Coyote Blog

This chart, from a book by Branko Milanovic via Carpe Diem reinforces a point about income distribution I make all the time -  for all we talk about income distribution in this country, our poorest 20% would be middle class in many countries of the world.  While I would love to see our poor doing even better, it begs the question of whether distribution or absolute prosperity is more important.

Just to give you a feel for reading the chart, the US's lowest ventile, or bottom 5%, have income that would put them in the 68th percentile worldwide.    Our poorest 20% (the first 4 ventiles) would be upper middle class or better in Brazil, China, and India.

When comparing to European social democracies, it turns out that while the US's income distribution is wider, that is almost entirely due to the top end being higher.  The poorest 10% make about the same as the poorest 10% in Europe, and I would argue that this analysis (from a leftish think tank) actually underestimates a quality of life advantage for American poor, who come out higher even than the middle class in Europe on things like living space and appliance ownership.

Perhaps more importantly than income inequality, income mobility remains high in this country. More on income inequality concerns here.

I am in the process of completing a home mortgage.  The process has become awful again, not as bad as it was in the early 90's but harder and more frustrating than in the mid-2000's.  There is one set of rules, and if one's situation does not fit those rules, good freaking luck.  Right now, for example, getting a home mortgage when one is self-employed, even in a pretty large business with a decade of history, is really hard.

So I like this proposal

At the moment there is nobody doing conforming mortgages except Fannie and Freddie. Indeed there is almost nobody doing mortgages of any kind except Fannie and Freddie. If the free market wants the business they can have it. (They just don't want it at this sort of interest rate spread - and I don't blame them.)

All the government need to do is tell Frannie to raise their price a little each quarter. Currently they charge 20-25bps for guaranteeing mortgages. (The free market won't take credit risk at that price.) So it is entirely open to the FHFA (and hence the Treasury) to tell Fannie and Freddie to raise their prices by 5bps. The government will get paid better for the risk they are taking (and what free market ideologue will disagree with that) and the private sector can compete if they want to.

I doubt the free market will. But then in a quarter or two Frannie can raise their pricing by another 5 bps. And a quarter or two later Frannie can raise by another 5bps.

At some stage you will get to a level where the private sector chooses to compete. Frannie should not set its price competitively though. In another quarter they should raise the price another 5bps. And in another quarter they should raise again.

By the way, this is a classic example of not learning from your last mistake.  That spread is absurdly low.  I wouldn't guarantee my best friend's loan for 20bp.  Would you take on the default risk of a $100,000 mortgage for $200 a year?

I have hypothesized that immigration may have an effect on median income -- not because it is bad for the economy per se but just form the fact of adding millions of new people in the bottom quartiles would tend to shift the median downwards (just the pure math of the thing).

I have only given them a quick glance at this point, but Tyler Cowen links several studies that tend to say my hypothesis is false.

Also, here is an interesting discussion about the median income stagnation hypothesis itself and how sensitive it is to the end point, pointing out in particular that most folks start their analysis from a point within Nixon's wage and price controls, which skew the data - shifting the start point forward even a couple of years makes most of the stagnation go away.  He builds on a post by Brink Lindsey showing historic median income growth over a longer time frame, implying the aberration may have been the boom of the 1950s and 1960s rather than the lower growth rates of today.

I would normally find this a fascinating debate if it weren't for the dark cloud behind it that half the folks arguing the point wish to use it as a justification for further reductions in economic liberties.

Fred Pearce has a nice article (in Grist of all places) about how the Population Bomb essentially defused itself.

For a start, the population bomb that I remember being scared by 40 years ago as a schoolkid is being defused fast. Back then, most women round the world had five or six children. Today's women have just half as many as their mothers -- an average of 2.6. Not just in the rich world, but almost everywhere.

This is getting close to the long-term replacement level, which, allowing for girls who don't make it to adulthood, is around 2.3. Women are cutting their family sizes not because governments tell them to, but for their own good and the good of their families -- and if it helps the planet too, then so much the better....

And China. There, the communist government decides how many children couples can have. The one-child policy is brutal and repulsive. But the odd thing is that it may not make much difference any more. Chinese women round the world have gone the same way without compulsion. When Britain finally handed Hong Kong back to China in 1997, it had the lowest fertility in the world -- below one child per woman. Britain wasn't running a covert one-child policy. That was as many children as the women in Hong Kong wanted.

This is almost certainly one of those multiple-cause things, and we have always had the hypothesis that wealth and education reduced population growth.

But the author makes an interesting point, that urbanization, even in poorer countries, may a big driver as well.  After all, in the city, food and living space for children are expensive, and there are fewer ways children can support the family (I hadn't thought of this before, but I wonder if industrial child-labor restrictions, which mainly affected cities, had an impact on birth rates by making urban children less lucrative?)  In fact, urban jobs require educations which are expensive  (even if they are free, non-productive family members must be fed and housed for years).

My Forbes column is up on the minimum wage.  It covers some of the ground I could not get to on TV the other night.

For many, low wage jobs are the first rung on the ladder to success and prosperity.  Raising the minimum wage is putting the first rung of the ladder out of reach of many low-skilled Americans.

File this under "why I blog rather than do a lot of talking head cable shows."

I love it when progressive policy wonks who have never, and would never sully their hands with running an actual productive enterprise, tell me I must be running my business wrong.

I flew to New York to go in studio on the Stossel show today.  I did a brief bit on the minimum wage, a reprise from my earlier cameo on Stossel special.  It will be on tomorrow, Thursday at 9PM Eastern on Fox Business  (not Fox News, Fox Business).

The whole experience was new to me, which made me virtually unique as I was surrounded by policy wonks who do this kind of talking head thing all the time.   By the way, there was no sharing of questions or his plan in advance -- I think they want you cold.  So answers are all in real time.

Please, please, please do not write me or post comments such as "you should have said ____."  It will just depress me.  Believe me, 5 minutes after walking out I thought of 9 things I should have said.  Which is in fact why I blog rather than engage much any more in real time argument.

Anyway, I think his show will be pretty good -- he has Michael Cannon on health care and segments after mine on cash for clunkers and alpaca subsidies.  I shared the green room with an alpaca, which will probably just go to prove the old saying about always getting upstaged by kids and animals.

By the way, I think Stossel must set a different tone for his staff than is normal on TV.  I was talking to one of his producers, a guy that had come with Stossel from ABC, and I asked him if he had studied something relevant to this job in college.  I expected him to say "yes, theater" or "yes, television production."  But he said "yes, economics at George Mason."  I loved that answer.

This chart in the NY Times is pretty interesting, though I could quibble about the color coding.  You have to stare at it a minute to get it - each cell represents a combination of stock purchase and sales dates, with the color representing the average market inflation-adjusted return for that buy and hold period (click to enlarge, or click through to the source link where it is explained in more depth).

Whenever one uses red and green for coloring a chart, the reader is going to assume red is bad and green is good.  In this case, the light red represents returns from 0 to 3% above inflation.  Is that bad?  Maybe.  I would say inflation plus 3% is probably lower than people's expectation of stock market returns, but I think a lot of folks would equate red with capital erosion, which is not the case if returns are out-pacing inflation.

This is sort of a good-news-bad-news story.  The good news is that there is no 25-year period where returns fall below inflation.  The bad news is that the median return of inflation plus 4% is probably less than most folks are planning for -- including a lot of state pension funds that are still counting on returns like 8% for their entire portfolio (something like inflation + 5-6%), which is a blend of stocks and bonds, implying they are hoping for an equity return north of that.

HT:  Flowing Data

Chinese exceptionalism, or do we just notice it because it is so large.  I clicked through to this chart from a link on Instapundit that said to note how Chinese fertility fell off the map.  When I watched the video though, what I saw was ALL the fertility rates falling at roughly the same pace, at roughly the same point.  The lesson seems to be that fertility tends to drop with increasing mortality, wealth, and technology -- which is what many of us have been saying in response to Paul Ehrlich for years.

I am probably over-reading this, but I am sensitive that there is a sort of storyline of Chinese exceptionalism -- due to their taking some sort of totalitarian third way -- that seems to be admired among certain US socialists and environmentalists and Thomas Friedman.  This hearkens back to all the admiration for the Japanese MITI-managed economy, right before their economy crashed for two decades or so.

China flourishes because it has a culture, never fully suppressed by Mao, whose people take well and quickly to capitalism -- much of the development around Southeast Asia in previous decades was led by expat Chinese.  The totalitarianism that is, depressingly, so admired by the US intelligentsia is just going to lead China into the abyss.  Already we can see bubbles emerging due to the state's forced mispricing of key economic inputs, from capital to oil.  The burden of spending on triumphalist projects like super-bridges and mega-buildings and Olympics and high speed trains is going to start appearing over the next few years.

Here is my prediction:  The Chinese are going to have a bubble burst that will rival any such economic explosion that we have seen in the last century.  I have been looking at the situation and by a number of metrics, the bubble is already huge.  I would bet against China, but the problem (as with all shorts) is timing.  Government officials, if they really dedicate themselves to the task, can extend bubbles for a long time.  Even in the US, which is less authritarian and more transparent, it can be argued that Fannie and Freddie and Barnie Frank and Alan Greenspan helped push off the reckoning by at least 5 years.   Of course, the longer you push it off, the worse it gets.  Which means the Chinese bubble is going to be a doozy.

Postscript: Here is a nice example -- admiration from US environmentalists for China gutting their economy to make arbitrary goals

It's interesting to note the dedication China has displaying in achieving its [energy efficency] target -- shutting down entire operations and even executing rolling blackouts. Surely there would have been some amount of embarrassment for the nation on the world's stage if it had missed its target, but that likely would have been minor. It's worth noting the difference in political culture: What do you think would have happened if the US had such an energy-reduction target to hit, but a sagging economy got in the way?

I can tell you with some certainty: We would have missed that mark.

Will there never be an end to Americans who take advantage of our uniquely strong speech protections to laud totalitarians?

I find it hard to be surprised nowadays by how low trade policy can sink.  So I was depressed rather than surprised when I read this update on Magnesium trade.

Those of us who complain about protectionism often complain that its proponents mindlessly cite the seen (ie jobs lost to foreign competition) without taking into account the unseen (numerous consumers and consumer industries benefited by imports).  What I did not know is that this is not just bad economics, but is cemented into legislation:

In 2005, U.S. Magnesium Corporation, the sole producer of magnesium in the United States, succeeded in convincing the U.S. International Trade Commission and U.S. Commerce Department to impose duties on imports of magnesium from competitors in Russia and China. Before toasting this outcome with some clichéd or specious utterance about how the antidumping law ensures fair trade and a level playing field for U.S. producers, it is important to understand that downstream, consuming industries (those U.S. producers that require for their own production the raw materials and intermediate goods subject to the antidumping measures) have no legal standing in these cases. Statute forbids the U.S. International Trade Commission from considering their arguments or projections about the likely consequences of prospective duties. Statute requires that the ITC consider only the conditions of the petitioning industry.  In other words, the analysis is slanted.  The antidumping law codifies these evidentiary asymmetries, which makes it easier for U.S. suppliers to cut-off their U.S. customers’ access to alternative sources of supply.

In other words, in the case of magnesium, on the interests of the US Magnesium Corporation can be considered by the US Government in evaluating trade policy - the interest of the other 300 million of us is illegal even to mention.

This was also funny, from the government as Abbot and Costello files:

But on trade policy formulation, it seems that the right hand doesn’t always know what the left hand is doing. Last year, while magnesium imports from China were subject to U.S. antidumping duties, the Obama administration launched a WTO case against China for its restraints on exports of raw materials, including magnesium. That’s right. The U.S. government officially opposes China’s tax on exported magnesium because it imposes extra costs of U.S. consuming industries, but it insists on enforcing its own antidumping duties on magnesium imported from China despite those costs.

I continue to be fascinated by the similarity between climate science and macro-economics.  Both study unbelievably complex multi-variable systems where we would really like to isolate the effect of one variable.  Because we only have one each of climates and economies  (we can define smaller subsets, but they are always going to be subject to boundary effects from the larger system) it is really hard to define good controlled experiments to isolate single variables.  And all of this is done in a highly charged political environment where certain groups are predisposed to believe their variable is the key element.

In this post by Russ Roberts, one could easily substitute "climate" for "economy" and "temperature" for "unemployment."

Suppose the economy does well this year–growth is robust and unemployment falls. What is the reason for the improvement? Will it be because of the natural rebound of an economy after a downturn that has lasted longer than people thought? The impact of the stimulus finally kicking in? The psychological or real impact of extending the Bush tax cuts? The psychological or real impact of the November election results? The steady hand of Obama at the tiller? All of the above? Can any model of the economy pass the test and answer these questions?

The reason macroeconomics is not a science and not even scientific is that the question I pose above is not answerable. If the economy improves, there will be much talk about the reason. Data and evidence will be trotted out in support of the speaker’s viewpoint. But that is not science. We don’t have a way of distinguishing between those different theories or of giving them weights to measure their independent contribution.

I’m with Arnold Kling. This is a time for humility. It should be at the heart of our discipline. The people who yell the loudest and with the most certainty are the least trustworthy. And the reason for that goes back to Hayek. We can’t measure many of the things we would have to measure to have any reasonable amount of certainty about the chains of connection and causation.

I have heard it said that the only way nowadays to advance pure science is to be working on arcana like the first microsecond of the universe or behavior of the 9th dimension in string theory.   There is still room for a ton of useful work on the analysis, solution, and forecasting of complex multi-variable systems, even if it is just a Goedel-like proof of where the boundaries of our potential understanding can be drawn.

By the way, I wrote my own piece about the limits of macroeconomics here.

My new Forbes column is up, and it discusses an article by Michael Malone that said in part:

The recent quick fade of the Deficit Commission was the latest reminder that America no longer seems to have the stomach for big challenges.  There was a time "“ was it just a generation ago? "“ when Americans were legendary for doing vast, seemingly superhuman, projects:  the Interstate Highway System, the Apollo Missions, Hoover Dam, the Manhattan Project, the Normandy invasion, the Empire State Building, Social Security.

What happened?  Today we look at these achievements, much as Dark Age peasants looked on the mighty works of the Roman Era, feeling like some golden age has passed when giants walked the Earth.

My response includes the following:

The list he offers is a telling one "” all except the Empire State Building were government programs, just as were the "mighty works" of the ancient Romans.  And just like the Romans, these and other government projects have more to do with triumphalism than they do with adding real value.

It is interesting he should mention the Romans.  There were few grand buildings during the centuries when Rome was a republic.  Only in the later Imperial period, when Rome became an autarky, did rulers begin to build the monumental structures that Malone admires.  Emperors taxed their subjects and marshaled millions of slaves to build temples and great columns and triumphal arches and colosseums to celebrate"¦ themselves.  Twentieth Century politicians have done the same, putting their names on dams and bridges and airports and highways and buildings.  They still build coleseums too, though today they cost over a billion dollars and have retractable roofs.  Are these, as Malone suggests, monuments to the audacity of the greatest generation, or just to the ego of politicians?...

This is the same concern that drives Thomas Friedman to extol the virtues of the Chinese government, where a few men there can point their fingers and make billions of dollars flow from their citizens to the projects of their choice.  This is a nostalgia for coercion and government power, for Lincoln imposing martial law, for FDR threatening to pack the Supreme Court, for the Pharaohs getting those pyramids built.  It is a call for dis-empowerment of the masses, for re-concentrating power in a few smart visionary folks, presumably including Mr.  Malone.

This is a pretty interesting observation, from Walter Russell Mead via Arnold Kling

Most intellectuals today still live in a guild economy. The learned professions - lawyers, doctors, university professors, the clergy of most mainline denominations, and (aspirationally anyway) school teachers and journalists - are organized in modern day versions of the medieval guilds. Membership in the guilds is restricted, and the self-regulated guilds do their best to uphold an ideal of service and fairness and also to defend the economic interests of the members. The culture and structure of the learned professions shape the world view of most American intellectuals today, but high on the list of necessary changes our society must make is the restructuring and in many cases the destruction of the guilds...

In most of our learned professions and knowledge guilds today, promotion is linked to the needs and aspirations of the guild rather than to society at large. Promotion in the academy is almost universally linked to the production of ever more specialized, theory-rich (and, outside the natural sciences, too often application-poor) texts, pulling the discourse in one discipline after another into increasingly self-referential black holes. We suffer from 'runaway guilds': costs skyrocket in medicine, the civil service, education and the law in part because the imperatives of the guilds and the interests of their members too often triumph over the needs and interests of the wider society.

This is one of the more interesting things I have read this week, and confirms a hypothesis I have developed, which is that whenever the Left in this country begs that we emulate some fast growing government planned economy, we are probably looking at a bubble about to burst (e.g. the Left's desire to emulate Japan's MITI in the late 80's and their envy of China's authoritarian economic interventions today).

The Royal Bank of Scotland has advised clients to take out protection against the risk of a sovereign default by China as one of its top trade trades for 2011. This is a new twist.

It warns that the Communist Party will have to puncture the credit bubble before inflation reaches levels that threaten social stability. This in turn may open a can of worms.

"Many see China's monetary tightening as a pre-emptive tap on the brakes, a warning shot across the proverbial economic bows. We see it as a potentially more malevolent reactive day of reckoning," said Tim Ash, the bank's emerging markets chief.

At some level, the dynamic is not surprising and is one seen in every developing country -- early development is based on export markets taking advantage of low cost labor.  But as growth proceeds, demand for labor increases and bids up labor costs.  A transition has to occur from exporting low-cost merchandise to making a higher-value products and services for the domestic market.  Dislocations are nearly inevitable

On a recent visit to a chemical plant in Suzhou, I was told by the English manager that wage bonuses for staff will average nine months pay this year. This is what it costs to keep skilled workers. His own contract is fixed in sterling, which has crashed against the yuan over the last two years. "It is a sobering experience," he said.

China may have hit the "Lewis turning point", named after the Nobel economist Arthur Lewis from St Lucia. It is the moment for each catch-up economy when the supply of cheap labour from the countryside dries up, leading to a surge in industrial wages. That reserve army of 120m Chinese migrants everybody was so worried about four years ago has already dwindled to 25m.

This tends to be made worse in a heavily planned economy.  As any Austrian-schooler will tell you, government intervention in the economy and credit markets tend to distort investments, pushing investment capital from the most productive uses into less productive assets that are favored by the government distortions.  Thus the Japanese 80's and American 00's real estate bubbles.  And now the Chinese:

The froth is going into property. Experts argue heatedly over whether or not China has managed to outdo America's subprime bubble, or even match the Tokyo frenzy of late 1980s. The IMF straddles the two.

It concluded in a report last week that there was no nationwide bubble but that home prices in Shenzen, Shanghai, Beijing, and Nanjing seem "increasingly disconnected from fundamentals".

Prices are 22 times disposable income in Beijing, and 18 times in Shenzen, compared to eight in Tokyo. The US bubble peaked at 6.4 and has since dropped 4.7. The price-to-rent ratio in China's eastern cities has risen by over 200pc since 2004

Brian Caplan compares his life with that of the richest of the Gilded Age:

I just returned from the Biltmore, America's largest home.  Built by George Vanderbilt between 1889 and 1895, the Biltmore is a symbol of how good the rich had it during the Gilded Age.  I'm sure that most of the other visitors would answer "very good indeed."

But how many would actually want to trade places with George?  Despite his massive library, organ, and so on, I submit that any modern with a laptop and an internet connection has a vastly better book and music collection than he did.  For all his riches, he didn't have air conditioning; he had to suffer through the North Carolina summers just like the poorest of us.  Vanderbilt did travel the world, but without the airplane, he had to do so at a snail's pace.

Perhaps most shockingly, he suffered "sudden death from complications following an appendectomy" at the age of 51.  (Here's the original NYT obituary).  Whatever your precise story about the cause of rising lifespans, it's safe to say that George's Bane wouldn't be fatal today.

I made this observation several years ago, though, though I went west coast railroad entrepreneur rather than east coast.  I showed pictures of a San Francisco mansion and a middle class home of a friend of mine in Seattle.

One house has hot and cold running water, central air conditioning, electricity and flush toilets.  The other does not.  One owner has a a computer, a high speed connection to the Internet, a DVD player with a movie collection, and several television sets.  The other has none of these things.  One owner has a refrigerator, a vacuum cleaner, a toaster oven, an iPod, an alarm clock that plays music in the morning, a coffee maker, and a decent car.  The other has none of these.  One owner has ice cubes for his lemonade, while the other has to drink his warm in the summer time.  One owner can pick up the telephone and do business with anyone in the world, while the other had to travel by train and ship for days (or weeks) to conduct business in real time.

I think most of you have guessed by now that the homeowner with all the wonderful products of wealth, from cars to stereo systems, lives on the right (the former home of a friend of mine in the Seattle area).  The home on the left was owned by Mark Hopkins, railroad millionaire and one of the most powerful men of his age in California.  Hopkins had a mansion with zillions of rooms and servants to cook and clean for him, but he never saw a movie, never listened to music except when it was live, never crossed the country in less than a week.  And while he could afford numerous servants around the house, Hopkins (like his business associates) tended to work 6 and 7 day weeks of 70 hours or more, in part due to the total lack of business productivity tools (telephone, computer, air travel, etc.) we take for granted.  Hopkins likely never read after dark by any light other than a flame.

If Mark Hopkins or any of his family contracted cancer, TB, polio, heart disease, or even appendicitis, they would probably die.  All the rage today is to moan about people's access to health care, but Hopkins had less access to health care than the poorest resident of East St. Louis.  Hopkins died at 64, an old man in an era where the average life span was in the early forties.  He saw at least one of his children die young, as most others of his age did.  In fact, Stanford University owes its founding to the early death (at 15) of the son of Leland Stanford, Hopkin's business partner and neighbor.  The richest men of his age had more than a ten times greater chance of seeing at least one of their kids die young than the poorest person in the US does today.

Hopkin's mansion pictured above was eventually consumed in the fires of 1906, in large part because San Francisco's infrastructure and emergency services were more backwards than those of many third world nations today.

Here is a man, Mark Hopkins, who was one of the richest and most envied men of his day.  He owned a mansion that would dwarf many hotels I have stayed in.  He had servants at his beck and call.  And I would not even consider trading lives or houses with him.  What we sometimes forget is that we are all infinitely more wealthy than even the richest of the "robber barons" of the 19th century.  We have longer lives, more leisure time, and more stuff to do in that time.   Not only is the sum of wealth not static, but it is expanding so fast that we can't even measure it.  Charts like those here measure the explosion of income, but still fall short in measuring things like leisure, life expectancy, and the explosion of possibilities we are all able to comprehend and grasp.

I have never really understand all the hatred directed at ticket scalpers.  They only make money because the original sellers of a scarce resource  (e.g. tickets to a concert) under-price their product.  Scalpers live on the difference between the list price of the ticket and the true market clearing price.  So they buy the tickets when they first come out for $80 and resell them for, say, $200.

Scalpers will never go away.  Even if there were not a mispricing problem, there is always going to be a secondary market for date/time specific products that are non-refundable  (just think how great it would be if there were a secondary market for airline tickets you could no longer use, though alas TSA and airline rules pretty much make this impossible).

But scalping would be a lot, lot smaller if concerts just sold the tickets originally at the market clearing price, or held some sort of auction for them.  Then the original price would be $200, not $80, and the margin for flipping the tickets goes away.

Which then presents us this irony for those consumers who whine about scalped ticket prices.  The fact is the higher market clearing price never goes away, even if it is achieved in some sort of black market.  In fact, what eliminating scalping really means is that instead of some people paying $80 and some paying a higher price, everybody pays a higher price.  There is no mystical low price, larger supply solution to the problem.  In fact, the lower price with scalping model really is a gift from bands and concert promoters -- the scalping margin really could be theirs if they wanted it.

I am reminded of all this by this notice to fans posted by the White Stripes' Jack White and linked by TJIC.  The subject in question is limited edition vinyl but the discussion is exactly similar.  White took some small steps as publisher to capture some of the scalper's margin discussed above, and apparently some fans freaked.

As can be expected, the media really did a poor job of covering the GM IPO, consistently underestimating the total public cost of the bailout (e.g. no one is mentioning the $45 billion in tax-loss carryforwards GM was allowed to keep, against all precedent).

But the real cost of the handling of the GM bankruptcy is in 1) the terrible precedents it set in hammering secured creditors to the benefit of favored political allies of the Administration and 2) the loss of the opportunity to get billions of dollars in production assets out of the hands of the people who have be sub-optimizing them.

It was this latter issue I have focused the most on, particularly in this post where I argued for letting GM die.  I said in part:

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA.  ...

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one"¦ for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe's most productive human and physical assets into organizations with DNA multipliers less than one.

Coyote, November 10

But what is really happening here is that the dollar is being devalued.  This is one of the semantic quirks that make me laugh "” when Argentina or Zimbabwe do this, its called devaluation.  When a western nation does it, it is called quantitative easing.

Don Boudreaux today:

Fed Chairman Ben Bernanke, fresh from injecting hundreds of billions of new U.S. currency units into the economy "“ and from planning the injection of yet an additional 600 billion such units "“ criticizes the Chinese government for injecting hundreds of billions of new Chinese currency units into the economy ("Bernanke Takes Aim at China," Nov. 18).  Apparently, when Beijing increases the supply of Chinese currency it does so as part of what Prof. Bernanke ominously labels a "strategy of currency undervaluation," but when Uncle Sam does the same thing with U.S. currency units it's called "quantitative easing" and "a move in the right direction."

I am thinking about renaming the Chevy Volt the Chevy Bastiat.  Because the entire vehicle concept is based on the hope that people will ignore the unseen.  Specifically, those pushing the vehicle are hoping that buyers will just assume the electricity for the vehicle is free (after all it is not separately metered) and that the CO2 footprint is zero (despite the fact that in states like Michigan, an electric car is essentially powered by coal combustion.  From autobloggreen

We often, though sometimes incorrectly, assume that it's cheaper to operate an electric vehicle than a comparable gasoline auto. Hey, who hasn't? While this assumption generally holds true, electrical rates vary widely across the nation and can throw off the numbers. In some instances, like when Inside Line's engineering editor, Jason Kavanagh, drove the Chevrolet Volt out in sunny California, one discovers that operating a vehicle powered by electricity can indeed cost more than running it with the liquid fuel that pours from a pump.

Earlier, I took down the absurd initial advertising that the Volt got 230 MPG.

Here is a simpler explanation of QE2:  The same people who always get us out of recessions, eg private business people, will eventually get us out of this one.  However, the government has an incredible stake in trying to convince everyone that they actually drive the economy.  Therefore, it is important for the feds to be able to claim credit for any recovery.  Since some sort of natural recovery from the recession is likely in 2011 (and per Mark Perry may already be in progress) the government needs some program that it can credit for the recovery.  Since Congress will not pass Obama's (or Krugman's) desired son-of-stimulus bill, then the Fed must step up to create a plausible high-profile program.

Most of the time when folks lament about the US's trade deficit, I just yawn.  That is because to a large extent the trade deficit is simply an artifact of an arbitrary accounting definition.  Basically, we define a certain fairly arbitrary subset of total commerce and commercial activity between two countries, and then throw tantrums when that arbitrary account is unbalanced.  At the end of the day, the payments loop has to close - the dollars come back to the US somehow.  Historically, most money from such trade deficits have come back to the US as foreign investments in US assets (think, for the example, Japanese investments in the late 80's in US real estate and high profile companies).

It is amazing that we would complain about such a situation.  First, we should be thrilled that foreigners choose to invest in our productive assets rather than just our manufactured goods.  Second, think about it this way -- if we export a product, we get the foreign money but the product goes overseas.  When foreigners invest in our fixed assets, we get the money and the assets remain here.  It is the outsized political influence of shareholders and workers in a few export-oriented industries  rather than economic rationality that keeps the US Congress so fixated on the "trade deficit."

The one issue I have with the trade deficit is it is in large part tied closely to the budget deficits run by the Feds.   Think about it this way -- let's take the definition of the balance of trade and keep it intact, adding just one single additional export product to the calculation:  US Government debt securities.   Certainly these are products we export, and there is nothing wrong with thinking about them as an alternative way for foreigners to spend dollars vs. buying US exports  (just as we all face the choice of investing for savings or buying consumer goods with our own incremental income).

Last year the US trade deficit was between $400 and $500 billion per year.  In 2009 the US government deficit was something like $1.4 trillion.  Assuming they issued debt securities to fund this deficit (ignore QE for now) and assuming foreigner bought 40-50% of these bods, then we exported as much as $700 billion in US government bonds to foreign buyers.  Now, suddenly, when we consider this one additional export product in the mix, we are running a trade surplus.  This is why currencies like the yuan are not necessarily as undervalued as people (including President Obama) may assume -- the issuance of government bonds creates a huge demand for the dollar, and keeps the value high.  If exporters are truly pissed off about the high value of the dollar vs. the yuan, they should not complain to the Chinese, they should complain to Obama and the US Congress for competing with them in foreign markets.  Though we tend to go through phases where we forget it, saving is a competitive product to consumer goods.

Update: Scott Grannis via Carpe Diem

"The Chinese sell us mountains of cheap goods, then turn around and invest most of the proceeds (equivalent to our trade deficit with China) in U.S. Treasury securities. We get the goods, and we get to keep the money. Then we devalue the dollar, and they lose on their investment. Why we would want them to stop doing this is beyond me, though if I were a Chinese citizen, I would be furious with my government for directing such massive quantities of my country's export earnings to Treasuries.

This post is based on playing around with some analogies to try to understand quantitative easing in my own mind.  I can't decide if this approach is helpful or just wanking.  I fear it is the latter, but if we banned all banned all intellectual wanking in blogs,  my feed reader would be virtually empty.

I haven't really written much about the Fed's latest round of quantitative easing, dubbed QE2.  Basically they plan to print some significant fraction (I see different numbers in different articles) of a trillion dollars and use the newly created money to buy government bonds  (they don't actually print the money but create it out of thin air in the memory banks of computers).  As I understand it, the theory is that this will boost the price (and thus reduce yields) on the government bonds on the balance sheets of private banks.  This will in turn have two effects:  improve (at least on paper) the balance sheets of banks, hopefully making it more likely to lend; and it will reduce the yield on the bonds on their balance sheets, hopefully making private loans look like a better investment in comparison.

I am not an economist, and so won't get embroiled in issues I don't understand, but it strikes me that even if one accepts the theory of QE, it will be difficult to have any measurable impact as long as Congress  and the administration keeps generating new debt at astounding rates.

But what is really happening here is that the dollar is being devalued.  This is one of the semantic quirks that make me laugh -- when Argentina or Zimbabwe do this, its called devaluation.  When a western nation does it, it is called quantitative easing.  Because, uh, we are much smarter or something.   But I have to believe that a lot of progressives have hitched their wagon to QE2 out of the hope for some inflation (wow, the revenge of William Jennings Bryant).   Because inflation and dollar devaluation would nominally achieve some of the goals they are hoping for, including:

• making Chinese imports more expensive, creating a wealth transfer from consumers to a few politically powerful exporters
• re-inflating the housing bubble while devaluing long-term fixed rate mortgages, creating a wealth transfer from creditors to debtors
• continuing the wealth transfer from average workers (who typically don't have COLA's) to government and union workers (who typically do have COLA's)
• acts as wealth transfer from individuals to government since it creates an effective income tax rate increase, as key income levels in the tax tables, particularly where AMT kicks in, are not indexed for inflation

It is impossible to argue that devaluing a currency is a path to wealth generation.  It can't be, though progressives, as always, are willing to tolerate a total reduction of wealth as the price for the type of re-distributions discussed above.

But excepting the re-distribution arguments, it strikes me that the only possible argument for this devaluation is that the economy is somehow trapped in a local minima from which the escape energy is too high.  This would make QE a bit like annealing in a metal, where metal that is heated up and cooled too fast can be hard and brittle.  The only way to get it to be ductile is to re-heat it and then allow it to cool slower.

This is kind of a pretty comparison, but in large part it is probably BS.  The economy is way, way, way more complex and multi-variate than crystallization in a metal.  Even if we were trapped in a local minima, which by the way it is pretty much impossible to determine, we don't know what kind of energy should be applied to the system to move it out.  In fact, if we wanted to use this analogy, it would make far more sense to me to remove barriers to entrepreneurship and wealth creation which likely form a large part of the energy barrier that keeps us in such a local minima.  In fact, the annealing analogy would likely point one in the direction of decalcifying markets and increasing labor mobility rather than massive government interventionism.  It is much easier for me to argue that the missing energy is entrepreneurship rather than liquidity.  Apparently, the German finance minister agrees with me:

The American growth model, on the other hand, is in a deep crisis. The United States lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies. "¦I seriously doubt that it makes sense to pump unlimited amounts of money into the markets. There is no lack of liquidity in the US economy, which is why I don't recognize the economic argument behind this measure. "¦The Fed's decisions bring more uncertainty to the global economy. "¦It's inconsistent for the Americans to accuse the Chinese of manipulating exchange rates and then to artificially depress the dollar exchange rate by printing money.

Update: Chinese bond rating agency downgrades US treasuries

The United States has lost its double-A credit rating with Dagong Global Credit Rating Co., Ltd., the first domestic rating agency in China, due to its new round of quantitative easing policy. Dagong Global on Tuesday downgraded the local and foreign currency long-term sovereign credit rating of the US by one level to A+ from previous AA with "negative" outlook.

From the New York Daily News, quoting VP Biden: (via Maggies Farm)

Every single great idea that has marked the 21st century, the 20th century and the 19th century has required government vision and government incentive

Wow, its hard to believe that even a hard core statist believes this in the face of historical evidence, but there it is.  The example  (and remember even a single correct example does not support the word "every") is an interesting one:

"In the middle of the Civil War you had a guy named Lincoln paying people $16,000 for every 40 miles of track they laid across the continental United States. "¦ No private enterprise would have done that for another 35 years."

I am actually stunned that he is historically literate enough to get the second part of this right, that there was in fact a single transcontinental railroad, James J Hill's Great Northern, that completed its line without government subsidies or land grants.  He even gets the date about right.  A few thoughts:

• Not mentioned by Biden is the emergence of the entire rest of the US railroad industry, which by 1860 had about 30,000 miles of track, mostly via private initiative.
• I think the original transcontinental railroad has interesting parallels to the Apollo program -- certainly government action got us into space and a transcontinental railroad faster than private action, but it could be argued that both delayed private initiative in these areas longer than would have occurred without the action.
• For Lincoln in the Civil War, the transcontinental had as much to do with cementing Union control of California as it did promoting commerce or any other values

Here is my favorite fact -- Every single transcontinental railroad went bankrupt at least once before 1925, except one.  Can you guess which one did not?  Yes, it was the Great Northern, the only one built entirely with private capital.