Re-examining Roosevelt's New Deal

Business confidence, defined

Robert Higgs includes a lengthy excerpt from a 1939 book by Raymond Moley called After Seven Years. Moley was a close adviser to President Roosevelt, but became disillusioned during the early part of Roosevelt's first term. This excerpt is an excellent summary of how destructive to normal business uncertainty can be, specifically the kind of uncertainty inflicted by politicians.

Confidence consists, on the one side, of belief in the prospect of profits and, on the other, in the willingness to take risks, to venture money. In Harry Scherman’s brilliant essay on economic life, The Promises Men Live By, the term is, by implication, defined much as Gladstone defined credit. "Credit," Gladstone said, "is suspicion asleep." In that sense, confidence is the existence of that mutual faith and good will which encourage enterprises to expand and take risks, which encourage individual savings to flow into investments. And in an age of increasing governmental interposition in industrial operations and in the processes of capital accumulation and investment, the maintenance of confidence presupposes both a general understanding of the direction in which legislative and administrative changes tend and a general belief in government’s sympathetic desire to encourage the development of those investment opportunities whose successful exploitation is a sine qua non for a rising standard of living.

This, Roosevelt refused to recognize. In fact, the term "confidence" became, as time went on, the most irritating of all symbols to him. He had the habit of repelling the suggestion that he was impairing confidence by answering that he was restoring the confidence the public had lost in business leadership. No one could deny that, to a degree, this was true, The shortsightedness, selfishness, and downright dishonesty of some business leaders had seriously damaged confidence. Roosevelt's assurances that he intended to cleanse and rehabilitate our economic system did act as a restorative.

But beyond that, what had been done? For one thing, the confusion of the administration's utility, shipping, railroad, and housing policies had discouraged the small individual investor. For another, the administration's taxes on corporate surpluses and capital gains, suggesting, as they did, the belief that a recovery based upon capital investment is unsound, discouraged the expansion of producers' capital equipment. For another, the administration's occasional suggestions that perhaps there was no hope for the reemployment of people except by a share-the-work program struck at a basic assumption in the enterpriser’s philosophy. For another, the administration's failure to see the narrow margin of profit on which business success rests — a failure expressed in an emphasis upon prices while the effects of increases in operating costs were overlooked — laid a heavy hand upon business prospects. For another, the calling of names in political speeches and the vague, veiled threats of punitive action all tore the fragile texture of credit and confidence upon which the very existence of business depends.

The eternal problem of language obtruded itself at this point. To the businessman words have fairly exact descriptive meanings. The blithe announcement by a New Deal subordinate that perhaps we have a productive capacity in excess of our capacity to consume and that perhaps new fields for the employment of capital and labor no longer exist will terrify the businessman. To the politician, such an extravagant use of language is important only in terms of its appeal to the prejudices and preconceptions of a swirling, changeable, indeterminate audience. To the businessman two and two make four; to the politician two and two make four only if the public can be made to believe it. If the public decides to add it up to three, the politician adjusts his adding machine. In the businessman's literal cosmos, green results from mixing yellow and blue. The politician is concerned with the light in which the mixture is to be seen, the condition of the eyes of those who look.

Mutual misunderstanding and mutual ill will were, of course, unavoidable in the circumstances, and the ultimate result was a wholly needless contraction of business [in 1937-38] — a contraction whose essential nature was so little understood that it was denounced in high governmental quarters as a "strike of capital" and explained as a deliberate attempt by business to "sabotage" recovery.

I've argued in the recent past that the worst thing governments can do at this point in a period of economic upheaval is to introduce additional political uncertainty.

Customer service really does matter

Loblaws has been our supermarket of choice for a number of years, since the Dave Nichol era, actually. They've often come up with new and interesting grocery products or packaging options that — even if they didn't pan out — kept up an unusual level of interest in the otherwise humdrum world of the food retailer. Lately, Loblaws has been changing many of their stores to "improve" the customer experience. One of the changes is in line with the current craze for eliminating plastic bags . . . encouraging shoppers to bring in their own bags.

I'm, at best, ambivalent about that notion¹. I don't mind carrying a bag or two for occasional purchases, but if I'm going to be spending a few hundred dollars for groceries (the weekly family grocery order), I'm not likely to carry anywhere near enough bags to package that kind of purchase.

The latest "innovation" is to expect shoppers to not only bring their own bags, but to pack their own bags, too. This, I'm sure, is seen as a great step forward for Loblaws, but is a severely retrograde step for individual shoppers. It's apparently also company policy that cashiers are not supposed to help shoppers to pack their grocery purchases, even if they're not otherwise busy. This may not be actual company policy, but it's what we've heard from cashiers themselves, as reason not to assist.

As Megan McArdle pointed out in a slightly different context, "This is why customer service matters. It's often the first thing to be cut by companies, because bad customer service doesn't show up anywhere on the bottom line. Not until much later, and not very clearly even then. But I'm willing to bet they'll lose substantial sales to people who see the first post, but not the second."

¹ I user the term "I", although Elizabeth does the vast majority of our grocery shopping.

Update, 24 June: Russ LeBlanc sent me this as a comment and (with his permission) I'm posting it as an addendum to the main entry instead:

The plastic bag scare is a classic example of PR corporate do-gooder spin that translates into increased profits. Plastic bags represent less than 1% of an average landfill. Not having to provide bags and getting praised to do it is a huge windfall for these companies. BTW, many of those re-usable bags are made in China and are comprised of "questionable" recycled material. Go figure.

Saving the environment is a good thing however much of the recycling movement is based on "junk" science that is right up there with mom's apple pie. If people only knew the real story they'd switch to cake.

While you can't blame a company for jumping on a bandwagon that will help increase corporate profits while improving the company's public profile, you'd prefer to see this being fact-based, not emotional-blackmail-based.

"You keep using that word . . ."

Paul Marks has his Inigo Montoya moment . . . "Capitalism. Newsweek keeps using that word. I do not think it means what they think it means."

The front cover of the edition has the headline 'Capitalist Manifesto' and this article is odd enough - page after page of standard statist stuff (supporting the bank bailouts and so on) written by one Newsweek's high ups. Why the high up is being given about half the magazine for his statist musings (rather than doing his job of editing the articles of real writers) is not explained - and the title of 'Capitalist Manifesto', for standard statism that one could hear and see on the BBC or American 'mainstream' broadcasters any day of the week, is also not explained.

However, this is by no means the most odd article.

There is also an article about a group of 'rebels' who are out to "save capitalism" from President Barack Obama. I was astonished to see such an article in the 'mainstream media' (especially in Newsweek) and read it. That is when the utter insanity of this edition of Newsweek hit me.

* Obligatory Princess Bride reference.

Stimulus, dissected

If you'd like to find out how the American government is "stimulating" various parts of the economy, you'll want to bookmark Reason's Taxpayer's Guide to the Stimulus:

Reason Foundation's Taxpayer’s Guide to the Stimulus breaks down each section of the American Recovery and Reinvestment Act to explain just how all that money is being spent, who is spending it, and what the whole stimulus means in layman's terms.

QotD: We'll take option three

Estimates of the cost of Obama care start at $1.2 trillion over the next decade. The administration believes it can cover about half that amount through tax increases on the rich and greater efficiencies in Medicare and Medicaid. But it's hard to find anyone else who shares that touching faith. When I asked Robert Bixby, head of The Concord Coalition, a bipartisan fiscal watchdog group, he said, "I don't see any plausible way of getting the savings they need to add the expanded coverage in a deficit-neutral way."

There are only three ways to pay for this expansion of health insurance coverage: increased taxes, reduced benefits, or shiny gold ingots falling out of the sky. Voters emphatically prefer the latter option, so that is the one most likely to be embraced by Congress and the administration.

Steve Chapman, "Indulging Our Health Care Fantasies: The problem with Obama's health care plan", Reason Online, 2009-06-15

QotD: The GM bailout again

We know what Obama is getting with this money — an empowered union that will back him when he runs in 2012 — but what are we getting? The Globe and Mail in Canada estimates that it will cost taxpayers $1.4 million per job saved. Had the free-market been left to be free, it would have cost us nothing to "save" these jobs. In fact one of the most compelling things for tax payers about a "free-market" is that it is free.

In absence of government intervention, GM would have gone into bankruptcy, like Delta Airlines and others did when they filed, keeping employees and operating. The reason Obama did not want this to happen is that in bankruptcy, the company can reject contracts and leases. The sweet UAW contract, which is the main cause of GM's demise, would be adjusted to fair market value. And "fair market" is nothing the liberals want any part of anymore. If only we had had a wise Latina woman on the board who could have used the richness of her experiences to make better decisions than the white males.

With the Democrats now running the car companies, look for quite a fall lineup of cars. My guess is that you will like the GM two-cylinder Geithner Midget. It veers hard to the left for no good reason, pays no taxes, blocks Rush Limbaugh on the radio and shows no remorse for past bad driving.

Ron Hart, "Government motors", The Destinlog.com, 2009-06-10

QotD: Government Motors on dealership closings

The Edsel was one of the biggest flops in the history of car making. Introduced with great fanfare by Ford in 1958, it had terrible sales and was junked after only three years. But if Congress had been running Ford, the Edsel would still be on the market.

That became clear last week, when Democrats as well as Republicans expressed horror at the notion that bankrupt companies with plummeting sales would need fewer retail sales outlets. At a Senate Commerce Committee hearing, Chairman Jay Rockefeller (D-W.Va)., led the way, asserting, "I honestly don't believe that companies should be allowed to take taxpayer funds for a bailout and then leave it to local dealers and their customers to fend for themselves."

Supporters of free markets can be grateful to Rockefeller for showing one more reason government shouldn't rescue unsuccessful companies. As it happens, taxpayers are less likely to get their money back if the automakers are barred from paring dealerships. Protecting those dealers merely means putting someone else at risk, and that someone has been sleeping in your bed.

Steve Chapman, "Government Motors: The trouble with Washington running a car company", Reason Online, 2009-06-08

QotD: Fix Medicare First

Think about this for a moment. Medicare is a huge, single-payer, government-run program. It ought to provide the perfect environment for experimentation. If more-efficient government management can slash health-care costs by addressing all these problems, why not start with Medicare? Let's see what "better management" looks like applied to Medicare before we roll it out to the rest of the country.

This is not a completely cynical suggestion. Medicare is, for instance, a logical place to start to design better electronic records systems and the incentives to use them. But you do have to wonder why a report that claims that Medicare is wasting 30 percent of its spending thinks it's making a case for making the rest of the health care system more like Medicare.

Virginia Postrel, "Medicare First!", The Dynamist, 2009-06-04

June 6th is Canadian Tax Freedom Day

Act Now! Free Government Money!

To dream the impossible dream . . .

The headline really caught my attention:

Canada considers selling Via Rail, CBC
As the nation grapples with a record deficit, two of Canada's most iconic companies may be up for grabs.

It's a summary of a report in the Globe and Mail, probably intentionally highlighting the things of most concern to their readership. I'd love to see the CBC privatized, but I doubt that the government will do that. VIA Rail wouldn't survive in the private sector — at least in its current form — as it's running too many uneconomical long-distance routes that don't come close to paying their way.

The return of Stagflation?

Jim Davidson points out some uncomfortable similarities between our current economic picture and the nadir of hope that was the late 1970s:

Now, sure, that's just one price. Other prices will vary significantly. But if you thought high gasoline prices were a thing of the past, be assured they are not. The government is printing money as though Obama believes there is no tomorrow.

If the current rate of change continues, by 24 August 2009 we should see $4.08 per gallon gasoline. Which might be good for another major financial crisis just in time for the start of the new school year.

[. . .]

However, the way to bet is not that the rate of inflation in fuel prices continues at the current rate, and not that it drops, but that the rate of change increases, that the price of energy surges upward. Why is that the way to bet? Because the government has abandoned plans to tax their way out of economic calamity, has found no buyers for its debt instruments so it cannot deficit spend with increased indebtedness to solve its problems, but, rather, has fixed on a plan to print its way out of the economic mess. (The option of cutting entire lists of government programs has only been mentioned by Ron Paul, who was called a psycho for doing so on "the Ed Show" which tells us what the establishment thinks.

So, as they print ever more money, as the Federal Reserve monetises the debt by buying government debt which won't sell overseas, the rate of inflation should escalate. I would expect it to go up dramatically, as it did in 1979. Probably without any stop, this time.

Google wipes North Korea off the map

Lester Haines notes that Google Maps has blanked out all the details of North Korea:

We're not quite sure what's going on down at Google Maps, but the search monolith's cartographical service has decided that the world would be a better place if North Korea were one big blank:

If you want to explore the great blank hermit, try North Korea Economy Watch instead.

Official Chinese statistics

If you've read the blog for a while, you'll know that I'm pretty skeptical about how believable the official statistics coming from the Chinese government may be. The Economist is somewhat undecided on the matter . . . sometimes publishing articles that treat the official numbers as legitimate and other times, showing more doubt:

Part of the recent optimism in world markets rests on the belief that China's fiscal-stimulus package is boosting its economy and that GDP growth could come close to the government's target of 8% this year. Some economists, however, suspect that the figures overstate the economy's true growth rate and that Beijing would report 8% regardless of the truth. Is China cheating?

Economists have long doubted the credibility of Chinese data and it is widely accepted that GDP growth was overstated during the previous two downturns. In 1998-99, during the Asian financial crisis, China's GDP grew by an average of 7.7%, according to official figures. However, using alternative measures of activity, such as energy production, air travel and imports, Thomas Rawski of the University of Pittsburgh calculated that the growth rate was at best 2%. Other economists reckon that Mr Rawski was too pessimistic. Arthur Kroeber of Dragonomics, a research firm in Beijing, estimates GDP growth was around 5% in 1998-99, for example. The top chart, plotting the official growth rate against estimates by Dragonomics, clearly suggests that some massaging of the government statistics may have gone on. The biggest adjustment seems to have been made in 1989, the year of political protests in Tiananmen Square. Officially, GDP grew by over 4%; Dragonomics reckons it actually declined by 1.5%.

Of course, The Economist doesn't want to lose sales in China, so the last paragraph of the article blithely re-assures readers that things are improving and that the official numbers are much harder to fudge now than they used to be. That may well be true (I rather hope it is), but in the same way that you can get much more impressive growth from a very small base, you can become much more honest with your numbers when you're starting from pure fiction.

I first posted about my skepticism back in 2004 and most recently in January. Let's just say that I'm still unconvinced.

US birthrate for unmarried women increased substantially

Cathy Young looks at the recent report from the National Center for Health Statistics, which shows a significant rise in the number of births to single mothers from 2002 to 2007:

Complicating the discussion, single motherhood comes in many different forms. An unwed mother is not necessarily a solo mother: about 40 percent are living with the baby's father when they give birth, and some later marry. A mother without a partner could be a teenage high school dropout trapped in poverty, or a 30-something professional who decides not to wait for "Mr. Right." While older, better-educated women are far less likely to become single mothers, one in three births to women in their late 20s and almost one in five births to women in their 30s are out of wedlock.

[. . .]

For many feminists, the ability to choose single motherhood is an essential part of female autonomy. According to American University law professor Nancy Polikoff, "It is no tragedy, either on a national scale or in an individual family, for children to be raised without fathers." Nation magazine columnist Katha Pollitt has put it more bluntly: "Children are a joy; many men are not."

But would the children agree? Of course, not every father is a joy to his child. Yet there is abundant evidence that children generally fare better with two parents—and many children without fathers keenly feel their absence.

In one positive development, unmarried fathers today are much more likely than in earlier generations to be a part of their children's lives, even if they are not living with the mother.

The Chrysler bankruptcy: destroying more than it saves

Richard Epstein makes some excellent points against letting the government's vastly distorting "deal" for Chrysler's bankruptcy go through:

The proposed bankruptcy reorganization of the now defunct Chrysler Corp. is the culmination of serious policy missteps by the Bush and Obama administrations. To be sure, the long overdue Chrysler bankruptcy is a welcomed turn of events. But the heavy-handed meddling of the Obama administration that forced secured creditors to the brink is not.

A sound bankruptcy proceeding should do two things: productively redeploy the assets of the bankrupt firm and correctly prioritize various claims against the bankrupt entity. The Chrysler bankruptcy fails on both counts.

As I've said in several other posts, business risks are priced into the business model. Government sticking its nose into existing contractual arrangements distorts the risks in ways that none of the contracting parties could have foreseen. Had they been able to foresee the intervention, they would almost certainly not have entered into the contract or would have negotiated radically different terms to compensate for the greater risks.

The US government, by throwing aside the normal hierarchy of creditors, has damaged all future bankruptcies, by introducing greater uncertainty into what had been (by most accounts) a very successful and risk-contained process.

On claim priority, unsecured creditors come at the bottom of the bankruptcy totem pole. The basic rule of credit transactions distributes the net assets first to secured creditors in the order of their priority. First mortgages are normally paid in full before second, and lower mortgagees receive anything, in order, on their loans. Unsecured creditors of all types have an equal claim regardless of the time they perfected their claims. But they receive their first dime only after secured creditors have been paid in full.

It is absolutely critical to follow these priority rules inside bankruptcy in order to allow creditors to price risk outside of bankruptcy. Upsetting this fixed hierarchy among creditors is just an illegal taking of property from one group of creditors for the benefit of another, which should be struck down on both statutory and constitutional grounds.

In trying to pander to a politically favoured group, the US government has made every other potential bankruptcy that much more risky . . . and containing risk is critical to a properly functioning economy. Nice work, guys. Bomb-throwing anarchists nod in respect for the damage you've inflicted.

QotD: Bonus payments and bosses

[. . .] bosses will rationally search for more-informal ways of rewarding their best staff. Rather than writing down a specific, objective measure of performance, they give themselves discretion to reward "good work" without being too precise about what "good work" is. The thinking is, quite sensibly, that while they can't define good work, they can recognize it when they see it. And with this discretion over raises, promotions, and bonuses, they have plenty of flexibility to dish out rewards and punishments in line with what everybody knows but nobody could prove in court.

There the story would end, but for one important problem: Managers are lying weasels. If performance bonuses are purely discretionary, the boss can weasel out of paying them, and so the workers won't be motivated by them. Why would anybody believe a manager who promises raises and promotions, but can't be specific about what they will be and what his staff would have to do to earn them?

Tim Harford, The Logic of Life: The Rational Economics of an Irrational World, 2008.

The magic of big numbers

H/T to Radley Balko.

NFL rookie salary cap?

As I always say at this time of year, I'm not making any predictions on the draft, as I don't follow college football, so I know almost nothing about the players eligible to be drafted.

Gregg Easterbrook has been saying for years that the NFL draft system is broken:

As regards rookie deals, there is increasing pressure for the NFL to adopt an NBA-style rookie wage scale. A year ago, NFL commissioner Roger Goodell said it was "ridiculous" that high-first-round choices, who have never played an NFL down, signed for more money than established NFL stars. It is indeed ridiculous. In recent years, the first-selection guaranteed-money average has been $29 million, meaning draft picks have hauled in more guaranteed money than LaDainian Tomlinson received in the deal he signed three years ago at the peak of his career. It is equally ridiculous, but less commented on, that first-round choices receive so much more than midround choices, when football is a team sport, and midround players often outperform first choices. Last year the average guaranteed money for a first-round choice was about $8 million — for a fourth-round choice, about $300,000. There's no way the typical first-round draftee means 27 times as much to his NFL team as the typical fourth-round draftee. But that's how the pay assumptions work.

The story repeats, draft after draft, as highly touted college stars are taken early in the first round, sign megabucks contracts and then go into the witness protection program. A rookie salary cap would be in the interests of almost everyone: teams, veteran players, and rookies-not-taken-in-the-first-round. The only ones who'd see their situation change for the worse would be the first 32 players taken in the draft (who would now have to prove that they can make the transition to the pro league before being rewarded with big contracts).

QotD: Why demographics matter

Whenever I write about demography, I usually get a ton of responses from folks saying: What’s so bad about falling population? Japan, Belgium and the like are pretty congested: Wouldn’t it be nice to have a bit more elbow room? Sure. With the rise of mill towns in the south and the opening up of the west, the population of my small municipality in New Hampshire peaked in the 1820 census, declined till 1940 and still hasn’t caught up to where it was 200 years ago. But it didn’t matter. Because we were a self-contained rural economy with no welfare and no public debt. If Japan and Germany were run like 19th century Granite State townships, they’d be okayish. But they’re not, so they won’t be. You can’t hunker down behind national borders when there aren’t enough young people inside the perimeter with a sufficient level of consumption to grow the economy at the rate necessary to cover existing government obligations.

This is the first crisis of globalization, and it is a far more existential threat than the Depression. In living beyond its means, its times, and its borders, the developed world has run out of places to pass the buck.

Mark Steyn, "Subprime Demography", National Review, 2009-04-21

Focus on the wrong things, and invent new categories of "terrorist"

Nick Gillespie finds things to critique in the performance of Janet Napolitano's DHS:

On the one hand, you've got the former governor of Arizona who manages to keep talking no matter how many of her own feet she's got stuck in her mouth. Janet Napolitano's agency released a report implying that if you think Ron Paul is onto something or that state governments should ever challenge federal ones, you're a terrorist [. . .] Even more recently, she fretted and then apologized for worrying that some of our boys coming home from Iraq might be anti-government. Imagine.

On the other hand, she's starting an Obama-sanctioned jihad against illegal immigrants who work in America and the "evil-doers" who hire undocumented workers to cut your grass and clean your sheets. From an appearance on State of Our Union:

What we have to do is target the real evil-doers in this business, the employers who consistently hire illegal labor, the human traffickers who are exploiting human misery.

In what alternate universe is the secretary living where it's evil (E-VIL!) to hire immigrants who are willing to work? Napolitano is also in favor of the idiotic border wall and "boots on the ground," meaning an unending harassment of all residents within Fortress America (after all, if you aggressively pursue illegals and their employers, it means you have to check everybody's papers and payrolls.)

The popularity of "getting tough on illegal immigrants" is bound to wane, as part of the "getting tough" will be much more vigorous enforcement of employment laws . . . which will require everyone at a targetted business to prove that they have the right to live and work in the country. It will literally mean having to show "your papers" to every jumped-up Jack-in-office who takes a notion that you might not be "legal".

As long as this sort of thing is conducted largely out of sight of most people, it's tolerated. They've already been moving to make this sort of enforcement effort much more visible.

Nobody (well, damned few people) argue that the border needs to be monitored, but the over-expansion of the definition of what constitutes the border is a very bad thing. 100 miles is an arbitrary number . . . who can object if the government decides it javascript:editPlacements()should be 200 or 300 miles? At what point can anyone say "this far, but no further"? If you've already conceded 100 miles, there's no logical stopping point, is there?

If you say it with enough sincerity, maybe it'll become possible

Dave Demerjian reports on President Obama's latest high-speed rail (HSR) pronouncements:

President Obama delivered on a campaign promise Thursday when he announced a plan to lay the groundwork for a high-speed rail network that would serve 10 of the nation's busiest transportation corridors.

The president, joined by Vice President Joe Biden and Transportation Secretary Ray Lahood, argued improving the nation's rail system is an economic and environmental necessity. Our overburdened highways and air traffic control systems are stifling growth, he said, and it is time to embrace rail.

"What we need, then, is a smart transportation system equal to the needs of the 21st century," he said. "A system that reduces travel times and increases mobility, a system that reduces congestion and boosts productivity, a system that reduces destructive emissions and creates jobs.

"There's no reason we can't do this."

Well, actually . . . there are several reasons why you can't do this:

[. . .] what's often missing from reports like this (contrasting HSR in other countries with regular rail service in the US or Canada) is that all HSR solutions require separate, reserved rights-of-way that never see non-high speed traffic (that is, no freight trains). The cost of developing and building the locomotives, coaches, signals, and control infrastructure pale in comparison to buying the land anywhere in North America on which to build the new railway. Passenger rail service, to approach sustainability — let's ignore the whole notion of profitability — has to be located in densely populated corridors . . . exactly where the costs of acquiring land are going to be highest.

Yeah, I know, it's bad form to quote yourself . . . but even eight billion dollars won't buy you anywhere near enough for one of these proposed systems, never mind ten of them.

Update, 17 April: Nick Gillespie isn't a fan of HSR:

And now this morning, Obama was on the tube again, yapping about traffic jams. What the hell is going on here? The president of the freaking United States is talking about traffic jams? Then again, in grammar school we did all learn that part of George Washinton's Farewell Address where he warned against entangling alliances and the dread menace of highway jughandles and traffic circles. That Obama's big solution is, ta-da!, "high-speed rail" is simply one more sign that he is simply not serious about anything other than paying off 19th and 20th century legacy special interests. I look forward to tomorrow's press conference, when Obama trains his laser-beam brain on the question of whether Razzles is a candy or a gum. [. . .]

If you're the president of the United States and you're talking about goddamn traffic jams and you're proposing high-speed rail as anything other than an unapologetic boondoggle that will a) never get built and b) never get built to the gee-whiz specs it's supposed and c) be ridden by fewer people than commuted by zeppelin last year, you've got real problems, bub. And by extension, so do we all.

QotD: Problems with public service

This whole they're-denigrating-public-servants complaint, a longtime favorite of Bill Maher's, has always struck me as willfully missing at least one important point. A core problem of government ineffectiveness has to do with incentives, and unintended consequences, not necessarily venality and incompetence. The do something mentality of elected officials inevitably leads to crude applications of blunt power, and just as inevitably that power has a tendency to get all mission-creepy, into areas of human existence that no government should really be messing with. And believe it or not, this can happen under Democrats, too.

Matt Welch, "Washington: Crackling With Brainy Sacrifice", Hit and Run, 2009-04-07

The cost of green jobs in Spain

I'd always suspected that there would be a higher cost for a new "green" job created than for an equivalent non-green one, but apparently I was being too optimistic:

[W]e find that for every renewable energy job that the State manages to finance, Spain’s experience cited by President Obama as a model reveals with high confidence, by two different methods, that the U.S. should expect a loss of at least 2.2 jobs on average, or about 9 jobs lost for every 4 created, to which we have to add those jobs that non-subsidized investments with the same resources would have created...

. . .while it is not possible to directly translate Spain’s experience with exactitude to claim that the U.S. would lose at least 6.6 million to 11 million jobs, as a direct consequence were it to actually create 3 to 5 million “green jobs” as promised (in addition to the jobs lost due to the opportunity cost of private capital employed in renewable energy), the study clearly reveals the tendency that the U.S. should expect such an outcome...

The study calculates that since 2000 Spain spent €571,138 to create each “green job”, including subsidies of more than €1 million per wind industry job...

Each “green” megawatt installed destroys 5.28 jobs on average elsewhere in the economy: 8.99 by photovoltaics, 4.27 by wind energy, 5.05 by mini-hydro.

These costs do not appear to be unique to Spain’s approach but instead are largely inherent in schemes to promote renewable energy sources.

Original report here (PDF), link courtesy of Ronald Bailey.

Update: Related concerns about "green" products from Megan McArdle:

Er, industry also knew how to make low-flow toilets, which is why every toilet in my recently renovated rental house clogs at least once a week. They knew how to make more energy efficient dryers, which is why even on high, I have to run every load through the dryer in said house twice. And they knew how to make inexpensive compact flourescent bulbs, which is why my head hurts from the glare emitting from my bedroom lamp. They also knew how to make asthma inhalers without CFCs, which is why I am hoarding old albuterol inhalers that, unlike the new ones, a) significantly improve my breathing and b) do not make me gag. Etc.

In fact, when I look back at almost every "environmentally friendly" alternative product I've seen being widely touted as a cost-free way to lower our footprint, held back only by the indecent vermin at "industry" who don't care about the environment, I notice a common theme: the replacement good has really really sucked compared to the old, inefficient version. In some cases, the problem could be overcome by buying a top-of-the-line model that costs, at the very least, several times what the basic models do. In other cases, as with my asthma inhalers, we were just stuck.

QotD: Lessons from the Great Depression

The relevance for today is simple. The famous "multiplier effect" of public spending may exist. U.S. cities do indeed need new highways, new buildings, and new roads, maybe even from the government. There may also be a spillover effect, as historian Alexander Field has noted. When the government builds a road, it is easier for the trucker to get from one point to another, and the trucker makes higher profits. These merits should be weighed against damage that comes when officials create projects and jobs for political reasons.

An emergency such as a Great Depression can serve as a catalyst for job creation. But the dire moral quality of that emergency does not guarantee that a project undertaken in its name will be more efficient than your standard earmark. In fact, infrastructure spending is often just a nicer name for what we used to call pork. Given the depth of modern capital markets, the New Deal's old argument that "only the government can afford this" looks particularly weak. The New Deal edifice is solid enough, but it doesn't form the best basis for the national future.

Amity Shlaes, "Afterword to the paperback edition", The Forgotten Man: A New History of the Great Depression, 2007, 2008

Fake charities

Johnathan Pearce looks at a useful new site for monitoring charitable organizations:

The blogger at Devil's Kitchen has been doing fine work, as have others, in exposing "fake charities" — those organisations that while claiming to be autonomous, voluntary organisations, receive a substantial amount of funding from the taxpayer via grants and as a result, frequently take positions in terms of public policy that, unsurprisingly, fit in with the fashionable bromides of transnational progressivism, health fascism and environmentalism. The Fake Charities website does sterling work in listing those organisations that should be closely watched. The site is a great resource and well worth bookmarking.

Charities are a valuable part of our social fabric, but those which operate like the ones identified in that post are not really charities at all . . . they're actually not-quite-arms-length creatures of the state. They enable more intrusion of bureaucrats into areas best served by genuine charities, bringing along with them the coercive powers of the state by slow degrees.

I object to these fake charities for exactly the same reason I object to mandatory so-called volunteer work by students: they pervert the underlying good intentions of real volunteers and taint the whole notion of voluntary effort.

Update: A comment on Johnathan's post by "Kevin B." is worth quoting also:

The trouble is that 'charities' are such useful tools for the state that cutting them off from the statists is nigh on impossible.

For a start, many of them are there to do 'research' or 'studies' that they then use to 'pressure' the government to do what the government wanted to do in the first place.

So when the elite want to do something 'for the children' for instance, you will find one 'charity' producing the research to justify it, another to applaud the government for accepting it, and a third bemoaning the fact that the government hasn't gone far enough.

Making it even harder for Ontario's small wineries

If you've read more than one or two posts here, you'll know I'm not a fan of big government, especially when that government moves into areas far better served by private enterprise. Ontario's liquor laws are still just emerging from the Prohibition era, and are strongly tilted in favour of large conglomerates and against smaller producers (it's much easier for the government to oversee a few giants than to actively interfere with oversee dozens or hundreds of smaller firms).

In an ideal world, I'd prefer to see the government get out of the alcohol business altogether . . . but that's not likely to happen. In the real world, the Ontario government strictly limits how Ontario wineries are allowed to sell and market their wines. The vast majority of Ontario wine sold is through the LCBO/Vintages channel. The LCBO is the only way small wineries are allowed to sell their wines aside from direct sales at the winery itself (even the recent innovation allowing winery-to-home sales is tightly controlled).

Given all of this, you'd expect (if you don't live in Ontario, that is) that the LCBO would be actively assisting small wineries to increase their market share and to increase the LCBO's proportion of domestic sales. But that's not the way things are done. Michael Pinkus explains:

Early last week, a winemaker called me up to say that there was scuttlebutt in Niagara that the government "kickback" program, to help small wineries get their wines into the LCBO, is at risk of being axed. Known as the VQASP (VQA Support Program) it provided a 30% return to the wineries whose wines got into the LCBO and Vintages stores. This encouraged more wineries to submit wines to the LCBO (previously they were reluctant to put their wines into the provincial monopoly shops because there was no profit to be made, wineries realized more money by selling their wines out the cellar door, even if it was a slower process and to a smaller audience). This program subsidized the sale of these wines and allowed more Ontarians to see, and buy, a greater array of VQA Ontario wines from wineries they probably didn’t even know existed. (In the last three years of the program, the number of Ontario wineries in the LCBO rose from 15 to 50). It is because of this program that many small wineries saw light at the end of a long harsh tunnel; some wineries even increased production in the hopes of having enough wine to offer to the LCBO and get the exposure the shelves which they so desperately needed (in order to be listed the LCBO needs a minimum supply so that all their stores can get the required product). With the cancellation of the VQASP, those wineries are now at risk of being overstocked and putting themselves into a deeper financial hole then they were before. At a time when the government is ear-marking millions of dollars to bail out the car manufacturers, who are just trying to maintain the status quo — the government has decided to cancel help to an industry that is growing, creating jobs and brings tourism to this province. I have a colleague that calls Ontario "a have not province" and something we will not have is a wine industry if this continues to be the way wineries are treated. It seems that the current government is prepared to keep them down.

Yes ladies and gentlemen, this is your government hard at work. Do they not realize that the "O" in LCBO stands for Ontario? How quickly we forget that when we walk into the store and are faced with shelf after shelf of Chilean, Australian and South African wine. I have noticed that when I enter a US liquor store, I have to search high and low for the "foreign" wines, having to wade through row after row of California, Oregon and Washington State wine. In the LCBO it's the exact opposite — I wade through every other country before I find my country's/province's wines and who knows, maybe I'm still buying Chilean, Australian or South African afterall, if you don't examine the label with a magnifying glass, you could get stuck with a Cellared in Canada wine.

Again, I'd prefer the government got the heck out of the liquor retail/wholesale business altogether, but if they won't do that, they should at least try to make it a level playing field for both domestic and foreign products, and for both small wineries and large multinational conglomerates. I've written about this before.

Economic uncertainty

The recent forced resignation of GM's CEO may be good politically — although that's questionable — but it's terrible economically. The economic picture is unsettled, which sharply reduces the dependability of long-term and even short-term forecasting. Businesses depend on forecasting to make investments, create jobs, increase or decrease production, and pretty much every other part of their operations. Uncertainty is normal, but high levels of uncertainty act to depress all economic activity . . . and the US government playing kingmaker with the heads of major corporations is a hell of way to create more uncertainty.

The specific merits of the Richard Wagoner dismissal are unimportant compared to the extra measure of uncertainty injected into the economy as a whole. If President Obama and his team can dismiss Wagoner, why not the heads of any bank accepting government funding? Why not other corporate officers (corporate directors have already been ousted at government whim)? At what level does the government's self-created new power stop?

The direction the US federal government has set will do nothing to settle economic worries, and much to increase them. The clear belief on the part of the administration is that they are better able to pick the winners and losers of economic activity of which most of them have no practical experience. That is a modern definition of hubris.

On the specifics of GM's (and Chrysler's) plight, I've been saying that they should have gone into formal bankruptcy last year. It would have been bad, for many people (suppliers, employees, and shareholders most directly), but it would have had the merit of being the best way to legally¹ and quickly² sort out the businesses, determining whether they are still viable or whether they are best broken up and sold off to the highest bidder. This life-in-death state under close government supervision is becoming the worst of all possible worlds. Nothing can be settled, everything is subject to radical change at the drop of a political hat, and nobody can see an end to the turmoil.

¹ Legally, in the sense that the laws are already on the books, tested, and workable. Not requiring additional legislation passed in the wee small hours of the morning by sleepy congressmen and senators who haven't read any of the bill being passed.

² Quickly, of course, is a relative term. Even a best-case fast resolution of a bankruptcy this size would be years, not months in length.

Scale, or how much is a trillion, really?

Megan McArdle tries to put those mind-crogglingly large numbers into a bit of perspective:

A trillion is, in some sense, a meaningless number. Perhaps this is a problem with inflation in both our currency and the size of our government — the spending figures are now beyond any normal person's imagining. In the comments to another thread, two readers try to put some emotional weight to these hefty numbers

To many of us, there's not enough verbal distinction between a million and a billion . . . a billion is bigger, yes, but most of us don't really grasp how much bigger (especially if you're on the left side of the Atlantic, where a billion is a much smaller number than it is on the right side). A trillion? Is that really a number? To most of us, no.

Don't expect $8 billion to buy much high speed rail service

In Europe and in Japan, high speed rail services are often touted as part of the solution to road congestion and increasing short-range air traffic problems. In Canada and the United States, high speed rail is also frequently proposed to address the same problems. Robert Poole explains why even $8 billion isn't even close to enough money to bring high speed rail links to North America:

It's unfortunate that President Obama has made inter-city high-speed rail his "signature issue" in transportation. The $8 billion inserted into the stimulus bill at the last minute has created expectations for Japanese-style bullet trains on 11 long-planned corridors, but those hopes are likely to go unrealized. Moreover, by promoting expanded passenger rail service in these corridors, this policy may hinder many people's hope of shifting more long-haul freight from truck to rail, as an energy-saving and greenhouse gas (GHG) reduction policy.

Let me explain the problem. True high speed rail (HSR) that goes 150-200 mph requires entirely separate rights of way with no grade crossings, shallow grades, very broad curves, and no 60 mph freight traffic. That's what Japan, France, Spain, Germany, and Italy are doing, and the taxpayer cost is many billions per line. Former Amtrak CEO Alex Kummant, in 2007 House testimony, estimated that an exclusive HSR corridor between New York and Washington would cost $10 billion — exclusive of new right of way (in some of the most expensive urban areas in the country). So it's laughable to think that $8 billion (even if supplemented by the $5 billion more the Administration proposes over the next five years) could provide more than a small down payment on 11 real HSR corridors, most of them far longer than the 200+ mile New York to Washington one. The proposed California HSR is estimated by its proponents to cost $50.2 billion, but a recent Reason Foundation "due diligence" report put the more likely cost at up to $81.4 billion.

So in fact, what the new federal funding will mostly be used for is upgrades to the existing shared passenger/freight tracks, aiming to get Amtrak trains up to speeds of 90 to 100 mph rather than today's 60 or 70 mph. But that raises the question of getting the best use out of America’s existing railroad infrastructure. While it's possible, with lots of passing sidings and expensive signaling systems, to operate both fast passenger trains and slower (and much longer) freight trains on the same trackage, the performance of both is hindered. U.S. freight railroads still have serious difficulties attracting time-sensitive freight, because rail freight takes so long (an intermodal trip from Tacoma to Columbus or Cincinnati takes 7 to 12 days) and is so uncertain (i.e., from 7 to 12 days!). Today's high-tech, just-in-time logistics system cannot operate with such long times or with large schedule uncertainty, which is why so much freight moves by truck instead of rail.

"You sound like a Breznhev-era apparatchik, giving the party line"

I'm guessing that Daniel Hannan isn't going to be on the next list of civil honours forwarded to the Queen . . .

A.I.G.: Less passion, more fact

Megan McArdle sums up recent discussions on AIG, then adds some uncomfortable facts:

Of course the AIG bonuses should go back! They were paid to people in the very group that lost money! They were paid to people who have already left the firm, putting the lie to the idea of retention bonuses! Also, they couldn't get jobs anywhere else anyway, so retention bonuses are unnecessary! And it's all just unmitigated greed! They're lucky to have jobs at all! They should be volunteering to work for free, wearing sackcloth and ashes, and grovelling on the ground in front of every taxpayer they can find, begging for forgiveness!

The information now emerging from AIG tells a different story.

Of course, it's much easier for politicians and media pundits to whip up a frenzy against evil "capitalist exploiters" than it is to point out that they're actively scapegoating the innocent.

QotD: Falling down the wrong side of the Laffer Curve

David Cameron, Tory leader, appears determined that it will not be just the current government that comes out with serious errors on policy. This refusal to not state that a new, higher tax band of 45 per cent "on the rich" will be repealed is a serious error. The error is to ignore the history of what happens when marginal tax rates are cut — these cuts lead to more, not less, revenue. Now of course, as small-government folk, we support tax cuts because we want taxes to fall, and not because we want higher revenues. But if it is revenues you are worried about, then raising taxes is dumb.

The UK and many other economies are falling down the wrong side of the Laffer Curve. It is profoundly depressing that the lessons I thought had been learned have been so totally lost. It makes me wonder whether any senior politician has a clue about economics whatever.

Johnathan Pearce, "It is the lack of basic economic understanding that is so terrifying", Samizdata, 2009-03-23

A better solution to power shortages?

One of the worst aspects of our current way of handling high energy demand is that once the limit is reached, unilateral decisions on the part of the energy supplier are imposed on everyone. In a mid-July heat wave, as everyone in the midwest turns on their air conditioners, the supply gets severely stressed . . . and the closer to full capacity, the more likely that everyone will be inconvenienced by brown-outs or black-outs. Spencer Reiss looks at a co-operative solution: paying major users to cut back their demand until the supply/demand stabilizes:

Many utilities already do an ad-hoc version of this, an emergency practice known as demand response that has lately been promoted by Jon Wellinghoff, acting chair of the Federal Energy Regulatory Commission. Now there's an alternative: Call EnerNOC, a Boston-based company that gangs commercial users who are willing, for a quarterly payment, to trim back operations on 30 minutes' notice. EnerNOC micromanages consumption at 3,400-plus locations from Maine to California. Between dimming lights, adjusting thermostats, and suspending industrial activities, the potential cuts top the output of a large nuclear reactor. And the savings can be huge.

The advantages should be clear: real-time (or almost real-time) ability to shift large blocks of energy usage out of peak demand times, benefitting both consumers and industrial energy users. The ability to co-operatively manage the overall demand rather than unilaterally cutting off users (and reducing the need for additional peak-only generation facilities) is clearly a better solution.

Incomplete headline of the day

This headline at the BBC News website is incomplete:

Top AIG bosses 'to repay bonuses'

It should continue with the much more informative ". . . to avoid Bill of Attainder". More information (and an explanation) here. Other recent posts here and here.

Cheesy tariff games governments play

A.I.G. bonuses taxed

Steve Chapman points out that the spasm of anger in which congress passed a retroactive 90% tax on the A.I.G. bonuses is being directed at the wrong people:

Congress is outraged. Really, really outraged. Unbelievably, incredibly outraged. And there are certainly grounds for anger.

Not at the insurance company AIG, which paid bonuses that are seen as intolerable, but at Congress, which blithely declined to prohibit them but is now shocked to find AIG doing what it was allowed to do. The Democrats who control Capitol Hill want revenge, as do many Republicans. So the House voted by a 328-93 margin to impose a 90 percent tax on the payments.

In doing so, members resolutely avoided a couple of inconvenient realities. The first is that the fault, if any, lies with the same people who are now angry. The second is that the tax conflicts with the clear intent of the Constitution.

The whole bonus scheme is intended to retain key personnel, and it makes perfect sense. In good times, high-performing executives can always try to move on to other firms who (in theory) offer more money, more opportunities for advancement, or both. The bonus payment is to try to keep those executives where they can do the most good for the corporation paying the bonus.

In these trying economic times, the bonuses actually make even more sense for the rest of the economy. They function to keep those same executives who made a total balls-up of A.I.G. from moving to other companies to do the same pillage-and-burn-and-sow-the-fields-with-salt to them. It's cheap, from the larger economy's point of view, to pay relative peanuts to keep all these folks from moving on and infecting other companies.

Update: Mark Steyn speaks for the outraged:

Are you outraged by these AIG bonuses?

No, no. For Pete's sake, you're an A-list congressional big shot. Try to get a bit of feeling into "outraged." The president's teleprompter puts it in italics, bold, capitalized and underlined: OUTRAGED !

That's better. Don't forget to furrow your brow and fume. No, not like a camp waiter when you send back the arugula salad drizzled in an aubergine coulis. We're looking for primal, righteous anger: You're outraged, OUTRAGED that bonuses are being handed out at companies the American taxpayer is bailing out. Yes, to be sure, the bonuses were specifically provided for in the legislation, but, like all busy senators and congressmen, you don't have time to read every footling trillion-dollar bill before you vote in favor of it. And yes, true, the specific passage addressing these particular bonuses was, in fact, added to the bill in your name, but that was nothing to do with you — you just did that because the White House asked you to, and just because their people called your people and some intern in your office drafted some boilerplate with your name on it is no reason for you to be denied 10 minutes of grandstanding on MSNBC. It's an outrage to suggest you're anything other than outrageously outraged!

iPhone app pricing

There's been an ongoing discussion on the Apple-iPhone mailing list for a while. The two "sides" are, speaking very generally, debating these two simplified points:

• High prices are only good for the developer (i.e., the user gets screwed)
• Low prices are only good for the user (i.e., the developer gets nothing but ego-boo)

Of course, any debate sounds simplistic when you try to boil it down too much. Marc Tassin, of Ilium Software, posted a full blog response to the discussion, which nicely rounds out the arguments:

$.99 Apps Make $500K!!!!!
Yep, and a kid playing guitar at his high school can become a rock star. These stories (like the Trism Tale) make fantastic press, but just like the music industry, professional sports, and Hollywood, those are the exceptions, not the rules. The majority of folks will never sell enough of their 99 cent app to even turn a profit, much less make it to the "big time."

Unfortunately, people start to think that these big money makers are how the store works, since these stories make better news for Wired and better commercials for Apple. There are tons of amazing apps that never sell well because they just didn’t have that lucky combo of good app/good timing/lucky placement in an Apple ad/etc. etc. So, yes. Some applications get lucky, but for the rest of them, a 99 cent price tag will put them out of business.

Lower Prices = More Profit
This just isn't true. Lower prices typically DO mean more sales, but it doesn't necessarily mean more profit. The math is pretty simple. You need to sell enough additional copies to make up for the lost revenue of the lower price. Sometimes this works — usually it doesn't. Often you make less than you did before, even though you are making a lot more sales. And this cost is multiplied by the fact that more customers = more overhead (support/sales database work/etc.), so now you’re making the same amount of money and have twice as many customers! When the final tally comes in, you've actually lost money! There is always a sweet spot but finding it is tough. Just going cheaper isn't the answer.

That last point is best summed up by the GM business model of recent years: "Sure, we lose $2,500 per car, but we make it up in volume!"

QotD: The Jimmy Carter legacy

The current depression was born when the administration of Jimmy Carter, and a Democratic Congress, irrationally demanded that lenders approve mortgages for individuals who really couldn't afford them and would almost certainly never be able to pay them back. The political strategy of giving goodies away like this, in exchange for votes and other kinds of popular support, was probably old hat by the time the Romans got around to plying urban tenement dwellers with bread and circuses.

At the same time, housing for the poor appears to be some kind of bizarre obsessive-compulsive fetish for President Peanut. He's spent decades since his deeply flawed and humiliatingly failed presidency, hammering nails into future residences under the Habitat for Humanity program. How ironic it is that, just as the economy begins collapsing, so are the former president's shoddily-constructed houses across the country.

L. Neil Smith, "Cambodian Road Trip", Libertarian Enterprise, 2009-03-15

Headline of the day

Winner of today's headline of the day award:

Florida Marlins Hope to Stimulate South Florida By Sucking $634 Million Out of Miami's Economy
Nick Gillespie

Whole thing here.

A.I.G.: a lightning rod for discontent?

It's apparently not just the top executives who're feeling the backlash over AIG putting some of its government rescue money toward bonuses for executives:

Now these executives are toxic, and those communities are rattled and divided. Private security guards have been stationed outside their houses, and sometimes the local police drive by. A.I.G. employees at the company’s office tower in Lower Manhattan were told to avoid leaving the building while a demonstration was going on outside. The memo also advised them to avoid displaying company-issued ID cards when they left the office and to abandon tote bags or other items with the A.I.G. logo.

One A.I.G. executive, who spoke on the condition of anonymity because he feared the consequences of identifying himself, said many workers felt demonized and betrayed. “It is as bad if not worse than McCarthyism,” he said. Everyone has sacrificed the employees of A.I.G.’s financial products division, he said, “for their own political agenda.”

Update: The Economist suggests a new pain indicator:

This crisis has brought a burst of creativity in the development of indicators of pain, from the subprime implode-o-meter to the downgrade-o-meter for structured securities. Perhaps it is time for the outrage-o-meter. Its needle would have jumped off the scale this week as America’s public, politicians and media huffed and puffed over the $165m in bonuses paid to members of the financial-products division that brought down American International Group (AIG). Troubles in that unit have forced the government to bail out the giant insurer, so far to the tune of $173 billion.

AIG’s wayward eggheads are not the only ones squirming. The affair is a test of the Obama administration’s handling of financial excess — and so far it has been ham-fisted. After flip-flopping over whether it had the authority to meddle with employment contracts, the Treasury eventually seized on a clause in the recently passed stimulus bill that may allow it to retrieve payments deemed contrary to the public interest. Tim Geithner, the treasury secretary, promised to recoup the money by deducting some of it from the next $30 billion tranche of aid for the company.

QotD: Inherited debt

Just between you, me, and the old, the late middle-aged and the early middle-aged: Isn't it terrific to be able to stick it to the young? I mean, imagine how bad all this economic-type stuff would be if our kids and grandkids hadn't offered to pick up the tab.

Well, OK, they didn't exactly "offer" but they did stand around behind Barack Obama at all those campaign rallies helping him look dynamic and telegenic and earnestly chanting hopey-hopey-changey-changey. And "Yes, we can!"

Which is a pretty open-ended commitment.

Are you sure you young folks will be able to pay off this massive Mount Spendmore of multitrillion-dollar debts we've piled up on you?

"Yes, we can!"

We thought you'd say that! God bless the youth of America! We of the Greatest Generation, the Boomers and Generation X salute you, the plucky members of the Brokest Generation, the Gloomers and Generation Y, as in "Why the hell did you old coots do this to us?"

Mark Steyn, "Welcome, kids, to the Brokest Generation: The young aren't to blame for this mess, but they'll be paying for it", Orange County Register, 2009-03-13

Harper distances himself from libertarians

The prime minister has decided that the "libertarian" tag is a disadvantage, so he's made some explicit remarks to distance himself from the philosophy:

Harper vigorously defended his policies, arguing that compromises had to be made to face the economic reality.

"I'm talking about compromises that address the reality of the lives of real people."

He went on to deride the spendthrift culture in the United States and the recklessness of Wall Street. Harper, who has been described as a libertarian in the past, surprised some in the audience by critiquing those same ideals.

"The libertarian says, 'Let individuals exercise full freedom and take full responsibility for their actions.' The problem with this notion is that people who act irresponsibly in the name of freedom are almost never willing to take responsibility for their actions."

Mike Brock, a Conservative blogger who attended the conference, called the speech bewildering.

"The treatment to classical liberals and libertarians — of which I consider myself — was nothing short of stunning," he wrote.

"The condescension was literally dripping from his mouth. Was this his response to the disillusionment that libertarians across the country have had to his government and its policies of late?

"If it was, it did not build any bridges. Rather, it burnt them right down."

Of course, there have been so few libertarian moves on the part of the federal government that this isn't really that much of a surprise.

John Stossel interviewed by Reason.tv

Day 2 of the ICCC

Ronald Bailey reports on day 2 of the International Conference on Climate Change shindig:

From the Stern Review, Goklany took the worst case scenario, where man-made global warming produces market and non-market losses equal to 35 percent of the benefits that are projected to exist in the absence of climate change by 2200. What did he find? Even assuming the worst emissions scenario, incomes for both developed and developing countries still rise spectacularly. In 1990, average incomes in developing countries stood around $1,000 per capita and at aroud $14,000 in developed countries. Assuming the worst means that average incomes in developing countries would rise in 2100 to $62,000 and in developed countries to $99,000. By 2200, average incomes would rise to $86,000 and $139,000 in developing and developed countries, respectively. In other words, the warmest world turns out to be the richest world.

Looking at WHO numbers, one finds that the percentage of deaths attributed to climate change now is 13th on the list of causes of mortality, standing at about 200,000 per year, or 0.3 percent of all deaths. High blood pressure is first on the list, accounting for 7 million (12 percent) of deaths; high cholesterol is second at 4.4 million; and hunger is third. Clearly, climate change is not the most important public health problem today. But what about the future? Again looking at just the worst case of warming, climate change would boost the number of deaths in 2085 by 237,000 above what they would otherwise be according to the fast track analyses. Many of the authors of the fast track analyses also co-authored the IPCC's socioeconomic impact assessments.

Various environmental indicators would also improve. For example, 11.6 percent of the world's land was used for growing crops in 1990. In the warmest world, agricultural productivity is projected to increase so much that the amount of land used for crops would drop to just 5 percent by 2100, leaving more land for nature. In other words, if these official projections are correct, man-made global warming is by no means the most important problem faced by humanity.

American Beer

Britain's economic failure

I knew that parts of Britain were in less-than-great economic condition, but I had no idea that things were this bad:

Parts of the United Kingdom have become so heavily dependent on government spending that the private sector is generating less than a third of the regional economy, a new analysis has found.

The study of "Soviet Britain" has found the government’s share of output and expenditure has now surged to more than 60% in some areas of England and over 70% elsewhere.

Experts believe the recession will tighten the state's grip still further as benefit handouts soar and Labour directs public sector organisations to create jobs to soak up unemployment.

In the northeast of England the state is expected to be responsible for 66.4% of the economy this year, up from 58.7% when a similar study was carried out four years ago. When Labour came to power, the figure was 53.8%.

Astonishingly, those aren't even the worst: in Wales it's 71.6%, while in Northern Ireland 77.6% of the economy is government spending of one form or another. It's a very bad sign when government spending becomes a majority of all economic activity in a region or country (because the government doesn't actually create wealth: it just collects it from those who do).

H/T to Perry de Havilland. for the link.

American responsibility for Mexico's drug war

L. Neil Smith summarizes the reported reasons America is said to be to blame for the current shooting war along Mexico's northern border:

Reportedly, this third war, although it is said to have begun as a struggle over turf between Mexican drug gangs, is being waged between those gangs and the Mexican government, which stupidly stuck its nose in when the intelligent strategy would have been to simply police the sidelines, in order to minimize potential casualties among uninvolved non-combatants, and let as many violent gangsters kill each other as possible.

Now I suppose you will anticipate who, according to politicians and the press, the great villain is, in all of this. That's correct, the good old U.S.A. Two reasons are offered for this. (There may be others, but although I fancy myself as sort of a political profiler, I get headaches trying to "think" like a socialist for too long at a time.)

The first reason is that, supposedly, Americans are the biggest drug consumers on the planet. There may be some truth in this: it becomes more and more difficult, every day, to live inside the mess that the Democrats and Republicans have fashioned for us. Chemicals do help, indeed; I prefer tequila, another run-for-the-border import. The Ragnorak del Sud is over territory in Mexican states that butt up directly against California, Arizona, New Mexico, and Texas, making it relatively easy to smuggle drugs into this country over (or under) the border.

More recently, it develops that the second reason that the United States is to blame for this war in Mexico between uniformed thugs and non-uniformed thugs, is that we Americans have all these guns, see? And left to themselves, whenever the damned evil contrivances aren't spontaneously murdering family members up here, they take it in mind to crawl over the border all by themselves and wind up in the vile hands of poor, innocent gangsters whom they seduce into pulling their triggers.

Never mind that there are no respectable facts that support this contention or anything even remotely like it. Mexican authorities support it because it makes them look minutely less incompetent and corrupt than everybody on the planet knows they are. To American politicians it's nothing more than another socialist lie constructed to justify the eventual seizure of every semiautomatic across the country — the very weapons best suited to fulfill the role intended by the authors of the Second Amendment: keeping the government in line.

Fearmongering

Anthony Randazzo points out that most of the government's intervention in the market has served to prolong the misery, yet not to actually improve the situation:

At this point, the depth of the recession has largely been created by the panic started by former Treasury Secretary Henry Paulson and President George W. Bush. "If money isn't loosened up, this sucker could go down," President Bush said about the economy as he urged for bailouts last September.

Dire warnings of "catastrophe" or "before its too late" without any clear definition of what those concepts really mean are similar to, and no less troubling than, Mafioso scare tactics. It is this fear that has been driving the government to quick, impulsive action that is only worsening the problem.

Clearly fear and panic didn't start the recession. There were system-wide failures due to a toxic combination of excessive growth optimism, a belief the boom would go on forever, a lack of healthy fear of losses, incompetency, and coercive regulations. But as Fidelity Investments executive Edward Johnson said this week, "We can only hope that the government's cure doesn't further sicken the patient."

Looking back, most legislators regret passing their first cure — the Troubled Asset Relief Program (TARP) bill — as fast as they did. There wasn't a clear and present danger at the time — just Secretary Paulson saying if we didn't give him unlimited powers the sky would fall in and economy would collapse. No one understood what Paulson's forecasts of catastrophe would result in, but they didn't want to find out. Terrified, 'doing nothing' was not presented as an option and $700 billion was approved to buy up toxic debt.

Ironically, after a month of discussion the Treasury decided that buying troubled assets wouldn't work after all and decided to go with capital injections instead. But this all took place many weeks after TARP was passed, and the world hadn't ended. So much for the need for speed that was used to push the bailout through.

It's gotten so bad lately that it seems as though every time the markets finish a day in the black, someone from the government has to get up on his hind legs and proclaim another impending disaster (or worse, further government intervention) . . . and the market goes down again the following day.

The economy won't recover until all the malinvestment has been worked out of the system; much of that mistaken spending was as a result of governments trying to prolong "the good times". Stability is essential to long-term planning for any business . . . and in today's climate only a fool would assume that the current situation will stabilize in a hurry. No stability means that no sensible business is going to take any risks they don't absolutely have to take — and building new facilities and hiring new staff count as risks in this market.

Of course, the cycle isn't complete without mention of the news media: they're geared to report bad news, and there's a plethora of bad news to report at the moment. In an ironic twist, this is the first time that economic turmoil has seriously threatened the jobs of newsmedia workers in all areas: at least in the living memory of most current reporters and editors. This only encourages further negative connotations to every piece of economic news they report.

It's like a reworked version of the old joke about a recession is where your neighbours lose their jobs and a depression is when economists lose their jobs. From the media point of view, this is an economic apocalypse because it's directly affecting them and their fellow media types.

What happens to shipping during a global recession?

Roger Henry sent some interesting images (either originally from Rick Udris, or forwarded to Rick from someone else):

Guess which one has your stuff still on it. During the Iraqi/Iran war it was all oil-tankers parked there and also off Brunei. The area is out of the hurricane belt and security is pretty good.

A couple of very large images after the jump.

Ships being stored in Singapore.

Looking like a modern recreation of the WWII invasion fleet, hundreds of merchant ships wait for better economic times.

Another view of some of the vast fleet of idle merchant vessels.

An ugly picture

This is what happens when you allow significant distortions in the real estate market (especially mortgage interest deductability):

Okay, it's clearly not the whole reason for the distressingly large number of "underwater" mortgages, but it clearly has some responsibility for the result. When people are given incentive to over-invest in housing through tax deductions, everything works well . . . as long as the price of housing continues to rise. This is what happens when that is no longer true.

H/T to James Lileks (for extra depressive realty/reality, watch the video clip in this post).

Mark Steyn returns to Macleans

He's back, and demographically feistier than ever:

Anything happen while I was gone?

Oh, yeah. The collapse of the global economy. Armageddon outta here. The ecopalypse is upon us. Down south, President Obama has abandoned the gaseous uplift of "the audacity of hope" and warns we're on the brink of the abyss. In the old New Deal, FDR warned that "we have nothing to fear but fear itself." For the new New Deal, President Hopeychangey says we have nothing but fear itself. Get used to it. In Russia, the nation's wealthiest oligarchs have seen their net worth decline by two-thirds. They can't steal it as fast as it depreciates. Even yard sales of Soviet nukes to chaps with Waziristani business cards won't make it up.

The only thing booming is declinism. In Britain, the Baby Boomers are now "Baby Gloomers," according to the Daily Telegraph's Elizabeth Grice, who gives the impression she's working it up into a book proposal for one of those slim volumes of contemporary manners one keeps in the guest "loo," amusingly illustrated with line drawings of once prosperous middle-class couples reduced to trawling the supermarket shelves for bargain "wine boxes" and microwaveable "Italian-style" focaccia. In the U.S., Steven Kotler thinks this is no time to get hung up on details. The planet is going to hell. So what's the big picture? The rooty-tootiest root cause of all?

Answer: motherhood and apple pie. If we didn't have so much motherhood, we wouldn't have all these people eating apple pies, manufactured in a plant in Guangdong and then shipped on some massive floating carbon footprint all the way to Price Chopper in Cedar Rapids. Motherhood is the root cause. As Mr. Kotler says:

"You don’t need to ask what you need to do for the world. You already know.
"Stop having children. It's that easy."

It really is! So he's calling for a five-year moratorium on having children, planet-wide. The Soviets had five-year plans but Mr. Kotler wants a five-year ban — "because a billion less people is a great place to start." Key word: "start." Experts agree that the carrying capacity for the planet is about two billion people. Actually, they don't agree: some of the earthier-than-thou eco-types say it's only 300 million. But Mr. Kotler doesn't want to sound like an extremist or anything, so he's starting with that best-case scenario. If the planet's carrying capacity is two billion tops, we need to unload a good 4½ billion. And, while no one outside of Dutch hospitals is arguing for compulsory euthanasia (yet), not adding to the total would be "a great place to start."

Do you sometimes think that perhaps Agent Smith's diatribe about humanity as a virus somehow got mislabelled as a biology lecture?

"I'd like to share a revelation that I've had, during my time here. It came to me when I tried to classify your species and I realized that you aren't actually mammals. Every mammal on this planet instinctively develops a natural equilibrium with its surrounding environment, but you humans do not. You move to an area and you multiply, and multiply until every natural resource is consumed. The only way you can survive is to spread to another area. There is another organism on this planet that follows the same pattern. Do you know what it is? — A virus. Human beings are a disease, a cancer of this planet. You are a plague, and we . . . are the cure."

QotD: Stop the spending

Last night, President Barack Obama underscored that, despite being in the Senate for the past few years and his party being in charge of Congress since 2006, he's just mopping up for the bungler in chief who preceded him. I yield to no ink-stained wretch in my vast and bottomless dislike of George W. Bush but let's hold Obama's feet to the fire here: He has consistently pledged to, you know, stop spending right after well, you know, he and Congress stop spending.

Seriously, we're really going to knuckle down and cut some "eliminate wasteful and ineffective programs" costing $2 trillion over the next decade. Spoiler alert: That comes to a whopping 5 percent or so of baseline projected spending over the next decade. Break out the champagne, 'cause happy days are here again!

If Obama is serious about restoring trust and confidence in the government's ability to live within its gargantuan means (and he should be), he should start by rewriting the $410 billion Omnibus Spending Bill that the Democrats have just dropped like a big, wet, steaming, stinking pile of...pork barbecue.

Nick Gillespie, "The Deficit That Obama Didn't Quite Inherit But Will Almost Certainly Vastly Expand", Hit and Run, 2009-02-25

Rick Santelli: new revolutionary

H/T to Cjunk, guest-blogging at Small Dead Animals.

What India's economic reforms got right

If you haven't already watched the recent Reason.TV clip on Slumdog Millionaire, click here. The situation in India has dramatically improved for vast numbers of people:

"In the 1990s India started liberalizing its economy," says Dalmia, "and it did three things: cut taxes, liberalized trade, and deregulated business." Although they failed to cut the kind of red tape that entangled Slumdog's orphans, the reforms did make it easier for more Indians to start businesses and hire employees.

"One IT company doesn't just employ computer professionals," says Dalmia. "It also needs landscaping services, cleaning services, and restaurants. There was this tremendous spillover effect that allowed people to lift themselves out of poverty."

Since the early 1990s, India has cut its poverty rate in half. About 300 million Indians—equivalent to the population of the entire United States—escaped the hunger and deprivation of extreme poverty thanks to pro-market reforms that increased economic activity.

Yet here in America we're turning away from market reform. Says Dalmia, "It's just this great conundrum that at the same time that deregulation and markets have produced such dramatic results in India, they are falling into suspicion in America." Dalmia's prescription for India is at odds with what politicians have chosen to "stimulate" the United States. "What India needs to do is continue apace with its liberalization effort, but expand it to include the poor. Release them from the shackles of government corruption and government bureaucracy."

More here.

QotD: Autarky Now!

I see that the former BBC presenter of a programme about gardens and gardening, Monty Don, has recently argued that we should aim to be self-sufficient in food. The trouble with such calls for self-sufficiency is that the unit in which such activity should occur is not spelled out. Does Mr Don think trade should be confined to within Britain, or within a region of it, or a village? Has this character no idea of how starvation frequently accompanied those societies cut off from the benefits of trade? Has he no notion of the benefits of trade, division of labour, regional specialisation, etc?

Of course I have nothing against owners of land looking to grow their own food if they want — how could I? But of course I doubt that Mr Don or other self-sufficiency types want to adopt such a grass-roots policy, to excuse the pun. I grow most of my own herbs, for instance. People have at times brewed their own beer to avoid the insipid stuff on sale in the shops, and as a result, this encouraged the "micro-brewery" movement in the US and elsewhere. But that is an example of enterprise at its best. The trouble with Mr Don, I suspect, is that his approach tends to be accompanied by calls to restrict imports, and the like.

Johnathan Pearce, "Bad ideas on economics", Samizdata, 2009-02-20

What Slumdog Millionaire can teach

QotD: Government Economy

The George W. Bush administration was so incredibly careless with your money that, according to this report to the Senate Banking Committee, it paid $254 billion this past autumn for bank stock worth $176 billion on the dates of purchase. Seventy-eight billion dollars wasted! Why isn't this on the front page of every newspaper in America? If you made a workplace decision that wasted several thousand dollars, you'd be in hot water — yet Bush administration White House and Treasury Department officials wasted $78 billion without consequences or accountability. That amount would have been more than sufficient to create universal health care for a year. Instead the money was forcibly removed from your pockets and transferred to the rich of Wall Street and the banking world (buying stock at more than market value effectively is a gift to the firms). Your children will be paying for this and similar irresponsible use of public funds for their entire working lives.

Treasury officials had the temerity to tell Harvard Professor Elizabeth Warren, chairwoman of the bailout oversight panel — by the way, her excellent 2003 book "The Two-Income Trap" predicted a national financial meltdown caused by bad mortgages — the mistake isn't quite as bad as it sounds because the stocks purchased have returned $271 million in dividends to taxpayers. So we threw $78 billion out the window but $271 million (three-tenths of 1 percent) blew back! In contemporary Washington, this is viewed as driving a hard bargain.

Gregg Easterbrook, "TMQ's annual Bad Predictions Review", ESPN Page 2, 2009-02-10

Who foresaw the economic meltdown? Adam Smith, that's who

P.J. O'Rourke cribs from his own research notes to point out that Adam Smith was way ahead of his time:

The free market is dead. It was killed by the Bolshevik Revolution, fascist dirigisme, Keynesianism, the Great Depression, the second world war economic controls, the Labour party victory of 1945, Keynesianism again, the Arab oil embargo, Anthony Giddens's "third way" and the current financial crisis. The free market has died at least 10 times in the past century. And whenever the market expires people want to know what Adam Smith would say. It is a moment of, "Hello, God, how’s my atheism going?"

Adam Smith would be laughing too hard to say anything. Smith spotted the precise cause of our economic calamity not just before it happened but 232 years before — probably a record for going short.

[. . .]

One simple idea allows an over-trading folly to turn into a speculative disaster — whether it involves ocean commerce, land in Louisiana, stocks, bonds, tulip bulbs or home mortgages. The idea is that unlimited prosperity can be created by the unlimited expansion of credit.

Such wild flights of borrowing can be effected only with what Smith called "the Daedalian wings of paper money". [321] To produce enough of this paper requires either a government or something the size of a government, which modern merchant banks have become. As Smith pointed out: "The government of an exclusive company of merchants, is, perhaps, the worst of all governments." [570]

The idea that The Wealth of Nations puts forth for creating prosperity is more complex. It involves all the baffling intricacies of human liberty. Smith proposed that everyone be free — free of bondage and of political, economic and regulatory oppression (Smith's principle of "self-interest"), free in choice of employment (Smith's principle of "division of labour"), and free to own and exchange the products of that labour (Smith's principle of "free trade"). "Little else is requisite to carry a state to the highest degree of opulence," Smith told a learned society in Edinburgh (with what degree of sarcasm we can imagine), "but peace, easy taxes and a tolerable administration of justice."

How then would Adam Smith fix the present mess? Sorry, but it is fixed already. The answer to a decline in the value of speculative assets is to pay less for them. Job done.

Ask your economist if Stimulis is right for you

Google's hangover

Ted Dziuba isn't showing Google the love that Google has come to expect:

Google's money-wasting skills aren't restricted to equity investments. They can spend it internally too. If there's one thing that Google's liberal-leaning workforce loves, it's a good entitlement. You suffered through more than a decade of collegiate education, partly out of fear of entering the real world, and partly because you'd never heard the word "overqualified" before, so when you landed that job as a Software Engineer in Mountain View, dammit, you were entitled to some free shit.

I want a big salary. I want a stock option grant that will get re-priced when it's underwater. I want free food every day. I want a shuttle bus to cart my fat ass from San Francisco to Mountain View, because I'm young and I deserve to live in the city even though it's an intractable commute for people who don't have chauffeurs.

I want all of this, and if you take any of it away, by golly, I'm going to whine about it on an internal mailing list. If my demands are not met, well, I guess I'll whine some more, but eventually shut up because my parents told me that I don't know how good I have it, and deep down, I'm too much of a chickenshit to go looking for a new job.

I see what Google's intention is: a well-cared-for workforce is a productive workforce. An employee who eats on campus doesn't take long lunches and can get back to work faster. When you work at Google, you call these things "perks." After you've quit Google, you call it "welfare." Google is quickly figuring out what the government already knows: Once you start with entitlement programs, the amount of money you need to spend on it never decreases. While Google doesn't publish this line item, probably out of shame, it's been estimated that they spend roughly $72 million per year on food alone.

Baloo's view of the stimulus

Rick McGinnis returns to blogging . . . the hard way

Rick McGinnis explains (and I know exactly what he's just gone through . . . I went through something similar at the end of November):

laid off

(It's been a while since I've updated this site. It would have been fair to call it - like most of my website - a derelict, but I had an excuse: a job that kept me very, very busy. I don't have that excuse any longer. Let's call this a work-in-progress, and see what happens. First, though, let's talk about how I got here.)

I KNEW SOMETHING WAS WRONG when my boss led me past her office, past the lunchroom and the accounting department, to the publisher's office where I noticed the company HR person and the union shop steward already waiting.

It took me a moment to realize what was happening, but once it started, I couldn't wait for it to be over. What made it so awful was the tedious scripting of the whole thing, and the boilerplate language: "unfortunately we've had to eliminate some positions ... I'm sorry to have to tell you ... just tell Ruth what you'd like her to get from your desk..."

I guess that's what made my first reaction anger, and not much else. It wasn't that I was mad at losing the job - the commute to the office had been a miserable ritual for weeks, even months, by now - so much as I was offended at being stuck in such a trite, predictable little play, and I was looking for some way to ad lib and break up the mediocrity of it all.

QotD: The cost of bad policies

Politicians and their disgusting, fawning, sycophantic pilot fish — the media — want us all to believe that economic ups and downs are a natural phenomenon, similar to earthquakes, meteor strikes, or the weather.

The simple fact that nobody ever mentions is that the economy itself is an artifact, a human invention, and while natural events do affect it in various ways — floods, drought, storms, and so on — most of whatever happens within it is as man-made as the computer I'm using to write this. Human beings shape the economy through all of their acivities. They find, make, buy, and sell innumerable goods and services. Unfortunately if they have political power, along with the evil will to use it, they can distort an economy in ways that conceal, destroy, steal, and force other folks to accept their products and practices, that have changed little since the walls of Babylon were erected.

That's what happened with the price of gasoline.

We've already discussed the way that the administration of Jimmy Carter (who worked in inflation the way artists work in watercolors) forced lenders — businesses that, like everything else in a truly free country, would have been immune to such an abuse of power — to offer mortgages to individuals who, by any reasonable market test were unable to pay them off. This, in effect, created money out of thin air — call it "fiat credit" — in a process only differing from actual counterfeiting because no printing press was involved. Clinton's administration piled this fraud higher and deeper until the "housing bubble" — an enormous market based solely on imaginary wealth — was created.

All that's required for a bubble to burst is a number of lenders who can't get their money back and can't sell the houses they've had to repossess. Companies the lenders owe money to don't get paid, and have to lay people off or go bankrupt. More disasters follow in a horrifying cascade of unpaid bills, fired workers, and rapidly dying businesses.

Who says there's no such thing as "trickle down"?

L. Neil Smith, "The Unnecessary Depression", Libertarian Enterprise, 2009-02-01

The Budget, cartoon format

As the Flea used to say, the Conservatives are really small-c conservatives. The "c" is getting smaller and smaller:

Click the cartoon to go to the Economist overview of the budget.

There's one minor tweak to make to the article: where it says "Jettisoning his party’s ideological commitment to small government", replace with "Ignoring even token lip service to small government".

Freemium content

Chris Anderson looks at the "Economics of Giving It Away", the move to free digital products:

Over the past decade, we have built a country-sized economy online where the default price is zero — nothing, nada, zip. Digital goods — from music and video to Wikipedia — can be produced and distributed at virtually no marginal cost, and so, by the laws of economics, price has gone the same way, to $0.00. For the Google Generation, the Internet is the land of the free.

Which is not to say companies can't make money from nothing. Gratis can be a good business. How? Pretty simple: The minority of customers who pay subsidize the majority who do not. Sometimes that's two different sets of customers, as in the traditional media model: A few advertisers pay for content so lots of consumers can get it cheap or free. The concept isn't new, but now that same model is powering everything from photo sharing to online bingo. The last decade has seen the extension of this "two-sided market" model far beyond media, and today it is the revenue engine for all of the biggest Web companies, from Facebook and MySpace to Google itself.

Economies of scale still apply — in fact, they may apply more in a digital sense — the minimum numbers are still not trivial. For example, this site is not ad-supported, largely because the traffic is not high enough to make it worthwhile for advertisers to place ads here: the tiny proportion of visitors who might click on an ad make the potential revenue smaller than the (admittedly tiny) administration cost to track and account for.

In other cases, the same digital economics have spurred entirely new business models, such as "Freemium," a free version supported by a paid premium version. This model uses free as a form of marketing to put the product in the hands of the maximum number of people, converting just a small fraction to paying customers. It's an inversion of the old free sample promotion: Rather than giving away one brownie to sell 99 others, you give away 99 virtual penguins to sell one virtual igloo. (Confused? Ask a child: This is the business model for the phenomenally successful Club Penguin.)

Variants of this model have been in use for quite some time. One of the very first software packages I used was a word processor called PC Write by Quicksoft, which was a very early version of the "Freemium" model: there was no charge to use the product¹, but by paying extra you got additional features, a printed manual, and free technical support. For the early 1980s, it was a radical business model (and an excellent quality product for the time).

Many iPhone applications have both a free "light" version and a paid "full" version: the installed base is now large enough that it is a very successful model for the producers.

"There is no disagreement . . ." oh, yes there is

Hundreds of economists beg to differ with this statement by President Obama:

There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy.

Details here.

Today's Budget Speech

Finance Minster Jim Flaherty is speaking in the house at the moment, but the National Post has already posted the highlights:

The measures in the budget appear designed to both address pressing economic concerns and ensure the support of the Liberal opposition in the House of Commons. Liberal Leader Michael Ignatieff has said he will announce on Wednesday his party's intentions.

Most of the tax relief will go to individuals and families, amounting to $20-billion in personal tax cuts over this and the coming five years.

It will include a 7.5% increase in the amount Canadians can earn before paying any tax and in the ceiling on the two lowest tax brackets. It also raises the amount that can be earned before child tax benefits are phased out, doubles the tax relief for low income workers who find work, and gives seniors an extra $150 in tax savings and reduces the amounts they must pull each year out of their retirement savings plans.

The spending stimulus, most of which was announced over the past week by a variety of ministers, includes $12-billion in investments in new and existing infrastructure across the country, and $7.8-billion to stimulate housing construction, including temporary renovation tax credits and more financial help for first-time homebuyers.

As well as tax cuts for individuals, the budget offers $8.3-billion for skills training, including extra support through a more generous employment insurance program for people who lose their jobs.

That last item is of some interest here . . . even though I'm still waiting to find out if I'll be entitled to benefits from EI. The Bloc has already announced they're voting against the budget . . . nice to see that they're consistent.

Update: More details on the tax reductions: they're not as dramatic as the headline rates would indicate (seriously, is anyone surprised by this?).

Update the second: Whaddaya know? The NDP don't like the budget either. NDP press release headline: "BUDGET FAILS TO PROTECT MOST VULNERABLE, CREATE AND SAFEGUARD JOBS". Given that governments aren't in the business of creating jobs, this is also not much of a surprise.

TurboTax's fine balancing act

Having recently had to pay a large sum of money to the Canadian government because the software we used to file our 2007 tax returns didn't correctly account for RRSP withdrawals (and/or my employer didn't withhold as much as I requested them to), I'm actually somewhat sympathetic here:

If you're an executive at Intuit, which makes a substantial chunk of change filing people's tax returns, you probably don't want to anger the future head of the Treasury — which, of course, contains the Internal Revenue Service, the ultimate consumer of your output. On the other hand, you don't want to imply that your product is capable of screwing up peoples' tax returns.

Witness the verbal gymnastics of Dan Maurer, Intuit SVP, as he tries to absolve both Tim Geithner and his firm from the mistakes on Geithner's return . . .

QotD: "The real scandal is what's legal"

I still can't understand how AIG, beneficiary of $152 billion in federal subsidies and loan guarantees, could get away with giving management $400 million in year-end bonuses for a year in which management did one of the worst jobs in financial history. That money was forcibly removed from your pocket and placed into the pockets of incompetent scoundrels — yet Congress does nothing! Now it turns out federally subsidized Merrill Lynch, the Bank of America subsidiary given $20 billion of your money two weeks ago, lost $15.3 billion in the fourth quarter of 2008, and yet handed its senior managers $4 billion in bonuses. Four billion, not million, forcibly removed from your pocket — or borrowed, with the bill handed to your children — and put into the pockets of scoundrels who did a terrible, horrible, awful job. Merrill Lynch managers must be laughing out loud: They screwed up in a major way, and for screwing up were lavishly rewarded, while blameless federal taxpayers were punished. Why isn't our Democratic-led, supposedly populist Congress incensed about such abuses?

Unfortunately, I do understand — because Congress is to blame for the abuses. Congress enacted October's $700 billion bailout of banks and Wall Street without including fraud provisions. At the moment of maximum leverage with banks and Wall Street, Congress simply handed over vast sums of your money without getting any accountability concessions in return. If a Pentagon contractor abuses federal money, if the vendor who supplies staplers and paper clips to the National Operational Hydrologic Remote Sensing Center abuses federal money, federal prosecutors move in, because contracts issued by federal agencies have fraud clauses. The October deal by which Congress handed over hundreds of billions of dollars to banks and Wall Street doesn't contain fraud clauses!

The AIG and Merrill Lynch top dogs may be despicable, but it's legal for them to stuff your money into their pockets as bonuses. As Michael Kinsley once said, "The real scandal is what's legal." That billions of the $700 billion bailout fund are being looted directly in front of our eyes is legal, owing to the carelessness of Congress.

Gregg Easterbrook, "Super Bowl Pick and Unwanted All-Pros", ESPN Page 2: TMQ, 2009-01-27

Invest wisely

Michael Pinkus offers some sage financial advice in these tough times:

If you had purchased $1000.00 of Nortel stock one year ago, it would now be worth $49.00. With Enron, you would have had $16.50 left of the original $1000.00. With WorldCom, you would have had less than $5.00 left. If you had purchased $1000 of Delta Air Lines stock you would have $49.00 left. On the other hand, if you had purchased $1,000.00 worth of wine one year ago, drank all the wine, then turned in the bottles for the LCBO recycling REFUND, you would have had $214.00. Based on the above, the best current investment advice is to drink heavily and recycle.

Amusing, but I suspect that the quality of wine you could buy that would return $214 in bottle deposits would more than counteract any pleasure you might feel in being so economical. (20 cents deposit per bottle, so over a thousand bottles . . . retailing for less than a dollar per bottle! Your liver would never forgive you.) I suspect a decimal place got moved in the original calculation . . . perhaps after a few too many under-a-dollar bottles of wine?

QotD: The Bush Legacy

In a way that was inconceivable when he took office, Mr. Bush — the advance man for the "ownership society," smaller and more trustworthy government, and a humble foreign policy — increased the size and scope of the federal government to unprecedented levels. At the same time, he constantly flashed signs of secrecy, duplicity, ineffectiveness and outright incompetence.

Think for a moment about the thousands of Transportation Security Administration screeners — newly minted government employees all — who continue to confiscate contact-lens solution and nail clippers while, according to nearly every field test, somehow failing to notice simulated bombs in passenger luggage.

Or schoolchildren struggling under No Child Left Behind, which federalized K-12 education to an unprecedented degree with nothing to show for it other than greater spending tabs. Or the bizarrely structured Medicare prescription-drug benefit, the largest entitlement program created since LBJ. Or the simple reality that taxpayers now guarantee some $8 trillion in inscrutable loans to a financial sector that collapsed from inscrutable loans.

Such programs were not in any way foisted on Mr. Bush, the way that welfare reform had been on Bill Clinton; they were signature projects, designed to create a legacy every bit as monumental and inspiring as Laura Bush's global literacy campaign.

The most basic Bush numbers are damning. If increases in government spending matter, then Mr. Bush is worse than any president in recent history. During his first four years in office — a period during which his party controlled Congress — he added a whopping $345 billion (in constant dollars) to the federal budget. The only other presidential term that comes close? Mr. Bush's second term. As of November 2008, he had added at least an additional $287 billion on top of that (and the months since then will add significantly to the bill). To put that in perspective, consider that the spendthrift LBJ added a mere $223 billion in total additional outlays in his one full term.

Nick Gillespie, "Bush Was a Big-Government Disaster: He expanded the state, and the sense that the state is incompetent.", Wall Street Journal, 2009-01-24

A Fisking! A Fisking!

It's been a while since anyone has done a proper Fisking, so up steps bold Nick Gillespie to fill the void:

Nobel Prize-winning economist and New York Times columnist Paul Krugman doesn't just accuse people who disagree with him of bad economics but of bad faith: "Any time you hear someone reciting one of these arguments" against various stimulus proposals coming out of the Obama admin, writes Krugman, "write him or her off as a dishonest flack."

Among the lies masquerading as arguments? "That the Obama plan will cost $275,000 per job created." In fact, says Krugman (without bothering to explain why his supposedly more accurate figure is so damn great):

The true cost per job of the Obama plan will probably be closer to $100,000 than $275,000 — and the net cost will be as little as $60,000 once you take into account the fact that a stronger economy means higher tax receipts.

That is incredible savings ($215,000 per job!), even before the first Obama stimulus dollar has been spent! Another bad argument, says Krugman, is the idea that

It's always better to cut taxes than to increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their money.

Here's how to think about this argument: it implies that we should shut down the air traffic control system. After all, that system is paid for with fees on air tickets — and surely it would be better to let the flying public keep its money rather than hand it over to government bureaucrats.

I do not follow the implication above (or is it an inference?). Beyond the weirdness of talking about air travel in this instance, wouldn't people stop flying if there were no air traffic control system? Hence the airlines would have some incentive to provide an ATC system even if the government weren't doing so (and in fact, that's effectively what other nations such as Canada do, where the ATC system has been corporatized). I think the argument that taxpayers are better at spending their money implies that people are not complete fucktards, while the long list of shovel-ready, job-creating pork projects compiled by the U.S. Conference of Mayors drives home what most of us know from daily experience: That other people spend your money less carefully than you usually do.

Krugman concludes, "It's clear that when it comes to economic stimulus, public spending provides much more bang for the buck than tax cuts...because a large fraction of any tax cut will simply be saved." I'm not sure what that means, exactly, either, especially if taxpayers saved the cut in, like, you know, a bank, which might make it available to people with businesses or mortgages or what have you. An odd side note to all this: If massive government spending grows the economy, then we should all be millionaires after eight years of Bush rule, shouldn't we?

China's economic situation

There's an article at The Economist today that shows a touching belief in the magic of the Chinese economy. The reported Gross Domestic Product has fallen to "only" 5.8%. The Economist's writer spends much of the article worrying about this gloomy report:

New figures show that China's GDP growth fell to 6.8% in the year to the fourth quarter, down from 9% in the third quarter and half its 13% pace in 2007. Growth of 6.8% may still sound pretty robust, but it implies that growth was virtually zero on a seasonally adjusted basis in the fourth quarter.

Industrial production has slowed even more sharply, growing by only 5.7% in the 12 months to December, compared with an 18% pace in late 2007. Thousands of factories have closed and millions of migrant workers have already lost their jobs. But there could be worse to come. Chinese exports are likely to drop further in coming months as world demand shrinks. Qu Hongbin, an economist at HSBC, forecasts that exports in the first quarter could be 19% lower than a year ago. 2009 may well see the first full-year decline in exports in more than a quarter of a century.

Economists have become gloomier about China’s prospects, with many now predicting GDP growth of only 5-6% in 2009, the lowest for almost two decades.

I've blogged about the Chinese economy on a few occasions (most recently here), generally with the same concern: that the numbers reported cannot be relied upon. The same is true here. Interestingly, the Economist article I linked to back in May makes this point quite well, yet today's article appears to treat the Chinese government's numbers as solid.

China has changed substantially from twenty years ago, and in many ways for the better. Most ordinary Chinese today are more free — economically anyway — than they were a generation ago, and there is a lot more opportunity for individuals to set up businesses and to succeed without needing Party connections. All this is indisputable . . . yet vast swathes of the Chinese economy are a legacy of the worst command-and-control period. It's not an exaggeration to say that we can expect to discover the "official numbers" have absolutely no relationship to reality, because the numbers are compiled from various sources including both freer quasi-capitalist companies and tottering government-owned (and often People's Liberation Army-owned) conglomerates which cannot be depended upon to report anything accurately.

An example from this article: "a fall in electricity output of 6% in the year to the fourth quarter, down from average annual growth of 15% over the previous five years." That's not just a reduction in the rate of growth, that's a reported drop in output of 6%. Imagine what the state of a European or Japanese/Korean economy running at only 94% of electricity . . . it'd be something you'd only see at times of severe economic contraction, not as a sign of a slow-down in growth.

Anyway, I'm just re-iterating what I've written before.

Advertising's final frontier

Gregg Easterbrook discerns a trend, based on the announcement that the New York Times will accept advertising on the front page for the first time in its 158th year:

WASHINGTON (January 20, 2022). Speaking at the White House Presented by Gazprom, Eli Manning, the CVS 46th President, said today the United States would begin to accept advertising on fighter planes, naval vessels and Air Force One.

"Just think, the next time I fly to an international conference to be jeered, your company's name and logo could be right next to the stars-and-bars on Air Force One," Manning said. "Call me in my sales office and I personally will handle your order." As for ads on the sides of military aircraft and warships, President Manning said that none of the generals in the Lockheed Martin Air Force have objected, nor have admirals for the Cunard Navy 'N' Caribbean Fun Line.

U.S. government agencies and officials began to accept advertising in 2016, the final year of the Boysenberry Diet Pepsi Barack Obama Administration, after the federal deficit exceeded the Citibank Gross Domestic Product. "The bailouts of Lexus, Tiffany and the Harvard endowment were bad enough," said a White House source who asked to be identified only as someone who finds it easy and convenient to buy office products from Staples. "Unlimited direct federal subsidies for country clubs, yachts and private jets was, in retrospect, a misjudgment," the source continued. "But the bankers told us they would refuse to lend unless they had free country club memberships. We had to do it, no one under any circumstances is allowed to question a banker!"

Speaking from the CNN/ESPN/BBC/Nigerian State Television White House Press Room, framed by adverts for toothpaste, pizza delivery and drive-through colonoscopies, President Manning strongly denied critics' claims the United States is for sale. "We cannot be for sale, the Beijing Investment Trust already owns 51 percent of our preferred stock," Manning said. Negotiations are ongoing to find new investors willing to inject funds into the Capital One United States Treasury and Payday Loan Service, in hopes that Treasury bills will be raised back above junk-bond status. "Until that happens, you can still use your Treasury bills for discounts at Quiznos," President Manning reassured Americans.

In other news, Lands End First Lady Abby Manning lit the national Christmas tree, signaling the festive start of the 2022 Christmas season.

Reason.TV's hopes and fears for the Obama administration

Hmmm. No embedding this time, apparently. Click here instead.

Adding to the "fears" category, Matt Welch has been listening to National Public Radio so you don't have to. Among the bad ideas on parade:

* A new Ministry of Culture? There was a long piece about Barack Obama will "revive American culture," boosting our allegedly beleauguered arts, taking us out of the dark days of, uh, Mapplethorpe-bashing or something.

* A European model for U.S. newspapers? I learned on Sunday that European newspapers are in "a better financial situation" than U.S. dailies (even though American newspapers are vastly more profitable, vastly more staffed, and filled with lots more and generally better journalism), and that we should be taking our newspaper-financing cues from Sweden. Where dailies are subsidized.

* A Cult of the Presidency? Where to begin? I heard a long news report on just how much of a historically post-partisan uniter Barack Obama really is. The moment after the groan-inducing Concert for Hope wrapped up at the Lincoln Memorial Sunday, the station hosts kicked it back to an analyst in Southern California for his measured take on the proceedings, and the first thing out of his mouth was "Wow, I just really wish I was back there to see such a thrilling event!" (Note: quote is approximate.) There was also an analysis of Barack Obama, the deep thinker/writer.

QotD: The Business Cycle

I am not an economist, nor — unlike a half-vast majority of the hairsprayheaded newsies who have somehow lately, miraculously, become overnight experts on all matters economic — do I pretend to be one on TV.

What I am is an individual who has worked hard for forty years in a difficult, exacting, and not terribly rewarding profession, which has nevertheless offered me the opportunity — an expensive one, but worth it — of telling the truth, exactly as I see it, without having to worry about what interests, corporate or otherwise, I might offend. And it seems to me that this is the moment — the very moment — when whatever I have sacrificed for that opportunity will now begin to pay off.

About halfway through those forty years, I made the acquaintance of Robert LeFevre, that great libertarian storyteller and teacher, who showed me (although I had already had suspicions in that direction) that what my generation had been indoctrinated to call the "Business Cyle" of boom and bust throughout American history was actually a government cycle of interference with the economy, followed by disaster, followed — usually — by government's backing off until prosperity restored itself, whereupon the idiotic cycle started over again.

In the 19th century, economic turndowns were called "panics", and from 1776 until 1929, two facts about them were incontrovertible. First, each and every one of them can easily be shown to have been the direct result of some particular stupidity on the part of the federal government. And second, as soon as government withdrew from the part of the economy it had damaged, the economy began to heal itself. Until 1929, no panic had ever lasted longer than about eighteen months. When the big Crash came in '29, and the Franklin Roosevelt regime decided to interfere even more, the resulting Great Depression lasted twelve years.

L. Neil Smith, "Collectivism's Last Stand", Libertarian Enterprise, 2009-01-18

Come to beautiful Belgium . . . and take sick leave

Michael Moynihan looks at the incredibly generous vacation and sick leave policies of some European countries:

Today's Wall Street Journal looks at the epidemic of healthy sick people in Belgium (i.e. people with hangovers bilking the government and their employers by taking advantage of the country's overly generous sick leave policies). In a Hit & Run post last year, I mentioned that, according to OECD figures, Sweden is one of the healthiest countries in Europe, yet its citizens topped the tables in accrued sick days. Odd, that.

Back in June, I offered the following anecdote from Sweden: "An acquaintance of mine in Stockholm was on sick leave for six months, collecting three-quarters of his salary after his girlfriend left him, rendering him "burned out" — utmattningssyndrom — and incapable of work." Well, according to the Journal, brokenhearted Belgians are also forcing the government to underwrite bad relationship decisions.

[. . .]

According to the Journal, a number of Belgian government agencies "were averaging 35 days of paid sick leave per employee each year, more than twice the national rate and seven times the U.S. average," before authorities cracked down on the cheats. And remember, Belgian workers are already the beneficiaries of four weeks of statutory vacation. With a less generous welfare state, perhaps the great Plastic Bertrand would find it necessary to start recording again.

That's rather more generous than the five days of paid sick leave I was entitled to on my last job (and given that Canada is more generous with things like that, I wonder if that seems excessive to typical American workers?).

Travel Tips for Visitors to Britain

Giles Coren offers some useful hints for visitors to Britain:

1 Do not pay full price. When shopping in Britain, bear in mind that the price marked is only a guide, it is always best to haggle.

Prices in Harrods, for example, may look ridiculously cheap to you, but locals cannot afford to pay even this much and if you pay more you will make life harder for them in the end. Do not damage their frail local economy with your powerful rupees.

2 When speaking to staff in shops, hotels and restaurants do not expect them to be solicitous, kind or helpful. What do you think they are, your bleeding butler? Effing nerve. What did your last servant die of?

3 If you do decide to make some purchases, do not forget that Savile Row suits and shirts from Jermyn Street may seem incredibly good value and look great with a tan when you're in that holiday frame of mind, but all that ethnic tat can look pretty ridiculous when you get it home.

4 Never ask a salesperson for help finding an item in your size or preferred colour - they will merely stare at you blankly as if you are an escaped lunatic and then tell you that everyfink is out on the floor. If you absolutely insist that they go and check the stockroom they will walk round a random corner, count to 30 and then go on a tea break.

5 Do not expect to find a full range of products in shops. Most shops in Britain are in receivership and merely flogging off old stock before being boarded up.

[. . .]

7 Take a good supply of colourful pens with you to give to the children who will flock around you asking for presents. And if you want to be really popular then give them knives, British children treasure these more than anything.

Sir Alan Walters

The Economist has a brief obituary for Sir Alan Walters, who served as one of Margaret Thatcher's chief economic advisors. The tone of the sub-heading ("His economic advice proved politically costly") does not match the content of the article, however:

As [Thatcher's] special adviser in Downing Street, he played a vital role in two of the most important episodes of her premiership. In 1981 he was brought back from academia to stiffen her resolve in pushing though a budget that cut public spending during a recession, the decisive break with the Keynesian past.

And in 1989, even more controversially, he returned to help her in a dispute with her chancellor, Nigel Lawson, who wanted sterling to join the European Exchange Rate Mechanism, a prelude to the euro. Sir Alan, like the prime minister, shared an instinctive distrust of such currency systems; he famously called this a "half-baked" idea. Mr Lawson resigned over what he saw as interference in economic policymaking, and Sir Alan had to go too. But in the long run Sir Alan’s view prevailed; the British still seem to prefer their pound, even in its present debauched state, to the euro.

My first trip back to Britain (I'd left as a child in 1967) was in 1979. I felt like I was visiting an Eastern Bloc nation: everything was grey, shabby, and run-down, labour unions were flexing their muscles to disrupt much of the economy, and everyone I met seemed to be feeling various levels of despair. The railway system was tottering under rotating labour actions (not real strikes, in the main, but slow-downs, walk-outs, and the like), so that even getting from London to Darlington was a weary, cold, much-delayed, and foodless (the catering union was on strike). Once we got to Middlesbrough (the very model of a Victorian industrial town at that time), the talk was all about power cuts, gas shortages, and the IRA). I'd only been back in the country for a few hours and I was already counting the days to escape back to "the west".

My next visit to the UK was several years later, and the difference was incredible: not just the physical surroundings, but in the vastly changed attitudes of the people. Where 1979 felt like entering the pages of an Orwell novel, there was little trace of that soul-numbness (though much grumbling about Margaret Thatcher . . . which was to be expected in the north of England and in Scotland).

QotD: The Madoff "victims"

If there is anything we have learned from the crisis in the financial sector, it's the urgent need for more regulation. Had federal regulators been more vigilant or wielded greater powers, all this suffering and heartache might have been averted. That's the story we've been told, and it must bring a rare smile to the face of Bernard Madoff.

Madoff was the manager of a Wall Street investment fund that he allegedly confessed to his sons was "one big lie" and "a giant Ponzi scheme." But "giant" fails to capture the scale of his fraud, which may have lost $50 billion, more than the entire gross domestic product of most of the countries on Earth.

Also striking is that his alleged victims were not rubes and simpletons but individuals of exceptional wealth and financial acumen — including various tycoons, as well as managers for banks, pension funds, and hedge funds. Even Madoff's own son, who worked for his father's firm, invested millions of dollars of his own money in the supposedly phony fund.

A Ponzi scheme, as it happens, is not a scam of dizzying complexity. It's the oldest scam in the book. You take money from new investors to pay off previous investors, and you keep doing it until the new infusions can't keep up with the withdrawals. It's about as simple as financial trickery gets.

So if regulators had been paying attention, they would have detected what was going on, right? After all, as one expert noted, Madoff was conspicuously unable to attract a lot of big institutions. "There's no Harvard management, there's no Yale, there's no Penn . . . no State of Texas or Virginia retirement system," James Hedges IV of LJH Global Investments told Fortune magazine.

Why not? "Because when you get to page two of your 30-page due diligence questionnaire," said Hedges, "you've already tripped eight alarms and said, 'I'm out of here.'"

Steve Chapman, "The Empty Case for More Regulation: The Madoff scandal shows why bigger government isn't the answer", Reason Online, 2009-01-08

The real problem with "green" cars

Ronald Bailey links to a column by Pete Geddes of the Foundation for Research on Economics and the Environment (FREE):

U.S. energy policy is best described as "keep it cheap." It's ironic that our political class is berating the Big Three for building the vehicles Americans bought in response. Congress is now poised to mandate that Detroit manufacture electric and hybrid vehicles. This approach is bound to fail, for these are cars consumers (a) don't want and (b) even if they did, can't afford. The recent plunge in the price of gas at the pump has not helped. November sales of hybrid cars fell 50 percent. U.S. hybrid sales are now back where they were in 2005. (Ford's best selling product in November was the F-150 pickup.) Only when electric and hybrid vehicles really do provide more value to consumers than the alternatives will they succeed.

[. . .]

In a masterstroke of special-interest politics, the UAW used CAFE's "two fleet" rule to forbid Detroit from importing smaller cars from its foreign operations. Forced to build small cars in domestic plants, with above market labor costs, Detroit could not make a profit. (In 2007, Toyota made 9.37 million vehicles and GM about the same. Toyota made a profit of about $1,874 per car, while GM lost $4,055.) Even Japanese and European carmakers rely on sedans with moderate fuel economy for profits. Small, super-efficient cars remain a niche product. Here's an inconvenient truth: forcing Detroit to build fuel-efficient cars in UAW factories is inconsistent with viable, sustainable manufacturing.

Critics often portray the Detroit automakers as "greedy, short-sighted profit seekers." To claim Detroit is refusing to sell cars consumers "really" want, compared with the cars they actually purchase, is a stretch. Is there a simpler explanation? Perhaps alternative cars are simply not ready for prime time?

Read the whole thing.

The origin of the state: livestock management

H/T to Paul Bonneau.

It's funny because it's true

Of course he'd say it's an economic stimulus, wouldn't he?

Vikings owner Zygi Wilf is now repositioning his attempt to get the taxpayers of Minnesota to build him a new football stadium as "economic stimulus":

With the state and federal governments looking for ways to jump-start the economy, a New Jersey businessman has an ambitious public works project he says will create more than 5,500 jobs and provide $500 million or more to local contractors.

The businessman is Zygi Wilf, principal owner of the Minnesota Vikings.

The project: A $954 million, state-of-the-art stadium for his football team in downtown Minneapolis — to be constructed using more than $635 million in public money.

"Why not? The Vikings are a public asset," said Lester Bagley, the Vikings' vice president in charge of stadium development. "This is going to create an economic boost."

An excellent example of Frederic Bastiat's Broken Window Fallacy in economics:

The parable describes a shopkeeper whose window is broken by a little boy. Everyone sympathizes with the man whose window was broken, but pretty soon they start to suggest that the broken window makes work for the glazier, who will then buy bread, benefiting the baker, who will then buy shoes, benefiting the cobbler, etc. Finally, the onlookers conclude that the little boy was not guilty of vandalism; instead he was a public benefactor, creating economic benefits for everyone in town.

[. . .]

The fallacy of the onlookers' argument is that they considered only the benefits of purchasing a new window, but they ignored the cost to the shopkeeper. As the shopkeeper was forced to spend his money on a new window, he could not spend it on something else. For example, the shopkeeper might have preferred to spend the money on bread and shoes for himself, but now cannot so enrich the baker and cobbler because he must fix his window.

Thus, the child did not bring any net benefit to the town. Instead, he made the town poorer by at least the value of one window, if not more. His actions benefited the glazier, but at the expense not only of the shopkeeper, but the baker and cobbler as well.

The spending that is seen weighs more heavily in most peoples' values than the spending that cannot take place because it has been pre-empted by the forced spending. In Minnesota's case, too many people see the government's "contribution" only for the positives (new jobs, new orders for materials, etc.), ignoring the other things which cannot be obtained because the money has gone to support a billionaire's quest for a new stadium.

QotD: Wall Street remuneration

Very high pay to Wall Street managers is justified on the grounds that they are financial geniuses with astonishing expertise. Instead it turns out many financial industry managers made basic blunder after basic blunder. The 2008 financial markets crash belies the entire premise of Wall Street — that the people there deserve huge paychecks for incredible skill in finance. Any fool can make money in a rising market by borrowing! But if the rise stops and you're leveraged, you hit the wall. This is the short version of how many Wall Street and hedge fund managers appeared to be "financial geniuses" from 2003 to 2006, then ended up destroying their investors. The financial manager with true expertise knows to avoid bubbles, especially bubbles based on borrowing. Many Wall Street and big-bank managers during the housing bubble were taking wild risks or performing no due diligence —and when the risks blew up, they got to keep their bonuses while investors and stockholders got hosed. At this point, it's totally obvious the system is rigged — lie about returns (or take crazy risks), claim a spectacular year, award yourself a vast bonus. When the scandal hits, so what? You keep the bonuses. TMQ's basic question: Why isn't this considered embezzlement, punishable by law? Financial managers have a fiduciary responsibility to act in their investors' interest. When financial managers instead act against their investors' interest in order to line their own pockets, that isn't just cynical — that sounds like a crime.

Gregg Easterbrook, "Armageddon", Tuesday Morning Quarterback, 2008-12-23

The history of the US auto industry

Megan McArdle attempts an even-handed look at how Detroit's automakers got into their current plight:

In the early 1950s, for various reasons Detroit developed a cozy three-way oligopoly. The UAW developed a cozy monopoly on supplying labor service to that oligopoly. In some ways, the UAW helped sustain that oligopoly. If you're a big company whose quality suffers, you have problems. But if you have a union making sure that labor quality cannot vary across the industry, you don't need to worry that your competitors will make a better car. Detroit competed on styling and power, not reliability or price.

During those years of oligopoly, the Big Three's first loyalty (after their loyalty to management) was loyalty to the union. The worst thing that could happen to a Big Three manager was a strike. Making a car that is reliable is only partly a matter of engineering; it's mostly a matter of extremely tight control over the assembly process. That tight control is necessarily less pleasing to the workers than looser rules. The unions could severely hurt a company with a strike. Whereas the customers? The customers could only go to another company where the same union was negotiating the same loose work rules.

(Yes, yes, I know that Toyota does it differently, with group responsibility. But Toyota's system was developed in the absence of a strong union; the adversarial model that the UAW had developed along, however historically necessary, made the Toyota example completely unworkable in a Detroit plant.)

After the unions, for the Big Three, the government was the next most worrisome constituent, followed by the dealers, then the suppliers. The customers were somewhere down there with the mayor of Youngstown, Ohio, in emotional importance to Detroit managers. It's not that the managers in Detroit had anything against their customers, and I've no doubt that they had lots of meetings in which moving testimonials to the gosh-darned swellness of Chevy or Buick or Mercury buyers. But the buyers had little power to punish them, and their other constituencies could make their lives miserable.

The biggest risk to any company, generally speaking, is unforeseen change. Yet, paradoxically, the safest method of planning (safe in the sense that the planner is less likely to be fired) is to base your plans on current trends continuing. The larger the organization, the greater the risk of sudden unanticipated change, yet the greater the tendency within the organization to resist any plan that deviates from the "current trends will continue" model.

Read the whole thing.

Beware the zombie!

Anthony Randazzo warns that we haven't paid enough attention to Japan's asset crisis (and aftermath) of the 1980s:

Killing zombies isn't typically the responsibility of America's president or treasury secretary. But if the country is going to get through the current financial crisis, President-elect Barack Obama and his economic team better get out their shotguns and aim for the head.

Today, our economy is plagued by struggling markets, liquidity concerns, and frozen credit. Twenty years ago, Japan faced nearly the exact same problems. Then they fell prey to the zombies.

After Japan's asset bubble burst in the late 1980s, their economy took a sharp downturn, prompting government officials to try bailing out banks and investing in infrastructure, much like the activity and proposals floating around America today. The results were terrible.

With the government propping up poor business models rather than allowing further job losses, firms wound up operating over the long-term without making a profit or adding any value to society. Their utter lack of vitality earned these perpetual money-leaching entities the moniker "zombie businesses." And unless American policymakers understand the failures of the Japanese response, we will suffer the same zombie fate.

Public support for bailouts? Still negative

Matt Welch rounds up the latest poll numbers for and against bailing out struggling businesses "after two months of relentless scaremongering by the nation's elite politicians and journalists":

Like Dick Cheney, I don't believe in governing by poll. But that won't prevent me from taking heart in the fact that, once again, Americans seem to have more instinctive faith in capitalism and less enthusiasm for government blank checks than their elected representatives.

In the comments to that post, "Ed" suggests the obvious solution:

I still think we should sell the rust-belt states to Canada. They must be worth something.

Bjorn Lomborg on the trade-offs involved in addressing climate change

Behind-the-scenes financial chicanery

Jeffrey Rogers Hummel uncovers the "most dramatic peacetime experiment in monetary and fiscal stimulus":

[. . .] the Treasury is now issuing extra securities to borrow money from the economy, then loaning the money to the Fed in these special deposits so that Bernanke can re-inject it to make his bailout purchases of various securities, all without increasing the monetary base. In other words, what the infamous bailout act permitted the Treasury to do directly is something it had already started doing indirectly through the Fed to the tune of half a trillion. All in the name of easing a tight Treasury market.

This means that the total bailout is not the $700 billion that Congress appropriated, but at least $1.2 trillion. And that figure doesn’t include the Fed’s mid-October promise of $540 billion to bail out money market funds, which if not covered by the Fed’s sale of other assets, will require either further monetary increases or further Treasury borrowing. Thus we now have the worst of both worlds: a massive bailout financed both by Treasury borrowing (in order to avoid inflation) and a Federal Reserve increase of the monetary base (which heralds future inflation anyway).

Of the $1.2 trillion increase in federal government borrowing, at least half took place within the space of a month. This sudden 25 percent increase in the outstanding national debt qualifies as the most dramatic peacetime experiment in fiscal stimulus the U.S. government has ever implemented. If Keynesian theory were correct, the economy should have been well beyond the reach of any potential recession by the end of October. But how many economists are going to acknowledge this striking empirical refutation of the fiscal policy they hold dear?

We may be about to see the biggest hike in inflation in 30 years . . .

QotD: A smoky anniversary

Last week marked the 10th anniversary of the Master Settlement Agreement (MSA) that resolved state lawsuits against the leading tobacco manufacturers. The occasion prompted attempts by the agreement's supporters to portray it as a great "public health" victory, as opposed to a government-backed conspiracy in restraint of trade that enriched trial lawyers, protected Big Tobacco from competition, and brought state treasuries more than $200 billion in found money, all at the expense of smokers, usually portrayed as victims of the companies that benefited from the deal. A good example of MSA boosterism was provided by syndicated columnist Marie Cocco, who opined that the public-spirited lawyers behind the deal have helped "save millions of lives and billions in health costs." Let's ignore the fact that discouraging people from smoking does not prevent deaths so much as delay them, and that increasing the ranks of longer-lived nonsmokers actually raises total spending on health care instead of reducing it. Is Cocco right to argue that the MSA "may well be the most significant advance in the campaign to curtail tobacco use since the 1964 surgeon general's report"?

Cocco notes that per capita cigarette consumption has fallen by about 28 percent since the MSA was signed in 1998. That compares to a decline of about 22 percent in the previous decade. Cocco attributes the acceleration of the downward trend to the MSA's restrictions on cigarette advertising and promotion, which included bans on billboards and on merchandise embossed with cigarette logos. I am skeptical that advertising has such a powerful effect on total consumption of cigarettes (as opposed to brand share), and Cocco offers no evidence to back up her thesis.

Tellingly, Cocco fails to mention that during this same period state and local cigarette taxes were raised over and over again. The one aspect of the MSA than can most plausibly be credited with discouraging consumption, a price increase of about 45 cents a pack that the tobacco companies used to cover their payments to the states, pales in comparison with the increase in the average state cigarette tax, which rose from about 35 cents in 1998 to $1.19 this year. Meanwhile, smoking bans have proliferated throughout the country and become increasingly strict. Cocco notes this development, which had nothing to do with the MSA, but still clings to the notion that getting rid of Marlboro billboards and Joe Camel T-shirts deserves the lion's share of the credit for reducing cigarette consumption.

Jacob Sullum, "When Paternalists Fall in Love With Greedy Lawyers", Hit and Run 2008-12-03

QotD: Of course they know what they're doing . . . we hope

Remember when Treasury Secretary Henry Paulson warned us that the economy was about to collapse unless Congress immediately authorized him to spend $700 billion on "troubled assets" held by banks? Remember when he said banks would never lend again as long as they remained saddled with these bad investments?

You do remember? So it's not just me. I was beginning to think I had dreamed the whole thing, because a month and a half later the Treasury Department has yet to buy any troubled assets, and last week Paulson said it had no plans to do so. Instead the department is using its $700 billion to buy the banks themselves, which I could almost swear Paulson said was a bad idea a couple of months ago. Evidently the Bush administration is still calling the effort the Troubled Asset Relief Program for the sake of the acronym, which suggests a cover for something unsightly or embarrassing.

Jacob Sullum, "Everything bad is good again", Reason Online, 2008-11-19

Union-management relations

Andrew Sullivan links to this old article by Gregg Easterbrook from 1983:

What is at the heart of these and other conflicts is not an urge for self-destruction but rather the chronic mistrust between corporate management and American labor unions. Louis Brandeis, hardly a corporate apologist, said in 1905, "Don't assume that the interests of employer and employee are necessarily hostile — that what is good for one is necessarily bad for the other. The opposite is more apt to be the case. While they have different interests, they are likely to prosper or suffer together." One might assume that if anything could prove the reasonableness of such advice to both labor and management, it would be the pressures of the recession and the need to work together to keep companies from going out of business. Nevertheless, confrontation, however destructive, continues to be the norm in many industries. William Hobgood, a former assistant secretary of labor, who mediated the coal strike in 1978, says, "Historically, labor has made most of its gains through confrontation, not cooperation, and historically, management has been most satisfied when it has employed pressure techniques. You would think that the recession would cause some positive structural change in that relationship, but so far, if anything, it's made matters worse."

Why this should be so has to do largely with the course of labor relations through the years of prosperity that preceded the American economy's doldrums. Then, mechanisms designed in anticipation of infinite growth, and geared chiefly to provide a constant improvement of wages and benefits, were built into contracts. These mechanisms made little provision for any decline in profits or the retrenchment that would have to follow. Today, they still have a powerful momentum, even though they have become detrimental to the interests of all, ultimately threatening the shutdown of factories and stores that are the source of union jobs and corporate income.

But union intransigence doesn't arise without cause. It's often said that companies get the unions they deserve, and in some industries, this was clearly true:

The goon squads employed by coal-mine owners, the dirty, unventilated textile mills, the subsistence-level wages, and the broken backs and missing limbs suffered by laborers working, exhausted, too close to open-hearth furnaces or vicious stamping presses are not all that far in the past. What coal miner could be ignorant of the explosion of the mine in Monongah, West Virginia, in 1907, which killed 361 men and was caused by a company's indifference to escaping methane, or of the mine explosion in West Frankfort, Illinois, in 1961, which killed 119 men and was also caused by the owner's negligence?

Before workers formed unions, they were forced to accept the wages they were offered, and either to tolerate conditions on the job or quit. Substantial improvements in wages and conditions were not achieved in most industries until the 1940s and 1960s, when unions mustered enough power to bargain on an industry-wide basis — a system known as "pattern bargaining."

QotD: Bailing out the Big 3

It is all a reminder that the biggest threat to a healthy economy is not the socialists of campaign lore. It's C.E.O.'s. It's politically powerful crony capitalists who use their influence to create a stagnant corporate welfare state.

If ever the market has rendered a just verdict, it is the one rendered on G.M. and Chrysler. These companies are not innocent victims of this crisis. To read the expert literature on these companies is to read a long litany of miscalculation. Some experts mention the management blunders, some the union contracts and the legacy costs, some the years of poor car design and some the entrenched corporate cultures.

There seems to be no one who believes the companies are viable without radical change. A federal cash infusion will not infuse wisdom into management. It will not reduce labor costs. It will not attract talented new employees. As Megan McArdle of The Atlantic wittily put it, "Working for the Big Three magically combines vast corporate bureaucracy and job insecurity in one completely unattractive package."

In short, a bailout will not solve anything — just postpone things. If this goes through, Big Three executives will make decisions knowing that whatever happens, Uncle Sam will bail them out — just like Fannie Mae and Freddie Mac. In the meantime, capital that could have gone to successful companies and programs will be directed toward companies with a history of using it badly.

David Brooks, "Bailout to Nowhere", New York Times, 2008-11-14

The auto industry mess

A few interesting links on the Big(?) ThreeTwo-and-a-half:

From the Wall Street Journal, some home truths about GM's forlorn hope, the Volt:

We're talking about a headache of a car that will have to be recharged for six hours to give 40 miles of gasoline-free driving. What if you park on the street or in a public garage? Tough luck. The Volt also will have a small gas engine onboard to recharge the battery for trips of more than 40 miles. Don't believe press blather that it will get 50 mpg in this mode. Submarines and locomotives have operated on the same principle for a century. If it were so efficient in cars, they'd clog the roads by now. (That GM allows the 50 mpg myth to persist in the press, and even abets it, only testifies to the company's desperation.)

Hardly mentioned is the fact that gasoline goes bad after a few months. If the Volt is used as intended, for daily trips of 40 miles or less, the car's tank will have to be drained periodically and the gas disposed of.

On the plight GM is in, and how long ago it started to drop into the abyss:

GM's operations are not otherwise sound. They have been headed for this moment since 1973. Conservatives blame legacy costs, and liberals blame management. They're both right. GM's legacy costs are crazy. So is the UAW leadership, which, goaded by the retirees, is knowingly driving the company into bankruptcy rather than negotiate clearly unsustainable deals. Those legacy costs would probably not be supportable by any company in a competitive environment; the UAW's expectations were created in an era of comfortable oligopoly, when all costs could be directly passed on to the consumer. And the poor quality control on American cars is, from all reports, the responsibility of the union, which maintains downright silly work rules that not even the most ardent liberal could defend in both the Big Three and their various parts suppliers. My favorite was the supplier plant that was forced to work in english measurement even though they had to sell parts in metric. But the examples are legion.

But too, management doesn't seem to be trying much harder to keep themselves out of bankruptcy court. The company could have limped on for longer if it had, y'know, made cars anyone wanted to buy. That's not the UAW's fault. GM's management seems to have a positive genius for making horrible cars, as if they'd deliberately sat down and asked themselves how they could best combine ugly, inconvenient, and unreliable into one expensive package.

And another post from Megan McArdle on why bankruptcy is the only sensible way to solve the problem:

The entire thing is a toxic mess, left over from the days when interlocking oligopolies contentedly conspired to suck every last dollar out of captive consumers to whom Detroit would happily have given Flintstones cars if they could have figured out how to do them in two-tone vinyl. But things that look like lunatic mistakes on the part of management were often quite rational responses to intolerable pressures. I'm still not clear on why the cars had to be ugly, and all of the indicators cunningly hidden behind the wheel where they wouldn't distract the driver, of course. Management did many stupid and inexplicable things.

Having driven the companies right up to the verge of bankruptcy, the conceded literally only when it became clear that the union members were about to get their contracts unilaterally rewritten by a judge, lose their health benefits, and possibly get their pensions crammed down by the PBGC, which maxes out somewhere slightly north of $40K per annum. Then the unions ever so generously agreed to cut health care costs by 30% in exchange for job security guarantees. And now that their game of collective bargaining chicken has resulted in the obvious disaster, they want us to pay to save their jobs, at a cost of over $300,000 per.

Corporations don't love the free market

Roderick Long explains why corporations are often the most bitter enemies of true free markets:

Corporations tend to fear competition, because competition exerts downward pressure on prices and upward pressure on salaries; moreover, success on the market comes with no guarantee of permanency, depending as it does on outdoing other firms at correctly figuring out how best to satisfy forever-changing consumer preferences, and that kind of vulnerability to loss is no picnic. It is no surprise, then, that throughout U.S. history corporations have been overwhelmingly hostile to the free market. Indeed, most of the existing regulatory apparatus — including those regulations widely misperceived as restraints on corporate power — were vigorously supported, lobbied for, and in some cases even drafted by the corporate elite.

[. . .]Tax breaks to favored corporations represent yet another non-obvious form of government intervention. There is of course nothing anti-market about tax breaks per se; quite the contrary. But when a firm is exempted from taxes to which its competitors are subject, it becomes the beneficiary of state coercion directed against others, and to that extent owes its success to government intervention rather than market forces.

Intellectual property laws also function to bolster the power of big business. Even those who accept the intellectual property as a legitimate form of private property can agree that the ever-expanding temporal horizon of copyright protection, along with disproportionately steep fines for violations (measures for which publishers, recording firms, software companies, and film studios have lobbied so effectively), are excessive from an incentival point of view, stand in tension with the express intent of the Constitution's patents-and-copyrights clause, and have more to do with maximizing corporate profits than with securing a fair return to the original creators.

Government favoritism also underwrites environmental irresponsibility on the part of big business. Polluters often enjoy protection against lawsuits, for example, despite the pollution's status as a violation of private property rights. When timber companies engage in logging on public lands, the access roads are generally tax-funded, thus reducing the cost of logging below its market rate; moreover, since the loggers do not own the forests they have little incentive to log sustainably.

Dissing "smart" growth

Frequent commenter (from back when I could allow comments) "Da Wife" sent along an interesting link on so-called smart growth:

Simply put, smart growth means an end to sprawling, car-oriented suburbia. In its place should rise transit-friendly communities where you can live, play and work.

The province's Places to Grow legislation has made it the new normal in the GTA and communities like Markham Centre are developing in response. But Mr. O'Toole is not impressed.

Q: Has the smart growth idea been around long enough to evaluate it?

A: Yes. California has been doing various versions since the 1970s, Hawaii since the 1960s . . . Are more people riding transit, riding rail because of higher densities? The answer is, no. One per cent of travel is by transit. Maybe 98 per cent is by car.

Has it has any effect on preservation of open space? Well, their urban growth boundaries are preserving marginal pasture land, but it's forcing people to drive 100 miles to build their homes on prime farmland.

It's also making housing very expensive. In Canada, the city that has done the most planning for smart growth is Vancouver, and it has the least affordable housing.

Q: But when you talk about housing prices in a city such as Vancouver, there's also geography and the economy; how high on the list does planning rank?

A: Number one. Seventy per cent of the Vancouver metropolitan area has been ruled off-limits to developers. There's plenty of room for growth if they allowed people to live in those areas. So people are having to accept housing they don't really want.

Most Canadians and Americans agree their preferred form of housing is a single-family home on a lot, where they can have a garden or place for their kids or pets to play.

Q: Is the model we've been living with, with a downtown, suburbs and bedroom communities, outdated?

A: It's definitely outdated. The part that's outdated is the downtown part.

In many metropolitan areas, more than two-thirds of the jobs are not in any kind of centre and that's because we have such good personal transportation, namely automobiles.

We have much a better distribution of jobs and that’s a remedy for congestion.

When we draw an urban boundary, we're saying we're going to deny people access to low cost land. I don't think government knows where people ought to live. I don't think government knows where jobs ought to be.

One of the attractions of "smart growth" policies is that it puts a lot of power in the hands of appointed planners, and keeps it out of the hands of those irresponsible property owners and developers. Bureaucrats almost always believe that they know better than individuals what is best for those individuals. This is the same thing on a larger scale: the government explicitly dictates what kind of land use is going to be allowed (to a finer degree of granularity than existing zoning rules), and there's little or no recourse for the people directly affected by the rules.

Worst economy since . . . 1991?

Matt Welch examines some of the hyperventilation over the current economic crisis:

Finally, a number that could be the worst on record since the Great Dustbowlia, though it's a number of direction, not position, and (just like GDP) when combined with the prior quarter it shows net growth.

I don't mean to minimize the pain here. But as Nick Gillespie pointed out a couple weeks back, "Any comparison with the Depression, which featured an unemployment rate of 25 percent and a contraction in GDP of over 33 percent at its worst moments, strains credulity."

Both the outgoing administration and the incoming one (whichever wins) have been using such inaccurate, scaremongering analogies to justify massive, ill-conceived federal interventions all over the private economy that will likely have profoundly negative long-term consquences in the forms of renewed inflation, managerial inefficiency from central planners, offshoring of capital markets, and what I fear will be the biggest Bubble of them all: Having the federal government guarantee damned near every large financial risk anybody takes. In a world of ever-increasing guarantees, why shouldn't every investor pour maximum money into whatever federally backstopped financial institution is offering the highest rates? And how do you suppose said institution will be able to afford paying out those high winnings? It won't be through sound investments, boyo.

As a confirmed apocalyptic, I continue to expect the sky to fall; but as a stat dweeb I'm just not seeing the elephant tracks. Right now, during our Worst Economic Crisis Since the Great Depression, unemployment is at 6.1 percent, inflation is at 4.9 percent, and GDP shrank 0.3 percent this quarter, though it's still up for the year. I don't see how that even begins to compete with the late-Carter, early-Reagan era, when GDP shrank in both 1980 and 1982, unemployment never dipped below 8 percent from November 1981 to January 1984, and inflation never dipped below 8 percent between September 1978 and January 1982.

New Scientist discards notion of "data"

Tim Worstall takes New Scientist to the woodshed for their deliberate innumeracy:

If you're going to start demanding a new economics, as the New Scientist just has, then it would be useful if you understood what the old economics you're trying to replace has to say . . . as the New Scientist clearly doesn't. Take this seemingly uncontroversial statement: "We live on a planet with finite resources — that's no surprise to anyone — so why do we have an economic system in which all that matters is growth? More growth means using more resources." Umm, no, it doesn't mean that.

Certainly, growth can lead to the consumption of more resources, but it's not a necessary outcome. "This one is built on a long-standing question: how do we square Earth's finite resources with the fact that as the economy grows, the amount of natural resources needed to sustain that activity must grow too?" No, this simply isn't true. They've entirely missed how those dastardly neo-liberal economists they want to overthrow define and measure growth. Apologies to those grandmothers I'm informing about egg-sucking, but a little basic economics here.

We define economic growth as a rise in GDP (don't sweat the details here) per capita. GDP is not measuring the use or not of resources. It's measuring the value added in the economy. If I use sand to make a wine bottle I will add some small amount of GDP. If I use that same sand and make a computer chip instead I will add more value and thus more to GDP with the same use of resources. If I don't use any sand at all and start singing at a concert where people pay me (with my voice, perhaps paying me to stop) then again, I've increased GDP with no use of natural resources at all. And just to complete the logic, if I learn how to pack more transistors onto a chip I can use less sand to make one of the same performance, allowing me to create the same GDP with less use of natural resources. There is thus no requirement for economic growth to mean an increase in the use of resources, natural or otherwise.

QotD: Political meddling

[. . .] a worrying trend about the direction America is poised to go during the coming Obamaverse. You might think that the Fannie/Freddie debacle would forever sear the eyeballs of those dreamers who aim to improve society by forcing private or semi-private companies to redirect their activities away from the bottom line and toward the desires of various interest groups, but then you'd be hopelessly naive. Mortgages and endowments ain't the half of it Everywhere you see government contracting you see a fantastical variety of social engineering projects. There are any number of colossal pension funds being tweaked as we speak to fit the political goals of people whose track record with managing money has been, shall we say, suboptimal. In the ongoing financial-market crisis, such politically correct investing may contribute to an awful lot of carnage.

Matt Welch, "You Will Be Mine You Will Be Mine, All Mine", Hit and Run, 2008-10-27

Part four of the social security story: Broken Trust

Worried about the viability of Social Security? Unless you're already collecting it, you should be!

Follow the animated adventures of Sonny, exactly the sort of youth who is set to get screwed by a system designed during The Great Depression, when workers were plenty and retirees rare.

In Episode Four, Sonny learns the big secret of Social Security: That all payroll taxes go into the federal government's general fund and are spent on all sorts of programs and activities that have nothing to do with individuals' retirements.

QotD: Bailing out the ethanol speculators

The federal government's ethanol policies have driven up the price of corn [. . .] But rather than reforming the policies that have caused a spike in corn prices, the federal government wants to bail out ethanol producers who speculated on the price of corn. Only the U.S. Department of Agriculture could dream up a policy like this. [. . .] The high price of corn has had a ripple effect over our entire economy. Instead of trying to bail out every industry hurt by it, the federal government needs to take a serious look at reforming our ethanol policies.

Rep. Jeff Flake, quoted by Mike Sunnucks, "Flake blasts proposed ethanol bailout", Phoenix Business Journal, 2008-10-22

The strange, unlamented death of libertarianism

Jacob Weisberg says the final rites over the corpse of libertarian theory, based on how badly the situation has become due to the Bush administration's total devotion to radical libertarianism:

A source of mild entertainment amid the financial carnage has been watching libertarians scurrying to explain how the global financial crisis is the result of too much government intervention rather than too little. One line of argument casts as villain the Community Reinvestment Act, which prevents banks from "redlining" minority neighborhoods as not creditworthy. Another theory blames Fannie Mae and Freddie Mac for causing the trouble by subsidizing and securitizing mortgages with an implicit government guarantee. An alternative thesis is that past bailouts encouraged investors to behave recklessly in anticipation of a taxpayer rescue.

There are rebuttals to these claims and rejoinders to the rebuttals. But to summarize, the libertarian apologetics fall wildly short of providing any convincing explanation for what went wrong. The argument as a whole is reminiscent of wearying dorm-room debates that took place circa 1989 about whether the fall of the Soviet bloc demonstrated the failure of communism. Academic Marxists were never going to be convinced that anything that happened in the real world could invalidate their belief system. Utopians of the right, libertarians are just as convinced that their ideas have yet to be tried, and that they would work beautifully if we could only just have a do-over of human history. Like all true ideologues, they find a way to interpret mounting evidence of error as proof that they were right all along.

To which the rest of us can only respond, Haven't you people done enough harm already? We have narrowly avoided a global depression and are mercifully pointed toward merely the worst recession in a long while. This is thanks to a global economic meltdown made possible by libertarian ideas. I don't have much patience with the notion that trying to figure out how we got into this mess is somehow unacceptably vicious and pointless — Sarah Palin's view of global warming. As with any failure, inquest is central to improvement. And any competent forensic work has to put the libertarian theory of self-regulating financial markets at the scene of the crime.

Remember all those Bush appointees waving their copies of Murray Rothbard's For a New Liberty: The Libertarian Manifesto and Hayek's The Road to Serfdom, while abolishing vast chunks of the federal government, ordering the mass withdrawals of American troops from all foreign lands, and selling off millions and millions of federal properties? Yeah, me neither.

How did those long-standing bastions of New Deal-era socialism, Fannie and Freddie, survive the gutting of all government involvement in the economy?

The answer is, of course, that George Bush is about as far away from a libertarian true believer as you could be without requiring people to refer to you as "Der Führer" or "Dear Leader" or "Big Brother". Big government projects? Check. Massive military spending? Check. Meddling in the free markets? Check. Vast increases in all kinds of regulation? Check. Imposition of further restrictions on individual freedom? Check.

Jeffrey Miron does the heavy lifting to refute Weisberg's bizzare notion that libertarians had anything to do with the current financial mess:

Whatever one's views of libertarian policies, the incontrovertible fact is that the U.S. has not pursued such policies. Not in the past 10 years. Not in the past century. Indeed, except for a brief moment before Alexander Hamilton engineered the first U.S. bailout of financial markets, not ever. If the U.S. had truly been the "Libertarian Land" that Weisberg alleges, a huge range of policies that have helped fuel the current situation would have been radically different.

In Libertarian Land, banks would not be chartered, defined, and regulated by government, as they have been in the U.S. for over 150 years. In particular, banks would have the right to "suspend convertibility," meaning they could tell depositors, "Sorry, you can't have all your money back right now," during banks runs that threatened bank solvency. This is precisely what banks did in key financial panics during the pre-Fed period, when suspension was illegal but tolerated or encouraged by regulators. By so doing, banks reduced the spread of panics and solvent but illiquid banks did not fail in large numbers.

In Libertarian Land, the Federal Reserve would never have been created. This means the Fed could not have turned a normal recession into the Great Depression by failing to stem a huge decline in the money supply. This decline and the related bank failures occurred because the Fed's existence was taken as indication that banks could not, or should not, suspend convertibility, as they had done successfully in the past. Thus in Libertarian Land, the Great Depression would probably not have occurred.

Update: I should also have linked to Matt Welch's round-up of reactions to Weisberg's article.

Economic vain hopes

Jacob Sullum makes an excellent point in regard to the exaggerated hopes (at least on the part of Obama-favouring media pundits) for job creation if Barack Obama is elected:

[Many Americans] probably will be disappointed, because Obama seems to view job creation not only as something the government does with taxpayers' money but as an end in itself. That's a recipe for wasteful spending that will divert resources from more productive uses and ultimately result in lower employment than would otherwise occur.

Obama says he will "transform the challenge of global climate change into an opportunity to create 5 million new green jobs," which he likens to the economic activity triggered by the personal computer. This way of looking at climate change is a variation on the broken window fallacy, according to which the loss caused by a smashed window is offset by the employment it gives the glazier.

By the same logic, Obama should view war, crime, and hurricanes as opportunities to create jobs. All three generate economic activity, but we'd be better off if the resources spent on bombs, burglar alarms, and reconstruction were available for other purposes, instead of being used to inflict, prevent, or recover from losses.

Almost as a throw-away introduction to the article, Sullum also points out that the turmoil in the real estate and banking sectors has not directly impacted other sectors of the economy yet:

Despite all the facile comparisons between the current economic situation and the conditions that preceded the Great Depression, the most recent figures show GDP continuing to grow, with unemployment at a historically modest 6.1 percent.

It must be remembered that all economic data is collected after the fact, so that what we think of as the "current" numbers are only indicating the situation from one to three months earlier.

Episode 3: Policy Warrior

"Worried about the viability of Social Security? Unless you're already collecting it, you should be! Follow the animated adventures of Sonny, exactly the sort of youth who is set to get screwed by a system designed during The Great Depression, when workers were plenty and retirees rare. In Epsiode 3, "Policy Warrior," Sonny, John McCain, and Barack Obama compete in various game show contest and learn that a few tweaks aren't going to save anybody's retirement account."

QotD: That's gonna leave a mark

Venezuelan President Hugo Chavez mocked George W. Bush as a "comrade" on Wednesday, saying the U.S. president was a hard-line leftist for his government's intervention of major private banks in the U.S. financial crisis.

Chavez, who calls capitalism an evil and ex-Cuban leader Fidel Castro his mentor, ridiculed Bush for his plan for the federal government to take equity in American banks despite the U.S. right-wing's criticism of Venezuelan nationalizations.

"Bush is to the left of me now," Chavez told an audience of international intellectuals debating the benefits of socialism. "Comrade Bush announced he will buy shares in private banks."

"Reporting by Patricia Rondon; Writing by Saul Hudson; Editing by Anthony Boadle", "Chavez says 'Comrade Bush' turns left in crisis", Reuters, 2008-10-15

Boom Baby Boom!

QotD: The crisis, in perspective

So. We are not in a depression. We are not even, so far as anyone knows, in a recession. And while the rest of the world's financial system dissolves in panic, Canada remains a notable island of stability. We do not have an emergency on our hands. What we have is a nasty downdraft in the stock market — one that is reflective of a deeper crisis, to be sure, but a crisis not of our making.

Is a 35% drop in the stock market (from its June peak) a crisis in itself? No it is not. The stock market does not owe you a living. It's down 35% from four months ago, but it was up 50% in the three years before that (see chart). The present "crisis" has taken prices on the TSE all the way back to where they were in the dark days of 2005 — when they had just finished climbing 50% in two years. Think back to that time. You were rich! You were happy! You were counting your money!

Maybe you should have sold then. But you didn't, because you wanted more. Now you're paying the price. You've given up three years of gains. But you're still up 50% from where you were five years ago. And, if you're sensible, you'll make up for not selling then by buying now. Those who were on the buy side on October 19, 1987 made a killing in the months that followed.

Not willing to risk it? Fine. Just sit tight. Worried about your retirement? If you're anywhere under 55, you'll be fine. You don't need the money for 10 or 15 years. Stocks will have more than recouped their losses by then (at a compound annual growth rate of 5%, you double your money every 14 years). If you're over 55 — what are you doing in the stock market?

Andrew Coyne, "The only thing they have to fear", Macleans.ca/blogs, 2008-10-08

Hitchens proposes a common-sense solution to the drug problem in Afghanistan

Christopher Hitchens outlines the best possible way to both deflate the Taliban and provide Afghanistan with a legitimate market for their primary agricultural product:

The U.N. Office on Drugs and Crime tells us that last year Afghanistan's poppy fields, on 193,000 hectares of land, produced 93 percent of all the world's opium. The potential production could be as high as 8,200 metric tons. And, unsurprisingly, UNODC also reports that the vast bulk of the revenue from this astonishing harvest goes directly to the Taliban or to local warlords and mullahs. Meanwhile, in the guise of liberators, NATO forces appear and tell the Afghan villagers that they intend to burn their only crop. And the American embassy is only restrained by the Afghan government from pursuing a policy of actually spraying this same crop from the air! In other words, the discredited fantasy of Richard Nixon's so-called "War on Drugs" is the dogma on which we are prepared to gamble and lose the country that gave birth to the Taliban and hospitality to al-Qaida.

Surely a smarter strategy would be, in the long term, to invest a great deal in reforestation and especially in the replanting of vines. While in the short term, hard-pressed Afghan farmers should be allowed to sell their opium to the government rather than only to the many criminal elements that continue to infest it or to the Taliban. We don't have to smoke the stuff once we have purchased it: It can be burned or thrown away or perhaps more profitably used to manufacture the painkillers of which the United States currently suffers a shortage. (As it is, we allow Turkey to cultivate opium poppy fields for precisely this purpose.) Why not give Afghanistan the contract instead? At one stroke, we help fill its coffers and empty the main war chest of our foes while altering the "hearts-and-minds" balance that has been tipping away from us. I happen to know that this option has been discussed at quite high levels in Afghanistan itself, and I leave you to guess at the sort of political constraints that prevent it from being discussed intelligently in public in the United States. But if we ever have to have the melancholy inquest on how we "lost" a country we had once liberated, this will be one of the places where the conversation will have to start.

Of course, no politician in America can countenance such a change in policy: it might "send the wrong message". But it's the single best way to achieve multiple worthwhile goals, not least of which is to provide Afghan farmers with tangible reasons why they should reject the Taliban.

QotD: Europe's under-regulated market?

As European stock markets tank, the Irish government guarantees bank deposits, the Benelux countries nationalize Fortis bank, Germany bails out Hypo Real Estate Holdings, and Denmark also guarantees bank deposits and dismally so forth, the question arises: Who knew that Europe, of all places, was so under-regulated? Or maybe de-regulation is not the chief cause for the outbreak of financial chaos? Just wondering.

Ronald Bailey, "Europe Under-Regulated Too?", Hit and Run, 2008-10-06

Jon asks 680 News if they're also rooting for a depression

Jon (my virtual landlord) sent the following query to 680 News:

Just sent this to 680 News, the tossers:

Hello —

Just a quick question for you about your editorial position: your current headline notes that the TSX has seen a "slight rebound" after a 1200-point drop. That "slight rebound" is currently, as of 4:03 pm, 734 points. That's hardly slight.

Just wondering why you're being misleading on this by referring to a rebound of 700-plus points as "slight."

Certainly Rogers has to understand that once we hit recession or worse, it will be the cable and cell phone accounts that will be first against the wall in many household budgets. So why would you want to egg on economic disaster? I can see why the Toronto Star would want to cheer on a recession — more people will be sleeping on and under newspapers, so they stand to gain from increased sales. But I can't see why Rogers would be rooting for a collapse.

Just wondering.

Jonathan Piasecki

He says he'll update me if they respond.

The world's greatest bailout body

Michael Flynn discusses the "secret history of the bailout bill":

The Senate is overly fond of referring to itself as the "world's greatest deliberative body." Barely 48 hours after the House rejected the Treasury's bailout plan, the august body took a previously passed House bill mandating that insurance companies cover mental health benefits, added in the core $700 billion bailout, laced in money for rural school districts and disaster relief, expanded FDIC deposit insurance coverage, and topped it off with over $150 billion in old and new tax breaks for businesses, individuals in high-income states, individuals living in states without an income tax, and various interests such as wooden-arrow makers and film production crews. GOP Leader Mitch McConnell, almost choking back tears after the Chamber passed the 451-page monster, said it was the Senate "at its finest." The Age of Pericles this ain't.

I'll leave it to others to comment on this mother-of-all-Christmas tree bills. The bulk of the Senate legislation is essentially the same as that rejected by the House. It authorizes the Treasury Department to use $700 billion to buy up bad loans. Certain banks get cleaner balance sheets immediately and the feds supposedly will minimize the risk to taxpayers by selling the bad loans when the market "stabilizes" and the prices of the loans have improved.

To paraphrase Mencken, this solution is neat, plausible, and wrong. The first failing is something that is only now being openly stated: Treasury expects to pay some unknown premium above any current market price for mortgage-backed securities (MBS). We don't know what the premium will be nor how it will be determined. Well, in a sense we do. It will mostly be determined by politics, not economics. This is the foundational flaw in the Treasury plan.

More on where the crisis started

Michael Flynn has more background on where the economic roots of the current crisis were planted:

Let's be clear: This is a Wall Street crisis, not a national economic crisis. The overall economy, while a bit weak, is still growing. Some politicians are comparing the current environment to the Great Depression. But in 1932, when the federal government last moved to bail out the banking sector, economic output had fallen 45 percent and unemployment was a staggering 24 percent. Today, economic output is actually up and unemployment is a historically modest 6.1 percent.

The overall economy doesn't even face a liquidity crisis in the current turmoil. Consumer, commercial/industrial, and real estate loans are all up over last year. Main Street is doing fine. The liquidity crisis is confined to Wall Street, between and among investment banks, insurance and securities firms, and hedge funds. There is the possibility that the contagion could spread, but in a global capital market, this is hardly certain.

As far as the origins are concerned, Mortgage-backed securities (MBSes) were the primary vehicle through which the damage was done, although they (like so many financial tools) are relatively neutral, but can be mis-used:

In the early years of this century, mortgage-backed securities exploded. Their growth provided unprecedented levels of capital in the mortgage market. There was a lot more money available to underwrite mortgages. At the same time, investment houses were looking to replace the healthy fees earned during the dot com bubble. MBSes had fat margins, so everyone jumped into the game.

[. . .]

Fannie and Freddie then went on a subprime bender. They made it clear that they wanted to buy all the subprime or Alt-A mortgages that they could find, eventually acquiring around $1 trillion of the paper. The market responded. In 2003 subprime mortgages made up less than 8 percent of all mortgages. By 2006, they were over 20 percent. Banks knew they could sell subprime products to Fannie and Freddie. Investments banks realized that if they laced ever increasing amounts of subprime mortgages into the MBSes, they could juice the returns and so earn bigger fees. The rating agencies, thinking they were simply dealing with traditional mortgages, didn't look under the hood.

Unfortunately, after several years of a housing boom, the available pool of households who could responsibly use the more exotic financing products had dried up. In short, there were no more people who traditionally qualified for even a subprime mortgage. However, Fannie and Freddie were still signaling that they wanted to buy these products. At the same time, activist groups were agitating for more lending to low-income families. Banks realized they could make even more exotic loan products (e.g., interest-only loans), get the activists off their backs, and immediately diffuse their risk by selling the mortgages into MBSes. After all, Fannie and Freddie would buy anything.

Everything worked as long as housing prices continued to rise. The most pessimistic scenarios on Wall Street showed a leveling off of housing prices; no one foresaw an actual decline in prices. Suddenly, though, there weren't enough buyers. In hot real estate markets, builders raced to bring inventory to market that they thought was inexhaustible. But at this point everyone (essentially) who could possibly qualify for a mortgage had received one. At the same time, the first wave of the more exotic mortgages began to falter. Interest rates on adjustable rate mortgages moved higher — the Fed was finally tightening the money flow — and mortgages that were initially interest-only were close to resetting, with monthly payments jumping to include principal. A not insignificant number of these mortgages moved into default and foreclosure.

It's a long article, but it really is worth while to read the whole thing.

QotD: Redefining "market failure"

In an interview with The Los Angeles Times editorial board last December, Treasury Secretary Henry Paulson made clear that he defined "market failure" as any instance in which investors, including home owners, lost money. In discussing various grand plans to buoy the economy, Paulson said, "What we're doing is avoiding a market failure that would have forced housing values down in a way that was not in the investors' interest, and in a way that the market wasn't intended to work."

You can read more of that exchange here, where it's reprinted in a recent reason column by Tim Cavanaugh. It's a pretty stunning and open admission of how Paulson conceives his job. Basically, his job is to maintain or increase prices, period. He doesn't want to oversee a market that acts as a discovery process because, as Dr. Zaius, the patron saint of all great Platonic experts, could tell you, "You may not like what you find." Indeed, you might find that you misunderestimated what people think your crap is worth (has Paulson, one wonders, ever gone to a garage sale, that ultimate testing ground of the subjective theory of value?).

So Paulson wants to socialize losses by the investing class with his economic PATRIOT Act, a hasty, hurried, and not-clearly-warranted piece of legislation that will somehow manage to change everything without addressing basic incentives in the financial sector (other than underscoring the idea that the American economy is too big to fail, so the feds will oddly bail it out in the name of capitalism).

Nick Gillespie, "The Fearsome Fear of a Looming Recession", Hit and Run, 2008-10-01

Today's stock advice

David Weigel provides a bit of context for your investment plans:

Your chart of the day comes from Econompic Data, whose editor notices that stock in Taser and canned soup was outperforming the S&P index.

I personally can't think of any pure bomb shelter plays (although the housing index is up over the past three months), but over the past three months; Campbell Soup Co (which also happened to be the ONLY stock in the S&P 500 that was up yesterday) and Taser International are up 16% and 34% respectively. This compares very favorably to the S&P 500, which has struggled and is down 14% over that time frame.

Would you take investment advice from a sports writer?

Gregg Easterbrook tells you how to invest your money (assuming you've got any left after the cataclysmic events of this week so far):

Then again, even if you've come into money, chances are you do not need a financial adviser. Follow this non-secret strategy that turns on buy-and-hold — buy-and-hold being the strategy endorsed by Warren Buffett. Place $100,000, the maximum federally insured amount, into a CD, to have some money that will always be secure; max out whatever retirement instrument you qualify for; ignore gold, art and similar investments that are volatile; ignore commodities options, short selling, derivatives and similar complex investments that often trip up even specialists; ignore anything that's "securitized" (assets packaged into securities, there is no chance you can evaluate the underlying assets); buy real estate or real property only if your plan is to hold it for many years; place the remainder of your funds in a plain-vanilla 60-40 Standard & Poor's index fund (one that invests 60 percent in blue chip stocks, 40 percent in corporate bonds and Treasury bills); buy that fund from any reputable investment firm open to the public; let the money in the 60/40 fund simply sit there, regardless of what's happening in the markets. For goodness sake, don't make frequent stock trades trying to "beat the market" — studies show that only about a third of investors and brokers who actively pick stocks do better than simply buying and holding the Standard & Poor's. For goodness sake, hang up on anyone promising "confidential tax avoidance strategies" or "a once in a lifetime opportunity." For goodness sake, never deal with any funds or money managers who say they use "secrets" or have "exclusive information." For goodness sake, don't purchase real estate, or any form of real property, thinking you will "flip" it. For goodness sake, don't panic and sell just because the market is falling. If the market is falling, do nothing — at some point the market will rise. A few years ago, Buffett had his brokers calculate how Berkshire Hathaway would have done had the company not made a single stock trade all year, and merely held its positions. The answer was the company would have come out ahead. This paragraph contains all the investment advice most people will ever need. Send TMQ a one-third percent commission when you get a decent return and don't lose any money.

Actually, aside from sending the one-third percent commission, this is all pretty good advice . . .

Economist round-up

Reason magazine polled several free-market economists to sample their reactions to some simple questions:

1. How bad is the current market situation?

Robert E. Wright
The current situation is potentially dire. The comparison with 1932-33 is sobering: An unpopular Republican president is in office, the financial system is a mess, and an important election looms, yet many fear what the articulate Democratic candidate might do if elected. We won't have to wait until March to find out this time around. But given how fast the world moves these days, late January will seem an eternity away. The payments system broke down last time (March 1933), necessitating a bank "holiday," a moving speech ("the only thing we have to fear is fear itself"), and creation of the FDIC (Federal Deposit Insurance Corporation). Breakdown of the payments system today would stagger the economy. During the Depression we didn't have to worry about hackers and terrorists but they must be salivating now. They will probably wait until after the election, but they will almost certainly try to kick us while we are down, just like they did during the last two recessions (1990 invasion of Kuwait and 9/11).

2. How bad are the current proposed bailout plans?

Jeffrey A. Miron
The bailout is a terrible idea. It transfers a huge amount of wealth to people who do not deserve it. It will generate enormous incentives for creative bookkeeping as the investment houses and banks try to rid themselves of any assets they do not want. The bailout fails to eliminate the crucial policies that contributed to and caused the current situation, such as the Community Reinvestment Act, the creation of Fannie Mae and Freddie Mac, and so on. Last but hardly least, the bailout sets a terrible precedent: If you take huge risks and become too big to fail, the government will bail you out.

3. What's the one thing we should be doing that we're not?

Mike Munger
Let the price mechanism work. High gas prices, for example. We are trying to bring down gas prices. But high gas prices limit demand, elicit new supply, and make alternative energy more profitable. Same with low prices on mortgages and other financial instruments. Buying up worthless assets is like trying to drink the ocean to stop a flood. You can't do it. Let financial firms, like AIG, take the hit, and build fire lines to contain the contagion. Guarantee the assets of the folks AIG owes, and consign AIG to the flaming hell it so richly deserves.

Otherwise, we will have class war. If my mortgage is more than I can pay, why shouldn't the government bail me out? If AIG gets the grease, so should I.

Whole article here.

A quick introduction to short selling

QotD: Don't panic (yet)

No matter how many times you'll hear it said over the next several awful days in Washington, this is not a binary choice between Henry Paulson's re-regulatory bailout and Great Depression 2.0. The 1930s will never happen again, thanks to a whole host of innovations and insights over the past seven decades. And even though the current mortgage-backed securities crisis is undeniably beginning to leak out from Wall Street, I'll reserve the kind of panic Bush seems eager to foment until maybe the economy actually stops growing, unemployment actually gets within shouting distance of Reagan-era levels, and the stock market does something scarier than fluctuate a whole lot.

As the participants in our June 2008 roundtable on the economy (including Donald Boudreaux, Ron Paul, and Megan McArdle) repeatedly pointed out, the one thing that may speed and deepen a so-far-nonexistent recession into something worse is the same kind federal overreaction that put the "great" in the Great Depression in the first place. I would have thought we'd all learned our lessons since then, but tonight's speech really hit home that it's no longer safe to take for granted any market literacy whatsoever.

Matt Welch, "The Four-Paragraph White Flag", Hit and Run, 2008-09-24

Why did the sub-prime crisis happen?

It was a subject of discussion in the office yesterday, as we tried to come up with plausible reasons why banks and other lenders were so eager to lend money to borrowers who could not reasonably pay back to the loans. We came up with a very short list of "a) sheer idiocy" and "b) some form of government policy". Apparently option "b" is correct:

Consider the low lending standards that were a significant component of the mortgage crisis. Lenders made millions of loans to borrowers who, under normal market conditions, weren't able to pay them off. These decisions have cost lenders, especially leading financial institutions, tens of billions of dollars.

It is popular to take low lending standards as proof that the free market has failed, that the system that is supposed to reward productive behavior and punish unproductive behavior has failed to do so. Yet this claim ignores that for years irrational lending standards have been forced on lenders by the federal Community Reinvestment Act (CRA) and rewarded (at taxpayers' expense) by multiple government bodies.

The CRA forces banks to make loans in poor communities, loans that banks may otherwise reject as financially unsound. Under the CRA, banks must convince a set of bureaucracies that they are not engaging in discrimination, a charge that the act encourages any CRA-recognized community group to bring forward. Otherwise, any merger or expansion the banks attempt will likely be denied. But what counts as discrimination?

According to one enforcement agency, "discrimination exists when a lender's underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants." Note that these "arbitrary or outdated criteria" include most of the essentials of responsible lending: income level, income verification, credit history and savings history — the very factors lenders are now being criticized for ignoring.

The whole article is here. H/T to Brian Micklethwait (who was kind enough to link to an earlier QotD).

Don't take my Kodachrome away

Once the best-known name in popular photography (at least partly thanks to Simon & Garfunkel), Kodachrome is now a rare item:

It is an elaborately crafted photographic film, extolled for its sharpness, vivid colors and archival durability. Yet die-hard fan Alex Webb is convinced the digital age soon will take his Kodachrome away.

"Part of me feels like, boy, if only I'd been born 20 years earlier," says the 56-year-old photographer, whose work has appeared in National Geographic magazine. "I wish they would keep making it forever. I still have a lot of pictures to take in my life."

Only one commercial lab in the world, Dwayne's Photo in Parsons, Kan., still develops Kodachrome, a once ubiquitous brand that has freeze-framed the world in rich but authentic hues since it was introduced in the Great Depression.

Eastman Kodak Co. now makes the slide and motion-picture film in just one 35mm format, and production runs - in which a master sheet nearly a mile long is cut up into more than 20,000 rolls - fall at least a year apart.

QotD: The invisible (back)hand

The hidden hand did well this month punishing stupidity. But libertarians committed to free markets, not corporate oligarchs, must pause to consider the need for field-leveling regulation. More precisely, we should ask whether there was sufficient enforcement of reasonable restraints already in place. We need Republicans to stand against excessive tinkering in markets, of course. But my modest retirement fund may be safer with Democratic regulators in charge than rogue elephants.

Terry Michael, "The Libertarian Case for Obama: Seven potential upsides to a hope-monger presidency", Hit and Run, 2008-09-19

"Bad move on my part" says Krugman

Radley Balko links to this highly entertaining little moment from an "Intelligence Squared US debate on state-provided healthcare:

PAUL KRUGMAN
And private insurance? That's the thing, I — Actually, can I just — I wanted to ask a question. And —

JOHN DONVAN [MODERATOR]
Please — please do —

PAUL KRUGMAN
— and I wanted to ask, actually two questions, to the audience. First, how many Canadians, would Canadians in the room please raise your hands. [ONE PERSON APPLAUDS, LAUGHTER]

JOHN DONVAN
We have about seven hands going up —

PAUL KRUGMAN
Okay, not as many as I thought. Okay, of those of you who are not on the panel who are Canadians, how many of you think you have a terrible health care system. [PAUSE] One, two —

JOHN DONVAN
We see — almost all of the same hands going up. [LAUGHTER]

PAUL KRUGMAN
Bad move on my part. [APPLAUSE]

"Irrational exuberance" on the part of the regulators

This post at The Big Picture is fascinating:

As we learn this morning via Julie Satow of the NY Sun, special exemptions from the SEC are in large part responsible for the huge build up in financial sector leverage over the past 4 years — as well as the massive current unwind

Satow interviews the above quoted former SEC director, and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.

You read that right — the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption — given only to 5 firms — allowed them to lever up 30 and even 40 to 1.

Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

It wasn't a market failure

Ronald Bailey looks at the potential devastation of the insurance industry as the claims pour in from the Texas coast:

The fact that insurance companies refused to insure property located on storm-wracked coasts is not an instance of market failure. A market failure supposedly occurs when the price of goods and services do not reflect the true costs of producing and consuming those goods and services. That's clearly not what happened here. The market is practially shouting at people, "Don't build something you can't afford to lose where hurricanes periodically crash ashore."

Instead the state "insurance" scheme is an example of government failure which occurs when a government intervention causes a more inefficient allocation of goods and resources than would occur without that intervention. In this case, it's the government that's telling people that it's OK to build in dangerous areas and then not charging them enough for the "insurance."

It's one of the biggest omissions from media coverage of hurricanes . . . the largest reason for the increasing damage toll isn't that the storms are necessarily more powerful or more frequent, but that many more people have been moving into areas that are subject to greater risk from those storms. Government meddling in the insurance market distorts the necessary pricing signals to property owners . . . usually forcing insurance companies to provide below-cost policies in high-risk areas or requiring private insurers to underwrite the losses of quasi-public or public insurers.

The inevitable LCBO

Michael Pinkus doesn't mind telling us that he'd like to see the end of the LCBO:

Nobody dislikes the LCBO more than a wine writer, it's not being boastful, it's just a fact. I feel that those who shop only at the LiCk-BO and don't go to trade events are the lucky ones. They don't know what they are missing. They don't get to try some mouth-watering wines that make you covet them immediately. They know not of the insanely cheap prices our friends south of the border get, the discounts, mail in rebates, 3-for-$10 specials, or heaven forbid, a $2 bottle of wine. They'll never know that some of the wines you try at these events are only sold through an agent by the case, but many people don't buy by the case, they want 3 or 4 at the most. "Get in with a friend," you'll be told, "our hands are tied." And tied they are, by, you guessed it, the protective liquor board, saving our cities and towns from the wilds of alcohol.

It's those who travel outside the country that get the biggest shock of all. They find out that Mondavi makes a true Bordeaux blend called Vinetta, or that Rosenblum makes about 800 kinds of Zinfandel . . . and yet their Ontario agent can't get it, never heard of it or won't bring it in. If you try on your own, well you'll pay close to, if not more than, double what you paid for it outside the country, thus taking all the fun and value out of your little finds and giving you a headache bigger than if you drank the whole bottle yourself in half-an-hour on an empty stomach. Sure this system we have might work for a case of 2-Buck-Chuck, but "I-can't-believe-it's-only-12-bucks" a wine find gets close to $30 once you get it home where the LCBO puts its grubby little duties and taxes on it . . . then it just doesn't seem like such a deal anymore, does it?

Folks, the LCBO is here to stay, I don't like it, but something tells me we have to work with it. Trust me, there is nothing more that I would like to do than walk into Larry's Liquor-Licious or Bob's Booze Boutique and hunt around looking for his "deal of the day", buy 2-for-1 Lafite, or save 25% on white sticker items. But the boys and girls at the BO have us by the short and curlies, like an ex-lover who has a naked picture of you and decided the world must see it 'cuz you're running for public office.

I've written about this before.

The unreal world of modern art

Nick Gillespie looks at the economics of the modern art world:

[. . .] Don Thompson, a business professor at Toronto's York University and author of the insightful and compulsively readable The $12 Million Stuffed Shark, argues that the two activities [owning art and appreciating art] are increasingly indistinguishable. Thompson spent a year touring auction houses, talking with dealers and even hanging out with artists, who emerge as altogether less interesting than the buyers and sellers around them.

Consider the case of British advertising legend Charles Saatchi, one of the central figures in Thompson's study of "the curious economics of contemporary art." Married to voluptuous TV cook Nigella Lawson, Saatchi is "the prototype of the modern branded collector," a tastemaker who doesn't just collect art but creates whole markets in the stuff, no matter how bizarre, sensationalistic or banal it might seem on first (or second, or third) blush. He adds value simply by his association with or interest in an artist.

Back in 1991, Saatchi commissioned "The Physical Impossibility of Death in the Mind of Someone Living" — a 15-foot tiger shark suspended in a giant glass tank — from Damien Hirst, whose reputation he had largely created via early patronage. Saatchi reportedly had fallen in love with Hirst's work after seeing "A Thousand Years," an installation featuring a rotting cow's head, flies and a bug zapper.

An artist friend of mine once said that he'd rather have work that appalled and disgusted viewers than to have their indifference. That's an encapsulation of what so much modern art is all about — the strength of the provoked reaction is key, while the actual "artistic" aspect can be all but absent. The degree of art involved is always open to debate, but the shock is what it's all about for many artists.

High gas prices induce lunatic "solutions"

Radley Balko observes the rancid combination of political ambition and economic ignorance in action:

Obama's opponent John McCain has smartly opposed a tax on oil company profits — and Obama has promptly attacked him for it.

But McCain isn't much better. McCain has proposed an equally ridiculous "gas tax holiday," which will also do almost nothing to provide relief at the pump. Obama has smartly opposed the idea — and McCain has promptly attacked him for it.

Economic ignorance is nothing new in politics. Neither is the idea that a candidate would perpetuate economic idiocy he knows to be false because it plays into the narrative he's pitching to the voters. But no issue seems to prompt more jaw-dropping sophistry and anti-capitalist demagoguery than gas prices.

Both candidates have promised to crack down on so-called "oil speculators," who are really only commodities traders wagering on whether the price of oil will go up or down. Speculators are an important part of the market process because they're generally knowledgeable about what they're trading, and their collective wisdom sends useful signals about supply and demand. "Cracking down" on speculators is silly. In the first place, it isn't possible. Oil futures are traded all over the world, well outside of U.S. jurisdiction. In the second place, if you own a 401(k), you're likely an indirect "speculator" yourself.

It's totally understandable why politicians are flapping their gums about high prices at the pumps: it's causing the public to feel pain, so they need to harness that for their own ends. Our best hope is that they're just tossing out the rhetorical "something must be done" notions and have no real intention of doing anything if/when elected, because almost nothing they can do will make the situation better . . . and so many of their options would make things worse.

Ronald Bailey commits lesè majesté

Ronald Bailey isn't expecting royal honours after Prince Charles ascends the throne:

His Royal Highness, the Dunce of Wales, Speaks Against Biotech Crops

[. . .] There's a tremendous amount of anti-biotech misinformation packed into this interview. First and foremost, farmers in both developed and developing countries will not adopt biotech crops unless they benefit from them, either from greater productivity, fewer input costs, improved sustainability or all three.

Let's consider just a few cases: Biotech insect-resistant corn in the Philippines boosted yields by 37 percent, reduced the costs of insecticide spraying by 60 percent, maintained populations of beneficial insects in the fields, and increased farmers' profits by 88 percent. With regard to sustainability, herbicide-resistant biotech crops make soil saving no-till farming more possible and new varieties of biotech rice reduce the run-off of nitrogen fertilizer that can damage waterways. Finally, His Royal Witless ignores the fact that of the 12 million farmers who have adopted biotech crops, 11 million of them are resource-poor farmers working in developing countries.

For all that some might say that Prince Charles has his heart in the right place, he's clearly got his facts from some alternate universe . . .

Update: Commenter "ChrisH" wraps it up wonderfully well:

Who'da thunk? Diana was the sharp tool in that toolshed.

I like the "peasants — back to your farms!" tone of some of it. Uh, I think you lost that argument 200 years ago.

But then, this:
dysfunctional conurbations of unmentionable awfulness

My gawd, the man is a poet. I don't even know what it means, but I want to set it to music.

There are very few people who could have played "Yo Mama so..." with Bill Buckley, but apparently Prince Chuck is one of them.

Decent watercolorist, as well, I hear...