Coyote Blog

I sat this weekend and pondered the pending financial bailout.  A number of fairly smart people who know more about Wall Street than I seem to think it a necessary evil, and this includes several folks who are nearly as libertarian as I.  Is a sort of knee-jerk libertarianism preventing me from accepting a necessary step to avert economic Armageddon?

I don't think so.  By the light of day on Monday morning, I still think it a bad idea.

Here is some of my thinking (to some extent my last point is the one that is most important to me -- if we want liquidity, let's put it in the right place).

• I am tired of businesses heading to the government bailout trough and arguing that the continued functioning not only of their industry, but of all the existing players in their industry, is critical to the health of the US economy and thus requires some sort of government subsidy/bailout/protection.  Coyote's first law of rent-seeking is that companies will always claim that failure of their business will have a disproportionately negative effect on the economy.  Coyote's first corollary to this law is that Congress usually accepts this argument at the exact point in time when it is no longer true.
• This bailout is even more grotesque than a normal industrial bailout.  GM can be said to have honestly tried to make the right cars, and just failed.  I don't like bailing them out, because I don't particularly like diverting capital into the hands of organizations that are proven failures at using capital well.  But the financial investors that we are bailing out today knew they were taking a lot of risk by purchasing risky securities and then leveraging them up on their balance sheets.  They lived high for years off of the fat returns for taking this risk, arrogantly explaining that they made lots of money because they were smarter than everyone else and because they were being rewarded for taking on risk.  But then they come running to the government when the returns on their risky securities turned south, which just makes me sick.  They were paid for taking this risk, so take it.  I am sorry that you have no cushion because all those earlier returns are already spent on Maserati's for your mistresses, but that is what chapter 7 is for.
• As many as 300,000 small businesses go bankrupt every year (this number is very, very hard to pin down, as it is hard to separate personal from business bankruptcy with small business).  Something like 299,998 of them do not get bailed out by the feds.  Why do the other 2 get special treatment vs. other US taxpayers?  Because they are better at lobbying Washington that they are essential?
• Yes, the government created the Alt-A and sub-prime mortgage markets,and caused them to flourish via Fannie and Freddie aggressively asking for and buying these loans.  And the feds, via tax policy, and local governments, via zoning, helped pump up the housing bubble.  But nothing forced private companies, particularly highly leveraged institutions like banks, to load up their balance sheets with these things, or, crazily, to write insurance policies on their value.  Libertarians want to use these government interventions as an excuse for the bailout, but it doesn't wash. I do think many banks reasonably have lawsuit material against ratings agencies Moodys and S&P, which is fine.  I think new blood in that business would be a very good thing.
• The total market capitalization of traded equities of public corporations on NYSE and NASDAQ is between $15 and $20 trillion.  That means that the first $150 billion of the bailout is equivalent to about a 1% price move on the exchanges, something that occurs almost every day.  Have we really close-coupled everything so tightly that a cumulative balance sheet hole on the order of magnitude of a 1% move on the stock market can bring down the whole financial system?  If so, we should just let the whole thing come down and rebuild itself in a more robust form.
• Wall Streeters pat themselves on the back all the time for how creative they are financially.  So get creative here.  Create some sort of new entity and have banks contribute toxic mortgages into the entity in exchange for equity.  Find some pension funds to invest in the new entity at a deep discount.
• These banks, who are experts in this stuff, claim they cannot value these failing, complex, illiquid mortgage packages.  OK, that may be true.  But how is the government possibly going to do any better?  Such a situation cannot possibly end well for the taxpayers. 
• I saw folks writing in fear last week that the commercial paper market might dry up.  The commercial paper market dries up all the time.  It comes back eventually.  People treat lending markets like they are charities or something, and they fear that lenders will give up and never come back.  But they are not charities.  They serve just as much of a purpose for lenders and for borrowers.  Businesses and folks with capital need to make money on short term cash.  They are not going to stop lending forever.  Even capital markets dry up from time to time.  The IPO market has disappeared several times, including several years in the post-Internet-bubble period. The junk bond market comes and goes.
• What is the government really worried about?  I presume that they are worried that liquidity will dry up and the ability of main street businesses to borrow will be impaired.  OK, then save the freaking $700 billion and if main street starts to have trouble borrowing, have the government participate somehow in that lending market.  Buy corporate bond issues, and/or increase the limit on SBA loan guarantees by a $100 billion  (this latter would allow a million new $100,000 SBA loans, and would actually generate money now in guarantee fees and only potentially cost money much later if the loans fail).  This way, we are investing liquidity in successful companies trying to grow rather than in failing banks that got us all into this.  Let's invest in success rather than in failure.

I have been on a Civil War reading binge lately, which began when I read "Time on the Cross", which is a really interesting economic analysis of American slavery.  Since I have read a number of other Civil War and Ante-Bellum history books, including James McPherson's excellent one volume Civil War history.

I was struck in several of these books by the reaction of British textile manufacturers to the war and, more specifically, the informal southern embargo of cotton exports in 1860-61.  These textile producers screamed bloody murder to the British government, demanding that they recognize the Confederacy and intervene on their behalf, claiming that the lack of cotton would doom their industry and thereby doom the whole country.  On its face, this was a credible argument, as textiles probably made up more of the British GDP at the time than any three or four industries account for in the US today. 

Fortunately, the British chose not to intervene, and risked the economic consequences of not supporting the textile industry by jumping into the American Civil War.  As it turned out, the British economy was fine, and in fact even the textile industry was fine as well, as demand was still high and other sources around the world stepped up (because of the higher prices that resulted from the Southern boycott) with increased cotton supplies.

Via Scrappleface:

The foundation of the U.S. economy could crumble, President George
Bush said today, if Congress fails to approve a U.S. Treasury plan to take over
foundering financial firms, a proposal which the president called "a
much-needed 21st-century civil rights act for stupid people."

"To sustain this shining city on a hill," Mr. Bush said, "we need to rescue
the ignorant, irresponsible folks "” from Wall Street to Capitol Hill to
Main Street "” who got us to where we are today. We must guarantee that no American suffers the soft bigotry of being forced to live with the consequences of his bad decisions."

The president, in remarks to the news media clearly aimed at
reluctant Republicans in Congress, said, "Our financial system rests on
a foundation of huge banks, brokerage houses and quasi-governmental
agencies that followed Washington's lead by gambling on long-shot,
poorly-collateralized investments. Now this glorious way of life is
threatened, and we must act to preserve it."

"We need to guarantee that the structures, systems, people and
products that got us to this point won't be tossed on the ash heap of
history," said Mr. Bush. "If these giant companies fail, then America
will be left with nothing but thousands of small to mid-sized financial
firms that made prudent investment decisions during the past 15 years."

If so, great for them.  The more free trade in the world, the better:

Canadian and European officials say they plan to begin
negotiating a massive agreement to integrate Canada's economy with the
27 nations of the European Union, with preliminary talks to be launched
at an Oct. 17 summit in Montreal three days after the federal election.

Trade Minister Michael Fortier and his staff have been engaged for
the past two months with EU Trade Commissioner Peter Mandelson and the
representatives of European governments in an effort to begin what a
senior EU official involved in the talks described in an interview
yesterday as "deep economic integration negotiations."

If successful, Canada would be the first developed nation to have
open trade relations with the EU, which has completely open borders
between its members but imposes steep trade and investment barriers on
outsiders"¦

A pact with the United States would be politically impossible in Europe, senior European Commission officials said.

I would have said that changing the last statement would be a great goal for an Obama administration that wants to make Europe love us again (did they ever?)  But he has made clear that trade does not count in his definition of good relations, and in fact has already committed to initiating trade wars against our neighbors Mexico and Canada.

Mark Perry has had a series of posts of late presenting the hypothesis that high rates of home ownership in the US may be detrimental as it reduces labor mobility.  The argument goes that homeowners have a harder time moving for new jobs than renters do.

Homeownership
impedes the economy's readjustment by tying people down. From a social
point of view, it's beneficial that homeownership encourages commitment
to a given town or city. But, from an economic point of view, it's good
for people to be able to leave places where there's less work and move
to places where there's more. Homeowners are much less likely to move
than renters, especially during a downturn, when they aren't willing
(or can't afford) to sell at market prices. As a result, they often
stay in towns even after the jobs leave. And reluctance to move not
only keeps unemployment high in struggling areas but makes it hard for
businesses elsewhere to attract the workers they need to grow.

The argument makes sense on its surface, but I am having a bit of trouble buying into it (though I will admit that as an American, I am steeped in decades of home-ownership-boosterism, so I may not be approaching the problem without bias).

On the plus side, the selling a home and buying a new one certainly has more costs than switching apartments, particularly if you add in a moving premium for home owners who can accumulate a lot more stuff than apartment dwellers and the switching costs due to emotional attachment to the current house.  Also, on its face, the argument is similar to criticisms of the economy of the antebellum south, where too much capital was invested in land and assets tied to the land.

However, I see a couple of problems with it.  First, its hard to find an increase in structural unemployment rates in the past decades to correlate to the increase in home ownership.  Second, the costs to change homes has been falling of late as the government-protected Realtor monopoly is finally being broken by technology and commission rates are falling.  Third, my sense is (though I can't dig up the data) that the average time in a home is dropping, meaning homes flip owners more frequently, again indicating a decreasing barrier to moving.

I would, however, be willing to accept that in a high home ownership regime, falling home prices and lengthening for-sale times could exacerbate an economic downturn by slowing mobility and thereby slowing the correction.  I would have argued in the past that this was offset by home equity as a savings tool and a source of cash in difficult times, but that could be different this time around as mortgage policies have tightened, drying up the ability to convert equity to emergency cash.

OK, the light at the end of the tunnel may be a train, but so far it is too soon to panic about bank failures.*  Mark Perry brings us this chart for perspective:

Of course, since we are in an election cycle, current problems are going to be portrayed as the worst economy since the Weimar Republic, or whatever.  Perry has a lot more in the post.

Katherine Mangu-Ward makes a point I have also made on occasion:

take a moment to thank the man who really saved the whales: John D. Rockefeller.

In
1846, Americans dominated the whaling industry with 735 ships. John D.
Rockefeller gets into the oil refining business in 1865. By 1876,
kerosene is routing whale oil, and the whaling fleet was down to 39 ships, because kerosene was just so darn cheap:

The
price of sperm oil reached its high of $1.77 per gallon in 1856; by
1896 it sold for 40 cents per gallon. Yet it could not keep pace with
the price of refined petroleum, which dropped from 59 cents per gallon
in 1865 to a fraction over seven cents per gallon in 1895.

This dynamic is also instructive for those fretting that we're going to run out of oil,
just as many undoubtedly worried that we were going to run out of
whales. (Note to self: Check historical record for instances of the
phrase "Peak Whale.")

I don't want to be overly self-referential here, but I actually "found" this reference to peak whale theory over two years ago when digging through the archives of this blog's 19th century predecessor, the Coyote Broadsheet:

As the US Population reaches toward the astronomical
total of 40 million persons, we are reaching the limits of the number
of people this earth can support.    If one were to extrapolate current
population growth rates, this country in a hundred years could have
over 250 million people in it!  Now of course, that figure is
impossible - the farmland of this country couldn't possibly support
even half this number.  But it is interesting to consider the
environmental consequences.

Take the issue of transportation.  Currently there are over 11
million horses in this country, the feeding and care of which
constitute a significant part of our economy.  A population of 250
million would imply the need for nearly 70 million horses in this
country, and this is even before one considers the fact that "horse
intensity", or the average number of horses per family, has been
increasing steadily over the last several decades.  It is not
unreasonable, therefore, to assume that so many people might need 100
million horses to fulfill all their transportation needs.  There is
just no way this admittedly bountiful nation could support 100 million
horses.  The disposal of their manure alone would create an
environmental problem of unprecedented magnitude.

Or, take the case of illuminant.  As the population grows, the
demand for illuminant should grow at least as quickly.  However, whale
catches and therefore whale oil supply has leveled off of late, such
that many are talking about the "peak whale" phenomena, which refers to
the theory that whale oil production may have already passed its peak.
250 million people would use up the entire supply of the world's whales
four or five times over, leaving none for poorer nations of the world.

I wrote more about John D. Rockefeller (including his role in saving the whales) in my praise of Robber Barrons several years ago.  In addition to Rockefeller, the article also discussed Cornelius Vanderbilt as the 19th century precursor to Southwest Airlines.  From the Harper's Magazine in 1859:

...the results in every case of the establishment of opposition lines
by Vanderbilt has been the permanent reduction of fares.  Wherever he
'laid on' an opposition line, the fares were instantly reduced, and
however the contest terminated, whether he bought out his opponents, as
he often did, or they bought him out, the fares were never again raise
to the old standard.  This great boon -- cheap travel-- this community
owes mainly to Cornelius Vanderbilt".

Marxism holds that the middle class will eventually disappear, as the world is polarized between a few large business owners and the masses of the proletariat.  Small and independent businesses would disappear, and most of the middle class would be pedestrianized.  The middle class was always a sticking point for Marx, and there is some question whether this is really prediction or wishful thinking.  I say wishful thinking, because Marx knew that he could not achieve his socialist end-state with a middle class in place -- he had to drive the middle class into the proletariat.

In a large sense, that is what was are seeing at the Democratic Convention -- the effort to convince the middle class that, against all reason and reality, they are actually not well-off, that they are marginalized victims.  It is an attempt to pedestrianize the middle class.  Thus we get this classic quote from Rahm Emanuel, via Matt Welch:

The truth is, the Bush crowd has been giving the middle
class a thumping. This November, the middle class is going to give it
right back. This election comes down to a simple question: do we want
four more years of Bush-McCain or do we want the change we need?

There
is only one candidate from the middle class, that understands the
middle class, and that can deliver the change the middle class needs:
Barack Obama. A strong economy depends on a strong middle class. But
George Bush has put the middle class in a hole and John McCain has a
plan to keep digging that hole with George Bush's shovel.

From the Interagency Task Force on Commodity Markets, via Mark Perry:

The Task
Force's preliminary assessment is that current oil prices and the
increase in oil prices between January 2003 and June 2008 are largely
due to fundamental supply and demand factors. During this same period,
activity on the crude oil futures market "“ as measured by the number of
contracts outstanding, trading activity, and the number of traders "“
has increased significantly. While these increases broadly coincided
with the run-up in crude oil prices, the Task Force's preliminary
analysis to date does not support the proposition that speculative
activity has systematically driven changes in oil prices.

The
world economy has expanded at its fastest pace in decades, and that
strong growth has translated into substantial increases in the demand
for oil, particularly from emerging market countries. On the supply
side, the production of oil has responded sluggishly, compounded by
production shortfalls associated with geopolitical unrest in countries
with large oil reserves. As it is very difficult to rely on substitutes
for oil in the short term, very large price increases have occurred as
the market balances supply and demand (see top two charts above).

If
a group of market participants has systematically driven prices,
detailed daily position data should show that that group's position
changes preceded price changes. The Task Force's preliminary analysis,
based on the evidence available to date, suggests that changes in
futures market participation by speculators have not systematically
preceded price changes. On the contrary, most speculative traders
typically alter their positions following price changes, suggesting
that they are responding to new information "“ just as one would expect
in an efficiently operating market.

Congress and other agencies have commissioned studies of this type on oil markets and prices approximately every 90 days or so for the last 35 years, and every one of them have come to the same conclusion:  Oil markets move based on the participant's best guesses about trends in supply and demand.  Duh.  As I wrote previously, the last hydrocarbon price manipulation case I have seen in court was aimed at a group that allegedly manipulated prices for 30 seconds at the end of a trading day whose closing price affected certain contracts.  And it is not clear that they were successful. 

San Francisco has a ballot initiative this November to seize all PG&E transmission lines and assets in the city such that all city power comes from a new government owned utility.  Further, the initiative would require that this new entity get 100% of its power from renewables, particularly wind and solar, by 2040.  It is similar to a 2001 initiative.

All due respect to PG&E's private property, but I would love to see this happen.  If I were governor, I would be seriously tempted to encourage them to proceed, with the only proviso that no one else in California be allowed to sell electricity to San Francisco on the hugely unlikely possibility that there might be a day without sunshine in San Francisco.   (I find it hilarious that San Francisco's solar future is trumpeted in the "fog city journal.")  This might actually be a big enough disaster that even the media would have trouble ignoring its spectacular failure.  It would also do wonders for the Arizona and Nevada economy, as major industries would move our way.

I am sure San Francisco is well on their way to success.  After all, the city just completed its largest ever solar project. 

            The solar system is expected to generate 370,000 kilowatt hours of
electricity annually, enough to power 80 San Francisco homes.

Wow.  It can power 80 whole homes, as long as its not night time or winter (when it is seldom sunny in SF).

One of the most prevelent misconceptions about the political economy is the assumption that business universally opposes government licensing and regulation.  Often this misconception manifests itself as someone making a statement like, "Even [name of large competitor in the industry to be regulated] supports the proposed regulation so what are you libertarians complaining about."

In fact, regulation tends to protect incumbents at the expense of new entrants or new business models.  Large competitors can pass on the costs of regulation to customers, but new entrants have substantial investments to make just to build the systems and knowledge for compliance.  Perhaps worse, regulation like licensing tends to lock in current business models, by making current business practices part and parcel of becoming licensed.

For these reasons, I am excited by the book In Restraint of Trade by Butler Shaffer:

This extremely important study by Butler Shaffer--professor of law
and economist--will change the way you think of the relationship
between the state and business. It makes a deep inquiry into the
attitudes of business leaders toward competition during the years 1918
through 1938 to see how those attitudes were translated into proposals
for controlling competition, through political machinery under the
direction of trade associations.

What he finds is a business sector not only hostile to free markets
but aggressively in favor of restrictions that would protect their
interests. This, he finds, is the very source of the origins and
development of the regulatory state.

The author chooses this period because it was a time when the entire
relationship between American business and the federal government
underwent dramatic upheaval. It was in this time that business forged a
consensus about the scope and intensity of competition behavior that
they would tolerate. This began to exhibit a disposition favoring
collectivist authority over one another via government-backed
enforcement agencies.

Free and unrestrained competition required more of them than they
were willing to tolerate. It required constant innovation, a fight
against falling prices, a continued effort to seek out new markets, and
the willingness to subject their bottom line to consumer preferences
for lower prices and better products. They saw the vibrancy of free
enterprise as a threat to their firms and well being, so they used
anti-business sentiment in politics to hamper the market in ways that
would benefit them....

If you ever thought that the struggle for free enterprise was about
business versus government, this study, which is written in exciting
prose and beautiful English, will change the way you understand the
essential struggle. The evidence is vast that big business cooperated
closely with big government in building the essential architecture of
the mixed economy.

If past presidential elections are any guide, by the time this one is over, it will have been said that this economy is the worst economy since the Great Depression.  W. Michael Cox and Richard Alm of the Dallas Fed write a fabulous article in the American putting current US economic conditions in historic context:

When a presidential election year collides
with iffy economic times, the public's view of the U.S. economy turns
gloomy. Perspective shrinks in favor of short-term assessments that
focus on such unpleasant realities as falling job counts, sluggish GDP
growth, uncertain incomes, rising oil and food prices, subprime
mortgage woes, and wobbly financial markets.

Taken together, it's enough to shake our
faith in American progress. The best path to reviving that faith lies
in gaining some perspective"” getting out of the short-term rut, casting
off the blinders that focus us on what will turn out to be mere
footnotes in a longer-term march of progress. Once we do that, we see
the U.S. economy, a $14 trillion behemoth, is doing quite well, thank you very much.

I can't really excerpt the article and do it justice, but suffice it to say that you won't see much of this in any Obama speeches this year.  Here are two charts from the article I particularly liked:

Of course, the rejoinder will be, but what about the poor?  Well...

Go read it all in advance of the campaign season.

A while back, Megan McArdle observed that Sweden's semi-socialist state performed well for a number of years, riding on residual work ethic in the system, a sort of cultural bank that eventually will be overdrawn.   According to Michael Moynihan, it appears this point has been reached:

Sweden does have the highest rate of workers on sick leave in
Europe, despite being consistently ranked by the OECD as Europe's
healthiest country. As my former colleague Johan Norberg has observed,
sick leave payments"”which, at the time of the last election, were as
high as 80 percent of a worker's salary"”accounted for a staggering 16
percent of the government budget.

Wow!  That is really staggering.  And not at all surprising.  Even in this country, I can't tell you how many people there are who consider a permanent disability to be roughly equivalent to hitting the lottery.  Income for life, without working!  I even had one woman who sued my company for actually (as the law requires) reporting her salary to the tax authorities rather than paying her under the table as she had hoped.  By creating evidence she could work, I endangered her disability application that was in the works (she kept a set of crutches in her car which she only used when on business related to this application).

The government figure of 7 percent unemployment was repeatedly mocked
by both former Prime Minister Göran Persson's detractors and allies. A
study by McKinsey Global estimated the true figure"”which included those
on sick leave, in early retirement, in jobs programs"”to be between 15
and 17 percent. Jan Edling, a researcher with the Social Democratic
trade union LO, estimated the total figure of unemployed to be 19.7
percent. (Edling's report was suppressed and he was himself offered
"early retirement.") The Confederation of Swedish Enterprise said the
figure was 16.5 percent. Other studies ranged from 12 percent to 18
percent.

The author also makes a point I have tried to make a number of times -- that the ability of the US economy to integrate and give opportunity to poor immigrants is a huge positive, in terms of assessing relative merits of different economic systems on the poor, that is never considered when evaluating European welfare states:
And the problem of unemployment in Sweden loops back around to the
difficulty Sweden has had in integrating its immigrants into the job
market.

As Swedish economist Esra Karakaya wrote in Aftonbladet in 2006,
the unemployment rate among immigrants in Sweden is 29 percent"”another
staggering figure, in marked contrast to the joblessness rate among
immigrants in this country. This, Karakaya convincingly argues, is
"because the labor market is governed by rigid job security laws" that
are incompatible with a globalized economy. Indeed, a recent study
tracking the fortunes of Somali immigrants in Sweden and in Minneapolis
(reported here in Swedish, summarized here in English)
found that its sample group in the U.S. started approximately 800
companies. In Sweden, they managed only 38. In a recent editorial in
the newspaper Expressen, Nima Sanandaji, a Kurdish immigrant, argued that
it was "important to study how the Swedish system of benefits, taxes
and [regulated] job market leads the same group of people to be
successful on one side of the Atlantic and to social poverty and
dependence in Sweden."

By the way, when you do the analysis right, the poorest quintile in Sweden does about the same as in the US.  The difference is that in 10 years, the poorest quintile in Sweden will still be the same folks, while the poorest quintile in the US will have moved up, to be replaced with new immigrants.

The economy, the Democratic Party, and the Republican Party are all acting more and more like they did in the 1970s.  Keep your head down, and expect more of this kind of garbage.

People who say that bad things come in threes never ran a small business.  Bad things can come in much larger, Costco-sized lots.  Such is the case today in my own little corner of the American economy.  Expect blogging to be light for a few days.  Also, I may be slow to fix the RSS problem that has been reported.  Sorry.

PS-  The big lots of bad stuff seem to come just after one was thinking "gee, its kind of quiet around here, maybe I will take a day off this week..."

Chad Graham of the Arizona Republic writes an article this week that begins with this headline:

Phoenix can learn economically from robust Seattle and Austin

Already, my BS antenna are deployed.  Why?  I don't know anything about Mr. Graham, but nearly every 20- or 30-something journalist would like all the world to be hip and freaky and trendy and cool like Seattle or Austin (or Boulder or San Francisco).  So they have a natural predisposition to writing a story and interpreting facts to say that Phoenix (or whatever uncool city they hail from) should do everything it can to emulate Seattle or Portland or whatever is the hip city of the moment. 

I have lived in Phoenix and Seattle and Boulder, and have done business in Portland and Austin.  And if you want to find a really great music club, Austin would be your place.  And if you are a really rich guy who wants a unique lake front home and a dock for his floatplane, Seattle would be the pick.  But if you were a middle class family trying to get the most home for your money, you would take Phoenix all the way.  And if you wanted to start a real business that makes stuff, you would be insane to do it in any of these cities except Phoenix (and perhaps Austin).  Portland and Seattle and Boulder and (more recently) Austin are what one might call rich snob - poor snob towns.  They appeal to the millionaire with the fractional ownership jet and the pierced and tattooed slacker club goer.  Which is fine, but does every city really need to be like them?

Unlike the Valley, some parts of the U.S. such as Seattle and Austin
have been only slightly affected by the national economic slowdown.

Neither area has experienced the Valley's level of falling home prices, increased foreclosure rates nor its slowed job growth.

Those regions are places that Phoenix could learn from as it charts
a future based less on housing and growth and more on competing in the
global economy.

OK, lets start with the home thing, since the article focuses A LOT on housing.  I am willing to concede that in some recent period Austin and Seattle had less of a home price drop than Phoenix.  Ignoring for a moment the absurdity of extrapolating 30 year trends from 6-12 months of data, we should look structurally at these housing markets.  It turns out that Seattle, for example, has MUCH higher median home prices than Phoenix, in large part due to structural regulatory factors that I would presume the author would like Phoenix to emulate. 

As a result, the median home price in Seattle is about $450,000 while the median in Phoenix is closer to $275,000.  In fact, the Seattle median is very close to the Phoenix 75th percentile.  [note figures do not match those in article - I could not find any two median home price numbers that were the same for a market] One comment on Seattle housing was this:

The pattern is very strong: In Seattle you have affluent, largely
single people chasing a small supply of urban housing. The result is
small household size, an exodus of families to the suburbs, and very
high housing prices in the city.

Is this really what Phoenix should emulate, just because our home prices dropped more over a 6 month period?

One year ago, the Valley's job growth ranked No. 7 among
metropolitan markets with more than 1 million workers, according to the
latest Blue Chip Job Growth Update released by the W.P. Carey School of
Business at Arizona State University.

It now ranks No. 20, while Seattle is  No. 2.

In job markets with less than 1 million workers, Austin ranks  No. 14.

So, until recently, Phoenix led both cities in job growth.  In the last year, we have fallen behind.  Can anyone on the planet tell me why the last year of data is more relevant than the previous five, or ten, when Phoenix dusted these markets?  One year of downturn and suddenly Phoenix's economy needs to be restructured by some massive government 5-year plan?

But here is the really funny part.  Let's take Seattle, the economic juggernaut with which the author is so enamored.  In 1960, Seattle had a population of about 550,000 people.  In 2000, Seattle had a population of about.... 550,000.  In the same time period Phoenix grew from 726,000 to 3.2 million.  Wow, that Seattle is a growth juggernaut.  But it is hard to get apples and oranges on MSA's and such, so here is data from a single source:  From 1990-2000, the Austin MSA added 400,000 people, Seattle MSA added 382,000 people and Phoenix added 1.01 million, more than the other two combined.  Presumably, most of these folks found work, so where are all the jobs being added?

In Phoenix, "housing-related employment is falling fast, and the
impact on the economy is extreme since the industry comprises over 15
percent of total employment . . . compared to 10 percent nationwide,"
an April Moody's Economy.com report said.

This is hilarious.  We happen to be in a housing market downturn, so Phoenix is doomed because it is overweighted towards home construction.  But did anyone visit Seattle or Austin in 2001/2002 after the tech bubble crash?  It was a bloodbath, far worse than what Phoenix is experiencing today.  This kind of analysis is so short-sighted as to be absurd. 

Maricopa County's average weekly wages increased 3.8 percent to $822
in the third quarter of 2007, according to the latest numbers available
from the U.S. Department of Labor.

Weekly wages in King County, home to Seattle, rose 8 percent to
$1,129. Wages in Travis County, home to Austin, rose to $911, a 2.7
percent jump.

Meanwhile, Arizona's average per person income ($33,029) grew by the
smallest percentage among states in 2007, according to the U.S. Bureau
of Economic Analysis.

One word for you:  immigration.  Arizona has gotten hundreds of thousands of new immigrants with relatively low skills, so they come in at the bottom of the income scale and drive median wages down.  Seattle and Austin immigration, to the extent they have it, are high-skilled and highly paid.  Does every city have to be a high-income yuppie white-Asian enclave like Seattle?  I like Arizona and its Hispanic influences, even if this immigration means the governor can't puff her chest out at the governors' conference over average wages.

The two cities have a greater percentage of employment in tech jobs,
with 9.2 percent in Austin and 8.8 in Seattle compared with 4.6 percent
in Phoenix.

Sorry, but I have never thought it a goal of government to subsidize and maximize "tech jobs."  The other 95.4% of us in Phoenix without a job statistically categorized by the government as a tech job are happy not to be subsidizing the other 4.6%.  This is the kind of effort that does nothing to help the average person, who will never have a tech job, but makes government officials feel really good about themselves.  Another way of putting it:  The author is suggesting the government single-mindedly focus on subsidizing a class of jobs that 90+% of the people in all three cities do not hold.

Postscript: For those of you who want to laugh yourself silly, you really need to read the "vision" in the sidebar of this article.  It is the most incredible collection of politically correct notions without any relationship to real value creation that I have ever seen.  I can't really do it justice, but here are some highlights:

2010

The latest housing bust finally convinces the Arizona Legislature to
fund an aggressive international-economic-development program that
invests in science, engineering, technology and higher education.

Incentives draw nutraceutical firms, which use food substances to make
products that provide health benefits, such as lycopene.
Green-technology firms partner with universities to launch companies
that turn a profit...

2035

High-paying technology jobs are clustered in three major areas from
Prescott to Phoenix to Tucson. The economy boasts an $800 billion
nutraceutical industry and the world's largest solar facility with
10,000 acres of sun power.

I bet they include no offset in their study for lost growth due to higher taxes to fund this.  And our city of 5-10 million people is going to build its economy on nutraceuticals?  We're going to have a vitamin water business that, at $800 billion, is 6% the current size of the entire US economy?  I sure hope some of the business school students who wrote this either wise up or go into academics, because if they try to walk in to a real corporate board room with this stuff they are going to get skewered.

I am exhausted by people making policy suggestions by looking at small parts of complex inter-related systems in isolation.  One such example is the recent response of some ethanol mandate defenders to recent charges that corn-based ethanol is net harmful to the environment and its mandated and subsidized use is driving up world food prices.

The response by some (certainly not in the corn lobby, of course) has been that our problems would all be solved if we switched to cellulosic ethanol, which is generally made from non-food plants.  Supporters argue that this eliminated the food for fuel problem.

Huh?  Sure, in the narrowest possible sense, I guess, since we are no longer using food crops but rather grasses and such to make ethanol.  But at any reasonably holistic level of analysis, this is simply absurd.  Food prices rise not because food is converted to ethanol per se, but because the amount of grains going into the food supply decreases.  The issue is the use of farmer's time and resources and the use of prime cropland to grow plants for fuel rather than food for consumption.  The actual crop used to make the fuel, whether corn or switchgrass, does not matter to food prices -- it is the removal of farmers and cropland from food production that matters.  The only way cellulosic ethanol is likely to improve food prices in substitution for corn is by being more efficient per acre in fuel yields than corn  (which may turn out to be the case, but has not yet been proven in this country).  But even so, incremental improvements in yield don't help much, because we are talking about enormous (40-50% or more) amounts of US cropland that would have to be dedicated to fuel, whatever the plant technology, to meet the current ethanol mandates.  And remember, the net effect on fossil fuels may still be zero no matter how much land is dedicated, since no one has demonstrated large scale ethanol operations in the US that don't use more fuel to produce the ethanol than they produce. 

Postscript:  Related to this topic of thinking about economic systems narrowly, Lubos Motl discusses the supposed positive green impact on the economy in light of the open window fallacy.

Huge alarm bells are going off as I read this headline in the Arizona Republic, whose motto should be "Happy to credulously print any crazy number your lobbying group puts in a press release."  In this case, the headline reads:

Ariz. economy reaped $500M from Super Bowl

Uh, sure.  Right.  Bet that is a quality number.  Lets first vet the source.  Who provided the paper with this number?

A study released today by the Arizona Super Bowl Host Committee
estimates professional football's championship game at University of
Phoenix Stadium in Glendale generated an economic impact of $500.6
million for the state.

Oh, I see.  Certainly a disinterested party.  And how was this number arrived at?

Arizona State University's W.P. Carey School of Business
completed the economic-impact report based on surveys of more than
1,500 visitors who came to the Valley to attend the game or take part
in festivities.

The survey revealed that visitors stayed in Arizona for an average of
3.9 nights and spent an average of $617 each day on hotels, food,
alcohol, transportation, recreation, shopping and other categories. The
report also calculated the amount that organizations dropped during
Super Bowl week.

Well, its good to see the business school at America's #1 party college on the case.  I would have thought this would be a very challenging study to conduct.  In my naiveté, I might have assumed that these Superbowl visitors might have displaced other potential visitors who would have been there anyway.  I would have fixated on the fact that Superbowl week is also Phoenix Open week and, given the beautiful winter weather here, one of the prime tourist weeks of the year even without the Superbowl.  I might have wondered how hotel stays during a week when most local resort hotels are full anyway could have been credited to the Superbowl, particularly when many locals left town to avoid the scene.   I might have been worried that I was not counting truly incremental revenues, but the folks in the business school at the university with Americas hottest coeds must be smarter than I am.

So apparently, these geniuses have found a way to assume that 100% of this $617 per day times 3.9 days is incremental and that there is no substitution effect.  However, they have also managed to somehow assume that University of Phoenix Stadium is even larger than I thought.  Because using these numbers, the only way to get to $500 million is if there were nearly 210,000 visitors.  Wow.  This does not even include the thousands of us from Phoenix who were also in the stadium. 

Look, the way to do this study is simple.  You look at sales tax receipts in Maricopa county over the period of January 2007-February 2008.  You calculate an underlying growth rate.  Then you compare the sales tax receipts for the Superbowl months (Jan-Feb 2008) with the same months a year previously, and see how much growth there is, if any, above the underlying growth rate.  I will tell you the answer right now:  It ain't anywhere close to $500 million.  I will eat my hat if its over $50 million.

Here is a reality check:  In 2004 the entire retail trade, from restaurants to stores to hotels, was $16.4 billion for all of Arizona.  This is $315 million per week.  Basically the study is saying that the entire retail trade for the whole state of Arizona was more than doubled in Superbowl week. 

Bullshit.

From Jane Galt:

All this useless activity is so that our politicians can look like They
Care by giving tiny tax breaks to all of their favorite people--that is
to say, the people who vote for them and give them money. All of these
tax breaks, almost without exception, do the most good for the people
who least need them. Meanwhile, they waste time for the rest of us,
distort the economy, and require us to pay extra people to process tax
returns. It's lose-lose-lose all around unless you owned a seal-fur
farm between 1987 and 1991.

She also outlines her alternative tax plan.

From the Beatles (yes, those guys)   (Beatles, Robin Hood, and of course they perform the song)

From yours truly, the five worst traits about taxes

For at least the last thousand years, western society has always had a hard core of doom-sayers who like to climb to the rooftops to shout that the end of the world is close at hand.  I am not a good enough student of history to know if this is a predictably human trait, or if it is uniquely tied to western religions like Christianity.  Certainly the Medieval millenarian streak was tied closely to the prophesies of Christianity.

Whether initially Christian or not, end-of-the-worldism is now the provenance of many fringe secular groups, not the least of which are the environmentalists.  In fact, the current global warming panic fits right into a long history of end-of-the-worldism, though I also think it has strong elements of socialism and youth culture guilt and lacks the optimism of Christian millenarianism.

Today's humorous does of doom comes right here from Arizona, via professor Guy McPherson of the University of Arizona.  Incredibly, our local media treats this interview straight up, without even the snark they would bring to, say, the article they wrote about me and other local climate skeptics.

First, let me explain Empire: We exploit humans and resources, often
with extreme violence, to provide Americans with indulgences beyond
belief to most people.

Had we started the project of powering down at least 30 years ago,
there might still be time. At this point, I cannot imagine any steps
that could allow us to avoid a meltdown of the economy or a relatively
rapid transition into the post-industrial Stone Age. We depend on
abundant, inexpensive oil for delivery of food, water, shelter, and
health care. The days of abundant, inexpensive oil are behind us. The
American Empire will soon run its course.

I am hopeful we can save a few tens of millions of Americans. But
we will need to make massive changes in our entire way of life,
starting immediately. We must abandon the project of globalization and
its attendant indulgences, for example, and focus on saving lives.

Yes, oil production will indeed peak at some point, and may even be peaking now (though I doubt it).  But the rest of this is just ignorant. 

There is very little that can make me go non-linear faster than when someone attributes economic growth to a politician, e.g. Reagan's economy or Clinton's economy.  So this post from Kevin Drum on the correlation between economic growth and the flavor of president in the Oval Office is just the kind of thing to make me lose it.  And not because I really care whether Team Coke or Team Pepsi looks better.

Larry Bartels says that Democratic presidents produce higher economic
growth than Republican presidents, and that the differences in average
growth rates for middle-class and poor families (but not affluent
families, apparently, who do well under both parties) are statistically
significant by conventional social-scientific standards.

OK, I have seen the analysis done different ways and accept the statistical conclusion.  You used to be able to get a really tight correlation between Washington Redskin football team performance and presidential election outcomes (via Snopes):

Sometimes one natural phenomenon supposedly
forecasts another, as in the belief that a groundhog's
seeing his shadow on February 2 portends another six weeks of
winter. In other instances the linkage is between affairs of mankind, as in the
superstition that the winner of football's Super
Bowl augurs that year's stock market performance (or vice-versa).

A recent item of this ilk maintains that the results of the last game
played at home by the NFL's Washington Redskins (a football team based in
the national capital, Washington, D.C.) before the U.S.
presidential elections has accurately foretold the winner of the last
fifteen of those political contests, going back to 1944. If the Redskins win
their last home game before the election, the party that occupies the White
House continues to hold it; if the Redskins lose that last home game, the
challenging party's candidate unseats the incumbent president. While we don't
presume there is anything more than a random correlation between these factors,
it is the case that the pattern held true even longer than claimed, stretching
back over seventeen presidential elections since 1936

What gets me is not the existence of a correlation, but the explanation:

In recent decades taxes and transfers have probably been more
important. Social spending. Business regulation or lack thereof. And
don't forget the minimum wage. Over the past 60 years, the real value
of the minimum wage has increased by 16 cents per year under Democratic
presidents and declined by 6 cents per year under Republican
presidents; that's a 3% difference in average income growth for minimum
wage workers, with ramifications for many more workers higher up the
wage scale. So, while I don't pretend to understand all the ways in
which presidents' policy choices shape the income distribution, I see
little reason to doubt that the effects are real and substantial.

I have three thoughts, of which the third is what really gets me:

• It is funny that no one considers that this correlation may work in reverse.  Everyone assumes government drives short-term economic performance.  What if, to some extent, short-term economic performance drives changes in government?  If one assumes that, even without the public spirited and Herculean efforts of our presidents, economies are naturally cyclical, then why try to explain cycles on politics when we know cycles are going to exist anyway.  Why wouldn't a perfectly valid alternate explanation be that one political party tends to be elected if the economy is in one part of the cycle and the other gets elected if the economy is in another place?
• The political brand names "Republican" and "Democrat" shift in meaning over time vis a vis economic policy recommendations, and individual presidents can diverge quite a ways from their party center line.  One can easily argue that Nixon was the most interventionist and economically ignorant president (think:  wage and price controls), despite the "Republican" brand name.  John Kennedy was more laissez faire than most Republicans are today.   Regulation, as measured by pages added to Federal Register, increased at a far faster pace under George Bush (I) than Bill Clinton.  Bill Clinton passed free market legislation, including NAFTA, that John McCain shys away from today, while George Bush passed an expansion of Medicare that Bill Clinton did not consider.  Oh, and when we discuss regulation and such, Congress sortof matter too.
• The author's argument boils down to "the more governors and useless loads we add to an engine, the more strongly the engine will run."  It is just absurd.  None of these guys have the first clue what it takes to run a business day to day, nor how much of a business owner's time and effort is aimed not at service customers better, and not at being more productive, and not at making employees happier or better trainined, but at responding to the latest mass of government regulation, paperwork, liscensing, taxes, and other total crap.  Here is just one example I wrote up about what sits on my desk.

To this last point, take just two things on my desk this morning.  The first is a pile of tax returns and some licensing paperwork.  Last year, our company's total tax bill was not that large.  But the problem is that the government takes the taxes in so many bites, and every bite costs time on our part learning the process and filling out paperwork.  For example, if I take all the taxes and licensing fees we pay to federal, local, and state governments, and multiply times the number of months or quarters each requires a report, I get a number of over 400.  Four hundred individual bites, each with its own paperwork and overhead.

The other problem sitting on my desk is a snack bar I inherited on a lease in California at Lake Piru.  The snack bar is a dump.  It is designed wrong, it is set up to cook the wrong kinds of foods, and uses space in the building very inefficiently.  I want to lay the whole thing out differently, as a win-win for everyone.  We could sell more with fewer workers.  The customers would get more selection, including much healthier choices.  The operation would be safer, because we would eliminate most of the heavy cooking  (e.g. deep fat fryers).  And it would be cleaner, with less wastewater and cleaner wastewater because there would be less grease and oil.

Unfortunately, it is very clear that Ventura County, California is not going to allow me to make these changes, at least at any cost I can afford.  First, apparently I need to build a new wastewater treatment plant for the snack bar!  But I am reducing the waste water load, I argue.  Does not matter.  New code requires a plant.  So because of this environmental code, I am pushed to continue the current operation which is environmentally worse than my proposed alternative.  We have the exact same problem on fire suppression.  But I am removing the ovens and most of the cooking equipment!  It's safer!  Doesn't matter, if I make any change at all, I have to install a new fire suppression system.  And on and on.  this is the true face of government regulation.  We face this kind of thing ten times a day.   

Anyway, I could go on and on about this stuff, but that is what the blog is about, so I will refer you to my past (and future) posts.

The NY Times has finally published a comprehensive take-down on the insanity of biofuel subsidies here.  All well and good, but this is at least five years too late.  For years, while this and other blogs have tried to point out that the biofuel emporer's has no clothes, the NY Times has been publishing breathless articles in support of biofuel subsidies and mandates, in fact criticizing the Bush administration and Congress for not moving faster on them. 

So is this what we must expect from the NY Times and the rest of the media?  Shameless pandering to politically correct policy goals that make no scientific sense until it is virtually too late to halt their momentum?  If so, everyone should read the Times' coverage on climate with a jaded eye, because it would not surprise me in the least to see the Times publish the definitive article on why the global warming alarmists are full of hot air only after Congress has gutted our economy with new climate taxes and mandates. 

It has already been reprinted around most of the freedom-loving portions of the blogosphere, but in case you have missed this quote from Hillary Clinton:

We need a president who is ready on Day 1 to be commander in chief of our economy.

Also revealed by Hillary:  John Galt has been captured and has been offered Wesley Mouch's job.

I don't know why I can't just move along from Michelle Obama's rant about the terrible cost of her Princeton / Harvard Law degree.  Maybe its because I attended the same schools (different degrees) and my reaction is just so different -- I had a fabulous experience and live in awe that I had such a unique chance to attend these schools, while Michelle Obama seems to experience nothing but misery and resentment.  Granted that I did not have to take on a ton of debt to get these degrees, but I have plenty of friends (and a wife) that did.

This analogy comes to mind:  Let's say Fred needs to buy a piece of earth-moving equipment.  He has the choice of the $20,000 front-end loader that is more than sufficient to most every day tasks, or the $200,000 behemoth, which might be useful if one were opening a strip mine or building a new Panama Canal but is an overkill for many applications.  Fred may lust after the huge monster earth mover, but if he is going to buy it, he better damn well have a big, profitable application for it or he is going to go bankrupt trying to buy it.

So Michelle Obama has a choice of the $20,000 state school undergrad and law degree, which is perfectly serviceable for most applications, or the Princeton/Harvard $200,000 combo, which I can attest will, in the right applications, move a hell of a lot of dirt.  She chooses the $200,000 tool, and then later asks for sympathy because all she ever did with it was some backyard gardening and she wonders why she has trouble paying all her debt.  Duh.  I think the problem here is perfectly obvious to most of us, but instead Obama seeks to blame her problem on some structural flaw in the economy, rather than a poor choice on her part in matching the tool to the job.  In fact, today, she spends a lot of her time going to others who have bought similar $200,000 educations and urging them not to use those tools productively, just like she did not. 

Postscript: Ironically, two Ivy League schools have actually decided that they want their graduates to be able to afford any career they wish, without fear of student debt, and so endeavor to provide student aid nowadays in the form of grants rather than loans.  One of those is Princeton University, her and my alma mater.

There.  I said it.  And I believe I am right.  My only hope for the Obama administration is that their family is like the Clintons, where Bill was much more moderate than his socialist wife who has held nothing but rent-seeking jobs that gravy-trained off her husbands political position.

"We left corporate America, which is a lot of what we're asking young
people to do," she tells the women. "Don't go into corporate America.
You know, become teachers. Work for the community. Be social workers.
Be a nurse. Those are the careers that we need, and we're encouraging
our young people to do that. But if you make that choice, as we did, to
move out of the money-making industry into the helping industry, then
your salaries respond." Faced with that reality, she adds, "many of our
bright stars are going into corporate law or hedge-fund management."

I already covered the idiocy of my fellow Princeton-Harvard grad's rant on student debt here.  And let's be clear:  You have absolutely no ground to criticize the state of the economy because kids of middle class black families are not doing well when you are busy counseling them to embrace low-paying jobs over higher-paying ones.