Dispatches from District 48
Archive for the ‘Economics’ Category.
Economists advocate for Federal funding of economists. Because if there is anything economics has taught us, its that the Feds do such a good job at allocating resources.
Via the Unbroken Window (arguing against personal interest, I suppose, since the author is a professor of economics)
Apparently, Los Angeles has tough anti-ticket scalping laws. This means that one is able to resell virtually any item one owns but no longer has a use for except tickets. In this case, government officials yet again don't like someone who places little value on an item selling it to someone who places more value on that item (a concept that is otherwise the basis for our entire economy). We can see the effect of such laws in London, where stadiums full of empty seats are juxtaposed against thousands who want to attend but can't get tickets, all because for some reason we have decided we don't like the secondary market for tickets.
A great example is embedded in this line in today's LA Times about crackdowns on scalping:
Jose Eskenazi, an associate athletic director at USC, said the university distributed football and basketball tickets free to several children's community groups but that scalpers obtained those tickets and sold them "at enormous profits."
I like the coy use of "obtained" in this sentence. Absent a more direct accusation, I have to assume that this means that scalpers bought the tickets from the community groups. Which likely means that strapped for cash to maintain their operations, these groups valued cash from the tickets more that the ability to send kids to a USC football game (in fact, taking them to a USC football game would involve extra costs to the community group of transportation, security, and feeding the kids at inflated stadium prices). It was probably entirely rational for the community groups to sell the tickets -- this is in fact a positive story. Selling the tickets likely got them out of an expensive obligation they could not afford and generated resources for the agency. Sure, USC was deprived of the PR boost, but if they really want the kids to come to the game, they can do it a different way (e.g. by organizing the entire trip). This is not a reason for curtailing my right to sell my tickets for a profit.
Anyway, I have ranted about this before. Sports team owners and music promoters have out-sized political influence (particularly in LA) and have enlisted governments to clamp down on the secondary markets for their products.
What I thought was new and interesting in this LA Times story was the evolving justification for banning ticket scalpers. Those who have followed the war on drugs or prostitution will recognize the argument immediately:
Lee Zeidman, general manager of Staples Center/Nokia Theatre and L.A. Live, said in a separate declaration that scalpers "frequently adopt aggressive and oftentimes intimidating tactics.... To the extent that ticket scalpers are allowed to create an environment that makes guests of ours feel uncomfortable, harassed or threatened, that jeopardizes our ability to attract those guests to our property."
In court papers, prosecutors accuse scalpers of endangering citizens, creating traffic hazards and diverting scarce police resources.
"Defendants personally act as magnets for theft, robbery, and crimes of violence," the filing states. "Areas with high levels of illegal ticket sales have disproportionately high levels of theft, robbery, crimes of violence and narcotics sales and use."
Wow, you mean that if we criminalize a routine type of transaction, then criminals will tend to dominate those who engage in this transaction? Who would have thought? If this were true, we might expect activities that normally are run by normal, honest participants -- say, for example, alcohol distribution -- to be replaced with gangs and violent criminals if the activity is prohibited.
It's amazing to me that people can still use the the criminal activity that results from prohibition to justify prohibition.
Update: John Stossel has an article on the London ticket scalping ban
...when they ban short-selling. As a response to economic problems, banning short selling is roughly equivalent to banning criticism of the government during a political crisis. Or perhaps more accurately, its like trying to improve poll results by not polling people with negative opinions. Short-selling has utility for the actual traders involved because it helps them achieve whatever financial or risk-management goals they might have. Short-selling has utility for the rest of us because it allows the full range of opinions to be expressed about the value of a particular company or asset. Nothing in a market economy is worse than having prices that have no meaning.
Turns out the guy who gasses up a school bus has a green job.
When Bureau of Labor Statistics Acting Commissioner John Galvin balked on what qualifies as a green job under the agency definition, Issa responded, “Just answer the question.”
“Does someone who sweeps the floor at a company that makes solar panels -- is that a green job?” Issa asked.
“Yes,” replied Galvin, who also acknowledged that a bike-repair shop clerk, a hybrid-bus driver, any school bus driver and “the guy who puts gas in a school bus” are all defined as green jobs.
He also acknowledged that an oil lobbyist, if his work is related to environmental issues, would also have a green job.
It gets better. Apparently, when I worked at the Exxon refinery in Baytown, TX, I had a green job:
The Bureau of Labor Statistics states a green job is either: a business that produces goods or provide services that benefit the environment or conserve natural resources, or a job in which a worker's duties involve making their establishment's production processes more environmentally friendly or use fewer natural resources
I have never encountered an industrial engineering job anywhere that was not concerned with having their processes use fewer natural resources.
I would argue the greenest of jobs are held by oil and other commodity speculators and traders. They ensure that prices at all times accurately match our current understanding of the scarcity of each resource. Without these accurate pricing signals, all efforts to properly invest to use more or fewer of these materials would be impossible. Just look at the "success" of investments like Solyndra that were made irregardless of these market pricing signals.
Kevin Drum is back on his "because Republicans won't agree to more massive deficit spending, they must be purposefully trying to destroy the economy." Literally. He translates Republican opposition to Obama's proposed stimulus packages as being explained by this strategy:
Basically, the Republican strategy for the past three years has been this:
- Do everything humanly possible to prevent the economy from recovering.
- Wait for 2012.
- Run a campaign focused on the fact that the economy is lousy.
This is such a shabby bit of false logic it is amazing anyone even attempts this any more, or more accurately, it's amazing that folks continue to buy it. Is it really so impossible to believe that there are actually people of goodwill who wish to see the economy improve but disagree with Drum and Obama as to the correct course to achieve that? Apparently not (I suppose the last stimulus was so wildly succesful that it is impossible to doubt the success of another trillion or so of deficit spending?)
The irony is that for some reason I simply cannot fathom, from a political tactics point of view, he points to this chart when talking about Truman and his "do-nothing" Congress:
He's is trying to make some political tactical point, but he is so blinded by his own assumptions that he misses the real point -- that the American economy grew at records rates through a "do-nothing" Congress. Now, I suppose Drum might argue that this was an accident of timing, but in fact Truman inherited what should have been, by Drum's Keynesian thinking, the worst economic situation ever since an enormous amount of government spending was going away after the war and new workers were simultaneously flooding back into the job market. If any time in recent history should have demanded Keynesian stimulus, this was it, and yet a do-nothing Congress led to a massive expansion. Hmmmm.
Swiss government bonds are trading at rates that imply a negative interest rate. The German government is issuing bonds with interest rates of zero that are actually trading above face value.
This is really bad news. Investing in these securities is effectively the equivalent of putting money in one's mattress -- it means that investors don't perceive any money-making uses for their money better than paying paying financially strong governments to keep it safe for a while. I am far from an expert on banking regulations, but my first guess on this is that this is at least in part a function of bank capital requirements that effectively require banks to put a lot of cash into government securities no matter how bad the return.
Germany and Switzerland certainly are providing some value in creating a safe haven for capital, but I wonder if in the long-run this is anything but destructive, shifting wealth and investment out of the private economy and into investments with no return.
A guest blogger on Megan McArdle's blog writes:
Here's my first such idea:
Abolish Mortgage-Backed Securities (and Offspring)
CDOs and credit default swaps don't kill financial systems, mortgages kill financial systems. There has been altogether too much opproprium directed at CDOs, credit default swaps and other structuring techniques that spread financial contagion, and not enough directed at the underlying collateral. The record seems to be, however, that Dick Pratt was correct when he called the mortgage "the neutron bomb of financial products."
This makes no sense. I don't have time for a comprehensive argument, so here are a few bullet points:
Here is a better plan:
Veronique de Rugy is doing an awesome job debunking the myth that European countries have cut spending in any meaningful way, and that the "austerity" that Krugman et. al. keeping going on about mostly consists of raising taxes. Perhaps because they so desperately want to raise taxes in the US, Krugman and company seem willfully blind in recognizing the tax increases in Europe and their negative consequences.
There is nothing surprising or unpredictable about the current oil boom, except perhaps how far it has gotten in the face of an Administration that has done virtually everything it can to stop it (thank god there is oil and gas under private land). Your humble scribe, neither an economist nor an expert in oil markets, wrote way back in 2005:
Everything old is new again. Back in the late 70′s, all the talk was about the world running out of oil. Everywhere you looked, "experts" were predicting that we would run out of oil. Many had us running out of oil in 1985, while the most optimistic didn’t have us running out of oil until the turn of the century. Prices at the time had spiked to about $65 a barrel (in 2004 dollars), about where they are today. Of course, it turned out that the laws of supply and demand had not been repealed, and after Reagan removed oil price controls and goofy laws like the windfall profits tax, demand and supply came back in balance, and prices actually returned to their historical norms....
Supply and demand work to close resource gaps. In fact, it has never not worked. The Cassandras of the world have predicted over the centuries that we would run out of thousands of different things. Everything from farmland to wood to tungsten have at one time or another been close to exhaustion. And you know what, these soothsayers of doom are 0-for-4153 in their predictions. ...
The vagaries of reserve accounting are very difficult for outsiders to understand. I am not an expert, but one thing I have come to understand is that reserve numbers are not like measuring the water level in a tank. There is a lot more oil in the ground than can ever be recovered, and just what percentage can be recovered depends on how much you are willing to do (and spend) to get it out. Some oil will come out under its own pressure. The next bit has to be pumped out. The next bit has to be forced out with water injection. The next bit may come out with steam or CO2 flooding. In other words, how much oil you think will be recoverable from a field, ie the reserves, depends on how much you are willing to invest, which in turn depends on prices. Over time, you will find that certain fields will have very different reserves numbers at $70 barrel oil than at $25....
All the oil doomsayers tend to define the problem as follows: Oil production from current fields using current methods and technologies will peak soon. Well, OK, but that sure defines the problem kind of narrowly. The last time oil prices were at this level ($65 in 2004 dollars), most of the oil companies and any number of startups were gearing up to start production in a variety of new technologies. I know that when I was working for Exxon in the early 80′s, they had a huge project in the works for recovering oil from oil shales and sands. Once prices when back in the tank, these projects were mothballed, but there is no reason why they won’t get restarted if oil prices stay high.
Postscript: I really need to find new topics to blog about. The adjacent article in 2005 included this, a frequent topic on this site. I had not idea I was writing about this so long ago:
When health care is paid for by public funds, politicians only need to argue that some behavior affects health, and therefore increases the state’s health care costs, to justify regulating the crap out of that behavior. Already, states have essentially nationalized the cigarette industry based on this argument.
The UK line is particularly interesting, since that is the country that Krugman has declared is austerity-izing itself into a depression. As I have pointed out before, real government spending in UK has been and is still rising. The percent of GDP of this spending has fallen a bit, but there is nothing about Keynesian stimulus theory that says changes in the percentage of government spending is stimulative, only its absolute value.
Here is one thing I would love to here Krugman et. al. opine on -- at what percentage of government debt to GDP does additional deficit spending become counter-stimulative. I imagine there is an inverse relationship for deficit-funded stimulus, such that it has a larger effect at lower debt levels with a zero to negative effect at higher interest levels.
Update: From another source, here is the UK in real $
Hey, Obama Administration! The evil speculators are moving oil prices again. Time to get after them. Hello? Anyone there? Where did everyone go?
It is amazing the number of goofy ideas folks have generated to try to substitute for prices in matching supply and demand. And none of them ever work. David Zetland has a good example in the world of water, where politicians are willing to jump through just about any hoop to avoid matching water supply and demand via prices.
The Left continues to push the myth that government "austerity" (defined as still running a massive deficit but running a slightly smaller massive deficit) is somehow pushing Europe into a depression. Well, this myth-making worked with Hoover, who is generally thought to have worsened the Depression through austerity despite the reality that he substantially increased government spending.
It is almost impossible to spot this mythical austerity beast in action in these European countries. Sure, they talk about austerity, and deficit reduction, and spending increases, but if such talk were reality we would have a balanced budget in this country. If one looks at actual government spending in European nations, its impossible to find a substantial decline. Perhaps they are talking about tax increases, which I would oppose and have been occurring, but I doubt the Left is complaining about tax increases.
Seriously, I would post the chart showing the spending declines but I can't because I keep following links and have yet to find one. I keep seeing quotes about "commitment" to austerity, but no actual evidence of such.
Let's take Britain. Paul Krugman specifically lashed out at "austerity" programs there are undermining the British and European economy. So, from this source, here is actual and budgeted British government spending by year, in billions of pounds:
2007: 544.0
2008: 575.7
2009: 621.5
2010: 660.6
2011: 683.4
2012: 703.4
2013: 722.2
Seriously, I will believe the so-called austerity when someone shows it to me. And this is not even to mention the irresponsibility of demanding more deficit spending without even acknowledging the fact that whole countries already have so much debt they are teetering on the edge of bankruptcy.
Here is the European problem -- they are pouring hundreds of billions of Euro into bailing out failed banks and governments. They are effectively taking massive amounts of available resources out of productive hands and pouring it into failed institutions. Had they (or we) let these institutions crash four years ago, Europe would be seeing a recovery today. The hundreds of billions of Euros used to keep banks on life support could have instead been used to mitigate the short term effects of bigger financial crash.
One of the complexities of analyzing causes of the financial crash was that there were two simultaneous leveraging events. Clearly, financial firms were over-leveraging securitized mortgages and their derivatives. But at the same time, home buyers were over-leveraging their real estate assets:
In 1989, only 1 in 230 homebuyers bought a house with a down payment of 3% or less. In 2003, the ratio was 1 in 7. By 2007, it was 1 in 3.
These charts make the case that government policy had a lot to do with this change.
Wonder why no one thought of this before? Prisoner's Dilemma as a game show. Two players with two choices with rewards structured similar to a classic prisoners dilemma game (though not quite -- to be exactly the same the return of steal-steal should be higher than the returns of picking split in split-steal).
I have written a number of times on the silliness of food miles and the locavore movement (here and here and here). For some reason the energy and resource intensity of foods is being judged merely on one component - transportation of the end product - which actually is only a tiny competent of food costs (and thus their resource use). Is it really more environmentally sensitive for us Phoenicians to grow our corn in the Arizona desert, where soils are unproductive and water must be imported from hundreds of miles away, rather than have it grown in the fertile soils of Iowa and trucked in?
Someone in the media, at least in Australia, finally notices:
TWO brands of olive oil, one from Australia, the other shipped 16,000 kilometres from Italy, sit on a supermarket shelf.
Most eco-friendly shoppers would reach for the Australian oil. But despite burning less fossil fuel to get here, it may not be better for the planet.
Contrary to popular belief, ''food miles'', or the distance food has travelled before we buy it, is a poor indicator of our food's total greenhouse gas emissions, or ''carbon footprint''.
More important is the way our food is farmed and produced, and how far we drive to buy it....
It turns out that stuff like economies of scale really matter
''Local food can often have a higher carbon footprint than food from afar,'' says principal researcher Brad Ridoutt.
He says even home-grown vegetables, with ''zero food miles'', do not necessarily have a smaller carbon footprint than those bought in the supermarket.
''With my veggies, I drive to Bunnings to buy fertiliser, and I go away for the weekend and forget to water them, and in the end I only harvest a few things that I can actually eat.
''By contrast, big producers, who can invest in the latest energy-efficient, water-efficient technology, and make use of all the parts of food, can be much more efficient,'' he says.
Of course, transporting food from producer to retailer still burns fossil fuels that release greenhouse gas emissions, in turn accelerating global warming. But freight emissions are only a fraction of those released during production, meaning even imported food, sustainably produced, can have a smaller carbon footprint than local alternatives.
Even the most rudimentary reading of economics should have given greenies a clue. In commodity products like most foods, prices tend to be driven down to a point that they reflect resources (and their relative scarcity) that went into the product. The cheapest foods tend to be those that use the least, and least scarce, resources in production. So buying locally grown food, which often tends to carry a price premium, should have been a flashing red light that maybe this was not the least-resource-intensive choice.
Today on the radio I heard a commercial for a company promising to teach me the exciting art of flipping houses. I could buy and resell houses up to three at a time in less than 30 days.
I guess I thought it would take a bit longer for this nuttiness to come back. I do know some smart people who are buying undervalued houses, putting a bit of money in them, and putting them on the rental market. Converting owner-occupied homes at the bottom of the market to rental properties makes sense to me, particularly since the ones I know are doing it with all equity.
However, I presume the folks tuning into the radio don't have that much equity, and anyway they were explicitly using the word "flipping" in the commercial rather than talking about rental income. I wonder who is lending on this stuff? I tried to refi my mortgage about 6 months ago on a 40% LTV but as a self-employed person it was a pain in the ass. Who's financing house flipping?
(yeah, I know, the answer probably is "all of us, via Fannie and Freddi or some other dumb government program).
It is hard to even describe to younger folks what a wasteland the American beer market was in the early 1980's. Via here
I found this to be one of the most immoral statements I have read in a long time (bold added)
Saez and Diamond argue that the right marginal tax rate for North Atlantic societies to impose on their richest citizens is 70%.
It is an arresting assertion, given the tax-cut mania that has prevailed in these societies for the past 30 years, but Diamond and Saez’s logic is clear. The superrich command and control so many resources that they are effectively satiated: increasing or decreasing how much wealth they have has no effect on their happiness. So, no matter how large a weight we place on their happiness relative to the happiness of others – whether we regard them as praiseworthy captains of industry who merit their high positions, or as parasitic thieves – we simply cannot do anything to affect it by raising or lowering their tax rates.
The unavoidable implication of this argument is that when we calculate what the tax rate for the superrich will be, we should not consider the effect of changing their tax rate on their happiness, for we know that it is zero. Rather, the key question must be the effect of changing their tax rate on the well-being of the rest of us.
From this simple chain of logic follows the conclusion that we have a moral obligation to tax our superrich at the peak of the Laffer Curve: to tax them so heavily that we raise the most possible money from them – to the point beyond which their diversion of energy and enterprise into tax avoidance and sheltering would mean that any extra taxes would not raise but reduce revenue.
Another way to state the passage in bold is, "if one can convince himself he will be happier with another person's money than that other person would be, it is not only morally justified, but a moral imperative to take it."
This is the moral bankruptcy of the modern welfare state laid bare for all to see. Not sure if this even deserves further comment. Either you see the immorality or you bring a lot of very different assumptions about morality to the table than I. For those of you who accept the quoted statement, how are you confident you will always be the taker, the beneficiary? You might be if the box is drawn just around the US, but from a worldwide perspective all you folks in the American 99% may find yourselves in the world's 1%.
And from a purely practical standpoint, while I suppose one might argue that the total happiness in this particular instant could be maximized by taking most all the rich's marginal income, what happens tomorrow? It's like eating your seed corn. Taking capital out of the hands of the folks who have been the most productive at employing capital and helicopter dropping it on the 99% feels good right up until you need some job creation or economic growth or productivity improvement.
To this day, over 30 years after I had it explained in economics class, I am still floored by the line I read in the introductory macro textbook describing the Keynesian manipulation of Y=C+I+G+(X-M) to demonstrate a "multiplier" effect. The part that I never could get over was at the very beginning when they said "I, or Investment, is considered exogenous" - in other words, the other variables could be freely manipulated, the government could grow and deficit spend as much as it liked, and investment would be unaffected. Huh?
My memory was that Keynesians considered "I" a loser. They felt anything that was not G or C actually acted as a drag, at least in the near term (in the long run we will all be dead). This despite the fact that "I" is the only thing that grows the pie over time.
My Forbes article is up for this week, and discusses 10 reasons why legislation frequently fails. A buffet of Austrian economics, Bastiat, and public choice theory that I wrote for the high school economics class I teach each year.
Here is an example:
3. Overriding Price Signals
The importance of prices is frequently underestimated. Prices are the primary means by which literally billions of people (most of whom will never meet or even know of each others' existence) coordinate their actions, without any top-down planning. With rising oil prices, for example, consumers around the world are telling oil companies: "Go find more!"
For a business person, prices (of raw materials, labor, their products, and competitive products) are his or her primary navigation system, like the compass of an explorer or the GPS of a ship. And just as disaster could well result from corrupting the readings of the explorer's compass while he is trekking across the Amazon, so too economic damage can result from government overriding price signals in the market. Messing with the pricing mechanisms of markets turns the economy into a hall of mirrors that is almost impossible to navigate. For example:
- In the best case, corrupting market prices tends to result in gluts or shortages of individual products. For example, price floors on labor (minimum wages) have created a huge glut of young and unskilled workers unable to find work. On the other side, in the 1970s, caps on oil prices resulted in huge shortages in the US and those famous lines at gas stations. These shortages and gas lines were repeated several times in the 1970's, but never have returned since the price caps were phased out.
- In the worst case, overriding market price mechanisms can create enormous problems for the entire economy. For example, it is quite likely that the artificially low interest rates promoted by the Federal Reserve over the last decade and higher housing prices driven by a myriad of US laws, organizations, and tax subsidies helped to drive the recent housing and financial bubble and subsequent crash. Many will counter that it was the exuberance of private bankers that drove the bubble, but many bankers were like ship captains who drove their ships onto the rocks because their GPS signal had been altered
Investors have a saying - your first loss is your best loss. In other words, if you think an investment sucks, swallow your pride, take your lumps, and get out entirely now.
This is NOT how we have dealt with the financial crisis. Through a series of bailouts, we have tried to keep failing financial institutions and countries on life support. We have dragged out the reckoning on mortgages, so we still have not had a real clearing in the real estate market. Worse, we have postponed, even entirely interrupted, financial accountability for those who made bad investments or took on too much debt.
Here is an interesting counter-example - Iceland, which basically went entirely bankrupt along with pretty much all their banks, is on the road to recovery.
Back when he was blogging, TJIC had a nice little animated gif with people running around yelling "Oh Noz."
[update: sent to me by by the folks at finem respice]
I wish I had it for this chart and the accompanying text (via Kevin Drum)
Many young adults have felt the impact of the recession and sluggish recovery in tangible ways. Fully half (49%) of those ages 18 to 34 say that because of economic conditions over the past few years, they have taken a job they didn’t really want just to pay the bills. More than a third (35%) say they have gone back to school because of the bad economy. And one-in-four (24%) say they have taken an unpaid job to gain work experience.
First, this study is great evidence of my "what is normal" fail. There is no baseline. OK, 24% moved back in with their parents. How many did this in good times? How much worse is this?
But the real eye-catcher to me is that somehow I am supposed to be shocked that people have to find a job to pay the bills. Even a job that, gasp, they really didn't want. I have a clue for you. A lot of jobs 22-year-olds have to take are not that compelling. Mine were not. Despite what colleges seem to be telling them, the world does not offer up a lot of really cool jobs to inexperienced young adults. Long before you are closing deals with CEO's, you are probably writing sales literature in some cubicle.
And by the way, I am struck by how wealthy our society is when I look at this chart. Look at answers two and three. In both cases, people are saying that in tough times, they chose to forego income and build their skills, even perhaps paying for the privilege. What other time in history would people have this luxury? How many countries today would have so many people with this luxury in hard times? Even in the Great Depression in this country I don't think we saw the same phenomenon. Obviously the economy sucks and it would be great for everyone for it to improve, but in most other times and even in many other countries in the world today, a significant bar in bad times would have been "I starved to death."
Kevin Drum apparently believes the reason Republicans are not passing further stimulus spending is because such a stimulus would be too likely to have immediate results improving the economy and thus will help Democrats in the next election.
This is the kind of politcal bullshit that drives me right out of the system. I am perfectly capable of believing Drum honestly thinks that further deficit spending will improve the economy this year. I think he's nuts, and working against all historic evidence, but never-the-less I believe he is sincere, and not merely pushing the idea as part of some dark donkey-team conspiracy. Why is it that he and his ilk, from both sides of the aisle, find it impossible to believe that their opponents have similarly honest intentions?
I mean, is it really so hard to believe -- after spending a trillion dollars to no visible effect, after seeing Europe bankrupt itself, and after seeing the American economy begin to recover only after crazy stimulus programs have mostly stopped -- that some folks have an honest desire to see economic improvement and think further stimulus programs are a bad idea?
