Posts tagged ‘economy’

What Admirers of Socialism Like AOC Could Learn From Just the Title of Adam Smith's Classic Book

The full name of Adam Smith's great work is "An Inquiry Into the Nature and Causes of the Wealth of Nations."  Even before we crack the spine of that book, we can learn a lot about that title.

Look at the title -- it might be a bit strange to modern eyes.  Because when we have inquiries today, it's generally on the opposite topic -- why are people still poor?  Most of us look around and see the incredible advancement of the modern economy and if we wonder anything, we wonder why some folks are still poor.

But in Adam Smith's day, human experience was far different.  Basically, the history of humanity to the year 1776 was that pretty much everyone was poor -- grinding, dangerous, subsistence poverty despite backbreaking labor -- and they had been so in a nearly unchanging way for millenia.  In Adam Smith's day, in the early days of the industrial revolution and increasing market-based commerce, the question was why are ordinary people -- people who aren't in ruling classes that just seize the wealth they have -- becoming wealthy.  At the time, the existence of wealth that existed without just looting it was what needed to be explained.

The fact that AOC and other modern admirers of socialism can fret about poverty is, as they imagine, attributable to capitalism, but not in the way they think.  Capitalism did not cause the poverty, it created the situation in which poverty is an issue with but a minority of the population (rather than essentially everyone).  Before capitalism, fretting about poverty would just have been fretting about .. the way things are for everyone.

It is worth a final note here to remind everyone that what we call "poor" today has pretty much nothing in common with what would be considered poor in Adam Smith's day, or at any other time in history.  The poor in America today -- whose major health problem is obesity! -- would be fabulously wealthy in any other pre-capitalist era.  One can even argue that the poor in America are better off than the poor in other supposed socialist paradises like Denmark, Sweden, or France.

The Insanity of Current Equity Valuations -- The WeWork Unicorn (I Bet You Thought I Was Going to Say Tesla)

WeWork is a provider of work spaces for individuals and startup companies.  Unless I am missing something (and WeWork devotees are welcome to chime in) it is essentially a hipper rebranding of traditional small business office space and services companies like Regus (now IWG).

Currently, Regus / IWG has about $3 billion in annual revenue on which it makes something like a positive 5% net income margin and trades at a valuation of about 1x annual revenues.  WeWork is a private company, though is rumored to be IPOing soon.  It had $1.8 billion of revenue last year but lost $1.9 billion, meaning that it was basically selling $10 bills for $5 each with an negative net income margin of 105%.  Its last funding round was done at a $45 billion valuation, or 81 times 2018 revenue.  This valuation will likely go up in an IPO.

No real point here, except to say that I have not seen valuations this insane since the late 1990's.  What makes the examples of WeWork and Tesla perhaps even more incredible than examples in the 1990's is that the market is putting growth software valuations on bricks and mortar companies.  Oracle or Microsoft might have been expected to scale up easily and relatively cheaply, but scaling a real estate company takes a ton of money.  Not sure where the growth economy of scale is in office space.  And don't even get me started with the extrapolated growth projections here.  When the tech bubble bursts, WeWork is going to have a ton of grief on its hands, and unlike software companies it is not going to be able to slash SG&A by cutting payrolls.  It is going to be stuck in a lot of long term leases and mortgages that it can't break (just ask Tesla about that when they tried to cut SG&A by closing their stores).

PS-  As with Tesla and any number of other examples, many devotees of certain products hear criticism of the company's valuation as criticism of the company's product.  The two do not have to be related.  Grossly overvalued companies can still have products you might want to buy.  In fact, if WeWork is selling you a $10 product for $5, I would not be at all surprised if you are satisfied.

PPS-  This is not to say you can't make money in a bubble.  Careful, observant, and risk tolerant individuals can make money riding stocks up that they know are due for a crash some day.  Readers know that I believe Tesla is headed for a reckoning, but I am making money this week on short term calls I bought last week because I knew that Musk is going to pump the stock like hell last week and this week and pull forward every bit of volume he can into Q1 in a bid to save a dying growth story.  I bet the stock would ride up on early reports of this but fall off once financials are out and further when Q2 shows that the order books have been drained.  But this is risky, risky, risky.  It is a tiny piece of my investment portfolio and this sort of investing is but a hobby for me, a bar bet to determine if I have really come to understand how Elon Musk ticks.  Also, I am just a layman and not a professional so don't listen to me.

Largest Cities in the World, By Year

I encourage you to click through to an animated visualization of the largest cities in the world, by year.

A few surprises, but the biggest one to me was how long Naples hung around on the list.

The fall and rise of the Chinese cities is also interesting.  People seem to get freaked out by China's growing prosperity, a fear for which I have zero sympathy -- people exiting poverty in China is an unalloyed good.  But here is a thought for context.  I can't absolutely prove that it is correct but I am pretty sure it is true.  The history of the world is that, with the exception of the 200 years from about 1800-2000, China has for 4000 years been the largest economy in the world.  Chinese prosperity today is not some aberration, it is a return to normal.

Update:  OK, I think I got it to embed:

The Democrat's "Green New Deal" is Mao's Great Leap Forward Brought to America. In Fact I Think I Am Going To Call It the Green Great Leap Forward

Readers have wondered why I have not really jumped on Alexandria Ocasio-Cortez's Green New Deal plan (which has since been endorsed by most major Democratic presidential candidates).  Well, one-reason is that we had no details, at least until a formal resolution was introduced in Congress and an FAQ went up and then back down on AOC's website.  The Ocasio-Cortez camp claims the FAQ went up by mistake (after previously claiming it was a Republican false flag operation), though I consider it more of a Kinsley Gaffe if it was a mistake at all.

The other reason I have ignored it to this point is the same reason I never enjoyed those American Idol episodes where they show all the people who can't sing but really think they are awesome embarrassing themselves.  It's weird enough seeing people who are incompetent think that they are capable.  It is even weirder seeing that person cheered on by a million other incompetent people on twitter.

But it appears that the entire Democratic Party has rapidly endorsed the plan, and every one of their Presidential candidates have said they are all for it, though site-unseen.  So I guess I have to wallow in a bit.  This may be the first of many posts, or maybe not.  It depends on how much I want to shoot at fish in a barrel.

It's hard to know where to start.  My first overall reaction is that there is no science and no economics in the plan at all.  I find this ironic (though not surprising) given that it comes from the environmental community that has called me "anti-science" for years for doubting global warming forecast rates based on exceptionally high degrees of positive feedback built into computer models.  AOC's entire plan feels like the results of a late-night policy brainstorming by a group of vegan poetry majors who chip in every idea they have seen someone post on Facebook.

Readers know that despite my skepticism that manmade CO2 will cause a climate catastrophe, I have presented a CO2-reduction plan on these pages.  You can read it here, but the three most relevant planks were:

  1. A revenue-neutral carbon tax that increased the price of producing CO2 and then let individuals and markets figure out how to do that most efficiently.  Since the point of the carbon tax is not to raise money for politicians but to send pricing signals to fuel users, the proceeds were netted against reductions in other regressive taxes, such as the payroll tax
  2. Elimination of all the command and control government programs where politicians pretend they know they best solution to technical-industrial problems and then mandate that scarces resources flow to their preferred solutions.  These are counter-productive, and not necessary since the carbon tax does the work for us
  3. Make regulatory changes to unleash a new generation of safe nuclear power, since this is the only high-production, reliable, not time-of-day dependent source of electrical power that we know about.

I did not think it was possible -- I presented the plan above as a transpartisan plan intended to bridge the gaps between Left and Right -- but the Green New Deal is EXACTLY opposite this plan

First, as with many on the Left, AOC does not understand much about economics, so she does not understand the carbon tax.  For the Left, the point of a carbon tax is not to send pricing signals in the marketplace but to raise money for politicians to spend on pet projects.  We saw this back in the Washington State carbon tax proposal, where environmentalists rejected a carbon tax because it was revenue neutral.  In her FAQ, AOC does exactly the opposite of my point 1 and 2.  She wants people just as smart and economically-savvy and scientific and stuff like herself at the top to redesign the US economy and to do this she needs a LOT more money than just a carbon tax:

The Green New Deal is a massive investment in the production of renewable energy industries and infrastructure. We cannot simply tax gas and expect workers to figure out another way to get to work unless we’ve first created a better, more affordable option. So we’re not ruling a carbon tax out, but a carbon tax would be a tiny part of a Green New Deal in the face of the gigantic expansion of our productive economy and would have to be preceded by first creating the solutions necessary so that workers and working class communities are not affected. While a carbon tax may be a part of the Green New Deal, it misses the point and would be off the table unless we create the clean, affordable options first.

Do you start to see the Great Leap Forward analogy?  Just to finish off the thought, AOC also goes the opposite direction of my nuclear point, proposing to ban nuclear power and dismantle  all that carbon-free electricity production.  Ask Germany how well that has worked out for them, as they have been forced into a rush of new coal-fired plants, or New York that is building three new large natural gas plants to replace the nuclear plants it is closing.  I will bet a thousand dollars that AOC has no real knowledge of nuclear safety nor has she spent probably 5 minutes studying the new generation of nuclear technologies.  Frankly, I bet as far as she has thought about it is that it is expected to be anti-nuclear on the Left so she is anti-nuclear like the other cool kids.

Every dumb, unscientific nostrum for energy-use reduction has at one time or another over the last several months been attached to the plan.  One example is the call for dismantling industrial agriculture and promoting local food production.  This is easily one of the silliest ideas (for fuel reduction) I can imagine and have written about it before.  I have no problem if you want to buy locally and don't want to buy from Kraft or Cargill.  Power to you.  But the conclusion that local food production will save energy is exactly the sort of conclusion that people with no experience rigorously analyzing scientific problems come up with.  They jump from the fact that Agriculture uses a lot of energy to "it must all be in transportation" and thus conclude "local agriculture will save lots of fuel."  But this is absurd.  First, fuel use in agriculture is not mostly transport to the end consumer.  The actual growing process consumes most of the fuel, and this fuel use is much more related to land productivity and economies of scale that would be destroyed by a local agriculture mandate.   And even if it did actually improve fuel use, think of the other environmental effects of growing food locally on land less-suited to its production -- you would greatly increase land and water use, just to start, both likely creating more environmental problems.

I am reminded of Mao's idea during the Great Leap Forward that China needed to produce all its steel locally in home-based backyard furnaces (I kid you not).  I think most of us can predict the obvious result - steel production crashed because you can't produce steel in any kind of amount or quality in the backyard.  But there were two less obvious results as well.  One, this contributed to the crash in agricultural output as skilled agricultural labor and resources was diverted to this silly steel-making scheme.  And two, whole forests were denuded as people sought out fuel for these furnaces.  China is still recovering from environmental messes this caused.  India barely avoided the same disaster as Ghandi wanted to eschew industrial production in favor of home spinning and weaving.  THIS is what you get when you let ignorant people command and control the economy.  Heck, this is what you get even when you let really, really smart people command and control the economy.

Update:  Since I have eschewed Twitter, mostly, of late, I missed the fact that #greenleapforward is the term folks are converging on.  Happy to go with that.

An Interesting Reason for Allowing More Immigration: Growing Labor Force Drives Economic Dynamism, Decreases Market Concentration

I thought this study was very interesting, as highlighted by Alex Tabarrok.  I usually try not to publish highlights from research papers without actually reading them (the divergence between press releases on papers and the papers themselves is shocking and constitutes what may be one of the worst current academic practices).  But in this case I have learned to trust Mr. Tabarrok's judgement:

The best paper I have read in a long time is Hopenhayn, Neira and Singhania’s From Population Growth to Firm Demographics: Implications for Concentration, Entrepreneurship and the Labor Share. HNS do a great job at combining empirics and theory to explain an important fact about the world in an innovative and surprising way. The question the paper addresses is, Why is dynamism declining? As you may recall, my paper with Nathan Goldschlag, Is regulation to blame for the decline in American entrepreneurship?, somewhat surprisingly answered that the decline in dynamism was too widespread across too many industries to be explained by regulation. HNS point to a factor which is widespread across the entire economy, declining labor force growth.

Figure Two of the paper (at right) looks complicated but it tells a consistent and significant story. The top row of the figure shows three measures of declining dynamism: the rise in concentration which is measured as the share of employment accounted for by large (250+) firms, the increase in average firm size, and the declining exit rate. The bottom row of the figure shows the same measures but this time conditional on firm age. What we see in the bottom figure is two things. First, most of the lines jump around a bit but are generally flat or not increasing. In other words, once we control for firm age we do not see, for example, increasing concentration. Peering closer at the bottom row the second thing it shows is that older firms account for a larger share of employment, are bigger and have lower exit rates. Putting these two facts together suggests that we might be able to explain all the trends in the top row by one fact, aging firms.

So what explains aging firms? Changes in labor force growth have a big influence on the age distribution of firms. Assume, for example, that labor force growth increases. An increase in labor force growth means we need more firms. Current firms cannot absorb all new workers because of diminishing returns to scale. Thus, new workers lead to new firms. New firms are small and young. In contrast, declining labor force growth means fewer new firms. Thus, the average firm is bigger and older.

Does the Zero-Sum Nature of Academic Success Contribute to the Left-wards Bias of Academia?

For a while now, I have  had a theory that the zero-sum nature of academic success (competition for a fixed and perhaps shrinking number of tenured positions) affects the larger world-view of academia. (This article that compares academia to a harmful cult demonstrates this zero-sum thinking pretty well.)

It is pretty well-established that the American academic community is disproportionately of the Left, and in fact tilts pretty strongly in many cases to the far Left / progressive side.  People debate a lot about why this should be, but I think one contributing factor (but certainly not the only one) that I have never heard anyone discuss is the zer0-sum game these academics must play in their own careers.  I think that many of them incorrectly assume that all professions, and all of the economy and capitalism, is dominated by this same dog-eat-dog zero sum game -- remember, for most, academia is the only industry they have ever experienced from the inside.  And once you assume that the whole economy is zero-sum, it is small step from there to overly-narrow focus on distribution of wealth and income.

One of the mistakes folks on the Left make about capitalism is to describe capitalism as mostly about competition.  In fact, capitalism is mostly about cooperation, its a self-organizing process where people who don't even know each other cooperate to deliver products and services, facilitated by markets and the magic of prices.  Sure, competition exists but it is not the fundamental feature, but an enabler that makes sure the cooperation occurs as efficiently as possible.  Capitalism in fact is about zillions of voluntary trades and transactions every day that each make both parties better off -- or else both sides would not have agreed to it.  Capitalism in fact is a giant positive sum game, a fact that many on the Left simply do not grasp.

Never in my business life have I thought any company I worked for was playing in a zero-sum game.  Sure, individual sales to an individual customer might be zero sum -- UPS is going to order its bearings from Rockwell or Emerson and winning and losing that one order is zero sum.  But as a whole no business I have been in has ever felt zero sum.  In my business running campgrounds, I want our campgrounds to be the best but our growth is generally not at the expense of some other campground -- it is about attracting more people for more days to camping and offering those who do camp more value-added services.

Postscript on Metrics:  As an aside, it struck me that one improvement to the dysfunctional academic experience described in the Washington Post article linked above might be to an a measurement of the professoriate that went beyond just counting published articles and their citations.  Start counting the number of advisees each professor has that lands teaching and tenured positions and you could change some behavior.

Some Thoughts About Income Growth and Mobility Part 1: The Right Way To Measure It

This is part 1 of a 2 part series.  Part 2 is here

The typical way of talking about income mobility and inequality is to look at the relative income and growth rates of different income quartiles.  Here is a chart used recently by Kevin Drum over at Mother Jones:

As you can see, since the three lines here have their steepest upwards slopes at different times, there are a myriad of possibilities for cherry-picking endpoints to make whatever point you want to make.  I would say this is a pretty healthy picture, with real income growth for everyone, though the general flatness of the middle income brackets since 2007 seems to get the most notice.

A healthy and growing economy should cause all of these quintiles to grow. But income growth and mobility for individuals is about more than just the quintiles.  As a small business owner over the last 20 years, I have had tax returns in all five quintiles -- I have had blowout years when I was "rich" and I have had years when my taxable income would qualify me for food stamps.  In other words, I move between the lines -- and so do a lot of other people.

Young people gaining experience and promotions move from lower to higher quintiles as they age.  New immigrants often come in at the bottom and progress over time.  When people retire, they may fall down a few quintiles.  Marriage might kick someone up to a higher quintile, and divorce may lead to them falling down a few.  There is a constant ebb and flow that is hidden by merely looking at quintiles.

Russ Roberts, who seems to be the token non-socialist at Medium, writes:

but the biggest problem with the pessimistic studies is that they rarely follow the same people to see how they do over time. Instead, they rely on a snapshot at two points in time. So for example, researchers look at the median income of the middle quintile in 1975 and compare that to the median income of the median quintile in 2014, say. When they find little or no change, they conclude that the average American is making no progress.

But the people in the snapshots are not the same people. These snapshots fail to correct for changes in the composition of workers and changes in household structure that distort the measurement of economic progress. There is immigration. There are large changes in the marriage rate over the period being examined. And there is economic mobility as people move up and down the economic ladder as their luck and opportunities fluctuate.

Roberts describes several studies that follow actual people, not quintiles, and finds that the American ideal of income mobility is still alive and well

This first study, from the Pew Charitable Trusts, conducted by Leonard Lopoo and Thomas DeLeire uses the Panel Study of Income Dynamics (PSID) and compares the family incomes of children to the income of their parents.⁴ Parents income is taken from a series of years in the 1960s. Children’s income is taken from a series of years in the early 2000s. As shown in Figure 1, 84% earned more than their parents, corrected for inflation. But 93% of the children in the poorest households, the bottom 20%, surpassed their parents. Only 70% of those raised in the top quintile exceeded their parent’s income.

... Julia Isaacs’s study for the Pew Charitable Trusts finds that children raised in the poorest families made the largest gains as adults relative to children born into richer families.

The children from the poorest families ended up twice as well-off as their parents when they became adults. The children from the poorest families had the largest absolute gains as well. Children raised in the top quintile did no better or worse than their parents once those children became adults.

He has a lot more at the link.

In part 2, I will discuss why public policy is missing the boat, and in some cases doing exactly the wrong thing, to promote income mobility particularly for the poor.

More Entrepreneurship Would Help Progressive Causes, But Progressives Do Not Understand It At All

Last week I was walking through one of our area's  large upscale resorts.  The resort was hosting what looked like a huge conference of a large franchising organization.  What struck me immediately in the lobby and everywhere on the grounds was how many people of color were there -- it might have been as many as half.  And the crowd was WAY more than half women.  I don't want to argue right now about buying a franchise as a path to entrepreneurship -- there are pros and cons.  But it really helped reinforce something I always suspected -- that entrepreneurship is a particularly important path of self-improvement for women and people of color.

These all sound like worth progressive goals, and in fact many progressive profess to support entrepreneurship.  Here is a screen shot from Beto O'Rourke's web site a loyal reader sent me:

Amazing.  We are going to promote entrepreneurship by showering the economy with regulations (1000 new bills a year in progressive CA) and making sure many of the returns from an entrepreneurs' money and effort go to other people.**  This is like saying we really want to promote the growth of the rabbit population and we are going to do it by putting out lots of rabbit traps and making sure all the carrots the rabbits are eating are given to others.

** By the way, perhaps the #1 great progressive misunderstanding is that without one single government intervention, the vast majority of the entrepreneur's efforts go to others.  Employees will earn far more in total than will the entrepreneur herself, and  consumers will be left with far more value from the products and services they buy than the entrepreneur ever got back in profit.  Steve Jobs created far more wealth and well-being for the rest of us than he did for himself.

Trans-partisan Plan #1: Addressing Man-Made Global Warming With A Plan That Could Be Supported By Both Democrats and Republicans

While I am not deeply worried about man-made climate change, I am appalled at all the absolutely stupid, counter-productive things the government has implemented in the name of climate change, all of which have costly distorting effects on the economy while doing extremely little to affect man-made greenhouse gas production.  For example:

Even when government programs do likely have an impact of CO2, they are seldom managed intelligently.  For example, the government subsidizes solar panel installations, presumably to reduce their cost to consumers, but then imposes duties on imported panels to raise their price (indicating that the program has become more of a crony subsidy for US solar panel makers, which is typical of these types of government interventions).  Obama's coal power plan, also known as his war on coal, will certainly reduce some CO2 from electricity generation but at a very high cost to consumers and industries.  Steps like this are taken without any idea of whether this is the lowest cost approach to reducing CO2 production -- likely it is not given the arbitrary aspects of the program.

These policy mess is also an opportunity -- it affords us the ability to substantially reduce CO2 production at almost no cost.

The Plan

Point 1: Impose a Federal carbon tax on fuel.

I am open to a range of actual tax amounts, as long as point #2 below is also part of the plan.  Something that prices CO2 between $25 and $45 a ton seems to match the mainstream estimates of the social costs of CO2.  I think methane's greenhouse effects are exaggerated, but one could make an adjustment to the natural gas tax numbers to take into account methane leakage in the production chain.   I am even open to making the tax=0 on biofuels given these fuels are recycling carbon from the atmosphere.

So what is the best way to reduce CO2 -- by substituting gas for coal?   By more conservation?  By solar, or wind?  With biofuels?  With a carbon tax, we don't have to figure it out or have politicians picking winners.  This is why a Pigovian tax on carbon in fuels is going to be the most efficient possible way to reduce CO2 production.   Different approaches will be tested in the marketplace.  Cap and trade could theoretically do the same thing, but while this worked well in some niche markets (like SO2 emissions), it has not worked at all in European markets for CO2.   There has just been too many opportunities for cronyism, too much weird accounting for things like offsets that is hard to do well, and too much temptation to pick winners and losers.

When I first crafted early drafts of this plan several years ago, I had assumed that Progressives championed a carbon tax for the reasons I listed above, ie that it is the most efficient means to allow markets to reduce emissions.  However, the referendum a couple of years ago in Washington State demonstrated that many Progressives may not understand this at all.  You can read a lot more about this debate here.  I fail the ideological Turing test on this one, because I don't know if the Progressives who were strongly for CO2 reduction but opposed the Washington State carbon tax did so because they did not understand economics or because they cared less about global warming than funding other Progressive causes.

Point 2:  Offset 100% of carbon tax proceeds against the payroll tax

Yes, there are likely many politicians, given their incentives, that would love a big new pool of money they could use to send largess, from more health care spending to more aircraft carriers, to their favored constituent groups.  But we simply are not going to get Conservatives (and libertarians) on board for a net tax increase, particularly one to address an issue folks on the Right may not agree is an issue at all.  So our plan will use carbon tax revenues to reduce other Federal taxes.

I think the best choice would be to reduce the payroll tax.  Why?  Because, the carbon tax will necessarily be regressive (as are most consumption taxes) and the most regressive other major Federal tax we have are payroll taxes.  Offsetting income taxes would likely be a non-starter on the Left, as no matter how one structures the tax reduction the rich would get most of it since they pay most of the income taxes.

There is another benefit of reducing the payroll tax -- it would mean that we are replacing a consumption tax on labor with a consumption tax on fuel. It is always dangerous to make gut-feel assessments of complex systems like the economy, but my sense is that this swap might even have net benefits for the economy -- so much so that we might want to do it even if there was no such thing as greenhouse gas warming.  In theory, labor and fuel are economically equivalent in that they are both production raw materials. But in practice, they are treated entirely differently by the public.   Few people care about the full productive employment of our underground fuel reserves, but nearly everybody cares about the full productive employment of our labor force.   After all, for most people, the primary single metric of economic health is the unemployment rate.  So replacing a disincentive to hire with a disincentive to use fuel could well be popular.

Point 3:  Eliminate all the stupid stuff

Oddly enough, this might be the hardest part politically because every subsidy, no matter how idiotic, has a hard core of beneficiaries who will defend it to the death -- this the the concentrated benefits, dispersed cost phenomena that makes it hard to change many government programs.  But never-the-less I propose that we eliminate all the current Federal subsidies, mandates, and prohibitions that have been justified by climate change. Ethanol rules and mandates, solar subsidies, wind subsidies, EV subsidies, targeted technology investments, coal plant bans, pipeline bans, drilling bans -- it all should go.  The carbon tax does the work.

States can continue to do whatever they want -- we don't need the Feds to step on states any more than they do already, and I continue to like the 50 state laboratory concept.  If California wants to continue to subsidize wind generators, let them do it.  That is between the state and its taxpayers (and for those who think the California legislature is crazy or that the Texas legislature is in thrall to oil companies, that is what U-Haul is for).

Point 4:  Revamp our nuclear regulatory regime

As much as alternative energy enthusiasts would like to deny it, the world needs reliable, 24-hour baseload power -- and wind and solar are not going to do it (without a change in storage technology of at least 2 orders of magnitude in cost).  The only carbon-free baseload power technology that is currently viable is nuclear.

I will observe that nuclear power suffers under some of the same problems as commercial space flight -- the government helped force the technology faster than it might have grown organically on its own, which paradoxically has slowed its long-term development.  Early nuclear power probably was not ready for prime time, and the hangover from problems and perceptions of this era have made it hard to proceed even when better technologies now exist.   We are at least 2 generations of technology past what is in most US nuclear plants.  Small air-cooled thorium reactors and other technologies exist that could provide reliable safe power for over 100 years.  I am not an expert on nuclear regulation, but it strikes me that a regime similar to aircraft safety, where a few designs are approved and used over and over makes sense.  France, which has the strongest nuclear base in the world, followed this strategy.  Using thorium could also have the advantage of making the technology more exportable, since its utility in weapons production would be limited.

Point 5: Help clean up Chinese, and Asian, coal production

One of the hard parts about fighting CO2 emissions, vs. all the other emissions we have tackled in the past (NOx, SOx, soot/particulates, unburned hydrocarbons, etc), is that we simply don't know how to combust fossil fuels without creating CO2 -- CO2 is inherent to the base chemical reaction of the combustion.  But we do know how to burn coal without tons of particulates and smog and acid rain -- and we know how to do it economically enough to support a growing, prosperous modern economy.

In my mind it is utterly pointless to ask China to limit their CO2 growth.  China has seen the miracle over the last 30 years of having almost a billion people exit poverty.  This is an event unprecedented in human history, and they have achieved it in part by burning every molecule of fossil fuels they can get their hands on, and they are unlikely to accept limitations on fossil fuel consumption that will derail this economic progress.  But I think it is reasonable to help China stop making their air unbreathable, a goal that is entirely compatible with continued economic growth.  In 20 years, when we have figured out and started to build some modern nuclear designs, I am sure the Chinese will be happy to copy these and start working on their CO2 output, but for now their Maslov hierarchy of needs should point more towards breathable air.

As a bonus, this would pay one immediate climate change benefit that likely would dwarf the near-term effect of CO2 reduction.  Right now, much of this soot from Asian coal plants lands on the ice in the Arctic and Greenland.  This black carbon changes the albedo of the ice, causing it to reflect less sunlight and absorb more heat.  The net effect is more melting ice and higher Arctic temperatures.  A lot of folks, including myself, think that the recent melting of Arctic sea ice and rising Arctic temperatures is more attributable to Asian black carbon pollution than to CO2 and greenhouse gas warming (particularly since similar warming and sea ice melting is not seen in the Antarctic, where there is not a problem with soot pollution).

Final Thoughts

At its core, this is a very low cost, even negative cost, climate insurance policy.  I am convinced this policy, taken as a whole, would still make sense even if CO2 turns out to be as harmless as nitrogen.  The carbon tax combined with a market economy does the work of identifying the most efficient ways to reduce CO2 production.   The economy benefits from the removal of a myriad of distortions and crony give-aways, while also potentially benefiting from the replacement of a consumption tax on labor with a consumption tax on fuel.  The near-term effect on CO2 is small (since the US is only a small part of the global emissions picture), but actually larger than the near-term effect of all the haphazard current programs, and almost certainly cheaper to obtain.  As an added benefit, if you can help China with its soot problem, we could see immediate improvements in probably the most visible front of man-made climate change:  in the Arctic.

Postscript

Perhaps the hardest thing to overcome in reaching a compromise here is the tribalism of modern politics.  I believe this is  a perfectly sensible plan that even those folks who believe man-made global warming is  a total myth ( a group to which I do not belong) could sign up for.  The barrier, though, is tribal.  I consider myself to be pretty free of team politics but my first reaction when thinking about this kind of plan was, "What? We can't let those guys win.  They are totally full of sh*t.  In the past they have even threatened to throw me in jail for my opinions."  Since I first published this plan I have had very prominent skeptics contact me to criticize me for "giving in to the warmists."

What I Am Wondering About Inflation

Tyler Cowen asks, "Why isn’t inflation higher?"  I have wondered that for a while, but monetary policy and related topics in macro are one of the areas I admit that I simply do not understand so I don't write about it.  So rather than offering any hypotheses to Cowen's question, I will ask my own:

  1. Is it possible that inflation exists but it shows up mainly in financial assets (stocks, bonds, perhaps real estate) that don't really factor into standard inflation metrics?  Every step the Fed has taken, as well as other western central banks, appears to me to be crafted to pump money into securities markets rather than into main street.  Certainly we have seen a huge inflation in the value of financial assets and real estate over the past several years.
  2. Expansion of the economy above the rate of productivity improvement should drive inflation, unless there was a lot of excess capacity to soak up.   That may have been partly the case in the US since 2008, but surely that is gone.  Does the still greatly underutilized Chinese and Indian labor force act as excess capacity that prevents inflation from heating up here?  If so, might Trump's trade restrictions interfere with this going forward?

Another Phoenix Light Rail Fail: Light Rail KILLS Transit Systems

Well, another year's ridership numbers are out for Valley Metro and Phoenix light rail and they are just as grim as they have been every year since Phoenix spent the first $1.4 billion on the first leg of the rail system (source)

Now, this picture is bad enough, until you realize that Valley Metro completed a huge extension of the rail line in 2016.  In 2016 the line length was increased by 31% and the cumulative capital investment increased by 36%.  With, as you can see, essentially zero effect on rail ridership in red.  The only small highlight was that after falling for years, bus ridership actually perked up a few percent.  As you may remember from earlier posts, bus ridership could be expected to fall due to cannibalization from light rail, but in fact it tends to fall even faster than rail ridership rises, causing total ridership to fall.  The reason is that light rail costs at least an order of magnitude more (including amortized capex) per passenger mile than busses, and so light rail tends to starve the bus system of funds.  Every light rail system implementation has been met with the need to slash bus service to pay for the huge light rail costs.  So despite enormous operating subsidies and more than $2 billion in cumulative capex, rail ridership has been flat and total transit ridership has fallen.

But in fact the picture is worse than this when you look over a longer timeframe, which is why Valley Metro has probably changed their practice from graphing nearly 20 years of history to graphing just 6.  Here is an older chart of theirs I posted years ago: (the top year in this chart is the bottom year in the chart above)

I will get back to the annotation in a moment.  But notice that despite all the cost and disruption and higher taxes from the light rail system, total ridership this year of 66.8 million is less than any year since light rail was opened and baredly 8% higher than it was before light rail opened 10 years ago in 2008.  Just organic city growth and recovery of the economy since 2008 should have driven faster growth than this.  In fact, in the 10 years before light rail was opened, Phoenix transit ridership grew 70%.  If that organic growth rate in bus service had been allowed to continue without the backbreaking costs and limited capacity of light rail being added to the mix, we should have expected 105 million riders this past year, not 66.8 million.

I Know Congress Hates To Challenge A President of Its Own Party, But...

...Congress simply has to pare back the tariff authority it has delegated the President.  It is simply insane that Trump can just unilaterally impose 20% tariffs on foreign automobiles, a $200 billion new tax on US consumers.

It is appalling to see Trump following the usual blue model of economic regulation, imposing one intervention after another, each meant to fix the unintended consequences of the last intervention.  Steel tariffs increased costs to domestic auto makers, so Trump proposes tariffs on foreign autos.  When tariffs result (inevitably) in counter-tariffs on US agricultural exports, Trump proposes more agricultural subsidies.   People (not me) lament gridlock in government and want more fluid lawmaking -- well here it is.  And it sucks.  It is mindless and reactive and emotional and totally ignorant of economics.

These tariffs, when combined with earlier actions, will result in tax increases on consumers that swamp the tax cuts Trump and the Republicans were so proud of last year.

I tend to be a pessimist so I have probably accurately called 5 or the last 2 recessions, but i have started to shift my investments around to get ready for a slowing economy and a market correction.

Update (source)

While both careful not to specifically cite the politically unwise 'tariffs', Boeing, GM, and Fiat Chrysler stocks are plunging in the pre-market after trade war-related impacts caused missed earnings or lowered outlooks.

General Motors Co. cut its forecast for profit this year as surging prices for steel and aluminum combine with swings in South American currencies to burden the largest U.S. automaker. Specifically, Bloomberg reports that raw material costs probably will be a $1 billion headwind to GM’s profit this year - roughly double its previous expectation - while the Argentine peso and Brazilian real are likely to drag on results through the remainder of 2018.

A Reminder: Why the US Rail System Is At Least as Good As the European System if You Care About Energy Use

In an article about the French railroad SNCF, Randal O'Toole makes a point I have screamed to the world for years:

Meanwhile, French trains carry less than 11 percent of freight, as more than 86 percent of freight is transported on highways. Those numbers are in sharp contrast to the U.S., where at least a third of freight goes by rail and less than 40 percent goes by truck (and I suspect a bad model has erroneously exaggerated the role of trucks).

American railroads are a model of capitalism, one of the least-subsidized forms of transportation in the world. They are profitable and do far more for the national economy than Europe’s socialized railroads, which mainly serve narrow elites.

Most of the intellectual elites and nearly all the global warming alarmists deride the US for not having the supposedly superior rail system that France and Germany have.  They are blinded by the vision of admittedly beautiful high speed trains, and have frittered away billions of dollars trying to pursue various high speed rail visions in the US.

I know that the supposedly pro-science global warming alarmists sometimes are not actually very focused on science, but this is pretty simple to think about.

First, consider the last time you were on a passenger train.  Add up the weight of all the folks in your car.  Do you think they weighed more or less than the car itself?  Unless you were packed into a subway train with Japanese sumo wrestlers, the answer is that the weight of the car dwarfs that of the passengers it is carrying.    The average Amtrak passenger car apparently weighs about 65 tons (my guess is a high speed rail car weighs more).  The capacity of a coach is 70-80 passengers, which at an average adult weight of 140 pounds yields a maximum passenger weight per car of 5.6 tons.  This means that just 8% of the fuel in a passenger train is being used to move people -- the rest goes into moving the train itself.

Now consider a freight train.  The typical car weight 25-30 tons empty and can carry between 70 and 120 tons of cargo.  This means that 70-80% of the fuel in a freight train is being used to move the cargo.

Now you have to take me on faith on one statement -- it is really hard, in fact close to impossible, to optimize a rail system for both passengers and freight.  In the extreme of high speed rail, passenger trains required separate dedicated tracks.  Most rail systems, even when they serve both sorts of traffic, generally prioritize one or the other.  So, if you wanted to save energy and had to pick, which would you choose -- focusing on freight or focusing on passengers?  Oh and by the way, if you want to make it more personal, throw in a consideration of which you would rather have next to you on crowded roads, another car or another freight truck?

This is why the supposedly-green folks' denigrating of US rail is so crazy to me.  The US rails system makes at least as much sense as the European system, even before you consider that it was mostly privately funded and runs without the subsidies that are necessary to keep European rail running.  Yes, as an American tourist travelling in Europe, the European rails system is great.  Agreed.  I use it every time I go there.  I have to assume that this elite tourist experience must be part of why folks ignore the basic science here.

My original article on all this years ago was in Forbes here.

Postscript #1:  One could argue that what matters is not the weight ratios of freight vs. passenger rail but how those compare to the road alternatives.  I would have to think this through, but it gets way more complicated because you have to start worrying about average occupancy and such since that also differs.  At full capacity say of 4 people, the typical 4000 pound car (US, rest of the world is less) would passenger weight around 12% of the total, higher than for the passenger train.   But average occupies could change the comparison and I don't have the time to work it through.  But for a full analysis we would have to take a lot of other things into account.  For example, trains are a poor fit with customer travel time preferences for longer US distances, even for higher speed options.  In the same way freight pencils out worse for rail in Europe because the last mile transport problems become a bigger percentage in a shorter haul.  I am confident though that for the US, the freight-dominant system is the right solution and it amazes me how hard it is to get anyone to recognize this.

Postscript #2:  Thinking about the SNCF, I actually did a consulting project there 20+ years ago.  I remember two things.   First they had 25% more freight car repair people than they had freight cars.  Which led me to making the tongue-in-cheek suggestion that they could give every one of these folks their own tool bag, assign them their own car to ride around on, and still cut a fifth of their staff.  I have never, ever, ever seen bloated staffing like I did at SNCF.  My other memory was lunches with executives that took place in palatial dining rooms with waiters in white gloves.  We ate for like 3 hours and drank a case of wine and all I could think about doing after lunch was going to take a nap.

Postscript #3:  This is really going to be a random aside, but if you want to bring science to the table, monorails are the dumbest things ever.  The whole advantage of rail is the friction reduction of a metal flanged wheel rolling on a metal rail.   Most monorails (and people movers) are just tires on a concrete beam (e.g this is how the Disney monorails work).  This is no more efficient than a bus and actually less because the train jacks up the vehicle to passenger weight ratio over a bus.  Because of certain geometry issues, monorails also have limited capacity.  Disney has been struggling with this for years at the Magic Kingdom in Florida and their ferry boats seem to move a lot more passengers than the adjacent monorails.  Monorails do look awesome, though, and their tracks are airier and more attractive than traditional elevated rail tracks.

The Conservatism of Progressives

Despite having a lot of respect for the intellect and the insane eclecticism of its author Tyler Cowen, I have never read the Complacent Class.  The title really did not intrigue me, and frankly from that title probably had the wrong vision of what the book was about.  That is, until I read George Will's recent review, in which he said in part:

In 1800, McCloskey says, the world’s economy was where Bangladesh’s economy now is, with no expectation of change. Today, most of the jobs that existed just a century ago are gone. And we are delighted that this protracted disruption occurred. Now, however, the Great Enrichment is being superseded by the Great Flinch, a recoil against the frictions and uncertainties — the permanent revolution — of economic dynamism. If this continues, the consequences, from increased distributional conflicts to decreased social mobility, are going to be unpleasant.

Although America is said to be — and many Americans are — seething about economic grievances, Tyler Cowen thinks a bigger problem is complacency. In his latest book, “The Complacent Class: The Self-Defeating Quest for the American Dream,” Cowen, professor of almost everything (economics, law, literature) at George Mason University and co-author of the Marginal Revolution blog, argues that the complacent class, although a minority, is skillful at entrenching itself in ways detrimental to the majority....

For complacent Americans, a less dynamic, growth-oriented nation seems less like an alarming prospect than a soothing promise of restfulness. In a great testimonial to capitalism’s power, “The Communist Manifesto,” Karl Marx wrote: “All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. All that is solid melts into air.” Complacent, because comfortable, Americans have had enough of that.

Hmm, I suppose I should read it.  I don't want to judge the premise of the book from a few lines of a 3rd party review, but the themes here are strikingly similar to something I wrote 13 years ago (!) on this blog in a post titled "Progressives are too Conservative to Like Capitalism".  I still agree with much, though not all, of what I wrote there so I will pare it down a bit:

Most "progressives" (meaning those on the left to far left who prefer that term) would freak if they were called conservative, but what I mean by conservative in this context is not donate-to-Jesse-Helms capital-C Conservative but fearful of change and uncomfortable with uncertainty conservative.

OK, most of you are looking at this askance - aren't progressives always trying to overthrow the government or something?  Aren't they out starting riots at G7 talks?  The answer is yes, sure, but what motivates many of them, at least where it comes to capitalism, is a deep-seated conservatism.

Before I continue to support this argument, I must say that on a number of issues, particularly related to civil liberties and social issues, I call progressives my allies.  On social issues, progressives, like I do, generally support an individual's right to make decisions for themselves, as long as those decisions don't harm others.

However, when we move to fields such as commerce, progressives stop trusting individual decision-making.  Progressives who support the right to a person making unfettered choices in sexual partners don't trust people to make their own choice on seat belt use.  Progressives who support the right of fifteen year old girls to make decisions about abortion without parental notification do not trust these same girls later in life to make their own investment choices with their Social Security funds.  ... [this would also make a good example:  Progressives oppose school choice because they don't think the poor capable of making good education decisions]

Beyond just the concept of individual decision-making, progressives are hugely uncomfortable with capitalism.  Ironically, though progressives want to posture as being "dynamic", the fact is that capitalism is in fact too dynamic for them.  Industries rise and fall, jobs are won and lost, recessions give way to booms.  Progressives want comfort and certainty.  They want to lock things down the way they are. They want to know that such and such job will be there tomorrow and next decade, and will always pay at least X amount.  That is why, in the end, progressives are all statists, because, to paraphrase Hayek, only a government with totalitarian powers can bring the order and certainty and control of individual decision-making that they crave.

Progressive elements in this country have always tried to freeze commerce, to lock this country's economy down in its then-current patterns.  Progressives in the late 19th century were terrified the American economy was shifting from agriculture to industry.  They wanted to stop this, to cement in place patterns where 80-90% of Americans worked on farms.  I, for one, am glad they failed, since for all of the soft glow we have in this country around our description of the family farmer, farming was and can still be a brutal, dawn to dusk endeavor that never really rewards the work people put into it.

This story of progressives trying to stop history has continued to repeat itself through the generations.  In the seventies and eighties, progressives tried to maintain the traditional dominance of heavy industry like steel and automotive, and to prevent the shift of these industries overseas in favor of more service-oriented industries.  Just like the passing of agriculture to industry a century ago inflamed progressives, so too does the current passing of heavy industry to services.

In fact, here is a sure fire test for a progressive.  If given a choice between two worlds:

  1. A capitalist society where the overall levels of wealth and technology continue to increase, though in a pattern that is dynamic, chaotic, generally unpredictable, and whose rewards are unevenly distributed, or...
  2. A "progressive" society where everyone is poorer, but income is generally more evenly distributed.  In this society, jobs and pay and industries change only very slowly, and people have good assurances that they will continue to have what they have today, with little downside but also with very little upside.

Progressives will choose #2.  Even if it means everyone is poorer.  Even if it cuts off any future improvements we might gain in technology or wealth or lifespan or whatever.  They want to take what we have today, divide it up more equally, and then live to eternity with just that.   Progressives want #2 today, and they wanted it just as much in 1900 (just think about if they had been successful -- as just one example, if you are over 44, you would have a 50/50 chance of being dead now).

Don't believe that this is what they would answer?  Well, first, this question has been asked and answered a number of times in surveys, and it always comes out this way.  Second, just look at any policy issue today.  Take prescription drugs in the US - isn't it pretty clear that the progressive position is that they would be willing to pretty much gut incentives for any future drug innovations in trade for having a system in place that guaranteed everyone minimum access to what exists today?  Or take the welfare state in Continental Europe -- isn't it clear that a generation of workers/voters chose certainty over growth and improvement?  That workers 30 years ago voted themselves jobs for life, but at the cost of tremendous unemployment amongst the succeeding generations?

The Insanity of Base Load Wind Power

I have talked a lot about how wind power has almost no effect on fossil fuel use because the unpredictability of wind requires a lot of fossil-fueled plants to keep burning fuel on hot standby in case the wind dies.  Matt Ridley comes at wind from a different angle, discussing what it would take for wind to actually have any meaningful impact on world electricity production.

Even put together, wind and photovoltaic solar are supplying less than 1 per cent of global energy demand. From the International Energy Agency’s 2016 Key Renewables Trends, we can see that wind provided 0.46 per cent of global energy consumption in 2014, and solar and tide combined provided 0.35 per cent. Remember this is total energy, not just electricity, which is less than a fifth of all final energy, the rest being the solid, gaseous, and liquid fuels that do the heavy lifting for heat, transport and industry....

Meanwhile, world energy demand has been growing at about 2 per cent a year for nearly 40 years. Between 2013 and 2014, again using International Energy Agency data, it grew by just under 2,000 terawatt-hours.

If wind turbines were to supply all of that growth but no more, how many would need to be built each year? The answer is nearly 350,000, since a two-megawatt turbine can produce about 0.005 terawatt-hours per annum. That’s one-and-a-half times as many as have been built in the world since governments started pouring consumer funds into this so-called industry in the early 2000s.

At a density of, very roughly, 50 acres per megawatt, typical for wind farms, that many turbines would require a land area greater than the British Isles, including Ireland. Every year. If we kept this up for 50 years, we would have covered every square mile of a land area the size of Russia with wind farms. Remember, this would be just to fulfil the new demand for energy, not to displace the vast existing supply of energy from fossil fuels, which currently supply 80 per cent of global energy needs.

How do renewables advocates trumpet the high renewables numbers they often report?  By lumping in other things and hoping the reader is tricked into thinking the total is wind and solar.

Their trick is to hide behind the statement that close to 14 per cent of the world’s energy is renewable, with the implication that this is wind and solar. In fact the vast majority — three quarters — is biomass (mainly wood), and a very large part of that is ‘traditional biomass’; sticks and logs and dung burned by the poor in their homes to cook with. Those people need that energy, but they pay a big price in health problems caused by smoke inhalation.

People who talk about sustainability often miss the single best metric we have of the net scarcity of resources that goes into any product:  price.  I am always amazed when people point at a much much higher price version of some product and claim that it is more sustainable.  How can this possibly be?  Assuming the profit margins are relatively similar, the higher priced product has to be using more and scarcer resources.  How is that more sustainable  (I will perhaps grant the exception that certain emissions are not properly priced into some products).

To this end, wind power is much more expensive than, say, power from modern natural gas generation plants, even if one factors in a $30 a ton or so cost of CO2 emissions.  This has to make us suspicious that maybe it is not really more "sustainable".

Wind turbines, apart from the fibreglass blades, are made mostly of steel, with concrete bases. They need about 200 times as much material per unit of capacity as a modern combined cycle gas turbine. Steel is made with coal, not just to provide the heat for smelting ore, but to supply the carbon in the alloy. Cement is also often made using coal. The machinery of ‘clean’ renewables is the output of the fossil fuel economy, and largely the coal economy.

Regulation and Innovation

We often talk about the direct costs of regulation, but in the long run perhaps the most worrying problem is a cost that is impossible to measure -- its effect on innovation.  From a labor regulation paper I am writing:

Labor regulations are written in consideration of existing, well established business models, and are not written for business models that might someday exist.  Often my employees ask me why labor law will not allow practices that would make a lot of sense in our business, both for employer and employee.  I tell them to imagine a worker in a Pittsburg factory, punching a timeclock from 9 to 5 Monday through Friday, working within sight of their supervisor, taking their breaks in the employee lunch room.  This is the labor model regulators and legislators had in mind when writing the bulk of labor law.  Any other labor model – seasonal work, part-time work, working out of the home, telecommuting, working away from a corporate office or one’s supervisor, the gig economy – become square pegs to be jammed in the round hole of labor law.

When someone does try to stick an innovative square peg in the round hole of existing regulation, there tend to be concerted efforts by regulators to kill the new model.  Just look at Uber and the efforts to force it out of its labor model and into a more traditional one.  Most of us see innovation as good and value-creating.  Regulators - by training, by their incentives, by the culture - see innovation as threatening.  They see innovations as viruses trying to bypass the immune systems they have spent years constructing.

Here is an example from pharmaceuticals that really struck me.  Alex Tabarrok is writing on promising anti-aging and cancer reduction drugs:

The assembled scientists and academics focused on one obstacle above all: the Food and Drug Administration. The agency does not recognize aging as a medical condition, meaning a drug cannot be approved to treat it. And even if the FDA were to acknowledge that aging is a condition worthy of targeting, there would still be the question of how to demonstrate that aging had, in fact, been slowed—a particularly difficult question considering that there are no universally agreed-on markers.

 

Another Reason to Discuss Government-led Local Business Development

I have written many times about my frustration with cronyist business relocation incentives handed out by most local and state governments.  I have always considered these government incentives to be insanely unproductive spending, often taking taxpayer money to move a company as little as a few miles to get it over some artificial border.  One issue I have not considered in these critiques is whether the sorts of companies selected for relocation are really in the long-term interest of the local community at all.

Almost by definition, most relocation subsidies go to large, well-known companies.  This is for a couple of reasons.  First, large companies have the clout to lobby and demand such subsidies, clout smaller businesses do not have.  Second, politicians are handing out these subsidies in order to get re-elected.  The actual product of these subsidies is a press release and a blurb on the politician's campaign website.  A press release saying that your faithful governor has gotten Joe Smith's Widgets to move to Arizona is a lot less powerful than saying he got a branch of General Electric to move to Arizona.  In fact, the sexier the name the better, which is why politicians fall all over themselves to get Google and Apple and Tesla to come to town (despite the fact that in my observation, it is the staid old companies like Honeywell and Wells Fargo and such that tend to invest a lot more in their local communities).   We have a plant in the Phoenix area that has already had two subsidized sexy companies in it (First Solar and an Apple screen manufacturing partner) and now is empty yet again waiting for the next sexy crony.  Apparently, the state has agreed to subsidize Apple again to use it for a data center, though the move-in may be delayed as there was a large fire at the building when the solar panels on the roof caught fire.  Three sexy press releases for Arizona politicians for the same building!

Anyway, I was thinking about this when I read the piece below from Scott Sumner

This reminded me of a very interesting study that compared two cities in Michigan, Flint and Grand Rapids:

In 1946, sociologist C. Wright Mills and economist Melville Ulmer concluded the fortunes of two of Michigan's largest cities, Flint and Grand Rapids, were headed in opposite directions.Seventy years later, their predictions are getting new notice from academics.

The researchers warned Flint was overly dependent on its big employers even though its workers made 37 percent more than the national average at the time.

The warning seemed out of place. By 1950, Flint was labeled "the happiest city in Michigan" and the "epicenter of the American Dream," thanks to its thriving auto industry.

Grand Rapids, whose economy was defined by its numerous small businesses, was less flashy. But it offered its citizens more mobility and opportunity for its middle class that would help it survive tough times, the researchers concluded.

Flint was still booming in the late 1960s, so it looked like this 1946 prediction was wrong. But then the prediction suddenly came true. Flint's metro population fell from 445,589 in 1970 to 410,849 in 2015. In contrast, Grand Rapids has been booming, with its metro population soaring from 539,225 in 1970 to 1,038,583 in 2015. And both of these places are in the rustbelt state of Michigan.

Trade and The World's Most Misunderstood Accounting Identity: Y=C+I+G+X-M (Update)

(Note:  This is an update of this post based on a new set of economically illiterate people in the White House).

Repeat after me:  Y=C+I+G+X-M is an accounting rule.  It does not explain anything about the economy.  It is as useful to telling us anything interesting about the economy as the equation biomass=plants+animals+bacteria tells us anything about the ecosystem.

Apparently our new commerce secretary is totally ignorant of this fact:

[New Commerce Secretary Wilbur Ross] has a simple but misguided view of global trade. He believes that good trade policy yields a national trade surplus, while bad deals produce trade deficits—as if every country in the world could run a trade surplus. In an August letter to this newspaper, Mr. Ross wrote, “It’s Econ 101 that GDP equals the sum of domestic economic activity plus ‘net exports,’ i.e., exports minus imports. Therefore, when we run massive and chronic trade deficits, it weakens our economy.”

Who taught him that? Imports are subtracted in GDP calculations to avoid overstating domestic production, not because they make us poorer. Many domestic products wouldn’t exist without foreign components.

Here is his faulty logic.  The GDP (Y) is calculated by adding Consumer spending + Investment by Business + Government spending + eXports and then subtracting iMports.  Because imports are subtracted in the GDP equation, they look to the layman like they shrink the economy.  How do we grow the economy?  Why, let's reduce that number that is subtracted!  But this is wrong.  Totally wrong.   Anything that reduces imports (e.g. a tariff) will likely reduce C+I+G by the same amount.   The M term is there simply to avoid double counting.  It has no economic meaning in this context whatsoever.  I have tried many times to explain this, but let me see if I can work by analogy.

Let's say we wanted an equation to count the amount of clothing we owned.  To make things simple, let's say we are only concerned with the total of Shirts, Pants, and Underwear.   Most of our clothes are in the closet, so we say our clothes are equal to the S+P+U we count in our closet.  But wait, we may have Loaned clothes to other people.  Those are not in our closet but should count in our total of our owned clothing.  So now clothes = S+P+U+L.  But we may also have Borrowed clothes.  Some of those clothes we counted in the closet may be Borrowed and thus not actually ours, so we need to back these out.  Our final equation is clothes owned = S+P+U+L-B.  Look familiar?

Let's go further.  Let's say that we want to increase our number of clothes owned.  We want wardrobe growth!  Well, it looks like those borrowed clothes are a "drag" on our wardrobe size.  If we get rid of the borrowed clothes, that negative B term will get smaller and our wardrobe has to get larger, right?

Wrong.  Remember, like the GDP equation, our wardrobe size equation is just an accounting identity.  The negative B term was put in to account for the fact that some of the clothes we counted in S+P+U in the closet were not actually ours.  If we decrease B, say by returning our friend's shirt, the S term will go down by the exact same amount.  Sure, B goes down, but so do the number of shirts we count in the closet.  So focusing on the B term gets us nowhere.

But it is actually worse than that, because focusing on reducing B makes us worse off.  If negative term B rises, our wardrobe is no larger, but we get the use of all of those other pieces of clothing.  Our owned wardrobe may not be any larger but we get access to more choices and clothing possibilities.  When we drive the negative term B down to zero, our wardrobe is no larger and we are worse off with fewer choices.  Similarly, in the the economy, focusing on reducing imports does not grow the economy, it just serves to make us poorer by reducing our buying choices and increasing the cost of consumer goods as well as manufacturing inputs.

I don't want to say that it's impossible for increases in imports to drag the economy.  For example, if oil prices rise, the imports number measured in dollars will likely rise, and the economy could be worse off as we have to give up buying other things to continue to buy the oil we need.  But, absent major price changes, drops in exports more likely just mirror drops in C+I+G.  If consumers are hurting, they spend less on everything, including imported goods.   At the end of the day, none of these numbers (Mr. Keynes, are you listening?) are independent variables.

Postscript:  Here is another example.  Imagine a company with three divisions, D1, D2, and D3.  How do we compute the company's total revenue?  Well, typically we would add the revenue from the three divisions, so Total Corporate Revenue R = RD1 + RD2 + RD3.  Oh, but there is a problem.  Some of the sales from each of our divisions are to each other.  We only want to measure our true revenue from external sales, so we need to subtract intra-company sales from the total (this is a very typical step in conglomerate accounting).  So total company revenue R = RD1+RD2+RD3-IC, where IC are the total of intra-company sales within the company between divisions.  If you had a new CEO who looked at this accounting, and the CEO's first thought was "if we got rid of all these intra-company sales, surely we would have more revenue, because they are subtracting from total revenue in the revenue equation."  What would you do with this CEO?  If you knew the first thing about corporate accounting, you would fire him or her immediately for being a moron.  Just because the IC term is negative in the accounting equation does not mean that intra-company sales are a drag on revenues.  Eliminating intra-comapny sales would likely reduce revenues and profits as company insiders are forced to find new, less trusted, and more expensive sources for their purchases than buying internally.

A Global Economy in Health Care Services? Good!

Kevin Drum laments that people are "Americans Flee America For Overseas Health Care Just Like Canadians."  My response in his comments:

I am confused by your using the word "flee". If I buy a Toyota, no one says I am "fleeing" the US manufacturing system. It is a global economy, and I don't know why the globalization of health care services is anything but a good thing. We have put so many barriers in the way of expanding capacity (licensing, certificates of need, FDA approvals, etc) and legislated so many artificial monopolies in health care, it seems perfectly reasonable, even good news, that competition for medical services is emerging from other countries.

Congratulations #DeleteUber on Weakening an Important Source of Restraint on Trump

A couple weeks ago I was having dinner with a couple of guys who fear and despise Trump.  I told them that all the marches in the streets were not going to affect Trump's behavior one bit, though it will affect the behavior of the Congress when (and if, given the new Imperial presidency, copyright Bush and Obama) they are called on to ratify some of Trump's actions.  I told them that the biggest check on Trump, at least in the near term on issues like immigration, was going to be American corporations.  As much as the Left may not like corporations, businesses need trade and immigration and free international travel to function in the global economy and they are not going to be happy about all of Trump's planned restrictions (you could see echoes of that last night in a number of the Superbowl commercials).

So of course the Left gears up a #DeleteUber campaign because Uber didn't participate in a taxi strike at JFK protesting Trump's immigration order.  Essentially, protesters who are mad at Trump for restricting travel are mad at Uber for, uh, not restricting travel.  In the end, all the #DeleteUber folks did was force the Uber CEO to quit Trump's advisory counsel.  Congratulations Left, you managed to remove a likely voice of reason from inside the White House.

I would happily join up with the Left in opposition to a lot of Trump's actions if I wasn't so absolutely horrified at their tactics.  There is no reason, no thoughtfulness at all.  Even the media participates in this dumbing down by simply refusing to making issues clear (e.g. continuing to call the 90-day visa timeout from 7 countries a "muslim ban").  And the first person from the Left who I hear criticize the anti-free-speech violence at Berkeley will be the first.

Update:  97 tech firms team up against Trump's immigration ban.  The problem with this approach is that I am not sure the "immigration ban", which is in fact a 90-day pause in issuing visas to folks from 7 countries, is actually illegal under current law and precedent.   Obama did something similar with Iraq at one point.   But I am happy to see them taking a shot at it -- in my mind a single person should not have this much power.  By the way, Amazon and Tesla did not sign, in part because their leaders still sit on Trump's advisory board.  The latter strikes me as a reasonable strategy, but I wonder how long the Left will allow them to remain inside the tent.

 

Why Germany Struggles With Integrating New Immigrants -- And Why Their Experience Isn't Comparable to the US

For years I have argued that immigration controls in this country are effectively a form of occupational licensing.  While US immigration controls are a terrible policy IMO, Germany's approach seems even worse.  They welcome people into their country but don't let them work, and then wonder why newly immigrated refugees can't find jobs.

In 2015, Germany waited the longest of any country in Europe to restrict the flow of asylum seekers from the Middle East. Yet once they arrived, the asylees who immediately sought work in Europe’s largest economy were greeted by bureaucracy. The law initially forbade asylees from seeking work for 9 months after their arrival, but was reduced to 3 months in November 2014. Then, inexplicably, at the height of the inflows, the German governmentbanned working if the asylee was forced to stay a reception center, which could be up to 6 months.

After the initial waiting period, asylees did not receive unrestricted employment authorization. Instead, they would have to find a “concrete” job offer—i.e. a firm must promise to hire them if the permit is granted—then apply for authorization. Even then, companies can only hire them during the first 15 months if the jobs are offered first to EU residents, and the federal labor department agrees that no one was willing to take. They also set asylee wages, which can price out low-skilled workers.

The hoops don’t end there. Asylees still have to get the approval of the immigration office at the municipal level. Under the law, it would take four years before they could compete equally with EU citizens.

On top of all these refugee-specific regulations, skilled workers are then tasked with proving that they can work in certain occupations. In order to obtain an occupational license, documentary proof of training—proof that’s often buried under bombed-out homes in Syria—is required. Some states in Germany allow asylees to demonstrate their skills in order to receive licensing, but others do not. “I am a dentist and could work, but what am I supposed to do? I am not allowed to work here!” one asylee told DW News.

Low-skilled immigrants haven’t avoided being targeted either. Germany introduced its first ever minimum wage in 2015—which disproportionately hits lower skilled migrants—and a study by the German government in August 2016 found that it had already cost 60,000 jobs.

 

Yes, Let's Make Entrepreneurship and Business Formation Even Harder

I am on the road this week in Alabama and Tennessee, but I felt the need to comment on one issue of the day.  These thoughts will be a bit rushed:

Well, it looks like the awesome team of Trump and Clinton may manage to take yet another shot at reducing entrepreneurship.  It's all a result of the report that the Donald had a nearly billion dollar tax loss decades ago, and that - gasp - this tax loss might have shielded his income from taxes for years.  Hillary's supporters are already demanding changes to the tax code and Trump, as usual, cannot muster an intelligent defense on even a moderately technical topic.

As someone who built a business over 10 years, I can't think of anything that would do more to screw up the already languishing rate of new business formation than to somehow limit the deductability of business losses on future years' taxes.

I lost money for years in my business -- trying to get it going, trying to grow it, engaging in more than a few failed experiments of new services.   I would have been much less likely to do so had I known that I couldn't offset future profits on my taxes with current losses.

I will add that making changes to the deductability of losses will only lead to some screwed up accounting behavior.  For example, had I known that the losses would not have been deductible, I probably would have found excuses to capitalize a lot of my expenses, reducing paper losses early and getting tax deductions later in the form of depreciation.  I probably could have saved some of the deductions but only with a lot of extra bookkeeping and accounting effort.  Is this really the way we want to revive the economy, by shifting sucking up more of entrepreneurs' time on useless paperwork games with the IRS/

Leveraging Up The World in Good Times -- The Madness of Modern Central Banking

From the WSJ:

The European Central Bank’s corporate-bond-buying program has stirred so much action in credit markets that some investment banks and companies are creating new debt especially for the central bank to buy.

In two instances, the ECB has bought bonds directly from European companies through so-called private placements, in which debt is sold to a tight circle of buyers without the formality of a wider auction.

It is a startling example of how banks and companies are quickly adapting to the extremes of monetary policy in what is an already unconventional age. In the past decade, wide-scale purchases of government bonds—a bid to lower the cost of borrowing in the economy and persuade investors to take more risk—have become commonplace. Central banks more recently have moved to negative interest rates, flipping on their head the ancient customs of money lending. Now, they are all but inviting private actors to concoct specific things for them to buy so they can continue pumping money into the financial system.

The ECB doesn’t directly instruct companies to create specific bonds. But it makes plain that it is an eager purchaser, and it lays out the specifics of its wish list. And the ECB isn’t alone: The Bank of Japan said late last year it would buy exchange-traded funds comprising shares of companies that spend a growing amount on “physical and human capital,” essentially steering fund managers to make such ETFs available to buy.

Note that none of the criteria for the debt purchases is anything like, "the company has sensible plans for investing the money."  It is merely buying debt for debt's sake.  In the US, private companies are using most of their debt issues to buy back stock, a nearly pointless exercise that channels money from central banks to propping up equity valuations.  I wouldn't be surprised if European companies do the same.

Folks, it may not feel like it, but we are at the top of the economic cycle.   We have negative interest rates and central banks buying up every available debt issues in relatively good times, when these were formerly considered tools for the deepest point in a recession.  I am not a big believer in government stimulus, but these folks are.  What are they counting on in the bad times, when nothing will be left in the tank?

But now, we see central banks going one step further, encouraging private companies to lever up at the top of the business cycle.   Historically, this has been a formula for disaster.  The oil industry has been a preview of this.  Take ExxonMobil (XOM).  XOM, given its size, has never been very good at developing certain sorts of plays (e.g. the shale boom).  What it has done historically is use its size and balance sheet to swoop in during inevitable periods of low oil prices and producer losses to buy up developed fields at good prices.  But this time around, XOM has only had limited ability to do this, because it spent the boom years levering up its balance sheet and buying back stock.  Other large oil companies are in even more dire straights, facing real cash flow crises because, again, they levered up to repurchase stock when they should have been cleaning up their balance sheet.

The Corporate State, In One Chart

James Bessen has a terrific article in the Harvard Business Review on the estimated contribution to corporate profits of rent-seeking, or the acquisition of special favors, subsidies, and protections from the government that shelter a company from the normal competition of a free market.  Bessen argues that such rent-seeking is major explanatory factor for recent rises in corporate profits.

W160518_BESSEN_WHATSDRIVING-1200x805

This topic will be a familiar one to Coyoteblog readers.   Show me a regulation and I will show you the large corporation that is able to use it to throttle competition.  I remember when everyone claimed the retail minimum wage was going to hurt Wal-Mart, but in fact Wal-Mart actually supported it because it was paying a higher wage than its smaller upstart competitors and thus the minimum wage would tend to hurt Wal-Mart's competition worse than it would be hurt.  Taxi service is one of the most regulated businesses in the country (at least in relation to the complexity of the business) and we are seeing just how much these regulations have supported taxi profits as we watch the taxi companies use the regulations to try to hammer Uber and Lyft.

According to Bessen, the effect is both large and on the rise:

I find that investments in conventional capital assets like machinery and spending on R&D together account for a substantial part of the rise in valuations and profits, especially during the 1990s. However, since 2000, political activity and regulation account for a surprisingly large share of the increase....

The pattern around the 1992 Cable Act is representative: I find that firms experiencing major regulatory change see their valuations rise 12% compared to closely matched control groups. Smaller regulatory changes are also associated with a subsequent rise in firm market values and profits.

This research supports the view that political rent seeking is responsible for a significant portion of the rise in profits. Firms influence the legislative and regulatory process and they engage in a wide range of activity to profit from regulatory changes, with significant success. Without further research, we cannot say for sure whether this activity is making the economy less dynamic and more unequal, but the magnitude of this effect certainly heightens those concerns.

Two characteristics make these changes particularly worrisome. First, the link between regulation and profits is highly concentrated in a small number of politically influential industries. Among non-financial corporations, most of the effect is accounted for by just five industries: pharmaceuticals/chemicals, petroleum refining, transportation equipment/defense, utilities, and communications. These industries comprise, in effect, a “rent seeking sector.” Concentration of political influence among a narrow group of firms means that those firms may skew policy for the entire economy. For example, the pharmaceutical industry has actively stymied efforts to address problems of patent trolls that affect many other industries.

I would add two other industries to this list -- medicine and legal.  The reason it likely does not show up in his study is that the returns in these businesses show up to individuals or small private firms.  But heavy regulation, and in particular a licensing process wherein one must get permission from the incumbents in order to compete with them, has always kept prices and returns in these businesses artificially high.

Note by the way that the breakpoint year of 2000 makes this a bipartisan issue, occurring in equal measure in Republican and Democratic Congresses and Presidencies.

And I don't think I need to remind folks, but both of our Presidential candidates are absolutely steeped in and committed to this cronyist, corporatist system

The Middle Class Is Shrinking Because They Are Becoming Rich

I have made this point before, but Tyler Cowen has a great chart from a new study.  The explanation is here, but basically they have defined the bands based on some income break points corrected for family size and inflation over time.

upper-middle

A reader sent me a nice note with this link, saying that I had been right many years ago when I began making this point.  That's good, but I will also confess to be wrong on a related point -- I said 8 years ago that the one good thing about having a Democratic President was that the media would become much more positive suddenly about the economy.  On that, I was wrong.  The media still has a strong bias towards telling everyone that their life is getting ever worse, even when no such thing is true.