More Thoughts On Recent Employment Losses

I posted some data this morning showing the current jobs report ranked not on absolute job losses but as a percentage of the total work force.  I have now pulled the whole data set from the BLS, which goes back to about 1939, and this is what the entire monthly series looks like of employment changes as a percentage of total employment (the purple line is a 3-month moving average).


Folks familiar with this data base may know of reasons the data has become less volatile (perhaps improved seasonal adjustments?) but never-the-less, I have a hard time reconciling this with the popular leftish notion that the decline of traditional American manufacturers (e.g. autos) and unions have led to increasing risk and job/income volatility.  I played around with a couple of ways to summarize the trends.  Here is the number of substantially negative (monthly losses greater than 0.25% of the workforce) jobs reports per decade:


And here is a metric of the volatility of the jobs number.  Since most folks don't really buy the classic economic argument that "risk" equates to volatility up or down, but feel that risk is only to the downside, I have looked at what is sometimes called the downside standard deviation of the jobs change numbers, in which all monthly data greater than zero are set to zero, and then a normal standard deviation is taken on the data.


Posted on December 8, 2008 at 04:42 PM | Permalink | Comments (12)

The 41st Worst Jobs Report Ever

This was sent to me by a reader:  Much as looking at percentage moves in the Dow is much more meaningful than looking at nominal points moves (500 points means a lot less when the average is at 10,000 than when it is at 1,000), it is useful to look at the recent jobs report in the same way.  While 553,000 lost jobs is certainly a lot, it is only the 41st worst loss since WWII when looked at as a percentage of the workforce  (and it would be much further down the list if we had similar metrics back into the 1930's and 1920's).  Via Bespoke Investment Group:


This tends to confirm the statement I made last week, that this recession is likely worse than anything a 20-something Obama supporter can remember, but is not yet even close to some of the problem years of the 1970's, much less the 1930's.

By the way, it is interesting to see all those 1950's dates in there but no dates in the last 25 years, given there are many who have been writing about the current economy being so much riskier for workers than the 1950's.

Posted on December 8, 2008 at 09:18 AM | Permalink | Comments (7)

The Glass Floor

I also thought about titling this post "Recession:  Rich, white males hardest hit."  This is one of the more interesting economic/demographics charts I have seen of late  (of course from Mark Perry):


See Mark Perry's post for more, and some guesses at explanations.

Posted on December 5, 2008 at 10:58 AM | Permalink | Comments (4)

Depression Doubt

MaxedOutMamma (an economist somewhere but she seems to only drop tantalizing clues as to where she plies her trade) is concerned:

I was troubled by how many people seemed to feel the economy wasn't in deep trouble. Profound skepticism and the belief that this is all media/political highjinks seem almost to be the consensus.

I guess you may have to put me in the majority.  I certainly don't doubt that we are headed for a recession.  And it would not surprise me if this is the worst recession that most 20-something Obama voters have experienced, though that is not saying much.  But I am not sure we are even facing the Seventies in this one and we certainly are not facing the 1930s.

Here is the problem that we more casual consumers of economic news must struggle with -- the media has fairly accurately predicted 20 of the last 3 economic downturns.  Everywhere you turn, you see analogies to the Great Depression, a period of time where unemployment topped 25%.  Given the media's track record and the nearly breathless panic about the looming economic disaster, any sane person has to put a divide-by-X filter on economic news.  It is certainly possible that I and other are using too large of an X as a correction factor, but is that my fault, or the fault of the purveyors of information who can't tell any story straight.

By the way, for us Polyannas, here are several interesting posts from Mark Perry

Posted on December 4, 2008 at 09:05 PM | Permalink | Comments (10)

Random Thought on Home Ownership

I'm thinking of the three major consumer purchases that are probably at the base of the hierarchy of needs:  Fuel, food, and shelter.  Its interesting how very different the media and public perception is of price changes in these areas. 

The reaction to fuel price increases is easy to predict - they are always portrayed as bad.  Rising prices hurt everyone, producers are evil, and speculators who make bets on rising prices are even more evil.

The reaction to rising food prices is more mixed.  That's because we have come to the collective decision that producers of food are sympathetic figures whereas producers of oil are unsympathetic.  So media laments about rising food prices are often tempered by good news stories about rising farm profitability.

And then there is shelter.  For this category of consumer expenditure, everything is flipped on its head.  Rising prices are good, and falling prices are bad.  One might argue that housing is different, because consumers often take an equity position in shelter that they do not take in food or fuel.  But all this means is that home buyers are speculating on the price of shelter, going long on bets that prices will rise.  They could easily just rent, and pay for their shelter month-to-month like they pay for their food or fuel, but many consumers bet on rising rents and shelter prices by buying shelter futures (ie purchasing a home).  In a real sense, home buyers are all speculators (using margin accounts at that!), but this is one case where we encourage speculation, and even have tax subsidies for it.

If the reader finds this a funny way to think of home ownership, here is a thought experiment.  Let's say at the age of 30 I wanted to take an equity stake in my current and future fuel needs.  I take out a loan to buy enough Exxon stock such that the annual dividends will cover my fuel purchases for the year.  If fuel prices go up, the dividends likely go up as well, so I am sheltered from the vicissitudes of worrying about my monthly fuel bill, and all I have to do is pay off a regular and predictable mortgage on my Exxon stock.  In 30 years, when the note is paid off, likely I have a big capital gain in my Exxon stock, which I could cash in at retirement if I want to downsize to less driving and fuel use.  Or I can pass it on to my kids.

The only difference I can come up with, economically, between this example and how we do housing is that in my example, consumer capital is invested in productive enterprises rather than dead real estate.

Posted on November 26, 2008 at 08:13 AM | Permalink | Comments (27)

Fight Price Gouging

LOL, via Phil Miller:

Please join me in support for poor, beleaguered gas station owners, the victims of unconscionable price gouging by ruthless consumers who are taking advantage of market conditions to reduce their demand for gasoline, driving down the price by nearly $2 per gallon over the last four months. Fortunately, governments are swinging into action. Georgia governor Sonny Perdue issued this statement: “The financial crisis has disrupted the consumption of gasoline, which will have an effect on prices. However, we expect the prices that Georgian gasoline station owners receive at the pump to be in line with changes in consumers’ incomes and the prices of substitutes and complements. We will not tolerate consumers taking advantage of Georgian business owners during a time of emergency.”

Posted on November 26, 2008 at 08:08 AM | Permalink | Comments (7)

Michael Lewis on ... Whatever the Hell is Happening on Wall Street

As usual, Michael Lewis is a great and informative read, trying to unravel the whole subprime mortgage / CDS / CDO bundle somewhat for laymen.  The article does not excerpt well, but I would summarize it in saying he identified four mistakes by the financial world.  The first two I would describe as real problems but not really new mistakes -- something similar could have been said about S&L's in the 1980's.  These are:

  1. A lot of subprime loans were issued to people with no freaking hope of repaying them, in an incredible general lowering of underwriting standards.  (we all should remember, though, the government and the media was trumpeting this as good news -- increase in home ownership rates, blah blah blah).
  2. People who bought these securities grossly underestimated the default risks, particularly in the crappiest tranches  (securitized packages of loans are resold in tiers, with a AAA tranche getting first call on any payouts, and the tail end BBB tier getting high interest rates but who takes the first principal losses if the loans default).

    But Lewis highlights two mistakes that are in some sense brand new.  These mistakes were effectively vast increases in leverage that acted as a multiplier for the subprime problem, while simultaneously spreading the problem into the hands of AAA investors who accepted the higher returns without paying too much attention to how they were obtained
  3. Someone started scooping up the BBB tranches from various securities packages, bundled these together, and somehow got a ratings agency to declare that the top 60% tranche of these repackaged dog turds were AAA. 
  4. Credit default swaps, originally insurance policies on loan portfolios, turned into a sort of futures market on subprime mortgage packages.  But, unlike futures markets, say in oil, where the futures trading volume are generally well under the total volumes of the underlying commodity flowing around the world, CDS values grew to as much as 100x the underlying commodity volume (in this case subprime mortgage securities).  CDS's went from a risk-management tool to a naked side-bet.

This is interesting stuff, and it was really only reading this piece that I think I started to understand #4 above (though if readers think I am describing this wrong, let me know).  All of this leads me to a few thoughts:

  • Nothing about this convinces me any of these firms need to be saved or bailed out.  Let them die.  Maybe the guys who rebuild the industry in their place will be smarter and more careful.  The country is going to face a recession whether Wall Street is bailed out or not -- too much (paper) value disappeared from consumer's net worths (or their perceptions of their net worth) for that not to be the case.  I lived through Texas in the 1980s when the S&L industry went bust almost to the last institution.   Nearly every one of the top 10 banks in the state went into FDIC recievership. 
  • I have seen people observe that this is an indictment of capitalism because so many people made such bad mistakes.  Sure.  No one said capitalism is a gaurantee against stupidity, or even fraud.  The difference is that the consequences of said stupidity and fraud have to be less in a free market system than if the same people had the power of cersion via government.  In a free market, these guys will fail and be wiped out and get washed away.  The people who they drag down may consider themselves to be innocent, but they participated of their own free will -- if they did not understand what they were doing, that is their problem.  In a statist system, you still have mistakes like this, but they are infinitely more catastrophic, as the stakes in play are often higher.  And the people who made the mistakes are never punished financially, because they are in charge of the machinery of state  (or friends of those in charge).  They make damn sure the power of the state is used to make everyone else pay for their mistake, kind of like ... this $700 billion bailout.
  • Lewis seems to have a hypothesis that the main system change that allowed all this to happen was the shift in ownership structure from partnerships to publicly-held corporations.  And certainly you do get some added agency risks with this, though I find this explanation a bit shallow.  I do think that folks with money are going to approach Wall Street "experts" and rating agencies with a lot more skepticism for a long time, and that can't be a bad thing.
  • The opportunity really exists for someone smart to start a brand new rating agency from scratch.  The only reason the current ones won't get wept away is simply that there are not many alternatives right now.  Warren Buffett should partner with someone well-connected with the new administration (Maybe Larry Summers, since there is no way he will survive a confirmation hearing with his men-are-from-large-standard-deviations-women-are-from-narrow-distributions baggage.)
  • Lewis is unfair in depicting all the mortgage lenders as predatory.  I am sure some were cheats, but remember that as far as Congress, the Administration, the Federal Government, and the media were concerned, these lenders making subprime loans were doing God's work -- they were expanding home ownership and bringing the dream of owning a home to poor people historically redlined, blah blah blah.  It is only with hindsight that we demonize them for doing the wrong thing -- at the time, absolutely everyone on in the country was pushing them to do exactly what they did.  This is also why Democrats struggle to suggest a resposive regulatory package to this whole mess, as any real reform would have to address minimum underwriting standards, which in turn would have the direct effect of limiting lending to the poor, an outcome with which no Democrat wants to be associated.

Update:  Just to be clear, as I have said before, this is about half of what happened.  There are really two stories, and usually authors focus on one or the other.  Story 1 is the steps taken by the Federal Government  (Fannie, Freddie, Community Reinvestment Act, mortgage interest deduction, low interest rates) that fueled the housing bubble and the expansion of credit to questionable borrowers.  It is described here, among other places.  Story 2 is the one above, how private firms decided not only to purchase these questionable loans made on bubble-inflated assets, but to leverage these assets up to staggering levels. 

Posted on November 12, 2008 at 09:03 PM | Permalink | Comments (6)

Yet More Economic Ignorance

Don Boudreax shares this leftish view of the auto bailout from Pat Garofalo:

More importantly though - as Pelosi and Reid said - “federal aid should come with ’strong conditions,’ such as requirements that car makers build more fuel-efficient vehicles.” Bill Scher at OurFuture writes, “With the auto industry in dire straits, we taxpayers have maximum leverage to demand the cars necessary to help lower energy costs, cut carbon emissions and reduce our dependency on foreign oil.”

So, uh, only when the government gets involved do consumers have any leverage with producers in terms of what products they produce?  Hello?  I'm sure Circuit City execs will be relieved to hear this.

In free markets, consumers have all the leverage in determining perhaps not what gets produced, but at least what gets sold in any marketplace.  Producers who are unable to match what they produce to what consumers buy eventually go bankrupt.  In fact, it is this process of consumers exercising their leverage with GM that Congress is attempting to interrupt with a bailout.  Consumers are telling GM loud and clear that GM is not making the cars at the price points they want.  Unable to do so, GM will likely fail.  This failure will result either in 1) GM, under bankruptcy protection, shedding any number of constraints that are preventing it from making what the consumers want or 2) GM liquidating its production assets to other owner/management groups who can do a better job with them.

This quote is a great example of the technocratic bent many leading Democrats bring to economics.  What these guys are asking for is not leverage for consumers, but leverage for a few Democratic technocrats to makeover the auto industry the way they want it.  People like Nancy Pelosi who would never in a million years be given the keys to a manufacturing corporation by a sane ownership group can effectively grab that jobs via the leverage her seat in Congress gives her.

Postscript:  Garofalo adds:

Podesta added that “the auto industry directly employs about 250,000 people and if you think about the ripple effects, they are the backbone of our manufacturing economy.” Indeed, according to estimates, one in 12 U.S. jobs is tied to car manufacturing, and a bailout of the industry could help boost the U.S.’s ailing manufacturing sector.

A couple of points.  First, a GM bankruptcy is hugely, enormously unlikely to mean the whole company is just shut down.  If you have flown in the last 10 years, unless you have favored only Southwest Airlines, you probably have traveled on a carrier in chapter 11.  That's what chapter 11 is - a breathing space while the company continues to operate but is able to restructure its liabilities.  Personally, I would love to see the company go chapter 7 and have a new wave of innovative people take over the assets and see what they could do with them.  But it is not going to happen.  GM may shed jobs over the next year, but they are going to do so anyway in the teeth of a recession, not because they went bankrupt.

Podesta must know that the issue in a bankruptcy will not be jobs, but labor contracts  (airlines have practically patented the chapter 11 vehicle for renegotiating union contracts).  Most GM manufacturing employees would probably keep their jobs through a bankruptcy, but they may well lose their contract that says they get paid $75.86 an hour with 34.5 days a year of paid leave.  Garofalo and Podesta are shilling for the union over wage bargaining, not jobs.

The other observation I want to make is to ask why the loss of these 250,000 jobs is going to be so much worse than the loss of 500,000 jobs over the last several years.


I know parts of Michigan suffered, but Podesta is claiming knock-on effects for the whole country.  So where were they?

Posted on November 11, 2008 at 09:47 AM | Permalink | Comments (13)

More on the Stagnating Wage Myth

A while back, when I discussed the stagnating wage myth, I observed that folks spreading this meme were careful to show figures only for cash wages, and not for total compensation.  In the period from 2000-2006, which is the typical period critics focus on (in part because it implies blame on the Bush administration, and in part because it lets them measure economic peak to trough) there has been a substantial shift in compensation mix from cash to non-cash benefits, including health care and paid time off.  Ignoring these components is particularly disingenuous given that many of these same critics have been long-time supporters of more paid time off and better company-funded health care.

As an example, this data (courtesy of Mark Perry) on the Big 3 automakers contracts is telling.  In 2000 (table page 3) it shows cash wages per hour worked at $22.71 and total comp at $43.57.  In 2006, the most recent year of data, it shows cash wages per hour worked at $29.15 and total comp at $75.86.  So, while cash wages per hour have increased about 4.25% compounded each year, total compensation has increased more than twice as fast, at 9.7% a year.  That latter increase is due both to a rapid rise in health care expenditures for employees as well as an increase in paid day off to 34.5 a year.  (by the way, if you are wondering why the UAW is fighting so hard for a government bailout, look no further than jobs with $75.86 an hour total comp. and seven weeks a year of paid days off.)

Posted on November 10, 2008 at 02:19 PM | Permalink | Comments (0)

Getting Out While There is Still Time

I worked for several years for AlliedSignal engines, now Honeywell, here in Phoenix.  At our main engine plant here, we endured a couple of union organizing campaigns that both fell just shy of winning a position for the union.  A reasonable manager might expect that under the Democrat's proposed card-check system which replaces anonymous votes with open petitions, that enough hijinx could be brought to bear to put the union over the top.  I don't now if this is what they have in mind, but...

Phoenix-based Honeywell Aerospace plans to move 700 manufacturing jobs from Phoenix to Mexico and the Czech Republic.

Employees were notified Thursday of the cuts, which will begin in the second quarter of 2009 and continue for three years. Most of the job cuts are expected in the first year.

Workers who asked not to be identified said the news caught employees completely off-guard.

The affected jobs are at Honeywell's 34th Street facility at Sky Harbor International Airport, where the company and its predecessors Allied Signal and Garrett have built jet engines for almost 60 years.

I think the timing just a day after election results in, and the level of surprise, are telling.  Time to get this done now, before the owners have to go cap in hand to their employees to ask permission to run their business as they see fit.  I thought this last bit they added brings a nice irony to the situation:

The announcement came two days after Barack Obama, who has promised to take a hard line with companies that move manufacturing jobs overseas, was elected the 44th U.S. president.

Whatever that means, but it does give yet another reason to get out fast.

Posted on November 6, 2008 at 11:00 PM | Permalink | Comments (6)

More on the European Economic Model

Yesterday I posted on the irony that in the name of "change" and "dynamism," the Democrats are pushing for what basically is an inherently more conservative (little-c), less dynamic economic system that mirrors that of many continental European countries.

Daniel, an American reader who does quite a bit of work in Europe, wrote me:

1) The static nature of the Euro mentality assigns a high cost to ... people ... who try to break the mold. Cost of failure is relatively high. In Italy if your small business declares bankruptcy, you forfeit the right to vote.

2) In Germany, workers are sorted at an early age into "blue collar schools" and "professional schools". I know from my youth, if I had grown up in Germany instead of America, I probably would not be a consultant but more like a janitor (not that there is anything wrong with janitors...).

3) Social services in Europe are hit and miss. In Germany, many people carry private insurance despite the availability of public insurance because of the lack of quality.

4) (this may be a good thing) Italian school children go through a less harsh puberty than American kids. Society has drilled into them that it's not cool to be different, so there are less cliques. When I share my experiences in school with most Europeans they usually make some snide remark about how growing up in a battle zone (primary school) has caused the Iraq war.

5) Highly skilled workers are in many cases no better paid than unskilled staff. In the south of Italy a senior programmer may make 2K euros per month. A secretary might make 1.5K a month. If it weren't for most Europeans fear of moving to new cities, there would be no programmers to hire.

6) Speaking of being afraid to move, many Europeans find the thought of moving to a different city complete alien concept.

7) Life in Euro is a much more comfortable than in America *if* you are European. If you are an immigrant, forget it. After two years of pitching companies in the South of Italy, I have never seen a black person be more than a street side vendor of trinkets. In Italy, there is an unsaid rule that you must be an Italian to ever be a professional.

8) Don't get me started on France.

9) It is illegal for a business to stay open more than it's quota in most European countries. It is illegal to operate a barber shop on Mondays.

Posted on October 29, 2008 at 08:06 AM | Permalink | Comments (16)

European-Style Political Economy Coming to America

A lot of folks, particularly on the left, look with some fondness at the political economy of continental Europe.  They are attracted by high job security, short work weeks, long vacations, and a strong welfare system.  They make the mistake of seeing in these traits a more promising society "for the little guy," when in fact just the opposite is true.

The European Corporate State

The political economy of companies like Germany and France are actually incredibly elitist, dominated by perhaps a hundred guys (and I do mean guys) who run the country in a model only a few steps removed from Mussolini-style fascism or the Roosevelt's National Industrial Recovery Act.   In these countries, perhaps 20 corporations, ten or fifteen large unions, and a group of powerful politicians and regulators run the economy.

US workers sometimes make the mistake of seeing the political power of European unions and equating this power with being a more egalitarian environment for workers.  But the European political economy is rule by the in-crowd over the out-crowd that exceeds any of the patronage relationships we complain about in this country.  What we don't often see from our American perspective is the way the system is structured not to protect poor from the rich or the weak from the strong, but to protect incumbents (whether they be corporations or skilled workers) from competition. 

In the European labor markets, mobility is almost impossible.  The union system is built to protect current high-skilled workers from competition from new workers, whether in the same country of from abroad.  Large corporations that form part of the cozy governance of the country are protected from new competition, and are bailed out by the government when they hit the rocks. 

As a result, unemployment is structurally high in countries like France and Germany, hovering for decades between 8 and 12% -- levels we would freak out at here.  Young and/or unskilled workers have a nearly impossible time breaking into the labor market, with entry to better jobs gated through apprenticeships and certifications that are kept intentionally scarce.  Joe the plumber is an impossibility in Europe.  Some Americans seem to secretly love the prospect of not easily being fired from their job, but they always ignore the flip side -- it is equally hard to ever be promoted, because that incompetent guy above you can't be fired either. 

Entrepreneurship in Europe is almost impossible -- the barriers just to  organizing your own corporation legally are enormous.  And, once organized, you will quickly find that you need a myriad of certifications and permissions to operate in your chosen field -- permissions like as not that are gated and controlled by the very people you wish to compete with.  The entire political economy is arrayed in a patronage system to protect current businesses with their current workers.

Here is a test, that works most places in the US except possibly in Manhattan.  Ask yourself who are the wealthiest and/or most succesful people that you know.  Then think about where they went to school.  Sure, some of the more famous Fortune 25 CEOs went to name schools, but what about the majority of succesful people you meet in your life?  If you are like me, most of them did not go to Ivy League or what one might call elite schools.  They had normal state college educations.  You will typically find a very different picture in Europe.  While of course there are exceptions, it is much more likely that the wealthy people one meets were channeled through a defined set of elite schools.

Corporations in Europe, particularly the cozy few who wield influence with the government, seldom fail and/or really gain or lose much market share.  I always thought this a telling statistic:  (Fortune 100 by year here)

[Olaf Gersemann] points out that of the top 20 largest publicly traded companies in the US in 1967, only 11 are even in the top 60 today, much less the top 20.  In contrast, he points out that of the 20 largest German companies in 1967, today, thirty-five years and nearly two generations later, 19 are still in the top 60 and 15 are still in the top 20.

Its also an inherently anti-consumer society.  The restrictions on foreign trade, entrepreneurship, and new competition all reduce consumer choice and substantially increase prices.  EU anti-trust enforcement, for example, barely pretends any more to look out for consumer interests.  Most of the regulators decisions are better explained by protection of entrenched and politically influential European competitors than it is by consumer power or choice.

"Progressives" in this country often laud the lower income inequality numbers in Europe vs. the United States.  The implication is that the poor in Europe are somehow better off.  But in fact this is not true.  Careful studies have shown that the poor are at least as well off in the US as in Europe, particularly when one corrects for the number of new immigrants in the US.  (That's another difference, by the way -- Europe is virtually closed to immigration, at least as far seeking new integrated citizens is concerned).  What drives income inequality is that our middle class is richer than Europe's middle class, and our wealthy have more income than Europe's wealthy. 

To this last point, I have always felt that comparisons of the wealthy in the US to those in Europe, and comparison of income inequality numbers, are a bit apples and oranges.  The US is a country where access to most of the best perks is via money - they have a price.  In Europe, access to most of the best perks can't be bought by money, they can only be accessed by those with the elite establishment club card.   To some extent, the income numbers understate the difference between rich and poor in Europe for this reason.

Next Stop:  America

We see many of the elements of the European economic system slipping into the US today.  An increasing number of professions require certification by the government, with this certification often either controlled by the incumbents in the profession or with criteria that essentially require new entrants to compete in the same way incumbents do.  We see the top companies with political influence, from Wall Street firms to banks to automobile manufacturers getting government assistance to stay in business or maintain their status.  This, from the proposed GM bailout, is the European system personified:

General Motors and Cerberus Capital Management have asked the U.S. government for roughly $10 billion in an unprecedented rescue package to support a merger between GM and Chrysler, two sources with direct knowledge of the talks said on Monday....

one of the conditions of the merger would be that GM-Chrysler would spare as many jobs as possible in order to win broad political support for the government funding needed to complete the deal, people familiar with the merger discussions said.

This is the same political deal cut in Europe.  Large powerful company is protected from failure by government.  In turn, powerful company protects interest of powerful union.  The only thing missing here, which I think is clearly on the agenda for the Obama administration, is a large protective tariff to shield this inefficient mess from competition.  Left out of the equation are consumers, who get more expensive cars and suffer because GM is again given a hall pass from producing cars that people actually want to buy.  Also left out are potential competitors, who don't get the government deal and who miss out on the chance to buy up GM assets and hire ex-GM employees out of bankruptcy and do a better job with them.  This European system puts a premium on keeping productive assets in their current hands, rather than in the most productive hands:

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe's most productive human and physical assets into organizations with DNA multipliers less than one. 

Beyond the actual legislation, the other sign that the European model may be coming to the US is in attitudes.  I think Michelle Obama is a great example of this.  She and her husband checked all the elite boxes - Princeton undergrad, Harvard Law - but she is shocked that having punched her ticket into elite society, society didn't automatically deliver, as it might in, say, France.  She's actually stunned that, had it not been for Barrack's succesful books, they might have had to give up their jobs as community organizers and at non-profits to actually earn enough to pay back their 6-figure school loans.

Despite their Ivy League pedigrees and good salaries, Michelle Obama often says the fact that she and her husband are out of debt is due to sheer luck, because they could not have predicted that his two books would become bestsellers. "It was like, 'Let's put all our money on red!' " she told a crowd at Ohio State University on Friday. "It wasn't a financial plan! We were lucky! And it shouldn't have been based on luck, because we worked hard."**

The Progressive Irony

In all this, I think there is an amazing irony.  In a nutshell its this:  The "Change" that Barrack Obama is selling to the electorate is in fact the creation of a government infrastructure to fight change.  I have written before that progressives are actually inherently conservative.

Ironically, though progressives want to posture as being "dynamic", the fact is that capitalism is in fact too dynamic for them.  Industries rise and fall, jobs are won and lost, recessions give way to booms.  Progressives want comfort and certainty.  They want to lock things down the way they are. They want to know that such and such job will be there tomorrow and next decade, and will always pay at least X amount.  That is why, in the end, progressives are all statists, because, to paraphrase Hayek, only a government with totalitarian powers can bring the order and certainty and control of individual decision-making that they crave....

One morning, a rice farmer in southeast Asia might faces a choice.  He can continue a life of brutal, back-breaking labor from dawn to dusk for what is essentially subsistence earnings.  He can continue to see a large number of his children die young from malnutrition and disease.  He can continue a lifestyle so static, so devoid of opportunity for advancement, that it is nearly identical to the life led by his ancestors in the same spot a thousand years ago.

Or, he can go to the local Nike factory, work long hours (but certainly no longer than he worked in the field) for low pay (but certainly more than he was making subsistence farming) and take a shot at changing his life.  And you know what, many men (and women) in his position choose the Nike factory.  And progressives hate this.  They distrust this choice.  They distrust the change.  And, at its heart, that is what the opposition to globalization is all about - a deep seated conservatism that distrusts the decision-making of individuals and fears change, change that ironically might finally pull people out of untold generations of utter poverty.

Don't believe me?  Below is from an email I received.  The writer was outraged that I would have the temerity to say that the middle class in the US had it better than even the very rich in the 19th century.

Sure, the average rural resident of a developing country earns more in dollars today than before. But you're missing the big picture. Wealth is about so much more than just money, and status symbols. It is about health, and well being, and contentedness, and happiness. The average peasant family in India in 1900 may have lived a spartan lifestyle by today's standards, but it probably could rely on more land per family, crops uncontaminated by modern pesticides and fertilizers, a stronger social network and village-based safety net. These peasants were self-sufficient. That is no longer the case

Progressives want to eliminate risk and lock in the current world.  New technologies, new competitors, new business models all need to be carefully screened and gated by a government-labor-corporate elite.  Entrepreneurship, risk, mobility, achievement all should be sacrificed to a defined and steady paycheck. In the name of dynamism, progressives, as well as many modern politicians, want to limit the dynamism of the American economy.  In the name of egalitarianism, they wish to create a small political elite with immense power to manage everyone's life.  In the name of progress, they wish to lock current patterns and incumbents in place.

** Postscript:  By the way, here is how I responded to Michelle Obama's education debt rant

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

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

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

Posted on October 28, 2008 at 12:09 PM | Permalink | Comments (14)

So If It's All About the TED Spread, Should We Be Worried?

Us non-financial types are always learning something new.  After a lifetime of thinking that our economy rests on free markets, entrepreneurship, an educated and flexible labor force, risk-taking, etc., we suddenly find that everything depends on the TED Spread, a metric most of which most of us were blissfully ignorant 2 months ago.

The TED spread is basically the difference or spread between short term inter-bank loan rates and short term treasuries or T-bills.  It is in some sense a measure of perceived risk of lending to banks vs. (what are considered) low or near-zero risk US treasury obligations.  One way to think about it in the current market is how much extra would you need in interest to lend to your slacker brother-in-law Earl vs. say to Bill Gates.

Not surprisingly, the TED spread has shot up over the last few weeks, and it tends to be the #1 metric cited in declaring impending doom for the US economy.  But Alex Tabarrok looked at a longer view of the TED spread, and found this:


Now, the period from 1970-1983 were not by any means an economic glory period, but on the other hand its clear that TED spreads of the order of magnitude we have seen in the past weeks are not unprecedented by any means. 

The problem I have with the TED spread is that higher recent spreads are being used as an indicator that credit has "dried up" and lending is at a standstill.  Why do I resist this conclusion?  Because of this chart:


So, gasoline prices rocketed from $1.50 a gallon to over $4.00 a gallon.  Does this mean that gasoline purchases have stopped?  Has the gasoline market closed up shop?  Of course not.  It just means the price went up.  It is absurd to show me a price chart, which is what the TED spread graph is, and infer from it changes in the underlying transaction volume. 

In fact, when one looks at actual volume, of inter-bank loans or new commercial lending, there is not (at least yet) any of the drop-off everyone seems to assume exists.  For example:


Posted on October 27, 2008 at 04:35 PM | Permalink | Comments (5)

You Heard It Here First

I said it a couple of weeks ago:

Economists will be poking through this situation years from now, and may well find the bunkers empty of WMD's.  Another trillion dollar commitment and unprecedented expansion of executive power ramrodded on the back of fear mongering and chicken-little crisis declaration.

And even before that on October 1

Well, they're picking through the bunkers now, and its not at all clear the threat was what it was portrayed to be.  The Fed of Minneapolis debunks four myths (pdf)

Myth 1. Bank lending to non…nancial corporations and individuals has declined sharply.
Myth 2. Interbank lending is essentially nonexistent.
Myth 3. Commercial paper issuance by non…nancial corporations has declined sharply and rates have risen to unprecedented levels.
Myth 4. Banks play a large role in channeling funds from savers to borrowers.

Apparently, others are starting to make the WMD comparison.

A couple of examples below.  First, sure looks like all the inter-bank lending has dried up:


Yep, and no one is lending to Main Street businesses either, so we better do something!


Just to avoid confusion, that upward spike began in September, well before the Lehman bankruptcy.  Similar stories in commercial paper, consumer lending, leases, etc.  See the whole thing.

Posted on October 22, 2008 at 01:21 PM | Permalink | Comments (14)

Another Bubble! We Need More Regulation!

From the WSJ:

Despite recent declines, prices are still higher than they were a year ago. But the recriminations over what went wrong have begun, complete with calls for more government involvement, efforts to make the industry more transparent and reforms to restore market confidence....

"[the market] is out of control," says H. Djusdil Akrim, director of a factory in Makassar, Sulawesi's biggest city.... "It's a wild, wild market -- and no one is running it," he says. "I think we need more regulation."...

No one knows when the market will hit bottom. Some traders are sitting on stockpiles they bought when the market was hot, and if global growth slows further, as expected, demand could weaken.

Whatever happens, the latest volatility is a wake-up call for the ... industry, which has been growing steadily for years.

I blame George Bush.  Oh, by the way, the industry is seaweed.

Posted on October 20, 2008 at 08:53 PM | Permalink | Comments (1)

A Brief Thought on Wealth

One of the pieces of data that turns out to be nearly impossible to find is a direct comparison of the median income by quartile on a PPP basis between countries.  In other words, how does the income of, say, the US lower quartile compare to other countries?  There are a zillion sites with metrics of income inequality and GINI indexes and such, but to my mind these are meaningless.  OK, the poor in the US are much less wealthy than the rich in the US, but how do they compare to the poor of other nations.  The few studies I have seen have reluctantly (remember, these are leftish academics) admitted that the US poor do pretty well vs. the poor in other nations.  Here is data for US vs. Europe.

I got a lot of grief a few years ago when I said, related to Kwanzaa:

Every African-American should wake up each morning and say "I give thanks that my ancestors suffered the horrors of the slavery passage, suffered the indignity and humiliation of slavery, and suffered the poverty and injustices of the post-war South so that I, today, can be here, in this country, infinitely more free, healthier, safer and better off financially than I would have been in Africa."

I wanted to actually make this comparison more real.  I used the CIA Factbook to estimate the share of per capita GDP on a PPP basis earned by the top decile, or top 10% wealthiest individuals, in a number of African nations (Example page here for Ethiopia -- calculation would be [25.5%/10%] x $700 per capita). 

So here are the results:

  • Ethiopia top 10%:      $1,785
  • Nigeria top 10%:        $6,972
  • Zimbabwe top 10%:    $800

Hopefuly this is enough of a sample to give you an idea of the range.  Only South Africa is a real outlier from this range.  Now, by the same methodology and source, here is the average share of the per capita GDP for the bottom 10% of earners in the US:

  • United States bottom 10%:   $9,160
  • United States African-American avg (est):  $32,060**

Wow!  This means that the average person in the bottom 10% in the US, most of whom we classify as below the poverty line, would easily, by multiples and orders of magnitude, be in the top 10% richest people in most African nations.   And the surviving decedents of those poor folks who got dragged to the US in slavery would be the Bill Gateses of their mother countries.

The point being, of course, that the size of the pie is typically more important than how you divide it up.  And it is nearly an axiom that government efforts to divide the pie more evenly almost always make it smaller.

** estimated based on 2006 median black household wages being about 70% of the US median household wages.  Yes, I know, we are wildly mixing apples and oranges here to get African American share of GDP per capita in the US, but its in the ballpark -- certainly close enough to make my basic point.  And yes, I know there are flaws in measuring income across countries even on a PPP basis.  If anyone knows of how to get this data more directly, please email me.

Posted on October 19, 2008 at 03:03 PM | Permalink | Comments (6)

Bending Over Backwards to Try to Show Wage Stagnation

The media is really bending over backwards to find ways to twist earnings data for average Americans to try to make the point that real income for many folks has stagnated or dropped.  They are doing this to support a two-pronged legislative strategy in the next Obama administration:

  1. Use the power of the government to further tilt the balance towards unions and against employers in wage negotiations  (this strategy having worked out so well to create prosperity in the automobile and airline industries)
  2. Further modify the income and Social Security tax structures to make them even more regressive than they are today.

They are firing on all cylinders behind this strategy.  They are even mobilizing the neo-Keynesians to make the pitch that the Great Depression and the current financial crisis were caused by a shift in wealth from laborers to the capital classes, and that the only way to prevent future crises and depressions is to, wait for it, increase the power of unions and institute more wealth redistribution  (Example here, via Kevin Drum).

I was going to do a post fisking the James Livingston article linked above on Kevin Drum's site, but Livingston's hypothesis was such a mess that it was just going to take too much of my day.  But in doing some research, I found this chart from a couple of years ago in the NY Times that really caught my attention:

Talk about chutzpuh -- look at the lede on the chart and then look at the chart itself.  Yes, the lede is correct, but only if you choose the totally meaningless number of "cash wages" rather than total compensation.  If one looks at total compensation (or what they call "overall" compensation), the entire argument falls apart.   Workers have maintained about their same "share" of the economy. 

Sure, a large percentage of that is now in health care benefits, but that's a choice workers have made (and the government has encouraged through tax policy).  In fact, this compensation mix has been driven in large part by the Left's beloved unions, so on what basis can folks say that these other benefits somehow "don't count?"  Certainly, they cost their employers equally, whether it is cash or health care.  Corporate profits are up a bit, but in line with their normal historical levels in the 1950s and 1960s, the golden age of the US economy, according to the Left.  (By the way, the pattern of falling wage shares and rising profit shares after recessions is a well-documented one.  Wage-earners do best at the end of an economic cycle, employers more towards the beginning.  The chart cut off after 1997 would look about the same as the last several years).

I will tell you right now that every time you hear someone bemoaning the stagnation of wages, they will never, ever, ever be talking about total compensation per individual.  Having, through government policy and union activity pushed the compensation mix to non-cash elements, they then play a heads-I-win-tails-you-lose game of not giving any credit for those compensation elements.

Other games that are played to try to make the case that real earnings have stagnated include:

  • Time frame selection. Everyone making this argument will choose 2000 as a starting point.  They justify it by saying it is the beginning of the Bush years, but 2000 is really selected because it is a pre-recession peak, and they have to measure peak-to-trough of the economic cycle to try to make their point.  Just as an example, if you look at the household income numbers below, you can see there is very typically a 5-year drop after a recession followed by net gains.  If we chose, say, the first Clinton term we could play the same game, showing a peak-to-trough drop in real incomes.
  • Household income game. The household income numbers are fraught with peril, because companies don't pay households, they pay individuals.  And household makeups are changing simultaneous to income changes.  For example, imagine the economy was just my household.  If my wife were to get fed up with my shtick and divorce me tomorrow, average household income would drop by 50% in one day (as our total income stays the same but we go from one to two households).  If my wife were to go back to her high-paying pre-kids job tomorrow (if only it were so!) our household income would go way up, in part because the labor department does not capture the value of the labor she provides at home.

    Mark Perry
    has a lot more on the household income numbers here, but he shows that the household size number has been changing a lot, causing the metric to understate income changes per individual:


  • Individuals matter.  Median income looks at the middle person on the ranked list of US incomes.  So, for example, if there are 100 million income earners, the median income is the income of number 50 million on this list.  But whoever the person is at spot 50 million is almost certainly not the same person who was at spot 50 million last year.  They might have fallen on the list, but the odds are they moved up.  As folks age and gain experience and/or seniority, they tend to increase income faster than inflation.  Most minimum wage earners, for example, tend to be under 25.  The number of families supporting three kids on minimum wage (at least of the primary bread-winner) at the age of 45 is really, really low, despite the anecdotes we are bombarded with in the media.


  • Immigration has a huge effect. The total number of foreign born people in the labor force is estimated around 21 million, of which perhaps 6.3 million are illegal immigrants.  Positing that at least 10 million of these arrived in the last two decades, and that many of these folks began at relatively low, below-median incomes, means that median incomes are hugely affected by immigration.  Leaving immigrants out so the comparison is close to apples and apples, to find the true median income gain over the last 20 years one would have to count up 10 million or so spots on the list. 

    Again, as in the previous point, most individuals can be better off even if the median stagnates  (presumably immigrants coming in at the bottom are also better off, even at the bottom, than where they were before, or they would not have come.  We often forget that much of our bottom quartile of income in this country would be upper middle class in many other nations).  This is a classic mix problem that most people, and the media, almost always get wrong.  In a situation with a changing mix of multiple groups, each of the groups can be improving on some metric, but the overall metric can go down.  You can see the income stats by race here.  Every race group has increasing median income, but since the Hispanic group has grown 8x faster than the anglo population in the US, the total results are mixed downwards.

    Here is a quick example.  Group A has values of 5,6,6,7.  Group B has values of 1,2,3.  Ten years later Group A is the same size and has values of 6,7,7,8.  Group B has doubled in size, and now has values of 2,3,4,2,3,4.  In these examples, every single individual has a higher value.  Also, Group A's median has increased from 6 to 7, and Group B's has increased from 2 to 3.  But the median for the whole combined group A+B has dropped from 5 to 4.  Both medians (and averages) can do funny things when mix is shifting.
  • Even the NY Times.  The NY Times actually makes two of these points for me in another article, arguing that historic median income drops were concentrated in areas of high immigration, and reported drops were due to the choice of the economic peak as a starting point.  WOW?  Is this the same NY Times I began this post criticizing.  Yes it is, the only difference is that this article ran in 2001, when they were reporting on the economy during a Democratic administration.
  • Income taxes are already wildly progressive.  While I would love to be in that top 1% group, I don't really begrudge them their success.  Besides, who can look at the chart below, again from Mark Perry, and come to the conclusion that the top 1% are being treated unfairly generously.


  • Every country that has implemented this plan (government-backed unions and wildly progressive tax policy), including most of Western Europe, is demonstrable worse off than the US on absolute measures.  This is both the median, but also in every quintile, including the poorest.  While it is true the poorest quintile has a bigger gap from the riches in the US vs. France for example, on an absolute basis our poorest are at least as well off  (particularly when differences in immigration policy are taken into account).

Posted on October 19, 2008 at 02:04 PM | Permalink | Comments (9)

Good News, Really

Believe it or not, I think this picture is actually good news:


This is a little flawed, since we would expect a constant trend to be a constant percent increase each year, which would be upward curving on this chart, not a straight line trend  (it would be straight on a log scale).  Never-the-less, it makes a point  (by the way, it is interesting the 1980's are considered the decade of greed on Wall Street rather than the 1990s, from this chart).

Here is a better way to make my point.  We get a similar chart if we look at PE ratios for the S&P500  (the chart below is on trailing 10 year average earnings).


Why is this anything but depressing?  Because I get the sense that many people, without any other general indicator of how bad things are in the financial markets, are using the steep drops in the stock market as a proxy measure.  The stock market looks like a disaster, so everything else must be a disaster.

But in a large sense, at least so far, all the stock market has done in the last 2 weeks is return to historical norms.  This tells me that there is nothing about the current level of the stock market that is screaming disaster signals.  In fact, the current level of the stock market is screaming normalcy. 

Of course, this does not mean the drop will stop here.  PE's in the worst of times have headed on down to 5 (which would be about DOW 3000, yuk).  And corrections seldom stop at the mean - they usually over-correct on below the mean.  But seen on these charts, this recent move looks more like the completion of the correction to the late 1990's bubble rather than necessarily an indicator of current financial disaster.

Posted on October 12, 2008 at 08:27 AM | Permalink | Comments (8)

Don't Panic

The best way to mobilize people is to make them panic.  That is why so many institutions have incentives to may you panic over the environment, or global warming, or the threat of terrorism, or the economy.  In most cases (Naomi Klein's hypothesis not-withstanding) these folks want you to get so worried you will give up something, either money or freedom or both.

Some kind of recession at this point is unavoidable, I guess.  But in fact, we really haven't seen what I would call a real recession since the early 1980's.  We've had a really long run, and now its time to cut back on that spending and board up the financial windows for a little while.  The economy has to de-leverage itself some, and that is going to slow things down for a while.  People keep talking about the Great Depression, and I don't see it.  I don't even think its going to be the 1970's.

The most visible symbol of financial problems seems to be the falling stock market.  But all those companies in those indexes are the same ones that were there a month ago, and are still healthy and making money.  The fall in the markets does not represent and change in the current health of industrial America.  The lower prices reflect a changing expectation about those company's future prospects, but the folks driving the market are just guessing, and really, their guesses aren't really any better than yours or mine.  Similar expectations drove oil up to $145 and now back down under $80.  Wall Streeters work really hard to portray themselves as smarter than you or I, but they are not.  I went to school with them.  I know these guys.  They aren't smarter, and they aren't any less susceptible to panic.  In fact, because they are often highly leveraged and are worried about making payments on that new Jaguar they just bought for their mistress, they tend to be more easily stampeded.

In October of 1987, the stock market fell 22.6% in one day.  If you date the current financial issues to about September 22, when the market closed around 11,000, then the market has fallen over these tumultuous weeks by 22.0% at last night's close -- dramatic, but still not as bad as the one day drop in '87. 

Posted on October 10, 2008 at 09:42 AM | Permalink | Comments (11)

Why Politicians Favor Cap and Trade over a Carbon Tax

There are a lot of incredibly good reasons to favor a carbon tax over cap-and-trade if we simply most reduce CO2 emissions.  Even a minor inspection of the inner workings of the California Air Resources Board under their AB32 cap-and-trade style program provides lists of examples of abuses, rent-seeking, inefficiency, etc. under cap-and-trade.  But Joe Nation, one of the California legislators who authored AB32, told me that he could not get even a 5-cent gasoline tax through a legislature that enthusiastically embraced the 100x (or more) expensive AB32.  Why?  Silly rabbit, because public costs of cap-and-trade can be fudged, hidden, ignored, and, when they absolutely have to be recognized, blamed on private companies.

Via a reader, here is our Arizona governor discussing the costs of cap-and-trade in Arizona:

Napolitano brushed aside questions of what effect the plan will have on utility rates.

"First of all, that it may increase electric bills doesn't mean it will increase them now," Napolitano said.

Brave, isn't she?  They are already preparing the story line to blame private industry for future price increases:

Napolitano said there is "lots of data" to suggest that utilities eventually will be able to save money "by moving to a system of 'green' energy."...

Fox said that, on a long-term basis, there may be cost savings.

You get that?  We smart government guys conducted a lot of really high-power circle jerks among graduate students and the consensus was that forcing the electrical industry to obsolete much of its current capacity and rebuild with some other uproven but more expensive technology would save them money in the long term.  If utilities raise prices, it's because they were not smart enough to figure out what we already know and they are just greedy capitalist pigs so blame them for the price increases, not use faithful public servants.  You see?  Cap-and-trade is like money laundering for taxes.  The tax is there, but its hidden well enough that a lazy media will not bother to trace it back to its owner.

But I wouldn't want you to take my assertion on faith (as Obama does with his 5 million green jobs promise), so lets look at what will have to happen.

The exact goals are hazy, but it appears our governor has committed the state to cutting CO2 emissions by 15% over the next 10 years.  One of the main ways that calling CO2 "pollution" is misleading is to imply it is some kind of combustion by-product, like soot or SO2, that could be scrubbed out.  But it is not.  It is fundamental to combustion.  So a 15% cut in CO2 emissions is 10-15% cut in power generation  (we likely get numbers lower than 15% by assuming cuts in production are preferentially from higher carbon sources like coal plants). 

So, basically this law requires the state's electrical utilities to obsolete 10% of its installed capacity, and either a) have tons of rolling blackouts; b) raise prices enough to force a large cut in demand  (remember, demand must be cut 10% AND all future growth must be halted); or c) the industry must spend hundreds of billions of dollars to build a ton of capacity in some other technology.  Option a will never fly politically.  Option c is almost sure to fail as well.  The permitting and construction processes can take decades.  From a cold start, I don't think its possible to rebuild 10+% of the states generation capacity in 10 years, either in nuclear or some other not-yet-ready technology.  The numbers simply don't work.  The only possible way I can imagine is maybe to install a zillion natural gas turbines, but to make the CO2 balance work out, you probably would have to rebuild 15% or more of the capacity, not just 10%, because there would still be some carbon emissions. 

Really, realistically, one is left with option b.  Prices are going to go up (just they would have to in option c to pay for replacement production capacity).  The price increases would be about as much as the carbon tax would have had to be to get the same effect, but price increases are corporation's fault while taxes are politicians' fault.  See?  The only good news is that the price increase will go to private players rather than the government.  That is until someone thinks to put in a windfall profits tax on utilities that are making lots of money on the government-enforced shortage.

Posted on October 8, 2008 at 07:45 PM | Permalink | Comments (9)

A Simple Alternative to Mark to Market Accounting?

I haven't posted at all on the brouhaha about mark-to-market accounting of derivatives and whether it was a contributor to the recent financial mess.  If I had to summarize the issue, I would describe it thus:  Investors want something more trustworthy than just management estimates of the value of complex securities -- so they would like an outside market-based reference point -- but the very complexity that makes these contracts hard to value as an outsider also tends to make their markets illiquid and volatile, making it difficult to get a good market value. 

Tom Selling addresses the problem of accounting for the value of credit default swaps here.  He makes what seems to me to be a common sense suggestion:

Requiring the asset and liability sides of derivatives to be separately measured and reported seems like an amazingly simple fix that could simplify regulation of the financial and insurance industries, reduce the need for the disclosures in financial statements written so as to discourage one from reading them, and help investors more easily assess risk.

This certainly seems reasonable to me.  When one buys a revenue producing asset with debt financing, the two are listed separately as an asset and a liability, rather than as one "net" asset, even though they may be inextricably linked (say if the asset is collateral for the loan and the loan has high pre-payment penalties).  Any thoughts?  Does this make sense, or is it naive?

Posted on October 7, 2008 at 10:01 AM | Permalink | Comments (4)

Fed To Start Buying Commercial Paper

Paul Kedrosky reports:

The Federal Reserve Board on Tuesday announced the creation of the Commercial Paper Funding Facility (CPFF), a facility that will complement the Federal Reserve’s existing credit facilities to help provide liquidity to term funding markets. The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers.

Kedrosky has a lot of interesting coverage of the current financial crisis.  He observes:

As Buffett has said, everyone in the world is trying to deleverage at once -- which is unworkable -- leaving the U.S. as the only institution in the world that can lever up at all -- and levering up it is. I just wish it was more obvious to me how you exit the other side of programs like this. Would we not be better off to quickly recapitalize and backstop some banks?

I share his concerns, but I actually kind of like the idea of bringing liquidity to main street business directly, rather than indirectly by bailing out failing financial institutions.  The problem of unwinding the program is a big one.  Right now, I get the sense that the financial markets are operating almost entirely on expectations of government action -  will the Feds buy back mortgages, will the Feds keep the overnight borrowing window wide open, will the feds gaurantee commercial paper, how much commercial paper will they buy.  This latter actually seem the least bad of a lot of other options.  At least the Feds are buying good assets from good companies.

Posted on October 7, 2008 at 08:36 AM | Permalink | Comments (3)

So Is The World Bailing Out of US Investments?

No, at least not yet, with the dollar at a 13-month high.

Posted on October 4, 2008 at 08:17 AM | Permalink | Comments (5)

Hey, Lets Look at More Financial Sector Charts!

OK, I know burn-out is setting in.  I certainly think that explains, in part, why the House voted for a demonstrably worse bill than they voted against the week before.  But John Moore has a number links to an interesting set of charts from the Milken Institute on the financial meltdown.

They hit on many of the things I discussed earlier, but put a greater emphasis on 1) securitization, and the effect it had on good underwriting standards and 2) on interest rates as a driver of the housing bubble.

Update:  And an interesting post on the link between credit default swaps and short-selling.  My personal view is that credit default swaps will someday be looked at like earthquake insurance -- nice premiums today, but too much systematic risk, too much certainty that in 10 or 20 years there will be an event that forces nearly every policy to pay simultaneously, wiping out the insurer.  You can't get earthquake insurance, and you nearly can't get hurricane insurance, and I think the default insurance market may go the same way.  Or, as a minimum, the price is going so high few people will buy it.  This is not a market failure, it is a market lesson learned and adjustment to reality.

Update #2:  Even more from economists on the rush to bailout.

Posted on October 4, 2008 at 08:02 AM | Permalink | Comments (5)

It Took Two Ingredients to Make this Financial Crisis

After having time to think more about the current crisis, I think the reason it is confusing is that it is the result of two parallel but largely independent causes that worked together to create this mess.  I told my mother-in-law in an email last week that the financial crisis would likely be a Rorschach test where everyone sees the crisis caused by all the things they opposed before the crisis.  Conservatives will see government intervention, liberals will see greed and deregulation.

What makes this situation particularly confusing is that of the two causes I believe led to the crisis, each has been embraced by one of the two parties as the only cause.  It's a case where everyone is half right, but the other half is important too.  It's a two part recipe, with neither active ingredient causing much of an explosion until mixed with the other. (special thanks to the folks at Q&O who have had a lot of good posts on these issues).

Cause 1:  Creating the Asset Bubble

The first thing that had to happen for the crisis was the creation of an asset bubble.  We need some type of over-valued asset whose prices crash to earth to spark the crisis.  So we begin with housing.

Home prices have gone through boom-bust cycles for years, just as have many commodities.  There is a whole body of literature on such cycles, so we will leave that aside and accept their existence as a feature of markets and human behavior. 

But this housing bubble had a strong accelerant, in the form of the Federal government.  For years, this nation has made increasing home ownership a national goal and many laws and tax policies have been aimed at this goal.  The mortgage interest deduction on personal income taxes is just one example.

Starting in 1992, Fannie Mae and Freddie Mac, which were strange quasi-public / quasi-private entities, came under pressure from the Congress (e.g. Barney Frank) and the Clinton administration to add increasing home ownership to poorer people part of their missions.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has

The results were astonishing:

Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low and moderate income borrowers. For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target — 42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005.

For 1996, HUD required that 12% of all mortgage purchases by Fannie and Freddie be "special affordable" loans, typically to borrowers with income less than 60% of their area’s median income. That number was increased to 20% in 2000 and 22% in 2005. The 2008 goal was to be 28%. Between 2000 and 2005, Fannie and Freddie met those goals every year, funding hundreds of billions of dollars worth of loans, many of them subprime and adjustable-rate loans, and made to borrowers who bought houses with less than 10% down.

Fannie and Freddie also purchased hundreds of billions of subprime securities for their own portfolios to make money and to help satisfy HUD affordable housing goals. Fannie and Freddie were important contributors to the demand for subprime securities.

Simultaneously, the 1977 Community Reinvestment Act was pushing private banks to make more loans to less qualified borrowers:

The Community Reinvestment Act (CRA) did the same thing with traditional banks. It encouraged banks to serve two masters — their bottom line and the so-called common good. First passed in 1977, the CRA was "strengthened" in 1995, causing an increase of 80% in the number of bank loans going to low- and moderate-income families.

These actions had a double whammy on the current crisis.  First, by pushing up housing demand, they inflated the housing pricing bubble.  Second, it meant that these inflated-price homes were being bought with lower and lower down payments.  In effect, individuals were taking on much more leverage  (leverage is a term that I will use to mean the percentage of debt used to finance a set of assets -- more leverage means more debt and less equity.  The term comes from the physics of a mechanical lever, in that more debt, like a lever, can magnify force.  Profits from assets are multiplied by leverage, but, alas, so are losses.) 

When the economy softened and the housing bubble started to burst, these new mortgage customers the government went out of its way to bring into the system did not have any resources to handle the changes -- they did not have the down payment to cushion them (or the banks) against falls in asset value and did not have the cash flow to cushion them against falling income in the recession and/or rising interest rates. 

The result:  Huge portfolios of failing loans with rapidly falling collateral values.

Cause 2:  Over-leverage of Risky Assets and Related De-regulation of Capital Requirements

I think the word "greed" was used about a zillion times last night in the Vice-Presidential debate.  But what does it mean in this context?  After all, we are all greedy in one way or another, if one equates greed with looking after one's self-interest.

So I will translate "greed" for you:  When you hear "greed on Wall Street", think leverage.  Remember, we said above that as long as the underlying asset values are going up, leverage (ie more debt) multiplies profitability.  [Quick example:  Assume a stock that goes from $100 to $110 in a year.  Assume you pay 5% interest on money.  No leverage, you make $10 on a $100 investment.  With 95% leverage -- ie buying $2000 worth of the stock with $100 equity and $1900 debt -- you would make $105 on the same $100 equity investment.  Leverage multiplied your returns by more than a factor of 10]

Remember that around the year 2000 we had the Internet bubble burst in a big way.  A lot of companies not only dropped, but went to $0 in value.  This was painful, but we did not have a cascading problem.  Why?  In part because most of the folks who invested in Internet companies did not do so in a highly leveraged way.  The loss was the loss, time to move on.  Similarly in this case, if these mortgage packages had been held as a piece of a un-leveraged portfolio, like a pension fund our an annuity, the loss would not have been fun to write off but it would not have cascaded as it has.  The government would have had to bail out Fannie and Freddie, a few banks would have failed, but the disaster would have been limited.

One reason this problem has cascaded (leaving aside blame for Henry Paulson's almost criminal chicken-little proclamations of doom to the world) is that many of these mortgage packages or securities got stuck in to highly leveraged portfolios.  The insurance contracts that brought down AIG were structured differently but in the end were also highly leveraged bets on the values of mortgage securities in that small changes in values could result in huge losses or gains for the contracts.   (Some folks have pointed to actual securitization of the loans as a problem.  I don't see that.  Securitization is a fabulous tool.  Without it, we would be seeing a ton more main street bank failures, as they would have had to keep many more of these on their books.) 

If this all sounds a bit like cause #1 above, ie buying inflated assets with more and more debt, then you are right.  There is an interesting parallel that no one wants to delve into between the incentives of home buyers trying to jump into hot housing markets with interest-only loans and Wall Street bankers putting risky securities into highly leveraged portfolios.  Leverage is really the key theme here.  In a sense, houses were double-leveraged, bought the first time around with smaller and smaller down payments, and then leveraged again as these mortgages were tossed into highly-leveraged portfolios.  Sometimes they were leveraged even further via oddball derivatives and insurance contracts whose exact operation are still opaque to many.

Those who have read me for a while know that I am in the "let them die" camp.  These Wall Street guys have been living high on the extra profits from this leverage in the good times.  They knew perfectly well that leverage is a two-edged sword, and that it would magnify their losses in a bad time.  But their hubris pushed them into doing crazy things for more profit, and I am all for a Greek-tragedy-like downfall for their hubris.  The sub-prime, first-time home buyer can claim ignorance or unsophistication, but not these guys.

During the Bush Administration, these bankers came to the SEC trumpeting their own brilliance, and begged to be allowed to leverage themselves even more via a relaxation of capital requirement rules.  And, in 2004, without too much discussion or scrutiny, the SEC gave them what they wanted:

Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.

On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

In part they traded capital requirements for computer models, a very dubious decision in the first place, made worse by the fact that most of the banks were gaming the models to reduce the apparent risk.  The crazy thing is that, in gaming the models, they really weren't trying to fool regulators, who pretty much were not watching anyway, but they were fooling themselves!  Certainly I would not expect government regulators to do a better job of risk assessment in this environment, which argues for a return to the old bright-line capital requirements that are fairly simple to monitor.  Investment banks played a game of Russian Roulette, and eventually blew their own brains out.  Which begs the question of whether the government's job is to protect consumers at large or to protect financial institutions from themselves.

“We foolishly believed that the firms had a strong culture of self-preservation and responsibility and would have the discipline not to be excessively borrowing,” said Professor James D. Cox, an expert on securities law and accounting at Duke School of Law (and no relationship to Christopher Cox).

The Dog that Didn't Bark:  Ratings Agencies

Clearly, ratings agencies have really failed in their mission during this fiasco.  Right up to the last minute, they were giving top ratings to highly risky securities.  But I think folks who want to lay primary blame on the rating agencies go to far.   Ratings agencies are for individuals and state pension funds and the like -- I have a hard time imagining Goldman or Lehman depending on them for risk assessment.  Its a nice excuse, and we may well have very different companies rating securities five years form now, but its just a small contributor.

The Fix

So you see what is going on.  Republicans are running around saying "the government caused it with the CRA" and Democrats are saying "it was greed and deregulation."  Incredibly, both parties seem to come to the conclusion that sickly mortgage securities need to be pulled out of the hands of the folks who created and bought them and put in ... my hands.  I had smugly thought that I had avoided buying a home with zero-down at the peak of the market, but I was wrong.  Via the federal government, I have bought a lot of them!

I personally would let the whole thing sort itself out, and live with the consequences.  My hypothesis is that much of the current credit squeeze in the money markets is due to Henry Paulson's clumsy public statements and the Fed's busting open the door to overnight borrowing.  Everyone is frozen not by the crisis, but by the prospect of some sort of government action.  Short term borrowers and lenders are doing their business with the Fed, as the government crowds out the private short term markets and causes the very problem it is trying to prevent. 

Without the government bending over backwards to take in short term money from lenders, private firms would be forced to find private options.  Lenders have to lend to stay alive financially, just as much as borrowers have to borrow.  Money may go into the mattresses for a week or two or three, but it can't stay there forever.

I do know that the fix is NOT

Fixing these financial problems listed above does not include:

Sec. 101. Renewable energy credit.
Sec. 102. Production credit for electricity produced from marine renewables.
Sec. 103. Energy credit.
Sec. 104. Energy credit for small wind property.
Sec. 105. Energy credit for geothermal heat pump systems.
Sec. 106. Credit for residential energy efficient property.
Sec. 107. New clean renewable energy bonds.
Sec. 108. Credit for steel industry fuel.
Sec. 109. Special rule to implement FERC and State electric restructuring policy.
Sec. 111. Expansion and modification of advanced coal project investment credit.
Sec. 112. Expansion and modification of coal gasification investment credit.
Sec. 113. Temporary increase in coal excise tax; funding of Black Lung Disability
Trust Fund.
Sec. 114. Special rules for refund of the coal excise tax to certain coal producers
and exporters.
Sec. 115. Tax credit for carbon dioxide sequestration.
Sec. 116. Certain income and gains relating to industrial source carbon dioxide treated as qualifying income for publicly traded partnerships.
Sec. 117. Carbon audit of the tax code.
Sec. 111. Expansion and modification of advanced coal project investment credit.
Sec. 113. Temporary increase in coal excise tax; funding of Black Lung Disability Trust Fund.
Sec. 115. Tax credit for carbon dioxide sequestration.
Sec. 205. Credit for new qualified plug-in electric drive motor vehicles.
Sec. 405. Increase and extension of Oil Spill Liability Trust Fund tax.Sec. 306. Accelerated recovery period for depreciation of smart meters and smart grid systems.
Sec. 309. Extension of economic development credit for American Samoa.
Sec. 317. Seven-year cost recovery period for motorsports racing track facility.
Sec. 501. $8,500 income threshold used to calculate refundable portion of child tax credit.

And, of course, the big one:

Sec. 503 Exemption from excise tax for certain wooden arrows designed for use by children.

All of these, however, are part of the bailout bill approved by the Senate.  Sources here and here.

Posted on October 3, 2008 at 11:20 AM | Permalink | Comments (16)

Currency Hot Potato

Apparently Zimbabwe had an inflation rate of 14,000% last month, for a total of 531 billion percent inflation this year.  If we assume for simplicity that inflation occurs only during working hours, if we spread if over 22 days a week, this means that ones pay at the end of the day is worth only 1/3 its value by lunch the next day, and 1/6 its value by the end of the next day.  My understanding is that Zimbabwe companies pay their employees several times a day and let them go out at lunch and buy something, anything, tangible with the cash before it is worthless a few hours later. 

By the way, I have my Zimbabwe 50 and 100 billion dollar notes on the wall of my office.  I am hoping for a trillion dollar note to go with it.  Meeses and Gippers coming soon.

Posted on October 2, 2008 at 09:26 AM | Permalink | Comments (6)

Um, I Think It is Time To Introduce You to the Term "Incremental"

The US Conference of Mayors has introduced a "study" extending on Obama's idea of millions of new green jobs:

A major shift to renewable energy and efficiency is expected to produce 4.2 million new environmentally friendly "green" jobs over the next three decades, according to a study commissioned by the nation's mayors.

The study to be released Thursday by the U.S. Conference of Mayors, says that about 750,000 people work today in what can be considered green jobs from scientists and engineers researching alternative fuels to makers of wind turbines and more energy-efficient products.

But that's less than one half of 1 percent of total employment. By 2038, another 4.2 million green jobs are expected to be added, accounting for 10 percent of new job growth over the next 30 years, according to the report by Global Insight, Inc.

Well, lets leave aside the measurement issue of making forecasts and establishing targets for metrics like "green jobs" that can be defined however the hell someone wants.  For example, if they really were to define "green jobs" as they say above "makers of ... more energy-efficient products," then nearly everyone in industrial America already has a green job.  Every car made today is more fuel-efficient than the equivalent car made 20 years ago, every motor more efficient, every machine more productive.

But lets discuss that word "incremental."  Politicians NEVER, EVER cite job growth projections that are truly incremental.  For example, tariff program X might be billed as saving 100 jobs in the steel industry, but what about the jobs lost in the steel-consuming industries due to higher costs?  The same is most certainly true in this whole "green jobs" fiasco.  It is the perfect political promise - impossible to define, impossible to measure, and therefore impossible to establish any accountability.  Everyone who makes the promise knows in his/her heart the jobs are not truly incremental, while everyone who hears the promise wants to believe they are incremental.  Politics thrives on this type of asymmetry.

I looked before at the impossibility of these numbers being incremental, but here is a second bite of the apple.  The article says specifically:

The report, being presented at a mayor's conference in Miami, predicts the biggest job gain will be from the increased use of alternative transportation fuels, with 1.5 million additional jobs, followed by the renewable power generating sector with 1.2 million new jobs.

Let's take the second number first.  Here are the current US employment numbers for the US power generation field:

Construction of power generation facilities:           137,000
Power generation and supply:           399,000
Production of power gen. equipment           105,000

That yields a total of 641,000.  So is it really reasonable to think that these green plans will triple power generation employment?  If so, then I hate to see what my electricity bill is going to look like.

The fuel sector is similar.  There are about 338,000 people employed in petroleum extraction, refining, transportation and wholesale -- a number that includes many people related to other oil products that are not fuels.  Add in about 100,000 for industry supplies and you get perhaps 450,000 jobs current tied to fuel production plus 840,000 jobs in fuel retailing (ie gas stations).  How are we going to add 1.5 million net new jobs to a fuel production sector with 450,000** currently?  And if we do, what is going to happen to prices and taxes?  And if the investments push us away from liquid fuels to electricity, don't we have to count as a loss 840,000 retail sector jobs selling a product no longer needed?

** Your reaction may be that these job numbers look low.  They are all from the BLS here.  Here is a quick way to convince yourself there really are not that many people working in the US oil and gas industry:  Despite years of mismanagement and government subsidies, politicians continue to fawn over auto companies.  Despite years of excellence at what they do, politicians demonize oil companies.  The reason has nothing to do with their relative performance, ethics, importance to the country, greed, etc.  The difference is that the auto companies and their suppliers employ millions of voters.  Oil companies employ but a few.

This is such ridiculous garbage as to be unbelieveable, but every paper in the country will print this credulously.  Because if journalists were good with numbers, they wouldn't be journalists, they'd be doing something that pays better.

Posted on October 2, 2008 at 09:07 AM | Permalink | Comments (3)

Everything Explained

The comedians have pretty much nailed it, via Jeffrey Tucker

Posted on September 30, 2008 at 10:59 AM | Permalink | Comments (4)

Lenders Have to Lend

I know this may be pointing out the obvious, but I think it needs to be said:  Lenders have to lend, just as much as borrowers have to borrow.  I know most people understand the "borrower" part of this phrase, but they seem to act as if lenders are somehow only putting their money on the street as some sort of charitable activity, and if we don't sufficiently kow-tow to all their needs, they will run away and never help us all again.

The fact is that people with large pools of money -- banks, pension funds, insurance companies -- HAVE to lend.  And in a time where stocks are dicey, they probably have more, not less, cash than normal they want to lend, much of it short-term.  Now, they may be temporarily scared off from doing so for a few days or weeks as they try to assess what is safe and what is not, but they can't stick their money in a mattress or buy tons of gold or invest in ammunition and run for the hills.  Banks have to pay off depositors; insurance companies often aim to break even on premiums and payouts and make their money on investing the cash in between; pension funds can't make their long-term obligations without making steady returns.Their very survival, in many cases, depends on making continuous returns off their free cash. 

Wisdom from Schoolhouse Rock:

You got a couple hundred bucks saved up in your birthday stash.
Why not deposit them dollars in the bank instead?
Then at the end of the year you'll come out way ahead,
Because the bank'll pay you money in exchange for the use of your cash!
And that's called interest; you're makin' money that way,
And you can buy that gear about a year from today.


Posted on September 30, 2008 at 09:00 AM | Permalink | Comments (4)

In Praise of Price Gouging

As I have pointed out any number of times, when supplies of something are short, you can allocate them either by price or by rationing.  Robert Rapier, via Michael Giberson made the point that combining shortages with tough state price-gouging laws inevitably led to rationing and long lines:

Someone asked during a panel discussion at ASPO whether we were going to have rationing by price. I answered that we are having that now. But prices aren't going up nearly as much as you would expect during these sorts of severe shortages. Why? I think it's a fear that dealers have of being prosecuted for gouging. So, they keep prices where they are, and they simply run out of fuel when the deliveries don't arrive on time. If they were allowed to raise prices sharply, people would cut back on their driving and supplies would be stretched further.

Neal Boortz made the same point yesterday, as the gas shortages in the southeast dragged out (unsurprisingly) for a second week:

nearly 200 gas stations in Atlanta are being investigated for price gouging.  Don’t investigate them!  Reward them!  Price gouging is exactly what we need!  It should be encouraged, not investigated....

The real problem now is panic buying.  People will run their tanks down by about one-third and then rush off to a gas station.  Lines of cars are following gas tanker trucks around Atlanta. The supplies are coming back up, but as long as people insist on keeping every car they own filled to the top and then filling a few gas cans to boot, we're going to have these outages and these absurd lines. 

So, how do you stop the panic buying?  Easy.  You let the market do what the market does best, control demand and supply through the price structure.  The demand for gas outstrips the supply right now, so allow gas stations respond by raising the price of gas .. raise it as much as they want.  I’m serious here so stop your screaming.  The governor should hold a press conference and announce that effective immediately there is no limit on what gas stations can charge for gas.  I heard that there was some gas station in the suburbs charging $8.00 a gallon.  Great!  That’s what they all should be doing.  Right now the price of gasoline in Atlanta is artificially low and being held down by government.  That’s exacerbating the problem, not helping it.  Demand is not being squelched by price. 

As the prices rise, the point will be reached where people will say "I’m fed up with this.  I'll ride with a friend, take the bus or just sit home before I'll pay this for a gallon of gas."  Once the price of a gallon starts to evoke that kind of reaction, we're on our way to solving the problem.  When gas costs, say, $8.00 people aren't going to fill their tanks.  They also aren't going to rush home to get their second car and make sure it is filled up either ... and you can forget them filling those portable gas cans they have in the trunk.  Some people will only be able to afford maybe five gallons!  Fine!  That leaves gas in the tanks for other motorists.  Bottom line here is that people aren’t going to rush out to fill up their half-empty tanks with $8.00 gas.

Here is something else to think of about lines and shortages.  What is the marginal value of your time?  I think most people underestimate this in their day to day transactions.  Some will say it is whatever they make an hour at work, and that is OK, but I will bet you that is low for most folks.  Most folks would not choose to work one more hour a week for their average hourly rate.  Start eating into my free time and family time, and my cost goes up.  That's why overtime rates are higher.   

So let's say an individual values his/her time at the margin for $25.  This means that an hour spent waiting in line or driving around town searching to fill up with 10 gallons raises the cost by $2.50 a gallon.  And this does not include the fuel or other wear on the car used in the search.  Or the cost of that sales meeting you missed because you did not have the gas to get there.  So an anti-gouging law that keeps prices temporarily down by a $1 or so a gallon may actually cost people much more from the shortages it creates.   

Posted on September 30, 2008 at 08:40 AM | Permalink | Comments (10)

The Alternate View

Several people I know have argued with my "do nothing" approach to the current mortgage and liquidity mess.  Their argument is that the current crisis has frozen the short term money market, with banks refusing to lend to each other, and only doing so via central banks.  The problem, they claim, is that this could lead to an extended drying up of business to business credit.  For example, two people both used the fuel retailing example, arguing that inventory purchases are made on credit, and paid off as the inventory is sold.  The logic, I assume, is that businesses have all reduced their working capital, and so a drying up of short term business credit will cause the economy to lock up, with producers and retailers unable to buy components and inventory.  One such argument here.

I guess the questions are 1) for how long and 2) how best to fix it.  To the first question, this is by no means the first time in my lifetime that short-term credit has dried up.  Liquidity eventually returns, mainly because lenders need to lend as much as borrowers need to borrow.  As to the second question, central banks are currently handling this by increasing the amount of money they will lend short term.  Rather than lend to each other directly, bank A deposits with the Fed and then the Fed lends to bank B.  The cycle ends NOT when every bank is healthy but when banks and other institutions are confident they know which banks are healthy.  All the bailout is doing is delaying this reckoning.  I don't think it matters that banks and certain financial institutions survive, I think it matters that the ones who are not going to survive are identified quickly so the rest can start lending again to each other.

Given these concerns, I reiterate my position that if the government is going to inject liquidity and create new financial asset insurance programs, it makes more sense to me to do it at the point of concern, i.e. in the credit market to main street businesses, rather than dumping the money into the toxic sludge of credit default swaps. 

Posted on September 30, 2008 at 08:18 AM | Permalink | Comments (5)

Where is the Credit Crisis?

Mark Perry observes that if we are in for a credit crunch, its not showing up in the numbers yet, as bank loans and leases hit an all-time high and most other types of lending are still near their peaks.

Posted on September 29, 2008 at 03:20 PM | Permalink | Comments (4)

This Seems Kind of Obvious in Hindsight

Saul Hansell at the NY Times has an interesting article about why risk assessment programs in investment banks were not sounding the alarm coming into the recent turmoil.  The article contains this gem:

Ms. Rahl said that it was now clear that the computers needed to assume extra risk in owning a newfangled security that had never been seen before.

“New products, by definition, carry more risk,” she said. The models should penalize investments that are complex, hard to understand and infrequently traded, she said. They didn’t.

I continue to see parallels between recent problems and the meltdown at Enron.  In fact, in many ways events in the natural gas trading market were a dry run for events in the mortgage market.   One filmmaker coined the phrase "Smartest Guys in the Room" to describe the hubris of the guys who ran Enron.  To some extent the phrase was absolutely true - I knew Jeff Skilling at McKinsey and he was indeed the smartest guy in the room.  But everyone can be wrong, and sometimes the smartest guys can be spectacularly wrong as they overestimate their ability to predict and control complex events.  I think this is a fair description of what went on in Wall Street over the past several years.

Posted on September 25, 2008 at 08:51 AM | Permalink | Comments (3)

Differential Inflation

I am seeing an increasing number of articles of late about differential inflation rates, and how changes in income inequality may be overstated by using a single inflation rate for rich and poor.  The argument goes that lower income folks who spend a relatively high share of income on goods that Wal-Mart and China have made cheap are experiencing a lower inflation rate than wealthier folks who have seen huge price increases at their favorite Four Seasons resort.  Mark Perry has two interesting articles along these lines.

Posted on September 19, 2008 at 11:22 AM | Permalink | Comments (2)

Re-Evaluating Home Ownership

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

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

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

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

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

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

Posted on September 14, 2008 at 11:24 PM | Permalink | Comments (10)

Don't Panic!

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

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

Posted on September 12, 2008 at 03:52 PM | Permalink | Comments (7)

Volume Gouging

I was just volume-gouged on gasoline today in Atlanta.  I was returning my rent car, and needed to fill the tank.   Stations here seem to fear a hurricane-related gas shortage, to the first station would only sell me 10 gallons maximum.  The second claimed to be out of gas.  At the third I was able to fill my tank the rest of the way.  These stations gouged me on volume, simply because they didn't have the simple courtesy to re-price their product upwards in a shortage in order to ensure continued availability of supply.

By the way, memo to news guys -- telling everyone to run out and fill their tanks RIGHT NOW in order to avoid a possible gasoline shortage will only precipitate said shortage.  If everyone fills his or her tank at the same time, this shifts inventory from large regional reservoirs to individual reservoirs (e.g. gas tanks), the most inefficient of inventory storage models.  Having every car's gas tank go nearly instantaneously from 5/8 full to full requires something like 600 million gallons of draw down from retail and wholesale inventory to car fuel tanks.  The system cannot survive that in 24 hours, and the hypothesized shortage becomes a reality.

Postscript:  By the way, the question of whether to run out and fill your tank tonight is a classic prisnoners dilemma game.  We are all better off if no one does it, but each invidividual probably maximizes his or her well-being by deciding to fill up, so everyone does it.

Posted on September 12, 2008 at 02:15 PM | Permalink | Comments (8)

New Unemployment Numbers

US unemployment in August "jumped unexpectedly" to 6.1%, by the oddest of coincidences in the first full month just after new, 12% higher US minimum wages took effect

The unemployment rate is higher than it has been in the United States in the last 5 years, but substantially lower than the rate most Western European countries like France and Germany experience even during peak economic times. 

In response, the Obama campaign is urging further increases to the minimum wage and emulation of labor policy and legislation in France and Germany.

Posted on September 5, 2008 at 01:53 PM | Permalink | Comments (14)

A Brief Observation on Pricing

Michael Cannon writes about the new trend in airline pricing to charge extra fees for different services (ranging from sodas to checked baggage).  I have seen several writers of the progressive ilk all up in arms about these extra fees.  Which in my mind confirms that there is no foundational position among progressives on such matters, only opportunistic attacks on corporations for whatever they happen to be doing.  They want air travel pricing to be bundled into one rate, covering all potential services one may or may not use.  But wait, they want cable TV pricing to be unbundled, with a la carte pricing rather than one rate so viewers can pay for only what they use. 

Anyway, the only irritation I have with the new airline pricing is that it drives people to try to carry on every bag they can, particularly since, at least on US Airways currently, bags that are gate-checked are not charged a fee.  This is fouling up security lines and making it a necessity to board early on a plane to have any hope of finding a carry-on space.  Which may add another revenue opportunity, that of charging extra for the option to board early.  Which, come to think of it, Southwest is already doing.

Posted on August 18, 2008 at 08:40 AM | Permalink | Comments (21)

Wealth and the Olympics

One of Megan McArdle's readers wonders why India, which in population is larger than any other country save China, has so few Olympic medalists.  I think the answer is fairly easy:  wealth.

It's a situation very parallel to the Italian Renaissance.  Then, the issue was the proliferation of so many great artists rather than athletes, but the fundamentals were fairly similar.  For a society to be able to give up its strongest and most talented youth to non-productive (meaning they don't contribute to food, clothing, or shelter) occupations like painting or competitive swimming requires a lot of wealth and leisure time.  Subsistence farmers can't give up a strong back from the fields, much less pay any kind of specialized training costs.  The explosion of artists in the Italian Renaissance was made possible by an explosion of wealth in the great Italian city-states of Florence and Venice and the like.   Further, wealth also means better neo-natal care and better childhood nutrition which leads to bigger and stronger adults. 

As with Renaissance painters, modern Olympic athletes need either a family that is wealthy enough to give up their labor and support him or her; or, they need a wealthy patron; or, they need support of the government.  US Olympic athletes generally have some of all three, though the role of the government is smaller than in other nations thanks to corporate patrons and the relative wealth of the American middle class.  China, and before it Russia, were successful because, lacking the first two, they had the government shoulder the entire burden.  India has chosen not to go the government route, which is fine.  It will have its successes in time, as the exploding middle class will raise kids who have the time and money to pursue excellence in various sports.

Posted on August 16, 2008 at 09:44 AM | Permalink | Comments (17)

Not The Best of Times Because, Why?

Kevin Drum posts this chart as a one-picture refutation of McCain's statement that we are living in the best of times.

Um, OK.  We all got wealthier.  And the problem is, what?  That someone else got even wealthier than I did?  So what.  Do we really have to keep refuting this zero-sum economics-of-envy argument?

I won't get into the whole zero-sum thing, because the chart itself proves that the world can't be zero-sum, since everyone got richer on average.  But here is a full refutation of zero-sum wealth arguments.  Also, a zero-sum wealth quiz here.

Looking at changes in income brackets is always misleading. In the US, most folks are migrating up the brackets as they age and gain experience. So most folks benefit not just from the increase in their bracket but a migration to the next bracket.

To this last point, the bottom end of the bracket is being flooded with new immigrants (legal or not) with poor skills and often no English. They drag down the averages, again understating how well the typical person is doing.  Lifetime surveys of individuals rather than percentile brackets always demonstrate that individuals gain wealth over time much fast than this type of analysis demonstrates.  And even the new immigrants at the bottom are presumably gaining vs. their previous circumstances, or else why else would they have immigrated in the first place.

Here is an alternate response to whether we are in the best of times.

By the way, here is an interesting article on why using a single inflation rate for the poor and the rich to get real income growth may be incorrect.  There is an argument to be made that the poor have a lower inflation rate than the rich, thanks to Wal-Mart.

Posted on August 13, 2008 at 11:29 AM | Permalink | Comments (34)

Settled Science

I always find it fascinating to observe how the same folks who criticize the US for not taking drastic action based on the "settled science" of global warming are often the first to ignore hundreds of years of study in the science of economics.  While the full breadth of economics is far from settled science, one thing that is far better understood than the effect of CO2 on global temperatures is the effect of higher prices on demand:  (via Market Power)

This chart confirms that for teenagers, those between the ages of 16 and 19 years old, all of the jobs that disappeared in 2007 were minimum wage jobs. In essence, a total of 94,000 hourly jobs disappeared for this age group overall. This figure is the net change of this age group losing some 118,000 minimum wage earning jobs and gaining some 24,000 jobs paying above this level.

This represents what we believe to be the effect of the higher minimum wage level increasing the barriers to entry for young people into the U.S. workforce. Since the minimum wage jobs that once were held by individuals in each age group have disappeared, total employment levels have declined as those who held them have been forced to pursue other activities.

Now consider this: The minimum wage was just reset on 24 July 2008 to $6.55 per hour, a 27.2% increase from where it was in early July 2007. Our best guess is that a lot of additional teenagers will be pursuing those other activities

Meanwhile, the lack of employment opportunities for the least educated, least skilled and least experienced segment of the U.S. workforce will likely have costs far beyond the benefits gained by those who earn the higher minimum wage. The government might be able to make the minimum wage earning teenage worker disappear, but they didn't do anything to make the teenagers themselves disappear.


The increase in minimum wage earners in some of the middle brackets is likely due to a sweeping effect -- if the minimum wage is increase from $6 to $7, people making $6.50 before are swept into the "minimum wage" characterization.   

Posted on August 11, 2008 at 08:36 AM | Permalink | Comments (12)

The Real Reason Why ExxonMobil Profits Suck

Because they are too freaking low!  ExxonMobil (XOM) is a cyclical company that is following on 20 years of middling prices for their commodity and finally have a price spike, and they only manage to make 8.5% return on sales  ($11.68 billion profit on $138 billion of revenues).  At the top of their cycle they are barely making the same profit margin as the average industrial company.  This is not good.   Sure, the absolute dollars are large, but it is a large company, and the absolute dollars of revenues, expenses, and taxes are also large.

While this outcome may be confusing to many  (since the press and politicians insist on calling these mediocre profits "windfall"), they are in effect the reflection of a new reality for western oil companies.  Less and less do companies like XOM operate their own oil fields.  They are increasingly concession operators or really glorified service companies and middle men to state producers. 

Disclosure:  I am an XOM stockholder, and I am not happy.

Postscript:  This from Mark Perry is kind of interesting:

Exxon has already paid $19.828 billion in income taxes for 2008 (data here), and will probably pay almost $40 billion in income taxes this year (see graph above, income tax data for 1999-2007 taken from Exxon's annual reports).

To put $40 billion of income taxes in perspective, it can be reasonably estimated that Exxon will pay more in income taxes this year (both here and outside the U.S.) than the entire bottom 50% of American individual taxpayers (about 67 million) will pay in income taxes this year.

Perry has a number of notes and updates in response to questions about how he got these figures at the bottom of his post.

Update:  Yahoo Finance data and ranking on profitability by industry.  Integrated oil companies come in around #60.

Posted on August 5, 2008 at 10:50 AM | Permalink | Comments (27)

Awesome Rant

Kudos to Kimberly Strassel for going off on a world class rant against their airlines, and their desire to blame their woes on "oil speculators."

I want to say thanks for the July 10 email you sent to all your customers seeking to explain why today's air travel experience is so painful. The letter, signed by 12 of you, explained that "oil speculators" -- presumably by betting on future oil prices -- are killing your industry and thus requested that I, as a consumer, pressure Congress to rein in this "unchecked" market "manipulation."

I admit that just lately I'd begun to feel that flying was something akin to having my intestines fished out with a long hook. Actually, I'd been wondering whom to blame for the fact that it would probably be cheaper, easier and maybe even faster to drive to wherever I want to go than to board one of your planes. Suddenly, all is clear.

I now understand that it is oil speculators who set your hiring policies and who must have outlined the three types of people you may employ: those who grunt at me, those who sigh deeply as if my presence has ruined their day and those who are actively hostile to my smallest request.

She goes off for quite a bit more.  Check it out.  I guess I am glad somebody's futures are going up in value.  My airline travel futures, also known as frequent flier miles, seem to get devalued constantly.

Posted on July 18, 2008 at 05:07 PM | Permalink | Comments (16)

Wow, I Was Wrong

Here-to-fore, I had generally accepted the meme that where Wal-mart moves in to small towns, smaller stores tend to fail due to the competition.  Unlike most who spread this meme, however, my response has generally been, "so?"  The number of people shoveling coal into steam boilers has decreased with the rise of diesel locomotives.  The number of people employed physically connecting phone calls with patch cords has fallen with the rise of automatic switching.  Technology and distribution systems change and morph over time. 

But I have to admit I appear to have been wrong -- the meme itself may not be true.  Via Mark Perry, who discusses this study in more depth.


Posted on July 18, 2008 at 12:47 PM | Permalink | Comments (8)

Water and Pricing

I while back, I wrote that I could fix our Arizona water "shortage" in about 5 minutes.  I pointed out that we in Phoenix have some of the cheapest water in the country, and if water is really in short supply, it is nuts to send consumers a pricing signal that says it is plentiful. 

David Zetland (via Lynne Keisling) follows up on the same theme:

The real problem is that the price of water in California, as in most of America, has virtually nothing to do with supply and demand. Although water is distributed by public and private monopolies that could easily charge high prices, municipalities and regulators set prices that are as low as possible. Underpriced water sends the wrong signal to the people using it: It tells them not to worry about how much they use.

Unfortunately, water is one of those political pandering commodities.  Municipal and state authorities like to ingratiate themselves with the public by keeping water prices low.  At the same time, their political power is enhanced if shortages are handled through government rationing rather than market forces, since politicians get to make the rationing decision -- just think of all those constituencies who will pour in campaign donations to try to get special rights to water from the water rationers.

Posted on July 17, 2008 at 10:14 AM | Permalink | Comments (7)

Oil at $140 is Still a Modern Miracle

Over the weekend, I was reading an article about T. Boone Pickens' energy plan, a thinly disguised strategy to grab government subsidies for his wind investments.  And I started to think how amazing it is that electricity from wind has to be subsidized to compete with electricity from fossil fuels.  Here's what I mean:

  • To get electricity from wind, one goes to a windy area, and puts up a big pole.  I presume that there are costs either in the land acquisition or in royalty payments to the land holder.  Either way, one then puts a generator on top of the pole, puts a big propeller on the generator, add some electrical widgets to get the right voltage and such, and hook it into the grid. 
  • To get electricity from petroleum is a bit more complex.  First, it's not immediately obvious where the oil is.  It's hidden under the ground, and sometimes under a lot of ocean as well.  It takes a lot of technology and investment just to find likely spots where it might exist.  One must then negotiate expensive deals with often insanely unpredictable foreign governments for the right to produce the oil, and deal day to day with annoyances up to and including rebel attacks on one's facilities and outright nationalization once the investments have been made.  Then one must drill, often miles into the ground.  Offshore, huge, staggeringly expensive platforms must be erected -- many of which today can be taller than the worlds largest skyscrapers.  Further, these oil fields, once found, do not pump forever, and wells must be constantly worked over and in some cases have additional recovery modes (such as water flood) added. 

    The oil, once separated from gas and water, is piped and/or shipped hundreds or even thousands of miles to a refinery.  Refineries are enormously complex facilities, each representing billions of dollars of investment.  The oil must be heated up to nearly 1000 degrees and separated into its fractions  (e.g. propane, kerosene, etc.).  Each fraction is then desulpherized, and is often further processed (including cracking and reforming to make better gasoline).  These finished products are in turn shipped hundreds or thousands of miles by pipeline, barge, and truck to various customers and retail outlets.

    To make electricity from the oil, one then needs to build a large power plant, again an investment of hundreds of millions of dollars.  The oil is burned in huge furnaces that boil water, with the steam driving huge turbines that produce electricity.  This electricity must then go through some electrical widgets to get to the right voltage, and then is sent into the grid.

Incredibly, despite all this effort and technology and investment required to generate electricity from fossil fuels, wind generators still need subsidies to compete economically with them.  In a very real sense, the fact that fossil fuels can come to us even at today's prices is a modern day business and technological miracle.

Of course, in the press, the wind guys begging at the government trough are heroes, and the oil companies are villains. 

Posted on July 13, 2008 at 08:48 PM | Permalink | Comments (48)

Peak Pricing for Parking

From my point of view, the NY Times buried the lede in this story about installation of parking sensors on San Francisco streets.  The article focuses mainly on the ability of drivers at some time in the future to get locations of empty parking spots on the streets via smartphone or possibly their GPS.  But I thought the pricing changes they were facilitating were more interesting:

SFpark, part of a nearly two-year $95.5 million program intended to clear the city’s arteries, will also make it possible for the city to adjust parking times and prices. For example, parking times could be lengthened in the evening to allow for longer visits to restaurants.

The city’s planners want to ensure that at any time, on-street parking is no more than 85 percent occupied. This strategy is based on research by Mr. Shoup, who has estimated that drivers searching for curbside parking are responsible for as much of 30 percent of the traffic in central business districts.

In one small Los Angeles business district that he studied over the course of a year, cars cruising for parking created the equivalent of 38 trips around the world, burning 47,000 gallons of gasoline and producing 730 tons of carbon dioxide.

To install the market-priced parking system, San Francisco has used a system devised by Streetline, a small technology company that has adapted a wireless sensor technology known as “smart dust” that was pioneered by researchers at the University of California, Berkeley.

It gives city parking officials up-to-date information on whether parking spots are occupied or vacant. The embedded sensors will also be used to relay congestion information to city planners by monitoring the speed of traffic flowing on city streets. The heart of the system is a wirelessly connected sensor embedded in a 4-inch-by-4-inch piece of plastic glued to the pavement adjacent to each parking space.

The device, called a “bump,” is battery operated and intended to last for five and 10 years without service. From the street the bumps form a mesh of wireless Internet signals that funnel data to parking meters on to a central management office near the San Francisco city hall.

This is actually really cool, but my guess is that politicians will not have the will to charge the level of peak prices the system may demand.

Postscript:  As many of you know, there is a new wave of urban planners who want to impose dense urban living on all of us, whether we like it or not.  I have no problem with folks who want to fight the masses and live in downtown SF or Manhattan, but the world should also have a place for the majority of us who like to have an acre of land and a bit less congestion. 

Anyway, in singing the praises of the urban lifestyle (which often is as much an aesthetic preference vs. suburbia as anything else), you seldom hear much about this type of thing:

Solving the parking mess takes on special significance in San Francisco because two years ago a 19-year-old, Boris Albinder, was stabbed to death during a fight over a parking space....

The study also said that drivers searching for metered parking in just a 15-block area of Columbus Avenue on Manhattan’s Upper West Side drove 366,000 miles[!!] a year.

And here we suburbanites are complaining when we have to park more than 5 spaces from the door of the supermarket.

Posted on July 12, 2008 at 10:54 PM | Permalink | Comments (9)

Oil Prices and State-Run Corporate Incompetence

Over the last year or so, I have been relatively optimistic for a relatively significant drop in oil prices over the next 2-4 years followed by a number of years of price stability at this lower level.  This would be a direct analog to what happened in the 80's after the 1978 oil price spike.

One argument readers have made against this scenario is that a much larger percentage of the world's oil potential is controlled by lumbering state oil companies than was the case in 1978, particularly given the US Congress's continued cooperation with OPEC in keeping US oil reserves off-limits to drilling.  The theory runs that these state run oil companies have a number of problems:

  • they move and react very slowly
  • they don't have the technical competence to develop more difficult  reserves
  • they don't have the political will to divert oil profits from social programs (including oil industry over-employment and patrimony) to capital spending

This latter issue is a big one - even keeping current fields running at a level rate requires constant capital and technological infusions.  I have written about this issue before, and I am sympathetic to this argument.  Here is Jim Kingsdale on this issue:

Events in Iran since the Revolution are an eery echo of what has happened in Venezuela since the advent of Chavez.  Skilled workers and foreign capital and technology have fled.  Corruption has become rampant  along with incompetence.  Production of over 6 mb/d fell to below 3 mb/d after the Revolution and is currently about 3.8 mb/d.  The pre-revolutionary head count of 32,000 employees has grown to 112,000.

Since the Revolution Iran has exported $801.2 billion of oil but nobody knows where that money has gone.  “Certainly none of it was invested in Iranian oil infrastructure which badly needs renovation and repair, upstream and downstream.”  The author claims the Iranian petro-industry is “on the brink of bankruptcy” although such a claim is not documented.

It is clear that Iran, Venezuela, Mexico, Nigeria, and Iraq together represent an enormous percentage of the world’s oil deposits and production that is being mismanaged.  The political and management dysfunctions in all of these countries simultaneously is a major reason for the world’s current energy crisis.  If these countries all operated in a standard capitalist mode, I suspect oil would be below $50 a barrel and the ultimate supply crisis might be five or ten or even fifteen years beyond when we will see it fairly soon.  There seems to be little hope that any of these countries will make a dramatic change in their oil productivity soon.

I am coming around to this argument.  I still think that oil prices are set for a fall, but lower prices may not last long if this analysis is correct.

Update: Of course Maxine Waters would like to add the United States to this list of countries with incompetent government management of oil reserves.

Posted on July 10, 2008 at 09:59 PM | Permalink | Comments (25)

The World's Safe Haven

We have rising oil prices and falling housing prices.  Mortgages are defaulting and stocks have been falling of late.  The dollar is in the tank.  But at the end of the day, the world still sees the US as the safest and most productive place to invest its money:

Its odd to me that from time to time we go through periods of angst (e.g. the late 1980s panic that the Japanese were "buying up America") about this effect, but we should instead be assured by this vote of confidence from the rest of the world.  One might argue that folks are simply buying US assets today because they are cheap, and certainly the dollar's fall makes US assets relatively less expensive.  But assets are cheap in Russia and Nigeria and Venezuela too, and you don't see the world rushing to invest a few trillion dollars in those locales. 

Postscript:  This foreign ownership of US assets also makes the world a more stable place.  I am always stunned when people argue that Chinese ownership of a trillion dollars of US debt securities gives them power over us.  Huh?  Since when does holding someone's debt give you power?  I don't think Countrywide Mortgage is feeling too powerful today.  The fact is that holding our debt and owning US assets gives China (and other nations) a huge shared interest in our stbility and continued prosperity.

Posted on July 9, 2008 at 11:11 PM | Permalink | Comments (7)

A Statistic I Hadn't Seen Before

Christian Boda, via Q&O, discusses inflation rates in the context of income (in)equality issues.  He offers this bit of information:

Inflation differentials between the rich and poor dramatically change our view of the evolution of inequality in America. Inflation of the richest 10 percent of American households has been 6 percentage points higher than that of the poorest 10 percent over the period 1994 – 2005. This means that real inequality in America, if you measure it correctly, has been roughly unchanged.

This actually makes a ton of sense - Walmart helps hold down food and clothing costs for average folks while the rich pay ever increasing rates to stay at the Ritz at Laguna Niguel.  He argues that as a result, globalization and the growth of low-cost manufacturing in China tends to help rather than hurt the poor.

It also helps to answer a question I had yesterday -- why do metrics of median wage growth adjusted for inflation tend to look unexciting, while at the same time other metrics show the poor doing so much better materially.  This notion of a graduated inflation rate by income class would go a long way to explaining these paradoxes.  In short, we may be applying the wrong inflation rate to metrics of wage growth of various income groups in assessing their well-being (not to mention the usual failing of missing individual migration between income groups).

Posted on July 7, 2008 at 08:46 AM | Permalink | Comments (8)

Keeping Some Perspective

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

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

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

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


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


Go read it all in advance of the campaign season.

Posted on July 6, 2008 at 08:38 AM | Permalink | Comments (6)

Economic Impact of Gas Prices

Are gas prices high or low by historical standards?  That seems like a nutty question, with prices at the pump cracking $4.00 a gallon, but one can argue that in terms of household pain, gas prices are nowhere near their historical highs.

Economist Mark Perry, at his blog Carpe Diem, shows that gas prices are far from their highs as a percentage of household income:

I thought the analysis could be taken one step further.  Mr. Perry was generous enough to send me his data, and I added a fourth piece of data to the analysis:  the average passenger vehicle MPG by year, as reported at the BTS here.  The MPG data set is spotty, and required some interpolation.  Also, data since 2004 is missing, so I assumed 2004 MPG's for more recent years (this is conservative, since the long-term trend would indicate fleet MPG's probably improved since 2004). 

From this data I was able to create what I think is a slightly improved analysis.  The key for households is not how much it costs to buy 1000 gallons, but how much it costs to buy the gas required to drive their typical annual miles.  Using 15,000 as an average driving miles per year per person, we get this result:


So, while I too think paying $4 for gas is not my favorite way to dispose of my income, in terms of average household pain created, gas prices are quite far from their historic highs.

Posted on June 30, 2008 at 02:52 PM | Permalink | Comments (18)

Dumbest Thing I Have Read Today

Apparently from the lips of Barrack Obama, via the WSJ and Tom Nelson:

"I want you to think about this," Barack Obama said in Las Vegas last week. "The oil companies have already been given 68 million acres of federal land, both onshore and offshore, to drill. They're allowed to drill it, and yet they haven't touched it – 68 million acres that have the potential to nearly double America's total oil production."

Wow.  I would not have thought it possible to blame government restrictions on drilling, which the oil companies have decried for years, on the oil companies themselves.  But apparently its possible. 

1.  Just because the Federal Government auctions an oil lease, it does not mean that there is oil there.  And if there is oil there, it does not mean the oil is recoverable economically or with current technology.  Does this even need to be said?

2.  The implication is that oil companies are intentionally not drilling available reserves (to raise prices or because they are just generally evil or whatever).  But if this is the case, then what is the problem with issuing new leases?  If oil companies aren't going to drill them, then the government gets a bunch of extra leasing money without any potential environmental issues.  Of course, nobody on the planet would argue Obama's real concern is that the new leases won't get drilled -- his concern is that they will get drilled and his environmental backers will get mad at him.

Posted on June 30, 2008 at 09:47 AM | Permalink | Comments (8)

Other Thoughts on Oil Prices and "Speculation"

As a followup to my point on oil prices, here are a selection of posts on oil prices and speculation that have caught my eye of late:

McQ writes about the charge of "inactive" oil leases, which Democrats attempted to use as an excuse for not opening up new lease areas for drilling

Tyler Cowen has a big roundup on the topic, with many links, and Alex Tabarrok has a follow-up.  Cowen discusses rising oil prices in the context of Julian Simon here.

Michael Giberson also addresses speculation, while observing that non-industrial buyers have not increased their position in the futures market as oil prices have risen

Finally, via Scrappleface:

When the U.S. Supreme Court reconvenes on the first Monday in October, the nine Justices may consider whether the Constitutional preamble clause “secure the Blessings of Liberty to ourselves and our Posterity” guarantees an individual right to drill for oil.

Now that the court, in a 5-4 ruling on the Heller case, has upheld the Second Amendment right of “the people,” not just state-run militias, to keep and bear arms, some scholars say the court may be willing to go the next logical step and recognize the peoples’ right to acquire their own fuel.

Posted on June 30, 2008 at 08:54 AM | Permalink | Comments (2)

My View on Oil Markets

A number of readers have written me, the gist of the emails being "you have written that X or Y is NOT causing higher oil prices -- what do you think IS causing high oil prices?"  Well, OK, I will take my shot at answering that question.  Note that I have a pretty good understanding of economics but I am not a trained economist, so what follows relates to hard-core economics in the same way pseudo-code relates to C++.

My first thought, even before getting into oil, is that commodity prices can be volatile and go through boom-bust periods.  Here, for example, is a price chart of London copper since 1998:


While oil prices have gone up by a factor of about four since 1998, copper has gone up by a factor of about 15!  But the media seldom writes about it, because while individual consumers are affected by copper prices, they don't buy the commodity directly, and don't have stores on every street corner with the prices posted on the street.

For a number of years, it is my sense that oil demand has risen faster than supply capacity.  This demand has come from all over -- China gets a lot of the press, but even Europe has seen increases in gasoline use.  Throughout the world, we are on the cusp of something amazing happening - a billion or more people in Asia and South America are emerging from millennia of poverty.  This is good news, but wealthier people use more energy, and thus oil demand has increased.

On the supply side, my sense is that the market has handled demand growth up to a point because for years there was some excess capacity in the system.  The most visible is that OPEC often has been producing below their capacity, with Saudi Arabia as the historic swing producer.  But even in smaller fields in the US, there are always day to day decisions that can affect production and capacity on a micro scale.

One thing that needs to be understood - for any individual field, it is not always accurate to talk about its capacity or even its "reserves" as some fixed number.  How much oil that can be pumped out on any given day, and how much total oil can be pumped out over time, depend a LOT on prices.  For example, well production falls over time as conditions down in the bottom of the hole deteriorate  (think of it like a dredged river getting silted up, though this is a simplification).  Wells need to be reworked over time, or their production will fall.  Just the decision on the timing of this rework can affect capacity in the short term.  Then, of course, there are numerous investments that can be made to extend the life of the field, from water flood to CO2 flood to other more exotic things.  So new capacity can be added in small increments in existing fields.  A great example is the area around Casper, Wyoming, where fields were practically all shut-in in the 1990's with $20 oil but now is booming again.

At some point, though, this capacity is soaked up.  It is at this point that prices can shoot up very rapidly, particularly in a commodity where both supply and demand are relatively inelastic in the short term.

Let's hypothesize that gas prices were to double this afternoon at 3:00PM from $4 to $8.  What happens in the near and long-term to supply and demand?

In the near term, say in a matter of days, little will change on the demand side.  Everyone who drove to work yesterday will probably drive today in the same car -- they have not had time to shop for a new car or investigate bus schedules.  Every merchandise shipper will still be trucking their product as before - after all, there are orders and commitments in place.  People will still be flying - after all, they don't care about fuel prices, they locked their ticket price in months ago. 

However, people who argue that oil and gas demand is inelastic in the medium to long term are just flat wrong.  Already, we are seeing substantial reductions in driving miles in this country due to gas price increases.  Demand for energy saving investments, from Prius's to solar panels, is way up as well, demonstrating that prices are now high enough to drive not only changed behaviors but new investments in energy efficiency.  And while I don't have the data, I am positive that manufacturers around the world have energy efficiency investments prioritized much higher today in their capital budgets.

There are some things that slow this demand response.  Certain investments can just take a long time to play out.  For example, if one were to decide to move closer to work to cut down on driving miles, the process of selling a house and buying a new one is lengthy, and is complicated by softness in the housing markets.  There are also second tier capacity issues that come into play.  Suddenly, for example, lots more people want to buy a Prius, but Toyota only has so much Prius manufacturing capacity.  It will take time for this capacity to increase.  In the mean time, sales growth for these cars may be slower and prices may be higher.  Ditto solar panels. 

Also, there is an interesting issue that many consumers are not yet seeing the full price effects of higher oil and gas prices,and so do not yet have the price incentive to switch behavior.  One example is in air travel.  Airlines are hedged, at least this year, against much of the fuel price increase they have seen.  They are desperately trying not to drive people out of air travel (though DHS is doing its best) and so air fares have not fully reflected fuel price increases.  And since many people buy their tickets in advance, even a fare increase today would not affect flying volumes for a little while.

Another such example that is probably even more important are countries where consumers do not pay world market prices for gas and oil, with prices subsidized by the government (this is mostly true in oil producing countries, where the subsidy is not a cash subsidy but an opportunity cost in terms of lost revenue potential).  China is perhaps the most important example.  As we mentioned earlier, Chinese demand increases have been a large impact on world demand, as illustrated below:


All of these new consumers, though, are not paying the world market price for gasoline:

While consumers in much of the world have been reeling from spiraling fuel costs, the Chinese government has kept the retail price of gasoline at about $2.60 a gallon, up just 9% from January 2007.

During that same period, average gas prices in the U.S. have surged nearly 80%, to about $4 a gallon. China's price control is great for people like Tang, who drives long distances in his gas-guzzling Great Wall sports utility vehicle.

But Tang and millions of other Chinese are bracing for a big jump in pump prices. The day of reckoning? Everybody believes it's coming right after the Summer Olympics in Beijing conclude in late August.

Demand, of course, is going to appear inelastic to price increases if a large number of consumers are not having to pay the price increases.

Similarly, there are factors on the supply side that make response to large price increases relatively slow.  We've already discussed that there are numerous relatively quick investments that can be made to increase oil production from a field, but my sense is that most of these easy things have been done.  Further increases require development of whole new fields or major tertiary recovery investments in existing fields that take time.  Further, we run up against second order capacity issues much like we discussed above with the Prius's.  Currently, just about every offshore rig that could be used for development and exploration is being used, with a backlog of demand.  To some extent, the exploration and development business has to wait for the rig manufacturing business to catch up and increase the total rig capacity.

There are also, of course, structural issues limiting increases in oil supply.  In the west, increases in oil supply are at the mercy of governments that are schizophrenic.  They know their constituents are screaming about high oil prices, but they have committed themselves to CO2 reductions.  They know that their CO2 plans actually require higher, not lower, gas prices, but they don't want the public to understand that.  So they demagogue oil companies for high gas prices, while at the same time restricting increases in oil supply.  As a result, huge oil reserves in the US are off-limits to development, and both the US and Canada are putting up roadblocks to the development of our vast reserves of shale oil.

Outside of the west, most of the oil is controlled by government oil companies that are dominated by incompetence and corruption.  For years, companies like Pemex have been under-investing in their reserves, diverting cash out of the oil fields into social programs to prop up their governments.  The result is capacity that has not been well-developed and institutions that have only limited capability to ramp up the development of their reserves.

One of the questions I get asked a lot is, "Isn't there a good reason for suppliers to hold oil off the market to sustain higher prices?"  Well, let's think about that.

Let's begin with an analogy.  Why wouldn't Wal-mart start to hold certain items off the market to get higher prices?  Because they would be slaughtered, of course.  Many others would step in and fill the void, happy to sell folks whatever they need and taking market share from Wal-mart in the process.  I think we understand this better because we know the players and their motivations better in retail than we do in oil.  But the fact is that Wal-mart arguably has more market power, and in the US, more market share than any individual oil producer has worldwide.  Oil producers have seen boom and bust cycles in oil prices for over a hundred years.  They know from experience that $130 oil today may be $60 oil a year from now.  And thus holding one's oil off the market to try to sustain prices only serves to miss the opportunity to get $130 for one's oil for a while.  People tend to assume that the selfish play is to hold oil off the market to increase prices, but in fact it is just the opposite.  The player who takes this strategy reduces his/her own profit in order to help everyone else. 

This is a classic prisoner's dilemma game.  Let's consider for a moment that we are a large producer with some ability to move prices with our actions but still a minority of the market.  Consider a game with two players, us and everyone else.  Each player can produce 80% of their capacity or 100%.  A grid showing reasonable oil price outcomes from these strategies is shown below:


Reductions in our production from 100% to80% of capacity increases market prices, but not by as much as would reductions in production by other producers, who in total have more capacity than we.  Based on these prices, and assuming we have a million barrels a day of production capacity, the total revenue outcomes for us of these four combinations are shown below, in millions of dollars (in each case multiplying the price times 1 million barrels times the percent production of capacity, either 80 or 100%):


We don't know how other producers will behave, but we do know that whatever strategy they take, it is better for us to produce at 100%.  If we really could believe that everyone else will toe the line, then everyone at 80% is better for us than everyone at 100% -- but players do not toe the line, because their individual incentive is always to go to 100% production.  For smaller players who do not have enough volume to move the market individually (but who make up, in total, a lot of the total production) the incentive is even more dramatically skewed to producing the maximum amount.

The net result of all this is that forces are at work to bring down demand and bring supply up, they just take time.  I do think that at some point oil prices will fall back out of the hundreds.  Might this reckoning be pushed backwards a bit by bubble-type speculation?  Sure.  People have an incredible ability to assume that current conditions will last forever.  When oil prices were at $20 for a decade or so, people began acting like they would stay low forever.  With prices rising rapidly, people begin acting like they will continue rising forever.  Its an odd human trait, but a potentially lucrative one for contrarians who have the resources and cojones to bet against the masses and stick with their bet despite the fact that bubbles sometimes keep going up before they come back down.   

I don't have the economic tools to say if such bubble speculation is going on, or what a clearing price for oil might be once demand and supply adjustments really kick in.  I do have history as an imperfect guide.  In 1972 and later in 1978 we had some serious price shocks in oil:


Depending on if you date the last run-up in prices from '72 or '78, it took 5-10 years for supply and demand to sort themselves out (including the change in some structural factors, like US pricing regulations) before prices started falling.  We are currently about 6 years into the current oil price run-up, so I think it is reasonable to expect a correction in the next 2-3 years of fairly substantial magnitude. 

Postscript:  I have left out any discussion of the dollar, which has to play into this strongly, because what I understand about monetary policy and currencies wouldn't fill a thimble.  Suffice it to say that a fall in value of the dollar will certainly raise the price, to the US, of oil, but at the same time rising prices of imported oil tends to make the dollar weaker.  I don't know enough to sort out the chicken from the egg here,

Posted on June 26, 2008 at 11:56 AM | Permalink | Comments (21)

So Where Are They Storing All the Oil?

I find the current political demagoguery that oil speculators are now the ones responsible for higher oil prices to be absolutely laughable.  I am willing to believe that oil supply and demand are perfectly inelastic over very short time periods, meaning that we might expect little change in supply or demand over a couple of days or weeks after a price change, allowing for a fairly free range of speculative excesses.  However, there is every evidence that oil is by no means perfectly price inelastic, and supply and consumption do change with price.  Already in the past few months we have seen, for example, substantial reductions in passenger car miles in this country. 

For any period of time longer than hours or days (or perhaps weeks), any cabal that is somehow manipulating oil prices well above the natural market clearing price is going to have to deal with a problem:  Extra oil.  Lots of it.  Even if the supply side is sticky due to shortages currently in drilling equipment, demand is not.  People are going to use less, and at the same time, every supplier is going to be trying to send every barrel to market as quick as they can  (oil producers know that prices that rise will eventually fall again -- that is the history of oil.  They are all programmed to move as much product as possible when prices are at all time highs).

A lot of dynamics, such as a short squeeze, can create a speculative bulge, but if speculators are somehow purposefully keeping oil prices high for long periods of time, they must be doing one of three things:

  1. Storing a lot of oil somewhere
  2. Creating an extensive system of production controls that keeps oil supply off the market.
  3. Have someone with deep pockets subsidize consumer demand for oil by selling excess oil off at below market prices.

One is just not possible, not in the quantities that would be required.  Two sort of happens in a haphazard and not very consistent way with OPEC, though it is hard to convince me that futures traders in Chicago have an active partnership with large state-run oil companies.  Three is actually happening, with the Chinese government continuing to sell gasoline and other petroleum products at below market prices, but there is evidence that there are limits to how much further they will take this.  Again, I think this is being done for reasons other than cooperation with mercantile exchange traders in the US.

To a large extent, this theory, if it is anything more than just populist capitalism-bashing, is a result of extreme ignorance.  There are an incredible number of people involved in the oil markets every day in numerous countries with numerous different incentives, such a large number that it is impossible to imagine a conspiracy.  There have been a couple of cases of proven petroleum commodity price manipulation in these trading markets - most of these have involved manipulation of prices at the end of the day on certain futures expiration and/or Platt's pricing windows.  The time frame for these manipulations have been on the order of 1-2 minutes.

But here is the best argument against this manipulation for higher prices, and it is amazing to me that no one ever thinks of it.  Sure, there are a bunch of really savvy people in the commodity trading business who are long on oil and want the price to be higher.  But for every seller, there is a buyer on the other side, someone who is at least as savvy and is desireous of lower prices.  Yes, I know it is a complicated concept, but for every trader selling there is one buying.  If there is an extended conspiracy to push up oil prices by speculators, do you really think the buyers are just going to sit on their hands and take it?  And do you really think the exchanges are going to be happy with this behavior, threatening the integrity of their trading system (really their only asset)?  Just ask the Hunt family, which attempted to corner the market and drive prices up in silver, only to have major buyers and the exchanges stop them cold, driving the Hunts in the process into bankrupcy. 

I wrote about this same topic previously here.

Posted on June 23, 2008 at 11:32 PM | Permalink | Comments (29)

Great Supporters of Science over Faith, Except When They're Not

Democrats are great public supporters of science over faith (e.g. stem cell research, evolution) except when the science is economics and one's faith is in government.

Posted on June 20, 2008 at 12:03 PM | Permalink | Comments (5)

On Corporations and Public Service

I had occasion to think about the term "public service" at about 6AM this Sunday morning.  As I was driving my son to a way-too-early baseball game, I flipped around the FM dial trying to find some music.  There was none.  All I could find were a number of really dull programs on arcane topics presumably on the air to fulfill the radio broadcaster's "public service" requirements of the FCC regulatory regime.  Since almost no one gets excited about this programming except for the leftish public policy types that inhabit regulatory positions, the radio stations broadcast all this garbage on Sunday mornings when no one is listening anyway.  Ironically, in the name of "public service," stations must broadcast material no one in the public actually wants to listen to.

Which leads me to coyote's definition of corporate public service:  Make a product or service for which people, without use of force or fraud, are willing to pay the listed price.

Any freaking moron can (or at least should be able to) offer a product or service that people will be willing to use for free.  Is this a public service?  Well, maybe.  If you are out there helping to feed homeless people, power to you.  But is it really a public service that the Miami transit system offers free rides that it can only pay for with deficit spending?  Or $1.50 bus rides that cost taxpayers $30 each to provide?  And this is not to mention the free services, like public service radio broadcasts, that many people would be willing to pay not to receive. 

That's why I say that any moron can give stuff away.   But find me the person who can create enough value that people are willing to pay enough for his product to cover all the material, labor, and capital inputs it took to create it, with surplus left over for both buyer and seller, and that is the person performing a real public service.

And let me listen to some freaking classic rock on Sunday mornings.

Posted on June 16, 2008 at 01:16 PM | Permalink | Comments (25)

Homes are Becoming More Affordable; Minorities, Poor Hardest Hit

It is interesting that with home prices and gasoline prices going in opposite directions, the media can declare both trends to be disasters for Americans.  Via Scrappleface:

The U.S. housing crisis reached fever pitch this month, with potential foreclosures up 48 percent compared with May 2007.

The devastation of receiving foreclosure notices has now swept through a full 2/10ths of one percent of American homes. About 1/10th of one percent of owners may lose their homes. For some of those people, it’s actually their primary residence in jeopardy, rather than a second home, rental property or vacation condo.


To add insult to misery, mortgage rates skyrocketed this month to 6.32 percent, a shocking figure a full third of what it was during the Carter administration.

As a result of the flood of homes on the market, real estate agent commissions have dipped precariously, and home buyers increasingly wrestle with the guilt of paying bargain prices for excellent properties.

Market analysts say home prices could plummet as much as another 10 percent by the end of 2009, leaving first-time home buyers to face the specter of owning a more spacious residence. The additional square footage inequitably boosts the burden of cleaning, heating and air conditioning.

Posted on June 13, 2008 at 12:02 PM | Permalink | Comments (5)

Incentives Everywhere

After this post on incentives, where I observed that perhaps 99% of all government policy failed on incentives issues, I thought about going a whole week and discussing every story in the context of failed or mismatched incentives.  Then I thought about all the time I had spent building up my readership only to chase everyone away in just one week, so I will defer that idea.

BUT, can anyone tell me what incentives these people have to go work and support themselves?

What are people who receive FEMA assistance doing to help themselves? That's the question NBC 15's Andrea Ramey asked those who have been staying for free in hotel rooms after they moved out of FEMA supplied travel trailers. What she found out is there are some who are doing very little.

The scorching heat puts many at the Quality Inn poolside, but for Gwenester Malone, she chooses to beat the heat by setting her thermostat to sixty degrees. Malone's room for the past three months, along with three meals daily, have all been paid for by taxpayers.

"Do you work?" asked NBC 15's Andrea Ramey.

"No. I'm not working right now," said Malone.

Malone says she can't drive and it's too hot outside to find work within walking distance. "Since the storm, I haven't had any energy or pep to go get a job, but when push comes to shove, I will," said Malone.

Just a few blocks away, Kelley Christian also stays at a hotel for free. She says she's not taking advantage of her situation, but admits it's easy to do. "It's too easy. You know, once you're there, you don't have to pay rent," said Christian. "I kept putting it off and putting it off and now, I'm tired of putting it off."

Posted on June 10, 2008 at 08:11 PM | Permalink | Comments (16)

Ignoring Incentives

OK, here is my question:  Do the folks in this article understand incentives and simply ignore them, or are they truly ignorant?

In a move that would make zero a grade of the past, the Chapel Hill-Carrboro school district is considering making 61 the lowest grade for a failing assignment.

The goal would be to assure that a single test-day disaster doesn't ruin a semester. Some teachers, students and parents say the change would coddle failing students....

Homework would not count for more than 20 percent of the quarterly grade, according to the proposal. Other proposed revisions include giving students more time to make up incomplete assignments while offering more support strategies, making it easier for them to pass.

"Students [would] have a chance to recover," Martin said. "Getting a bad grade or having a bad day does not mean you are a failure. This is about hope."

There is simply no way this is going to help, and it is amazing to me that educated people can't see it, yet I think that is the case (I don't believe they are trying to be evil)  A staggeringly large percentage of what goes awry in the world can be explained by bad or mismatched incentives, so it is incredible to me that our education system seems to so consistently resist teaching this topic.

Posted on June 9, 2008 at 07:12 PM | Permalink | Comments (20)

In Search of the Good Life

Tim Harford Via TJIC:

Superficially, it seems that many people seek sunny climes, especially now that air conditioning is available. For example, long-run population growth in the “Sunbelt” — the US South - is often attributed to a demand for, well, sun.

Harvard economists Ed Glaeser and Kristina Tobio think otherwise. They argue that before 1980, the boom in the South was thanks to the region's growing productivity. After 1980, population continued to grow, but house prices lagged behind those elsewhere in the US, suggesting that the driving force was not high demand but permissive planning rules. Certainly balmy California, with its tighter restrictions on building, did not enjoy the same population growth.

All of this tends to suggest that people don’t value sunshine quite as much as is supposed.

I have pretty convincing anecdotal evidence that the first part, at least, is true.  I worked for a large manufacturing corporation called Emerson Electric (no relation to the electronics company).  They are one of the few Fortune 50 companies not at all coy to admit that they move factories around the world chasing lower wages.  They had an epiphany decades ago, when in their planning, they assumed the move overseas was always a trade-off of wages for productivity... until they visited at motor plant in Brazil that had first world automation and productivity combined with third world wages.  That got their attention.  To their credit, they have pushed this further and further, such that not only are their factory workers in Mexico, but their plant superintendents and skilled workers and even their engineers are now Mexican too.

Anyway, if you listen to the company tell this story, phase 1 of the story was not a move to Mexico or Asia but to the south.  They must have moved probably 50 manufacturing plants over a decade from the northeast to the south during the sixties and seventies. 

This constant movement seems to be a natural life-cycle of locations as they grow wealthy.  Poorer regions eagerly welcome newcomers who may bring jobs and prosperity.  But, once the prosperity is there, the prosperous in town begin using government and other institutions to try to lock in their gains.  Corporations use government to fight new competitors.  Wealthy homeowners pass zoning to keep home prices high and rising.  Unions tend to increase and lock in gains for current workers at the expense of new workers.  A kind of culture of hostility emerges to any new job that makes less than $54,000 a year, any house that costs less than $400,000, and any immigrant who doesn't have a pale face.

Posted on June 7, 2008 at 10:33 AM | Permalink | Comments (0)

Prices vs. Government Action

Very often on this blog I criticize some ill-conceived government intervention as being bloated and/or ineffective and ill-conceived.  A great example is corn-ethanol, where the government has spent billions and caused consumers to spend additional billions in higher food and gas prices, all for a technology that does nothing to reduce oil consumption or CO2 output.

Too often, I criticize these programs for being stupid and ill-conceived, which they are.  But what I don't take the time to also point out is the necessarily narrow focus of these government actions.  No matter how hard Congress works to stuff energy and farm bills with every micro-managing pork barrel project their campaign donors could wish for, Congress still only has the bandwidth to affect a tiny fraction of a percent of what a single change in market prices can achieve.  Prices have absolutely stunning power of communication.  When gas prices go up, every single citizen likely reassesses his/her behavior and spending in a myriad of ways.  Thousands of entrepreneurs sit at their desk staring at the walls, trying to dream up business opportunities that these new prices may signal.  And thousands of energy producers, from the tiniest to the largest, rethink their investment plans and priorities. 

Posted on June 5, 2008 at 09:23 PM | Permalink | Comments (18)

I am Going to Break Every Window in Chris Plummer's House to Stimulate the Economy

We all know that the media is perfectly capable of ignoring even the most basic precepts of economics, but I thought Chris Plummer's article was especially heroic in doing so.  Even more so, it is absolutely stunning in its arrogance.  In his article, he writes on all the great ways that $8 a gallon gasoline will help make the world a better place.  I will stay away from the global warming related issues -- I have a whole other blog dedicated to that -- but here are a couple of the most egregious parts:

They may contain computer chips, but the power source for today's cars is little different than that which drove the first Model T 100 years ago. That we're still harnessed to this antiquated technology is testament to Big Oil's influence in Washington and success in squelching advances in fuel efficiency and alternative energy.
Given our achievement in getting a giant mainframe's computing power into a handheld device in just a few decades, we should be able to do likewise with these dirty, little rolling power plants that served us well but are overdue for the scrap heap of history.

OK, this first one is a science problem and not an engineering problem.  Here is the problem:  Gasoline contains more potential energy by weight and volume than any power storage source we have been able to invent (OK, its actually second, nuclear fuel is first, but I presume Plummer is not going there).  That is the problem with electric cars, for example.  Electric traction motors are demonstrably better sources of motive power than internal combustion engines.  Even Diesel railroad engines are actually driven by electric traction motors.  The problem is energy storage.  Batteries store much less energy per pound and per cubit foot than gasoline.  Ditto natural gas and hydrogen (except at very high pressures).

This claim that only the political power of oil companies keeps no-brainer alternative technologies at bay is absurd, though it is one that never dies in the lunatic fringes.  Mr. Plummer is more than welcome to make himself a billion dollars by selling one of these mystery technologies he fails to disclose.  I will be first in line to buy.

Necessity being the mother of invention, $8 gas would trigger all manner of investment sure to lead to groundbreaking advances. Job creation wouldn't be limited to research labs; it would rapidly spill over into lucrative manufacturing jobs that could help restore America's industrial base and make us a world leader in a critical realm.

This is the broken window fallacy on steroids.  I am a HUGE optimist about the limitless capabilities of the human mind, probably more so than Mr. Plummer (by the way, if he is such an optimist, he should read some Julian Simon).  But the best that humanity can probably do any time soon is offset a goodly percentage of the damage from $8 gas.  There is no net win here.  If there were, he should also be advocating $10 bread, $2,000,000 starter home prices, and $200 a month internet service.  Just think about all the innovation that would be required to react to these!

On a similar note, Venezuela's Hugo Chavez and Iran's Mahmoud Ahmadinejad recently gained a platform on the world stage because of their nations' sudden oil wealth. Without it, they would face the difficult task of building fair and just economies and societies on some other basis.

Yes sir.  Chavez would be much worse off if he was getting $8 for his gas rather than $3.  What is this guy thinking?  Well, he says this:

In the near term, breaking our dependence on Middle Eastern oil may well require the acceptance of drilling in the Alaskan wilderness

OK, but that can be done at $3 gas,and should have been allowed at $2 gas.  This oil could have been developed in an environmentally friendly way years ago.  Only Congressional stupidity stands in the way  (probably with the past support of Mr. Plummer).

The recent housing boom sparked further development of antiseptic, strip-mall communities in distant outlying areas. Making 100-mile-plus roundtrip commutes costlier will spur construction of more space-efficient housing closer to city centers, including cluster developments to accommodate the millions of baby boomers who will no longer need their big empty-nest suburban homes.
Sure, there's plenty of land left to develop across our fruited plains, but building more housing around city and town centers will enhance the sense of community lacking in cookie-cutter developments slapped up in the hinterlands.
This is an aesthetic and taste argument (note the "antiseptic") - the author thinks that suburbs are un-aesthetic and he thinks that urban life is superior.  Not surprising, as he chooses to live in San Francisco, and people there have self-selected for that kind of life.  Fine.  But I don't want it.  And the idea that it is good to pay $8 for gas to conform to his aesthetics is sickening.  (By the way, the opposite of antiseptic is germ-ridden.  Why don't people ever therefore use that as a modifier for urban communities?)

OK, I can't really get to all his points, but I have saved perhaps the best for last.  Here is one of the most incredibly condescending, authoritarian, and insensitive arguments I have ever seen.  He thinks it is better for poor and middle class Americans to pay $8 a gallon for gas because:
Far too many Americans live beyond their means and nowhere is that more apparent than with our car payments. Enabled by eager lenders, many middle-income families carry two monthly payments of $400 or more on $20,000-plus vehicles that consume upwards of $15,000 of their annual take-home pay factoring in insurance, maintenance and gas.
The sting of forking over $100 per fill-up would force all of us to look hard at how much of our precious income we blow on a transport vehicle that sits idle most of the time, and spur demand for the less-costly and more fuel-efficient small sedans and hatchbacks that Europeans have been driving for decades.
So, doubling the cost of necessities for the average American will make them financially healthier?  His argument is that people do all kinds of dumb things financially that a smart person like he would never do, and if gas prices drained everyone's wallet, they would not have any money left to make dumb purchases he does not approve of.  If this is such a great idea, shouldn't we all just move to North Korea and have done with it?

The anti-planner, where I got the link, has his own response.

Posted on June 4, 2008 at 09:25 AM | Permalink | Comments (15)

Because, You Know, People Are All Exactly the Same and Need the Exact Same Things

The Arizona Republic the other day had this headline which certainly caught me attention:

Report: 35% of Arizona jobs  'bad'

I can sympathize.  I have had jobs that were boring and unrewarding.  My last couple of Fortune 50 corporate jobs, while nominally cool on paper, were hugely frustrating.  But it seems this particular "report" had different criteria for "bad" jobs:

The new report calls 35 percent of jobs "bad" because they pay less than $17 an hour, or $34,000 a year, and offer no insurance or retirement plans. In a typical state, only 30 percent of the jobs are considered "bad."

Here is the heart of these studies:  A bunch of middle class people sit around and try to decide what jobs they would be willing to accept and which ones they would not.  Any job that they would not accept is a "bad" job, despite the fact that $12 or $14 an hour might be very good pay for someone with no skills, despite the fact that it makes no consideration of a person's circumstances (e.g. single, married, 2nd job, teenager, etc), and despite the fact that $34,000 would probably put a person in the top 20th  percentile of global wages.  I made a similar point vis a vis jobs in the third world.

Just so I can't be accused of cherry-picking, I will use my own company as an example.  We have a about 80 employees in Arizona, about 70 of which are paid less than $10 an hour and none of whom have a retirement plan or insurance.  All of my jobs in Arizona are included in their count of "bad jobs."  And you know what?  We have a waiting list of over 200 names of people who would take another of these jobs tomorrow if I had one to offer.  That's because my employees are not middle-class academics.   Most are older people who already have a health plan, who don't need a retirement plan (because they have already retired) and who just want a fun job in a nice location where they can live in their RV. 

This has to be one of the most utterly pointless studies of all time.  Sure, $14 an hour would probably suck as a 45-year-old college grad with 2 kids.  But it would be a windfall to a 16-year-old new immigrant with few skills and no English.  The only thing that would be more pointless would be to try to compare states - which they also do:

About 22 percent of Arizona jobs are considered "good" because they pay at least $17 and offer benefits. That is less than the typical state, which has 25 percent "good" jobs. The rest of the jobs are in between because they offer some benefits.

Since cost of living is totally comparable between Phoenix and Manhattan, then using a fixed wage rate to compare states makes complete sense.  By the way, by the study's definition, my job, which is usually awesome, is not "good" because I have no health plan.  In fact, in this study, a $40,000 job with a health plan is ranked as good while a $400,000 job with no health plan is not good.  Yeah, that makes sense.

Posted on May 29, 2008 at 10:48 PM | Permalink | Comments (15)

This "Price" Thingie

Wow, this is unexpected:

The FHWA’s “Traffic Volume Trends” report, produced monthly since 1942, shows that estimated vehicle miles traveled (VMT) on all U.S. public roads for March 2008 fell 4.3 percent as compared with March 2007 travel. This is the first time estimated March travel on public roads fell since 1979. At 11 billion miles less in March 2008 than in the previous March, this is the sharpest yearly drop for any month in FHWA history.

Someone really should research this phenomenon.  It is almost if gasoline prices, which we all know exist solely for the benefit of oil company profits and to support oil company CEO pay, have this heretofore unsuspected utility to modify demand for scarce resources. 

Not to be deterred by this spurious data point, the US Congress is moving ahead with this:

The current high price of gas has led to a lot of crazy proposals from gas tax holidays to creating a tax deduction based upon energy consumption. But Rep. Paul Kanjorski’s (D-PA) may top them all in terms of its stupidity. From the Times Leader, Kanjorski’s plan would do the following:

    • H.R. 5800 would tax industries’ windfall profits.

• The bill would set up a Reasonable Profits Board to determine when these companies’ profits are in excess, and then tax them on those windfall profits.

    • As oil and gas companies’ windfall profits increase, so would the tax rate for those companies.

• Kanjorski said his legislation will encourage oil companies to lower prices to prevent them from receiving higher tax rates.

Posted on May 27, 2008 at 09:05 AM | Permalink | Comments (14)

Giving Nothing Back

A few minutes ago, on some cable show, I saw a viewer comment that said something like "I am tired of big oil taking in billions and billions of dollars and giving nothing back.  It is time for the era of big oil to end."

Wow -- I would sure suggest he trying going to a different gas station.  Every time I give the oil companies some money, they give me back a tank of gasoline.  This gasoline has great value to me, and is something I could never produce for myself (OK, actually, I bet I could, but you know what I mean).  In fact, the only organization that takes my money and gives me nothing back in return in the government.

Posted on May 22, 2008 at 02:29 PM | Permalink | Comments (19)

Not Sure this Is A Point of Pride...

I actually found out about this early last year:

Mom-and-pop service stations are running into a problem as gasoline marches toward $4 a gallon: Thousands of old-fashioned pumps can't register more than $3.99 on their spinning mechanical dials.

We operate a marina in the back-end of nowhere in Colorado where, since we can only accept less-than-full-truckload gas shipments, we were paying wholesale prices over $3.50 last summer.  We attempted to go to $4.09 on the retail pump, and wham, we ran up against this retail equivalent of the Y2k bug.

Posted on May 22, 2008 at 02:14 PM | Permalink | Comments (7)

Comparing Phoenix to Seattle and Austin

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

Phoenix can learn economically from robust Seattle and Austin

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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


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

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

Posted on May 19, 2008 at 12:48 AM | Permalink | Comments (17)

Things No One Mentions When They Whine for the Good Old Days

Via Eugene Volokh:

Year Food spending as share of disposable income
1929 23.4%
1939 21.3%
1949 22.1%
1959 17.8%
1969 13.7%
1979 13.4%
1989 10.9%
1999 10.2%
2000 9.9%
2001 9.9%
2002 9.8%
2003 9.8%
2004 9.7%
2005 9.8%
2006 9.9%

My sense is the same pattern would emerge for gasoline prices, electricity (if you had it), phone service (if you had it), cross-country transportation, air conditioning, etc.


Posted on May 13, 2008 at 03:32 PM | Permalink | Comments (17)

Nobel Prize, for sure

Wow, I am not sure how I missed this seminal work, but I discovered it today via Steven Levitt.  The work is titled "On the Efficiency of AC/DC: Bon Scott versus Brian Johnson" by Robert J. Oxoby of the University of Calgary Economics Department. 

Our treatment variable in the experiment was the type of music played while individuals were making their decisions. As demonstrated by Bernardi et al. (2006), different musical styles can have different physiological effects in individuals. These effects, along with emotional responses, may result in different patterns of decision making regarding distributing money between oneself and another. In our Bon Scott treatment, participants listened to “It’s a Long Way to the Top” (featuring Bon Scott on vocals) from the album High Voltage. In our Brian Johnson treatment, participants listened to “Shoot to Thrill” (featuring Brian Johnson on vocals) from the album Back in Black....

our analysis suggests that in terms of affecting efficient decision making among listeners, Brian Johnson was a better singer. Our analysis has direct implications for policy and organizational design: when policymakers or employers are engaging in negotiations (or setting up environments in which other parties will negotiate) and are interested in playing the music of AC/DC, they should choose from the band’s Brian Johnson era discography.

I have this picture of AC/DC music blasting out on the floor of the Chicago Board of Trade

(the whole story behind this "study" is here)

Posted on May 13, 2008 at 10:37 AM | Permalink | Comments (2)

Inventory Theory

Inventory theory says that the amount of total inventory that needs to be held to satisfy demand is proportional to the number of inventory stocking points.  The most efficient (from purely an inventory size standpoint- there are other efficiency issues that mitigate against this) is one big single shared inventory.  The least efficient is every individual holding his/her own inventory.  Glen Reynolds points to this effect in food:

I SAW A FEATURE BY TONY CAVUTO last night on food stockpiling, in which one of his correspondents explained how he'd spent $1500 at Costco stocking up against shortages. You know, if you have stories like this on TV regularly, you'll get food shortages at stores even if there's no actual shortage in supply, because today's just-in-time inventory practices mean that there's no real slack for sudden increases in demand. The empty shelves will then promote panic and more stockpiling, setting the stage for the equivalent of a bank-run on grocery stores even if there's no actual reason.

The exact same thing happened in the early 1970s with gasoline**.  Imagine that there are 100 million cars, and each fills up when the tank is 1/4 full.  On average, then, every tank is 5/8 full.  If tanks are all 16 gallons, then there are a billion gallons of gas in people's personal gasoline "inventory."  Now imagine due to some perceived crisis everyone changes their policy and fills up when the tank is only half empty.  Then, on average, every tank is 3/4 full, giving a total inventory of 1.2 billion gallons.  If this panic occurs over a period of a few days, suddenly there is an incremental demand, above and beyond normal demand, of 200 million gallons to expand personal inventories.  That as much as 30,000 tanker truck loads of extra demand at retail in a few days.  When stations run out, and people change their policy to fill up at 3/4 (as many did in those times, in panic) then that causes another 200 million gallons to disappear into personal inventories.  Logistics systems are not built to handle these demands.

By the way, don't let the US government off the hook.  In the wake of the 1972 oil crisis, the main Congressional "contribution" was to pass a law that mandated oil companies deliver gasoline to each geographic area (probably by county, but I am not sure) in the same proportion as they did in the previous year.  A sort of directive 10-289 for gas distribution.  Well, we all know that things change, and among the biggest changes was the fact that with uncertain supplies and higher prices, a lot fewer people were driving on highways.  Because of Congress's action, rural interstate gas stations were swimming in gas, and the cities were out.  In a cruel but totally predictable twist, a number of the Congressmen who voted for this law later demagogued against oil companies for their poor distribution of gasoline that summer. 

Posted on May 9, 2008 at 08:47 AM | Permalink | Comments (3)

A Thought on Cellulosic Ethanol

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

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

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

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

Posted on May 8, 2008 at 08:38 AM | Permalink | Comments (28)

Will Hillary Sue the US Congress?

Hillary apparently wants to sue OPEC for not producing enough oil. If this idea had come in via the constituent mail, Hillary's staffers would probably have laughed themselves silly, but it is an election year, and no bottom has been found below which candidates are unable to keep a straight face while uttering what they know to be nonsense.

But should Hillary be suing OPEC, or the US?  Because if you ranked the world's countries on those that are doing the least to develop the most promising potential oil deposits, the US would be right at the top of that list.  By Hillary's logic, Western Europe and Japan should be suing us.


Posted on May 1, 2008 at 09:49 AM | Permalink | Comments (5)


Hillary has jumped on the gas tax holiday along with John McCain.   Kevin Drum calls it pure demagoguery (he probably wouldn't have been so blunt about Hillary, but since he already derided McCain for the idea, he has the good grace to apply the same criticisms to Hillary:

I'd say there's approximately a zero percent chance that Hillary Clinton or John McCain actually believe this is good policy. It would increase oil company profits, it would make hardly a dent in the price of gasoline, it would encourage more summertime driving, and it would deprive states of money for transit projects. Their staff economists know this perfectly well, and so do they.

But they don't care. It's a way to engage in some good, healthy demagoguery, and if there's anything that the past couple of months have reinforced, it's the notion that demagoguery sells. Boy does it sell.

I tend to agree with Drum.  The gas tax, at least when applied to its original purpose of funding highways and roads, is one of the better taxes out there, doing a pretty good job of matching the costs of roads to the users of the roads.  However, I did make this point in Drum's comment section:

I am glad you see that an 18.4 cent gas price reduction is small compared to the total price and proposing such a reduction by government fiat is pure demagoguery. 

I would like to point out that most oil companies have a profit on a wholesale gallon of gas that is also about 18-20 cents.  The reason they make so much money is that they sell a lot of gallons of gas (plus many other petroleum products).  So is it similarly pure demagoguery to blame oil company profits for the price of gas, or to suggest government schemes (e.g. windfall profits tax) to reduce these profits?

By the way, Hillary is particularly hypocritical on this, because she has adopted the 80 by 50 CO2 target (80% reduction by 2050).  To meet this target, which I think would be an economic disaster, is not going to require an 18.4 cent gas tax, but something like a $10 a gallon gas tax, or more.  Since she has adopted her 80 by 50 target, her correct answer on gas taxes should not be to propose a holiday, but to say "suck it up, because taxes are going to go a hell of a lot higher."  McCain, who has also adopted a CO2 target, though a less stringent one, is in the same boat.

Update:  OK, the $10 per gallon tax is probably gross under-estimated.  The number is likely to have to be much higher than that, given that Europeans are already paying nearly $10 a gallon and are not even in the ballpark of these CO2 targets.

Cost of gasoline
(U.S. Dollars per Gallon)
Date___     Belgium  France  Germany  Italy  Netherlands  UK  _ US
4/20/98     3.43___  3.44__  3.25___  3.48_  3.56_______ 4.04  1.21
4/21/08     8.62___  8.34__  8.58___  8.32_  9.51_______ 8.17  3.73

HT:  Hall of Record

Posted on April 29, 2008 at 10:31 AM | Permalink | Comments (4)

Two-Income "Trap", aka the Government Trap

Todd Zywicki has a nice post on the The Two-Income Trap: Why Middle Class Mothers and Fathers are Going Broke by Professor Elizabeth Warren and Amelia Warren Tyagi. 

In his writings on the tactics for engineering the communist state, Karl Marx talked a lot about the need to "proletarianize the middle class."  This has been a very popular tactic among leftish writers and politicians today, attempting to convince the middle class that they never had it so bad.

I won't repeat Zywicki's whole post, but the books author's argument revolve around examples which purport to show that as families go from one to two earners, their costs (health care, child care, cars, mortgage, etc.) go up by more than the additional income, making them poorer on a discretionary spending basis.

Zywicki first points out the same thing I immediately thought of when I read a summary of the book:

It is not clear what to make of all of this, except that it is hard to see how this confirms the central hypothesis of "The Two-Income Trap" that "necessary" expenses such as mortgage, car payments, and health insurance are the primary draing on the modern family's budget. And again, this unrealistically assumes that all increased spending on houses and cars is exogenously determined, ignoring the possibility that an increase in income leads to an endogenous decision by some households to increase their expenditures on items such as houses and cars.

While the assumption seems crazy, it makes sense in the context of leftish ideology, which holds that the middle class have only limited free will and tend to have their decision making corrupted by advertising and other corporate pressures.

But Zywicki goes further, and actually digs into the author's numbers.  He finds that the authors are surprisingly coy about addressing changes in taxation in their numbers.   Zywicki then uses the authors' own numbers, this time with taxes factored in using the authors' own assumptions, and gets these two charts:
Toddtwo_income_3 Toddtwo_income_4

As Zywicki summarizes:

As can readily be seen, expenses for health insurance, mortgage, and automobile, have actually declined as a percentage of the household budget. Child care is a new expense. But even this new expenditure is about a quarter less than the increase in taxes. Moreover, unlike new taxes and the child care expenses incurred to pay them, increases in the cost of housing and automobiles are offset by increases in the value of real and personal property as household assets that are acquired in exchange.

Overall, the typical family in the 2000s pays substantially more in taxes than in their mortgage, automobile expenses, and health insurance costs combined. And the growth in the tax obligation between the two periods is substantially greater the growth in mortgage, automobile expenses, and health insurance costs combined. And note, this is using the data taken directly from Warren and Tiyagi's book.

Posted on April 28, 2008 at 11:17 AM | Permalink | Comments (8)

The End is Near

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

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

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

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

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

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

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

Posted on April 14, 2008 at 09:08 AM | Permalink | Comments (9)

Progressives Support Markets?

It may really be a new era, when markets rather than command-and-control government allocations and restrictions are advocated by progressives to allocate scarce resources.  In this case, the argument is especially surprising, since it is arguing for more open water markets.  For some reason, water is the last place anyone seems to want to apply pricing signals, something I have written on many times.

There are clear gains from having an active market in water rights. It would help solve the problems posed by current water shortages in the West, and it would provide the flexibility necessary to confront the impact of climate change on water supplies in the coming decades. It would be, in a word, fluid.

Posted on April 11, 2008 at 09:15 AM | Permalink | Comments (6)

Dumbest Thing I Have Read Today

I agree with Kevin Drum, this is the dumbest thing I have read today:

There is a solution to the rising cost of oil, but it is a painful one. Let's say there is a lot of $20-a-barrel oil in the world — deep-sea oil, Canadian tar sands. But who would look for $20-a-barrel oil if someone else (Saudi Arabia) has lots of $5-a-barrel oil? The answer is: no one.

Basically, American taxpayers have to guarantee potential producers that the price in the future will not fall below $20 a barrel and that they will not lose their investments.

This is easy to do. The U.S. needs to guarantee that it will buy all of its oil at $20 a barrel before buying anything from OPEC. This forces the price of oil down to $20 a barrel, but it eliminates the possibility that it will ever go back to $5 a barrel.

The implication that no one will add capacity if there is anyone at all to the left of them on the supply curve is just silly, and defies history in any number of industries, including oil.  By this argument, no one would be building super-deep water oil platforms today.  The reason there is not more oil exploration today in certain areas of North America is that there are formal and informal government restrictions that make it hard and/or impossible.  And to the extent that oil companies are treating current oil prices as a bubble that will inevitably fall, all I can say is, bring it on. 

Posted on April 11, 2008 at 09:06 AM | Permalink | Comments (7)

Cargo Cult Economics

The Democratic party, which so often accuses others of adopting superstition over science, are themselves pursuing Medieval economics:

The Democratic Party's protectionist make-over was completed yesterday, when Nancy Pelosi decided to kill the Colombia free trade agreement. Her objections had nothing to do with the evidence and everything to do with politics, but this was an act of particular bad faith. It will damage the economic and security interests of the U.S. while trashing our best ally in Latin America.

The Colombia trade pact was signed in 2006 and renegotiated last year to accommodate Democratic demands for tougher labor and environmental standards. Even after more than 250 consultations with Democrats, and further concessions, including promises to spend more on domestic unemployment insurance, the deal remained stalled in Congress. Apparently the problem was that Democrats kept getting their way.

I am sure the Columbians, who for years have been told by the US to export something other than cocaine, are scratching their heads at this rebuff when they actually try to do so.  My sense is that the Democrats are reacting to this ugly picture of US manufacturing output post NAFTA:


We can see that since the passage of NAFTA in the mid-1990s that US manufacturing output has, uh, has.... can that be right?

Posted on April 10, 2008 at 08:31 AM | Permalink | Comments (17)

Presidents and the Economy

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted on April 7, 2008 at 11:31 AM | Permalink | Comments (9)

How I Stopped Demagoguing and Learned To Love The Oil Companies

I am on the road this week, and still do not have time to write the post I want to write about Obama demagoguing against oil companies.  Fortunately, I do not have to, because Q&O has this post.

Here is the short answer:  companies like ExxonMobil, even in the best of times (or most rapacious, as your perspective might be), makes 9-10% pre-tax profit on sales.  They make something like 5-6% when things are not so good.  This means that if gas prices are $3, when you take out the 45 cents or so of tax, Exxon is making between 13 and 25 cents a gallon profit.  Call it 20 cents on average.  So, wiping out profits completely with various ill-advised taxes or regulations would achieve the substantial goal of ... cutting about twenty cents off the price of gas, or about $2.50 off the price of a fill-up.  Of course, that is at the cost of eliminating all investment incentives in the world's most capital intensive resource extraction business.  Which in turn will mean that that price cut will last for about 2 years, and then be swamped by price increases from disappearing gas supplies  (exactly what happened in the late 1970s). 

Part of the problem is that most people do not understand the supply chain in crude oil.  It would seem logical that if the price of oil rises form $30 to $100, then all that $70 price increase is pure profit to Exxon.  That would have been true in 1905, but is not true today.  Exxon, even when it does the exploration and drilling, gets its oil via complicated agreements with state-owned corporations which in the main are structured so that the country in question, and not Exxon, gets windfall.  This means that if Obama wants to tax windfall profits, he needs to seek out Venezuela and China and Saudi Arabia.

The article covers all this and more.

Posted on March 27, 2008 at 08:33 PM | Permalink | Comments (3)

Arizona Politicians Pursue Protectionism -- Against New Mexico

Taking the economically illiterate but apparently politically powerful notion that it is important that commerce across arbitrarily selected geographic boundaries be minimized, some Arizona politicians are taking the argument to the next, ridiculous level:  Not content to blame perceived problems in the state economy (which has outperformed most other states) on NAFTA, Mexico, or Mexican immigrants, Arizona politicians are now blaming them on New Mexico.

An Arizona energy regulator is frustrated that Arizona Public Service Co. is passing up in-state wind-energy for power from New Mexico and Utah....

The state's largest utility buys 90 megawatts of energy from the Aragonne Mesa Wind Project near Santa Rosa, N.M., and officials have informed Corporation Commissioner Kris Mayes of plans to buy more renewable energy from out of state, including from a Utah geothermal-power plant.

"I am concerned that such out-of-state purchases hinder the development of renewable energy here in Arizona, and potentially deprive our state of much needed economic development," Mayes said in a letter to APS, echoing concerns she raised at a regulatory meeting last week.

Of course, everyone knows that silly government energy mandates have much more growth potential than, say, low electrical rates.  So obviously the power company is just being treasonous in buying power from the cheapest sources:

When APS [one of our electric utilities] chose to buy power from the Aragonne project in New Mexico, it rejected a similar proposal from a company that wanted to build a wind farm in northern Arizona, which wasn't built because of the decision from APS, Mayes said.

Brandt said the New Mexico project was better for customers.

"We put all these projects out with a competitive bid," Brandt said. "Then we select the resource that comes out the best. It's not always the cheapest. It's a combination of price, reliability and do-ability, all the things a common businessperson would look at."

He said APS would rather support Arizona power projects, but so far those that have bid on power have not been competitive.

Of course, all of this, even taking the cheapest source, is more expensive than electricity would be without these mandates:

When the Corporation Commission approved the renewable-energy standard in 2006, officials estimated it would raise an existing monthly tariff on customer bills from less than 50 cents to $1.05 to help APS meet the goal, but those projections have gone up. Regulators are expected to set a new limit on the tariff in the next month, according to Mayes and APS officials, with some proposals nearing $2.

The protectionist argument is summed up:

"This is Arizona ratepayer money that is currently going to other states that ought to stay in Arizona," she said. "We are in an economic downturn. It's a terrible time to be investing out of state."

Yes, yet another blow is struck against economic literacy and the concept of division of labor.  Just how arbitrarily small does a geographic area have to be before protectionists will accept that this area does not need to be self-sufficient of all products and services?


Posted on March 23, 2008 at 11:38 PM | Permalink | Comments (8)

Bear Stearns Roundup

My friend Scott, who actually worked for Bear Stearns years ago, sent me one of the more down to earth explanations of a liquidity trap that I have heard of late.  Imagine that you had a mortgage on your house for 50% of its current value.  Then suppose that in this alternate mortgage world, you had to renew your mortgage every week.  Most of the time, you are fine -- you still have good income and solid underlying asset values, so you get renewed with a rubber stamp.  But suppose something happens - say 9/11.  What happens if your renewal comes up on 9/12?  It is very likely that in the chaos and uncertainty of such a time, you might have trouble getting renewed.  Your income is still fine, and your asset values are fine, but you just can't get anyone to renew your loan, because they are not renewing anyone's loan until they figure out what the hell is going on in the world.

Clearly there are some very bad assets lurking on company books, as companies are still coming to terms with just how lax mortgage lending had become.  But in this context, one can argue that JP Morgan got a screaming deal, particularly with the US Government bending over and cover most of the riskiest assets.  Sigh, yet another government bailout of an institution "too big to fail."  Just once I would like to test the "too big to fail" proposition.   Why can't all those bankers take 100% losses like Enron investors or Arthur Anderson partners.  Are they really too big to fail or too politically connected to fail?

Anyway, Hit and Run has a good roundup of opinion.

Update:  I don't want to imply that everyone gets off without cost here.  The Bear Stearns investors have taken a nearly total loss - $2 a share represents a price more than 98% below where it was a year or two ago.    What I don't understand is that having bought Bear's equity for essentially zero, why an additional $30 billion guarantee was needed from the government.

Posted on March 17, 2008 at 11:21 AM | Permalink | Comments (9)

Oh Crap, I Agree With Paul Krugman!

Paul Krugman, on ethanol:

I'm almost never censored at the Times. However, I was told that I couldn't use the lede I originally wrote for my column following the 2007 State of the Union address, in which Bush made ethanol the centerpiece of his energy strategy: "Before the State of the Union address, there had been hints and hopes that President Bush would offer a serious plan to reduce our dependence on imported oil. Instead, however, he took refuge in alcohol."

Well, anyway - the news on ethanol just keeps getting worse. Bad for the economy, bad for consumers, bad for the planet - what's not to love?

Well, I have heard that he was a pretty good economist before he became a political hack.

Posted on February 22, 2008 at 10:33 AM | Permalink | Comments (10)

Kept Down by the Man

I think it's so cute when my fellow Princeton grads who pull down nearly a half million dollars a year complain about being put down by "the man."

Blaming your student debt on the structure of the economy when you chose to go to the most expensive school in the country is a bit like trying to get sympathy for the size of the note on your Lamborghini. 

By the way, lost in all this is the fact that Princeton is one of the two schools in the country that now help students graduate debt-free.  In most cases, Princeton has replaced student loans with outright grants. Somehow she kind of forgot to mention that Princeton solved this problem years ago, without even a whiff of government intervention. 

Posted on February 21, 2008 at 11:47 PM | Permalink | Comments (4)

Economic Resources for Free

Via the Mises Institute, some Austrian and libertarian economics texts are free online:

Posted on February 21, 2008 at 10:20 PM | Permalink | Comments (0)

More on the Teens as the New Seventies

For a while, I have been worried that the next decade may well be a return to 1970's economics, with bipartisan commitment to large government, ever-expanding government micro-management of... everything, growth-destroying taxes, and consumer-unfriendly protection of dead US industries.

Now, Megan McArdle points to an article that hints that the stagflation of the 1970's may be back as well.

Inflation and sluggish growth haven't joined in that ugly brew called stagflation since the 1970s. They may not be ready for a reunion, but they are making simultaneous threats to the economy and battling one might only encourage the other.

Among a batch of economic readings today, the Labor Department reported that import prices jumped 1.7% last month. The data included troubling signs that consumer products, many imported from China, have caught the inflation bug. The signs pointing to slowing growth included a sharp deterioration in consumers' mood, as measured by the Reuters/University of Michigan Surveys of Consumers, and a worsening outlook for manufacturers, revealed in the Federal Reserve Bank of New York's Empire State Manufacturing survey for February. The government also reported that U.S. industrial production only increased slightly during January, as colder weather elevated utilities output and offset sharp declines in the auto and housing sectors. If indeed inflation is teaming up with slower growth, it means big headaches for policy makers, in particular Ben Bernanke. The Federal Reserve chief in congressional testimony yesterday suggested that he is willing to keep lowering interest-rates if the economy stalls. But, naturally, he will have less room to do so if those lower rates would accelerate inflation to unacceptable levels.

Posted on February 18, 2008 at 09:53 AM | Permalink | Comments (3)

The New Stadium Lie

This week, we in Phoenix are supposedly getting our payoff for subsidizing the hapless Arizona Cardinals with a billion dollar football stadium that is used for its intended purpose (football games) for 33 hours per year  (3 hours per game times 11 games:  2 Cardinals pre-season, 8 home regular season, Fiesta Bowl).  In exchange we get a nicer stadium (if I were to want to see a Cardinals game live) but worse TV options (because instead of the best game of the week, we have to see our home team).

The big selling point, the cherry on top of the sundae the NFL uses to push new stadiums, is a Superbowl.  Which is in town this week.  So far, the huge economic stimulus has not really poured into our household, but I guess I need to be patient.  Anyway, the timing seems good to link this article, which comes via the Sports Economist:

If you build it, they will come. This is usually the mantra of those in favor of publicly financed sports stadiums, including the current proposal for a new soccer stadium in Chester. In this case they are visitors whose spending would turn devastated cities and neighborhoods into exciting destination points. Local schools, merchants, and residents all would benefit as municipal coffers swelled.

There's only one problem with this scenario. It's not true. Never has been. They do come, but cities are not saved. Over the past two decades, academic research has generated literally hundreds of articles and books empirically challenging the alleged economic wonders of new stadiums, even when they're part of larger development schemes. I have been studying and writing about publicly financed stadiums for more than 10 years and cannot name a single stadium project that has delivered on its original grandiose economic promises, although they do bring benefits to team owners, sports leagues and sometimes players....

Why, then, given the overwhelming academic research challenging stadium-centered economic development do political leaders (if not average citizens) still support such projects? In a just-released article in the Journal of Sport and Social Issues, my colleagues and I studied media coverage of 23 publicly financed stadium initiatives in 16 different cities, including Philadelphia. We found that the mainstream media in most of these cities is noticeably biased toward supporting publicly financed stadiums, which has a significant impact on the initiatives' success.

This bias usually takes the form of uncritically parroting stadium proponents' economic and social promises, quoting stadium supporters far more frequently than stadium opponents, overlooking the numerous objective academic studies on the topic, and failing to independently examine the multitude of failed stadium-centered promises throughout the country, especially those in oft-cited "success cities" such as Denver and Cleveland.

I can attest to the latter.  During the run up to various stadium-related referenda, the media was quite rah-rah for the stadium subsidies.  In fact, on radio, several talk show hosts denigrated voters who opposed the stadium subsidies as "stupid old retired people."  I remember calling in to a couple of talk shows opposing the stadium bills and being treated like a Luddite.

My article on sports team relocations and stadium subsidies as a prisoners dilemma game is here.

Posted on January 30, 2008 at 10:18 AM | Permalink | Comments (7)

What He Said

I couldn't have expressed my frustration with the economic illiteracy of the press and the general population better than does TJIC:

Jane Galt has a series of posts explaining why a competitive free health care market creates new drugs, and why strict regulation and/or nationalization wouldn’t improve things.

Mostly, this series just makes me sad and tired, the same way I’d be sad and tired if I saw smart verbal well educated people spending their time explaining that, no, Jews don’t have horns, and it’s a bad idea to drown your neighbors to see if they are witches.

The sheer wasted effort combating idiocy and ignorance, when these talented people could be doing so much more, if not for the resting levels of stupidity and ignorance cloaked with self-righteous anger that permeate the population.

The only proviso I would add is that for those of our political class, I suspect the ignorance may be more willful than actual, since a clear understanding of economics in the general populace might stand in the way of gaining personal power.  I expressed related sentiments here:

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

Posted on January 29, 2008 at 09:47 PM | Permalink | Comments (4)

Save It

The Arizona Republic this morning had some goofy headline in their print edition that said something like "How should you spend your $800 tax rebate?"  Far be it for me to presume to tell people how to spend their own money (what do I look like, a Congressman?) but here is a bit of advice:  Save it.  Because this is not a grant, it is a loan.

All of these rebates will be paid for with additional deficit spending.  This means that everyone will eventually pay for their rebate in the form of a) higher future taxes; b) higher future prices due to inflation; or c) increased job insecurity and/or lower future earnings due to reduced output in the economy; or d) all of the above.

It HAS to be this way.  Unlike private wealth creation, the government can't get wealth from nowhere.

Posted on January 25, 2008 at 04:05 PM | Permalink | Comments (20)

Minimum Wages and the Supply and Demand for Labor

In a post that is a nice follow-on to this one about wages in trucking, Russel Roberts has a nice post about people making minimum wage:

According to Current Population Survey estimates for 2006, 76.5 million American workers were paid at hourly rates, representing 59.7 percent of all wage and salary workers.1 Of those paid by the hour, 409,000 were reported as earning exactly $5.15, the prevailing Federal minimum wage. Another 1.3 million were reported as earning wages below the minimum.2 Together, these 1.7 million workers with wages at or below the minimum made up 2.2 percent of all hourly-paid workers.

Correcting for higher state minimum wages, but also adjusting for illegal immigrants (who are a special case with super-low bargaining power) and factoring in salaried workers (who by law to be salaried have to be making much more than minimum wage) one still finds that less than 2% or less make minimum wage, about half of whom are under 25.  Roberts has a follow-on post with comments from Tim Worstall to say that even this number may be too high:

Unfortunately, on the page he’s taken his information from he’s missed one thing which makes his case even stronger.

Nearly three in four workers earning $5.15 or less in 2006 were employed in service occupations, mostly in food preparation and service jobs.

That’s your waitron units and barkeeps folks. And what do we know about people who do these sorts of jobs? Well, perhaps you have to have actually done them (as I have, everything from the graveyard shift in a Denny’s to tending bar around the corner from this guy’s place): they all make tips. In fact, so much so that there is (or at least used to be when that BLS report was prepared) a special minimum wage for those in such jobs, one lower than the official Federal minimum wage.

For example, way back when, the min. wage was $3.35 an hour. Waiters got $2.01. You didn’t really care because even serving pancakes at 5 am you made another $25-$30 a shift ($50-$150 in a decent place). Barkeeps got $3.35 plus tips.

The BLS numbers are reporting what employers paid employees, not what people are actually earning. So we might in fact say that while the number being paid the minimum wage or less is 2.2% of the workforce, the number actually earning that figure is more like 0.5%.

As an aside, speaking of bargaining power, it strikes me that prostitution is an excellent example of supply and demand in labor markets trumping government mandates.  Prostitutes have absolutely no power to run to the government for help over minimum wage or work condition violations.  They have only limited power to get government help even when they are the victim of violence from those who pay them.  But on an hourly basis, the most succesful make far more than most Americans.

Posted on January 24, 2008 at 10:56 AM | Permalink | Comments (2)

There's No Shortage, Just A Price You Don't Like

In the absence of government meddling (e.g. price controls) healthy markets seldom create true shortages, meaning situations where one simply cannot obtain a product or service.  One might think there was a shortage, for example, of Superbowl tickets, since there are only a few available and tens of thousands, maybe hundreds of thousands, of people who would like to attend.  But in fact one can Google "Superbowl tickets" and find hundreds available.  You may not like the price ($3500 and up for one ticket), but they are available for sale.

Yesterday, the AZ Republic lamented that there is a shortage of truck drivers nationwide:

Trucking companies across the country are facing a shortage of long-haul drivers....

High driver turnover has traditionally been a problem throughout the trucking industry. But retirements and growing shipping demand have made the shortage of long-haul drivers more acute. Fewer drivers means delayed deliveries and higher delivery costs that could be passed on to consumers. The issue is especially crucial for the Phoenix area, which touts itself as a shipping hub for businesses fed up with the costs and congestion around Los Angeles-area ports. The Valley also is headquarters to two of the country's biggest for-hire trucking companies: Swift Transportation and Knight Transportation....

Trucking experts say the problem goes beyond a labor shortage in the industry. They call it a threat to the economy.

"Our country needs to figure out how to fix this," said Ray Kuntz, chairman and chief executive of Watkins and Shepard Trucking in Montana and chairman of American Trucking Associations. "Our economy moves on trucks."

Here is the key fact:

• Long-haul wages vary by company and are typically based on experience, safety record and commercial-driver's-license endorsements. Long-haul drivers with two or more years of experience usually earn at least $50,000 to $60,000 a year.

• An entry-level driver with no over-the-road experience starts in the high $30,000 range. Team drivers can earn more.

There is no way in a Platonic vacuum to determine if a wage is too high or too low.  But the driver "shortage" gives us a really good hint that maybe these salary levels are no longer sufficient to attract people to the rather unique trucking lifestyle.  I probably could write a similar article about how there is a shortage of Fortune 500 CEO's or airline pilots who will accept a $30,000 starting salary.  The problem then is not shortage, the problem is that wage demands are rising as trucking is out-competed for talent by alternative careers.   In fact, there is not shortage, but a reluctance by trucking firms to accept a new pricing reality in the market for drivers.

By the way, to some extent this "shortage" is indeed an artificial creation of the government.  Under NAFTA, Mexican truckers were long-ago supposed to have been given access to the US market, but overblown safety concerns have been used as a fig-leaf to block the provision as a protection for US truckers and a subsidy to the Teamsters.  If a truck driver "shortage" is really a national economic problem, then let's stop blocking this NAFTA provision.  But my sense is that the trucking companies in this article would freak at this, because they are not really concerned about the national economy but, reasonably, with rising wages hurting their bottom line.  My guess is this article is the front-end of a PR push to get states like Arizona to subsidize ... something.  Maybe truck driver training.  Look for such legislative proposals soon.


Posted on January 24, 2008 at 08:38 AM | Permalink | Comments (7)

Post-Scarcity World

I am going to post a bit more on this topic later today, but here is one of a number of great old computer ads shown here.  Don't miss Elvira shilling for her favorite CASE tools.  (HT Maggies Farm)


I just bought 2 TB in four 500 MB drives for less than $430 including shipping  (that's an improvement from $150 per MB in 1979 to about $0.22 per MB**).   With the great tools now available on most motherboards, I arrayed these in a fast and redundant Raid 0+1 setup with 1TB of storage.  (Yes, to the total geeks out there, I would have preferred Raid 1+0 but alas the Nvidia chipset on my board did not support it.)

** By the way, this 700x improvement over 30 years actually has little or nothing to do with Moore's law.  While some of the materials sciences are related, this improvement has little to do with silicon and nothing to do with transistor density.  This is the result of incredible human creativity in the face of brutal competition, both from other hard drive manufacturers as well as from substitutes like static RAM.

Posted on January 23, 2008 at 08:39 AM | Permalink | Comments (8)

Cargo Cult Economics

From Venezuela:  (via Mises)

Venezuela launched a new currency with the new year, lopping off three zeros from denominations in a bid to simplify finances and boost confidence in a money that has been losing value due to high inflation....

"We're ending a historical cycle of ... instability in prices," Finance Minister Rodrigo Cabezas said Monday, adding that the change aims to "recover a bolivar that has significant buying capacity."

Prices have risen as Chavez has pumped increased amounts of the country's oil income into social programs, reinforcing his support among the poor and helping to drive 8.4 percent economic growth in 2007.

The Central Bank is promoting the new monetary unit with an ad campaign and the slogan: "A strong economy, a strong bolivar, a strong country." Officials, however, have yet to clearly spell out their anti-inflationary measures.

Good to see the government taking meaningful steps.  Next up will be "Whip Inflation Now" buttons. 

The 8.4 percent growth cited above may be illusory, given this:

Venezuela has had a fixed exchange rate since February 2003, when Chavez imposed currency and price controls. The government has said it is not considering a devaluation any time soon.

But while the strong bolivar's official exchange rate will be fixed as 2.15 to $1, the black market rate has hovered around the equivalent of 5.60 to $1 recently.

Posted on January 18, 2008 at 08:27 AM | Permalink | Comments (3)

Yeah, this is Going to Work

Via the New York Times:

Prime Minister Wen Jiabao responded Wednesday to growing public anxiety about inflation by announcing that China would freeze energy prices in the near term, even as international crude oil futures have continued to surge....

Last November, China raised gasoline and diesel prices by almost 10 percent, partly to appease officials at state-owned refineries. Refiners had complained that price controls were forcing them to swallow the difference between higher prices for crude oil on the world market and regulated consumer prices at home for refined products. So refineries cut back production of gasoline and particularly diesel, causing long lines at fuel stations around the country.

More on past Chinese problems from gas price caps.  Here is a picture of one such past gas line in China. 


    I got my driver's license in 1978, just in time to spend the first few months of my driving life sitting in gas lines with the family car, a result of a series of market distorting actions by the US government.

Meanwhile, I presume the French and Germans will see no problem with this approach:

The Economist says, of the state of economics education in France and Germany, "I desperately hope it's not really this bad." Unfortunately, I think it's really that bad. When the 35 hour work week was proposed, I was talking to someone in the French consulate who did economics and trade. "Aren't you worried that this will raise employer's costs and lead to business failures or higher unemployment?" I asked.

"That's just Anglo-saxon economics" was his rather stunning reply.  Apparently, in France, demand curves do not slope downwards.

Posted on January 11, 2008 at 08:35 AM | Permalink | Comments (6)

What Happens When You Abandon The Price Mechanism to Allocate Resources

When the government does not allow prices to float in real time in response to changes in supply and demand, then gluts and shortages are inevitable.  When shortages occur, due to prices that are capped or not allowed to move upwards sufficiently quickly, queues and/or spot shortages occur.  When the government decides it does not like this, the jack-booted thugs step in and we have government-enforced rationing.  California, famous for its stupidity in letting wholesale electricity prices float while capping retail prices and thus creating an economic disaster several years ago, is at it again in the electricity market:

What should be controversial in the proposed revisions to Title 24 is the requirement for what is called a "programmable communicating thermostat" or PCT. Every new home and every change to existing homes’ central heating and air conditioning systems will required to be fitted with a PCT beginning next year following the issuance of the revision. Each PCT will be fitted with a "non-removable " FM receiver that will allow the power authorities to increase your air conditioning temperature setpoint or decrease your heater temperature setpoint to any value they chose. During "price events" those changes are limited to /- four degrees F and you would be able to manually override the changes. During "emergency events" the new setpoints can be whatever the power authority desires and you would not be able to alter them.

In other words, the temperature of your home will no longer be yours to control. Your desires and needs can and will be overridden by the state of California through its public and private utility organizations. All this is for the common good, of course.

I can't think of anything that better illustrates the tie between free exchange and freedom.  And by the way, how long before the greenies in the legislature suggest using this mechanism even when there are not shortages to turn down everyone's air conditioner, just because they can.

Update: Exercise for the reader -- Figure out how, once this policy goes bad, the state of California will again blame Enron for their failure.

Posted on January 8, 2008 at 08:54 AM | Permalink | Comments (15)

Using Copyright Law to Block Price Arbitrage

Movie producers sell DVDs cheaper in, say, Taiwan than they do in the US.  This is not an unheard of economic phenomenon -- it happens in every commodity and product.  The reason we don't notice these price differences too much is that traders and arbitragers and shipping companies will target the largest price differentials and take advantage of them by buying and shifting products around until the price differential is less than the transportation and transaction costs.  Basic economics.

However, despite a number of structural advantages that already serve to reduce this cross-flow (e.g. different languages), the media companies are trying to stretch copyright law far beyond what CopyOwner says is legally defensible:

Copyright owners (including the owners of the “works” embodied in the copyrighted labels on common non-copyrighted goods) like to discriminate in pricing by creating artificial markets so that discounts in one market won’t be resold at a lower price in over-priced markets. The thinking goes, “Why let U.S. consumers get the benefit of prices that are affordable to people in developing countries when we know we can get more out of the U.S. consumer’s pocket?”

The “first sale doctrine,” now codified as Section 109 of the Copyright Act, makes clear that the copyright owner’s right of distribution is subject to the copy owner’s right to sell it to anyone, anywhere, at any price. And that’s great policy. Entrepreneurs who see too big a gap between the prices charged U.S. consumers and the prices charged consumers elsewhere for identical copies can buy the cheaper product and sell it at a profit, while still giving the U.S. consumer a better bargain.

But that’s not why I nearly fell out of my chair. I was used to these anti-competitive price discriminators ranting about perfectly lawful gray market goods. What this story does is label these perfectly legal importers as pirates. That’s right. Despite quoting the Supreme Court in Quality King Distributors v. L’anza Research International, that “once the copyright owner places a copyrighted item in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution,” a ruling that suggests that the evildoers are those who try to circumvent the law by preventing gray market imports, they go on to call the importers “pirates”

Posted on January 6, 2008 at 10:02 PM | Permalink | Comments (1)

Big Round Number

It is always amazing how big round numbers hold the media in thrall.  Last week we saw the inevitable spate of articles about oil crossing the $100 mark, if only for a few minutes of trading  (actually, the more interesting milestone was somewhere back in the low $90 range when we exceeded the highest past price for oil in inflation-adjusted dollars).

I don't get hugely worked up about gradual commodity price changes.  Oil price increases are signals, signaling marginal consumers to use less and suppliers with historically marginal sources and substitutes to consider their development.  Also, our economic dependence on oil per dollar of GDP has declined, meaning that $100 oil has less impact on the economy than, say, it would have 20 years ago:


I would certainly prefer lower oil prices, and my business suffers to some extent when gas prices rise, but it is not a disaster  (it is interesting that higher oil prices are considered bad in the media, while lower home prices are considered bad in the media).  I know from past experience in the oil patch that oil price bubbles are often followed by oil price drops.  The high oil prices of the seventies were followed by rock-bottom oil prices in the eighties, and subsequent recession in the oil patch (causing the housing bust I discussed here). 

Also, given how we got to these higher oil prices, I tend to take them as good news.  Oil prices are not rising due to some drop off in supply.  Instead, they are rising because of a strong global economy, in particular with millions of people entering the middle class in Asia.  This is GOOD news. 

I have written on peak oil a bunch, so I won't get into it again.  Oil production at worst is going to flatten out for a long time, meaning we will have a steady rise in oil prices over time as the economy grows.  If you want a third party evaluation of peak oil theory, go ask climate catastrophists who believe that CO2 production is an impending disaster for the economy.  These guys know that there are lots of unproduced hydrocarbons out there, and it terrifies them.   Al Gore and James Hansen were running around last week trying to close off Canadian tar sands from development.

Finally, after this series of random thoughts, one more interesting take on this via Megan McArdle:  $100 oil was a stunt

Some observers questioned the validity of the price mark when it emerged that the peak was the result of a trader – one of the “locals” who trade on their own money – buying from a colleague just 1,000 barrels of crude, the minimum allowed, industry insiders said. The deal on the floor of the New York Mercantile Exchange was at a hefty premium to prevailing prices.

Insiders named the trader as Richard Arens, who runs a brokerage called ABS. He was not available for comment. Analysts said he may have been testing the ceiling of the crude price, but the premium he paid surprised the market.

Before the $100-a-barrel trade, oil prices on Globex were at $99.53 a barrel. Immediately after the trade, prices went down to about $99.40, suggesting a trading loss of $600 for Mr Arens.

Stephen Schork, a former Nymex floor trader and editor of the oil-market Schork Report, commented: “A local trader just spent about $600 in a trading loss to buy the right to tell his grandchildren he was the one who did it. Probably he is framing right now the print reflecting the trade.”

Posted on January 6, 2008 at 09:44 PM | Permalink | Comments (1)