Dispatches from District 48
Archive for the ‘Economics’ Category.
An interesting post from the Knowlege Problem. An interesting fit with my post earlier this week on Progressives are too Conservative to Like Capitalism.
The interviewer characterizes Hayek's Road to Serfdom as "a bible for people on the conservative political side". I really must object to this characterization, and I'd like to think that Hayek would too. Indeed, one of his most powerful essays was titled "Why I am Not a Conservative".
Many in the left to far-left eschew the liberal title nowadays (since they consider liberals now to be wimps and too moderate, like that Clinton guy) in favor of the term "progressive". This term has gone in and out of favor for over a century, from the populists of the early 1900's to the socialists of the more modern era.
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. And, Progressives who support the right of third worlders to strap on a backpack of TNT and explode themselves in the public market don't trust these same third worlders to make the right decision in choosing to work in the local Nike shoe plant.
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:
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?
More recently, progressives have turned their economic attention to lesser developed nations. Progressives go nuts on the topic of Globalization. Without tight security, G7 and IMF conferences have and would devolve into riots and destruction at the hands of progressives, as happened famously in Seattle. Analyzing the Globalization movement is a bit hard, as rational discourse is not always a huge part of the "scene", and what is said is not always logical or internally consistent. The one thing I can make of this is that progressives intensely dislike the change that is occurring rapidly in third world economies, particularly since these changes are often driven by commerce and capitalists.
Progressives do not like American factories appearing in third world countries, paying locals wages progressives feel are too low, and disrupting agrarian economies with which progressives were more comfortable. But these changes are all the sum of actions by individuals, so it is illustrative to think about what is going on in these countries at the individual level.
One morning, a rice farmer in southeast Asia might faces a choice. He can continue a life of brutal, back-breaking labor from dawn to dusk for what is essentially subsistence earnings. He can continue to see a large number of his children die young from malnutrition and disease. He can continue a lifestyle so static, so devoid of opportunity for advancement, that it is nearly identical to the life led by his ancestors in the same spot a thousand years ago.
Or, he can go to the local Nike factory, work long hours (but certainly no longer than he worked in the field) for low pay (but certainly more than he was making subsistence farming) and take a shot at changing his life. And you know what, many men (and women) in his position choose the Nike factory. And progressives hate this. They distrust this choice. They distrust the change. And, at its heart, that is what the opposition to globalization is all about - a deep seated conservatism that distrusts the decision-making of individuals and fears change, change that ironically might finally pull people out of untold generations of utter poverty.
In fact, over the last 20 or so years, progressives have become surprisingly mute on repression and totalitarianism the world over. In the 1970's, progressives criticized the US (rightly, I think) for not doing more to challenge the totalitarian impulses of its allies (the Shah of Iran comes to mind in particular) and not doing enough to end totalitarianism and repression in other nations (e.g. South Africa, Guatemala, El Salvador, etc etc)
Today, progressives have become oddly conservative about challenging totalitarian nations. By embracing the "peace at any cost" mantra, they have essentially said that they can live with anything, reconcile anything, as long as things remain nominally peaceful (ie, no battles show up on the network news). Beyond just a strong anti-Americanism, the peace movement today reflects a strong conservatism -- they want to just leave everyone alone, no matter how horrible or repressive, and hope that they will in turn leave us alone. They fear any change that would stir things up.
There are any number of other examples of the strong conservative streak in the progressive movement. Here are a few more that come to mind:
Well, I have again written too long, and I'm tired. If you are not ready to rush to defend the barricades of capitalism, you might read my post from last week called "60 Second Refutation of Socialism, while Sitting at the Beach". Most of what I have written here has been said far more eloquently by others. Of recent writers, Virginia Postrel, in the Future and its Enemies, has written a whole book on not just capitalism but dynamism and progress in general, and why people of all political persuasions tend to be scared by it. Brink Lindsey addressed many of these same issues as well in his book Against the Dead Hand. Of course, the Godfather of individual choice and societal dynamism is Friedrich Hayek.
I am reading Olaf Gersemann's book Cowboy Capitalism and enjoying it immensely. He points out that of the top 20 largest publicly traded companies in the US in 1967, only 11 are even in the top 60 today, much less the top 20. In contrast, he points out that of the 20 largest German companies in 1967, today, thirty-five years and nearly two generations later, 19 are still in the top 60 and 15 are still in the top 20.
We think of European fascism as having been defeated in 1945, but, at least in terms of fascist economic ideas like the corporate state, it is alive and well in old Europe. Take France for example. France is run by an elite group from a couple of universities who circulate and criss-cross paths between government, large corporations, unions, and the military. This group is loyal to each other first, and to ideology second. What the US Government stands accused of doing to support Haliburton (forget what actually happened - just take the wildest accusations) happens routinely and as a matter of policy between the French Government and their largest corporations.
Though the US has from time to time made mistakes in this regard (e.g. Chrysler bailout), their actions are nothing compared to the total support that French and German corporations get. In many industries, the government has gone so far as to fix current business models in place by law, effectively outlawing alternative business approaches (e.g. discounting is illegal in German retailing). In addition, these countries make entrepreneurship extraordinarily difficult, helping to prevent competition from new upstarts. For example, Gersemann points out that the cost of organizing a new business entity in the US costs an entrepreneur about a week's pay; In France and Germany, it costs 4 months pay or over 20x more.
In my article "60 Second Refutation of Socialism, While Sitting on a Beach", I pointed out that wealth is created when people are free to use their mind to envision new things, AND free to pursue this vision without undue barriers. Europe, in killing entrepreneurship and dynamism, is killing this second criteria for wealth creation. Propping up aging basic industries, four day work weeks, 8 week vacations, immense public sector employment, and unlimited unemployment benefits may feel good for a while, but they destroy wealth. Old Europe is like a retired person spending their investment principle: Quality of life may be good today, but future income and wealth is at risk.
UPDATE
I have written a number of times that our health care system will never work right until the person making the choices about health care is the same one bearing the costs of those choices. Today, individuals and doctors make choices but insurance and employers pay the cost. As a result, neither individuals nor doctors are very price sensitive, and have every incentive to sign up for every expensive diagnostic imaginable, particularly given whats going on in malpractice law. Insurers who pay the bills are trying to control more of the decision making, but this just pisses everyone off. Unfortunately, many want to fix this by putting both selection and payment in the governments hands - ughh. My preference is of course to find a way to let individuals continue to make choices for themselves, but bear more of the cost. MSA's are one such approach, I am sure there are others.
Marginal Revolution has an interesting post pointing out that the market for college textbooks has a similar disconnect -- professors choose the book but students pay for them, resulting in rapidly rising textbook costs.
Last week, there were several comments in Carnival of the Capitalists that people would like to see more articles highlighting the benefits of capitalism. This got me thinking about a conversation I had years ago at the beach:
Hanging out at the beach one day with a distant family member, we got into a discussion about capitalism and socialism. In particular, we were arguing about whether brute labor, as socialism teaches, is the source of all wealth (which, socialism further argues, is in turn stolen by the capitalist masters). The young woman, as were most people her age, was taught mainly by the socialists who dominate college academia nowadays. I was trying to find a way to connect with her, to get her to question her assumptions, but was struggling because she really had not been taught many of the fundamental building blocks of either philosophy or economics, but rather a mish-mash of politically correct points of view that seem to substitute nowadays for both.
One of the reasons I took up writing a blog is that I have never been as snappy or witty in real-time discussions as I would like to be, and I generally think of the perfect comeback or argument minutes or hours too late. I have always done better with writing, where I have time to think. However, on this day, I had inspiration from a half-remembered story I had heard before. I am sure I stole the following argument from someone, but to this day I still can't remember from whom.
I picked up a handful of sand, and said "this is almost pure silicon, virtually identical to what powers a computer. Take as much labor as you want, and build me a computer with it -- the only limitation is you can only have true manual laborers - no engineers or managers or other capitalist lackeys".
Yeah, I know what you're thinking - beach sand is not pure silicon - it is actually silicon dioxide, SiO2, but if she didn't take any economics she certainly didn't take any chemistry or geology.
She replied that my request was BS, that it took a lot of money to build an electronics plant, and her group of laborers didn't have any and bankers would never lend them any.
All too many defenders of capitalism would have stopped here, and said aha! So you admit you need more than labor - you need capital too. But Marx would not have disagreed - he would have said it was the separation of labor and capital that was bad - only when laborers owned the capital, rather than being slaves to the ruling class that now controls the capital, would the world reach nirvana. So I offered her just that:
I told her - assume for our discussion that I have tons of money, and I will give you and your laborers as much as you need. The only restriction I put on it is that you may only buy raw materials - steel, land, silicon - in their crudest forms. It is up to you to assemble these raw materials, with your laborers, to build the factory and make me my computer.
She thought for a few seconds, and responded "but I can't - I don't know how. I need someone to tell me how to do it"
And that is the heart of socialism's failure. For the true source of wealth is not brute labor, or even what you might call brute capital, but the mind. The mind creates new technologies, new products, new business models, new productivity enhancements, in short, everything that creates wealth. Labor or capital without a mind behind it is useless.
From the year 1000 to the year 1700, the world's wealth, measured as GDP per capita, was virtually unchanged. Since 1700, the GDP per capita in places like the US has risen, in real terms, over 40 fold. This is a real increase in total wealth - it is not money stolen or looted or exploited. Wealthy nations like the US didn't "take" the wealth from somewhere else - it never even existed before. It was created by the minds of human beings.
How? What changed? Historians who really study this stuff would probably point to a jillion things, but in my mind two are important:
So today's wealth, and everything that goes with it (from shorter work hours to longer life spans) is the result of more people using their minds more freely.
Look around the world - for any country, ask yourself if the average person in that country has the open intellectual climate that encourages people to think for themselves, and the open political and economic climate that allows people to act on the insights their minds provide and to keep the fruits of their effort. Where you can answer yes to both, you will find wealth and growth. Where you answer no to both, you will find poverty and misery.
UPDATE
While it is not exactly a direct follow-on to this article, see my post Progressives are too Conservative to Like Capitalism for an analysis of some of capitalism's detractors. For yet another way to explain capitalism, at least libertarian philosophy, here is a new-agy approach that is actually pretty good. Finally, Spontaneous Order has an interesting post comparing religious creationism in the physical world with progressives' statism in the economic/social realms.
Update #2: Here is my more recent statement covering similar ground, focusing on the mistaken assumption that economics are all zero-sum.
Roy Soifer recently suggested, as reported in Photon Courier, that the percentage of Harvard Business School graduates going to Wall Street jobs can be used as a reverse indicator of the market (i.e. lots of graduates going to Wall Street means the market is peaking and due for a fall).
As a graduate of that HBS in 1989, I have a few thoughts. First, the vast majority of HBS graduates go into Wall Street, consulting, or the corporate world. The relative popularity of these three destinations tends to vary over time. To some extent this variation is due to what's "hot", and to some extent its due to simply to what jobs are available and what recruiters are showing up on campus.
Second, though pride urges me to agree with this statement from Photon Courier, I really can't:
But one would hope that MBAs from a leading school--who have certainly studied business cycles--would reflect more on the principle of "buy low, sell high" before deciding among their various offers.
When I graduated from HBS, I don't remember having a clue what I wanted to do. Its all fine and good to talk about trying to get in early on a growth sector, but that implies I am taking a job to maximize NPV of future incomes. If that were the case, I would have gone to Wall Street, or remained a consultant. But I also would have probably hated it.
A more interesting HBS graduate job indicator for me has been "how has the jobs people have evolved since they graduated". When I graduated, everyone seemed to be investment bankers and consultants. At our fifth year reunion, everyone was posturing as to how successful they had been, how far they had risen, etc. Most people were still in the same type jobs, with only a few outliers who had switched careers already. Our tenth reunion was totally different. At our tenth, no one talked about their job - everyone talked about their kids. The contrast was dramatic. Many people were in different careers, including a number who were testing the dot-com waters.
At the fifteenth reunion, everyone seemed much more relaxed. Job performance stress at from the fifth and family starting stress at the tenth were mostly gone. Many, many people (including me) had their own businesses, and few of these were ones anyone would have predicted; I don't think anyone was a consultant anymore. Here are a few examples just from our 90-person section of businesses graduates are running now:
My observation - very few were the types of businesses that come recruiting at HBS.
My parting observation about career choices through life comes from Dan Simmons' great Hyperion series, where the prophet Aenea gives here famously concise advice to humanity:
Choose Again.
Certainly true with careers.
When was the last time you paid attention to the cost of any medical procedure (not your copay or share - but the actual cost)? When was the last time you balanced whether to have an incremental medical procedure, such as an extra test, based on cost vs. benefits? If you are like most Americans, the answer is "not lately" because our health care system does not give the end consumer any of the normal incentives to "shop" that they would when, say, buying a TV.
Marginal Revolution has a great post on laser eye surgery, probably one of the most popular medical procedures not covered by traditional insurance (I would normally guess "most" popular surgery, but having lived in Dallas and Scottsdale, I am all-too-aware of the popularity of breast implant surgery as well). Guess what - it is one of the few medical procedures with high satisfaction and falling prices.
For several years, I worked for a major supplier to the commercial airline industry. Eventually, I had to leave, because the entire industry just drove me nuts - some of the worst structural problems in any industry I have seen combined with an incredible unwillingness to do anything about them. Marginal Revolution reminds me about the airline industry with this post.
Through the 1990s, the average weight of Americans increased by 10 pounds, according to the Centers for Disease Control and Prevention. The extra weight caused airlines to spend $275 million to burn 350 million more gallons of fuel in 2000 just to carry the additional weight of Americans, the federal agency estimated in a recent issue of the American Journal of Preventive Medicine (fee req'd).
As entertaining as this is, the industry is still totally unwilling to address the real problems in the industry.
Yesterday, Florida apparently passed a new minimum wage $1.00 higher than the Federal minimum wage of $5.15 per hour.
This is actually an oddity - a red state with a higher minimum wage. Before the election, this Department of Labor map, showing the states with minimum wages higher than the Federal rate (shown in green) looked a lot like the presidential election map. With the exception of Alaska (which has price and wage levels so different from the lower 48 that it should have its own currency) all the states with higher than federal minimum wages are also strong Kerry states (e.g. Left Coast, New England and Illinois).
This is going to have huge implications for us. Camping is a low margin business, and most hosts are paid minimum wage. In fact, many of our hosts, who are retired, don't want to get paid at all, so they don't mess with their social security, but that of course is not possible. The total increase in wages will be higher than what we make in Florida, so we are going to be spending a lot of time evaluating price increases vs. cutting back on labor somehow.
UPDATE
I see from our logs we are getting a lot of hits on this post from search engines. For those of you looking for more information on the implementation of this increase, we still have not seen any enabling regulation to go along with it. Will it have the same exemptions as the Federal law? Anyway, the go-live date is apparently 6 months from approval, which I presume equates to early April, 2005.
Good News via Robert Samuelson and Marginal Revolution.
While the number of people living under the poverty line have crept up, there is actually good news under the surface that has gone unreported (good news - unreported - your kidding me!)
Compared with 1990, there were actually 700,000 fewer non-Hispanic whites in poverty last year. Among blacks, the drop since 1990 is between 700,000 and 1 million, and the poverty rate -- though still appallingly high -- has declined from 32 percent to 24 percent. (The poverty rate measures the percentage of a group that is in poverty.) Meanwhile, the number of poor Hispanics is up by 3 million since 1990. The health insurance story is similar. Last year 13 million Hispanics lacked insurance. They're 60 percent of the rise since 1990.
To state the obvious: Not all Hispanics are immigrants, and not all immigrants are Hispanic. Still, there's no mystery here. If more poor and unskilled people enter the country -- and have children -- there will be more poverty. (The Census figures cover both legal and illegal immigrants; estimates of illegal immigrants range upward from 7 million.) About 33 percent of all immigrants (not just Hispanics) lack a high school education. The rate among native-born Americans is about 13 percent.
So, much of the increase in the people under the poverty line can be traced to immigration of low-skilled Hispanics trying to make a better life for themselves in this country. Of course, when these people first arrive, with no English, often lacking a high school education, and initially, no permanent job, they are going to be below the poverty line. Over time, many will find the American dream and move up (easy proof: if that were not so, why are so many trying so hard to immigrate here?) If we had been collecting the statistics carefully in the early 20th century, we would have seen a similar effect with the immigration of low-skilled Irish, Italian, German, etc. workers to this country. Surely, during this burst of immigration, it would have appeared that the poverty rates were going up, but not one would in retrospect argue anything but that everyone was getting steadily wealthier through this period.
Congratulations to Edward Prescott, our hometown hero from Arizona State, who shares this years Nobel Prize in Economics.
Why is it that the Nobel committee gives its highest economics prizes to people who consistently put more intellectual nails in the coffin of socialism, then go out of their way to give the "soft" prizes, such as literature and peace, consistently to communists, socialists, and enablers of totalitarianism?
UPDATE
Marginal Revolution has a good roundup on what exactly this economics prize was won for. I should have been more specific when I said "more intellectual nails in the coffin of socialism". The link explains it better, but one argument against free markets is that recessions are proof of market failure and a "better" system would not have them. Prescott and Kydland, among other things, show how:
Recession may be a purely optimal and in a sense desirable response to natural shocks. The idea is not so counter-intuitive as it may seem. Consider Robinson Crusoe on a desert island (I owe this analogy to Tyler). Every day Crusoe ventures out onto the shoals of his island to fish. One day a terrible storm arises and he sits the day out in his hut - Crusoe is unemployed. Another day he wanders out onto the shoals and finds an especially large school of fish so he works especially long hours that day - Crusoe is enjoying a boom economy. Now add into Crusoe's economy some investment goods, nets for example, that take "time to build." A shock on day one will now exert an influence on the following days even if the shock itself goes away - Crusoe begins making the nets when it rains but in order to finish them he continues the next day when it shines. Thus, Crusoe's fish GDP falls for several days in a row - first because of the shock and then because of his choice to build nets, an optimal response to the shock.
UPDATE #2
This is very timely. Our new Nobel Laureates did a lot of work on short term / long term economic paradoxes. For example, they work a lot with problems such as prescription drug regulation, where people can be made happy in the short term (lower prices) but really unhappy in the long term (via forgone research and therefore fewer new drugs). Interesting given that Kerry/Edwards are advocating just such a short term fix that would lead to long-term disaster. The press made a big deal out of how the Nobel Committee slapped Bush in the face with its Peace Prize to Jimmy Carter. Don't hold your breath waiting for anyone to point this one out.
I am not an economist, and would rather not stray too far off track, but the recent payroll numbers are raising interesting questions about the nature of business and employment in this country. Recent jobs growth numbers and unemployment numbers have been fine, with about the same unemployment numbers as we saw in November of 1996 when both parties agreed that the economy was pretty good.
However, as the total jobs growth numbers have lagged GDP growth, a number of people have scratched their heads to wonder why. One interesting fact is that when you survey households rather than employers, the jobs growth numbers look substantially better. Many are pointing to this household survey to say that the economy is changing - that more people are starting their own business or consulting and so are missed in the payroll numbers. This is a good theory, but its force is mitigated by the fact that the sample size, survey process, and error rates for the household survey are all much worse than the payroll survey.
Heritage Foundation argues that the household data is right and is better reflecting reality. Economic Policy Institute argues the opposite.
As a relatively new convert from the corporate world to small business, I can tell you that anecdotally, a good number of the people who left (voluntarily or not) the corporate world early in this decade have not gone back, and are, like me, now self-employed. I just had my 15th business school reunion and the proportion of small people self-employed or running small businesses is up a startling amount since the 10th reunion.