Coyote Blog

As much as Bernie would like to blame the money laundering and money-hiding in the Panama papers on capitalism, in fact the vast majority of clients in those papers appear to be from socialist and strongly interventionist, populist governments.

Socialist countries tend still have winners and losers just like capitalist countries.  However, those winners and losers are not determined by success in making products and services in the marketplace, but in success in reaching a leadership position in the government or cozying up to those in government.  Soviet government elite had special privileges and special stores not accessible by ordinary Russians.  The Castro brothers and Hugo Chavez's daughter are among the richest people in the western hemisphere.

However, these wealthy leaders now have two problems.  First, they likely spend most of their time spouting egalitarian claptrap, so that they would like to hide their wealth in order to mask the obvious consistency problem.  Perhaps more importantly, their socialist policies have likely destroyed the country's economy -- there is, for example, no place any sane person would want to invest a billion dollars in Venezuela.  They need to get their money out of the country but because everyone else in a socialist country is also trying to get their money out, the self-same leader has likely instituted capital controls.  So the leader needs to put his or her money in a different country where it can actually be invested productively, and in doing so must evade their own capital controls.

Vox shares what is perhaps the greatest achievement in human history, the continuing disappearance of absolute poverty:

Readers of this blog will likely  have seen this before (though it may well be new to Vox readers).  Here is the amazing thing about the Vox article:  It never once mentions capitalism, trade, economic freedom, or any synonym.  Here is a sampling of the tone of the accompanying article:

There's still much work to be done: 14.4 percent of the world amounts to 1 billion people who still need to be lifted out of extreme poverty. And making sure everyone's making at least $1.25 a day isn't the end of the fight either. The world's median income is still only $3 to $4 a day. By comparison, the poverty line in the US for a family of four is $16.61 per person per day. Once under-$1.25-a-day poverty is eradicated, the world needs to set about eradicating under-$15-a-day poverty, which will be a substantially harder task.

Vox is treating this like it is the result of some top-down effort, using the same language one might use to describe the eradication of Yellow Fever in Panama.  As if this resulted (and as if future progress depended on) some all-hands-on-deck technocratic government program.

No one "set about" eradicating poverty.  It happened because governments, at least to some extent, got out of the way and didn't stop it.  China is a great example.  Mao "set about" trying to eliminate poverty using many of the approaches likely favored by the Vox staff, and killed a few tens of millions of people in the process.

Here is my theory of the world's accelerating wealth formation that I have written on a number of times before.  This chart largely results from:

• There was a philosophical and intellectual change where questioning established beliefs and social patterns wentfrom being heresy and unthinkable to being acceptable, and even in vogue. In other words, men, at first just the elite but soon everyone, were urged to use their mind rather than just relying on established beliefs and appeals to authority.
• There were social and political changes that greatly increased the number of people capable of entrepreneurship. Before this time, the vast vast majority of people were locked into social positions that allowed them no flexibility to act on a good idea, even if they had one. By starting to create a large and free middle class, first in the Netherlands and England and then in the US, more people had the ability to use their mind to create new wealth. Whereas before, perhaps 1% or
  less of any population really had the freedom to truly act on their ideas, after 1700 many more people began to have this freedom.

So today's wealth, and everything that goes with it (from shorter work hours to longer life spans) is the result of more people using their minds more freely.

If I asked you what three major American consumer products saw the largest steady price rises in the last decade (as opposed to price volatility, as we see in commodities like gasoline) one might well answer "housing, medical care, and college tuition."

Two or more of each of these share a number of features in common

• Long, sustained government programs to increase access / ownership / usage
• Substantial portion of pricing paid by third parties.
• Easy to obtain, government subsidized debt financing.

The housing bubble has of course burst.  Obamacare, by further disconnecting individual use from the true costs of the services, will likely push health care costs ever higher.  And then there is the college bubble.  I am a bit late on this, but this is truly a remarkable chart:

I have already heard the leftish talking point on this, which is that this increase in debt is the fault of (surprise!) private lenders and loan originators.   This is a similar argument to the one made in the mortgage bubble, arguing that all the bad loans are the results of unscrupulous private originators and securities packagers.

And certainly there were many private companies originating awful mortgages and selling them to Fannie and Freddie.   But what we forget in hindsight is that the government was begging for them to do so.  Fannie and Freddie had active programs where they were encouraging mortgages with Loan-to-value of 97% or more.  This kind of leverage is absurd, particularly for American-style no-recourse home mortgages.  Sure, it was crazy to write them, but they were getting written only because the government was asking for them to be written and buying them all up.

In fact, in student loans, almost all of this loan growth is eagerly being underwritten by the Feds, not by private lenders.  Note the only consumer credit line really growing below is the "federal government" line (in red), which is primarily being driven by federally backed student loans.

One might argue that this is once again due to private originators going crazy.  But the Feds took over origination of all federal student loans in 2010.  You can see that much of the growth has occurred after the Feds took over origination.  In fact, I think most of us can understand that when the origination decision is shifted from being a business decision to a political decision, student lending standards are certainly not going to get tougher.  We can see that in home lending, where Fannie and Freddie have already returned to most of their worst pre-crash origination standards (here is an example of government promotion of these low down payment programs).

The other day my mother-in-law argued that the student lending business (particularly private lenders) needed reform because some students were being charged exorbitant rates.  Having not been in the market for student loans lately, I wondered if this were the case.  But the first thing that caught my eye was this stat:  The 2-year default rate (not lifetime, but just in the first 2 years) of student loans was 8.8% last year, and 12% if one looks at the first 3 years.  Compare that to credit card default rates which are around 6%.  And recognized that these are apples and oranges, the student loan numbers actually understate lifetime default rates.

Based on that, the interest rate on student loans should be in the twenties.  Against this backdrop, the rates I see online seem like a screaming deal.  Probably too good of a deal.  Which is why so many people are piling into these loans on the explicit promise society has made to them that their college degree will pay off, no matter what the cost.
Beyond the absurd price increases in both public and private education, here is the 900 pound gorilla in the room -- some majors are simply more valuable than others.  A computer programming grad is going to have a lot more earning potential than the average poetry or gender studies major.

What we really need is tiered lending standards based on a student's major.  Banks don't treat the earning potential of a dog-grooming business and a steel mill the same, why treat a mechanical engineering degree the same as a sociology degree?  But, of course, this is never, ever going to happen.

Years ago I had these thoughts along this line, in response to a Michelle Obama rant about the cost of education

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:  Kids who find they cannot pay their student debts and think bank home foreclosures are the worst thing in the world are in for a rude surprise -- home mortgage default consequences are positively light in this country.  The worst that happens is that you lose the home and take a ding on your credit record.  Student debt follows you for life, with wage garnishments and asset losses.  People walk away from home debt all the time, the same is not true of student debt.

It seems that one of those cycles the US always castigates itself about is a perception that the Europeans have a better rail system than we do and that we should somehow emulate their system.  Which is why we still have federal subsidies of a half-assed Amtrak system and high-speed rail proposals are circulated breathlessly from time to time. 

By the way, I have been a consultant to French railroad SNCF and I gaurantee we do not want to emulate the European rail system.  First and foremost, the railroads are huge employment boondoggles.  I remember that the SNCF when I was there had something like 100,000 freight cars but 125,000 freight car maintenance people.  I suggested the railroad could assign one individual full time to his own car and still lay off 20% of the work force. 

The main reason we don't have inter-city passenger rail is a simple one that anyone spending 5 minutes with the numbers can understand -- there are distance break points where air travel is more economic than rail, and most US inter-city transit falls into the larger distance ranges.

Anyway, the anti-planner shares a bit of information that is seldom mentioned in the rail discussion that makes the US rail system look a lot more desireable:

Europe has decided to run its rail system primarily for passengers,
while America's system is run mainly for freight. Europe's rail system
has about 6 percent of the passenger travel market, while autos have
about 78 percent. Meanwhile, 75 percent of European freight goes by
highway. Here in the U.S., highway's share of freight travel is only 29
percent, while the auto's share of passenger travel is about 82
percent. So trains get 4 percent of potential auto users in Europe out
of their cars, but leave almost three times as much freight on the
highway.

In fact, the freight rail system is so efficient that to some extent we've obviated the need for the Panama Canal.  Many Asian container ships bound for Europe actually make port in Seattle or Vancouver, offload their containers onto trains which shoot across the country to New York or another eastern port where they are reloaded on ships for the trip to Europe.

By the way, in the same article, don't miss the hilarious proposal in Minnesota to spend taxpayer money for a high speed rail line from the Twin Cities to ... Duluth.  Yeah, that's the ticket.  New York to Boston barely makes it financially, but St. Paul to Duluth is going to be a winner.