Coyote Blog

This observation is apropos of nothing, but I have noticed something odd about the sales efforts of companies.  They seem to be either too aggressive or downright dormant.

I answer my own phone at work, so every day I hear the parade of people calling me asking for the "person who purchases your printer supplies."  Certain industries, including toner, office supplies, telecom, etc. seem to have irritatingly aggressive sales forces.

And then we have companies like Wham-O.  Yes, the toy guys.  We opened a new snow play area and are selling hundreds of plastic sleds a week.  Unfortunately, we can't find any manufacturer to talk to us about a distribution deal.  So one of my managers spends a part of each week combing every Sams Club and Wal-Mart in Northern Arizona to buy plastic sleds for resale.  I have called Wham-O, a large maker of these sleds, about twenty times.  I have talked to many different people.  I have been referred to several different reps and even the head of the sales department.  And no one will return my call, despite a plea that I want to buy hundreds of sleds a week. 

It is possible that in this Wal-Mart world, volume of this size from one retail outlet is not worth pursuing, but this casualness about making a sale really amazes me.  I would chalk it up to some unique circumstance at Wham-O, but I have had this experience with a number of other companies.  I can't tell you how many times I have left plaintive messages to firms saying "I want to buy a bunch of your product, can someone please call me back to tell me how."

Weird.  Fortunately, we finally had a Canadian company today actually returned our calls and was more than happy to sell us large lots of their product.  Oops, there goes the trade deficit.

Via Hit and Run:

As part of their 100 hours, the House plans to pass legislation that
would enable the federal government to negotiate Medicare Part D drug
prices.

My experience is that when the government "negotiates" prices via their standard procurement processes, they end up paying higher prices than a private firm might (see "$6000 hammer").  I am not a very experienced political observer who understands all the insider-speak, so maybe someone out there can tell me.  In this context, does "negotiate" actually mean "use the government's fiat power to demand that prices be set at whatever hell level they want?"

If it is the latter, then does anyone really believe that with populist political pressures, prices are going to be set anywhere near high enough to continue to justify intense drug R&D?  Already most of the world pays just above marginal cost for drugs, such that we in America pay for most all the drug R&D that occurs  (a form of charity we never get credit for).  If the US government "negotiates" US drug prices down to marginal cost, who will be funding the new life extension therapies I will be needing in about 20 years?

Update: One clarification based on the comments.  There is nothing wrong per se with American drug companies selling pharmaceuticals outside the US near marginal cost.  Profit is where you find it.  However, the issue is that US politicians tend to use these international drug prices as a benchmark, as in "US customers should get the same low price foreigners are getting."  The result is all the drug re-importation battles we have from time to time.  (By the way, its funny that politicians who support drug re-importation to reduce the US drug price differential vs. other countries never seem to apply the same solution to the entirely parallel situation of other countries having much lower labor costs than ours -- in fact in these cases they actively resist labor re-importation, which we also call immigration or outsourcing.)

A second point I want to make is that we cannot say for certain whether US customers are getting a good value or a bad value at current drug prices, though both supporters and opponents of the current health care system try to draw conclusions about the "fairness" of drug prices.  This is an odd situation to be in.  In other situations when people challenge the "fairness" of pricing, say gasoline prices, we libertarians can always retort "Well, buyers and suppliers both agreed to the transaction at X price, so X price was fair for both."   

But we can't do this with drug prices.  The reason we can't determine whether individuals are getting a good value is that, as I wrote at length in this post, our health care system is not structured in a way where individuals make cost-benefit tradeoffs for themselves.  Our employer's insurance company, via their coverage policies, or the US Government, via its rule-making and tort law, make these trade-offs for us.  Some drugs you might never pay for yourself, but you take because your insurance company pays for them.  Some drugs (e.g. Vioxx) you might dearly love to take, but the American litigation mess effectively precludes your access to it.  My suspicion is that, given the value I put on my life, prices for many US drugs are still a bargain for me, but who knows what trade-offs other people would make in a free society?  At the end of the day, we don't know what the real market price for pharmaceuticals is.  All we can say with confidence is that whatever price the government "negotiates," it will most likely be wrong.

By this definition of "not normal", I am not normal either.  I share with Tabarrok the strong sense that the New Deal (combined with shockingly stupid use of Wilson's Federal Reserve and of course rampant scorched-earth protectionism) extended rather than shortened the Great Depression. 

Imagine, increasing the power of
unions to strike and raise wages during a time of mass strikes and mass
unemployment. Imagine thinking that cartelizing whole industries
thereby raising prices and reducing output could improve the economy.
Not everything Roosevelt did was counterproductive - he did end
prohibition (although in order to raise taxes) - but plenty was and
worst of all was the uncertainty created by Roosevelt's vicious attacks
on business.

One of the things I think we have done historically is understate the true degree to which Roosevelt showed himself willing to take the country down the road to socialism, or more accurately, Mussolini-style fascism. Via David Gordon:

Roosevelt never had much
use for Hitler, but Mussolini was another matter. "'I don't mind
telling you in confidence,' FDR remarked to a White House
correspondent, 'that I am keeping in fairly close touch with that
admirable Italian gentleman'" (p. 31). Rexford Tugwell, a leading
adviser to the president, had difficulty containing his enthusiasm for
Mussolini's program to modernize Italy: "It's the cleanest "¦ most
efficiently operating piece of social machinery I've ever seen. It
makes me envious" (p. 32, quoting Tugwell).

Why did these
contemporaries sees an affinity between Roosevelt and the two leading
European dictators, while most people today view them as polar
opposites? People read history backwards: they project the fierce
antagonisms of World War II, when America battled the Axis, to an
earlier period. At the time, what impressed many observers, including
as we have seen the principal actors themselves, was a new style of
leadership common to America, Germany, and Italy.

Once more we must avoid a
common misconception. Because of the ruthless crimes of Hitler and his
Italian ally, it is mistakenly assumed that the dictators were for the
most part hated and feared by the people they ruled. Quite the
contrary, they were in those pre-war years the objects of considerable
adulation. A leader who embodied the spirit of the people had
superseded the old bureaucratic apparatus of government.

If you don't believe me, it is probably because you are not familiar with the National Recover Act (NRA) -- the famous "blue eagle".  This program was the very heart of Roosevelt's vision for the American economy, a vision of cartelized industries managed by government planners. (via Sheldon Richman of the Concise Encyclopedia of Economics):

The image of a strong
leader taking direct charge of an economy during hard times fascinated
observers abroad. Italy was one of the places that Franklin Roosevelt
looked to for ideas in 1933. Roosevelt's National Recovery Act (NRA)
attempted to cartelize the American economy just as Mussolini had
cartelized Italy's. Under the NRA Roosevelt established industry-wide
boards with the power to set and enforce prices, wages, and other terms
of employment, production, and distribution for all companies in an
industry. Through the Agricultural Adjustment Act the government
exercised similar control over farmers. Interestingly, Mussolini viewed
Roosevelt's New Deal as "boldly... interventionist in the field of
economics." Hitler's nazism also shared many features with Italian
fascism, including the syndicalist front. Nazism, too, featured
complete government control of industry, agriculture, finance, and
investment.

And further, from John Flynn's The Roosevelt Myth via Anthony Gregory:

[Mussolini] organized each trade or industrial group or professional
group into a state-supervised trade association. He called it a
corporative. These corporatives operated under state supervision and
could plan production, quality, prices, distribution, labor standards,
etc. The NRA provided that in America each industry should be organized
into a federally supervised trade association. It was not called a
corporative. It was called a Code Authority. But it was essentially the
same thing. These code authorities could regulate production,
quantities, qualities, prices, distribution methods, etc., under the
supervision of the NRA. This was fascism. The anti-trust laws forbade
such organizations. Roosevelt had denounced Hoover for not enforcing
these laws sufficiently. Now he suspended them and compelled men to
combine.

And read this to see the downright creepy Soviet-style propaganda Roosevelt used to promote the NRA.  One example:

A hundred thousand schoolchildren
clustered on Boston Common and were led in an oath administered by
Mayor James Michael Curley: "I promise as a good American citizen to do
my part for the NRA. I will buy only where the Blue Eagle flies."

The fact that the worst of the NRA was dumped by the Supreme Court, and eventually by FDR under pressure, cause us to forget what businessmen in the 1930's were seeing.  The unprecedented fall in asset prices in the early thirties would normally have started to attract capital, at least from the bottom-fishers.  But any reasonable observer at that time would have seen the US government on a path to controlling wages, prices, capacity, etc  -- not an environment conducive to investment.  In fact, under Roosevelt's NRA industry cartels, its not clear that private industrial investment was even legal without the approval of the Code Authority for that industry.

People look back fondly and give credit to the CCC and large public works programs for our recovery, but in fact these programs were necessary because FDR's New Deal, and particularly the NRA, made private investment dry up.

Postscript:  By the way, questioning the greatness of the New Deal is one of those issues that will get you labeled a wacko almost as fast as being a climate change skeptic.  Here is Janice Rogers Brown getting slammed for questioning the New Deal.

From our American point of view, we usually think of the attack by the Japanese at Pearl Harbor fifty-five 65 years ago as the main Japanese objective at the time.  In fact, the attack on Pearl Harbor was merely a screening move, an attempt by the Japanese to limit the US's ability to respond to its main objective -- seizure of resource-rich targets in Indonesia and Southeast Asia. 

The Japanese in 1941 shared many of the beliefs that are disturbingly common today.   They believed that their country had to be "self-sufficient" in key industries and resources.  And, they had a huge distrust of foreigners and international trade.  Lou Dobbs would have been very comfortable with them.  The end result of believing in self-sufficiency was that Japan eschewed peaceful trade as a way to gain resources in favor of colonialism and military intervention.  To some extent, the European colonialism of the 19th and early 20th centuries stemmed from the same beliefs.

As an island nation, Japan had developed a rich and complex social
structure. It resisted westernization by sealing itself off from
contact with the outside world, particularly Europe and the United
States. By the early twentieth century, though, Japan's efforts to
achieve self-sufficiency were failing, for the nation lacked its own
raw materials and other resources. Some members of the ruling class
argued that Japan could grow and prosper only by modernizing and
adopting Western technology. Japanese nationalists, though, advocated a
different path: the establishment of an empire that would not only
elevate Japan's stature in the eyes of the world but also guarantee
access to the resources the nation needed. Moreover, many members of
the nation's traditional warrior class"”the Samurai"”were embittered by
the aftermath of World War I. Japan had backed the victorious Allies,
but the Samurai believed that in the peace negotiations following the
war the United States and Great Britain had treated Japan as a
second-class nation. They, too, longed to assert Japan's place in world
affairs.   [answers.com]

After WWII, the Japanese gave up colonialism and military intervention in favor of arms-length trade.  And, as a result, grew through peaceful exchange into being the wealthy world power that militarism and "self-sufficiency" could never achieve.

Postscript: Some might argue that the Japanese were forced to give up on trade in favor of militarism by the US embargoes.  This is a particularly popular explanation among the "America-is-the-source-of-all-evil" academics, that the Japanese would have peacefully traded for all their needs if only we had let them.  This viewpoint is silly, and completely ignorant of the goals and philosophies of those running Japan.

The Japanese desire to be resource self-sufficient is always there, and the embargoes were a result of previous military adventures by the Japanese to gain colonies by force in Korea and China, as well as Japanese threats to invade southeast Asia.  Japanese militarism to achieve "imperial self-sufficiency" predated western embargoes by many, many years.  The western embargoes may have forced the Japanese hand to move quicker than they might have, but their moves into resource-rich Indonesia were probably coming soon anyway, just as similar moves in Korea and China had been going on for a decade.

To be fair, today's self-sufficiency advocates are passive and xenophobic rather than aggressive and xenophobic, as the Japanese were.  This is at least a small improvement, and means that they prefer to quietly sink into squalor rather than going out with a bang (two bangs?) as the Japanese did.

Update:  Memories of the Pearl Harbor attack.  And the Arizona Republic comes through with a good series on the death of the USS Arizona.

I still get a lot of email and
commentary on my posts explaining why a trade deficit does not
necessarily result in a build up of debt.  Its a mistake that
protectionists like Lou Dobbs make, either accidentally or on
purpose, to confuse the trade deficit with a debt (Dobbs, in the linked article, claimed that we had $5 Trillion in accumulated trade debt).  In another
attempt to explain this, I want to present a thought experiment.

In our hypothetical, a regular old
American guy named Joe walks into a Wal-Mart to buy new Plasma TV.
Lets assume that Joe is presented with two choices, a Chinese-made TV
and an American-made TV.  The American TV is $2000 and carries a
brand Joe recognizes;  the Chinese TV is $1800 and is a brand Joe
does not recognize.  As far as he can tell, both are featured
similarly.

Joe may choose to take a chance with an
unknown brand to save $200, or he may not.  Let's see what happens
either way.  If Joe picks the Chinese TV over the American TV, the US
trade deficit will likely be worse, by whatever Wal-Mart has to pay
to restock the shelves.  But, while the trade deficit may be worse if
Joe buys Chinese, is there any additional debt created by buying
Chinese rather than American?

Well, Joe doesn't have more or less
personal debt either way.  Whether he is paying with cash or
financing the TV, this decision is unaffected by whether he buys
Chinese or American.  He may happen to buy Chinese and take on debt
to purchase the TV, but the decision to take on debt has nothing to
do with the fact that it is an import.  If he had bought the American
TV, he presumably would have taken on debt for that purchase as well.
In fact, if anything, since the Chinese TV is cheaper, Joe's
personal debt is reduced by buying Chinese over American.

In fact, the only way in which Joe's
personal debt could be said to be increased by Chinese imports is if
the $200 price differential was enough to change his mind from
not-buying a TV to buying one, and he then financed the purchase.
But this is only going to occur in a small percentage of
transactions, and besides, it would be unfair to call something so
empowering "“ ie giving Joe the power to get something he really
wants that he would otherwise been unable to "“ as a negative.
(Update: I do think this is sortof the logic trade opponents
use.  They argue that "rampant consumerism"is causing an increase
in consumer debt which is kindof sortof tied up in some way with this
whole cheap Chinese goods at Wal-Mart thing, so therefore trade
causes debt.  This may sound good rhetorically at an
anti-globalization rally but makes no sense scientifically).

Now let's take Wal-mart.  Assuming they
know how to price items, they will make a gross margin on either the
Chinese or the American TV.  How, then, can having to restock the TV
Joe bought by buying one from an American factory for say $1400
affect Wal-Mart any differently than paying the same (or less) money
to a Chinese company?  The answer is that it has no effect.  Buying
Chinese vs. American has no effect on Wal-Mart's debt.

So let's say Joe bought the Chinese TV,
and the Chinese end up with $1400 (the factory price) in US currency
courtesy of Wal-Mart.  If they don't need anything in the US, they
will trade this currency for yuan to someone in China who does want
to buy something in the US.  Let's assume that these dollars are all
incremental, so none go to buying exports from the US or goods to be
consumed in the US.  Let's assume that it all gets invested as
profits, and further, let's assume that it gets invested 100% in US
debt securities.

Aha!  People want to say to me.  There
is the debt!  Chinese are buying up US bonds.  And so they are.  But
trade did not cause or create the debt.  Just because Chinese trade
dollars are reinvested in debt securities does not mean trade cause
the debt.  In fact, the US government debt would exist with or
without Chinese trade, courtesy of the tax and spend whores of both
parties in the US Congress.  If the Chinese had not bought the debt,
someone else would have, and the debt still would have existed.  In
fact, the US debt would likely have just been a bit larger and a bit
costlier without Chinese buyers to bring down interest rates.

So, to review, an average American
makes an incremental decision to buy Chinese rather than American,
the trade deficit gets worse, but no debt is created.  So I renew my
challenge to Lou Dobbs, who claims America has $5 trillion in trade
debt by asking a simple question:  Where?

For some reason, probably because no one there has actually read my blog, the Minutemen Project has me on their email list for press releases.  This one caught my eye:

Judge John H. Wilson has stepped out of his judicial robes to write a children's book. Hot House Flowers is aimed at entertaining and educating children, but adults will find the story an informative and useful object lesson in politics and current events and a cautionary tale to share with family and friends.

Judge Wilson tackles the topic of illegal immigration in an imaginative manner, and the publisher adds a colorful assortment of illustrations to the Judge's metaphorical story of cartoon "hothouse flowers" which must resist the intrusion of weeds from outside the borders of the protected house.

On first reading this, I wanted to barf.  Comparing immigrants to weeds that attack us lovely (Caucasian) flowers is really insulting.  However, on second thought, I thought this analogy was somewhat apt. 

A hothouse flower is one that can't compete or survive outside of the limited confines of its greenhouse.  Rather than being able to survive on its own, a hothouse flower takes a ton of outside care and feeding.  The very term "hothouse flower" when applied to a person tends to mean someone who can't really function in the real world.  And in some sense this is what our citizens and businesses will become in a Lou-Dobbsian world of limited immigration and trade protectionism, each of us hot house flowers or Marie Antoinette's who have no ability to function in the larger world.  We all need healthy interchange and competition with the world at large to stay vital and growing as a country and as individuals.

By the way, a lot of those weeds turn into flowers:

"Over the past 15 years, immigrants have started 25 percent
of U.S. public companies that were venture-backed." These businesses
employ some 220,000 people in the U.S. and have a current market
capitalization that "exceeds $500 billion, adding significant value to
the American economy."

Sorry posting has been light this week.  A reader was nice enough to point to the latest rant by Lou Dobbs here.  Apparently, he has decided to take the position that free traders are now elitists, while folks like him who want the government to pick and choose winners among American businesses and industries as "populist."  The obvious response of course is that beneficiaries of American protectionist legislation tend to read as the who's who of politically connected elitists.  It is also hilarious to equate free trade, whose benefits are backed by 100 out of 100 economists, with some irrational faith-based belief system.  But I will leave that aside to point to this line:

He and others completely disregard the $5 trillion in trade debt that
the United States has built up through 30 consecutive years of trade
deficits. That trade debt is rising faster than our national debt and
is simply economically unsustainable, no matter what any faith-based
economist would argue. Our political, business and media elites
continue to disregard reality.

Here is my very, very simple challenge for Lou Dobbs to help those of us who obviously don't get it:  Point to where this $5 Trillion of Debt is.   What private individuals or corporations owe it to whom?  That should be simple.  With the national debt, we can just go out and count all those government bonds.  But where is this trade "debt"?

Answer:  IT DOESN'T EXIST.  What he means is that over some time span of several decades, American has a cumulative trade deficit of $5 trillion.  But trade deficit does not mean debt.  I showed this in great detail here.  Calling it a "trade debt" is not a sloppy mistake on Dobbs part but an outright lie, meant to make the point that running deficits every year is unsustainable.  But America has become the wealthiest country in the world running trade deficits for the majority of the last 100 years.   In fact, one can argue that the trade deficit itself only exists as a phantom of the awkward and limited way in which we measure trade. 

Postscript: I constantly get people who write me that the fact the Chinese are buying up a lot of US government bonds or corporate bonds with their trade profits is proof of a "trade debt."  No such thing.  The US Government bonds are evidence of a fiscal deficit of the federal government, also called the national debt, and exists not because of trade but because Congress has no fiscal discipline.  Corporate debt is growing to buy back stock, make corporate acquisitions, and to buy new plants and facilities.  The fact the Chinese help to fund these debts does not mean that trade caused this debt.  In fact, foreigners buying US debt securities depresses interest rates and actually keeps the national debt lower.

Here is a thought experiment:  Wal-Mart runs a multi-billion dollar trade deficit every year with China.  Why isn't it building up lot's of debt to the Chinese?

I have been thinking about this previous post on trade and wanted to improve my answer to Jon Talton, our free-markets-hating business columnist in the Arizona Republic.  In his recent column advocating that we finally give up on all this free trade stuff, he said:

Americans were assured that new trade accords and China's membership in
the World Trade Organization would mean better living standards for
American workers. That's because China and other countries supposedly
would buy American exports.

I thought my answer was OK, but I want to take another shot at it, because I hear the argument all the time that "trade only benefits the US if other countries buy our exports."  This is wrong, but this misconception drives many people's thinking on trade.

If we are importing more from other countries but they are not "buying more of our exports," such that we have a large trade deficit, there are two possibilities to explain this:

• The definition of exports is too narrow
• Someone is throwing away value by building up a big pile of US dollars

The first is the most likely explanation.  A dollar is valueless in China, and the UK, and France except to the extent someone thinks they can eventually use it to buy something in the US.  Dollars that aren't or can't be used to buy dollar-denominated assets of some sort have no value.  The money a Chinese exporter accepts from Wal-mart is only valuable if they can recycle it and buy something in the US with it (or trade the dollars to someone else in China who wants to buy something in the US). 

So the dollars we send overseas for imports are going to come back.  But the  reason our trade accounts are out of balance is that the trade deficit numbers they quote on TV define our exports narrowly.  In short, "exports" as commonly measured don't include all the things we sell to foreigners for dollars.

One example of this is if a Chinese company takes the $10 million dollars it earns from exporting to the US and then invests $10 million in US materials to build a factory in the US.  That sounds OK, right?  That seems to be in balance.  But in the way we calculate the trade deficit, that would show as a $10 million trade deficit, because goods (and services) that foreigners buy in the US and consume in the US (rather than back in their home countries) are not considered an "export."  In fact, I would consider this "better" than an export, since both the dollars and the goods stay in the US.  But to trade deficit hawks, this is worse, mainly because their measurement is flawed.

A second example is if a Chinese company take the $10 million dollars it earns from exporting to the US and invests the money in US mortgage bonds.  Again, this would show as a trade deficit, but the US economy benefits from lower interest rates.  In this case, we are again selling foreigners a product, in this case wealth protection, which the US is very good at since we have a more stable economy and stronger rule of law than any other country in the world.  And again, the way we measure "export" does not encompass this product, since our trade measurement has a strong manufacturing bias that does not match the more diverse nature of our economy today.  (For those that lament forefingers helping to fund the enormous government debt, I share your pain, but that is a government spending problem and not a trade problem).

But what if the foreigners are totally perverse.  What if they ignore their own best interests and refuse to buy our exports and just sit on the dollars they get from trade without recycling them in any way to the US?  What if they do this even if by doing so, they would be throwing away billions, even trillions of dollars in value?  As absurd as this sounds, this is exactly the concern Talton and other trade-skeptics raise.

Well, the US in this case would STILL be better off.  First, the US would be getting whatever goods we are buying overseas cheaper or better (or else people would not be buying them).  This would reduce the costs of inputs to other products, and increase money consumers have to spend on other things.  The labor that would have gone into making these products domestically would be redeployed to making other things, increasing our net wealth. 

By the way, it is this last sentence I think Talton and his peers would not accept.  They tend to view employment as zero-sum, ie there are a fixed number of jobs in the world, and if we import, that creates jobs overseas which must reduce jobs in the US.  But labor markets have never worked that way.  As I wrote before:

I have taken on this zero-sum mentality before,
but it is particularly wrong-headed in this case.  Historically, the
argument makes no sense.  For example, the automation of the farm
sector wiped out 80 or 90% of the farm jobs in the US over the last
century.  By the zero-summers logic, we should be impoverished.
Instead, these people were redeployed to manufacturing and service jobs
that create far more wealth than the old 19th century farm employment.
But while people can sort of accept this historically, they can never
accept this in real-time.  But the fact is that when we lose, say, a
textile job to foreign competition, we not only gain because everyone
pays less for textiles and thus has more money to spend on other
things, but that worker gets redeployed over time to higher-value
functions.  Look at the old textile belt in North Carolina - what's
there now?  Electronics and Bio-tech.

By the way, the other thing that would occur if foreigners just buried dollars in the sand without recycling them is that the value of the dollar would rise to levels higher than it would be at if these countries recycled their dollars, thus further lowering the price of inputs for the US.  Talton laments this very effect:

Now, the populists will get a chance to make their arguments,
especially over what the American response should be to Chinese
currency manipulation, tariffs and subsidized exports.

The currency manipulation and subsidized exports have one thing in common:  They are both ways that the Chinese destroy value for their own citizens in order to lower prices for American consumers.  And Talton claims that the populist argument should be to end these practices?  Why?  I think its great that the Chinese want to hold billions in dollars just to keep the dollar high and prices low in the US.  I think its great that their taxpayers want to subsidize lower prices in the US.   I can understand why a Chinese citizen might want this to stop, but why should we, who are the beneficiaries?

Update: By the way, another common misconception is that a trade deficit implies someone is building up a debt.  This is not (not not not) at all true.  We can run a trade deficit indefinitely without building up a debt.  Yes, foreigners are currently investing some of their trade profits in US government bonds necessitated by the federal government's deficit spending, but the two are only weakly related - a trade deficit does not cause government debt.  A great way to see if a columnist has any idea what they are talking about is to see if they confuse the federal budget deficit with the trade deficit.  It is almost funny how often I see this confusion appears in print.  Anyway, this confusion is why people like Talton call the trade deficit "unsustainable".  See my posts on why the trade deficit is not a debt (and here).

Am I the only one who gets ethical qualms about frequent flier programs?  If your job was to buy supplies for the company you work for, and a printer company offered to give you and your family a Hawaiian vacation if only you would have your company buy their printers instead of the competition's, could we all agree that would be a kickback or bribe?  And that it would be, if not illegal, certainly unethical?

So why don't the same rules apply to airline travel?  When buying an airline flight for business, you are acting as a purchasing agent for your company.  And the airlines, in the form of frequent flier miles, are offering you [not the company] something of value to steer your corporate purchasing decisions to their product.  Frequent flier miles are a blatant kickback.  Informal poll:  How many of you have purchased flights that are a worse deal for your company but a better deal for your frequent flier account?

A further rant: OK, if you are not turned off by that rant, here is a related one about Visa cards that give out frequent flier miles.  As mentioned earlier, these are hugely profitable for credit card companies, so much so that they create much of the value in modern airlines.  Credit card companies, perhaps the only stable monopoly I have seen in my lifetime, have perfected the art of forcing retailers to subsidize their credit card users. 

Now, a fairly rational person would expect that a cash transaction is cheaper than doing one on credit.  However, due to the very strong position of MC and Visa processors, credit card customers actually get a lower price than cash customers.  Here is why:  Credit card companies have taken to giving their users a rebate on their purchases, either in cash or frequent flier miles or some other compensation.  These rebates are funded by charging higher interchange fees to merchants (basically a percentage of credit card transactions cleared).  The magic occurs because merchants, in their processing agreements, are generally banned from giving discounts to customers for using cash.  As a result, the higher credit card interchange fees are spread among all customers, cash or credit card, equally.   The result is that credit card customers pay lower net prices than cash customers, when the rebates are factored in.

Though our trade association tries to seek government action of some sort, I am neither confident that this will help or philosophically inclined to ask for such help.  Right now, I am working within the association to try to build support for some sort of one day boycott against accepting credit cards as a starting point to trying to build up some group negotiating power vs. the credit card processors.

Don Boudreaux has a great response to the growing tide of protectionism, as espoused and defended by Harold Meyerson:

Harold
Meyerson repeats the canard that "globalization entails [a] downward
leveling" of economic well-being ("Tipping Point for Trade," November
11).

This belief is crushed by mountains of evidence.  It's
crushed also by its own illogic: if ordinary people are served by being
"protected" from globalization, then they can be made even better off
by being protected from countryization - and better off still by being
protected from townization and neighborhoodization.  Protectionist
quackery implies that we achieve maximum prosperity when no one
consumes anything produced by anyone else.

Bravo.  I wrote about my fears of a Democratic Congress rolling back Bill Clinton's free trade legacy here.

I was wondering this morning if I could turn public opinion against penicillin.   After all, hundreds of people die every year from taking penicillin.  If I ran a newspaper, every day I could feature another heart-rending story about a small child or a single mother with four kids dieing from a penicillin allergy.  Sure, some heartless fools who don't understand these poor people's suffering will say that penicillin is a net benefit.  But that will be easy to counter - I'd ask them to show me who was saved.  Sure, lots of people take it, but how can you prove they would have been worse off without it?  How can you prove how many people would have died without it?  I would have an easy time, because the victims of penicillin are specific and very visible, and the beneficiaries are dispersed.

I thought of this analogy while I was reading Jon Talton's column on the front page of the Arizona Republic business section celebrating the Democratic victory in Congress because we may finally be able to get rid of this awful free trade stuff.  As an aside, Talton has always been an interesting choice as the primary business columnist int he Republic, given that he doesn't really feel bound by the teachings of economics and he really does not like business.   His socialist-progressive formulations may be appropriate somewhere in the paper, but seem an odd choice for lead business columnist, sort of like finding a fundamentalist evolution denier, who still accepts Archbishop Usher's age of the earth, as lead science columnist.

I would fisk Talton's column in depth, but he doesn't really say anything except throwing together a hodge-podge of progressive rants against globalization (CEO pay, China, decimation of manufacturing -- he's got everything in there).   Like most progressives, he extrapolates flatness (not even declines, but flatness!) from 2001-2004 and declares that the world economy has changed and he has seen a major macro-economic trend (no mention of how the business cycle and recession we had in the same period might have affected things).

I will just take on one piece, where he says:

Americans were assured that new trade accords and China's membership in
the World Trade Organization would mean better living standards for
American workers. That's because China and other countries supposedly
would buy American exports.

Economists, what grade does Mr. Talton get?  F!  Because he demonstrates that he does not understand the economic argument for trade.  Because the argument does not actually require that foreign countries buy our exports for us to be better off with trade.   Comparative advantage says that even imports alone help our economy, allowing us to purchase inputs more inexpensively and refocus our domestic labor on tasks which we do comparatively better. 

The second fallacy with his statement is that export numbers grossly understate the amount of goods and services that foreigners buy from us.  Exports are only the goods they buy from us and take back to their country.  But foreigners buy many goods from us and use them in the US (say to build a factory or as an investment or financial instrument) and these foreign purchases of American goods don't show up as exports.  As long as the US is the safest and most stable country in the world, we will probably always run a trade deficit, as foreigners will continue to want to keep the goods and financial instruments they buy from us in the US where these assets are safer.  I wrote a lot more about this topic, and the recycling of dollars from China, here.

Finally, implicit in this anti-globalization view of trade is an assumption that the economy is zero-sum -- ie, there is sort of a global fixed pool of jobs, and if China gains steel market share and employment, the US net loses employment.  I have taken on this zero-sum mentality before, but it is particularly wrong-headed in this case.  Historically, the argument makes no sense.  For example, the automation of the farm sector wiped out 80 or 90% of the farm jobs in the US over the last century.  By the zero-summers logic, we should be impoverished.  Instead, these people were redeployed to manufacturing and service jobs that create far more wealth than the old 19th century farm employment.  But while people can sort of accept this historically, they can never accept this in real-time.  But the fact is that when we lose, say, a textile job to foreign competition, we not only gain because everyone pays less for textiles and thus has more money to spend on other things, but that worker gets redeployed over time to higher-value functions.  Look at the old textile belt in North Carolina - what's there now?  Electronics and Bio-tech.

The problem with trade is very like the one in the penicillin analogy -- it is all-to-easy to identify the few short term losers, who lost their job in American industries that can't compete with foreigners, but all-too-hard to find the huge dispersed benefits from lower prices and the continuing creative destruction that comes with strong competition.  This doesn't mean that individuals lives aren't disrupted, but it does mean that it's short-sighted to the point of being a Neanderthal to use these disruptions as an excuse to throttle free trade, just as it would be short-sided to ban penicillin because some people have allergic reactions.

It will be interesting to see if the Lou Dobbs populists rule the day on this issue.  If so, they it will be ironic that it is the Democrats, not the Republicans, who take the first major steps to dismantling the work of Bill Clinton  (because it sure as heck hasn't been GWB supporting free trade).

My prior posts on why you should stop worrying and learn to love the trade deficit are here and here and here and here.  I also looked at trade with China from the other side, and found it is China that should be mad about their government's trade policies and currency manipulation, not us:

It is important to note that each and every one of these
government interventions subsidizes US citizens and consumers at the
expense of Chinese citizens and consumers.  A low yuan makes Chinese
products cheap for Americans but makes imports relatively dear for
Chinese.  So-called "dumping" represents an even clearer direct subsidy
of American consumers over their Chinese counterparts.  And limiting
foreign exchange re-investments to low-yield government bonds has acted
as a direct subsidy of American taxpayers and the American government,
saddling China with extraordinarily low yields on our nearly $1
trillion in foreign exchange.   Every single step China takes to
promote exports is in effect a subsidy of American consumers by Chinese
citizens.

This policy of raping the domestic market in pursuit of exports
and trade surpluses was one that Japan followed in the seventies and
eighties.  It sacrificed its own consumers, protecting local producers
in the domestic market while subsidizing exports.  Japanese consumers
had to live with some of the highest prices in the world, so that
Americans could get some of the lowest prices on those same goods.
Japanese customers endured limited product choices and a horrendously
outdated retail sector that were all protected by government
regulation, all in the name of creating trade surpluses.  And surpluses
they did create.  Japan achieved massive trade surpluses with the US,
and built the largest accumulation of foreign exchange (mostly dollars)
in the world.  And what did this get them?  Fifteen years of recession,
from which the country is only now emerging, while the US economy
happily continued to grow and create wealth in astonishing proportions,
seemingly unaware that is was supposed to have been "defeated" by Japan.

I was going to respond to Kevin Drum's post crowing that the Oregon minimum wage increase didn't do any harm.  But Brian Doss at Catallarchy does a fine enough job that I will outsource to him. Here is a taste:

The 5.4% unemployment rate tells us a bit more; its 1 point higher
than the national average. I'm not going to be as quick as Kevin to
infer causation from correlation here either, but it doesn't seem like
much of a positive spin to say that a rate of unemployment that's 25%
higher than the national average is good because it happened to be 7.2%
back in 2002"¦

Also, the quote seems seriously confused that there is a meaningful
distinction (in this case) between the theoretical and statistical
(what else would employment economists use in their theory?). Despite
that confusion, David Neumark (mentioned in the WSJ article) does lay out a fairly comprehensive, concrete,  statistical study of minimum wage laws and their effects here,
among other things showing that for whatever else a minimum wage does,
the effect is primarily among the teenaged to those in their early 20s,
the sign is negative, and in the long run negative if a minimum wage
prevents a teen or young adult from gaining employment and more
importantly not gaining the habits of employment.

Further evidence of the this kind is summarized by Alex Tabarrok here,
whereby he relates studies showing that 25% of the folk on the mininum
wage (nationall) are teenagers, and 50% of all minimum wage earners are
aged 25 and younger. These are people, Alex notes, that with age and
experience will likely soon earn more than minimum wage anyway, thus as
an antipoverty tool it's fairly weak....

Its a particularly bad antipoverty tool, it has non-trivial effects
on the structure of employment within and across industries, and has
possible non-trivial long term negative effects on low-skill
individuals' abilities to stay employed and to increase their own
productivity and standards of living. All of the things it purports to
want to do can be done by much more targeted, efficient, and effective
policy tools.² 

"˜Liberals' of America, please, I beg of you: save your breath for policies that actually help poor Americans, eh? And it you won't do it for me, can you do it for the children"¦?

There is much more good stuff.

Whenever I read these articles by progressives that basically boil down to "the most basic laws of supply and demand don't apply to labor, which is the most fundamental trade good in the economy," I just have to shake my head.  I am reminded of my advice to progressives:

Economics is a science.  Willful ignorance or emotional
rejection of the well-known precepts of this science is at least as bad
as a fundamentalist Christian's willful ignorance of evolution science
(for which the Left so often criticizes their opposition).  In
fact, economic ignorance is much worse, since most people can come to
perfectly valid conclusions about most public policy issues with a
flawed knowledge of the origin of the species but no one can with a
flawed understanding of economics.

Leading "progressive" blogger Markos Moulitsas is trying to tempt libertarians to the progressive cause.  He tries to convince libertarians that growing corporate power should scare them more than government power.  Uh, no.  Hammer of Truth has a good rejoinder:

Moulitsas still cites corporate power over people as a problem, and
still fails to recognize that corporations gain their undue power from
government. Government is the enabler, empowering corporations to step
on individuals and small businesses through both regulations and
subsidies. It's only by restraining government that corporations can be
held in check, and it's unfortuate that Moulitsas hasn't figured this
out yet.

Nearly every government law, from anti-trust to trade law to licensing, generally is written to benefit incumbents who make campaign contributions against upstart competition.  Also, by the way, corporations can't send people with guns to your house if you don't cooperate with their will. 

I have in the past been at the executive level of several Fortune 50 companies, and this notion of corporate power is hilarious.  In each case, our situation seemed like that of a wounded, lumbering elephant, trying to stay just ahead of a back of small but swift predators.  Sure, our very size meant that sometimes we did damage from our thrashing around, but to somehow call this power is absurd.  We were constantly fighting against our own size to try to hold on to what market we had.

Finally, with corporations, including the current great Satan Wal-Mart, I can always choose not to shop or work there.  The IRS and the US Congress offer me no similar protection from their control.

More good stuff along the same lines from Catallarchy.

In this older post, I went into more depth on why progressives never will like capitalism, because they are too conservative (little-c).  At the end of the day, progressives like Kos want to reduce risk, variability, unpredictability and general "messiness".  These goals carry too high a price in terms of lost freedom and lost upside for humanity.

This is one of the oddest false dichotomies I have seen in a long time:

Since 1992, the National Election Study
has asked respondents four questions that collectively make up an
"authoritarian index." The four questions ask you to specify which of
two attributes you value more in children:

1. Independence vs respect for elders

2. Self-reliance vs. obedience

3. Curiosity vs. good manners

4. Being considerate vs. being well behaved

The first item in each pair marks you as less
authoritarian and the second item marks you as more authoritarian.
After you've answered all four, the scores are added up and normalized
on a scale from 0 to 1, with 1 being the most authoritarian.

It will come as no surprise that authoritarians tend to vote
Republican. What may surprise you, though, is that this has only become
true in recent years.

I am sure this does not "surprise" Kevin Drum's leftish readers, since they so want to think of themselves as freedom- and individual-rights-loving vs. the mean old Republicans, whom I certainly have no desire to defend on this score.

But are these weird false dichotomies or what? 

Why is independence the opposite of respect for elders?  Isn't this like saying Kleenex is the opposite of pudding?  Isn't the opposite of "independence" actually "the desire to mooch off other people"?  Why isn't the opposite of "self reliance" in fact the "desire to have the government run your life for you?"  I mean, I personally have strived (striven??) to have my kids simultaneouly be both curious and have good-manners. 

And is Drum really trying to argue that Democrats are all about the stuff on the left side while Republicans are for all the stuff on the right?  Who in the world is going to believe that the folks who, for example, support Social Security because they think individuals can't be trusted to manage their own retirement savings, are the spokesmen for "independence" and "self-reliance."  As I said in my comments to the post:

As a libertarian, I am thrilled to see you championing the cause of anti-authoritarianism and self-reliance.  I am sure that this means
that we will soon see your opposition to telling people what wages are
acceptable, what features their car must have, where they can and can't
smoke, who they can or can't hire and fire, where they can get their
health care, what schools they are forced to fund, how much fat can be
in their diet, what drug risk trade-offs are acceptable, how steep
their wheelchair ramps have to be, how energy efficient their
appliances have to be, what minimum percentages of minorites must be at
their school in their workforce, why they shouldn't be allowed to shop
at Walmart or buy from Chinese manufacturers, what lisence they need to
braid hair or to sell caskets, etc.

Arizona has a ballot initiative here in November to raise the minimum wage to $6.75.  Perhaps more worrisome, the law has been structured to raise the rate every year based on some cost of living increase.  (As an aside - these cost of living escalators in government-mandated wage rates are insanely recursive.  The government raises wages, which increases prices, which leads to a further increase of the statutory rate).  An Arizona group opposed to the initiative has put out a nice Word document with the proposed laws language annotated with facts and refutations.

I will not be coy and pretend that I don't have an interest in this question.  The campgrounds we operate on public lands were run by volunteers in the past, until the courts decided that private companies were not legally allowed to use volunteers.  Most of our camp hosts, who tend to be in their 70's or older (we have many employees in their eighties and a few in their nineties!) get paid minimum wage plus a camp site in a nice park for the summer (the latter is what they really want).  Unlike private campgrounds that are built to be efficient to operate, the public campgrounds we operate tend to be small and labor-intensive.

We make about a 5% profit on sales in the camping business (yes, I know that is pathetically low).  Labor is 60-70% of our costs, if you include costs that are directly tied to wages like payroll taxes and workers comp. premiums.  This law would raise the minimum wage by 31%.  You do the math.  In a stroke, this ballot initiative would raise our costs by 20% (.31 x .65) in a business where costs are 95% of revenues.  Something has to give.  I am not going to work the hours I work and run the business for charity.  A 5% margin is almost there already.  We are therefore planning for two different contingencies.

1. Camping fees will have to rise by approximately 20%.  This means that a camping fee of $16 will go up by $3.  I will not make any more money, this will all be a pass-through to my employees, most of whom really wanted to volunteer in the first place.  One could rename this ballot initiative the "vote yourself a camping fee increase" initiative.  A few years ago, an attempt to raise lodging taxes on camping by a few percent met with howls of opposition.  But in effect this is ballot initiative in in effect adding a 20% tax to camping fees.
2. My labor model of hiring retired people may well have to change.  There is a real trade-off in hiring retired folks to maintain campgrounds.  On the plus side, we get a lot of honest and responsible people who have the time and the flexibility in their life to pick up stakes and go live in a campground all summer.  The down side, of course, someone who is 75, or 85, is not going to work as fast or as productively as younger folks.  My workers also tend to get injured more easily (my insurance company freaks every time it sees my employee list with dates of birth) which costs a lot in workes comp. premiums.

   When presented with the choice in the current market of hiring a retired person at $5.15 an hour or a younger, faster worker at $7.50 an hour, I have been happy to hire retired people.  This model has worked great for us.  Unfortunately, I must revisit this business model when my choice is between hiring a faster worker at $7.50 and a slower worker at $6.75 (and rising).  Already in high minimum wage states like CA, OR, and WA we have begun shifting away from hiring as many retired people.  I also hire a lot fewer people, having invested in automated fee collection in high labor cost areas.  (Think about this, at least for a few seconds, before all of you start sending me the inevitable emails I get for being a heartless brute for paying anyone minimum wage).

By the way, the federal government gets around this problem for the campgrounds it operates itself.   How?  Why, it exempts itself from these laws.  Most federal campgrounds employ retired persons as volunteers.  They don't pay campground workers minimum wage, they pay them ZERO.

I wrote a much longer post on minimum wage laws here.  Minimum wage laws are becoming hip in traditionally red-state border areas as a tool to keep immigrants from working.

Update:  I actually underestimated the amount of my costs directly tied to wages, and so I have updated some of the numbers to be more realistic.

There is nothing bloggers enjoy more than ranking themselves. Brian Gongol issues the latest rankings, this time of Business and Economics blogs.  Coyote Blog actually makes the rankings, with between 8-9% of the traffic of the leader Marginal Revolution (which is a great site).  Gongol uses a newspaper analog to say that if Marginal Revolution is USA Today, I am the Rochester Democrat and Chronicle.  Uh, OK. 

Maybe someone can set up trade futures on business blog rankings.  If that were to happen, you know what Marginal Revolution would title the post....

By the way, he leaves off two of my favorites, probably because they are not in the NZ Bear data base:  Cafe Hayek and Mises Blog.

At least one homebuilder is predicting doom and gloom:

"It would be difficult to characterize the position of
home builders as other than in a hard landing," says Robert Toll, chief
executive of luxury home builder Toll Brothers Inc., which reported yesterday that net income fell 19% in the third quarter ended July 31. (See related article.)

In his 40 years as a home builder, Mr. Toll says, he
has never seen a slump unfold like the current one. "I've never seen a
downturn in housing without a downturn in employment or... some
macroeconomic nasty condition that took housing down along with other
elements of the economy," he says. "This time, you've got low
unemployment, you've got job creation, you've got a stable stock market
and relatively low interest rates."...

In much of the country, property markets began cooling
rapidly in the second half of last year. Home builders were still
turning out houses at a rapid clip, and the surge of new and previously
occupied homes on the market convinced buyers there was no need to
hurry. Over the past year, the number of previously occupied homes
listed for sale nationwide has risen nearly 40%. In some metropolitan
areas, including Orlando and Phoenix, the supply has quadrupled.

I never got that excited about the run-up in the price of my home, so I won't worry too much if it falls again.   For the average homeowner, the paper-price run-up of housing prices doesn't really have much meaning unless they are considering moving soon to a lower-home-price area or they are going to retire and downsize.  My house supposedly doubled in value in the last four years.  We went out shopping for a home in the area, and you know what?  All the other prices doubled too.  I could trade my current house for about the same house I could trade it for four years ago.  The only really beneficial effect was that the increase in home equity made for useful collateral in a business loan I took out.

Of course, the home speculators may take a bath - there are several latecomers to the speculation / spec home business in my neighborhood who are holding houses that won't sell for the huge prices they are asking.  I posted that this was coming over a year ago, using a model for contrarian investing I learned at the Harvard Business School:  Do the opposite of what doctors and dentists are doing.

I have tried many times to combat the absurdity of zero-sum economic thinking.  Unfortunately, Democrats seem to be testing income-inequality messages as their lead horse to ride in the upcoming elections, so we are going to hear a lot more of it.  It bothers me even more when smart liberals like Kevin Drum buy into the zero sum thinking.  To his credit, he doesn't totally buy into this mess from Paul Krugman:

The concern [is] that, through mechanisms we're not entirely sure of, the very richest are siphoning off the economic growth before it flows through the middle and lower classes. The worry is about the distribution of growth, but the suspicion is that the distribution is being warped by the sheer level of inequality.

But then he goes onto say nearly the same thing:

I'm not sure this gets the mechanism quite right, though.  There are two basic ways that unequal growth can happen:

1. The rich suck up vast amounts of income growth, and this leaves very little money for the middle class. Thus, wages for the middle class are stagnant or, at best, rising slowly.

2. Middle class wages are kept stagnant, and this frees up vast amounts of money from economic growth. The money has to go somewhere, and it goes to the rich.

Now, obviously, it doesn't have to be one or the other. It could be both. But I suspect there's a lot more analytic power in #2 than in #1.

And finally, this stupendously ridiculous statement:

After all, the income from economic growth has to go somewhere, and if it's not going to the middle class it's going to end up going to the rich. Where else can it go?

What's bizarre about all of these statements is it treats wealth, and in this case specifically income growth, like a phenomena that is independent of individuals and their actions.  They treat income growth like it is a natural spring bubbling up from the ground, and a few piggy people have staked out places by the well and take all the water before the rest of us can get any.

Wealth and income growth comes from individual action.  Most rich people are getting more rich because they are intelligently investing and taking risks with their capital, applying the output of their mind to create new wealth.  There is no (none, zero, 0) economic correlation that says that if the rich get really rich, then there is less left over for the poor. 

Here is his solution:

Now, there's certainly no reason to reduce marginal tax rates on the hyper rich in an effort to make inequality even worse than it otherwise would be. But as unjustified as this is, tax cuts aren't the main issue. Median wages are. Focus government policy like a laser on improving the wages of the middle class, and reductions in income inequality will follow.

And how the hell does he suggest the government do that?  Seriously.  Can anyone tell me one single thing the government can do to improve middle class wages that does not involve tax policy?  Well, we can back into his solution from this paragraph where he lists things the government can do that are bad for the middle class:

Appoint members to the Federal Reserve who are obsessed with inflation and act to cool down the economy at the least sign that average hourly wages are rising. Make it harder to form unions in new industries, thus reducing the bargaining power of the working class. Support free trade agreements that put downward wage pressure on low-income workers. Support tax and deregulation policies that make middle class jobs less secure.

So presumably, his solution to increasing middle class wages is: 1) allow inflation to run at a higher rate 2) encourage unionization  3) adopt protectionist measures for uncompetitive industries and stifle free trade  4) increase regulation on businesses and reverse deregulation in industries (presumably like airlines and telecoms).

I'm no Julian Simon, but if we could structure a bet as to whether these policies would help real middle class wages, I would sure take the opposite side from Mr. Drum.

Here is my theory for what is going on, if you even accept that middle class income stagnation is real and not a symptom of our difficulty measuring the benefit of improving products and technologies.  I think much like technological advances from time to time in the past have caused restructurings in the labor market for blue collar workers, we are going through the same thing, really for the first time, with white collar middle class workers.  Technology and globalization offer all sorts of opportunities for companies, and the result is a real restructuring of how many types of white collar workers are used.  Until this restructuring is complete, wages may stagnate, since any wage pressure will just lead to companies implementing changes from their backlog of streamlining opportunities.

At some point we will work through this, and wages will rise again.  If anything, I think the government does damage by slowing this process down.  Note that nearly every one of Drum's suggestions would slow or stop this restructuring.  This is one of the ironies of progressives -- despite their name, what they don't like about capitalism is the change.   They want safety and predictability from the inherently unpredictable.  So protectionism slows global outsourcing, and also reduces the pressure for cost improvement.  Regulation tends to lock in current practices and make changes harder.  Ditto strong unions.

One of the reasons I like some of what Bill Clinton did was that in the early 90's, he faced tremendous pressure to take many of these same steps, trying to halt the economic restructuring that was occurring due to competition from Asia.  He didn't have the government step in, though, and he supported free trade, and the country thrived.  His fellow Democrats (including his wife) should learn from that.

update:  A real economist (unlike me and probably Paul Krugman) discusses inequality and unionization

update #2:  More real economists, this time the awsome guys at Cafe Hayek, pile on.

From Don Boudreaux at Cafe Hayek:

In yesterday's Wall Street Journal, Lawrence Lindsey wrote
about the Chinese government's policy of not allowing the value of the
yuan to rise against that of the dollar:

America, however, benefits from this arrangement. The Chinese clearly
undervalue their exchange rate. This means American consumers are able
to buy goods at an artificially low price, making them winners. In
order to maintain this arrangement, the People's Bank of China must buy
excess dollars, and has accumulated nearly $1 trillion of reserves.
Since it has no domestic use for them, it turns around and lends them
back to America in our Treasury, corporate and housing loan markets.
This means that both Treasury borrowing costs and mortgage interest
rates are lower than they otherwise would be. American homeowners and
taxpayers are winners as a result.

The Chinese are holding on to a Trillion dollars in US currency, with the main effect of subsidizing lower prices and interest rates for US consumers.  What a deal!  (I took a more tongue-in-cheek approach to the same issue here)  I know most commentators instead want to focus on the threat of China suddenly dumping those dollars, disrupting US markets.  People need to understand that the cost of doing the latter is enormous for China, not only in lost value of their dollar-denominated assets but in lost exports as the value of the Yuan would spike.  To test the hypothesis of holding dollars as a strategic weapon, would you feel more secure in the US if the government held a trillion dollars of yuan?  Why?  I would in fact feel more vulnerable to China, dependent on the health of their economy.  I personally am a big believer that Chinese investments in the US are great, and will act as a stabilizing influence in the future. 

By the way, while the above refers the Chinese government holdings of US financial assets, Cafe Hayek also points to an article by John Makin of the AEI who observes that the trade deficit is a misnomer, as the US is providing services that are not counted, specifically wealth-protection services:

In summary, Makin argues that one of the reasons foreigners sell so
many goods and services to Americans and then consistently refrain from
buying an equivalent amount (in value terms) of goods and services from
Americans is that foreigners have a high demand for "wealth-storage"
services supplied by dollar-denominated assets.

The fact that global savers accommodate U.S.
consumers by keeping U.S. interest rates lower than they otherwise
would be and the dollar stronger than it otherwise would be is simply a
manifestation of America's comparative advantage at supplying wealth
storage facilities.

In
other words, there's no real imbalance.  If the services supplied by
"wealth-storage facilities" were counted in international commercial
accounts as "services," then the U.S. current-account would not be in
deficit.

I have written before about why we should not fear the trade deficit with China, and why the word "deficit" is itself a misnomer, here and here.

Some of you may have heard of him -- about a year ago blogger Kyle MacDonald started on a quest to make a series of barter transactions with a red paper clip as his starting item that would result in his owning a home.  Since to make this work he had to get a higher monetary value out of each successive transaction, one had to believe either that he was a really really good exploiter of market inefficiencies, or, more likely, would advance in each trade with a premium related to the publicity value of his effort.  In other words, people would trade him value X for something less than value X to either garner publicity for themselves or because they just wanted to participate.

Well, for most of the effort, all proceeded well.  People traded with him voluntarily, in many cases knowing that on a strictly financial market value assessment, they may have lost in transactions with him but making up for it with the non-tangible benefit they got from participating.  Well, I say it was voluntary, and it was, right up to the final transaction.  But then it fell apart.  Because in that last transaction, the town government of Kipling, Saskatchewan bought Mr. MacDonald a house with taxpayer money, in exchange for a movie role (the article is not clear on how the town will use a speaking part in a movie) and I am pretty sure this was not done with the voluntary consent of every taxpayer in Kipling.

Intriguingly enough, he was offered this item of value (a movie role) from actor director Corbin Bernsen as pure gift, rather than a trade.  Macdonald, interestingly enough, did not accept the role as a gift because he "feared the integrity of his journey would be compromised if he
accepted the role without trading Bernsen something he really could
use".  And the taxpayers of Kipling really could use a movie role, how?  It says volumes about the philosophic state of western man that accepting a gift freely offered challenged the "integrity" of what he was doing but accepting taxpayer money taken by force without the owners' permission is A-OK.

As a preface, I am not a socialist planner, so I do not presume to make other people's economic trade-offs for them.  If someone out there chooses to collect Pinto station wagons or pay $10 million to go on a Russian space launch, power to them.

That being said, I will observe that gas price concerns seem to drive people to do things that they would not normally do in other contexts.  Market Power quoted this statement from the Washington Post:

"When prices go up, you're going to see some interesting things," said Tom
Kloza, chief analyst for the Oil Price Information Service in New Jersey.
"Saving money on gas is something that's just magical in this country. Rational
thought just doesn't apply to gas."

Market Power was skeptical that such irrationality exists, but I think it may be correct.  Here are a few examples:

1.  Waiting for hours:  A couple of years ago when I lived in Seattle, a local Costco put in a gas station and sold gas for 10-15 cents or so below most of the other local stations.  Every time I went there, there was a huge line -- perhaps half an hour long -- to get gas.  For a fifteen gallon fill-up saving 15 cents and waiting 30 minutes, that equates to $4.50 an hour savings for their efforts, not to mention the extra driving time (and gas!) spent getting to this one spot rather than their local station.  How many people in the line would have driven an extra 10 miles to take a job at $4.50 an hour? 

Lately, I witnessed a free gas promotion where people lined up and waited at least 3 hours for 10 gallons for free gas (people apparently had lined up starting at 4AM for the promotion that began at 8AM.  This is a bit better deal at $10 per hour, but I wonder how many people in the line would have participated in any other endeavor for $10 an hour?  Market Power points to a similar promotion in Sioux Falls, where the value of police time providing security was probably higher than the value of the gas given away.

2.  Save a dollar, pay three extra.  One of the reasons I am unconcerned with gas price gouging is that many gas stations today use gas as a loss leader, hoping to pull motorists into their store or restaurant.  In the language of gouging, what this means is that typically you are getting a great price on gas (given what the dealer's costs are) and are getting gouged on coffee and Twinkies.  Its amazing to me that people who check the Internet to find the place with 5 cents a gallon cheaper gas will then walk into the convenience store and pay whatever for Cokes and water and cigarettes and beer and coffee.  It seems crazy, but the best way to explain it is that for a number of people, a dollar saved on gas gives them far more satisfaction than say a dollar save on soft drinks.

3.  Wagering with the rental car company.  Every rental car company offers you a wager nowadays.  They give you the chance to buy the whole tank of gas in advance for something like 20 cents less than the local market rate.  Assume the local market rate is $3.20, the rental car advance rate is $3.00, and the tank is 15 gallons.  All you have to do to win this bet as the renter is to return the car with less than 1 gallon left.  If you do, you win, otherwise you lose.  Is this a bet you want to take?

But I left something out - the value of your time.  Let's say you value your marginal time at $30, and it take 15 minutes to fill up the rent car yourself.  By taking the fuel option, you save $7.50 of time.  This means to win the bet, including the value of your time, you have to turn it in with less than 3.5 gallons left, or less than 1/4 full.  The other alternative is to not stop and turn it in at the rent car place and let them fill it up at their $6.00 rate.  But even this ridiculously inflated rate for turning the car in part-full is still a better option than the pre-paid fuel as long as you don't use more than half a tank.   And I bet that the vast, vast majority of people who rent cars, particularly on business trips, don't use a half tank (a half tank at 20mpg is about 150 miles).

One of the best tests of my proposition is to see how many businesses
today act as if this gas-price-overfocus is a real phenomenon:  Car
dealerships give away free gas rather than rebates;  many many
companies are having free gas promotions;  gas stations continue to
sell gas at cost to get you in their store.  Basically, businesses
everywhere are betting that their customers will find $30 of gas more
appealing than any other $30 giveaway. 

None of the above bothers me particularly -- people are different and interesting in how they act.  That's why government planning tends to chafe everyone.  In fact, the only part of this supposed irrationality about gas prices that does bother me is the fact that so many people run to the government for price controls and gouging investigations whenever gas prices go up, and so many Congressmen of both parties see value to pandering to these instincts.  This despite the fact that gas prices are still effectively far lower as a percentage of income than they were 25 years ago.  I wish they would all go back to sipping their $8 Starbucks coffees and just deal with it.

Update:  Was on Snopes.com checking out an email that seemed like an urban legend (it was) and saw a sidebar listing gas wars as the #1 urban legend email of the moment.  ExxonMobil seems to be the bad-guy target-of-choice, I guess just because they are the largest.  The "idea" in the email is that if everyone would boycott ExxonMobil and shop at other gas stations, the price of gas would fall.  LOL.  As Snopes points out:

A boycott of a couple of brands of gasoline won't result in lower
overall prices. Prices at all the non-boycotted outlets would rise due
to the temporarily limited supply and increased demand, making the
original prices look cheap by comparison. The shunned outlets could
then make a killing by offering gasoline at its "normal" (i.e.,
pre-boycott) price or by selling off their output to the non-boycotted
companies, who will need the extra supply to meet demand. The only
person who really gets hurt in this proposed scheme is the service
station operator, who has almost no control over the price of gasoline.

This week, the US took a step to normalize relations with Libya:

The United States restored
full diplomatic ties with Libya on Monday, rewarding the
longtime pariah nation for scrapping its weapons of mass
destruction programs and signaling incentives for Iran and
North Korea if they do the same

The logic was that Libya still is a sucky dictatorship, but it has taken some important steps forward into the light which we want to reward.  Perhaps more importantly, the administration acknowledges that increasing intercourse with the western democracies tends to have liberalizing effects in countries in this world of open communications (see: China).  Its a difficult trade-off, but I am fine with this.  Certainly we are no virgin in terms of having diplomatic relations with bad governments.

My question is:  Why doesn't this same logic apply to Cuba?  I think it is pretty clear that embargo and shunning over the past 40+ years have had as much effect as they are going to have.  Why not try engagement?  I think this particularly makes sense well before the chaos that may ensue after Castro's death.  If anything, just by reading the behavior of Cuban expats, Cubans remind be of the Chinese in terms of their entrepreneurship, and I certainly think engagement has worked better than shunning in China. 

Of course I already know the answer to my question:  Because Cuban expats make up a large voting block in the most critical presidential election swing state and no candidate wants to be soft on Castro.  But this seems to make it even more of an opportunity for a second-term president who doesn't have to contest Florida again.

Update:  Yes, I did indeed spell it "Lybia" at first.  Seems vaguely Feudian.  Excuse 1:  Blogging is a real time function.  Excuse 2:  Its just a hobby.  Excuse 3:  I was a mechanical engineer in school

More than any subject on Coyote Blog, my immigration posts have engendered more disapproving comments than anything else I have written.  I won't repeat my position except to say that I don't care if immigration is currently illegal, because my point is that it should be legal.  In short, my stance has been that our rights do not flow from the government but from our basic humanity, and therefore activities like association, employment decision-making, and property purchase should not be contingent on citizenship.  Its one of those arguments where I wish many on my side of the argument would shut up -- If the best argument you can muster for immigration is 'who will pick the lettuce', you are not helping very much. 

For the first 150 years of this country's history, our country was basically wide-open to immigration.  Sure, there were those opposed (the riots in NYC in the 19th century come to mind) but the opposition was confined mainly to xenophobes and those whose job skills were so minimal that unskilled immigrants who could not speak English were perceived as a threat.   It was only the redistributionist socialism-lite of the New Deal and later the Great Society that began to make unfettered immigration unpopular with a majority of Americans, who rightly did not wish to see the world's poor migrate to the US seeking an indolent life of living off of government handouts.

But, as Congress debates a series of immigration plans that make not sense and don't seem internally consistent, I will propose my own.  I hope that this plan will appeal to those who to date have opposed immigration because of the government handout problem.  I am sure it will continue to be unappealing to those who fear competition in the job market or who don't like to be near people who don't speak English very well.  This is an elaboration of the plan from this post:

1. Anyone may enter or reside in the US. The government may prevent entry of a very short list of terrorists and criminals at the border, but everyone else is welcome to come and stay as long as they want for whatever reason.  Anyone may buy property in the US, regardless or citizenship or residency.  Anyone in the US may trade with anyone in the world on the same terms they trade with their next door neighbor.
2. The US government is obligated to protect the individual rights, particularly those in the Bill of Rights, of all people physically present in our borders, citizen or not.  Anyone, regardless of citizenship status, may buy property, own a business, or seek employment in the United States without any legal distinction vs. US "citizens"
3. Certain government functions, including voting and holding office, may require formal "citizenship".  Citizenship should be easier to achieve, based mainly on some minimum residency period, and can be denied after this residency only for a few limited reasons (e.g. convicted of a felony).  The government may set no quotas or numerical limits on new citizenships.
4. All people present in the US pay the same taxes in the same way.  A non-citizen or even a short term visitor pays sales taxes on purchases and income taxes on income earned while present in the US just like anyone else.  Immigrants will pay property taxes just like long-term residents, either directly or via their rent payments.
5. Pure government handouts, like Welfare, food stamps, the EITC, farm subsidies, and public housing, will only be available to those with full US citizenship.  Vagrancy and squatting on public or private lands without permission will not be tolerated.
6. Most government services and fee-based activities, including emergency services, public education, transportation, access to public recreation, etc. will be open to all people within the US borders, regardless of citizenship status, assuming relevant fees are paid.
7. Social Security is a tough beast to classify - I would put it in the "Citizen" category as currently structured (but would gladly put it in the "available to everyone" category if SS could be restructured to better match contributions with benefits, as in a private account system).  But, as currently configured, I would propose that only citizens can accrue and receive SS benefits.  To equalize the system, the nearly 8% employee and 8% employer social security contributions will still be paid by non-citizens working in the US, but these funds can be distributed differently.  I would suggest the funds be split 50/50 between state and local governments to offset any disproportionate use of services by new immigrants.  The federal portion could go towards social security solvency, while the state and local portion to things like schools and medical programs.

With this plan, we return to the America of our founding fathers, welcoming all immigrants who are willing to take the risk of coming here.  We would end the failed experiment of turning citizenship from a voting right into a comprehensive license that is required to work, own property, or even associate and be present within the US border.  Since immigrants today who are "illegal" pay no income or social security taxes into the system today (they do pay sales and, via rent, property tax), this plan would increase tax revenues while reducing some welfare state burdens.

I think if you asked many prospective immigrants, they would agree to this deal - no handouts, just a fair chance to make a living and a life.  However, immigrant advocacy organizations are hugely unlikely to accept this plan, as most seem today to have been co-opted by various Marxist organizations who are opposed to anyone opting out of the welfare state (it is no coincidence that the recent immigration policy protests all occurred on May Day, the traditional Soviet-Marxist holiday).

Finally, I would like to offer one thought to all those who worry about "absorbing" ten or fifteen million new immigrants.  First, I would argue that we have adopted many more immigrants than this successfully in this country's history, including my grandparents and probably yours.  Second, I would observe that as recently as the last several decades, we managed to absorb 40 million new workers quite successfully, as I wrote here:

Check this data out, from the BLS:

• In 1968, the unemployment rate was 3.8%.  22.9 million women were employed in non-farm jobs, accounting for 34% of the work force.
• In 2000, the unemployment rate was 4.0%.  62.7 million women were employed in the work force, accounting for 48% of the total
• In these years, the number of women employed increased every single year.  Even in the recession years of 1981-1983 when employment of men dropped by 2.5 million, women gained 400,000 jobs

This is phenomenal.  After years of being stay-at-home moms or whatever, women in America decided it was time to go to work.  This was roughly the equivalent of having 40,000,000 immigrants show up on our shores one day looking for work.  And you know what? The American economy found jobs for all of them, despite oil embargos and stagflation and wars and "outsourcing".

The following is from our Chinese sister publication called Panda Blog:

Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States.  The Chinese government does so through a number of avenues, including:

• Limiting yuan convertibility, and keeping the yuan's value artificially low
• Imposing strict capital controls that limit dollar reinvestment to low-yield securities like US government T-bills
• Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.

This policy of raping the domestic market in pursuit of exports and trade surpluses was one that Japan followed in the seventies and eighties.  It sacrificed its own consumers, protecting local producers in the domestic market while subsidizing exports.  Japanese consumers had to live with some of the highest prices in the world, so that Americans could get some of the lowest prices on those same goods.  Japanese customers endured limited product choices and a horrendously outdated retail sector that were all protected by government regulation, all in the name of creating trade surpluses.  And surpluses they did create.  Japan achieved massive trade surpluses with the US, and built the largest accumulation of foreign exchange (mostly dollars) in the world.  And what did this get them?  Fifteen years of recession, from which the country is only now emerging, while the US economy happily continued to grow and create wealth in astonishing proportions, seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses.  These achieved nothing lasting for Japan and they will achieve nothing for China.  In fact, the only thing that amazes us more than China's subsidize-Americans strategy is that the Americans seem to complain about it so much.  They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth.  They complain about the yuan exchange rate, which is set today to give discounts to Americans and price premiums to Chinese.  They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress's insane deficit spending.  They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China!  This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media.  After all, the fact that China exports more to the US than the US does to China means that by definition, more of China's economic production is dependent on the well-being of the American economy than vice-versa.  And, with nearly a trillion dollars in foreign exchange invested heavily in US government bonds, it is China that has the most riding on the continued stability of the American government, rather than the reverse.  American commentators invent scenarios where the Chinese could hurt the American economy, which we could, but only at the cost of hurting ourselves worse.  Mutual Assured Destruction is alive and well, but today it is not just a feature of nuclear strategy but a fact of the global economy.

Panda Blog goes on to ask that their government end these distorting policies, for the sake of China's future.  I for one kindof hope that they keep subsidizing the stuff I buy over at Wal-mart...

I have been stuck in rural Colorado a few days, my stay extended by a pretty good spring snowstorm up in the high country.  I was visiting our new Colorado marina.  Finally getting to the airport, I found a backlog of unapproved comments, which I have passed through in mass.  Sorry for the delay, but blame spam-bots.  I hate having to approve comments to filter spam as much as you must hate the delay in seing your comments appear.

The other day in this post I, for the first and last time, wrote that my commenters needed to educate themselves.  I knew this was a stupid thing to write, leading with my chin, as it were.  I have posted all kinds of dumb stuff, and a number of things that I have been informed were outright errors (see the update to that same post, for example).  My commenters are great and often more knowlegeable than I am, so it was a dumb tone to adopt.  My only excuse is that I had about 5 emails in a row that confused the trade deficit with the federal budget deficit and the national debt, and I was ready to scream. 

I'm sorry.