so that major competitors in the applications space are embarrassed and incur extra cost to work around the roadblocks that Microsoft puts up. This is both a violation of contract and a fraud. When you know that if you challenge Microsoft in their application space, you run a strong risk of having the OS shift under you specifically to break your application, most people will be deterred from even trying. This is the major reason why when MS gets a dominant share in an application sector, competition in that sector dies.

The failure of government prosecutors to challenge Microsoft and force them to obey the normal rules is what has made a very good software company into a business monstrosity, a monopoly that everybody is scared of. But how do you fix things? Antitrust is an ill-fitting bandage, with its solution being break up the too powerful entity into smaller chunks that prosecutors can tackle. But nobody even seems to have the stomach to do that, just creating consent decrees and issuing fines.

The cure, in my opinion, is jail time the next time Microsoft engages its dirty tricks division. The lie of equal access to the Win32 API is already exposed and its developer community is drifting away to Unix variants because they now know that the deck is stacked against them on Windows. But until prosecutors gain the technical ability to quickly, and effectively prosecute criminal fraud cases when the fraud is conducted in computer code, we've got a major problem in the free market system.

Government Sponsored Obesity

Apparently, high fructose corn syrup is making america fat. Russell Robert's solution of banning the sweetener though is simply unacceptable. I'm quite confident that if we just lifted those nasty sugar quota limits, we'd have the problem licked in no time.

Replenishing Seed Corn

Part of the problem of the Iraqi reconstruction is that so much of what is wrong with Iraq is replenishing dangerously depleted 'seed corn'. While actual seed corn is also a problem, most of what I'm talking about is the maintenance and improvements that are both difficult to spot in the normal order of business and which dictatorships habitually try to make people believe are not important. The dictatorships do this in order for them to rob these accounts and create their 'miracles' of efficiency and national pride with the money. By the time the infrastructure becomes totally dilapidated, it can be decades later.

This is not unique to dictatorships. The most obvious example of this in the US is the collapse of the West Side Highway in New York City due to many years of delayed maintenance and other neglect. It took over a decade for NYC to climb out of its maintenance hole and some claim that it hasn't fully climbed out to this day. Certainly, the West Side Highway was never fully restored. The problem (and it's largely unsolved as far as I can tell) is how to make such normal maintenance tasks both visible and a sign of bad government when they start to be robbed?

Inflation and Information Costs

The Angry Economist has a thoughtful essay on inflation and what it actually means. One thing stuck out at me, the flat statement that people viscerally do not wish to have productivity lower wages so a Federal Reserve or like institution is absolutely necessary to inflate the currency and keep prices from deflating. This is an unusual economic proposition to say the least. People usually have desires for such abstract things as a unit of account not as absolute values which must be provided but as relative values which can be trumped by a competing desire that is worth more.

Now a central bank constantly runs the risk of mis-inflating and distorting the relations between debtors and creditors by inflating things unexpectedly fast or slow, advantaging one class over the other. This is a real risk that carries tremendous consequences as any student of the Weimar Republic would know. Inflation can lead to political unrest and war in the most extreme cases and often leads to poverty and destitution for people who are caught in its terrible grasp. But the defenses against inflation are a daily cost for all of us as we calculate whether to accept inflation risk or lay that off to some insurance agent who will either provide a lower return (like TIPS bonds versus regular Treasury bonds in the US) or pay off on an actual inflation policy.

So what is the nature of this fear of shifting things to a mechanistic system where wages drop but prices drop more due to productivity? Why is adopting such a system worse than living with the caprice of government officials who manipulate the wealth of the nation to fulfill their own ambitions? And how bad would the costs of those political decisions have to be before the nation says, enough, we'd rather have a static money supply and dropping prices? Could the next Weimar short-circuit the rise of the next Hitler by shifting to such a system? Or would worldwide mayhem and mass casualties really be a price people are willing to bear to preserve their inflating unit of account?

Zambia Learning to Play the Immigration Game

Apparently, Zambia is providing support to white Zimbabweans fleeing Mugabe's persecution. They apparently don't mind a white face if it comes with a reputation for producing a great deal of food and export income for the country.

The long-term benefits will accrue to those in Africa who are willing to embrace the talented who are politically inconvenient elsewhere and are willing to work hard and build a better future. But the entire continent will benefit as everybody sees how such an open policy pays off over the long run.

Real Life Rent Control

The original rent control statutes for New York City were adopted in order to soak up an excess housing condition during World War II. Everybody was off to the war and things were crazy so they adopted 'emergency' stabilization measures. It look's like the emergency housing glut is over. The key statement is "The only new construction in the area are developments with enormous, jacuzzi-filled mansions." If prices are booming, why aren't people building houses that are relatively affordable?

The problem is simple, builders don't trust the local politicians anymore. They've had too much stolen too often to trust that politicians will keep their word and allow them to charge market rents for the long haul. So they only build for the rich because the rich can always afford to buy and they are the least likely to be able to get the local council to rob the developer blind.

Romanian Busines R&D

Over at @rgumente, Dragos wonders at how small and medium enterprises in Romania can benefit from government research. I can recall one bit of government research that was highly productive (and we could use repeated doses all over the planet). It's an approach spearheaded by Newt Gingrich around when he took over the Congress and the Republicans were in full "Contract with America" mode. He went and gathered business leaders and asked them what were the legal changes that would best cause them to hire additional workers.

In a country like Romania where the law is a horrible mishmash of several constitutional systems, with unnecessary complexity, inconsistent application of the law, and outright pernicious regulation all over the place, a consistent program of identifying the worst of what is wrong with the law and the regulatory regime would be a real positive. Research that analyzes employment effects subsequent to changing the law so that people can measure and see things getting better is also another benefit.

Research doesn't have to be about new products or services to be of use to the SME sector. In the world of the Non-Integrating Gap, identifying and measuring exactly how the government is worsening people's lives and measuring improvements is a real service, no matter who pays for it.

Stubborn Economists

You can always tell when somebody is set back on their heels by having their argument challenged when their argument is a quantitative one and they resort to handwaving that such effects must be minor and unimportant. This is different from positions like the Laffer Curve, or my own argument that net numbers, not gross numbers of innocent lives lost should be used in morally evaluating Iraq from a humanitarian perspective. The validity of such arguments does not depend on the exact numbers. They are true across the vast majority of circumstances.

So is the argument that artificial hearts don't save lives one that is numbers dependent or does the lack of numbers just indicative that nobody wants to do the long laborious research process.

Long and laborious, hah!

Three google searches leads me to the Division of Transplantation, one phone call and a single transfer leads me to Laura Tidwell, who's off to get the real numbers and who suggests the following links for good statistics on transplantation while she's looking:

The Organ Procurement and Transplantation Network
USTransplant.org

The actual numbers (and how significant an effect this actually is) should be in an update at the bottom when I get the callback.

The only numbers in the mix so far are the 77 days of average use that such temporary artificial hearts are used for. Now this doesn't mean that you're on a heart for 77 days on average and you keel over. You might get a permanent solution of a donated heart in 40 days and that, according to Alex Tabarrok's calculation would bring down the value of the artificial heart by bringing down its use value.

If I didn't die last month because of a lack of a transplanted heart and I get a transplant a month or two later that will last me years, the value of the temporary solution is quite high and not quantifiable in such a simple formula as lifetime extended by permanent heart divided by lifetime extended by temporary heart. This is also why it's not unjust to pay a great deal more for gasoline off a tow truck that you call than gasoline at the gas station. You're buying two different things that have different values.

It seems odd to be arguing for marginal analysis with somebody who rights the marginal revolutions blog but here I am. Money spent on increasing donations versus research dollars on an artificial heart are not a proper comparison. First of all, organ donation encouragement needs to be looked at not in total spending but at the margin. How much extra fuss and expense do you need to go through for the next heart?

Also, you need to look at expenses for artificial hearts in a different way. The ultimate goal is a heart that will work fine without being chained to external machinery. If you can take intermediate results of that research and make a product out of them, all to the good. The income will help fund further research to a permanent solution.

What's happening is that you're comparing a production problem (increase heart supply via donation) with the rehabilitation of a waste product (failed intermediate steps toward the permanent, wholly internal, artificial heart) of the research program to create a substitute good for donated hearts. What's being protested is a method of fundraising for the research program.

Thus, even if the argument were entirely true (and I'm still waiting for that return phone call to get the actual data) it's a stupid one to make because the mechanism a research program uses to save lives versus a production level procedure is entirely different. It's apples and oranges.

Artificial Hearts Can Save Lives

Tyler Cown's Marginal Revolutions is generally a good read but I can't say I particularly like this article that argues against the idea that artificial hearts save lives.

The idea is that if there are only 2200 hearts made available each year, there are only 2200 lives that can be saved and only an increase in supply will increase lives saved. This has two problems with it, both of which rely on non-economic knowledge. First, not all hearts that are harvested can be used. It is quite possible that not all compatibility types are represented at any one time on the waiting list and if a heart comes available where there is no matching recipient available you either lose the heart or you stick it in somebody who isn't really compatible but will last long enough on their 'temporary' heart until a better one comes along (or the tissue rejection kills them). In other terms, for temporary artificial hearts to be useless, organ wastage has to be zero.

But beyond assuming wastage is zero, it also assumes that scientific advance is zero for all practical purposes. If you have a temporary artificial heart that extends your life 9 months, max and on month three, a new treatment for a permanent artificial heart or some other new advance comes about and you shift to the new technology, you would not have made it but for that temporary heart and it is proper to say that your life was saved by that stopgap measure. So, if a new technique can be applied to 10% of the donor waiting list, having a longer list increases lives saved.

The unfortunate reality is that too many economists make unwarranted assumptions and discredit perfectly good theories by spouting nonsense like artificial hearts won't save lives when a proper accounting of the facts would lead to the inevitable conclusion that they do (and by using the exact same theories, mind you).

Manufacturing Jobs

If I understand things correctly, the number of manufacturing jobs that exist worldwide is shrinking. Automation is killing them off faster than increased consumption produces them. If that's the case, I would expect that if you have x% of the manufacturing in your country, all things being equal, you'd lose x% of the worldwide manufacturing job loss. The political policies that a country adopts in a shrinking job environment would need to be adjusted to the reality of worldwide manufacturing job loss so if you would expect that 20k jobs would be lost in a given year but you lost 5k then that's a pretty good year for those 15k that didn't lose their jobs even though they normally would have. This is similar in principle to the seasonal adjustments in unemployment that are done to take into account that certain parts of the year have unusal numbers of hirings and firings.

So why isn't anybody doing this sort of adjustment? Even if you can't quickly get reliable worldwide figures, you'd think that they'd compile the numbers as they come in to get some sort of measuring stick to keep expectations properly aligned with reality. The truth is, it would be a public service. People, by continually hearing about the secular reductions in worldwide manufacturing jobs, would no longer be tempted by xenophobic rants. They would also make better career choices and fewer of them would be caught in the nasty position of losing a job in a declining industry where there is always a surplus of qualified labor in the field.

It's a mystery

The Nature of Electrical Markets III

I wrote last August about creating a new smart grid that would allow people to have quick access to pricing information and for smart appliances to have profiles that would adjust their consumption downward during price spikes. I had no idea until now that a first generation effort in just such a grid was happening right next door in Chicago. The first year's results are in and even with very primitive IT tools (phone calls and a web site you manually visit), people are happy with a smarter grid because it saves them money.

This success is likely to drive early adoption of a smart grid because it is a month to month reality, unlike the catastrophic scenario of teams of terrorists taking down the grid every few days. The methods of control are very primitive. Fortunately, the IEEE has a working group that is likely to be able to provide help, IEEE P1547 specifically P1547.3. The same sort of information that a central utility would tell a distributed power generator (the explicit target for P1547) it's time to turn on or shut off would be the same sort of information useful for a consumer to decide whether to shut down or leave running their various energy consuming appliances.

According to the minutes of the last meeting, P1547.3 is currently scheduled to come up for a vote in December of 2004. This puts the engineering of a smart grid IT system in the realm of practicality starting mid 2005. The smart grid is coming and the evidence is showing up in out of the way, practical forums like the IEEE.

More Sprawl Please

I've been noticing that more and more of my intellectual output consists of unlikely paired blog postings. By maintaining an eclectic reading list (which will not be my blog roll else you could do the same thing yourselves) I get to do things like combine a whine about libertarian hopelessness on land use issues over at City Comforts and the net negatives of fair trade practices to conclude, more sprawl please.

First, the City Comforts item, which goes on and on about the impracticality of libertarian land use policy, which is laissez faire. The article bothers me because I always find, in actual circumstances, such difficulties that pro-zoning and pro-takings people bring up are usually either unrealistic, or unjust. But if you enter into the trench warfare of example via example, you've given up deduction and entered into the land of inductive reasoning, a difficult and time consuming method of reaching a conclusion on large social policy goals.

The Adam Smith Institute's article on the economics of fair trade coffee and its negative effects left me feeling a bit warmer. Fair trade coffee is likely to create larger coffee production overall as new producers enter the market and the persistent overproduction of coffee will lead to persistently strong calls for subsidy and protection. The general point is made that the free market needs to be unleashed in a fit of agricultural creative destruction.

The combination of the two leads me to think about the destructive effects of sustainable growth ideology on the supply of agricultural land. If we're in persistent oversupply of farmland, the best thing to happen would be a growth in the incidence of developers buying up farmland and taking it out of production with new suburban or urban development. In other words, sprawl is the free market solution for too much farmland and zoning and other non-libertarian land use controls that are anti-sprawl are contributing to the barriers that 3rd world farmers have to lift themselves out of poverty and misery.

So shame on you, Seattle for your cruel and heartless anti-sprawl provisions.

National Movie Industries Don't Deserve Protection

Evan Kirchoff has an analysis of The Passion of The Christ from a movie business perspective. Key graf:

The stunning fact here is that Hollywood failed to notice that there was about a billion dollars (remember that the movie hasn't yet been released in the major world centers of Christianity: Africa, the other Americas) lying around for the taking. That demonstrates a mindboggling sampling bias in the market research of an industry whose interest in reliable data is at least equal to that of the Kerry campaign. If something this big can be completely off our sociocultural radar, then our radar sucks.

But it's not only Hollywood's radar. Is there a national cinema in the world that couldn't have put on this production? It's not like there's some language or cultural advantage to the anglosphere. This is the ultimate in foreign films, shot entirely in aramaic with a bit of latin sprinkled on top. Maybe Vatican City might have a natural language advantage but they don't have serious studios.

Every single movie industry that asks for protection from the big bad americans from here on out should have the box office grosses from The Passion shoved under their noses and asked "why aren't you just making films that are good?" They no longer have an excuse. The lie that Hollywood has seized the cultural high ground upon which it is possible to make movie gold is exposed as an utter illusion. The national movie making groups are guilty of being too much like Hollywood, not too little like it. The only thing they refuse to share is Hollywood's deep visceral desire to make movies that people want to watch. The only reason that Hollywood is the only film industry being beaten up is that the others are seen as not really mattering.

This too is a lie and a blind spot. I wonder which national cinema will be the first to prove it?

Episcopalians v Democrats: Where's the Money?

Democrats say that only the rich are benefitting from the 'jobless recovery'. Like every other real Church Episcopalians cut across all socioeconomic status but have traditionally been noted as having a healthy concentration of those very same rich people. So with Bush benefits flowing to them, you'd think their church donations would be up. Wrong, they're actually down and Midwest Conservative Journal keeps me up to date on these sorts of things (not being an episcopalian, I'd otherwise be out of the loop).

The Episcopalians claim that contributions are down because of the hard economy but it doesn't have anything to do with their actively gay bishop. Democrats claim that the economy's boom is only concentrated among the rich, a group that features numerous Episcopalians.

So who's right? They both can't be.

The Conceit of Frictionless Adjustment

The Angry Economist graciously responded to my commentary in an update on his post. Unfortunately, he doesn't quite get the problem.

There are two reasons to create a trade imbalance which impoverishes your people and enriches your partner. One is because you need to put an enormous number of people to work in order to avoid bad political outcomes and the second is to create such a preponderance on debt held by you that you can crash your partner's economy at will and extract a never ending stream of concessions to avoid that fate.

In either case the move requires economic adjustments, adjustments that are not cost free. I would suggest that the costs do not even ramp up cumulatively but rather are exponential in nature. The price of going from 3% unemployment to 8% unemployment is not pleasant but the price of going from 50% unemployment to 55% unemployment might just be revolution.

I want to be clear. I don't think that the right response is to engage in protectionism or otherwise engage in economic warfare. The PRC has numerous faults and pressure points that are not fundamentally economic. They are a society that trades extensively in 'face' or status and are thus vulnerable to non-economic responses. They have an execrable human rights record. They have territorial ambitions in Taiwan and elsewhere. They are vulnerable to a free flow of information.

The problem that the Angry Economist suffers from is a textbook economist conceit. Friction is difficult to measure and pops up in unpredictable ways. Economists tend to assume frictionless environments and that is usually an acceptable shortcut because friction is a byproduct of interactions and a small enough effect that it is usually swamped by the interactions that are studied.

This goes wrong when friction is, in fact, the main effect. I am suggesting that it is possible to create an attack based largely on friction, depending on the friction being cancelled out in conventional analysis until it is too late and you've achieved a position where you can create friction on a scale that causes a collapse.

When such a novel approach is adopted, it's like crossing over from newtonian to einsteinian physics. Small effects that are negligible in the old system become large enough that they can no longer be treated as close enough to zero to be ignored. In the economic system, I suggest that friction has become just such a factor.

Now how do you adjust to such economic friction bombs? What are appropriate responses? I suggest grin and bear it is only a small improvement on a repeat of Smoot Hawley and that we should look for better solutions.

The Bankrupt Borrow Money

It's an often unappreciated fact that a company entering bankruptcy proceedings almost always takes on additional debt during reorganization. If you've got no money and you aren't just going to suddenly cease operations, you've got to have an orderly process to resolve the situation so people still have to get paid for showing up to work and the people actually running the bankruptcy process have to get paid. So most bankruptcy judges will authorize debt as part of a plan to emerge from bankruptcy.

The United States of America is bankrupt.

We've got huge, insurmountable future obligations that simply cannot be paid with any reasonable future demographic scenario. The taxes necessary to theoretically make good on our "entitlements" promises would crush the economy and still wouldn't collect sufficient funds in the real world.

So, we need to reorganize. We need to adjust our future obligations while our credit rating is still good, and we need to transition entitlement programs to the non-entitlement category.

There's an election season coming up. I know that the Bush administration has a plan for entitlement reform. It's a tried and true formula that has been successfully used in other countries like Chile to go from defined benefit pay-as-you-go to defined contribution plans with private investments. John Kerry, during the traditional summer period of issuing position papers needs to present a plan at least as well structured. To duck and avoid the issue is more than just bad policy, it's a disaster for our country.

The results of timidity in reform can be seen on display in Donald Rumsfeld's 'Old Europe'. Government paralysis spreads with more and more areas being put off limits to reform, militaries atrophy and shrink in both size and effectiveness, foreign policies become little more than craven appeasement to enemies who are too stubborn to be overcome by what little leverage is left.

The US cannot fall into that mindset and survive the next century. Bankrupt though it is, it is going to have to borrow money. The only thing is that the only bankruptcy judge available (the one that approves such expenditures) is the US voter, a figure that has huge conflicts of interest. There is no good solution anymore. We've thrown all those away with delay. Now, it's just buckle down and do what's right or we will all drown.

Andrew Sullivan's Tax Challenge

Andrew Sullivan wants a war tax but isn't very happy about it and is asking for alternative ideas. Well, here's mine. But first, some facts:

1. The reason we aren't economically tanking right now is that Asia, especially the PRC, is irrationally buying up our sovereign debt for their own reasons. They are likely to continue doing so.
2. We have created a nightmare of unsustainable generational obligations (entitlement programs) that could only be met by banning the pill and condoms, recreating an America with an average family size of 5-6 kids. The only successful model for dealing with this sort of problem is to migrate to private accounts and spend a significant amount on transition costs (in our case, about a trillion dollars).
3. We used to have a 2% telephone tax to pay off the Spanish American War. It had a sunset provision of every two years. It was finally put to rest by the Gingrich Congress.

So we have two potential revenue sources, cheap borrowed money so PRC workers don't rebel against their communist masters and a 'temporary' war tax that is likely to last into the next (22nd) century. Since the PRC, Japan, and all the rest are going to distort our debt markets by bidding up the dollar no matter what we do on the war tax, I say let those countries who desperately need to keep their currencies low vis a vis the dollar fund things to get us out of our financial jam.

The PRC is likely to continue its policy of unreasonably swallowing US sovereign debt for the foreseeable future as it has hundreds of millions of workers to keep happy and it won't be able to keep up without an astounding amount of exports. It's running along the high wire without a net and can't afford to stop buying Treasuries.

Yes, the deficit will explode. But right now we're facing national bankruptcy and a little thing like war spending isn't going to do anything more than push the default date a little, this way or that. The big monetary killer is Social Security and other mandated programs. They need to be made as similar as possible to their private counterparts and partially or wholly privatized as quickly as possible.

As these programs become partially, then wholly privatized, the new dispensation will create huge new pools of capital to fund businesses and grow the economy, increasing national income and reducing our debt burden as a percent of GDP. Then, in a few decades when the great PRC transition is over and the PRC wants to unwind its dollar position, the US will have the wherewithal to redeem those notes as they will have been converted into stock market investments and will have created sufficient taxable wealth that redemption will be possible without collapse.

But what if we raise taxes with inflation at about 1% and Asia, especially the PRC committed to pumping up the dollar? Classic free market ideology that dates back to Adam Smith advises that we don't retaliate with a trade war. But at the same time, this is a purposefully distortive policy on the PRC's (and others') part. So how will we handle the deflationary distortion as we raise taxes?

Legitimate Reasons to Hate Outsourcing

The Angry Economist thinks that reactions to George Mankiw's endorsement of outsourcing are a litmus test of economic literacy. I think he's mostly right but is missing a significant point. Not everything is economics and a large portion of the discomfort with outsourcing derives from noneconomic sources.

A society is not all dollars and cents but is also based on social relationships that have value outside an economic system. The adjustments that must be borne in a dynamic economy create social costs and there is nothing wrong with being unhappy about the situation. The solution is in easing transitioning costs to new jobs and creating social support networks so that flexibility is enhanced. You can have a heart and assist transitions into new fields without being economically illiterate.

Another point that is appropriate is that outsourcing related job losses are not entirely related to comparative advantage but to an artificial economic intervention on the part of other countries to absorb surplus labor by importing jobs and exporting wealth to the US.

Now Adam Smith was right to say that if your neighbor is chopping off his nose to spite his face, it ultimately makes no sense to do the same. But the political interventions of others to lower their currencies and artificially maintain trade surpluses with the US result in more adjustments than would otherwise be the case in a normal free market international system.

These are unfriendly acts and while not a legitimate cause of war, should not pass by without notice and without reaction by our foreign policy establishment. The key is to keep the reaction outside the economic sphere so we do not chop off our own noses out of spite.

Regulatory Business Opportunities

I was all set to become outraged at Matthew Yglesias' endorsement of mandatory automotive breathalyzers but a nameless commentator made me smile with this, "You'll also need a law prohibiting sober people from hanging around bars at closing time and blowing into other people's breathalyzers for ten bucks a shot."

Yes you would.

It also made me think about the larger question of how many businesses out there today exist solely to provide the functional workaround to the nanny state? What is their GDP? What would be the estimated increase in wealth if the capital used up to provide such parasitical 'compliance/avoidance' businesses were put to more productive uses? Even among the free market true believers, is anybody toting up the full cost?

$10 for starting up a drinker's car at closing time, heh. And I just know how they'd do it to avoid liability, hand blown balloon sales.

Currency Follies

Romania is not in the Euro zone but lots of people use euros and you can open up an account in euros, which somebody did, and my wife wants $100 worth of euros transferred there.

It's interesting that people have been talking about euros becoming an alternate reserve currency since before the actual introduction of the thing yet, here we are years later and Citibank's online setup is unprepared for just the sort of transaction such a reserve status would require, the wiring from a dollar account to a non-euro country in euros. You can do it, but it requires a branch visit.

It's always interesting to see how business rules assumptions crop up unexpectedly in code. It would have been very easy to make the screen a bit different so alternate reserve currencies could be handled on-line but somebody didn't put it in the spec so the programmers never accounted for this particular use case.

Blogads rates II

Clayton Cramer is bemoaning his lack of blogads and I can understand why. His traffic is higher than the Chicago Report and his rates are lower then theirs but they have two ads and he has none.

His 1 week rate would be reasonable for my own advertising experiment if I had a budget and was prepared to properly measure the results.

Hey Argus! why not plunk down an extra $10 and grab some more traffic?

Unemployment's Dirty Little Secret

EJ Dionne's sounding a warning over free trade but unfortunately, he keeps the lid on much of unemployment's dirty little secret. Most companies are peopled by employees who look around and see the dysfunction, the waste, the abuse of resources that mark bad management. If they've paid attention any time over the last three decades they know that this means that this company is going to either:

a) go broke
b) be bought
c) have some sort of scandal which will result in a), b), or both
d) ship jobs elsewhere in an attempt to lower costs rather than change practices
e) most likely all of the above

In other words, the average american worker today has all the tools and inside knowledge necessary to figure out that he's living on a flood plain and the weather report section of the farmer's almanac doesn't look particularly good.

Some organize a new business while they're working for somebody else and move on. Others improve themselves and change careers to a well-paid service job that's in shortage, like nursing. Others arrange for their labor to no longer be sold as an employee but as a consultant. But the large majority just sit there and let the tidal wave hit them because they choose not to see the warning signs and, eventually, they have to come home and say that the factory's closing, not their fault really, as John Edwards points out in that stump speech, "they did nothing wrong."

In reality, the problem is that these workers did nothing, and that's what's wrong. If you're employed, evaluate your company as an investor would. If you wouldn't invest your money in your firm, you shouldn't invest your labor either. If you move to another money earning opportunity on your own schedule, you're going to get the best opportunity you can, quite possibly increase your family's economic position, and be much less likely to be caught in a family threatening economic jam.

People's labor investment decisions ought to be re-evaluated as often as their stock investment decisions. Such things can be made into an semi-automated process and need not consume people. After all, how did the day traders do, in the end?

The truth is that it is comfortable not to think about such things, that the company will give you a job to do for the next few decades. I wouldn't invest my money like that and I won't invest my labor like that either. And if this style of labor evaluation becomes prevalent, it will revolutionize the world (in a very good way). Companies dance to the tune of the financial analysts because they influence the company's access to life giving capital. But a company's labor force is life giving too, it's just being negotiated for the most part by a bunch of analytical incompetents. It doesn't have to be.

blogads rates

I wonder how do people set up their blogads rates. Is there some sort of rate guide? Is there data available? Would it be worthwhile to compile something independently by parsing the rate sheets and the blog traffic in TTLB?

Inquiring minds want to know.

Spend, Michael, Spend!

Will spendthrift Michael Jackson put control of the Beatles catalog in the hands of a bank (and then straight onto the Internet)?

The phenomenon of the rich throwing away their wealth is very, very old but its virtually ignored by the "rich are getting richer" crowd. People do throw their money away. Inflation and heirs eat away much of the rest.

Then again, what I really would like to see is the Beatles Catalog hit the iTunes Music Store.

Blogs Buying Blog Ads: Why?

Instapundit is one of the blogs you just have to study if you are going to have any hope of turning serious money as a blogger. He's got the links. He's got the circulation. Analyzing the Instaman's methods is all to the good for the aspiring blogger/capitalist. But one thing on that site puzzles me. There's an ad there for another blog, the Chicago Report. Now this is a pretty good blog in itself but its got nowhere near the traffic levels necessary to bring in the kind of income that would justify spending hundreds on advertising on Instapundit. It would be like advertising your local pizza joint on CNN.com. Sure, you'd get some traffic, but would that make back the money you laid out on the ad?

Instapundit's blogads price sheet is one link away from the front page and is as follows:
1 week - $375
2 weeks - $600
1 month - $1000
3 months - $5000
1 year - $20000

The Chicago Report ad has been up at least a week so they're putting out hundreds, maybe thousands of dollars to get...

twice as much traffic as I get for free.

As of this writing, I've got 3500 visits this month and they've got 7000. You can't get much money for that sort of traffic and Chicago Report's Blog Ads price sheet shows it:

1 week - $20
2 weeks - $30
1 month - $80
3 months - $200
1 year - $1000

Amazingly, Chicago Report does currently have two ads running, both decent blogs that are either getting comp'd or are advertising as a vanity project.

I don't understand the idea of spending hundreds of dollars to get back tens. Chicago Report has good production values, good writing (though I do disagree with some of it, just look at their comments) but I can't make sense of their business plan.

So what am I missing?

No Chairs, No Sales

Virginia Postrel is lamenting the loss of chairs at a Borders she used to haunt. It's not that difficult to issue a complaint that will carry weight. Just let a manager know that...

No chairs, no sales!
[[chant to the cadence of no justice, no peace]]

They do care about this sort of feedback, especially if you let them know you're blogging about it so it's not only a customer incident but a press incident.

Light Morning Blogging

We're off to set up a business banking relationship. Tenacity is the key, I think, to a great deal of success. In the end, we did not abandon Citibank but found a reasonable person within it and they're just a bit further away.

If you're in need of a business banker and you're around Oakbrook, IL, you won't do much better than Brandy Sladek.

Where are the Pharma Corporate Raiders?

The New Yorker has an intriguing article on Big Pharma's pipeline problem. The idea is that R&D doesn't scale (though how he would explain 3M is a mystery) and that pharmaceutical firms should adopt the current Hollywood studio system, becoming distribution houses and money suppliers.

What really puzzles me is that if it is true, we have a classic case of the parts being greater than the whole and dismemberment would lead to huge profits for any corporate raider willing to take on the challenge. So why aren't there any doing just that?

That one's a real head scratcher.

Sustainable Free Market Rail?

And they said it couldn't be done. Apparently Thames traines are running in private hands and subsidy free. This occurred in six years. On May 1, 1971 Amtrak started service with the same goal in mind, private rail providing unsubsidized service. It's been 32 years and they still haven't made it.

When the inevitable happens and Amtrak, once again, asks for an additional bailout, Congress would be more than wise to give the Thames people a consulting contract to work out the kinks in the Amtrak business plan, and perhaps steal away a few good managers as well.

HT: Live From the Third Rail, Transit Blog

Should America Refuse a Free Lunch?

The Economist advocates Let the dollar drop. Sure, no problem, but what to do about asian economies who, not having learned the proper lessons from the Asian currency crisis, are repeating their mistakes by propping up the dollar and lowering their currencies' relative value?

To my mind, this evokes the idiocy the Japanese perpetrated on themselves by purchasing inflated US assets in the 1980s. Buying up Rockefeller Center looked like a great move back then but six years later they sold it to locals at half the price. So, this time they prop up our currency, give us lots of free stuff in exchange for over-priced debt at record-low yields. And when the bubble breaks and they are holding paper that's lost a great deal of value and the US quickly gets its fiscal house in order, what then? The problem with the bubble wasn't the bubble, per se. We had our own problems with the savings and loan bad debt crisis in the '80s. The problem was essentially a cultural one, an unwillingness to face the shame of failure and just get rid of the consequences of past foolishness. In Japan and the rest of east Asia there are still leftovers of their bubbles. The US has long since moved beyond the S&L failure as debts were settled at a loss and assets liquidated and moved to hands that could turn a profit on them.

But other than making sure that the US economy is supple and can recover from the inevitable snapping of artificial trends what, exactly, is the US supposed to be doing? Its currency is manipulated up, its free trade ideology and international obligations block it from restricting imports. Without increased stimulus, the US economy would today be in a deflationary cycle. And what alternate stimulus is currently available besides deficit spending? We're pretty maxed out on tax cuts. Interest rates are at record lows and inflation is barely 1%. What policy option is left except spending like a drunken sailor and preparing for the downstream consequences as best we can?

GWB: What Harvard Does to Conservatives

A good article on the Harvard Business School and how it has left its mark on President Bush. It's an interesting reminder that anybody who declares that GWB is an idiot is also declaring that Harvard graduated an idiot, that a Harvard MBA can be bought, that influence can be peddled, that maybe others who have come out of the program are similarly unqualified. This is the kind of nasty innuendo that I suspect has played its part in forming GWB's attitudes towards affirmative action and the 'soft bigotry' that comes with those programs.

It's informative and you should read the whole thing as it not only gives insight into the President but also the entire class of Harvard MBAs who run so many of the world's premier companies.

Measuring the Deficit

The Columbia Journalism Review blog is rapping knuckles at the NY Times over how they're reporting the federal budget deficit. The NYT was using a straight dollar figure unadjusted for inflation, the CJRB said that as a percent of GDP was a better measure and showed that we are nowhere near the peak year of 6.0% of GDP.

I very much agree that %GDP is the relevant figure. A credit card bill that would ruin me might be the normal run of the mill figure for Paris Hilton or Donald Trump. What you make influences how much debt you can take. But the CJRB misses a story. The figures that CJRB uses exclude wartime years. But you only do that during peacetime. If you're in a war, you have to throw in the debt figures for WW II and other war years. We didn't get to over 100% debt to GDP in WW II with under 10% deficit to GDP figures.

We thus get back to the big foreign policy question of the day, are we at war. The CJRB does good work by chiding the Times for its dollar deficit reporting. But it has its own bias showing when it implicitly throws out wartime deficit figures.

What's Your 'E' Point?

Thomas Nugent has a nice Laffer Curve analysis up on NRO. In between taking whacks at Kerry for being unforgivably retrograde in economics, he made the interesting point that the optimum point, marked 'E' on the curve, differs from individual to individual.

So why isn't there some sort of quiz to find out your individual 'E' rating? What factors go into figuring this out?

With all the silly and inane quizzes floating around on the Internet, you'd think someone would have put one together on this one. As far as I can tell, you'd be wrong.

Government Business Limitations

Dr Eamonn Butler writes the following over at the Adam Smith Institute Blog:

The problem in aviation is that European airports are mostly owned by the state. And we're right to be concerned about how state money is used: we've had enough of governments messing up markets by subsidizing things in order to buy votes. So we need strict rules against subsidies.

This is dead on. In economics, if a manager provides a payoff to a customer to the detriment of the shareholders, this is a breach of fiduciary duty and a crime. A government businessman's duty is to provide a service to the benefit of the public. But if he lowers prices, is it a subsidy via the treasury? Is he doing it to run a sale to make a greater profit on higher volume? You can't tell the difference and the government businessman has all the incentive in the world to please key electoral blocs with subsidies and give difficult to prove discounts to connected special interests. This is a systemic failure of the government run economic model and I wish the people on the other side of the Atlantic all the luck in the world in their efforts to privatize their airports.

Ignoring Ceiling Prices

You can see some of the most uneducated analysis arising from the simplest mistakes. The geopolitical effects of resource prediction cannot be done properly without analyzing economic ceiling prices. A sad case in point is this analysis over the coming US/China war over oil.

The truth is that the entire article depends on the idea that there are no major new supplies of oil available and that the nations of the world, especially superpower US and the rising economic giant PRC, are on a collision course due to that competition. It is a patently false analysis because it completely ignores huge energy deposits that become available at higher prices, potential competition that constrains ME nations in their capability to raise prices.

The competition between the US and the PRC over influence will exist. It is unlikely to produce war as long as the PRC is content to purchase its energy and not invade nations to steal it away. The idea that it is necessary for the US to use its geopolitical muscle in order for the PRC to behave rationally and invest in a diversified energy stream is both patronizing to the PRC and would be a foolish waste of US resources.

The US, if it needs to make an effort at all, needs to work towards making the price of abundant alternative energy systems fall below the market price of oil and have the oil age end at a relatively low energy price. Which alternatives these will be is unclear but striving mightily so that only we have to kowtow to dysfunctional arab oil principalities is not a positive outcome for the United States.

Deflation: Now or Later?

A very informative piece in the Economist outlines the US Federal Reserve's dilemma. Low inflation has led to extremely low interest rates and asset prices, especially housing, are moving up. A housing asset price boom could set the US economy on a dangerous path when it bursts, sending us into deflation. But with inflation so low, the cure for an asset boom (raising interest rates) could send us spinning into a deflationary spiral right now.

The Economist ends up suggesting a small interest rate hike. I would have to disagree. If the problem is people overextending their debt then that is the problem that should be addressed. The story of the seven fat years and the seven lean years is instructive. People who refinance now and take their savings in payments in order to increase their equity and get out of debt are the smart players in today's economy.

If you're out of debt, you're mostly out of trouble in a deflationary economy. That message has to go out, it has to go out strong, and it can be done without changing interest rates. Both the Presidency and the Fed Chairmen have very loud bully pulpits. It would be highly preferable for them to use those instruments, to encourage savings and investment and debt reduction instead of cranking up the interest rates when inflation is so low and seems poised to drop further.

Immigration Cost Voodoo

Dana Rohrbacher is bringing up the health care cost of illegal immigrants. He's right to worry about the issue. It's a problem with illegal immigrants as it is with every other black market worker. But the cure for much of this is to bring these workers out of the black market. If you're being paid in cash, your total tax contributions to the system are zero. But if you are pulled into the system, you do pay some taxes. You contribute, and in that contribution lower the problem of uncompensated healthcare.

The problem of uncompensated healthcare given to illegal aliens is real. The cure needs to be more than just merely cutting a check from the Federal Government to the locals who are currently footing the bill. This idea can use a lot of improvement.

Economic Ignorance in the Medical Field

I'm on a random blog journey and I stumble across a clueless med student:

After every question, I just wanted to shake them and scream “Single-payer!” (Yes, I have a slight flair for the dramatic.) And I’m not trying to be idealistic. I realize it’s not a golden bullet. I realize health care reform is politically difficult. I acknowledge it. Fully. But how can doctors continue to work on some sort of patchwork system—like suing the insurance companies, like the CMA did with the RICO lawsuit—but not fight for a long-term change? People seem like they’re willing to fight their own fights—but not fight for medicine as a whole, as well as their patients. It almost seemed as if the doctors were more willing to deal with the hassles of HMOs (which they cited as “the reason you never get to see your kids”), but aren’t willing to try another solution, even when it was staring them in the face.

...

But honestly, how much of this “doctors are barely getting by” mantra am I supposed to believe? I’m a medical student, and at the same time, still a member of the public. A lot of the questions discussed “How do we get patients to realize that doctors are hurting,” and “Universal health care does nothing to address low incomes for specialists.” The malpractice issue aside, who’s struggling out there? And I mean struggling. When you’re “struggling” to make car payments on the BMW or the 5-bedroom house, you don’t count. You can live a perfectly happy and satisfactory existence with a measly Honda and cheaper mortgage, can’t you? Isn’t it more the expectation of a certain level of income that’s the problem? Not the absolute income, but the level relative to one’s societal expectations as an all-important doctor? (Sidenote: would specialists and/or general practitioners not be willing to take a pay cut to have reduced administrative workload, increase the time they’re actually practicing medicine, and possibly increase the time with their families?) Maybe it’s my societal naivete of what it’s like to have children and mortgages and responsibilities greater than oneself?

There are two kinds of economic stupidity going on here. First, there is the infatuation with the idea of single payer health systems. I left the following in comments:

"how could any other nation be insuring everyone, have higher general health outcomes, and spend less?"

For the FRG, it's very simple how they manage to get more by spending less. They're using involuntary servitude.

The health ministry has at its disposal approximately 90,000 conscientious objector draftees that it only pays peanuts for. In fact, the German military wants to end the draft but is being stymied by the health ministry because they can't afford to run the health system by paying people to do it without a prison term hanging over their heads.

A lot of public systems advertise low costs and good service but they simply do not deliver. In former eastern bloc countries the system was that the service quality is terrible unless you bribe people. France demonstrated this summer how fragile their health system is with 15,000 excess deaths due to poor healthcare planning running into generous vacation schedules.

The list can go on and on but it all boils down to a double standard. The current system is a mixed free/state system but is labeled free market healthcare and is looked at in its reality, warts and all. Public systems, by contrast, are examined in their platonic, idealized glory and it's relatively rare that you get to see the reality of poor service, slowed innovation, and unsustainability without external support like those poor german draftees.

You can bet dollars to donuts that the pay difference between a draftee's salary and what a free market worker is not included in international price comparisons for health care. Fantasy comparisons like that dominate the discussion of free market v. single payer solutions.

Single payer health systems all break down in different ways but the ultimate truth is that they all break down. In the FRG, it's involuntary servitude and a groaning budget. In France, it's dead seniors. In Canada, it's discreet trips across the border to relieve pressure on long lines for care. The symptoms vary, the disease is the same, government intervention in medical care.

The second piece of economic inanity is a complete lack of understanding of opportunity costs. If you stop your education after four years of undergraduate school, you get to start earning money. But no, doctors go to medical school instead and lose the opportunity to have tens of thousands in income while gaining career experience in some other trade. Not only that, but they usually pay for the privilege without benefit of having the money so end up leaving medical school not only without the money they could have earned but with a huge mountain of debt besides.

Then they go and get a job as a resident, a job that could not be done outside an educational program because it would be illegal. The hours worked, the pure grind would lead to much higher salaries if the job were done by people negotiating in a free market. Thus there are more tens of thousands of foregone income. Depending on your specialty, you could be losing 6 years or 10 years off your earning potential because of your career choice.

Now, a certain number of people will enter the field because they have a vocation and want to help people. But not all such people become doctors. Some are orderlies, nurses, pharmaceutical or medical researchers.

For the sheer lost opportunity, risk and responsibility, you can't beat the doctor. To get enough of them, you have to pay them well. The consequence of squeezing doctor incomes is that people leave the field. The payoff is no longer worth it and they won't pay for medical school for their kids, they don't advise others to get into the profession, and many find other things to do than medicine. If the doctor wanted a Honda and small house lifestyle, he could have had it with better hours, more respect, and and easier lifestyle as a nurse.

HT: Suburban Guerrilla (not what you think)

US Cell Phone Madness

It turns out that T-Mobile will give you a new phone if you extend your contract. US cell phone systems are economically different from just about every other country. You pay to receive calls as well as make them and they charge an arm and a leg for service to pay for the phones they are so heavily discounting when you sign up. Now I know. Get a new phone every year as long as I'm satisfied and either replace my beaten up one or list it on e-bay.

What Rush Doesn't Get

On my way to the hospital today, I was tuned in to Rush's program and I caught him complaining about how he couldn't understand how adding a benefit could slow down the growth of government. The analysis is simple if you measure the right things but there's a great deal of double counting in the current medicare debate and I think that's the source of Rush's confusion.

Coronary bypass surgery costs somewhere between $22k and $24k. If a senior has heart disease, the US government is currently on the hook for it and pays for that very expensive operation. On the other hand, a lot of those operations can be eliminated by the use of drugs, which seem to cost an average of $220 a month or $2640 per year. That's a considerably cheaper solution, especially when you consider that in the 8-9 years you're putting off an operation and saving money, some seniors will die of other causes (reducing expenses) while among the surgery crowd others will need a second operation because their arteries clog again. For seniors, there's a fairly high economic value to not front loading your expenses.

What the government does by putting taxpayers on the hook only for the more expensive operations is they encourage the wasteful use of the surgeon's knife rather than the more efficient pharmacist's prescription. This is a cost distorting incentive that has been around since the pharmaceutical revolution started to kick into high gear and pills started to heavily displace operations in normal medicine.

Where fiscal conservatives get tripped up is that while they correctly estimate growth in the government expenditure of pills, they do not believe that any cost savings will be coming down the pike on medicare funded surgical procedures. Cost savings have proven illusory before but the entirely natural reluctance of patients to go under the knife will lead to a pretty big uptick in medical (pill based) management.

Primary care physicians will also have an incentive to limit their surgical referrals. Surgical money does not go into their pockets, but into the pockets of the referred surgical team. There is no incentive for over referral, in fact, there is a negative financial incentive to do so.

Rush isn't alone in mistaking the costs. What I believe is going on is that the Bush people decided that Medicare could better serve its customer at less net cost while simultaneously becoming more compatible with future privatization by adding the drug benefit. Having that plus plan choice plus HSAs makes the bill that was signed into law a long term win for those who want a smaller government.

The Limits of Economics

This voluntary cannibalism thing just bugs me. Besides posting on the idea of human ownership, I'm bothered with the idea that ultimate ends are a proper study of economics. Economics is essentially the science of resource allocation. But ultimate ends are not resources, only means are.

I started off by leaving this in comments to the economics of cannibalism story:

Another argument is that economics does not apply to the subject. Economics is the rationing of resources. That a person's time is a resource is fairly well established and subject to the rules of economics. That a person is a resource to be disposed of according to economic rules is not established in the least. Are people means to an end or ends in and of themselves. If they are ends, cannibalism cannot be properly the subject of economics.

People's acquisition and expense of resources are all in service to an ultimate end and that end, when traced back as far as it will go, is usually some pleasure or usefulness to a person or persons. Thus, much of what is economically analyzed as ends are merely subsidiary ends, means to a greater end. There is no greater end than people, no means that they can be properly spent using purely economic analysis. This is why we don't have widespread human medical testing, for example, even though it would save countless lives and accelerate medical progress. Societies (Nazi Germany, Imperial Japan) who organize such programs are viewed with horror because they have transgressed into treating ends as means.

The entire premise of the thread is just wrong. Cannibalism has no economics.

There is a thirst for seamless explanations. It partially explains the enduring appeal of the communist as opposed to the capitalist enterprise. Capitalism is an economic system that tends to be paired with certain political and social systems. Communism is a seamless garment that explains politics, economics, and social relations. But the difficulty of creating such a seamless construct, a theory of everything, has meant that so far nobody has succeeded in coming up with such a thing. If somebody ever did, it truly would be the end of history. There would be nothing left to fight over.

Economics is an important science. But unless you turn it into a religion, it does not answer all of life's questions. It certainly doesn't answer the problem of voluntary cannibalism.

Virtual Currencies

101-280 points to a fascinating new service in Massively Multiplayer Online Role Playing Game (MMORPG) add ons, a foreign exchange market. Right now it's a little acorn but it's likely that low commissions and specialized facilities will permit this initiative, or a future competitor, from unseating ebay and the other general goods online markets from their dominance in the virtual goods trade.

Essentially, the trade in virtual goods and currencies is a highly specialized form of trade in entertainment goods. The essence of buying a korean soap opera or a 100k purchase of Star Wars Galaxies credits is the same. It's just that the liguidity of SWG credits, being produced as well as consumed, is much higher and the follow on trade will be much higher because, unlike the soap opera, SWG is an artistic endeavor that is a collaborative process. People not only consume the art, as art, but also play small or even large roles in creating it.

There does not seem to be any enforceable legal restraint that MMORPGs can do to prevent such virtual goods trading. The only thing that I can see that would handle the game balance problems that such trading would create would be to make a more realistic economic system with a high charity component that fades out as you gain resources, especially if you gain them quickly. Poor and new players get lots of things out of pity 'on the house' so to speak. But accumulate treasure and everybody is nickle and diming you on everything, the tax man is taking a hefty chunk, and things get expensive. It would be a way of asserting balance without going into motive, why did xyz player give up their incredibly valuable weapon to Mr. nondescript new player? It becomes irrelevant as an army of merchants, beggers, toll takers, and other NPCs descends on the newly wealthy like a piranha school on a bleeding cow in the Amazon.

Computer Lifespan

I spent a great deal of today shopping for a new computer for my parents. They have been using my old Power Macintosh 6100 for years and it's finally gotten too painful, even for them. Put it this way, it barely can run AOL 4.

My father has always been a photography buff and my mother has always loved photo albums so I can already tell that iPhoto is going to be a real hit. I was surprised, though, at some of my father's questions. He wanted to be able to pull stills from a movie, to burn his own DVD, was interested in listening to an Apple Store lecture on GarageBand. I've known him all my life and my mom's known him longer but I think we were both surprised at the extent and variety of his interests.

I think that a lot of older people are like that, with all sorts of ideas percolating in their heads but no accessible way to get them out. They have no patience for the technical minutiae of getting a computer to work, they just want to do what they want to do with a minimum of fuss and dependence on outside help. I've always known that the demographic existed. I just never figured out how much my father was a member...

A Check in a Cereal Box

I've never seen anything like it. A valid check, a valid account, made out in the amount of $6 attached to the inside of a box of Trix cereal I bought for less than $2.

It's for children's admission to a movie promotion (Looney Tunes: Back in Action specifically) but it's a real check. Private currency schemes, in the form of coupons, points programs, etc are getting more and more sophisticated and likely to get more convertible as time goes on. This is a new one for me though. An honest amount of negotiable cash stuck in a cereal box at a value level that exceeds the purchase price of the good.

A check.
Astounding.

Price Ceiling Analysis

I'm fascinated by the concept of market price ceilings. These are things that absolutely ruin a crisis monger's day. For instance, oil has a price ceiling. There are abundant sources of oil in Western countries, most notably Canada. The price to extract this oil is high which is why most of it stays in the ground. The price ceiling for oil is the extraction cost of this Canadian (tar sand) oil plus the initial cost to set up the extraction machinery. But Canadian deposits are not the only ceiling because they are not the only alternative source. A large variety of substitute sources could make up for politically dubious OPEC oil. The lowest abundant alternative energy source price ceiling is the maximum price that an OPEC oil embargo could damage us if the Middle East spun completely out of control.

There are people who don't often get many headlines who work on lowering these price ceilings. Some are in solar, others do wind turbines, others work on coal gasification, still others in the Canadian oil sands field. Every time some guy in a lab coat goes eureka and drops the price down a bit on extraction, transport, or a unified distribution system (commonly known as the hydrogen economy) the clock ticks down on OPEC's viability and the necessity of excusing all those nasty political and social practices in the middle east.

The horrible part about price ceilings is that they are the orphans of the news business. They don't sell, they're complex, and are hard to pick out when they show their influence. There's not a lot out there.

One of the big low grade threats to the world is a threatened lack of sufficient, cheap, potable water. A January 12th item from Austin Bay gives an intriguing account of an unusual water deal and an accidental illustration of how to spot the hints of a price ceiling at work.

January 12, 2004: Water is a big strategic issue in the Middle East. It is far more valuable than oil. Israel and Turkey recently reached a very telling armaments agreement. Turkey will ship Israel millions of liters of fresh water in exchange for Israeli arms and munitions. The water will be shipped in ocean tankers from Turkish to Israeli seaports. Here are some of the specifics as reported in the international press: The water for arms deal will last 20 years. Each year Turkey will send Israel 50 million cubic meters of water. Israel will build several large water tanker ships to carry the water. The water will come from Turkey’s Manavgat River. In return, Turkey will receive Israeli armored vehicles and air force technology. Both nations see this as a “win-win” deal. Here’s a thought, which may seem farfetched at the moment, but check it out in five years: One of the main reasons the Israelis are reluctant to reach a deal with Syria about the Golan Heights is because the Golan is a key regional water resource. If Syria moderates politically, the reliable supplies of water from Turkey may give the Israelis more “flexibility” on the Golan issue. (Austin Bay)

Do you see the price ceiling at work? Israel's water needs will grow over time. Everybody's water needs are growing. So why is this deal time limited for 20 years? A sudden cessation of water delivery would impact the entire country. Cities have been abandoned for lack of water. Furthermore, flexibility on the Golan due to alternate Turkish water supplies would make the bind even worse as the net effect would be to put Israel in a spot with more people and even less water than today. The only way this makes sense is if the guys in the lab coats are making enough progress that 20 years from now water will be cheap enough not to worry about river supplies or container ships from Turkey. The water will be worth less than the weapons by then, calculates Israel, so the deal terminates.

If water desalination plants grow inexpensive enough for general use, a great number of malthusian disaster scenarios go up in smoke. Water wars generate conflict not only all over the middle east but even in the US today. If piped, desalinated water sufficiently drops in price, agricultural usage will no longer cause nearly as much environmental conflict with green activists (and people have almost come to blows as recently as the Clinton administration on this issue).

Discussing Hitler

Bruce Bartlett's current NRO article on Keynes tackles the problem of seriously discussing Hitler as an actual leader with policies that had nothing to do with the Holocaust and the human rights. He does it fairly well though I disagree with his conclusions on Keynes. Frankly, if you say your theories are more easily adapted to a totalitarian state and that doesn't creep you out, leading you to reconsider your economics, this is pretty good evidence that you have an insufficient aversion to tyranny.

I don't know whether it's correct to say Keynes was a crypto-fascist, or even wise to debate the subject except as historical biography. What I do feel is important is putting Hitler into context as more than the monster who killed so many, jews and non-jews.

Obsessive focus on this aspect of Nazi Germany hides the fact that there were other things wrong with Hitler's rule and empowers Hitler revisionists who take Nazi hype on economics and social policy (outside ethnic policy) as largely true because critiques of Hitler keep getting get hijacked by the human rights victims and their families. Other aspects of the regime have been insufficiently critiqued which is a shame because there were lots of other things wrong with that regime and we shouldn't limit our lessons learned from the debacle just to "don't commit genocide".

The Costs of Socialism: Robbing Peter to Pay Paul

Communism was always something of a shell game. They would rob from 10 areas and dump their resources into a showcase, highlighting the glorious achievements of the system while everything else fell apart. The area to be preferentially supported shifted fairly rapidly and, in the real world, there were always several emphasis areas and many more neglected areas. This shell game worked for quite some time until people noticed that despite all the great progress, everything seemed to be on a downward slope in comparison with capitalist countries.

The real question of today isn't whether Soviet style communism works. It clearly doesn't. It's whether the 3rd way, euro-socialism middle ground is infected with the same style of robbing Peter, John, and Mark to pay Paul shell game economics. Follow the link to this article over at Samizdata to see a sad portrait of how its happening there too. EU science is suffering vis a vis US labs and there is simply not enough money to actually equalize it but we can all make bleating noises about a crisis and temporarily we can raid funds from other budgets to catch up in a crash program... until the crisis is gone... until an army of budgetary termites robs from the science budget to pay for their crises.

Guest Worker Assumptions

Those who are opposed to the Bush proposal claim that employers will preferentially hire illegals by offering below market low wages and, when there are no domestic takers, will hire foreign workers at the low price, swelling the ranks of the unemployed mostly among the unskilled.

There are problems with this scenario. It assumes that:

1. People prefer unemployment to minimum wage jobs
2. Nobody will take these foreign workers and hire them away at slightly higher wages arbitraging the wage rate and causing the initial employer to actually lose money.
3. No organized labor group will gather and fill and leave in quick rotation any jobs offered by employers who are taking advantage of the system, again, costing employers money.
4. There will be no safeguards against discrimination in favor of foreign temporary workers.

So, if people can't make a buck exploiting these temporary workers, the new national job board better matches the unskilled with local native talent, and watchdog groups keep an eye out to make sure that this remains the situation, what objections are left?

Wikipedia: Health Savings Accounts

Wikipedia is a fantastic resource, if for nothing else, it allows you to put in your own subject matter expertise, or at least point out areas that need expanding on. I just engaged in a bit of the latter by creating a new page on Health Savings Accounts. Now I'm still reading the bill but in other analyses I've been reading, I've found a lot of fans and not too many detractors (at least of the honest variety). The only people who are complaining about HSAs were the same people who have been trying to knife MSAs (HSAs more limited predecessor) from the start.

They look like a winner and deserve an entry explaining them so I just add a link. Hopefully someone will come along afterwards and put in some text. Others will come along and improve it, and thus Wikipedia gets improved.

In the Long Run the Kids Are Alive

"In the long run, everyone's dead" is probably the most famous, fatuous, evil phrase that John Maynard Keynes ever uttered. He used the phrase to great effect to dismiss free market concerns that his nostrums, in the long run, would lead to disaster.

The problem is that while Keynes is dead, the next generation has to live with the consequences of excess death, substandard capital stocks, and a burning desire of Keynes' disciples to do it all over again. That's what he unleashed into the world and it's not a pretty picture.

This is not to say that short term action that would have negative long term consequences if continued is always a bad idea. There are plenty of projects that build things up that are worth saddling the next generation with some debt. Examples might include land purchases like the Louisiana purchase or a war. You don't want to do it too often but there is a sustainable pace.

The difference is that with Keynesian short term focused economic management, there really aren't too many long term positive effects. You get economic sclerosis in the form of eventual stagflation and a difficult mess to clean up. Worse, you get an intellectual atmosphere of kicking the can down the road, front loading benefits and back loading the price to pay. It's a set of bad habits that have jumped party boundaries because the political career benefits are just very seductive.

Good News About Sugar

With the passage of CAFTA we're going to start seeing sugar come down in price. For those of us who have had the privilege of drinking a Coke or Pepsi made with sugar instead of the ADM dreck called high fructose corn syrup, this is welcome good news.

It's likely that clothes prices will also go down, and human dignity will go up as central americans from the relevant nations empower themselves over the next decade to lift themselves out of poverty by the sweat of their own brows.

But for me and my sweet tooth, the most visible payoff will be the reduction of HCFS in my diet.

I'll probably post a bit more serious analysis later.

Nit Picking the Angry Economist

In general, I like The Angry Economist. I do have to take issue with one detail of his characterization of the minimum wage. Minimum wage economics is not so simple or straightforward a science as he makes out. If it were, it wouldn't be so politically potent a vote getter.

Employers are given two choices when confronted by labor that does not meet a legal minimum wage. They can either forgo the labor and not pay anything or they can pay for the next best substitute.

What the employer does depends on the cost and benefit of the next best substitute. In the case where the next best substitute has a large fall in cost/benefit, increasing the pay of the worker actually would make sense and would happen. This is the heart of the positive case for minimum wage laws. When we ignore that this case can exist anti-minimum wage law campaigners leave a logical weakness in their arguments that really doesn't need to be there.

First of all, the existance of such a large gap between alternatives would not be the normal state of things but something of a rarity. In essence you'd have that "I've got my boss over a barrel" feeling at a very low wage rate. This is not normal.

Secondly, bosses don't like feeling like they're over a barrel. They would have an unmet need, a low gap alternative to substitute for the unjustified wages they are paying to low productivity workers. Since bosses in general have high amounts of available capital, entrepreneurs would spot any actual occurance of such an unusual low wage/high gap situation as an opportunity to provide a lower gap substitute and capture business.

Thus we have a situation where the low wage voters are captivated by the chimera of having their bosses over a barrel and extracting surplus wages but the actual occurance of this is such a rarity that it's all just a cruel hoax.

But a cruel hoax is not the same as a nonexistant or illogical phenomena. The angry economist would have better served his readership if he'd been a bit less angry this time.

Drug Price Reductions a Republican Would Love

Cointelpro published what I think is a low blow about the Republican party. Entitled Why I Could Never be a Republican, he asserts that Republicans (in this case Andrew Sullivan) believe that "any action taken to lower the insane costs of drugs will kill innovation". This is just factually not true. Off the top of my head I can think of two conservative positions of long standing that would have the effect of reducing drug expenses and would have not only some but majority Republican support.

1. Actions to reduce 1st world drug R&D free riding.
2. Actions to increase the time that a medicine is available for use under patent protection without lengthening patent protection.

Since drug R&D is the majority of the cost to introduce a new pharmaceutical the developer has radically different (and higher) costs than any competing producer once the temporary patent monopoly expires. To survive that, the R&D costs for that drug (and that drug's share of preceding dead end research) have to be recovered before the patent expires and new generic competitors start producing the same drug, otherwise you're going to lose money as your sales dry up as you won't be able to cut prices sufficiently to maintain some share in the market.

Some countries simply are too poor to be able to pay much more than the generic price. In such countries, it makes sense to enter the market, price the drug at what the market will bear, and make a small profit rather than charge one price worldwide and get almost no sales in that particular country. This logic holds as long as people can't just take delivery in that country and transship them to a rich country, pocketing the price difference. Arbitrage has to be too expensive to be worth it.

The problem is that rich countries that could afford to pay a higher price have passed laws controlling drug prices to some government derived formula that is below market price. They depend on the drug companies making the same calculations for them as for a poor nation and so far things have worked out pretty well, for them. In passing these laws, they have reduced the pool of 1st world patients who pay for the R&D, thus forcing the remaining consumers to pay not only their share but the share of their free rider cousins in other 1st world countries. The problem has gotten so bad that no other major 1st world nation is paying their full R&D share but the US. Republicans would have no problem in legislation that addressed this and encouraged other countries to re-establish a free market in pharmaceutical prices.

The second point is a familiar conservative complaint. The FDA is too bureaucratic, too slow, too cautious and it drug approval delays cost lives. Legislation to improve FDA approval efficiency would reduce drug prices and would have overwhelming Republican support.

So maybe Cointelpro might end up a Republican after all?

Why Microsoft Won't Be the Next GE

I Cringely speculates about where Microsoft goes next and concludes that it looks a lot like GE, a conglomerate in a huge number of different businesses that never dies because there's always a some part of the empire pumping profits back to the stockholders and funding the reinvention that all businesses have to undertake to stay profitable in the long run.

To create this makeover, Microsoft needs cash, lots of cash, billions in cash and more billions in stock value to acquire the businesses needed to ensure its permanent status on the world business landscape. It doesn't have enough yet so where is it going to get it?

Cringely proposes that MS is cannibalizing its independent consulting partners and pushing everybody into an MS support contract, creating DRM to finally end piracy of all types (but especially its own software), and generally ensuring that everybody has to be part of the great MS revenue stream or they simply can't get anything done.

The problem with Cringely's thesis is the idea that we'll all go along with it. Cringely notes "We live in the age of branding and the Microsoft, Windows, and Office brands are among the best-known in any industry, yet how many people actually buy software from Microsoft BECAUSE it's from Microsoft?" He misstates the situation. For something on the order of 40% (and growing) Microsoft products get purchased despite being from Microsoft.

Microsoft has become an anti-brand for these people for two reasons. First there are the well known technical problems that arise with Microsoft products. But increasingly more important, Microsoft business practices, especially Microsoft legal and licensing are viewed with suspicion by an increasing number of people. For the happy few, Apple's Macintosh or Linux provide a welcome escape but for many, they just don't see how to escape the clutches of MS in their business software.

People don't like feeling trapped in an abusive situation and you can be sure that the Microsoft label will be the kiss of death as it expands out to areas where they do not already have significant market penetration. Microsoft used to be the insurgent against hated IBM but have proven themselves to be even worse than the IBM of old. Microsoft will never again be able to play the scrappy underdog.

The real question is how and when will people move from being trapped in an MS world to liberating themselves from the clutches of MS legal and the fear that their OS vendor is perfectly capable and willing to sabotage their software if they get in Microsoft's way (a la DR-DOS and Lotus 1-2-3).

Distributed Power, Iraqi style?

I just read Virginia Postrel's reader supplied suggestion that Iraq get a large load of generators shipped over there to allow them to have distributed power while the US military secures the country from saboteurs.

I find myself in the unaccustomed role of being the wet blanket for this suggestion. I've written before on the subject and am quite enthusiastic on getting away from centralized power but they really need more than a few generators to make it work.

The problem is that providing electricity is a combined problem of capital goods (the generator) and consumption goods (the fuel supplies) and on a yearly basis, it's the fuel that dominates. So even if you parachute in a free generator for every Iraqi family, many families won't be able to run it very often because they can't afford the fuel. Of course, the families that would have the most problems are poor and it is among these people that Saddam's offers of money for attacks would look most attractive.

Generators are a piece of the puzzle but what's required are generators with interconnects that can push current back out onto the grid so you don't just have lights on in houses in the top 5% of Iraqi society with everybody else tripping over their useless generators in the dark.

The nature of electrical markets II

Earlier I wrote about some features of electrical markets and how it would be an improvement both economically and from a national security standpoint to have a smart electrical grid.

mhp over at Netcraft writes about a Rackshack notice in their support forums cancelling a setup fee sale. They were offering setup fees of $1 but had to cancel because their local power company did not believe that Rackshack's power requirement estimates were accurate.

What Rackshack woke up to was a notice one day to put no extra load on the grid because the local segment was at maximum capacity. No doubt this restriction will cost them some sales, momentum, and is embarrassing for them as it creates the impression that one of their critical vendors is simply not up to the task of properly forecasting demand, a real negative for a hosting provider which must guarantee 24/7/365 service.

In a smarter grid, capacity would be part of the information flow transmitted in the ebb and flow of the market. Instead of writing a note on some engineering diagrams, Rackshack could have bought a futures contract for power delivery and they most likely would have gotten the juice that they needed, when they needed it. And if they didn't have it, they could have bought on the spot market from a distributed producer. At the worst, a trailer carrying a generator would have been parked at the facility until more permanent arrangements could be met (and the defaulting provider would probably have to swallow the cost).

Gasoline price finder

Thanks to The Angry Economist for a good article on gasoline prices. But most of all for pointing out an essential site, Gas Buddy, which will let you find out where are the least expensive gasoline prices in the US and Canada.

IBM, Pay Me !

I can trash talk SCO with the best of them. I've got a blog and I'm not afraid to use it. So where's my check? I could use the money.

According to SCO's CEO, "You've got all of these guys and it looks like the whole world is coming against SCO. It's really IBM that has wired in all of these relationships," he said. "That's why it looks like they're sitting back and not doing anything. It's us fighting a whole bunch of people that they put on the stage."

Color me unimpressed. At the recent SCO Forum, they finally unwrapped some code that they claim was infringing by flashing a few lines on a screen for about 15 seconds. Unfortunately for SCO, they were dumb enough to give out the presentation Powerpoint to a journalist without making said journalist sign an NDA. This led to a devastating analysis by Bruce Perens which shows that SCO is at best incompetent and possibly criminal. Eric Raymond pursues the criminal angle a little more forcefully. "You have a choice. Peel off that dark helmet and deal with us like a reasonable human being, or continue down a path that could be bad trouble for us but will be utter ruin — quite possibly including jail time on fraud, intellectual-property theft, barratry, and stock-manipulation charges — for you and the rest of SCO's top management."

ESR's blog is the delightfully named armed and dangerous. The most dangerous weapon in existence is the human mind. From the evidence uncovered so far, it looks like Darl McBride is bringing a knife to a gunfight.

Fading away

The Economist -- Half a billion Americans?

"But assume, for a minute, that Americans remain, as they are now, about one-third richer per head than Europeans. The high-series projection implies that America's economy in 2050 would still be more than twice the size of Europe's—and something like that preponderance would still be there even if you assume that by then much of Central and Eastern Europe will have joined the EU."

Stratfor -- U.S. Dollar Steams Ahead, but No Euro Crash Pending Aug 22, 2003 [subscription only so no link]

"On the economic front, the U.S. economy has outgrown the European economy for seven consecutive quarters, and by any measure -- productivity, unemployment, business investment, currency flows, stock markets, etc. -- the United States clearly is leaving Europe behind. This is not particularly new. In fact, with the exception of three quarters during the 2001 recession, this has been the state of affairs since the end of the Cold War."

Let's assume that the time period is 1990 q1 - 2003 q2 so we have a period of 54 quarters. For 51 of the 54 quarters the US grew faster. Is it reasonable that the Economist's assumption will hold true that the US will only be 1/3 richer than the EU in 2050? Read the article and you will find a tale of woe about the EU falling behind in population with rising costs as far as the eye can see while US dependency costs stabilize with a new boom of US children coming online into the working world about 2030. If Stratfor's correct though, the Economist might actually have been optimistic about Europe's comparative future.

The nature of electrical markets

Markets set price, but the question is how often and how well? If someone has fluctuating demand that changes by the day but can only contract for power by the month, what happens to that fluctuating demand information? In reality, that information dies. In the discussion of a smart electrical network, one thing that is critically important is the ability to transmit pricing information more widely and quicker.

In a true smart market, you would be able to price electricity down to the individual circuit, perhaps even the individual electricity using device. The reason for this is you might be willing to pay 1x for a light in your bedroom but the electricity running your dialysis machine might be worth 10x and the respirator might be worth 10000x. Right now such pricing information is impossible to transmit in all its complexity. Without a smart grid it will remain impossible to transmit or route. With a smart grid, the capability will grow until eventually, all of it can be captured and prioritized real time. If price rises can happen in real time, all of a sudden unreliable power systems create incentives for distributed generation because taking advantage of the blackout price spikes gets you much better ROI.

But how will such a grid be built? In a country with a static or shrinking population, the only mechanism is through replacement. Every year, meters go bad, lines exceed their lifetime and are replaced, and transformers die from various reasons and are also replaced. Replacing as you go is one realistic method. That might get you 1%-3% in yearly smart grid rollout. But in a growing country like the US, this is not the only mechanism. Every time a new subdivision is built, the electrical grid is extended. There is no reason that you couldn't make a central skeleton of a market and subdivision by subdivision, create smart grid subdivisions. Realistically, add another 1%-3% depending on housing conditions (and the US mania for destroy and rebuild).

The good news is that computing cycles are cheap and growing cheaper and thus an imperfect market can be created that will improve things even at a small scale. At first, trading could occur within the subdivision. As information spreads about the benefits of the smart grid more and more people would want to join to gain the benefits. Early adopters would be environmentalists who would want to do it for mother earth, tinkerers who like the engineering aspects (the geek value of taking part in such a project is off the charts), and power entrepreneurs who think they can make a bit of extra cash flow a month.

As the network grows it will reach a tipping point where network effects will explode into the national consciousness and it will become the next hot bubble. Like the Internet, the ultimate crash will also have virtually no effect on the positive engineering effects of that future bubble.

A few things about the smart network. The smart network is already partially here. For large industrial users, it's been here for some time. For mid sized businesses, they've come on board a bit more recently. This isn't a matter of subsidy but of simple business sense. If you have a need to generate power, there's simple sense in selling that power when the spot price exceeds your generation price.

But remember, market conditions have changed. It's no longer just about economic value. There are those who want to create panic, despair, and terror among us to achieve their goals. It's no longer acceptable to have a system that fails in such a stupid way, giving relatively small attacks the ability to create large effects.

How much money we invest in infrastructure improvements to get around this right now is a separate question but simultaneous to all the power improvements that need to be put into place to scale our dumb network out of its present crisis we need to start putting into place a smart network that will have smart failure modes. With smart failure modes we end up getting small attacks creating small effects. A resilient system will actually create a disincentive to attack at all.

Casualty economics

Stratfor has an interesting piece in its subscriber only section on the prospects for the dollar. The holiday on the strong dollar policy is apparently over and the dollar is set to rise. One of the moderating factors which will mean the dollar's rise will be slower than its fall is the situation in Iraq. Apparently there is a significant chunk of the investor community that believes Iraq is a quagmire in the making. At the same time, these same investors believe Chechnya is a manageable situation for Russia.

It turns out that the Russians have lost more men this month than the US has lost during the past three months (May 1 - Present) plus Russia has something of a reputation for hiding its problems and low balling its official casualty figures. The Democrat/media drumbeat of negativity is creating economic bad news for the US via market distortion. I wonder if anybody's going to catch on and punish them for it?

Good news for Asia's economy

OPEC, and especially Saudi Arabia, have worked the asian oil market hard, creating an "Asia premium" on oil prices that has ranged as high as $3/bl. This has meant extra billions in OPEC coffers with oil consuming businesses in Asia paying the price. Stratfor in their e-mailed intelligence brief has noted that Israel's TIPLine oil pipeline has recently finished some modifications that spell the end of the Asia premium. Russia is constrained by Turkey's (possibly illegal according to the WW I settlements) Bosphorus tanker regulations to shipping oil in small tankers that simply are uneconomic to use beyond local transport. Israel falls within the practical Russian tanker zone so now oil can be unloaded on Israel's Meditteranean coast in smaller Russian tankers, transshipped via the TIPLine and reloaded into conventional long-haul supertankers in the Red Sea at the port of Eilat for further shipment to Asia.

Stratfor's story seems to be for subscribers only but a cut and paste of the article is available, unfortunately without attribution. Naughty Evgeny.

Will Japan wake up this time?

It's been a lost decade for Japan but they've always had the ability to fix their own troubles, they just felt too ashamed to do what was needed. Some signs now point to a possible Japanese reflation coming. Look to the value of the yen because it might start to matter again.

Japan reflation will upset the applecart for all the SE Asian Japan wannabe countries who are trying to follow Japan's path to success. They will survive the new competition but it will be very uncomfortable. The more an asian country is delicately balanced doing its own high wire act, the less welcome Japan's re-entry into the world of serious economic players will be. The PRC will likely be very unhappy as it tries to avoid a spectacular crash of its own. Can both these Asian powerhouses grow quickly at the same time? I wonder.