How is it that almost nothing works correctly yet we still manage to keep on with our lives? This morning I was attempting to get an update on the weather. When I turned on the TV I was presented with the message “One moment please. This channel should be available shortly.” But that was not to be. Channel after channel mocked me with this promise and like a toddler waiting for Santa I sat in patient anticipation. Nothing. After a lengthy call to the cable company’s support center and Herculean efforts by a very polite and professional young man named Seth, my service was restored. Now it’s doing it again.
There was a time, let’s call it the seventies, when stuff broke all the time and got fixed in good faith. Let’s say your Ford Maverick broke down and you had it repaired at a local shop. It took a day or two, was probably performed at a reasonable expense, and the same problem did not occur again. Lot’s of other problems may have followed but in general stuff stayed fixed. But a ’75 Maverick was about as complex as a toaster. So let’s extend the discussion to services.
When I was a kid if Creature Double Feature was interrupted due to ‘technical difficulties’ at Channel 56 your adolescent shade tree economist would go apoplectic. After several precision strikes from a sock full of quarters delivered by his mother, he would be soothed enough to gather himself and wait around five to ten minutes for service to be restored. As Gamara took flight once again to battle Mothra the world would fall back into synch. No calls to Seth, no holding the function button down for ten seconds while the signal was refreshed, and no turning it off for five minutes and then turning back on. And, most importantly, no substitutes.
Back in the golden age of simplicity there were few alternatives (substitutes) for most products. We’re not talking about competition, channel 56 vs. channel 38 vs. channel 27 (if you had reception for channel 27 out of Worcester you either lived on a mountain or had an antenna that could also pick up pulsars from the other side of the galaxy), substitution in economics refers to replacing one type of good with another. In our example this would be trading TV for radio or a book. The measure of how easily one product can be substituted for another is referred to as the Marginal Rate of Substitution. There’s a whole lot of math that economists use to try to determine the cost of these trade-offs but simply put most people who want to watch TV at certain point in time really want to watch TV. Changing their minds to go read a book or listen to the radio presents a high cost, not in terms of dollars but rather in terms of satisfaction. The utility (satisfaction) lost in switching from one medium to another is high.
But that was then. These days technology continually provides us with more and more substitutes. When my cable went out I was still able to go online and bitch about it. I could watch TV online as well as movies and a frighteningly wide assortment of ‘videos’ on You Tube. I could play video games, watch a DVD, mess around with my kid’s iTouch, listen to iTunes, I think you get the picture.
Back in the seventies I didn’t have access to any of these forms of entertainment with the exception of a VCR, which at the time cost about as much as a used Ford Maverick (around $1,000). As technology has progressed it has delivered to us an amazingly diverse set of products. This increasing assortment of products has without doubt decreased the Marginal Rate of Substitution but at a cost. Actually, two costs.
The first is complexity. Implementing and supporting (not fixing) a PC or multi-use television is far more time consuming and complex than plugging in a TV set, adjusting the rabbit ears, and turning the dial. Although most gaming consoles are straight forward in their operation, try using an additional function on them. And due to the trend of offering similar services across platforms (TVs that use WiFi, computers that can download movies and TV shows) the level of standards and consistency has not caught up to the product offerings.
In short, the entertainment, media, and personal electronics industries have bet on the assumption that the lower cost of substitution will trump the increase cost of complexity. They have also carelessly bet on transferring the cost of that complexity to you and me. Hence an increase in what economists call Suckiness. The days of waiting for Channel 56 to resolve their technical difficulties have given way to you, me, and Seth figuring them out. There’s an opportunity here. Most people don’t watch even 10% of the 800 channels they get through their premium cable service. If there was a package that offered only 80 channels of your choosing but guaranteed 99.99% uptime or your money back for the interruption in service I bet you’d buy it. It’s no longer competition from other cable companies that cable companies worry about, it’s substitution.
If just one cable company provided a service that increased the cost of substitution through delivery of a superior product, they would reduce Complexity and Suckiness as well. I’m not going to hold my breath. I have to go and call Seth again, I have his personal line.
Later
Saturday, July 10, 2010
Monday, June 14, 2010
We Regulate What We Don’t Understand
In the first few decades after the founding of our great Republic the role of the federal government was essentially to deliver the mail and protect us from threats like the still brisling British Empire and the bipolar French. Over time, through spasms of progressive idealism, the role and power of the federal government has expanded. Scholars, gadflies, politicians, and philosophers have spent lifetimes arguing about the benefits and dangers of government expansion but whether you’re for or against it the reality is that the shapeless all encompassing whatever it is that we refer to as ‘the government’ continues to grow.
So I am confused (a feeling I deal with most of the time so it’s kinda like my safe place) as to why we’re now hearing that corporate domination of Washington is the cause for everything from the financial meltdown to the oil spill in the gulf. I think it’s safe to assume (of course it’s not but I’m playing economist here) that most of the voting public understands that businesses contribute billions of dollars to political campaigns and political action committees (PACs). We can also assume with little risk that the same organizations hire thousands of lobbyists and fund associations to represent their interest. Finally, this game has been going on for a long time and it’s not just big business that plays. Groups as diverse as the NRA, MoveOn.org, and the Teamsters all fork over tons of cash to influence government action. Sure they’re probably outspent 10 – 1 but many of the non-business special interests can compete with the oil companies and banks through the use of voters as currency.
The conundrum, I believe, is that there is something akin to a physical law of the universe at play here. As government expands the opportunities to influence government also expand. Build it and they will come, wearing nice suits with long donor lists in the pockets and attractive ‘analysts’ who would like to meet with you after work for a few drinks to discuss this or that or who need you as a keynote speaker at a conference in Fiji, all expenses paid of course.
So if government expands on the premise of helping to provide services not adequately provided by the private sector or to regulate services to protect citizens from the foibles and shenanigans of those private sector hooligans, one would think that said services and regulations would be developed and operated to serve and to regulate as intended. Sure, if one was huffing a can of keyboard duster every three minutes. Truth be told (more precisely the shade tree economist’s version) the expansion of government as presently conducted, especially in terms of regulation, favors those being regulated more than the stakeholders supposedly being protected.
How’s that? When a real juicy piece of legislation is introduced, say healthcare reform or financial reform (the next time I get mad at my kids I will implement TV reform or video game reform) that’s too big for a rep’s staff to handle they enlist the Office of Legislative Counsel, a small band of intrepid public servants who impartially draft legislation. But 40 lawyers can only do so much and that’s where lobbyists come in. I won’t get into details (because that would require a lot of effort) but it’s not as simple as someone showing up with briefcase full of unmarked bills and getting a little somthin’ somthin’ for the effort. As John Dickerson marvelously points out in a 2006 article in Slate, the way to a Congressman’s vote is through his clueless and overburdened staff. A deft lobbyist will insert himself into the legislative process as an expert or a connection point to experts who by wonderful chance say just what the lobbyist told you at the Super Bowl but with reams of data and footnoted research.
So as government expands its not the corporate takeover of government we should be concerned about, it’s the government takeover of corporations. Yes, those greedy bastards from Goldman-Sachs and BP blew up the financial system and a mother of an oil well but they were allowed to. Instead of offering simple and clear laws with stringent penalties and no loopholes, we get thousand page laws with more escape clauses than a Florida building inspection. The offices of government charged with enforcing these laws are mostly overseen by Congress. Need I say more. And yes, you’re right if you’re thinking what a wonderful score a lobbyist has when they are present at creation, through implementation, all the way to enforcement.
When government takes upon itself the responsibility of managing something it doesn’t understand it becomes a cat’s paw for those that do. There is a tipping point at which regulation turns from useful and thoughtful to promiscuous and negligent. My guess is we passed that point around the Grant administration.
Later
So I am confused (a feeling I deal with most of the time so it’s kinda like my safe place) as to why we’re now hearing that corporate domination of Washington is the cause for everything from the financial meltdown to the oil spill in the gulf. I think it’s safe to assume (of course it’s not but I’m playing economist here) that most of the voting public understands that businesses contribute billions of dollars to political campaigns and political action committees (PACs). We can also assume with little risk that the same organizations hire thousands of lobbyists and fund associations to represent their interest. Finally, this game has been going on for a long time and it’s not just big business that plays. Groups as diverse as the NRA, MoveOn.org, and the Teamsters all fork over tons of cash to influence government action. Sure they’re probably outspent 10 – 1 but many of the non-business special interests can compete with the oil companies and banks through the use of voters as currency.
The conundrum, I believe, is that there is something akin to a physical law of the universe at play here. As government expands the opportunities to influence government also expand. Build it and they will come, wearing nice suits with long donor lists in the pockets and attractive ‘analysts’ who would like to meet with you after work for a few drinks to discuss this or that or who need you as a keynote speaker at a conference in Fiji, all expenses paid of course.
So if government expands on the premise of helping to provide services not adequately provided by the private sector or to regulate services to protect citizens from the foibles and shenanigans of those private sector hooligans, one would think that said services and regulations would be developed and operated to serve and to regulate as intended. Sure, if one was huffing a can of keyboard duster every three minutes. Truth be told (more precisely the shade tree economist’s version) the expansion of government as presently conducted, especially in terms of regulation, favors those being regulated more than the stakeholders supposedly being protected.
How’s that? When a real juicy piece of legislation is introduced, say healthcare reform or financial reform (the next time I get mad at my kids I will implement TV reform or video game reform) that’s too big for a rep’s staff to handle they enlist the Office of Legislative Counsel, a small band of intrepid public servants who impartially draft legislation. But 40 lawyers can only do so much and that’s where lobbyists come in. I won’t get into details (because that would require a lot of effort) but it’s not as simple as someone showing up with briefcase full of unmarked bills and getting a little somthin’ somthin’ for the effort. As John Dickerson marvelously points out in a 2006 article in Slate, the way to a Congressman’s vote is through his clueless and overburdened staff. A deft lobbyist will insert himself into the legislative process as an expert or a connection point to experts who by wonderful chance say just what the lobbyist told you at the Super Bowl but with reams of data and footnoted research.
So as government expands its not the corporate takeover of government we should be concerned about, it’s the government takeover of corporations. Yes, those greedy bastards from Goldman-Sachs and BP blew up the financial system and a mother of an oil well but they were allowed to. Instead of offering simple and clear laws with stringent penalties and no loopholes, we get thousand page laws with more escape clauses than a Florida building inspection. The offices of government charged with enforcing these laws are mostly overseen by Congress. Need I say more. And yes, you’re right if you’re thinking what a wonderful score a lobbyist has when they are present at creation, through implementation, all the way to enforcement.
When government takes upon itself the responsibility of managing something it doesn’t understand it becomes a cat’s paw for those that do. There is a tipping point at which regulation turns from useful and thoughtful to promiscuous and negligent. My guess is we passed that point around the Grant administration.
Later
Saturday, June 5, 2010
Apples and Oranges
Last Wednesday Apple became the most valuable technology company, as measured by its stock market capitalization (AAPL), on the planet. Investors value the i everything maker more than IBM, Microsoft, or Hewlett-Packard. It’s easy to see why; when was the last time you got really excited about a new laptop or server? And do you even care about the operating system running them? No, probably no, and Apple knows it.
Comparing Apple to other global technology companies is, to use a gem of a cliché, like comparing apples to oranges.
Apples see the world as a place full of individual consumers who require simple yet powerful products to serve their needs. It may be communication, entertainment, or business but Apple’s products (iPhones, iPads, iPods, iMacs) share a similar look and feel as well as many applications. Just like there are different shampoos that can do a decent job of washing your hair or different sneakers that can protect your feet but fill those needs in slightly different ways, the apples look at their products as consumer based.
The term “Consumer Products” is used to categorize companies offering a vast portfolio of products under a common name (Proctor & Gamble, 3M, Johnson & Johnson). It’s a bit of a contradiction but when you think about your product based on the needs of the individual consumer you more than likely will produce something many people will like.
Oranges, on the other hand, look to serve specific needs of general customers. They offer ‘scalable solutions’ for ‘increased performance’ and ‘greater capacity’. All good things I’m sure but they often fail to identify how they’ll fix a specific problem or help take advantage of an opportunity that users can identify with. For example trying to run a report on last month’s expenses (by the way there’s an App for that).
Oranges continually back themselves into competitive corners by trying to isolate and dominate specific customer markets or niches using products that can quickly be commoditized. It’s cool that a printer can do double sided color high resolution printing very fast but if I wait a month or two there will be a knock off at half the price. Who’s come up with a computer easier to use than a Mac? Please let me know where I can get a music player that’s cheaper, easier to use, and with more legally available content than an iPod and I’ll buy it.
Apple’s new dominance signals more than just Wall Street affirmation. It signals a move away from the needs of businesses pushing the edge of technology to the needs of consumers. This shift means trouble for companies like Microsoft and Dell who rely on high volumes from businesses to compensate for low margins. Google may have a dog in the fight but so far they haven’t produced a significant ‘total solution’ – one piece of technology as a product. You need to buy a phone from another company to get the Android operating system or by a computer to make use of Google’s applications.
Again, Apple beats the competition. I may have to find a service provider for the iPhone but the product comes from one company. If I buy a Mac, one company supports my hardware and my operating system.
Apple won’t remain the dominant technology company for long, no single organization can. What Apple’s resurgence means to us is that the click of the keyboard and the drag of the mouse have their days numbered. Simplification, miniaturization, and customization are quickly replacing the complex, bulky, and commoditized. Good.
Later.
Comparing Apple to other global technology companies is, to use a gem of a cliché, like comparing apples to oranges.
Apples see the world as a place full of individual consumers who require simple yet powerful products to serve their needs. It may be communication, entertainment, or business but Apple’s products (iPhones, iPads, iPods, iMacs) share a similar look and feel as well as many applications. Just like there are different shampoos that can do a decent job of washing your hair or different sneakers that can protect your feet but fill those needs in slightly different ways, the apples look at their products as consumer based.
The term “Consumer Products” is used to categorize companies offering a vast portfolio of products under a common name (Proctor & Gamble, 3M, Johnson & Johnson). It’s a bit of a contradiction but when you think about your product based on the needs of the individual consumer you more than likely will produce something many people will like.
Oranges, on the other hand, look to serve specific needs of general customers. They offer ‘scalable solutions’ for ‘increased performance’ and ‘greater capacity’. All good things I’m sure but they often fail to identify how they’ll fix a specific problem or help take advantage of an opportunity that users can identify with. For example trying to run a report on last month’s expenses (by the way there’s an App for that).
Oranges continually back themselves into competitive corners by trying to isolate and dominate specific customer markets or niches using products that can quickly be commoditized. It’s cool that a printer can do double sided color high resolution printing very fast but if I wait a month or two there will be a knock off at half the price. Who’s come up with a computer easier to use than a Mac? Please let me know where I can get a music player that’s cheaper, easier to use, and with more legally available content than an iPod and I’ll buy it.
Apple’s new dominance signals more than just Wall Street affirmation. It signals a move away from the needs of businesses pushing the edge of technology to the needs of consumers. This shift means trouble for companies like Microsoft and Dell who rely on high volumes from businesses to compensate for low margins. Google may have a dog in the fight but so far they haven’t produced a significant ‘total solution’ – one piece of technology as a product. You need to buy a phone from another company to get the Android operating system or by a computer to make use of Google’s applications.
Again, Apple beats the competition. I may have to find a service provider for the iPhone but the product comes from one company. If I buy a Mac, one company supports my hardware and my operating system.
Apple won’t remain the dominant technology company for long, no single organization can. What Apple’s resurgence means to us is that the click of the keyboard and the drag of the mouse have their days numbered. Simplification, miniaturization, and customization are quickly replacing the complex, bulky, and commoditized. Good.
Later.
Monday, May 24, 2010
Propeller Beanies of the Gods
Sometime today (Monday, May 24, 2010) Nstar and Cape Wind ‘officials’ will meet to discuss the possibility of the utility buying electricity from the proposed offshore windmill farm. There will be the usual executive small talk concerning mutual acquaintances, who plays golf where and maybe a mention of the Celtics. But eventually the conversation (or presentation) will turn to money. Here’s where the hypocrisy of Cape Wind will be glazed over thicker than a triple dipped Krispy Kreme.
It’s not the more expensive price to consumers (estimated at an extra $1.50 per month) that bothers me, rather it’s the idea of investors getting a huge return from a boondoggle made possible by poor government policy and unimaginative politicians desperately seeking affirmation from Greeniks(1).
The way electric utility companies make money is by charging customers through a rate structure approved by state regulators. The rates are designed to allow the companies to make a profit through recovering “prudently” incurred costs and a rate of return “sufficient to attract new investment in transmission facilities”. So one could say that smart investors would want to maximize cash flow by covering as much of the prudently incurred costs as possible while jacking up the value of the investment in transmission facilities to provide as big a return as possible (10% of a billion is thousand times greater than 10% of a million). Add to this state requirements, like the Green Communities Act which requires utilities operating in Massachusetts to buy a percentage of electricity from renewable sources in Massachusetts, and you have an environment well suited for inefficient projects the likes of which would make Willie Wonka blush.
According to Cape Wind’s website the offshore windmill farm will provide 155 new jobs, up to 55 of them on the cape. It will also be very clean, replacing the equivalent power that would be produced “from burning 570,000 tons of coal, or 113 million gallons of oil, or 10 billion cubic feet of natural gas.” And contrary to reports from finance publications and several papers, Cape Wind claims the project “will reduce the clearing price for electricity in the New England spot market by reducing operations of the regions most expensive power plants, this will reduce electricity prices in New England by 25 million dollars per year.” The first two benefits are the result of impact studies, the third is spurious at best.
So you’re thinking, after reading four paragraphs of regurgitated uninspired middle school level research, that your shade tree economist is headed for a predictable close of drill baby, drill. Wrong. Here’s where it gets interesting (it actually doesn’t get interesting but what the hell, you’re more than halfway through now). Renewable energy from clean sources is exactly what this country needs and we need it yesterday. Unfortunately a $1 billion to $2 billion(2) wind farm moves us in the wrong direction. It is an act of financial and political hubris the likes of which gave us insolvent quasi-government mortgage underwriters and a federal recipe for health care coverage that will break the back of an already entitlement loaded system.
If we as taxpayers and beneficiaries of good environmental policy want to back a $1 billion plus investment, we should actually benefit from it. What about using $1 billion to invest in many local projects? A combination of clean/renewable sources that work on a local level? Why not fund smaller windmills to help supply power to schools, hospitals, and malls? What about plug-in stations for electric cars? A good chunk a billion dollars could also beef up an aging nuclear power plant or hydro-electric dam.
The big drawback to managing power from renewable sources is that they are by nature unreliable. If the sun don’t shine or the wind don’t blow there’s no microwave popcorn. Hence the need considering current technology to mix consistent but dirty with inconsistent but clean (kind of like prom dates). Supporting smaller local efforts mitigates inconsistency.
Cape Wind maybe a windfall for investors in EMI corp. and its owners but for the rest of us it’s a big dig solution to a problem that is best solved by taking another road.
Later.
(1) Greenik – a.k.a. ‘Watermelon’ – one who is green on the outside, red on the inside. A person who’s true agenda is maximizing government control of private sector activity but who claims to act in the best interest of the environment or climate as a means to an end.
(2) Cape Wind has not released investment estimates but media reports range from $1 billion (Boston Globe) to $2 billion (AP).
It’s not the more expensive price to consumers (estimated at an extra $1.50 per month) that bothers me, rather it’s the idea of investors getting a huge return from a boondoggle made possible by poor government policy and unimaginative politicians desperately seeking affirmation from Greeniks(1).
The way electric utility companies make money is by charging customers through a rate structure approved by state regulators. The rates are designed to allow the companies to make a profit through recovering “prudently” incurred costs and a rate of return “sufficient to attract new investment in transmission facilities”. So one could say that smart investors would want to maximize cash flow by covering as much of the prudently incurred costs as possible while jacking up the value of the investment in transmission facilities to provide as big a return as possible (10% of a billion is thousand times greater than 10% of a million). Add to this state requirements, like the Green Communities Act which requires utilities operating in Massachusetts to buy a percentage of electricity from renewable sources in Massachusetts, and you have an environment well suited for inefficient projects the likes of which would make Willie Wonka blush.
According to Cape Wind’s website the offshore windmill farm will provide 155 new jobs, up to 55 of them on the cape. It will also be very clean, replacing the equivalent power that would be produced “from burning 570,000 tons of coal, or 113 million gallons of oil, or 10 billion cubic feet of natural gas.” And contrary to reports from finance publications and several papers, Cape Wind claims the project “will reduce the clearing price for electricity in the New England spot market by reducing operations of the regions most expensive power plants, this will reduce electricity prices in New England by 25 million dollars per year.” The first two benefits are the result of impact studies, the third is spurious at best.
So you’re thinking, after reading four paragraphs of regurgitated uninspired middle school level research, that your shade tree economist is headed for a predictable close of drill baby, drill. Wrong. Here’s where it gets interesting (it actually doesn’t get interesting but what the hell, you’re more than halfway through now). Renewable energy from clean sources is exactly what this country needs and we need it yesterday. Unfortunately a $1 billion to $2 billion(2) wind farm moves us in the wrong direction. It is an act of financial and political hubris the likes of which gave us insolvent quasi-government mortgage underwriters and a federal recipe for health care coverage that will break the back of an already entitlement loaded system.
If we as taxpayers and beneficiaries of good environmental policy want to back a $1 billion plus investment, we should actually benefit from it. What about using $1 billion to invest in many local projects? A combination of clean/renewable sources that work on a local level? Why not fund smaller windmills to help supply power to schools, hospitals, and malls? What about plug-in stations for electric cars? A good chunk a billion dollars could also beef up an aging nuclear power plant or hydro-electric dam.
The big drawback to managing power from renewable sources is that they are by nature unreliable. If the sun don’t shine or the wind don’t blow there’s no microwave popcorn. Hence the need considering current technology to mix consistent but dirty with inconsistent but clean (kind of like prom dates). Supporting smaller local efforts mitigates inconsistency.
Cape Wind maybe a windfall for investors in EMI corp. and its owners but for the rest of us it’s a big dig solution to a problem that is best solved by taking another road.
Later.
(1) Greenik – a.k.a. ‘Watermelon’ – one who is green on the outside, red on the inside. A person who’s true agenda is maximizing government control of private sector activity but who claims to act in the best interest of the environment or climate as a means to an end.
(2) Cape Wind has not released investment estimates but media reports range from $1 billion (Boston Globe) to $2 billion (AP).
Monday, April 5, 2010
Check Please
Its tax time again so I thought you’d enjoy a look into who actually pays federal income taxes, where a lot of that money goes, and the effect its having on this country. Niccolo Machiavelli once said “Severities should be dealt out all at once, so that their suddenness may give less offense; benefits ought to be handed ought drop by drop, so that they may be relished the more.” And that’s the way taxes work. In fact, the federal government does such a fine Machiavellian job with the money we send in that those drops of benefits are hardly perceptible for most of us (remember, I’m talking about the feds here, not towns or states).
First up, who pays most of the federal income tax? If you said middle class or working families you’d be wrong. To quote an often referred to article from the San Diego Union Tribune “According to the most recent IRS data available (from 2007), the top 10 percent of households - with incomes roughly $100,000 or greater - pay roughly 70 percent of all federal income taxes. That share is up from just below 50 percent in 1980. If you include the top quarter of all taxpayers, the share balloons to 85 percent.” Taken another way, in 2008 34% of people (48 million individuals) who filed an income tax return paid no income taxes. 52% of the federal government’s total revenue comes from personal income taxes.
Shady breakdown: .85x.52= .44 so 44% of government revenue is paid by 25% of the people filing tax returns.
Is it a healthy sign when almost half of what the government takes in is paid by a quarter of its citizenry? Wait, it gets better… I mean worse, no, more like sad.
According to the 2009 Index of Dependence on Government it is estimated that 60.8 million Americans remain dependent on the government for their daily housing, food, and health care. Roughly 20% of all Americans. But wait, there’s more. Throw in farm subsidies, college loan programs and the Department of Education, Social Security, and the twin big kahunas Medicare and Medicaid and you get a substantial overall dependence on the federal government.
Yeah, yeah, yeah, I’ve seen this government is bad, scare mongering, taxes suck rhetoric before. Where’s the pie chart showing where all the money goes? (it’s right here by the way)
My issue, however, is not with overall spending (although I do have issues with that as well. I have lots of issues). My issue here is with our growing dependence on the federal government. The danger of dependence is two fold. First, as more wealth is transferred from individuals to the government, less is available for investment and savings. Based on the recent behavior of Wall Street one could understand how some people would prefer shipping large portions of their income to the government instead of sending it to inept bankers or criminals running some hedge funds. But as you’ll see, in the long run that’s not a good idea. Second, and more important, as the government becomes more involved in providing services once covered by the private sector it becomes the sole intermediary for those services. There’s a big difference between government grants or contracts given out to organizations and managed via private sector intermediaries (banks, insurance companies, non-profits, and even state or local governments) and directly run government services: the difference is who has power.
When John D. Rockefeller wanted to control the oil market he bought up the intermediaries (pipelines, railroads) first. When the cost of doing business got to be too much for his competitors they sold out to him. With government takeovers of services once performed by the private sector, there is a real risk that the money required to implement those services could be steered towards recipients on a political means, not on needs based or qualified means. What you get are monopolies run not for greed or profit but for politics and power. At least with greed you can argue there are efficiencies from profit seeking and potential for innovation (though not much). Power also becomes more centralized, not a good thing for a democracy.
Still another worry with expanding government is how to pay for it. As mentioned above almost half of government receipts come from about a quarter of its tax paying populace. The rest comes from a variety of fees and other taxes. Even with those additional revenue streams the federal government is far from covering current and proposed outlays. The sizeable gap (deficit) between what Washington spends (the budget) and what it takes in (revenue) is closed by borrowing. For the fiscal 2010 year the federal government will borrow 40% of what it spends. That 40% isn’t like a mortgage, it’s more like buying gas and groceries with a credit card. After a while, the interest on that debt begins to crowd out other spending. If it crowds out too much you go bankrupt.
Finally, as more people become dependent on the government for primary services while fewer are able to pay in, the disparity between rich (tax payers) and poor (government dependents) grows wider and deeper. There's never a good end to this story unless you're a big fan of sacking cities and inventive devices like the guillotine.
So what’s the good news you ask? Well there’s some. You can vote for people who understand the dynamic of spending what we don’t have. You can vote for people willing to make hard choices. You can be willing to absorb some pain now in hopes that there will be less in the future. It’s the political equivalent to brussel sprouts for a nation that prefers wing dings. Good times, good times.
Later.
First up, who pays most of the federal income tax? If you said middle class or working families you’d be wrong. To quote an often referred to article from the San Diego Union Tribune “According to the most recent IRS data available (from 2007), the top 10 percent of households - with incomes roughly $100,000 or greater - pay roughly 70 percent of all federal income taxes. That share is up from just below 50 percent in 1980. If you include the top quarter of all taxpayers, the share balloons to 85 percent.” Taken another way, in 2008 34% of people (48 million individuals) who filed an income tax return paid no income taxes. 52% of the federal government’s total revenue comes from personal income taxes.
Shady breakdown: .85x.52= .44 so 44% of government revenue is paid by 25% of the people filing tax returns.
Is it a healthy sign when almost half of what the government takes in is paid by a quarter of its citizenry? Wait, it gets better… I mean worse, no, more like sad.
According to the 2009 Index of Dependence on Government it is estimated that 60.8 million Americans remain dependent on the government for their daily housing, food, and health care. Roughly 20% of all Americans. But wait, there’s more. Throw in farm subsidies, college loan programs and the Department of Education, Social Security, and the twin big kahunas Medicare and Medicaid and you get a substantial overall dependence on the federal government.
Yeah, yeah, yeah, I’ve seen this government is bad, scare mongering, taxes suck rhetoric before. Where’s the pie chart showing where all the money goes? (it’s right here by the way)
My issue, however, is not with overall spending (although I do have issues with that as well. I have lots of issues). My issue here is with our growing dependence on the federal government. The danger of dependence is two fold. First, as more wealth is transferred from individuals to the government, less is available for investment and savings. Based on the recent behavior of Wall Street one could understand how some people would prefer shipping large portions of their income to the government instead of sending it to inept bankers or criminals running some hedge funds. But as you’ll see, in the long run that’s not a good idea. Second, and more important, as the government becomes more involved in providing services once covered by the private sector it becomes the sole intermediary for those services. There’s a big difference between government grants or contracts given out to organizations and managed via private sector intermediaries (banks, insurance companies, non-profits, and even state or local governments) and directly run government services: the difference is who has power.
When John D. Rockefeller wanted to control the oil market he bought up the intermediaries (pipelines, railroads) first. When the cost of doing business got to be too much for his competitors they sold out to him. With government takeovers of services once performed by the private sector, there is a real risk that the money required to implement those services could be steered towards recipients on a political means, not on needs based or qualified means. What you get are monopolies run not for greed or profit but for politics and power. At least with greed you can argue there are efficiencies from profit seeking and potential for innovation (though not much). Power also becomes more centralized, not a good thing for a democracy.
Still another worry with expanding government is how to pay for it. As mentioned above almost half of government receipts come from about a quarter of its tax paying populace. The rest comes from a variety of fees and other taxes. Even with those additional revenue streams the federal government is far from covering current and proposed outlays. The sizeable gap (deficit) between what Washington spends (the budget) and what it takes in (revenue) is closed by borrowing. For the fiscal 2010 year the federal government will borrow 40% of what it spends. That 40% isn’t like a mortgage, it’s more like buying gas and groceries with a credit card. After a while, the interest on that debt begins to crowd out other spending. If it crowds out too much you go bankrupt.
Finally, as more people become dependent on the government for primary services while fewer are able to pay in, the disparity between rich (tax payers) and poor (government dependents) grows wider and deeper. There's never a good end to this story unless you're a big fan of sacking cities and inventive devices like the guillotine.
So what’s the good news you ask? Well there’s some. You can vote for people who understand the dynamic of spending what we don’t have. You can vote for people willing to make hard choices. You can be willing to absorb some pain now in hopes that there will be less in the future. It’s the political equivalent to brussel sprouts for a nation that prefers wing dings. Good times, good times.
Later.
Thursday, March 11, 2010
A Good Gardener Needs a Hard Heart and a Sharp Axe
A few random things I’ve been meaning to get to:
GMAC – Back in January I thought it was a good idea to leave GMAC to its own fate. The thinking was that it was better, faster, and cheaper to follow a managed bankruptcy than to bail out a loser of a company whose implosion would have little impact on a financial system functioning about as well as the New Jersey Nets. It appears the Congressional Oversight Panel for the Troubled Asset Relief Program agrees. The five member panel’s report states that GMAC was “a company that apparently posed no systemic risk to the financial system, that did not seem to be too big to fail, too interconnected to fail, or indeed, of any systemic significance.” Do you think we’ll ever see the $17.2 billion repaid?
Another wise decision – The Senate Finance Bill intended to overhaul current regulation of financial markets will include the creation of an agency to track financial risk. According to the New York Times the proposed agency “is intended to give federal regulators daily updates on the stability of individual firms as well as that of their trading partners, including hedge funds.” The Times report goes on to say “the agency would give regulators a broader view of the health of participants in the financial markets and the potential for problems to spread.”
The new agency, tentatively labeled The National Institute of Finance, would assist regulators but “would have no policy responsibilities but would instead collect and analyze data, building models to assess relative risks and predict how one firm’s problems might affect others.” The agency would be a division of the Treasury Department with congressional oversight.
If you’ve read the Black Swan or ever filled out an NCAA basketball tournament bracket you understand the accuracy and value of risk based predictions. Now imagine the federal government equivalent to the pre-game shows put on by ESPN or the NFL Network. Long, over analyzed, and over talked decisions where .500 is a winning record. Here’s a radical idea: Instead of creating yet another government entity open to influence, corruption, and mismanagement, why not require ‘structured investment vehicles’ and derivatives to be traded on exchanges like common equities? Participants would have to play by the same rules as equities investors and traders, complete with the regulation and transparency required. Oh, what’s that? You say people like Barney Frank and Chris Dodd are much better suited to manage risk in financial markets by providing the keen oversight like that provided for FannieMae and FreddieMac.
You’re right, silly me.
Fat Boy Slim – The richest man in the world is a Mexican investor best known for buying Mexico’s state run phone monopoly 20 years ago and bailing out the New York Times last year. Carlos Slim (haven’t I seen that name before in a Neal Stephenson or William Gibson book?) is worth an estimated $53.5 billion, that’s equivalent to about 72 mega-zillion Pesos. He just beat out Bill Gates ($53 billion). Oh well Bill, that’s what you get for showering all that money on African kids and schools.
Later
GMAC – Back in January I thought it was a good idea to leave GMAC to its own fate. The thinking was that it was better, faster, and cheaper to follow a managed bankruptcy than to bail out a loser of a company whose implosion would have little impact on a financial system functioning about as well as the New Jersey Nets. It appears the Congressional Oversight Panel for the Troubled Asset Relief Program agrees. The five member panel’s report states that GMAC was “a company that apparently posed no systemic risk to the financial system, that did not seem to be too big to fail, too interconnected to fail, or indeed, of any systemic significance.” Do you think we’ll ever see the $17.2 billion repaid?
Another wise decision – The Senate Finance Bill intended to overhaul current regulation of financial markets will include the creation of an agency to track financial risk. According to the New York Times the proposed agency “is intended to give federal regulators daily updates on the stability of individual firms as well as that of their trading partners, including hedge funds.” The Times report goes on to say “the agency would give regulators a broader view of the health of participants in the financial markets and the potential for problems to spread.”
The new agency, tentatively labeled The National Institute of Finance, would assist regulators but “would have no policy responsibilities but would instead collect and analyze data, building models to assess relative risks and predict how one firm’s problems might affect others.” The agency would be a division of the Treasury Department with congressional oversight.
If you’ve read the Black Swan or ever filled out an NCAA basketball tournament bracket you understand the accuracy and value of risk based predictions. Now imagine the federal government equivalent to the pre-game shows put on by ESPN or the NFL Network. Long, over analyzed, and over talked decisions where .500 is a winning record. Here’s a radical idea: Instead of creating yet another government entity open to influence, corruption, and mismanagement, why not require ‘structured investment vehicles’ and derivatives to be traded on exchanges like common equities? Participants would have to play by the same rules as equities investors and traders, complete with the regulation and transparency required. Oh, what’s that? You say people like Barney Frank and Chris Dodd are much better suited to manage risk in financial markets by providing the keen oversight like that provided for FannieMae and FreddieMac.
You’re right, silly me.
Fat Boy Slim – The richest man in the world is a Mexican investor best known for buying Mexico’s state run phone monopoly 20 years ago and bailing out the New York Times last year. Carlos Slim (haven’t I seen that name before in a Neal Stephenson or William Gibson book?) is worth an estimated $53.5 billion, that’s equivalent to about 72 mega-zillion Pesos. He just beat out Bill Gates ($53 billion). Oh well Bill, that’s what you get for showering all that money on African kids and schools.
Later
Tuesday, March 9, 2010
Killer Whales, Ted Nugent, and Monty Python
I rarely re-post stuff but I think Ted Nugent's recent commentary from the Washington Times merits one. Although I don't agree with everything Nugent says below, I do follow a similar pragmatic approach to our responsibility for and treatment of animals. For a closer representation of the Shady take on wildlife, please refer to Monty Python's Mosquito Hunting.
Here's Terrible Ted's take on human-wild animal relations:
I love animals - they're delicious
By Ted Nugent
Animals give me life. I like to eat them, ride them, pet them, wear them, grow them, watch them, and know in my pure aboriginal predator heart and soul that the health and condition of the animals in our lives are direct indicators of our own quality of life. The wildlife on the sacred Nugent hunting grounds, like all across North America, is thriving, naturally wild and spectacular. Our three Labrador retrievers and stupid old cat are clearly the happiest pets on earth. I love animals, and they love me. Perfect.
And yes, Eloise, that is an American buffalo between my legs. Isn't he adorable? See the snot flying and enraged fire in the eyes? And the bison ain't bad looking, either.
Having made my spectacular rock 'n' roll stage entrance astride a wildly spirited one-ton South Dakota beast for a few hundred protein-infested concerts, no one knows better than I the dynamic of celebrating wild beasts in dramatic and outrageously entertaining ways. I agree with Jack Hannah and other professional critter handlers that wildlife education provided by zoos, circuses, commercial aquariums and various animal spectacles is appreciated best when it occurs on stage with crazed guitar players. I bet my audiences would concur.
With but a cursory review of my annual hunting, fishing and trapping calendar, the evidence is irrefutable that few men have spent more time with wild animals in their natural habitat that this old Motown rocker. The spirit of the mighty beasts fortify my belly and my soul.
My relationship with wild animals is as pure as it gets. I am a hunter, and surely there is no wiser use of renewable wildlife resources than killing them and grilling them. That's why there are more deer, turkey, black bears, cougars and other big game critters in America today than in recorded history. We manage them according to genuine, value-based utility. Go figure.
The only difference between me, and say, Steve Irwin, brain-dead hippie grizzly bear neighbors, religious voodoo rattlesnake witch doctors, homosexual Las Vegas lion huggers, and the Orca handlers at Sea World is that I am smarter and more respectful to the wonderful wildness of such creatures. I don't taunt, probe, prod or bother my wild animals in any way for your entertainment. And though I do hop aboard for a thrilling ride, I am not so stupid as to forget that my buffalo is, and always will be, a wild buffalo. You know, the kind that would just as soon trample you into a bloody puddle of snot and hair than look at you.
Admitting this truism is why I carried a 10mm handgun in my belt during those stage rides, just in case the beast decided to go buffalo on me. A quick 200-grain armor-piercing slug through the back of his head would have made the difference between a momentary increase in entertainment value and a few dozen or more trampled rock fans. I knew this, and I was prepared. I am such a radical pragmatist.
Remember the circus lion tamers of yore, a chair in one hand, a pistol in the other? Prudent and respectful during a time before dangerous animals somehow became cute. The Bambi curse is to defile the wildness of beasts. They are killer whales, not show whales. And don't tell me that grabbing alligators by the tail promotes conservation. Wise use? I think not. Shame on you.
If you want to manage elephants, lions, leopards, camels, stallions, bears or other such phenomenal wild animals, the very least you can do is to show a little respect for the wildness that attracts you to them by being prepared to neutralize the deadliness of that wildness when it erupts. Not if it erupts, when it erupts.
Not a year goes by without some sensational tragedy ruining human and animal lives by careless, disrespectful misuse of these majestic creatures. Either do it right or just put them on display, hands-off, so nobody gets hurt. It is about time that we cut out the selfish make-believe fun of animal abuse for our own desires, and show some respect. Either that, or we have one of two choices for the killer whales in captivity out there right now - Muktuk or sushi for the masses. Take your pick.
Later.....
Here's Terrible Ted's take on human-wild animal relations:
I love animals - they're delicious
By Ted Nugent
Animals give me life. I like to eat them, ride them, pet them, wear them, grow them, watch them, and know in my pure aboriginal predator heart and soul that the health and condition of the animals in our lives are direct indicators of our own quality of life. The wildlife on the sacred Nugent hunting grounds, like all across North America, is thriving, naturally wild and spectacular. Our three Labrador retrievers and stupid old cat are clearly the happiest pets on earth. I love animals, and they love me. Perfect.
And yes, Eloise, that is an American buffalo between my legs. Isn't he adorable? See the snot flying and enraged fire in the eyes? And the bison ain't bad looking, either.
Having made my spectacular rock 'n' roll stage entrance astride a wildly spirited one-ton South Dakota beast for a few hundred protein-infested concerts, no one knows better than I the dynamic of celebrating wild beasts in dramatic and outrageously entertaining ways. I agree with Jack Hannah and other professional critter handlers that wildlife education provided by zoos, circuses, commercial aquariums and various animal spectacles is appreciated best when it occurs on stage with crazed guitar players. I bet my audiences would concur.
With but a cursory review of my annual hunting, fishing and trapping calendar, the evidence is irrefutable that few men have spent more time with wild animals in their natural habitat that this old Motown rocker. The spirit of the mighty beasts fortify my belly and my soul.
My relationship with wild animals is as pure as it gets. I am a hunter, and surely there is no wiser use of renewable wildlife resources than killing them and grilling them. That's why there are more deer, turkey, black bears, cougars and other big game critters in America today than in recorded history. We manage them according to genuine, value-based utility. Go figure.
The only difference between me, and say, Steve Irwin, brain-dead hippie grizzly bear neighbors, religious voodoo rattlesnake witch doctors, homosexual Las Vegas lion huggers, and the Orca handlers at Sea World is that I am smarter and more respectful to the wonderful wildness of such creatures. I don't taunt, probe, prod or bother my wild animals in any way for your entertainment. And though I do hop aboard for a thrilling ride, I am not so stupid as to forget that my buffalo is, and always will be, a wild buffalo. You know, the kind that would just as soon trample you into a bloody puddle of snot and hair than look at you.
Admitting this truism is why I carried a 10mm handgun in my belt during those stage rides, just in case the beast decided to go buffalo on me. A quick 200-grain armor-piercing slug through the back of his head would have made the difference between a momentary increase in entertainment value and a few dozen or more trampled rock fans. I knew this, and I was prepared. I am such a radical pragmatist.
Remember the circus lion tamers of yore, a chair in one hand, a pistol in the other? Prudent and respectful during a time before dangerous animals somehow became cute. The Bambi curse is to defile the wildness of beasts. They are killer whales, not show whales. And don't tell me that grabbing alligators by the tail promotes conservation. Wise use? I think not. Shame on you.
If you want to manage elephants, lions, leopards, camels, stallions, bears or other such phenomenal wild animals, the very least you can do is to show a little respect for the wildness that attracts you to them by being prepared to neutralize the deadliness of that wildness when it erupts. Not if it erupts, when it erupts.
Not a year goes by without some sensational tragedy ruining human and animal lives by careless, disrespectful misuse of these majestic creatures. Either do it right or just put them on display, hands-off, so nobody gets hurt. It is about time that we cut out the selfish make-believe fun of animal abuse for our own desires, and show some respect. Either that, or we have one of two choices for the killer whales in captivity out there right now - Muktuk or sushi for the masses. Take your pick.
Later.....
Tuesday, February 23, 2010
I’m a New School Construction Schizophrenic and so am I
So there’s a proposal in your town to build a new high school (I chose high school construction because it’s where the money’s at). As with just about everything in life where you stand on the matter depends on your perception of what benefits you will receive.
As an economist (or some shut in with a blog who thinks he’s one) your analysis must begin with a complete rejection of the rational expectations theory. The theory states that people will act according to very well thought through outcomes based on maximizing their ‘utility’ or simply put, satisfying their wants and needs.
Having recently been through a multi-year saga of living in a town debating the merits of a new high school, I can tell you that any evidence of rational thought as to why or why not to build was a rare find. In discussions with pro or con factions I felt as if I was talking to Howard Beale (the crazed news anchor played by Peter Finch in the film Network) on a bender. Yes, it gets that passionate.
So in trying to decide where I really stand on this issue I tried to strip out my own beliefs and look at research and hard data on the economics of new school construction. In hindsight I would have had more success looking for hard data on the Loch Ness Monster or the heterosexuality of Ryan Seacrest.
What I found was mostly heavily partisan based research supporting either the benefits of new or refurbished schools or supporting the abandonment of public schools altogether. With only slight hyperbolae I can say that what’s out there for research on this topic is written by, on the one hand, people who believe school facilities should be the equivalent of the Four Seasons in Dubai or, on the other hand, people who believe the government has no place educating children and such matters should be handled by the private sector or by parents blessed with the wisdom of Aristotle and the math skills of Isaac Newton. But hey, lack of data has never stopped me before so here I goes.
When trying to judge the economic benefit to a community from building a new high school one must consider the relationship between school facilities and academic performance, the relationship between academic performance and housing values, and the relationship between infrastructure development and community utilization (value). Think of this as a hierarchy of needs: You can’t have good performance without a good foundation, you can’t derive benefit without performance, and you can’t derive value without benefit.
The Relationship of School Facilities to Academic Performance:
This one is easy to sum up: The conditions of school facilities have a direct impact on everything from absenteeism to teacher job satisfaction and job performance. What is not evident is any direct correlation between capital expenditures and academic performance. However, there is strong evidence that without quality facilities there can not be sustainable improvements in performance.
The Relationship of Academic Performance to Housing Values:
Ask any realtor what the top factor for home selection is and they will say school quality. It may not be number one for every buyer but it is the 600 pound gorilla. If you don’t want to take my word for it (and I recommend you don’t) check out the effort the National Association of Realtors is going through to get members to work directly with communities to improve schools and school performance: Schools and Real Estate. Academic or school performance influence on home values is measurable. According to one study (please see the Federal Reserve of New York’s research paper) that used house prices to quantify the value parents place on school quality, the impact of school quality on housing prices suggested an increase of 1.8% - 4.5% for each 5% increase in standardized test scores.
The Relationship of Infrastructure to Community Utilization:
This relationship isn’t as cut and dry as the other two but I wanted to add it because almost every piece of research I looked at mentioned it. In summary, any capital expenditure undertaken by a community should consider as much benefit to the community as possible. Mixed use facilities are one way to achieve lasting and widespread value for a community. The lesson learned here is if you’re going to build something expensive like a high school, make sure you can get as much use out of it as possible. This does not mean you have to build a Taj Ma High School, it merely suggests considering broader community needs and requirements. Don’t provide a specific group with a Mercedes, provide many groups with a Ford.
I call myself a Libertarian because I believe the government (at all levels) should leave me alone with my guns, bourbon, and discount books. But I’m also a realist. A long time ago the founders of this country believed that public education could provide this country with a key element for lasting freedom. Public education, as much as it has been maligned by all shades of the political spectrum, has helped to create a society and economic system of advancement and achievement seen nowhere else. State of the art school facilities do not guarantee economic success but communities that do not invest wisely in their schools can not expect the same level of benefits as those that do. Choose wisely.
Later….
As an economist (or some shut in with a blog who thinks he’s one) your analysis must begin with a complete rejection of the rational expectations theory. The theory states that people will act according to very well thought through outcomes based on maximizing their ‘utility’ or simply put, satisfying their wants and needs.
Having recently been through a multi-year saga of living in a town debating the merits of a new high school, I can tell you that any evidence of rational thought as to why or why not to build was a rare find. In discussions with pro or con factions I felt as if I was talking to Howard Beale (the crazed news anchor played by Peter Finch in the film Network) on a bender. Yes, it gets that passionate.
So in trying to decide where I really stand on this issue I tried to strip out my own beliefs and look at research and hard data on the economics of new school construction. In hindsight I would have had more success looking for hard data on the Loch Ness Monster or the heterosexuality of Ryan Seacrest.
What I found was mostly heavily partisan based research supporting either the benefits of new or refurbished schools or supporting the abandonment of public schools altogether. With only slight hyperbolae I can say that what’s out there for research on this topic is written by, on the one hand, people who believe school facilities should be the equivalent of the Four Seasons in Dubai or, on the other hand, people who believe the government has no place educating children and such matters should be handled by the private sector or by parents blessed with the wisdom of Aristotle and the math skills of Isaac Newton. But hey, lack of data has never stopped me before so here I goes.
When trying to judge the economic benefit to a community from building a new high school one must consider the relationship between school facilities and academic performance, the relationship between academic performance and housing values, and the relationship between infrastructure development and community utilization (value). Think of this as a hierarchy of needs: You can’t have good performance without a good foundation, you can’t derive benefit without performance, and you can’t derive value without benefit.
The Relationship of School Facilities to Academic Performance:
This one is easy to sum up: The conditions of school facilities have a direct impact on everything from absenteeism to teacher job satisfaction and job performance. What is not evident is any direct correlation between capital expenditures and academic performance. However, there is strong evidence that without quality facilities there can not be sustainable improvements in performance.
The Relationship of Academic Performance to Housing Values:
Ask any realtor what the top factor for home selection is and they will say school quality. It may not be number one for every buyer but it is the 600 pound gorilla. If you don’t want to take my word for it (and I recommend you don’t) check out the effort the National Association of Realtors is going through to get members to work directly with communities to improve schools and school performance: Schools and Real Estate. Academic or school performance influence on home values is measurable. According to one study (please see the Federal Reserve of New York’s research paper) that used house prices to quantify the value parents place on school quality, the impact of school quality on housing prices suggested an increase of 1.8% - 4.5% for each 5% increase in standardized test scores.
The Relationship of Infrastructure to Community Utilization:
This relationship isn’t as cut and dry as the other two but I wanted to add it because almost every piece of research I looked at mentioned it. In summary, any capital expenditure undertaken by a community should consider as much benefit to the community as possible. Mixed use facilities are one way to achieve lasting and widespread value for a community. The lesson learned here is if you’re going to build something expensive like a high school, make sure you can get as much use out of it as possible. This does not mean you have to build a Taj Ma High School, it merely suggests considering broader community needs and requirements. Don’t provide a specific group with a Mercedes, provide many groups with a Ford.
I call myself a Libertarian because I believe the government (at all levels) should leave me alone with my guns, bourbon, and discount books. But I’m also a realist. A long time ago the founders of this country believed that public education could provide this country with a key element for lasting freedom. Public education, as much as it has been maligned by all shades of the political spectrum, has helped to create a society and economic system of advancement and achievement seen nowhere else. State of the art school facilities do not guarantee economic success but communities that do not invest wisely in their schools can not expect the same level of benefits as those that do. Choose wisely.
Later….
Tuesday, February 16, 2010
Inflation Hesitation
I’ve written about inflation several times because no other area of economic study is as relevant to us. Not knowing how much something is going to increase in cost, especially staples like electricity, water, and the 20 or so HD channels I already overpay for, creates ripples in our everyday lives and in the economy. Add to this the tendency of inflation to wipe out savings and retained value in assets (homes, equities) and you begin to understand how bad inflation really sucks.
However, I’m not as worried about inflation as I used to be. If you pay attention to the mainstream media, or better yet what’s left of it, you’ve most likely heard about all the ‘money’ the Federal Reserve has pumped into the ‘system’. I put ‘’ around money and system because it turns out that the Fed didn’t pump what can be considered money into what we vaguely refer to as the system. Despite the warnings from well known economists like Glenn Beck (he’s one of the reasons I call myself a libertarian and not a conservative) the way the Fed supported many of the ‘too big to fail’ financial train wrecks was not by giving them cash. Instead the Fed used a recently constructed and little known tool to essentially escrow the dough it gave to financial superfund sites like Fannie Mae and Freddie Mac.
The Fed didn’t print money and ship it in trucks to banks in the hope that they would lend it out. The Fed was able to keep its eyes on the liquidity it created by buying up mortgage-backed securities, bonds, and Treasury notes from financial institutions. It then made the banks park much of the proceeds (to the tune of about $1.1 trillion) with the Fed. It ‘incentivized’ these transactions by increasing the interest rate on excess reserves – the money the Fed pays the banks on the reserves the banks must keep with the Fed to protect their collective bottom lines.
Consider this the security deposit banks pay the Fed in order to use the Federal Reserve system to borrow and move money around. The banks will behave better with the Fed’s money if they can make more interest off of it and keep up their reserves so they don’t blow it all.
The banks and other financial institutions can take the money the Fed has provided but as the incentive grows, most banks will leave it be to ensure their balance sheets meet tougher standards. When the economy picks up, the Fed can adjust up this interest rate without significant impact to the economy due to the fact that the banks will be able to generate capital from ongoing operations. Eventually the Fed can either let this money flow back into the economy without contributing to inflation (as the economy expands and can soak it up) or it can pull it back in by raising interest rates.
So there, I feel better about inflation rearing its ugly head just as the economy recovers. And it’s good to know that there are creative and somewhat pragmatic people working at the Federal Reserve.
Later
PS: I feel guilty for not being as entertaining as I usually am (I know you laugh at me not with me) so here’s something I hope can fill the gap:
http://www.youtube.com/watch?v=d0nERTFo-SkMonday, February 1, 2010
What?
Last Wednesday the SEC (Securities and Exchange Commission), on a 3 – 2 party line vote, decided to “encourage companies to disclose the effects of climate change on their business”. According to the New York Times and the Wall Street Journal:
“SEC Chairman Mary Schapiro, an Obama administration appointee, said the agency wasn't weighing in on the global-warming debate and wanted to ensure that investors get reliable information.”
The agency “wasn’t weighing in’? Right, and monkeys just flew out of my butt. What we have here is the Obama administration acting prudently to ensure that, no matter what happens to any proposed climate change legislation, steps will be taken to increase regulation aimed at reducing so called green house gas emissions.
By the tone of the fifth grade level prose above you may have gathered that I’m an anthropogenic global warming skeptic. Correctamundo. (For the breakdown of your humble shade tree economist’s official position on climate change please look below.) Skepticism aside, what really bugs me about what the SEC did is the smoke and mirrors use of a supposedly free market device to enact not so free market regulation.
Here’s how my thinking goes (you might want to break here for a couple of whip hits to help your brain function for a moment the way mine works all the time); The SEC requires public companies to disclose certain information when reporting financial information. The intent is to provide context for all the numbers that don’t make sense in financial statements detailing balance sheets, cash flows, etc. Many of these ‘notes’ disclose potential risks not reflected in the made up numbers in the financial statements. Usually these disclosures are things like “There are potential revenue fluctuations due in part to our CEO being a degenerate gambler who likes to raid the accounts receivables for meth money.” Or “We don’t really make any money, we just keep issuing stock and borrowing wads of cash to make it look that way”.
These disclosures are sensible when they directly relate to the revenue or expense generating activities of a firm. With Wednesday’s decision the SEC, under pressure from activist groups like the Social Investment Forum, has further politicized the disclosure practice by trying to relate an abstract risk to a tangible business impact often referred to as ‘material’. The SEC defends its decision by saying “…a company must disclose the significant risks that it faces, whether those risks are due to increased competition or severe weather.” An SEC staff paper further detailed the justification stating that a company should make disclosers to the public if it believes a new law or international treaty limiting carbon dioxide emissions might increase operating costs. Now that’s interesting. Why? Remember, disclosures are rarely seen as positive, so if pending climate laws or regulations potentially impact your business and you’re forced to take a guess on what may or may not happen, you are put at a competitive disadvantage.
Who cares? It seems reasonable to make a company tell its investors that proposed regulation may add risk or detriment to its operations. But here’s the rub, the SEC can punish a company for failure to disclose and therefore gets to make a judgment call on who they, or any wronged party, believes is a potential green house gas emitter.
In the recent housing market bubble and subsequent crash we saw what happens when multiple government agencies target a specific social outcome and use regulation and policy (often uncoordinated) as means to an end. If you liked what you got as a result of the regulatory gumbo produced for the housing market, you’re going to love the coming onslaught of green based government initiatives.
Later.
Official Shady Climate Change Position Statement: It seems average global temperatures have risen over the past century. Not disputing that. Anyone who thinks the majority or sole contribution to this rise is the result of human activity is delusional. Anyone who thinks human activity has zero impact on the environment at large, not just climate, is delusional. Therefore, most people who argue about climate change/global warming, no matter their position, are delusional. Talking to, let alone arguing with such people, is akin to trying to get a tennis ball out of the mouth of the Boxer-Rottweiler mix that lives across the street.
Addendum to the Official Shady Climate Change Position Statement: Delusional thinking aside, if you think you can alter future global climate and weather patterns by drastically reducing your carbon footprint or by forcing your friends and neighbors to buy into your delusional life choices, you’re on the bullet train (green of course) to disappointment central. It is the opinion of this completely clueless and unlearned person of all things climate and weather that for millions of years the climate has swung from extreme to extreme without coal fired electricity generation and Ford F350s. Therefore, to believe that human action can have a greater impact on long term climate trends than impacts from solar activity, the position of the earth relative to the sun, global ocean currents, and terrestrial phenomena (everything from volcanoes to the migration of the earth’s magnetic pole) is nutty. Furthermore, if you think we’re smart enough or technologically advanced enough to actually predict these trends through modeling, go ask the fantastically smart folks who used to work for BearStearns about how all that modeling stuff plays out in real life.
Addendum to the Addendum to the Official Shady Climate Change Position Statement: Why do so many smart people (as well as journalists and college professors) believe that human activity is the predominant, even sole cause for climate change/global warming? Some of them are convinced and have completely sold themselves on this. Don’t ask why, it is what it is. Most are taken with the possibilities created by the perceived need to change human behavior to address the ‘crisis’. Simply put, the thought process goes like this:
We’re fucked. Wait a minute, maybe we fucked ourselves. If we fucked ourselves we can un-fuck ourselves by stopping, or better yet reversing, the behavior that got us here. Let’s fuck with everybody to make sure those other fuckers do what we want so we can control all the fucking around that got us fucked in the first place. Since merely existing as human beings causes activity that in turn causes global warming, or better yet climate change, almost every aspect of our daily lives should be overseen by someone who really knows what the fuck their doing. The wicked smart people who think like this honestly believe that the vast majority of mouth breathing resource consuming humanoid locusts on this planet need to be instructed (told) how to behave. Climate change/global warning is the latest and perhaps greatest opportunity to be leveraged by these real life Ellsworth Tooheys.
Final Addendum: To be honest, I’m in favor of most of what the global warming/climate change crowd wants. More investment and tax credits for green energy, clearing the way for increased use of non-carbon energy sources (solar, wind, nuclear, etc.), and basically anything that moves our economy away from imported oil and gas. However, my rational is quite different from theirs. I do not fear an apocalyptic end to humanity from bad weather. Rather, I fear an elongated demise of western civilization from the continued transfer of wealth from a creative, progressive, and pluralistic group of societies to an enrichment of largely repressive, intolerant, and static group of societies. Mix in the fact that many of these petro-states want to harm us by any means possible and you’ve got a heck of a good reason to invest in a Prius and a pellet burning stove.
If you think Cap and Trade is the answer you should delve deeper into the way the current system works. I won’t go into it hear (NPR’s Fresh Air does one of the best covers on C&T I’ve seen: Cap And Trade And The New Carbon Economy) but it’s a mess with no measurable returns to date that has created a speculative market that makes real estate derivatives look like green stamps.
“SEC Chairman Mary Schapiro, an Obama administration appointee, said the agency wasn't weighing in on the global-warming debate and wanted to ensure that investors get reliable information.”
The agency “wasn’t weighing in’? Right, and monkeys just flew out of my butt. What we have here is the Obama administration acting prudently to ensure that, no matter what happens to any proposed climate change legislation, steps will be taken to increase regulation aimed at reducing so called green house gas emissions.
By the tone of the fifth grade level prose above you may have gathered that I’m an anthropogenic global warming skeptic. Correctamundo. (For the breakdown of your humble shade tree economist’s official position on climate change please look below.) Skepticism aside, what really bugs me about what the SEC did is the smoke and mirrors use of a supposedly free market device to enact not so free market regulation.
Here’s how my thinking goes (you might want to break here for a couple of whip hits to help your brain function for a moment the way mine works all the time); The SEC requires public companies to disclose certain information when reporting financial information. The intent is to provide context for all the numbers that don’t make sense in financial statements detailing balance sheets, cash flows, etc. Many of these ‘notes’ disclose potential risks not reflected in the made up numbers in the financial statements. Usually these disclosures are things like “There are potential revenue fluctuations due in part to our CEO being a degenerate gambler who likes to raid the accounts receivables for meth money.” Or “We don’t really make any money, we just keep issuing stock and borrowing wads of cash to make it look that way”.
These disclosures are sensible when they directly relate to the revenue or expense generating activities of a firm. With Wednesday’s decision the SEC, under pressure from activist groups like the Social Investment Forum, has further politicized the disclosure practice by trying to relate an abstract risk to a tangible business impact often referred to as ‘material’. The SEC defends its decision by saying “…a company must disclose the significant risks that it faces, whether those risks are due to increased competition or severe weather.” An SEC staff paper further detailed the justification stating that a company should make disclosers to the public if it believes a new law or international treaty limiting carbon dioxide emissions might increase operating costs. Now that’s interesting. Why? Remember, disclosures are rarely seen as positive, so if pending climate laws or regulations potentially impact your business and you’re forced to take a guess on what may or may not happen, you are put at a competitive disadvantage.
Who cares? It seems reasonable to make a company tell its investors that proposed regulation may add risk or detriment to its operations. But here’s the rub, the SEC can punish a company for failure to disclose and therefore gets to make a judgment call on who they, or any wronged party, believes is a potential green house gas emitter.
In the recent housing market bubble and subsequent crash we saw what happens when multiple government agencies target a specific social outcome and use regulation and policy (often uncoordinated) as means to an end. If you liked what you got as a result of the regulatory gumbo produced for the housing market, you’re going to love the coming onslaught of green based government initiatives.
Later.
Official Shady Climate Change Position Statement: It seems average global temperatures have risen over the past century. Not disputing that. Anyone who thinks the majority or sole contribution to this rise is the result of human activity is delusional. Anyone who thinks human activity has zero impact on the environment at large, not just climate, is delusional. Therefore, most people who argue about climate change/global warming, no matter their position, are delusional. Talking to, let alone arguing with such people, is akin to trying to get a tennis ball out of the mouth of the Boxer-Rottweiler mix that lives across the street.
Addendum to the Official Shady Climate Change Position Statement: Delusional thinking aside, if you think you can alter future global climate and weather patterns by drastically reducing your carbon footprint or by forcing your friends and neighbors to buy into your delusional life choices, you’re on the bullet train (green of course) to disappointment central. It is the opinion of this completely clueless and unlearned person of all things climate and weather that for millions of years the climate has swung from extreme to extreme without coal fired electricity generation and Ford F350s. Therefore, to believe that human action can have a greater impact on long term climate trends than impacts from solar activity, the position of the earth relative to the sun, global ocean currents, and terrestrial phenomena (everything from volcanoes to the migration of the earth’s magnetic pole) is nutty. Furthermore, if you think we’re smart enough or technologically advanced enough to actually predict these trends through modeling, go ask the fantastically smart folks who used to work for BearStearns about how all that modeling stuff plays out in real life.
Addendum to the Addendum to the Official Shady Climate Change Position Statement: Why do so many smart people (as well as journalists and college professors) believe that human activity is the predominant, even sole cause for climate change/global warming? Some of them are convinced and have completely sold themselves on this. Don’t ask why, it is what it is. Most are taken with the possibilities created by the perceived need to change human behavior to address the ‘crisis’. Simply put, the thought process goes like this:
We’re fucked. Wait a minute, maybe we fucked ourselves. If we fucked ourselves we can un-fuck ourselves by stopping, or better yet reversing, the behavior that got us here. Let’s fuck with everybody to make sure those other fuckers do what we want so we can control all the fucking around that got us fucked in the first place. Since merely existing as human beings causes activity that in turn causes global warming, or better yet climate change, almost every aspect of our daily lives should be overseen by someone who really knows what the fuck their doing. The wicked smart people who think like this honestly believe that the vast majority of mouth breathing resource consuming humanoid locusts on this planet need to be instructed (told) how to behave. Climate change/global warning is the latest and perhaps greatest opportunity to be leveraged by these real life Ellsworth Tooheys.
Final Addendum: To be honest, I’m in favor of most of what the global warming/climate change crowd wants. More investment and tax credits for green energy, clearing the way for increased use of non-carbon energy sources (solar, wind, nuclear, etc.), and basically anything that moves our economy away from imported oil and gas. However, my rational is quite different from theirs. I do not fear an apocalyptic end to humanity from bad weather. Rather, I fear an elongated demise of western civilization from the continued transfer of wealth from a creative, progressive, and pluralistic group of societies to an enrichment of largely repressive, intolerant, and static group of societies. Mix in the fact that many of these petro-states want to harm us by any means possible and you’ve got a heck of a good reason to invest in a Prius and a pellet burning stove.
If you think Cap and Trade is the answer you should delve deeper into the way the current system works. I won’t go into it hear (NPR’s Fresh Air does one of the best covers on C&T I’ve seen: Cap And Trade And The New Carbon Economy) but it’s a mess with no measurable returns to date that has created a speculative market that makes real estate derivatives look like green stamps.
Friday, January 29, 2010
The Recession According to South Park
This is the best explanation of what went wrong during the last decade's spending binge I have seen. The economy as god analogy is only something Trey Parker and Matt Stone could come up with. Enjoy!
http://www.southparkstudios.com/search/?search=Margaritaville&type=episodes
Monday, January 25, 2010
Glass-Steagall Redux
Last Thursday president Obama launched what could be the first of many attacks on the country’s financial system. The target last week was the practice known as proprietary trading. A proprietary trade is when a bank uses its own money to buy or sell equities, derivatives, or anything else they can find laying around that looks more profitable than loaning people money. The president wants banks to stop this because he and others believe that this activity is too risky for banks and helped lead to the financial implosion of 2008/2009. Many of the fungi interviewed in the financial press described the president’s move as ‘curious’ or ‘a step backward’. Backward, that is, towards the repealed law known as Glass-Steagall that separated commercial and investment banking. If the president’s proposal brings us ‘backwards’ to Glass-Steagall than it’s the most (only?) sensible move to date the administration has made in the area of finance and economics.
Here’s why: Back in May I tripped all over myself trying to explain how and why the financial markets started to behave like Artie Lange. One of the reasons I cited was the repeal of the Glass-Steagall Act. Having a bank play the equivalent of the house while its customers play poker is not conducive to good moral or economic outcomes. So by not allowing a commercial bank to act like, or own, a hedge fund may seem restrictive, it’s much needed.
The president’s proposal lacked details but that may have been a calculated move to make Congress fight it out while being soaked in cash from lobbyists. The lack of clarity made markets nervous and helped send the Dow down over 5% by the end of Friday. It seems bankers and institutional investors sell stuff when they think they’re about to get shafted, making sure to sell their stuff before yours (the house bets last but holds the cards). This lack of clarity coupled with the notion of reversing direction on the so called ‘modernization’ of securities laws in the late nineties fueled skepticism in the press.
Peter Wallison, writing in the Wall Street Journal, put up a clever argument as to why the ban on proprietary trading is not such a good idea:
“Because banks are government-backed, and privileged in many ways, their activities are limited by law and regulation. They are restricted in how they can use their insured deposits. The Glass-Steagall Act, despite what we constantly hear in the media and from people who should know better, still applies to banks; it forbids them from engaging in underwriting or dealing in securities. This should prohibit them from engaging in proprietary trading to the extent that this is dealing in securities. Bank holding companies, however, because they are not banks and not government-backed, can engage in any financial activity, including securities dealing. Why would we prohibit them from doing so when they are using their own funds? “
I count myself as one of the people Mr. Wallison believes should know better but gosh darn it here I goes anyway. If it turns out that Congress passes a law telling bank holding companies they can’t play online Texas hold ‘em with their own money, good! Yes, they are not using directly backed government funds but neither were AIG, Citigroup, or GM for that matter. But they all got infusions of government (taxpayer) funds because without their continuing operation, the economy would supposedly fall deeper into the abyss. By default (punny!) these large financial institutions are backed by the government just like a sixteen year old is backed by her parents when the gas money accidentally goes towards a new pair of Uggs. The fact there are financial institutions so large that their demise would sink a $14 trillion economy was also addressed by the Obama administration on Thursday but it’s not as exciting as the rise from the dead of Glass-Steagall (I know, I have goose bumps too!) so I won’t go there.
I like the president’s proposal in two ways. First, Glass-Steagall never should have been repealed. Second, the specificity of the proposal hopefully signals an end to this administration’s jones for huge, un-passable chunks of reforms.
Later
Here’s why: Back in May I tripped all over myself trying to explain how and why the financial markets started to behave like Artie Lange. One of the reasons I cited was the repeal of the Glass-Steagall Act. Having a bank play the equivalent of the house while its customers play poker is not conducive to good moral or economic outcomes. So by not allowing a commercial bank to act like, or own, a hedge fund may seem restrictive, it’s much needed.
The president’s proposal lacked details but that may have been a calculated move to make Congress fight it out while being soaked in cash from lobbyists. The lack of clarity made markets nervous and helped send the Dow down over 5% by the end of Friday. It seems bankers and institutional investors sell stuff when they think they’re about to get shafted, making sure to sell their stuff before yours (the house bets last but holds the cards). This lack of clarity coupled with the notion of reversing direction on the so called ‘modernization’ of securities laws in the late nineties fueled skepticism in the press.
Peter Wallison, writing in the Wall Street Journal, put up a clever argument as to why the ban on proprietary trading is not such a good idea:
“Because banks are government-backed, and privileged in many ways, their activities are limited by law and regulation. They are restricted in how they can use their insured deposits. The Glass-Steagall Act, despite what we constantly hear in the media and from people who should know better, still applies to banks; it forbids them from engaging in underwriting or dealing in securities. This should prohibit them from engaging in proprietary trading to the extent that this is dealing in securities. Bank holding companies, however, because they are not banks and not government-backed, can engage in any financial activity, including securities dealing. Why would we prohibit them from doing so when they are using their own funds? “
I count myself as one of the people Mr. Wallison believes should know better but gosh darn it here I goes anyway. If it turns out that Congress passes a law telling bank holding companies they can’t play online Texas hold ‘em with their own money, good! Yes, they are not using directly backed government funds but neither were AIG, Citigroup, or GM for that matter. But they all got infusions of government (taxpayer) funds because without their continuing operation, the economy would supposedly fall deeper into the abyss. By default (punny!) these large financial institutions are backed by the government just like a sixteen year old is backed by her parents when the gas money accidentally goes towards a new pair of Uggs. The fact there are financial institutions so large that their demise would sink a $14 trillion economy was also addressed by the Obama administration on Thursday but it’s not as exciting as the rise from the dead of Glass-Steagall (I know, I have goose bumps too!) so I won’t go there.
I like the president’s proposal in two ways. First, Glass-Steagall never should have been repealed. Second, the specificity of the proposal hopefully signals an end to this administration’s jones for huge, un-passable chunks of reforms.
Later
Tuesday, January 19, 2010
Over Stimulated
Can government spending end a recession? Those crazy bastards at the Heritage Foundation think not. In a well written piece in last week’s Wall Street Journal, Brian Riedl (the Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation (1)) argues that the great Keynesian federal money enema of 2009/10 will not only add bupkis to the short term national income, it will kill us in the long term.
Riedl sums up his argument by explaining where stimulus money comes from:
“Congress cannot create new purchasing power out of thin air. If it funds new spending with taxes, it is simply redistributing existing purchasing power (while decreasing incentives to produce income and output). If Congress instead borrows the money from domestic investors, those investors will have that much less to invest or to spend in the private economy. If they borrow the money from foreigners, the balance of payments will adjust by equally raising net imports, leaving total demand and output unchanged. Every dollar Congress spends must first come from somewhere else.”
Those in favor of stimulus and yet more stimulus may concede the “where it comes from” argument but would counter by noting the benefits of pumping magic money into the economy. Stimulus seekers could say that there is a multiplier effect from government spending. In fact, the Obama administration contends that virtually all stimulus spending creates or saves jobs and therefore has a multiplier effect of around 1.5. Simply put, for every $1 sent out through stimulus spending a $1.50 is eventually created in the wider economy.
Now comes the fun; It is impossible to measure a multiplier and anyone who says they can is either a college professor or someone trying to sell you something. But let’s not allow spurious data and intellectually bankrupt methodologies to slow us down. Let’s accept the idea that multipliers are measurable and see where it takes us.
Let us assume a revenue neutral program in the same vein as food stamps or unemployment insurance in that we are not expecting an annual return from the expenditure. What we are expecting is the passing along of that $100 to other participants in the economy thus promoting growth. Now let’s say the government borrows $100 from you or increases your taxes by the same amount and uses it to plant grass in an old parking lot to make it look better, become green, and provide a frequently unemployed local (we’ll call him Cletus) with a modest steady job mowing the grass. At first blush this seems like, and can even be measured as, a win/win. Let’s also assume all materials are purchased locally and all pre-Cletus labor is local as well.
So what’s bad about our imagined cash for grass program? As the saying goes, it’s what happens next that counts. Your $100 is a one time multiplier. It added value once and cannot create additional value to support the new lawn or Cletus. Eventually, additional funds will have to be allocated to maintain the Fescue-Cletus industrial complex. The value of the money you gave to or was taken from you by the government drastically decreases over time. Had that money stayed in a bank (and been loaned out) or invested in a business it would have had a much better chance of generating lasting value and thereby providing a long term multiple. The economy may have to wait longer and experience a smaller rush than with the cash for grass program but over time there would be greater benefit. How much is arguable depending on the nature of the investment or savings.
Could there be a different result had your $100 gone to a green energy startup? My guess is yes but there are private sector players in place who can invest your $100 in startups and can do it with less overhead and are held accountable in ways government can’t be (when was the last time a congressman from Massachusetts was fired?).
So what’s my point? If the government insists on redistributing or borrowing money to put a spark in the economy, let’s make sure it’s limited to those things the it can do that the private sector can’t (not much), like properly funding unemployment insurance and food stamps. And as for Cletus and his family, we should ensure his participation in the economy through providing opportunity and support rather than a push onto a government plantation.
Later.
(1) I’m wondering if the Heritage Foundation is going the way of the college bowls in its approach to sponsorship. Could we eventually see the Tostitos and Miller Lite Fellow in Consumer Affairs in the National Car Rental/Chick-fil-A Institute of Over Consumption?
Riedl sums up his argument by explaining where stimulus money comes from:
“Congress cannot create new purchasing power out of thin air. If it funds new spending with taxes, it is simply redistributing existing purchasing power (while decreasing incentives to produce income and output). If Congress instead borrows the money from domestic investors, those investors will have that much less to invest or to spend in the private economy. If they borrow the money from foreigners, the balance of payments will adjust by equally raising net imports, leaving total demand and output unchanged. Every dollar Congress spends must first come from somewhere else.”
Those in favor of stimulus and yet more stimulus may concede the “where it comes from” argument but would counter by noting the benefits of pumping magic money into the economy. Stimulus seekers could say that there is a multiplier effect from government spending. In fact, the Obama administration contends that virtually all stimulus spending creates or saves jobs and therefore has a multiplier effect of around 1.5. Simply put, for every $1 sent out through stimulus spending a $1.50 is eventually created in the wider economy.
Now comes the fun; It is impossible to measure a multiplier and anyone who says they can is either a college professor or someone trying to sell you something. But let’s not allow spurious data and intellectually bankrupt methodologies to slow us down. Let’s accept the idea that multipliers are measurable and see where it takes us.
Let us assume a revenue neutral program in the same vein as food stamps or unemployment insurance in that we are not expecting an annual return from the expenditure. What we are expecting is the passing along of that $100 to other participants in the economy thus promoting growth. Now let’s say the government borrows $100 from you or increases your taxes by the same amount and uses it to plant grass in an old parking lot to make it look better, become green, and provide a frequently unemployed local (we’ll call him Cletus) with a modest steady job mowing the grass. At first blush this seems like, and can even be measured as, a win/win. Let’s also assume all materials are purchased locally and all pre-Cletus labor is local as well.
So what’s bad about our imagined cash for grass program? As the saying goes, it’s what happens next that counts. Your $100 is a one time multiplier. It added value once and cannot create additional value to support the new lawn or Cletus. Eventually, additional funds will have to be allocated to maintain the Fescue-Cletus industrial complex. The value of the money you gave to or was taken from you by the government drastically decreases over time. Had that money stayed in a bank (and been loaned out) or invested in a business it would have had a much better chance of generating lasting value and thereby providing a long term multiple. The economy may have to wait longer and experience a smaller rush than with the cash for grass program but over time there would be greater benefit. How much is arguable depending on the nature of the investment or savings.
Could there be a different result had your $100 gone to a green energy startup? My guess is yes but there are private sector players in place who can invest your $100 in startups and can do it with less overhead and are held accountable in ways government can’t be (when was the last time a congressman from Massachusetts was fired?).
So what’s my point? If the government insists on redistributing or borrowing money to put a spark in the economy, let’s make sure it’s limited to those things the it can do that the private sector can’t (not much), like properly funding unemployment insurance and food stamps. And as for Cletus and his family, we should ensure his participation in the economy through providing opportunity and support rather than a push onto a government plantation.
Later.
(1) I’m wondering if the Heritage Foundation is going the way of the college bowls in its approach to sponsorship. Could we eventually see the Tostitos and Miller Lite Fellow in Consumer Affairs in the National Car Rental/Chick-fil-A Institute of Over Consumption?
Monday, January 11, 2010
Preparation GMAC
To prevent or to prepare? It’s a question you probably ask yourself a lot more than you realize. In relationships, business, and even our health we often have to decide if it is better to try to prevent something from happening than it is to prepare for it (or vice versa). Charles De Gaulle once said we should all make use of the inevitable. He was a preparer and an expert survivor. He was also French and a real asshole.
Chuck, however, was able to secure French participation in the division of Germany post World War II, avoid having American troops stationed in France, and even develop advanced nuclear power and weapons capability largely without American or British help. In short, he led France out of a horrible period of war and despair into a period of independence and abundance without having to give up much. De Gaulle had the insight that France would be better off understanding and adapting to post war change than trying to prevent that change from altering the country(1).
Unfortunately the US Treasury Department does not share De Gaulle’s philosophy. On December 30th the Treasury Department announced a $3.8 billion capital infusion into General Motors Acceptance Corporation (GMAC) extending it’s ownership of the one time General Motor’s division to 56%. The intent is to "protect taxpayers and put GMAC in a position to raise private capital and pay back taxpayers as soon as practicable," announced the Treasury. The reason the government feels the need to ‘protect’ taxpayers is because it already shelled out $12.5 billion to keep GMAC solvent. From a tax payer perspective it’s a lot like betting the over/under to make up for a loss if the Colts don’t cover against the Bills. A strategy traditionally referred to as throwing good money after bad.
So what the hell does this have to do with my prevent or prepare question three paragraph’s ago? The Treasury is trying to prevent GMAC from biting the big one when it may be cheaper and less risky to put a bullet in it. Here’s my reasoning, or more accurately put my rant: A free market should allow for the destruction of participants that can not survive through self generated value. This assumes it is more costly and risky trying to prevent such a loss than to prepare for it. We’ve seen above how the U.S. Treasury is trying to prevent the loss of a major financial player under the assumption that its demise would negatively impact auto and home lending. Could it be cheaper and less risky if we prepared for it? I vote yes.
Here’s how preparation makes more sense than prevention. First, allow GMAC to go bankrupt. I’m not talking about bankruptcy light like chapter 11. No, no, I’m talking lucky 7; liquidation. The good loans would find a home and the bad loans would be written off. The argument against liquidation is that there would be less lending bandwidth for cars and houses and would thus impact economic growth. That’s not a bad thing because too much lending got us into the current mess.
Another part of the preparation would be to insure loans properly, as savings accounts are today, so that defaults would be covered. This approach is somewhat robbing Peter to pay Paul in that higher interest rates are the preferred mechanism to protect against defaults. However, adding default insurance could be better for consumers and lenders by offering more appropriate pricing.
In short, we can prepare for economic tsunamis by constantly adding taxpayer bricks to the seawall or we can pick our beachside property more carefully and put our houses on pilings. We can fall prey to the hubris of believing we can control complex events and systems or we can recognize the inevitable and make use of it.
Later
(1) Shady note: Isn’t it interesting how France is viewed today as being regressive and insular? Another De Gaulle quote “I have tried to lift France out of the mud. But she will return to her errors and vomitings. I cannot prevent the French from being French.”
Chuck, however, was able to secure French participation in the division of Germany post World War II, avoid having American troops stationed in France, and even develop advanced nuclear power and weapons capability largely without American or British help. In short, he led France out of a horrible period of war and despair into a period of independence and abundance without having to give up much. De Gaulle had the insight that France would be better off understanding and adapting to post war change than trying to prevent that change from altering the country(1).
Unfortunately the US Treasury Department does not share De Gaulle’s philosophy. On December 30th the Treasury Department announced a $3.8 billion capital infusion into General Motors Acceptance Corporation (GMAC) extending it’s ownership of the one time General Motor’s division to 56%. The intent is to "protect taxpayers and put GMAC in a position to raise private capital and pay back taxpayers as soon as practicable," announced the Treasury. The reason the government feels the need to ‘protect’ taxpayers is because it already shelled out $12.5 billion to keep GMAC solvent. From a tax payer perspective it’s a lot like betting the over/under to make up for a loss if the Colts don’t cover against the Bills. A strategy traditionally referred to as throwing good money after bad.
So what the hell does this have to do with my prevent or prepare question three paragraph’s ago? The Treasury is trying to prevent GMAC from biting the big one when it may be cheaper and less risky to put a bullet in it. Here’s my reasoning, or more accurately put my rant: A free market should allow for the destruction of participants that can not survive through self generated value. This assumes it is more costly and risky trying to prevent such a loss than to prepare for it. We’ve seen above how the U.S. Treasury is trying to prevent the loss of a major financial player under the assumption that its demise would negatively impact auto and home lending. Could it be cheaper and less risky if we prepared for it? I vote yes.
Here’s how preparation makes more sense than prevention. First, allow GMAC to go bankrupt. I’m not talking about bankruptcy light like chapter 11. No, no, I’m talking lucky 7; liquidation. The good loans would find a home and the bad loans would be written off. The argument against liquidation is that there would be less lending bandwidth for cars and houses and would thus impact economic growth. That’s not a bad thing because too much lending got us into the current mess.
Another part of the preparation would be to insure loans properly, as savings accounts are today, so that defaults would be covered. This approach is somewhat robbing Peter to pay Paul in that higher interest rates are the preferred mechanism to protect against defaults. However, adding default insurance could be better for consumers and lenders by offering more appropriate pricing.
In short, we can prepare for economic tsunamis by constantly adding taxpayer bricks to the seawall or we can pick our beachside property more carefully and put our houses on pilings. We can fall prey to the hubris of believing we can control complex events and systems or we can recognize the inevitable and make use of it.
Later
(1) Shady note: Isn’t it interesting how France is viewed today as being regressive and insular? Another De Gaulle quote “I have tried to lift France out of the mud. But she will return to her errors and vomitings. I cannot prevent the French from being French.”
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