What, No Bailout?

I wish we saw this attitude more often, particularly among large corporations (from an article discussing aftermarket ticket prices for the Super Bowl).

"This is really something we never anticipated," said Will Flaherty, director of growth at SeatGeek. "The cheapest seat on SeatGeek right now is $8,000, but no site seems to have any inventory." Flaherty believes speculative buying is behind the spike. Ticket brokers frequently sell "air" to their customers, taking orders before they have tickets in hand. "We've noticed significantly more speculative selling activity than in recent years," Flaherty said. "Over the last few days, those sellers have been scrambling to buy up tickets to fill their orders, resulting in the Super Bowl ticket version of a short squeeze. Brokers with tickets in hand have been taking advantage of their leverage, raising prices dramatically and arbitrarily withholding some of their inventory."

Ety Rybak, co-founder of the high-end brokerage Inside Sports & Entertainment Group, has spent more than anticipated this time around to fulfill orders before the game. "I can tell you some ugly horror stories about what I have had to pay. But that’s part of the business," he said. "If I sold you tickets for $2,500, and I have to pay $7,500 to do it, unfortunately that’s the world that I chose to live in." The flip side to the high costs is a brisk business in late orders.

Maybe the US sugar cartel, among many other groups, could discover this approach to individual responsibility.

Everyone Gets Wealthier, Minorities and Women Hardest Hit

It is hard to look at this data and see anything but a positive story, but apparently the New York Times and the rest of the media only see tragedy.  If there is no problem, there is no justification for increased government power, therefore there must be a problem.

middle-class

(I am presuming this is in real dollars rather than nominal, but God forbid that the NYT ever makes such things clear).  They do manage to show a slight negative recent trend in the growth of the percentage of low income Americans, but only by cherry-picking the dates of comparison to the peaks and troughs of the last two business cycles.  Overall I would read the story as middle and lower class are moving into upper income brackets, but the Times headlines it as "Middle Class Shrinks Further as More Fall Out Instead of Climbing Up," illustrated with a classic empathy-inducing sad-mom photo.

By the way, since more rich people fall than middle class, it would seem to make sense to discuss instead the falling fortunes of rich people, but of course the NYT has no desire to write that article.

Republican Hypocrisy: On-Again, Off-Again Federalism

Both political parties have issues on which they are systematically rank hypocrites.  Republicans are particularly so on Federalism, or on the power of states vs. the Federal government.

In the last week, an AZ Republican has proposed to defend Federal law against state pre-emption:

A Flagstaff lawmaker is hoping to throw a new roadblock in the path of those who want to legalize marijuana in Arizona.

Only thing is, his plan may be too little – and too late.

The measure by Republican Rep. Bob Thorpe would spell out that any voter-sponsored initiative that proposed anything that conflicts with federal law could take effect only if approved by 75 percent of those who cast ballots. Right now, a simple majority is all that is needed.

Thorpe told Capitol Media Services he has one particular measure in mind: a proposal by the Marijuana Policy Project to get voters here to adopt a Colorado-style law legalizing the recreational use of marijuana.

He pointed out that marijuana use remains illegal under federal law. Yet Arizona voters decided in 2010, by a margin of just 4,340 votes, to allow the use of the drug for medical purposes.

Wow, principled stand for the rule of law, right?  Well, just year or so ago the same AZ state Republicans put on the ballot, and got passed, a Constitutional amendment essentially pre-empting large parts of the PPACA, a different Federal law:

Section 2.

A. To preserve the freedom of Arizonans to provide for their health care:

1. A law or rule shall not compel, directly or indirectly, any person, employer or health care provider to participate in any health care system.
2. A person or employer may pay directly for lawful health care services and shall not be required to pay penalties or fines for paying directly for lawful health care services. A health care provider may accept direct payment for lawful health care services and shall not be required to pay penalties or fines for accepting direct payment from a person or employer for lawful health care services.

B. Subject to reasonable and necessary rules that do not substantially limit a person's options, the purchase or sale of health insurance in private health care systems shall not be prohibited by law or rule.

And just so it is understood that this is not some populist end-around Republican legislators, these same Republicans passed a bill last year, vetoed by the Governor, to essentially ban enforcement of Federal health care law

Arizona - S 1088, passed House and Senate; vetoed by governor, May 28, 2011. Would oppose any state role in compulsory participation in a health care system or purchase of health insurance; would prohibit any government official from enforcing prohibitions on purchase or sale of health insurance in private health care systems otherwise authorized by the laws of the state; would affirm a right to direct payment or purchase of lawful health care services; would prohibit threats of penalties, fines, taxes, salaries, wage withholding, surcharges or fees to punish or discourage the exercise of such right. Also would establish an Interstate Health Freedom Compact, to unify states opposing the ACA.

In the last several years, I can count at least four "principled" positions taken by AZ Republicans on Federalism:

  1. State law should not pre-empt Federal law (marijuana criminalization)
  2. State law should pre-empt Federal law (Obamacare)
  3. States should enforce Federal laws that we think the Feds refuse to enforce sufficiently aggressively (immigration)
  4. States should prevent the Feds from enforcing Federal law when we think they are being too aggressive in enforcing (Grand Canyon National Park closure during shutdown)

So there you have it.  Pick a position, stick to it.

In China, It's 1928

I know I have been warning about a Chinese recession/depression for a while, but it takes a while (and still will take some time) for this disaster to play out.  But the warning signs are all there.  This article today in the WSJ is a great example.  

A little over a year ago, a Chinese credit agency downgraded a government-owned financing company in this dusty industrial city. Default—nearly unheard-of in China on government bonds—was a possibility, it said.

But during discussions with lenders, city officials made sure Wuhan Urban Construction Investment & Development Corp. could keep borrowing, officials with knowledge of the matter say. The city during those discussions said it backed the finance firm, essentially guaranteeing the debt, and helped the company restructure its assets to entice investors to lend more.

Borrowing by firms like Wuhan Urban is a big reason China’s debt load is expanding. The International Monetary Fund says China’s debt is growing more rapidly than debt in Japan, South Korea and the U.S. did before they tumbled into deep recessions. Local-government borrowing is responsible for one-fourth of the buildup in China’s overall domestic debt since 2008....

Even before its latest step, Beijing had put forward plans to slow local-borrowing growth. But China’s local governments have a surprising ability to resist policies. Another central-government priority—reducing excess production in steel, cement and other industries—has foundered due to local opposition.

“The guys running local government financing operations won’t roll over and die,” says Fraser Howie, co-author of “Red Capitalism,” a study of China’s financial system. “These companies take on a life of their own.”

Perhaps we should call this the looming Thomas Friedman recession, as China goes bankrupt doing exactly what Friedman admires - building more and more infrastructure and then taking out debt and building even more.

There is absolutely no reason to believe, as folks like Friedman do, that this investment in infrastructure automatically has a positive return, and in fact there are a lot of reasons to think it does not (ie gluts of housing and basic materials).  As I have written before, like light rail spending in the US, these infrastructure investments pay their benefits mostly in prestige to local government officials and rents for politically connected contractors and government workers and not in real returns to future economic growth.

I tend to accept the Austrian theory of recessions, which I would simplify (perhaps inaccurately) as mis-allocation of capital and labor investments leading to economic downturns as the economy restructures.  The longer the reckoning is put off, the worse the recession.   These mis-allocations can sometimes be due to private causes (e.g. over-euphoric investments in early Internet companies in the late 1990's) but they often have public causes (e.g. artificially low interest rates or government programs to promote investment in a single industry like, say, housing).

I am convinced this is what brought down Japan -- after years of admiration for Japan, inc. and MITI economic management, it turns out the government had directed all capital into a few export manufacturing industries, while continuing to protect retail and agriculture locally from any real change or competition.  Which is why 25 years of government directed deficit spending has not fixed the recession -- it just doubles down on the original cause.  For those of you too young to remember, the Friedman-types of the world were all praising Japan to the hilt in the late 80's as the model we should all be following.  People like this don't admit error, they simply shut up about Japan and started praising the same behaviors in China.

The same reckoning is coming to China.  Probably not this year or the next, but within the next 5 years almost for sure.  It is 1928 in China.

Postscript:  By 1928, I mean a year of apparent prosperity before the Great Depression in 1929.  I am not referring to the nominal reunification of China or start of the "republic" under Chiang Kai-shek.

Christians vs. Muslims

I think this author, like many others, gets it wrong by comparing Jesus and Mohammad to try to get at the roots of modern Islamic violence.  I don't think you can explain the (relative) non-violence of Christians today vs. the prevalence of violence among certain portions of the Islamic religion by looking at their scriptures.

The reason is that for hundreds of years ago, Christians were the world's crazed terrorists.  They would burn you to death for being a heretic, or being gay, or being suspected of witchcraft.  When the first Crusade was called by the Pope, hordes of Christians in the Rhine Valley headed north (rather than south and east) to forcibly convert or kill Jews in numerous German communities.   The Christian on Christian sectarian violence of the 30 years war was perhaps the worst cataclysm Europe ever endured until the 20th Century.

I am sure Christians would say that such violence is inconsistent with true Christianity, etc. but never-the-less history shows that Christians have no less inherent propensity to religious violence than Muslims.  Christians have moved on -- matured, maybe?  I am not sure what the word is.  Unfortunately, parts of Islam have not, which makes it dangerous today in a way that Christianity is not.

The Geek / Non-Geek Divide

I took this picture in La Jolla this weekend -- it is of a house with a very narrow driveway that has a turntable to help the car get in and out of the garage facing the right way.

 

turntable

 

I thought it was amazing, but my wife immediately began saying things like "well, I think you could easily get the car in and out without it by... blah blah."  I told her you don't have a turntable because it is necessary, you have it because it is awesome.   Didn't she watch the Batman series growing up?  It's a freaking turntable for your car!  What further justification is needed?

Why Its Madness To Spend So Much Effort Pressuring China to Reduce CO2 output

...because CO2 is the least of its pollution problems.  See here.   As the West has proven over the last century, it is entirely possible to have economic growth and modern technology while maintaining clean water and soot-free air.  So why don't we let China focus on that?  It is entirely unproven whether modern technology will allow economic growth without CO2 production, yet that is what we spend all of our time pestering China to do.

Root Cause Failure Analysis Fail

I just finished setting up 10 laptops for new managers.  I hate this process, but it is much faster now since I figured out how to get one exactly right and then clone a disk image onto a usb hard drive.  I can then boot the new computer with a recovery disk and apply the disk image.

Anyway, there was something wrong with two of the installations.  Symantec had server issues all this week and two of the PC's simply would not sync with their servers, probably because I set them up at the heights of their issues.  So I had to pull them out, and do the uninstall-reinstall thing on the virus software.

But the very first laptop did not work -- it was coming on but its screen was blank.  I pulled another out of the box.  Same problem.  And again.

Panicking I changed the power supply, checked the power outlets, and everything else I could think of.  I finally called Dell in a rage.

Before they could really even pick up the phone, I happened to tilt the computer.  The screen came on.  I lifted it up in the air.  Worked fine.

I finally figured out that I was sitting the laptop on top another closed laptop (of the same model) I had been working on.  The bottom laptop was powered down, but it turned out that something was causing the laptop on top of it to have its screen not work.  I can only guess it was some magnetic thing from the battery charging apparatus, since that was the only thing that was likely energized in the other laptop.

Anyway, problem solved but I never would have guessed that stacking laptops would make them not work.

Let's Make Employment of Low-Skill Labor Profitable Again

Brink Lindsey of Cato is gathering academic essays on the topic "If you could wave a magic wand and make one or two policy or institutional changes to brighten the U.S. economy’s long-term growth prospects, what would you change and why?"  I am by no means in the distinguished academic company that were invited to contribute, but I thought it was an interesting topic.  Here is my (uninvited) contribution.

The question of skills and the American workforce is typically tackled in only one direction:  that we need more high-skilled workers to meet the challenge of emerging industries and business models that are increasingly driven by technology.  A recent report by the OECD, and as summarized in the New York Times, is a typical example of this concern.  As Eduardo Porter writes in the Times:

To believe an exhaustive new report by the Organization for Economic Cooperation and Development, the skill level of the American labor force is not merely slipping in comparison to that of its peers around the world, it has fallen dangerously behind.

The report is based on assessments of literacy, math skills and problem-solving using information technology that were performed on about 160,000 people age 16 to 65 in 22 advanced nations of the O.E.C.D., plus Russia and Cyprus. Five thousand Americans were assessed. The results are disheartening....

“Unless there is a significant change of direction,” the report notes, “the work force skills of other O.E.C.D. countries will overtake those of the U.S. just at the moment when all O.E.C.D. countries will be facing (and indeed are already facing) major and fast-increasing competitive challenges from emerging economies.”

A lot of head scratching goes on as to why, when the income premium is so high for gaining skills, there are not more people seeking to gain them.  School systems are often blamed, which is fair in part (if I were to be given a second magic wand to wave, it would be to break up the senescent government school monopoly with some kind of school choice system).   But a large portion of the population apparently does not take advantage of the educational opportunities that do exist.  Why is that?

When one says "job skills," people often think of things like programming machine tools or writing Java code.  But for new or unskilled workers -- the very workers we worry are trapped in poverty in our cities -- even basic things we take for granted like showing up on-time reliably and working as a team with others represent skills that have to be learned.  Amazon.com CEO Jeff Bezos, despite his Princeton education, still learned many of his first real-world job skills working at McDonald's.  In fact, back in the 1970's, a survey found that 10% of Fortune 500 CEO's had their first work experience at McDonald's.

Part of what we call "the cycle of poverty" is due not just to a lack of skills, but to a lack of understanding of or appreciation for such skills that can cross generations.   Children of parents with few skills or little education can go on to achieve great things -- that is the American dream after all.  But in most of these cases, kids who are successful have parents who were, if not educated, at least knowledgeable about the importance of education, reliability, and teamwork -- understanding they often gained via what we call unskilled work.   The experience gained from unskilled work is a bridge to future success, both in this generation and the next.

But this road to success breaks down without that initial unskilled job.   Without a first, relatively simple job it is almost impossible to gain more sophisticated and lucrative work.  And kids with parents who have little or no experience working are more likely to inherit their parent's cynicism about the lack of opportunity than they are to get any push to do well in school, to work hard, or to learn to cooperate with others.

Unfortunately, there seem to be fewer and fewer opportunities for unskilled workers to find a job.  As I mentioned earlier, economists scratch their heads and wonder why there are not more skilled workers despite high rewards for gaining such skills.  I am not an economist, I am a business school grad.   We don't worry about explaining structural imbalances so much as look for the profitable opportunities they might present.  So a question we business folks might ask instead is:  If there are so many under-employed unskilled workers rattling around in the economy, why aren't entrepreneurs crafting business models to exploit this fact?

A few months back, I was at my Harvard Business School 25th reunion.  Over the weekend, they had dozens of lectures and programs on what is being researched and taught nowadays at the school.  I can't remember a single new business model discussed that relied on unskilled workers.

Is this just the way it is now?  Have the Internet and computers and robotics and complex genomics made unskilled work obsolete?  I don't think so.  I have been running a business for over a decade that employs more than 300 people in unskilled positions.  I will confess that the other day I came home tired from work and told my wife, "Honey, in my next company, I have to find a business that doesn't require employees."  But that despair doesn't come from a lack of opportunities to deliver value to customers with relatively unskilled labor.  And it doesn't come from any inherent issues I might have running a large people-driven service company -- in fact, I will say there has been absolutely nothing in my business life that has been more rewarding than seeing a person who has never had anything but unskilled jobs discover that they can become managers and learn more complex tasks.

The reason for my despair comes from a single source:  the government is making it increasingly difficult and costly to hire unskilled workers, while simultaneously creating a culture among new workers that short-circuits their ability to make progress.

The costs that government taxes and rules add to labor have been discussed many times, but usually individually.  Their impact is clearer when we discuss them as a whole.  Let's take California, because that state is one I know well.  To begin, the minimum wage is $9 (going to $10 an hour in 2016).  To that we have to add taxes and workers compensation premiums, both of which are high because because California does little to police fraud in unemployment and injury claims.  For us, these add another $3.15 an hour.  We also now have to add in the Obamacare employer mandate, which at a minimum of $3000 per full-time employee (accepting the penalty is cheaper than paying for health care) adds another $1.50 an hour.  And the new California paid sick leave mandate adds another 45 cents an hour.  So, looking just at core requirements, we are already up to a minimum of $14.10 an hour, less than 2/3 of which actually shows up in the employee's paycheck.

But these direct costs don't even begin cover the additional fixed costs of hiring employees.  We pay a payroll company thousands of dollars a year to make sure that regulations on taxes and paychecks are followed.  We spend so much time making sure our written plans and documentation on safety meet the requirements of OSHA and its California state equivalent that we barely have the capacity to actually focus on safety.  In California we have to have complex systems in place to make sure our employees don't work through their lunch break, that they have the right sort of chair and that they sit in them frequently enough, that they follow all the right procedures when the temperature outside goes over 85 degrees, that they get paid for sick leave and get their job back after extended medical leave.... the list goes on and on.

In a smaller company, we don't have lawyers and a large human resource staff.  In fact, we tend to have little staff at all.  If some new compliance issue arises -- which happens about every day the California legislature is in session -- the owner (me) has to figure out a solution.  In one year I literally spent more personal time on compliance with a single regulatory issue -- implementing increasingly detailed and draconian procedures so I could prove to the State of California that my employees were not working over their 30 minute lunch breaks -- than I did thinking about expanding the business or getting new contracts.

Towards the end of last year I was making a speech to a group of business school students, and someone asked me what my biggest accomplishment had been over the prior year.  I told them it was probably getting the company down from hundreds of full-time workers to less than 50, converting everyone to part-time.  And it was a huge effort, involving new systems and a number of capital investments to accommodate more staff working fewer hours.  And it had a huge payout, saving us hundreds of thousands of dollars a year in Obamacare penalties and compliance costs.  But come on!  How depressing is it that my biggest business accomplishment was not growing the business or coming up with a new customer service but in cutting the working hours for good employees?  But that is the reality of trying to run a service business today.  The business couldn't be profitable until we'd adjusted our practices to these new regulations, so there was no point in even thinking about growth until we had done so.

Labor-based business models that work at a $7 or $8 total labor cost may well not work at $15, and they certainly are not going to grow very fast if the people responsible for seeking out growth opportunities are instead consumed in a morass of legal compliance issues.  But there is perhaps an even more damaging impact of government interventions, and that is to the culture of work.  I will confess in advance I don't have comprehensive data to prove my hypothesis, but let me tell a couple of stories.

Until 2010, we never had an employee sue us.  We had over 8 years hiring 350 seasonal workers a year, mostly older retired folks, without any sort of legal issues.  Since 2010, we have had eight employee suits threatened or filed, all of which we have won but at a legal cost of $20-$25 thousand each (truly Pyrrhic victories).  So what changed around 2010?  Well, our work force composition changed a lot.  Before that time, we typically hired older retired folks, because the seasonal nature of the job is simply not very appropriate for a younger person trying to support themselves without other means (like retirement or Social Security).   However, after 2009 when a lot of younger folks were losing their traditional jobs, they began applying to our company.  Our work force shifted younger, which actually excited me because I felt it would help us in attracting a younger demographic to the campgrounds we operate.    But all eight of these legal actions were by these new, younger employees.  I asked one person who was suing us over what was a trivial slight, really a misunderstanding, why they did not just call me (my personal number is in their employee handbook) to fix it.  They said that if I had fixed it, they would have lost the opportunity to sue.

I mentioned earlier that we had struggled to comply with California meal break law.   The problem was that my workers needed extra money, and so begged me to be able to work through lunch so they could earn a half-hour more pay each day.  They said they would sign a paper saying they had agreed to this.  Little did I know that this was a strategy devised by a local attorney who understood meal break litigation better than I.  What he knew, but I didn't, was that based on new case law, a company had to get the employee's signature every day, not just once, to avoid the meal break penalties.  The attorney advised them they could get the money for working lunch AND they could sue later for more money (which he would get a cut of).  Which is exactly what they did, waiting until November to sue so they could get some extra money to pay for Christmas bills.  This is why -- believe it or not -- it is now a firing offense at our company to work through lunch in California.

Hopefully you see my concern.   I fear that we have trained a whole generation that the way one gets ahead is not to work hard and gain new skills but to seek out and exploit opportunities to file lawsuits.  That the way to work in an organization is not to learn to manage the inevitable frictions that result from different sorts of people working together but to sue at the first hint that you have been dissed.  As an aside, I think this sort of litigiousness, both of employees and customers, is yet another reason employers are reluctant to hire low-skilled employees.  If as a business owner one is absolutely liable for any knuckle-headed thing your most junior employee might utter, no matter how clear you are in your policies and actions that such behavior is not tolerated, then how likely are you to hire a high-school dropout with no work experience?

Is it any surprise that most entrepreneurs are pursuing business models where they leverage revenues via technology and a relatively small, high-skill workforce?  Uber and Lyft at first seem to buck this trend, with their thousands of drivers.  But in fact they prove the rule.  Uber and Lyft are very very careful to define themselves and their service in a way that all those drivers don't work for them.  I would go so far to say that if Uber were forced to actually put all of those drivers on their payroll, and deal with they myriad of labor compliance issues, their model would fall apart

We cannot address the skill gap unless people have entry level, low-skill-tolerant jobs to take the first steps up the ladder of success.  If the government continues on its current course, it will become impossible to run a business that employs unskilled workers.  The value of the work performed will simply not justify the cost.  We may be concerned about income inequality today, but if we kill off the profitability of employing unskilled workers, then we are going to be left with a true two-class society -- those with high-skill jobs and those on government assistance --and few options for moving from one to the other.

Quantitative Easing and the Left's Relationship to the Rich and to Large Corporations

The Left spends a lot of time railing against the rich and large corporations.  But in practice, they seem hell-bent on lining the pockets of exactly these groups.  Today the ECB announces a one trillion plus euro government buyback of public and private securities.

Between Japan, the US, and now Europe, the world's central banks are printing money like crazy to inflate securities values around the world -- debt securities directly by buying them but indirectly a lot of the money spills over into stocks as well.  This has been a huge windfall for people whose income mostly comes from capital gains (i.e. rich people) and institutions that have access to bond and equity markets (i.e. large corporations).  You can see the effects in the skyrocketing income inequality numbers over the last 6 years.  On the other end, as a small business person, you sure can't see any difference in my access or cost of capital.  It is still just as impossible to get a cash flow loan as it always was.

The Miracle of Gas Prices

I have written before about how amazing it is that gasoline can be delivered to your car so cheaply.  The investments, the technological complexity, the distances covered, the molecular-level processing necessary, the density of retail distributions establishments -- they are all simply staggering.

I hate to steal this in full from Mark Perry, who has an awesome blog, but he has a list of the price per gallon of other liquids you buy.  Think about the complexity of, say, orange juice as opposed to gasoline.

Product Cost Per Gallon
HP Printer Ink $4,500
Nyquil $107.52
Premium Vodka $76.80
Honey $46.72
Hair Gel $44.80
Pancake Syrup $32.26
Red Bull $28.00
Windex $23.81
Real Lemon Juice $22.91
Soy Sauce $22.66
Chicken Noodle Soup $21.25
Mouthwash $19.65
Tide Laundry Detergent $18.18
Dawn Dish Detergent $17.92
Craft Beer $17.78
Mustard $17.41
Mayonnaise $17.02
409 Cleaner $16.64
Ranch Dressing $16.00
Half and Half Cream $15.87
Shampoo $15.36
Spaghetti Sauce $14.59
Ketchup $13.95
Vegetable Oil $13.44
Orange Juice $11.69
V-8 $10.37
Tomato Juice $9.47
Juicy Juice $8.83
Cranberry Juice $7.94
Soy Milk $6.66
Gatorade $6.53
Apple Juice $6.00
Iced Tea $5.89
Ammonia $4.10
Milk $4.00
Pepsi $3.71
Vinegar $3.07
Sparkling Water $2.94
Gasoline $2.05

Want to Increase Infrastructure Money for Highways Immediately by 31%? Stop Diverting Highway Money to Transit

This DOT table, pointed out to me by Randal O'Toole, shows that money spent on highways could be increased immediately by over 30% if highway money was not diverted to transit and other uses.  About 13% of state gas tax revenues meant for highways are diverted to non-highway transit projects (e.g. light rail boondoggles).  Another 9.4% are diverted to general funds, and may not be applied to transportation projects at all.   The same table shows that if all state MVD receipts were used to support investments for cars rather than transit and general spending, money available for roads would increase 45% from those funds.

Transit projects should be supported by their own riders.  This will never happen, because they are so egregiously expensive per passenger-mile that no one would ride them if their trip were not subsidized by the rest of us**.  And I am exhausted with having folks argue that highways are "subsidized" because they require tax money beyond the gas taxes (which are essentially a user fee) when these extra tax monies for highways would be largely unneeded if the highway funds were used for highways.  The diversion to general funds is particularly troubling, since sleazy government officials are obviously trying to piggy-back off the popularity of highway infrastructure investment to generate a slush fund for activities taxpayers are less likely to support.

And please do not tell me that as a highway driver, investments in transit are doing me a favor by getting cars off the road.  Transit investments are so expensive per passenger mile that the same money spent getting a few cars off the road via transit would substantially increase road and highway capacities.  A dollar of highway investment carries at least an order of magnitude more passenger miles than a dollar of transit spending.

** I am always amazed that supporters of such transit projects call light rail projects "sustainable".  Forget for a minute that they seldom use less energy per passenger mile than driving.   Think about all the resources that go into them.  This at first seems like a hard problem -- how do we account for all the resources that go into transit vs. go into driving.  But then we realize it is actually easy, because we have a simple tool for valuing resource inputs:  price.  Prices are a great miracle.  They provide us with a sort of weighted average of the value and scarcity of the resources (both hard, like titanium, and soft, like labor and innovation) that go into a product.  So if light rail costs 10x or more per passenger mile than driving, as it often does, this means that it uses ten times the value of resource inputs as driving.  This is sustainable?  I do not think that word means what you think it means.

Good God, is There No Indignity Too Trivial For Government Officials to Regulate?

The Business Secretary of the UK is desperately worried that when travelling to other countries, Brits will encounter a different selection of Netflix programming from what they are used to at home.  This trivial issue seems to demand a whole new regulatory and copyright regime:

Vince Cable will risk a clash with the film and music industries on Tuesday by calling for the creation of a single EU market for digital services such as Netflix.

The Business Secretary will say in a speech in Brussels that such services should offer the same content in all EU member states, for services paid for in one country to be available in the same form in all countries and for pricing offers to be replicated across the continent.

At present Netflix and Spotify, which operates a subscription streaming service for music, offers different catalogues at different prices depending on where the customer is located.

Harmonising such services across the EU would require copyright holders to change the way they license their material, which is currently carefully segmented for different geographic markets to maximise sales

Whenever Euro-regulators suggest harmonization across countries, they always assume that harmonization will lead to everyone adopting whatever the lowest current rate and broadest service offering that  exists in any one country.  But why?  That pretty much never happens.  It is at least as likely that anyone getting harmonized will get worse service at a higher price.

What's Going on Here

Anyone want to explain this?  It was sent in one of those emails that sort of go around.

http://1.bp.blogspot.com/-nTsYA2CjxEY/UTHUm65l1TI/AAAAAAAAEvc/99q4byX0znM/s1600/24.jpg
Water straight from the tap becomes cloudy when frozen.
To make ice cubes crystal clear, allow a kettle of boiled water to cool slightly
and use this to fill your ice cube trays.

I know that crystal growth is path dependent.  Is this just the water equivalent of annealing in metal and glass?

Update:  Long-time reader Travis says that boiling the water drives all the trapped air out, making the cubes clear.  Jeez, I so wanted this to be some wonky crystal formation answer

My Obama Inauguration Column, Six Years Ago Today

It is hard to remember, or even believe today, the absolute hysteria that accompanied Obama's nomination.  Even folks who should have known better were sucked in.  I seemed to be the only surly one that day who found the adulation, the near Imperial coronation, sickening.  Here is an excerpt.  I stand by it six years later:

Folks are excited about Obama because, in essence, they don't know what he stands for, and thus can read into him anything they want.  Not since the breathless coverage of Geraldo Rivera opening Al Capone's vault has there been so much attention to something where we had no idea of what was inside.  My bet is that the result with Obama will be the same as with the vault.

There is some sort of weird mass self-hypnosis going on, made even odder by the fact that a lot of people seem to know they are hypnotized, at least at some level.  I keep getting shushed as I make fun of friends' cult behavior watching the proceedings today, as if by jiggling someone's elbow too hard I might break the spell.  Never have I seen, in my lifetime, so much emotion invested in a politician we know nothing about.   I guess I am just missing some gene that makes the rest of humanity receptive to this kind of stuff, but just for a minute snap your fingers in front of your face and say "do I really expect a fundamentally different approach from a politician who won his spurs in .... Chicago?  Do I really think the ultimate political outsider is going to be the guy who bested everyone at their own game in the Chicago political machine?"

Well, the spell will probably take a while to break in the press, if it ever does -- Time Magazine is currently considering whether it would be possible to put Obama on the cover of all 52 issues this year -- but thoughtful people already on day 1 should have evidence that things are the same as they ever were, just with better PR.   For God sakes, as his first expenditure of political capital, Obama is pushing for a trillion dollar government spending bill that is basically one big pork-fest that might make even Ted Stevens blush, a hodge-podge of every wish-list of leftish lobbyists that has been building up for eight years.  I will be suitably thrilled if the Obama administration renounces some of the creeping executive power grabs of the last 16 years, but he has been oddly silent about this.  It seems that creeping executive power is a lot more worrisome when someone else is in power.

It has been suggested by some that today is less a cultish corronation but a big victory party in the battle against racism.  Well, I am certainly willing to accept it on those terms.  I have been arguing for years that it is time to declare victory on the worst aspects of race and gender discrimination, and move on to problems of interest to all races (like individual freedom or giving kids options to escape crappy public schools).   Unfortunately, I fear that too many folks in power are dependent on the race/gender/class wars continuing, so you and I may think we are declaring victory, but those with power over our lives have not.

The 2014 Temperature Record No One Is Talking About

Depending on what temperature data set you look at **, or on your trust in various manual adjustments in these data sets ***, 2014 may have beaten the previous world temperature record by 0.02C.  Interestingly, the 0.02C rise over the prior record set four years ago would imply (using only these two data points which warmists seem to want to focus on) a temperature increase of 0.5C per century, a few tenths below my prediction but an order of magnitude below the alarmists' predictions for future trends.

Anyway, whether there was an absolute record or not, there was almost certainly a different temperature record set -- the highest divergence to date in the modern measured temperatures from what the computer models predicted.  The temperature increase for the past 5 years was a full 0.17C less than predicted, the largest gap yet for the models in forward-prediction mode (as opposed to when they are used to backcast history).

 

** There are four or five or more data sets, depending on how you count them.   There are 2 major satellite data sets and 2-3 ground based data sets.  The GISS ground data set generally gives the largest warming trends, while the satellite data sets give the least, but all show some warming over the last 30 or so years (though most of this warming was before 1999).

*** The data sets are all full of manual adjustments of various sorts.  All of these are necessary.  For surface stations, the measurement points move and change technology.  For the satellites, orbits and instruments shift over time.  The worrisome feature of all these adjustments is that they are large as compared to the underlying warming signal being measured, so small changes in the adjustments can lead to large changes in the apparent trend.  Skeptics often charge that the proprietors of land data sets are aggressive about including adjustments that increase the apparent trend but reluctant to add similar adjustments (eg for urban heat islands) that might reduce the trend.  As a result, most of the manual adjustments increase the trend.  There is actually little warming trend in the raw data, and it only shows up after the adjustments.  It may be total coincidence, but the database run by the most ardent warmist is the GISS and it has the highest trend.   The database run by the most skeptical is the UAH satellite database and it shows the smallest trend.  Hmm.

Surprise! Greek Problems Were Not Solved By Kicking the Can Down the Road

Greece is looking like it's falling apart again.  Or perhaps more accurately: Greece continues to fall apart and the lipstick Europe put on the pig a few years ago is wearing off and people are noticing again.

I warned about this less than a year ago:

Kevin Drum quotes Hugo Dixon on the Greek recovery:

Greece is undergoing an astonishing financial rebound. Two years ago, the country looked like it was set for a messy default and exit from the euro. Now it is on the verge of returning to the bond market with the issue of 2 billion euros of five-year paper.

There are still political risks, and the real economy is only now starting to turn. But the financial recovery is impressive. The 10-year bond yield, which hit 30 percent after the debt restructuring of two years ago, is now 6.2 percent....The changed mood in the markets is mainly down to external factors: the European Central Bank’s promise to “do whatever it takes” to save the euro two years ago; and the more recent end of investors’ love affair with emerging markets, meaning the liquidity sloshing around the global economy has been hunting for bargains in other places such as Greece.

That said, the centre-right government of Antonis Samaras has surprised observers at home and abroad by its ability to continue with the fiscal and structural reforms started by his predecessors. The most important successes have been reform of the labour market, which has restored Greece’s competiveness, and the achievement last year of a “primary” budgetary surplus before interest payments.

Color me suspicious.  Both the media and investors fall for this kind of thing all the time -- the dead cat bounce masquerading as a structural improvement.  I hope like hell Greece has gotten its act together, but I would not bet my own money on it.

In that same article, I expressed myself skeptical that the Greeks had done anything long-term meaningful in their labor markets.  They "reformed" their labor markets in the same way the Obama administration "reformed" the VA -- a lot of impressive statements about the need for change, a few press releases and a few promised but forgotten reforms.  At the time, the Left wanted desperately to believe that countries could continue to take on near-infinite amounts of debt with no consequences, and so desperately wanted to believe Greece was OK.

I have said it for four years:  There are only two choices here:  1.  The rest of Europe essentially pays off Greek debt for it or 2.  Greece leaves the Euro.  And since it is likely Greece will get itself into the same hole again some time in the future if #1 is pursued, there is really only leaving the Euro.  The latter will be a mess, with rampant inflation in Greece and destruction savings, but essentially the savings have already been destroyed by irresponsible government borrowing and bank bail-ins.  At least the falling value of Greek currency would make it an attractive place at for tourism if not investment and Greece could start rebuilding its economy on some sort of foundation.  Instead of bailing out banks and Greek officials, Germany should let it all fall apart and spend its money on helping Greece to pick up the pieces.

By letting Greece join the Euro, the Germans essentially let their irresponsible country cousins use their American Express Platinum card, and the Greeks went on a bender with the card.   The Germans can't keep paying the bill -- at some point you have to take the card away.

This is a GOOD Sign for the United States

Thomas Friedman, and many others, think it is a sign of America's decline and some sort of failure of government will that other countries are building super-massive showcase infrastructure projects while we are not.  They would take this chart as a sign of decline:

20150114_sky

I disagree.  This is a sign of growing maturity on the part of the United States.  Many of these super-tall building projects make little economic sense, but are completed to validate the prestige of emerging nations, like teenage boys comparing penis sizes.  Grown men are beyond that behavior, just as are grown-up nations.  I discussed this in the context of rail a while back at Forbes.  In that case, it seems everyone thinks the US is behind in rail, because it does not have sexy bullet trains.  But in fact we have a far more developed freight network than any other country, and shift of transport to rail makes a much larger positive economic and environmental impact for cargo than for rail.  It comes down to what you care about -- prestige or actual performance.   Again choosing performance over prestige is a sign of maturity.**

The US had a phase just like China's, when we were emerging as a world economic and political power, and had a first generation of successful business pioneers who were unsure how to put their stamp on the world.  So they competed at building tall buildings.   Many of the tallest were not even private efforts.  The Empire State Building was a crony enterprise from start to finish, and ended up sitting empty for years.  The World Trade Center project (WTC) was a complete government boondoggle, built by a public agency at the behest of the Rockefeller family, who wanted to protect its investments in lower Manhattan.  That building also sat nearly empty for years.   By the way, the Ken Burns New York documentary series added a special extra episode at the end after 9/11 on the history of the WTC and really digs in to the awful crony and bureaucratic history of that project.  Though Burns likely did not think of it that way, it could as easily be a documentary of public choice theory.  His coverage earlier in that series of Robert Moses (featuring a lot of Robert Caro) is also excellent.

** I have always wondered if you could take this model further, and predict that once-great nations in decline (at least in decline relative to their earlier position) might not re-engage with such prestige projects, much like an aging male seeking out the young second wife and buying a Porche.

Update:  Here is part of what I wrote on US vs. European and Japanese railroading, which I think is an absolutely awesome example of where the triumphalists like Friedman go wrong:

In particular, both Friedman and Epstein think we need to build more high speed passenger trains.  This is exactly the kind of gauzy non-fact-based wishful thinking that makes me extremely pleased that these folks do not have the dictatorial powers they long for.   High speed rail is a terrible investment, a black hole for pouring away money, that has little net impact on efficiency or pollution.   But rail is a powerful example because it demonstrates exactly how this bias for high-profile triumphal projects causes people to miss the obvious.

Which is this:  The US rail system, unlike nearly every other system in the world, was built (mostly) by private individuals with private capital.  It is operated privately, and runs without taxpayer subsidies.    And, it is by farthe greatest rail system in the world.  It has by far the cheapest rates in the world (1/2 of China’s, 1/8 of Germany’s).  But here is the real key:  it is almost all freight.

As a percentage, far more freight moves in the US by rail (vs. truck) than almost any other country in the world.  Europe and Japan are not even close.  Specifically, about 40% of US freight moves by rail, vs. just 10% or so in Europe and less than 5% in Japan.   As a result, far more of European and Japanese freight jams up the highways in trucks than in the United States.  For example, the percentage of freight that hits the roads in Japan is nearly double that of the US.

You see, passenger rail is sexy and pretty and visible.  You can build grand stations and entertain visiting dignitaries on your high-speed trains.  This is why statist governments have invested so much in passenger rail — not to be more efficient, but to awe their citizens and foreign observers.

But there is little efficiency improvement in moving passengers by rail vs. other modes.   Most of the energy consumed goes into hauling not the passengers themselves, but the weight of increasingly plush rail cars.  Trains have to be really, really full all the time to make for a net energy savings for high-speed rail vs. cars or even planes, and they seldom are full.  I had a lovely trip on the high speed rail last summer between London and Paris and back through the Chunnel — especially nice because my son and I had the rail car entirely to ourselves both ways.

The real rail efficiency comes from moving freight.  As compared to passenger rail, more of the total energy budget is used moving the actual freight rather than the cars themselves.  Freight is far more efficient to move by rail than by road, but only the US moves a substantial amount of its freight by rail.    One reason for this is that freight and high-speed passenger traffic have a variety of problems sharing the same rails, so systems that are optimized for one tend to struggle serving the other.

Freight is boring and un-sexy.  Its not a government function in the US.  So intellectuals tend to ignore it, even though it is the far more important, from and energy and environmental standpoint, portion of transport to put on the rails.  In fact, the US would actually probably have even a higher rail modal percentage if the US government had not enforced a regulatory regime (until the Staggers Act) that favored trucks over rail.   If the government really had been asleep the last century, we would be further along.

California Drought Update -- Not Even Close to Worst Drought Ever

There is little trend evidence anywhere that climate is getting -- pick the world -- weirder, more extreme, out of whack, whatever.  In particular, name any severe weather category you can imagine, and actual data in trend charts likely will not show any recent trend.

The reasons the average person on the street will swear you are a crazy denier for pointing such a thing out to them is that the media bombards them with news of nearly every 2+ sigma weather event, calling most of these relatively normal episodes as "the worst ever".

A great example is the California drought.  Here is the rolling average 5-year precipitation chart for California.  Find the worst drought "ever".

multigraph3

I know no one trusts anyone else's data in public debates, but you can make these charts yourself at the NOAA site, just go here:  http://www.ncdc.noaa.gov/cag/.  The one record set was that 2013 had the lowest measured CA precipitation in the last century plus, so that was indeed a record bad year, but droughts are typically made up of multiple years of below average precipitation and by that measure the recent CA drought is the fourth or fifth worst.

By the way, Paul Homewood points out something that even surprised me and I try not to be susceptible to the mindless media bad news stampeded:  California rainfall this year was close to normal.  And, as you can see, there is pretty much no trend over the last century plus in California rainfall:

multigraph1

 

As discussed previously, let's add the proviso that rainfall is not necessarily the best metric of drought.  The Palmer drought index looks at moisture in soil and takes into account other factors like temperature and evaporation, and by that metric this CA drought is closer to the worst of the century, though certainly not what one would call unprecedented.  Also, there is a worsening trend in the Palmer data.

multigraph_palmer

 

Update:  By the way, the fact that two measures of drought give us two different answers on the relative severity of the drought and on the trend in droughts is typical.   It makes a mockery of the pretense to certainty on these topics in the media.  Fortunately, I am not so invested in the whole thing that I can't include data that doesn't support my thesis.

Keynesian Moving Target on What Constitutes Austerity

The other day I said I was confused by what exactly creates Keynesian stimulus, and in reverse, what constitutes austerity.  I had thought that it was deficit spending that creates the stimulus, but then sometimes it seems to just be spending and in the case of the Kevin Drum post I was discussing, he says it is not the level of spending but only the first derivative of per capita real government spending (with no reference to whether it is debt or tax funded) that matters.

I figured that I was just confused because I had not formally studied economics past my undergrad years, but apparently practicing economists are also confused.  Here is Scott Sumner:

What is the proper measure of austerity?  The textbooks talk about deficits.  But most of the Keynesian bloggers focus on government purchases.  So which is it?  And if it’s purchases, why did these same bloggers claim that austerity would result from big tax increases in the US in 2013, and a big tax increase in Japan in 2014?  And why does the measure chosen (ex post) usually seem to be the one that best supports their argument in that particular case?

As a postscript, I will add that every climate skeptic can totally empathize with this Sumner concern:

A number of Keynesian bloggers have recently expressed dismay that the rest of us don’t buy their model.  Maybe it would help if they’d stop ignoring our criticisms of their model, and respond to our complaints.

Great Moments in Bad Economic Policy

This article on bad bipartisan energy laws and regulations from Master Resource brought back some old memories of the 1970s.

Folks who are at all economically literate understand the role that government price controls (specifically price caps) had on gasoline shortages in the 1970s.  When there was a supply shock via the Arab oil embargo, prices were not allowed to rise to match supply and demand.  As in the case of all such price control situations, shortages and queuing resulted.

It is too bad in a way that most folks today can't really remember the gas lines of 1973 and again in 1978.  It was my job in 1978 as the new driver in the family to go wait in line for gas for all the family cars.  I wasted hours and hours sitting in gas lines. I wonder if anyone has every computed the economic value of the time lost to Americans sitting in gas lines because politicians did not want the price to rise by 20 cents.

A number of my friends who knew my dad was an Exxon executive were surprised at my waiting in lines, and wondered why we didn't get some sort of secret access to gas.  But my family waited in lines like everything else.

Well, almost like everyone else.  Because of my dad's position, we did have a bit of information most people did not have, at least in the first shock of 1973.  It was not a secret, it was just totally unreported in the media.  The key was the knowledge of a piece of Congressional legislation called the Emergency Petroleum Allocation Act of 1973.  It had an enormous impact on exacerbating the urban gas lines, but either out of a general ignorance or else a media/academic desire not to make government regulation look bad, it is as unknown today as it was unreported in 1973.

What the law did was this -- it mandated that oil companies distribute gasoline geographically in the US in the same proportion that it was sold in the prior year.  So if they sold x% in area Y last year before the embargo, x% must be distributed to area Y this year after the embargo.  I can't remember the exact concern, but Congress had some fear that oil companies would somehow respond to price signals in a way that caused gasoline allocations to hose someone somewhere.

Anyway, the effect was devastating, probably even worse than the effect of price controls.  The reason was that while Congress forced gasoline supply distribution patterns to remain the same as the prior year (in classic directive 10-289 style), demand patterns had changed a lot.  Specifically, with the fear that gas might not be available over the road and looming economic problems, people cancelled their summer long-distance driving trips.

Everyone stayed home and didn't drive the Interstates cross-country.  So there was little demand for gas at the stations that served these routes.  But by law, oil companies had to keep delivering gasoline to these typically rural stations.  So as urban drivers fumed sitting in gas lines for hours and hours, many rural locations were awash in gas.  Populist Congressmen berated oil companies in the press for the urban gas shortages and lines, all while it was their stupid, ill-considered laws that created a lot of the problem.

So this was the fact that should have been public, but was not: That instead of sitting in urban gas lines for four hours, one could drive 30 minutes into the countryside and find it much easier.  Which is what we did, a number of times.

By the way, it was about this time that I read Hedrick Smith's great book "The Russians."  It was, for the time, a nearly unique look at the life of ordinary Russians under Soviet communism.  I wish the book were still in print (I would love to see one of the free market think tanks do a reissue, at least on Kindle).  Anyway, about 80% of the book seemed to be about how individual Russians dealt with constant shortages and ubiquitous queuing.  It seemed that a lot of the innovation in the general populace was channeled into just these concerns.  What a waste.  Dealing with the 1970s gas lines and shortages is about the closest I have ever come to the life described in that book.

California Fighting Our Horrible Shortage of Laws

I reported a while back about the apparent (from all the media angst over "gridlock") horrendous shortage of laws.  Well the California legislature is stepping in to the breach, passing over 900 new laws over the last year.  Our company is steadily exiting California because we have no desire to learn to comply with 900 new laws a year, but obviously many of you are simply begging to be legislated and regulated more so you are welcome to rush into the breach.

Wow, Who Could Have Predicted This?

Full-time employment in one fast-food survey drops over last several years from 50% of workers to less than 2%.

This is the conclusion I draw from my survey in December of 136 fast-food restaurants (franchisees) that employed close to 3,500 workers. Before 2014 about half the employees were “full time” as defined by ObamaCare; that is, they worked 30 hours or more a week. The potential cost to the employers of providing mandated health insurance to their full-time staff would have been about $7 million a year. But by the time the employers took advantage of all their legal options they were able to reduce their cost to less than 1% of that amount.

The first step was to make all hourly workers part time. That may seem easy to do, but in the fast-food business it’s not uncommon that employees fail to show up for work. Other employees are asked to work additional hours to prevent the restaurant from shutting down. By the end of 2014, 58 employees had crossed the line to full-time status and were eligible for mandated health insurance in 2015.

My 2012 article about the end of full-time work in the retail service sector.  The follow-up at Forbes was here.

$400 Million Dollars in Public Money for a Building Used 30 Hours a Year

I love to watch the NFL but that organization and its team owners are some of the worst cronies in the country.  A huge portion of their teams' increase in net worth over the last 30 years has come from public funding of its stadiums.  These NFL stadiums are used by their teams for 8 regular season games and at most 2 pre-season games a year, or for a total of about 30 hours a year.  Taxpayers are being forced to buy buildings with a 0.3% occupancy.

St. Louis is the next to propose a taxpayer fleecing, proposing to spend $400 million before they have even paid off the enclosed stadium they built 20 years ago.  What a farce.

Years and years ago I described this as an awful sort of prisoner's dilemma game.  If governments colluded in a promise not to subsidize teams, we would still have NFL teams in roughly the same cities but without the billions of dollars in taxpayer money having been passed on to 32 billionaires.

The Big Government Trap: Does Stimulus Require Government Spending to Continuously Rise?

There has been a lot of back and forth over the last few years about "austerity".  I have wondered how government spending levels over the last few years that dwarf any peacetime levels in history could be called "austerity", but that is exactly what folks like Paul Krugman have been doing.   Apparently, the new theory is that the level of spending is irrelevant to stimulus, and only the first derivative matters.  In other words, high spending is not stimulative unless it is also increasing year by year.   Kevin Drum provides an explanation of this position:

Austerity is all about the trajectory of government spending, and this is what it looks like. You can argue about whether flat spending represents austerity, but a sustained decline counts in anyone's book. The story here is simple: for a little while, in 2009 and 2010, stimulus spending partially offset state and local cuts, but by the end of 2010 the stimulus had run its course. From then on, the drop in government expenditures was steady and significant. It was also unprecedented. If you run this chart back for 50 years you'll never see anything like it. In all previous recessions and their aftermaths, government spending rose.

blog_total_govt_expenditures_per_capita_inflation

So, by this theory of stimulus, the fact that we spent substantially more money in 2010-2014 than in pre-recession years (and are still spending more money) turns out not to be stimulative.  The only way government can stimulate the economy is to increase year-over-year per capital real spending every single year.

I will leave macro theory (of which I am increasingly skeptical) to the Phd's.  In this case however, Drum's narrative is undermined by his own chart he published a few weeks ago:

blog_private_employment_2001_vs_2010

In his recent austerity article quoted above, he describes a sluggish recovery with a step-change in 2014 only after "austerity" ends.  But his chart from a few weeks earlier shows a steady recovery from 2010-2014, right through his "austerity" period.  In fact, during the Bush recovery he derides, we actually did do exactly what he thinks is stimulative, ie increase government spending per capita steadily year by year.  How do we know this?  From another Drum chart, this one from last year.  I changed the colors (described in this article) and compared his two charts:

click to enlarge

 

By Drum's austerity theory, the Bush spending was stimulative but the Obama spending was austerity.  But the chart on the right sure makes it look like the Obama recovery is stronger than the Bush recovery.

 

A better explanation of the data is that a recession driven by the highly-leveraged mis-allocation of too much capital to home real estate was made worse in 2008-2009 by a massive increase in government spending, which is almost by definition a further mis-allocation of capital (government is taking money from where the private sector thinks it should be invested and moves it to where politicians think it should be spent).  The economy has recovered as that increase in government spending has been unwound.