Coyote Blog

Don Boudreaux had these two rejoinders to the notion that the GM bailout is a success simply because GM is making a profit.

Economically literate opponents of the Detroit bailout never denied that pumping hundreds of millions of taxpayer dollars into Detroit automakers would restore those companies to health.  Instead, they argued, first, that bailing out Detroit takes resources from other valuable uses.  Because he doesn’t even recognize that other valuable uses were sacrificed by this bailout, Mr. Dionne offers no reason to think that the value of saving Detroit automakers exceeds the value of what was sacrificed to do so.  No legitimate declaration that the bailout is successful is possible, however, without evidence that the value of what was saved exceeds the value of what was sacrificed.

Economically literate bailout opponents argued also that it sets a bad precedent.  By signaling to big corporations that government stands ready to pay the tab for the consequences of their poor decisions, big corporations will more likely make poor decisions in the future.  It’s far too early for Mr. Dionne to conclude that this prediction is mistaken.

I would offer a third concern -- that the government has kept hundreds of thousands of skilled workers and billions of dollars of physical assets under the management of the same group that have decidedly underutilized these assets in the past.  A bankruptcy without Federal intervention would likely have shifted assets and skilled workers into new companies with different management teams and cultures pursuing different strategies with different information.

I always have trouble explaining this issue to people.   Think of a sports team with great players but a lousy coach and management team.  Having the government ensure that the lousy management stays in control of the great players is a waste for everyone.  I explained it more in depth in this post, where I concluded

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case – Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.

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

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.

About 20 years ago I did a rail transit study for McKinsey & Company with a number of European state rail companies, like the SNCF in France.   With my American expectations, I was shocked to see how overstaffed these companies were.  At the time, the SNCF had more freight car maintenance personnel than they had freight cars.  This meant that they could assign a dedicated maintenance person to every car and still get rid of some people.

Later in my consulting career, I worked for Pemex in Mexico, where the over-staffing was even more incredible.  I realized that in countries like France and Mexico, state-run corporations were first and foremost employment vehicles run for the benefit of employees, and, as  distant second, value-delivery vehicles and productive enterprises.

Over the last 20 years, I have seen more and more of this approach to public agencies coming to the US.  If nothing else, the whole Wisconsin brouhaha hopefully opened the eyes of many Americans to the fact that public officials and heads of agencies feel a lot more loyalty to their employees than they do to taxpayers.

I see this all the time in my business, which is private operation of certain state-run activities (e.g. parks and recreation).  I constantly find myself in the midst of arguments that make no sense against privatization.   I finally realized that the reason for this is that they were reluctant to voice the real reason for opposition -- that I would get the job done paying people less money.  This is totally true -- I actually hire more people to staff the parks than the government does, but I don't pay folks $65,000 a year plus benefits and a pension to clean the bathrooms, and I don't pay them when the park is closed and there is not work to do.  I finally had one person in California State Parks be honest with me -- she said that the employees position was that they would rather see the parks close than run without government workers.

Of course, if this argument was made clear in public, that the reason for rising taxes and closing parks was to support pay and benefits of government employees, there might be a fight.  So the true facts need to be buried.  Like in this example from the Portland transit system, via the anti-planner.

In 2003, TriMet persuaded the Oregon legislature to allow it to increase the tax by 0.01 percent per year for ten years, starting in 2005. In 2009, TriMet went back and convinced the legislature to allow it to continue increasing the tax by 0.01 percent per year for another 10 years. Thus, the tax now stands at $69.18 per $10,000 in payroll, and will rise to $82.18 per $10,000 in 2025.

At the time, TriMet promised that all of this tax increase would be dedicated to increasing service, and as of 2010, TriMet CFO Beth deHamel claims this is being done. But according to John Charles of the Cascade Policy Institute, that’s not what is happening.

Poring over TriMet budgets and records, Charles found that, from 2004 (before the tax was first increased) and 2010, total payroll tax collections grew by 34 percent, more than a third of which was due to the tax increase. Thanks to fare increases, fares also grew by 68 percent, so overall operating income grew by about 50 percent, of which about 7 percent (almost $20 million) was due to the increased payroll tax.

So service must have grown by about 7 percent, right? Wrong. Due to service cuts made last September, says Charles, TriMet is now providing about 14 percent fewer vehicle miles and 12 percent fewer vehicle hours of transit service than it provided in 2004 (comparing December 2004 with December 2010). TriMet blamed the service cuts on the economy, but its 50 percent increase in revenues belie that explanation.

By 2030, according to TriMet’s financial forecast (not available on line), the agency will have collected $1.63 billion more payroll taxes thanks to the tax increase. Yet the agency itself projects that hours and miles of service in 2030 will be slightly less than in 2004.

Where did all the money go if not into service increases? Charles says some of it went into employee benefits. TriMet has the highest ratio of employee benefits to payroll of any transit agency. At latest report, it actually spends about 50 percent more on benefits than on pay, and is the only major transit agency in the country to spend more on benefits than pay. This doesn’t count the unfunded health care liabilities; by 2030, TriMet health care benefits alone are projected to be more than its payroll.

Donna Laframboise discusses 18th century transportation issues, and particularly the horse manure problem:

The Superfreakonomics authors draw heavily on the work of Eric Morris, whose urban planning Masters thesis explored the reality of horse-based transportation in 19th-century cities. A user-friendly encapsulation of his research appears in an 8-page article here. (It was published in Access, a U of California transportation publication. The entire issue is available here.)

Morris points out that, by the late 1800s, large urban centers were “drowning in horse manure.” Not only were there no solutions in sight, people were making dire predictions:

In 1894, the Times of London estimated that by 1950 every street in the city would be buried nine feet deep in horse manure. One New York prognosticator of the 1890s concluded that by 1930 the horse droppings would rise to Manhattan’s third-story windows.

The automobile helped solve this growing ecological problem.  Back in 2006, I had considered the same thing with a hypothetical blog post from 1870 which is pretty close to the Times of London article quoted above (which I had never seen):

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

To the last point, my article on how John D. Rockefeller and Standard Oil saved the whales is here.

Every time you see a politician claiming he created jobs with some expenditure of taxpayer money, you have to ask yourself, what would private investors have done with that money had it not been taken away from them?  Via John Stossel

In a new article, "The Myth of Green Energy Jobs: The European Experience", the environmental scientist and a resident scholar at the American Enterprise Institute writes,

"Green programs in Spain destroyed 2.2 jobs for every green job created, while the capital needed for one green job in Italy could create almost five jobs in the general economy."

Several years ago, I offered the following hypothesis to a reporter:

I would argue that the current obsession with small changes to trace levels of CO2 in the atmosphere has in fact gutted the environmental movement.  Nothing else is getting done. ... My prediction– 10-20 years from now, environmentalists are going to look back on the current global warming hysteria as the worst thing ever to happened to the environmental movement.

Here is an example of that effect.  A study comes out that says the following about the health of the Great Lakes:

The Commission is troubled by nearshore eutrophication, aquatic plant growth caused by excessive nutrients, which causes adverse effects on ecosystems, the economy, recreation, and human health.  The reemergence of algal blooms is likely due to multiple factors, including inadequate municipal wastewater and residential septic systems; runoff from increased impervious surface areas and agricultural row-crop areas; discharges from tile drainage which result in more dissolved reactive phosphorus loading; industrial livestock operations; ecosystem changes from invasive mussel species; and impacts from climate change which include warmer water and more frequent and intense precipitation and stormwater events.

Of these listed potential causes, only the last, climate change, is not addressed at all in the main study document, nor is addressing climate change on their list of recommendations, which in fact emphasize that solutions tend to be local.   In fact the tone of the study is that the causes are complex and poorly understood, but never again beyond this sentence is climate change mentioned or any evidence of increased precipitation or runoff presented.

One is left with the impression it was a toss-in on the list, included because climate change is "hot" and sexy and a magnet for funding and attention.  Certainly the report provides no other evidence or detail as to why it is included in the list.  Certainly any intelligent reader would understand that the climate change item was, at best, included to round out the possibilities of a complex and poorly understood problem, but that the study points to many of the other items on the list as more productive places to seek solutions.

So, given this, what do environmental reporters pick up?  Here is the headline environmental reporter Cameron Scott uses on his SFGate blog "the Thin Green Line":

Climate change threatens Great Lakes

Yep, he latched on to the last, least important item that is completely un-adressed by the main report.  By doing so, he is in effect helping to distract attention from the real causes that can be addressed and diverting attention to issues that are tangential at best.  The solution will likely involve better managing agricultural runoffs and dealing with municipal wastewater plants which are under-treating discharges.

This is why I say that the global warming hysteria will be looked back on as a dead time for the environmental movement, when obsession with trace amounts of CO2 either caused folks to lose attention on important issues, or even caused environmentalists to advocate for ecologically detrimental programs (e.g. biofuels).

From Slate.com via Carpe Diem:

"Maybe it is not the growth that is deficient. Maybe it is the yardstick that is deficient. MIT professor Erik Brynjolfsson explains the idea using the example of the music industry. "Because you and I stopped buying CDs, the music industry has shrunk, according to revenues and GDP. But we're not listening to less music. There's more music consumed than before." The improved choice and variety and availability of music must be worth something to us—even if it is not easy to put into numbers. "On paper, the way GDP is calculated, the music industry is disappearing, but in reality it's not disappearing. It is disappearing in revenue. It is not disappearing in terms of what you should care about, which is music."

As more of our lives are lived online, he wonders whether this might become a bigger problem. "If everybody focuses on the part of the economy that produces dollars, they would be increasingly missing what people actually consume and enjoy. The disconnect becomes bigger and bigger."

But providing an alternative measure of what we produce or consume based on the value people derive from Wikipedia or Pandora proves an extraordinary challenge—indeed, no economist has ever really done it.

Ditto Facebook, free flash games, ichat, etc.  I think the point is dead on, though I have no idea how to fix it.  Maybe as a value of the consumer's time?  If your time is worth $15 an hour, and you spend it on Facebook, then your benefit must have been at least $15?

Thinking about this, it strikes me that there is no GDP credit for leisure time, either.  There is almost nothing more valuable to me .  If everything in my life stays the same but I can use technology or other factors to restructure my time to get one extra hour of leisure, isn't that of huge value?  But there is no credit for it in GDP or earnings accounts.

The article discusses consumer surplus, which strikes me as the heart of the matter.  GDP and earnings metrics track what we pay, not how much value we receive.  If one hypothesizes that consumer surplus is rising as a percentage of purchase price, then we are missing a lot of wealth creation.

Many of you may know that my business is engaged in private management of public recreation.  We get a lot of pushback from certain sectors who believe access to government lands or services should be free -- ie already paid for by their income taxes.

I often argue that this notion of discretionary services (like parks and campgrounds) being run with high cost government labor and funded by general revenue taxes is a dead one - in fact it has been dead for at least 10 years.  Just look around at public parks organizations.  Odds are that your state is facing parks closures and is very likely not fully funding park maintenance. I wrote about this failed model here.

In the future, anything discretionary government program that can charge use fees or be privatized or both will do so.  Or else it will be provided at terrible quality with long queues and frequent closures.  Don't believe me?  Lets look at the US government budget data from last year. This chart has been making the rounds -- I have not checked the data source but I presume it is correct (as usual click for larger version)

I have some interest in the science of chartmanship.  McKinsey & Company did a great job teaching me how to make a presentation, a skill I have honed somewhat in way too many planning and strategy jobs that seemed to revolve around Powerpoint  (one of the criteria for my current job is that it did not involve Powerpoint).

This chart is a case where the author used the wrong chart type.  The pie chart is not appropriate to show a changing total (as the author does with the size of the pie).  The eye has trouble assessing volumes.  I have taken the same data and put it in a slightly different form.  I did not take time to make it pretty, but I think it works better in this format:

Now do you see my point about discretionary spending?  Last year government taxes just about covered entitlements and interest on the debt.  Had we not borrowed, there was no money left over for any discretionary spending, including all of the Defense budget!  Now, even without action, the picture will improve in 2011 as taxes go up with a rising economy and some of the unemployment spending goes down.  But this might just get us to still having a defense department.  Either large swaths of discretionary spending is going to have to be zeroed out, or some sort of entitlement restructuring is necessary.

Of course, tax increases will likely be part of the mix as well, but look at the individual income tax bar.  Even doubling it would not close the budget gap!

This article by Mark Perry seems right to me -- the lightest touch (and probably the most effective) approach to bank regulation is to return to a regime that puts its major emphasis on capital requirements.

We can talk all day about causes of the recent financial crisis, but in my mind the root cause was taking real property with a volatile underlying value (e.g. homes) and leveraging the absolute crap out of it.   In the initial transaction, home buyers were allowed to come to the table with less and less equity, until deals were being cut with more than 100% debt.  This stupidity was a true public-private partnership, as the government kicked off the party and encouraged its growth via various community development policies as well as policies atFannie and Freddie, but private originators as well as home buyers eagerly jumped into the fray.

This debt backed by property that was already too highly leveraged was thrown into portfolios that were themselves highly leveraged, and then further leveraged again through CDS's and other derivatives.  And then the CDS's were put into leveraged portfolios.  I would love to figure out the effective leverage in the AIG portfolio.  For ever $1 million in real property that secured the mortgages they insured, how much equity did they have?  A thousand bucks?  Less?

These investors felt protected by diversification that didn't really exist.  The felt safe with AAA ratings from agencies who really didn't understand the risks any better than anyone else did.  They relaxed assuming everything was watched by government regulators who were in way over their heads.  But more than anything, they felt protected by history.  The system of putting mortgage risks into tranches, such that the top tranches could only be affected by default rates consider then to be wildly improbable, had never to that point failed to deliver its promise.   Default rates had always stayed withing expected norms.

And this is the most dangerous risk -- the risk that something will happen that has never happened before.  Default rates that seemed impossible suddenly became reality.  Tranches that were untouchable suddenly were losing large chunks of their value.  Sure, there were warning signs, but at the end of the day what happened was that events occurred that were worse than people had thought was the worst case scenario  (there is a whole body of interesting behavioral study on how humans tend to overestimate their understanding and underestimate the width of a probability distribution).

As new financial products are created and the economy evolves and the government pursues new forms of interventions in commerce, new failures can occur that have never happened before.  And never has there been invented a micro-regulatory approach that guards against new-type failures (they don't even do a very good job against old-style failures).  Capital requirements are the one approach that guard against catastrophic failures even for unanticipated risks.

It can be argued that this will raise the cost of capital, at it is true interest rates at any one point of time would have to go up.  But one can argue that the low interest rates of the 2000's greatly understated the true cost of capital, and that those additional costs were paid in a sort of balloon payment at the end of the decade.

I am still thinking this through -- I don't think any regular reader would be mistake me for someone who favors regulation in general, but I am coming around to some extent on the notion that banks are different.  I would ideally like to see a self-policing market where companies that choose to cut equity too fine just go bankrupt.  But the reality of the political-financial complex today is that this never happens -- costs of large failures are socialized, and executives who made bad choices get fat gold parachutes and Treasury jobs.

Postscript:  I have arguments all the time about whether the financial melt down was mainly caused by government or private action.  Was it a public or private failure.?  My answer is yes.

One thing that those of us who promote private action over public can never repeat enough is this:  Our support for private action does not mean that private actors don't screw up, that there are not bad outcomes, that people don't make bad decisions, etc.  They do.  Lots of them.  When these constitute outright fraud, there should be prosecution.  For the rest of the cases, though, libertarians believe that in a free society there are automatic corrections and sources of accountability.

Make a bad product - people stop buying it.  Sign a union contract with wages that are too high - you go bankrupt.  Treat your workers shabbily - and the best of them go work for someone else.  Take on too much risk - you will fail and lose all your capital.

The problem with our financial sector is not that it is not regulated -- it is the most regulated sector of the economy.   The problem is that, as always happens, there has been substantial regulatory capture.  There has been an implicit deal cut by large financial institutions - regulate me, but in return protect me.  In a sense, as is typical in a corporate state, large corporations and government have become partners.

As a result, many of the typical checks and balances on private action in a free economy have been disrupted.  In effect, certain institutions became too big to fail, and costs of failure and risk taking were socialized.

That is why the answer is not one or the other.  Certainly the massive failures were driven by the actions of private actors.  But they were driven in part by incentives put in place by the government, and their stupid behavior was not checked because traditional private avenues of accountability had been neutered by the government.    This is why the recent financial crisis will always remain a sort of political Rorschach test, where folks of wildly different political philosophies can all find justification for their position.

I thought this article interesting - the hypothesis that communist countries pursued a sort of cargo cult economic policy.  Since they did not really understand economics (and as communist countries have banned many of the most important processes for economic growth), communist leaders tried to emulate successful western nations by copying high-profile bits of their economy.  For example, since Western nations were prosperous and had early on built big steel industries, communist leaders decided that building big steel industries would make them prosperous.

It falls somewhat short as a framework for explaining communist economies, but I do think that this cargo cult mentality was an important part of their thinking and even is a part of progressive thinking today.  After all, if you willfully deny classical economic theory as well as the power of individual action and private initiative, you have to fill in the blanks somehow.

High speed rail and mass transit strike me as classic modern examples -- great cities of the world have large mass transit systems so therefore if our city builds a rail system we will become great.

(via Popehat) one of the writers at Balloon Juice offers this test of a "reasonable" Conservative blog

1) Do you believe in evolution?

2) Do you believe that the average temperature on earth has increased over the past 30 years?

A few semi-random thoughts:

• Count me as a yes for both
• Is the best test of the likely reasonableness of a political blog really to ask two questions about science that such a blog might never even touch?  This is not an entirely rhetorical question -- just the other day I linked the data that suggested that asking your date about beer might be the best way to test their views on sex.  Sometimes odd cross-correlations exist, but I don't think these would be my first test
• I find the Left's obsession with evolution as a litmus test for political thought to be funny, as the theory of evolution is largely irrelevant to any political questions except fairly narrowly the question of teaching evolution in schools.   I find it funny as much of the Left does not believe in a science - micro economics (very specifically differentiated from macro) - that is also fairly old and well understood and is much more relevant to typical political blog discourse.  I had a debate on national TV a few weeks ago with a man who claimed, as many on the Left will, that raising the minimum wage will increase employment.   If we want to test blogs based on scientific questions, why wouldn't a far more relevant question in public discourse be "do you believe demand curves slope down" or perhaps something like "do you believe breaking windows stimulates the economy?"
• The second test is not a bad test of any site writing about global warming and climate change.  I don't know many science-based skeptics who would deny that global temperatures have likely increased over the last 30 years  (from a data base without UHI or alarmist manual adjustments or large data holes, the trend is something like 0.1C per decade).   I say "likely" because it could be argued that 0.1C is within the error bar of the measurement. Even so, this wouldn't be my first test, even for climate sites
• I would tend to have four tests of the liberal and conservative sites I read
  • Is it interesting to read (after all, this is a freaking unpaid hobby)
  • Is the data-analysis-to-name-calling ratio fairly high
  • Are they willing to step out of team politics and question their own team from time to time
  • Do they have interesting perspectives on individual liberty.  I can plow through Marxist economic posts on progressive sites if from time to time they have a useful perspective on, say, indefinite detentions or gay marriage.  I can plow through some social Conservatism if they have useful posts on economics and fiscal policy.

This post from Nick Gillespie is sort of relevent, in which he talks about CPAC and social conservatives.  One line that struck me

A person's choice of sexual partner in no way means he or she can't be in favor of less spending on farm subsidies.

If I weeded out every blog that held some sort of view with which I disagree (or might even call "unreasonable") I would be down to about 3 blogs in my reader.

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.

We tried out the new IPic theater yesterday.  They are shooting at a super-premium niche, and we went for the top package.  For our money we got free valet parking, free popcorn, and an unbelievable luxury recliner seat as nice and roomy and comfortable as anything in your house.  Waiters brought food and drinks (including cocktails) to our seats, and my wife got a nice pillow and blanket.   Not sure I am taking the kids to the smurf movie (yes, there is one coming) at this place, but it was a great date night with the wife, and in the current economy had a sort of Fiddling While Rome Burned kind of vibe to it.

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 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.

I have argued for a while that Obama is building a European-style corporate state, where a troika of powerful government officials, unions, and the largest corporations run the country for their own benefit.  As far as the economy is concerned, this means legislation that cements the position of large, powerful competitors against smaller competitors or future upstarts.  You can see this in Europe, where for decades the list of largest corporations seldom turns over, as they have entrenched themselves in government to protect their position  ().

Here is today's episode, from the Obamacare law:

Under the headline, "Construction Stops at Physician Hospitals," Politico reports today that "Physician Hospitals of America says that construction had to stop at 45 hospitals nationwide or they would not be able to bill Medicare for treatments." Stopping construction at doctor-owned hospitals might not seem like the best way to boost the economy or to promote greater access and choice in health care, but that exactly what Obamacare is doing.

Kenneth Artz of the Heartland Institute explains, "Section 6001 of the health care law effectively bans new physician-owned hospitals (POHs) from starting up, and it keeps existing ones from expanding." Politico adds, "Friday [New Year's Eve] marked the last day physician-owned hospitals could get Medicare certification covering their new or expanded hospitals, one of the latest provisions of the reform law to go into effect."

This little-noticed but particularly egregious aspect of Obamacare is, by all accounts, a concession to the powerful American Hospital Association (AHA), a supporter of Obamacare, which prefers to have its member hospitals operate without competition from hospitals owned by doctors.

Paul Krugman has become pretty famous for being able to peer into the complex economy and find something to justify whatever he is promoting.  Higher interest rates, lower interest rates, more growth, less growth, unemployment, or boom times all simultaneously are proof of whatever theory he currently holds (which, in turn, is generally exactly the theory required to support actions by the Democratic leadership).

In the same way -- hot weather, cold weather, drought, wet weather, mild weather, lost of hurricanes, a lack of hurricanes -- are all simultaneously the proof for man-made global warming.  Whatever the weather currently is, someone can use a government grant to build a model to prove that it is due to anthropogenic global warming.  Thus this story -- Global warming causing freezing.

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.

My Forbes post this week is on progressives and capitalism:

Progressives are often as overwhelmed by the world economy as primitive man was by his natural environment.  Just as the primitive man was confused by and fearful of storms and earthquakes and drought and disease, progressives are befuddled by the rise and fall of industries, booms and recessions, wealth and poverty.  And just as primitive men invented gods and myths to help bring order and a sense of controllability to events they didn't understand, progressives create governments in the hopes of imposing top-down order on a chaotic economy....

The children of the 1960's had a number of catch phrases, among them "power to the people."  The irony is that no system in history has ever empowered individuals as much as has capitalism.  Capitalism is the only way to organize economic activity without the use of force, the only approach that does not require that a few human beings be given power over us to guide our activity from above.  This results in an order that is emergent and bottom-up, as beautiful in its complexity as anything in nature.  And, and order that is as terrifying to progressives as nature was to primitive man.  As a result, progressives would trade it all away, would accept a master, would accept impoverishment and stagnation, in order to attain predictability.

I am sure, if asked, most  progressives would profess to desire iPod's and cures for cancer.  But they want these without the incentives that drive men to invent them, and the disruption to current markets and competitors and employees that their introduction entails.  They want to end poverty without wealth creation, they want jobs without employers, they want cars without unemployment for buggy whip makers.  When it comes to actual, real-world legislation, progressives will nearly always embrace predictability and egalitarianism over innovation and growth.

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

From the WaPo

With United Nations climate negotiators facing an uphill battle to advance their goal of reducing emissions linked to global warming, it's no surprise that the woman steering the talks appealed to a Mayan goddess Monday.

Christiana Figueres, executive secretary of the U.N. Framework Convention on Climate Change, invoked the ancient jaguar goddess Ixchel in her opening statement to delegates gathered in Cancun, Mexico, noting that Ixchel was not only goddess of the moon, but also "the goddess of reason, creativity and weaving.

The Mayans used to also cut the hearts out of living human beings as sacrifices to their gods, an apt metaphor for what the assembled UN delegates want to do to development and the world economy.

After several posts yesterday, I rewrote my thoughts on EV's and the new EPA mileage numbers.  I am more convinced than ever that this standard borders on outright fraud, particularly when the DOE published what should be the correct methodology way back in the Clinton Administration and the EPA has ignored this advice and gone with a methodology that inflates the MPG (equivilant) of EV's by a factor of nearly 3.  For example, the list the Nissan Leaf with an MPGe of 99, but by the DOE methodology the number should be 36.

The full article is in Forbes.com and is here.  An excerpt:

The end result is startling.  Using the DOE's apples to apples methodology, the MPGe of the Nissan Leaf is not 99 but 36! Now, 36 is a good mileage number, but it is pretty pedestrian compared to the overblown expectations for electric vehicles, and is actually lower than the EPA calculated mileage of a number of hybrids and even a few traditional gasoline-powered vehicles like the Honda CR-Z.

Supporters of the inflated EPA standards have argued that they are appropriate because they measure cars on their efficiency of using energy in whatever form is put in their tank (or batteries).  But this is disingenuous.  The whole point of US fuel economy standards is not power train efficiency per se, but to support an energy policy aimed at reducing fossil fuel use.  To this end, the more sophisticated DOE standard is a much better reflection of how well the Nissan Leaf affects US fossil fuel use.  The only reason not to use this standard is because the EPA, and the Administration in general, has too many chips on the table behind electric vehicles, and simply can't afford an honest accounting.

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."

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.

One of the things that Ayn Rand did particularly well in Atlas Shrugged was to set the rules of collectivism in motion and see them carried to their logical extreme.  To this end,  I have always considered the hobo's tale to Dagny on the train about 20th Century Motors to be the climax of the book.  It pulls a lot of plot threads in the book together, and the story represents the ultimate expression of how a true socialist society would evolve.  "From each according to his ability, to each according to his need" is taken to its extremes, and rather than brotherhood, everyone ends up hating and resenting their fellow workers.  In retrospect, it seems dead-on prescient of this bit about Greece:

The Greek state was not just corrupt but also corrupting. Once you saw how it worked you could understand a phenomenon which otherwise made no sense at all: the difficulty Greek people have saying a kind word about one another. Individual Greeks are delightful: funny, warm, smart, and good company. I left two dozen interviews saying to myself, "What great people!" They do not share the sentiment about one another: the hardest thing to do in Greece is to get one Greek to compliment another behind his back. No success of any kind is regarded without suspicion. Everyone is pretty sure everyone is cheating on his taxes, or bribing politicians, or taking bribes, or lying about the value of his real estate. And this total absence of faith in one another is self-reinforcing. The epidemic of lying and cheating and stealing makes any sort of civic life impossible; the collapse of civic life only encourages more lying, cheating, and stealing. Lacking faith in one another, they fall back on themselves and their families.

The structure of the Greek economy is collectivist, but the country, in spirit, is the opposite of a collective. Its real structure is every man for himself. Into this system investors had poured hundreds of billions of dollars. And the credit boom had pushed the country over the edge, into total moral collapse.

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.