Posts tagged ‘economy’

Entirely Predictable Unintended Consequences -- San Francisco Rental Market

There should be a word for "entirely predictable unintended consequences".  The Germans have come up with some good words for complex ideas, like schadenfreude, so maybe we can outsource the task to them.

Anyway, I just finished a book called Season of the Witch, about San Francisco in the 1960's and 1970's.   Churchill once said that “The Balkans produce more history than they can consume” and I am reminded of this quote when reading about San Francisco in these two decades.  Written by a Progressive sympathetic to San Francisco's bleeding leftist edge (the author cannot mention Ronald Reagan without also expressing his disdain), it is never-the-less pretty hard-hitting when things go off the rails (e.g. the enablement of Jim Jones by the entire leftist power structure).

Much of the narrative is about the great influx of lost youth and seekers of alternative lifestyles into the city; the attendant social, crime, and drug issues this created; and a quest for tolerance and social peace.   As such, it is not a book about political or economic policy per se, it's more about the people involved.  But we do get glimpses of the policies that key players like Harvey Milk, Dianne Feinstein, and Willie Brown were advocating.

What struck me most were the policies these folks on the Progressive Left had on housing.  They had three simultaneous policy goals:

  1. Limit San Francisco from building upward (taller).  San Francisco is a bit like Manhattan in that the really desirable part where everyone wants to live is pretty small.  There was (and I suppose still is) a desire by landowners to build taller buildings, to house more people on the same bit of  valuable land.  Progressives (along with many others across the political spectrum) were fighting to have the city prevent this increased density as a threat to San Francisco's "character".
  2. Reduce population density in existing buildings.  Progressive reformers were seeking to get rid of crazy-crowded rooming houses like those in Chinatown
  3. Control and cap rents.  This was the "next thing" that Harvey Milk, for example, was working on just before he was shot -- bringing rent controls to San Francisco.

My first thought was to wonder how a person could hold these three goals in mind without recognizing the inevitable consequences, but I guess it's that cognitive dissonance that keeps socialism alive.   But it should not be hard to figure out what the outcome should be of combining: a) some of the most desirable real estate in the country with b) an effective cap on density and thus capacity and c) caps on rents.  Rental housing is going to be shifted to privately owned units (coops and condos) and prices of those are going to skyrocket.  You are going to end up with real estate only the rich can afford to purchases and a shortage of rental properties at any price.  Those people with grandfathered controlled rents will be stuck there, without any mobility.

So I was reading this the other day.  It turns out there is a severe shortage of affordable rental properties in San Francisco, and lately there have been a record number of conversions of rental properties to private ownership.

With the area economy rebounding, San Francisco is in the midst of a housing crisis as many residents are evicted from their apartments. With rents strictly regulated, an increasing number of San Francisco owners are getting out of the rental business and cashing out their properties to turn them into co-ops. Steven Greenhut argues that rent control actually forces prices upward, especially over the long term, by diminishing the supply of available rental housing.

Update:  One recurring theme through the book is that progressive elements in SF saw their government and particularly their police force as "bullies".  They used this term a lot -- and they were right.  So it is interesting today to see all these progressives and how they act with power.  Turns out, they are all bullies too, just on different issues.

By the way, the Dirty Harry movies are way more interesting after reading this book.  Season of the Witch is what all this looked like to a progressive.  The Dirty Harry movies are what the same events looked like from a different perspective.

Don't Fire Sebelius

I am not sure why everyone thinks it would be a punishment to fire Sebelius at this point.  Three days after she is fired, she will have a handful of million dollar a year job offers from health care companies and lobbyists who want to tap her influence into this administration.  The Administration and Congress is actively picking winners and losers in 1/7 of the economy, so there are billions at stake.  Sebelius can name her price.

Instead I would love to see her stay in office three long years and answer every press question and Congressional inquiry about Obamacare, over and over and over.

USA Today: Shutdown Has Trivial, Unmeasurable Impact on Economy

OK, actually, they did not use the words "trivial" and "unmeasurable."  But they could have.  What they actually said in a story splashed across the front page:

The 16-day government shutdown cost the economy jobs, delayed mortgages and lost retail sales — at least $12 billion worth, and maybe as much as $24 billion

$12-24 Billion is between 0.08% and 0.15% of GDP.  This is for a shutdown of the government for 4.4% of the year (16 days divided by 365).   That hardly seems like a substantial impact, and not at all in line with the scare stories in advance of the shutdown.  (And this is coming from someone who was impacted a lot, though due to illegal actions by the administration).

Trading $1 in Debt for 85 cents of Economic Activity

UPDATE:  Mea culpa.  One point in the original post was dead wrong.  It is possible, contrary to what I wrote below, to get something like a 0.7%  difference in annual growth rates with the assumptions he has in the chart below (Drum still exaggerated when he called it 1%).  I don't know if the model is valid (I have little faith in any macro models) but I was wrong on this claim.  Using the 0.7% and working more carefully by quarter we get a cumulative GDP addition a bit lower than the cumulative debt addition.  There is still obviously a reasonable question even at a multiplier near 1 whether $1 of economic activity today is worth $1 of debt repayment plus interest in the future.  

I am not a believer, obviously, in cyclical tweaking of the economy by the Feds.  To my thinking, the last recession was caused by a massive government-driven mis-allocation of capital so further heavy-handed government allocation of capital seems like a poor solution.  But what really drives me crazy is that most folks on the Left will seductively argue that now is not the time to reduce debt levels, implying sometime in the future when the economy is better will be the appropriate time.  But when, in any expansion, have you heard anyone on the Left say, "hey, its time to reduce spending and cut debt because we need the fiscal flexibility next time the economy goes wrong."

I will leave the stuff in error below in the post because I don't think it is right to disappear mistakes.  For transparency, my spreadsheet reconstruction both confirming the 0.7% and with the updated numbers below is here:   reconstruction.xls.

 

Kevin Drum is flogging the austerity horse again

I see that Macroecomic Advisors has produced a comprehensive estimate of the total effect of bad fiscal policies. Their conclusion: austerity policies since the start of 2011 have cut GDP growth by about 1 percentage point per year.

Something seemed odd to me -- when I opened up the linked study, it said the "lost" government discretionary spending is about 2% of GDP.  Is Drum really arguing that we should be spending 2% of GDP to increase GDP by 1%?

Of course, the math does not work quite this way given compounding and such, but it did cause me to check things out.  The first thing I learned is that Drum partook of some creative rounding.  The study actually said reductions in discretionary spending as a percent of GDP reduced GDP growth rates since the beginning of 2011 by 0.7% a year, not 1% (the study does mention a 1% number but this includes other effects as well).

But it is weirder than that, because here is the chart in the study that is supposed to support the 0.7% number:

click to enlarge

Note that in the quarterly data, only 2 quarters appear to show a 0.7% difference and all the others are less.  I understand that compounding can do weird things, but how can the string of numbers represented by the green bars net to 0.7%?  What it looks like they did is just read off the last bar, which would be appropriate if they were doing some sort of cumulative model, but that is not how the chart is built.  If we interpolate actual values and are relatively careful about getting the compounding right, the difference is actually about 0.45%.  So now we are down to less than half the number Drum quoted see update above (I sent an email to the study author for clarification but have not heard back.  Update:  he was nice enough to send me a quick email).

So let's accept this 0.45% 0.7% number for a moment.  If GDP started somewhere around 16 trillion in 2010, if we apply a 0.45% the quarterly growth numbers from his chart, we get an incremental economic activity from 2011 through 2013:Q2 of about $333 billion.

So now look at the spending side.  The source says that discretionary spending fell by about 2% of GDP over this period.  From the graph above, it seems to bite pretty early, but we will assume it fell 1/12 of this 2% figure each quarter, so that by the end of 2013 or beginning of 2014 we get a fall in spending by 2% of GDP.  Cumulatively, this would be a reduction in spending over the 2.5 years vs. some "non-austere" benchmark of $388 billion.

Thus, in exchange for running up $677 billion $388 billion in additional debt, we would have had $445 billion $333 billion in incremental economic activity.  A couple of reactions:

  1. Having the government borrow money and spend it definitely increases near-term GDP.  No one disputes that.  It is not even in question.  Those of us who favor reigning in government spending acknowledge this.  The question is, at what cost in terms of future obligations.  In fact, this very study Drum is quoting says

    Economists agree that failure to shrink prospective deficits and debt will bestow significant economic consequences and risks on future generations. Federal deficits drive up interest rates, “crowding out” private investment. If government borrowing supports consumption (e.g., through Social Security and major health programs) rather than public investment, the nation’s overall capital stock declines, undermining our standard of living. The process is slow but the eventual impact is large.2 In addition, accumulating debt raises the risk of a fiscal crisis. No one can say when this might occur but, unlike crowding out, a debt crisis could develop unexpectedly once debt reached high levels.

    High deficits and debt also undermine the efficacy of macroeconomic policies and reduce policymakers’ flexibility to respond to unexpected events. For example, in a recession, it would be harder to provide fiscal stimulus if deficits and debt already were high. Furthermore, fiscal stimulus might be less effective then. Additional deficit spending could be seen as pushing the nation closer to crisis, thereby forcing up interest rates and undercutting the effects of the stimulus. With fiscal policy hamstrung, the burden of counter-cyclical policy is thrust on the Federal Open Market Committee (FOMC) but, particularly in a low interest-rate environment, the FOMC may be unable (or unwilling) to provide additional monetary
    stimulus.

  2. I guess we have pretty much given up on the >1 multiplier, huh?  Beggaring our children for incremental economic growth today is a risky enough strategy, but particularly so with the implied .66 .85 multiplier here.

This is not the first time Drum has taken, uh, creative data approaches to cry "austerity" during a mad spending spree. 

Climate Humor from the New York Times

Though this is hilarious, I am pretty sure Thomas Lovejoy is serious when he writes

But the complete candor and transparency of the [IPCC] panel’s findings should be recognized and applauded. This is science sticking with the facts. It does not mean that global warming is not a problem; indeed it is a really big problem.

This is a howler.  Two quick examples.  First, every past IPCC report summary has had estimates for climate sensitivity, ie the amount of temperature increase they expect for a doubling of CO2 levels.  Coming into this IPCC report, emerging evidence from recent studies has been that the climate sensitivity is much lower than previous estimates.  So what did the "transparent" IPCC do?  They, for the first time, just left out the estimate rather than be forced to publish one that was lower than the last report.

The second example relates to the fact that temperatures have been flat over the last 15-17 years and as a result, every single climate model has overestimated temperatures.  By a lot. In a draft version, the IPCC created this chart (the red dots were added by Steve McIntyre after the chart was made as the new data came in).

figure-1-4-models-vs-observations-annotated (1)

 

This chart was consistent with a number of peer-reviewed studies that assessed the performance of climate models.  Well, this chart was a little too much "candor" for the transparent IPCC, so they replaced it with this chart in the final draft:

figure-1-4-final-models-vs-observations

 

What a mess!  They have made the area we want to look at between 1990 and the present really tiny, and then they have somehow shifted the forecast envelopes down on several of the past reports so that suddenly current measurements are within the bands.   They also hide the bottom of the fourth assessment band (orange FAR) so you can't see that observations are out of the envelope of the last report.  No one so far can figure out how they got the numbers in this chart, and it does not match any peer-reviewed work.  Steve McIntyre is trying to figure it out.

OK, so now that we are on the subject of climate models, here is the second hilarious thing Lovejoy said:

Does the leveling-off of temperatures mean that the climate models used to track them are seriously flawed? Not really. It is important to remember that models are used so that we can understand where the Earth system is headed.

Does this make any sense at all?  Try it in a different context:  The Fed said the fact that their economic models failed to predict what actually happened over the last 15 years is irrelevant because the models are only used to see where the economy is headed.

The consistent theme of this report is declining certainty and declining chances of catastrophe, two facts that the IPCC works as hard as possible to obfuscate but which still come out pretty clearly as one reads the report.

Seriously, Media Cannot Find Cost to Closure Beyond Parks

I wrote earlier that the only downside the AP could find with the looming shutdown were National Park closures.  I am not exaggerating.  It is the only thing they have.  Here is the CNN site about 45 minutes before midnight.  I added the red arrow

cnn-screen

 

As I wrote earlier, the only other function the 800,000 to-be-furloughed government employees seem to have is drawing a paycheck. Clicking on the article above the parks article entitled "multibillion$$ hit", we find absolutely no hint that these employees do anything of economic value or that their lost work will hurt the economy.   The only thing that they apparently usefully do is spend tax money

A government shutdown could cost the still-struggling U.S. economy roughly $1 billion a week in pay lost by furloughed federal workers. And that's only the tip of the iceberg....

The total economic impact is likely to be at least 10 times greater than the simple calculation of wages lost by federal workers, said Brian Kessler, economist with Moody's Analytics. His firm estimates that a three to four week shutdown will cost the economy about $55 billion.

Really?  There is a 10x Keynesian multiplier on these people's paychecks?   I would sure love to see what kinds of stuff they spend money on because I have never heard of a number that absurdly high.

What else can they think of to worry about beyond these lost paychecks?  Only one other specific is mentioned in the article.  Get ready for it -- the national parks will close!

Many federal contractors will also have to cut back on staffing if they don't get the business they normally do from the government. There's also a large variety of businesses that depend on the government to conduct their normal operations -- tourism businessesthat depend on national parks staying open, for example.

So there you have it.  The government shutdown does two things:  It closes the national parks and lays off 800,000 people who apparently do no valuable work (other than keep parks open!) but who have the highest Keynesian multipliers on their spending of any individuals in the nation.

What Is Wrong With Health Care, Though My Diagnosis is Opposite of the Left's

Note:  I did not like the way I first wrote this post so I have re-written it extensively.  

Progressives are passing around this chart from Brookings as an indicator of "what is wrong" with the US healthcare system.

blog_proton_beam_facilities

This is how Kevin Drum interprets the chart:

In other words, the supposed advantage of PRT—that it targets cancers more precisely and has fewer toxic side effects—doesn't seem to be true. It might be better in certain very specialized cases, but not for garden variety prostate cancer.

And yet, new facilities are being constructed at a breakneck pace. Why? Because if they build them, patients will come. "They're simply done to generate profits," says health care advisor Ezekiel Emanuel. Roger that.

This is an analysis that may be true, but let's take a moment to consider how strange it is.  Forget health care for a minute.  Think about any other industry.  Here is what they are effectively saying:

  1. Industry competitors are making huge investments in a technology that has no consumer value
  2. The competitors in this industry are all making investments in this technology so rapidly that the industry is exponentially over-saturating with capacity.

And from these two facts they conclude that the profits of industry competitors will increase??

Let's for a moment say this is true -- an enormous investment that has no customer utility and that is made by so many players that the market is quickly over-saturated actually increases industry profits.  Let's take a moment to recognize that this is BIZARRE.  We have to be suspicious of some structural issue for something so bizarre to happen.  As is typical of progressives, their diagnosis seems to be that private actors are somehow at fault for being bad people to make these investments.  But these same private actors, even if they wanted to, could never make this work in any other industry, and besides there is no evidence that hospital managers are any worse people than, say, cookie company managers.  The problem is that we have fashioned a bizarre system through heavy government intervention that apparently makes these pointless investments sensible to otherwise rational actors.

One problem is that in any normal industry, consumers would simply refuse to buy, or at least refuse to pay a very high price, for services that have little or no value.  But in health care, we have completely eliminated any consumer visibility to prices.  Worse, we have eliminated any incentive for them to care about prices or really even the utility of a given procedure.  This proton beam thingie might improve my outcomes 1%?   Why not, it's not costing me anything.  Perhaps the biggest problem in health care is that the consumer has no incentive to shop.  Obamacare does nothing to fix this issue, and in fact if anything is taking us further away from consumer shopping and price transparency by working to kill high deductible health insurance and HSA's.

There is only one other industry I can think of where capital investment, even stupid capital investment, automatically translates to more profits, and that is the regulated utility business.  And that is what hospitals have become -- regulated utilities that get nearly automatic returns on investment.

In a truly free market, if these investments made no sense, one would expect very soon a reckoning as those who made these nutty investments go bankrupt.  But they obviously don't expect this.  They expect that even if it turns out to be a bad investment, they will use their political ties to get these costs built into their rate base (essentially built into reimbursement rates).  If any private or public entity refuses to pay, you just run around screaming to the media that they want to deny old people care and let sick people die.  Further, the government can't let large hospitals go bankrupt because it has already artificially limited their supply through certificate of need processes in most parts of the country.

The Left has proposed to fix this by creating the IPAB, a group so divorced from accountability that it can theoretically make unpopular care rationing decisions and survive the political fallout.  But the cost of this approach is enormous, as it essentially creates an un-elected dictatorship for 1/7 of the economy.  Which tends to be awesome if your interests and preferences line up with those of the dictator, but sucks for everyone else.  Which category do you expect to be in?  (Oh, and let's not forget how many examples we have from history of benevolent technocratic dictatorships - zero.)

The much more reasonable solution, of course, is to handle these issues the same way we do in cookies and virtually every other product -- let consumers make price-value tradeoffs with their own money.

A Third of Government is Shutting Down and The Only Lost Function Anyone Can Name is Parks

First, you did not read the title wrong.  A government shutdown means only about a third of the government actually shuts down.  But the more amazing thing is that given multiple opportunities to name what we would lose if this one third goes away, all anyone can name is parks.  This is from a Q&A by the Associated Press via Zero Hedge, which says we would lose parks and have some delays in new disability applications and, uh, we would lose parks.

About one-third of the government will shut down. About 800,000 of about 2.1 million federal employees will be sent home without pay. National parks will close.

NASA will continue to keep workers at Mission Control in Houston and elsewhere to support the International Space station, where two Americans and four other people live. Aside from that only about 3 percent of NASA's 18,000 workers will keep working.

The military and other agencies involving safety and security would continue to function. These include air traffic controllers, border patrol and law enforcement officers. Social Security, Medicare and veterans' benefits payments would continue, but there could be delays in processing new disability applications.

A partial shutdown that lasts no more than a few days wouldn't likely nick the economy much. But if the shutdown were to persist for two weeks or more, the economy would likely begin to slow, economists say.

Extended closures of national parks would hurt hotels, restaurants and other tourism-related businesses. Delays in processing visas for overseas visitors could interrupt trade. And the one-third of the federal workforce that lost pay would cut back on spending, thereby slowing growth.

So there you have it -- we lay off 800,000 government workers and the only two losses the AP can come up with is that national parks will close and those 800,000 people will have less to spend.    Since the NPS employs about 22,000 people, this means that the other 778,000 have a contribution to the economy that consists mainly of drawing and then spending a salary?

I would love to see the government shutdown rules modified to add National Parks to the critical assets that remain open in a shutdown, since this seems the only thing anyone cares about.  Then it would be fascinating to see how the downside of the shutdown would be spun.  I can see the headlines now.   "AP:  Millions of TPS reports go unfiled".

Update:  My company runs parks under concession contract in the National Forest and for other government agencies.  In all previous shutdowns, we have remained open, since we pay money into the government budget rather than draw money out, and since the parks we operate employ no government workers.  This time, though, we are starting to get notices we have to shut down too.  This may be an attempt by the administration to artificially make the shutdown worse than it needs to be.  I will update you as I learn more.

We Are In the Best of Hands: Janet Yellen Edition

The Arizona Republic today reviews a speech given by Yellen in January, 2007 in Phoenix:

It was January 2007 when Yellen, then head of the Federal Reserve Bank of San Francisco, spoke here about financial literacy before transitioning into comments about the economy — comments that now look remarkably unperceptive.

Back then, months before the real-estate and banking crisis took down the economy, Yellen expressed concern that inflation was uncomfortably high while job gains were coming too swiftly.

“If labor markets are as tight as the unemployment rate suggests, then there may be reason for concern about building inflationary pressures,” she said according to my Jan. 18, 2007, article.

Subsequent events showed that inflation was the last thing we had to worry about, while the lack of jobs has emerged as a central drag on the economy. Back then, U.S. unemployment was around 4.5 percent. But after the recession took hold, it more than doubled, peaking at 10 percent in late 2009. At 7.3 percent currently, it remains well above where it should be this far into an economic recovery.

In contrast, core consumer inflation (which excludes food and energy costs) of 1.8 percent today has hardly budged from the 2.2 percent rate that had Yellen all worked up back then.

In another comment during her Phoenix talk that now looks wildly off-base, Yellen, who later was named vice chair of the Fed’s board of governors, said recession risks had receded despite lingering weakness in housing. She cited the Valley as a place where home-price appreciation had come down from unsustainably high rates of increase.

The Great Recession, as we all now know in hindsight, began later that year, triggered by a home-price slide of epic proportions.

I don't want to beat her up too bad for missing the bubble burst, since most everyone did.  They also all missed the last bubble burst, and the one before that, etc.

This is what makes me crazy:  not that these folks were wrong, even consistently brutally wrong, but that they display absolutely no modesty in their actions given that they were so wrong.  They propose policy steps, such as seemingly eternal QE, that are astoundingly risky unless one assumes that they have a very, very good grasp on exactly where the economy is going.  Which they clearly never have had in the past.  If they acted like they had been wrong most of the time, then I would have little to criticize.  But to be consistently wrong and then make huge risky bets as if you have reliable predictive powers is hubris of the worst sort.

Absolute Fecklessness

I am still reading through the Detroit Free Press report on Detroit's financial history and it is really amazing.  All the stuff you expect to see is there -- over taxation, over regulation, crony gifts, huge government pay and pensions, etc.  But this was new to me, and even worse than I expected:

Gifting a billion in bonuses: Pension officials handed out about $1 billion in bonuses from the city’s two pension funds to retirees and active city workers from 1985 to 2008. That money — mostly in the form of so-called 13th checks — could have shored up the funds and possibly prevented the city from filing for bankruptcy. If that money had been saved, it would have been worth more than $1.9 billion today to the city and pension funds, by one expert’s estimate.

Outright gifts of taxpayer money to government workers, even beyond their already rich salary and pensions!  Folks on the Left from Paul Krugman to Obama are trying to portray Detroit as the innocent victim of economic and demographic exogenous forces beyond their control.  Don't let them.  The exodus from Detroit and the destruction of its economy were not random events the city had to endure, but self-inflicted wounds.

Raise Medicare Taxes

I have made this argument before -- your lifetime Medicare taxes cover only about a third of the benefits you will receive.   Social Security taxes are set about right -- to the extent we come up short on Social Security, it is only because a feckless Congress spent all the excess money in the good years and has none left for the lean years.

But Medicare is seriously mis-priced.  I have always argued that this is dangerous, because there is nothing that screws up the economy more than messed up price signals.  In particular, I have argued that a lot of the glowy hazy love of Medicare by Americans is likely due to the fact that it is seriously mis-priced.  Let's price the thing right, and then we can have a real debate about whether it needs reform or is worth it.

A recent study confirms my fear that the mispricing of Medicare is distorting perceptions of its utility.

As debate over the national debt and the federal budget deficit begins to heat up again, an analysis of national polls conducted in 2013 shows that, compared with recent government reports prepared by experts, the public has different views about the need to reduce future Medicare spending to deal with the federal budget deficit. Many experts believe that future Medicare spending will have to be reduced in order to lower the federal budget deficit [1] but polls show little support (10% to 36%) for major reductions in Medicare spending for this purpose. In fact, many Americans feel so strongly that they say they would vote against candidates who favor such reductions. Many experts see Medicare as a major contributor to the federal budget deficit today, but only about one-third (31%) of the public agrees.

This analysis appears as a Special Report in the September 12, 2013, issue of New England Journal of Medicine.

One reason that many Americans believe Medicare does not contribute to the deficit is that the majority thinks Medicare recipients pay or have prepaid the cost of their health care. Medicare beneficiaries on average pay about $1 for every $3 in benefits they receive. [2] However, about two-thirds of the public believe that most Medicare recipients get benefits worth about the same (27%) or less (41%) than what they have paid in payroll taxes during their working lives and in premiums for their current coverage.

Update:  Kevin Drum writes on the same study.  Oddly, he seems to blame the fact that Americans have been trained to expect something for nothing from the government on Conservatives.  I am happy to throw Conservatives under the bus for a lot of things but I think the Left gets a lot of the blame if Americans have been fooled into thinking expensive government freebies aren't really costing them anything.

Keynesian Multiplier of 0.05

So much for that Keynesian stimulus notion (emphasis in the original)

With everyone focused on the 5th anniversary of the Lehman failure, we are taking a quick look at how the world's developed (G7) nations have fared since 2008, and just what the cost to restore "stability" has been. In a nutshell: the G7 have added around $18tn of consolidated debt to a record $140 trillion, relative to only $1tn of nominal GDP activity and nearly $5tn of G7 central bank balance sheet expansion (Fed+BoJ+BoE+ECB). In other words, over the past five years in the developed world, it took $18 dollars of debt (of which 28% was provided by central banks) to generate $1 of growth. For all talk of "deleveraging" G7 consolidated debt has been at a record high 440% for the past four years.

The theory of stimulus -- taking money out of the productive economy, where it is spent based on the information of hundreds of millions of people as to the relative value of millions of potential investments, and handing it to the government to spend based on political calculus -- never made a lick of sense to me.  I guess I would have assumed the multiplier in the short term was fractional but at least close to one, indicating in the short run that if we borrow and dump the money into the economy we would get some short-term growth, only to have to pay the piper later.  But we are not even seeing this.

The Problem With Affirmative Action

Janet Yellen may soon be a victim of affirmative action.  I know that sounds odd, but I think it is true.

To preface, I have no preferences in the competition to become the next head of the Federal Reserve, and assume that Janet Yellen and Larry Summers are equally qualified.   I don't think the immense power the Fed has to screw with the economy can be wielded rationally by any individual, so it almost does not matter who sits in the chair.  Perhaps someone with a bit less hubris and a little more self-awareness would be better with such power, which would certainly mitigate against Summers.

But Yellen has a problem.  When this horse race first emerged in the press, many in the media suggested that Yellen would be a great choice because she was a woman, and qualified.  Most of the press coverage centered (probably unfairly given that she does seem to be quite qualified) on her woman-ness.  This leaves Yellen with a problem because many people were left with a first impression that the reason to choose her was primarily due to her having a womb, rather than her economic chops.

This is the downside of affirmative action.

Most Unsurprising Headline of the Year

Via the AZ Republic:

The pay gap between the richest 1 percent and the rest of America widened to a record last year.

...

Last year, the incomes of the top 1 percent rose 19.6 percent compared with a 1 percent increase for the remaining 99 percent.

...

But since the recession officially ended in June 2009, the top 1 percent have enjoyed the benefits of rising corporate profits and stock prices: 95 percent of the income gains reported since 2009 have gone to the top 1 percent.

That compares with a 45 percent share for the top 1 percent in the economic expansion of the 1990s and a 65 percent share from the expansion that followed the 2001 recession.

The Federal Reserve is pumping over a half trillion dollars of printed money into inflating a bubble in financial assets (stocks, bonds, real estate, etc).  It should be zero surprise that the rich, who disproportionately get their income and wealth from such financial assets, should benefit the most.   QE is the greatest bit of cronyism the government has yet to invent.

(yes, I understand that there are many reasons for this one-year result, including tax changes that encouraged income to be moved forward into last year and the fact it was a recovery off of a low base.  Never-the-less, despite decades of Progressive derision for "trickle down" economics, this Administration has pursue the theory that creating an asset bubble that makes the rich much richer will in the long term help the economy via the "wealth effect.")

Meet the Person Who Wants to Run Your Life -- And Obama Wants to Help Her

I am a bit late on this, but like most libertarians I was horrified by this article in the Mail Online about Obama Administration efforts to nudge us all into "good" behavior.  This is the person, Maya Shankar, who wants to substitute her decision-making priorities for your own

article-2381478-1B11DB61000005DC-332_308x425

 

If the notion -- that a 20-something person who has apparently never held a job in the productive economy is  telling you she knows better what is good for you -- is not absurd on its face, here are a few other reasons to distrust this plan.

  • Proponents first, second, and third argument for doing this kind of thing is that it is all based on "science".  But a lot of the so-called science is total crap.  Medical literature is filled with false panics that are eventually retracted.  And most social science findings are frankly garbage.  If you have some behavior you want to nudge, and you give a university a nice grant, I can guarantee you that you can get a study supporting whatever behavior you want to foster or curtail.  Just look at the number of public universities in corn-growing states that manage to find justifications for ethanol subsidies.  Recycling is a great example, mentioned several times in the article.  Research supports the sensibility of recycling aluminum and steel, but says that recycling glass and plastic and paper are either worthless or cost more in resources than they save.  But nudgers never-the-less push for recycling of all this stuff.  Nudging quickly starts looking more like religion than science.
  • The 300 million people in this country have 300 million different sets of priorities and personal circumstances.  It is the worst hubris to think that one can make one decision that is correct for everyone.  Name any supposedly short-sighted behavior -- say, not getting health insurance when one is young -- and I can name numerous circumstances where this is a perfectly valid choice and risk to take.
  • The justification for this effort is social science research about how people manage decisions that involve short-term and long-term consequences

Some behavioral scientists believe they can improve people's self-control by understanding the relationship between short term memory, intelligence and delay discounting.

This has mostly been used to counter compulsive gambling and substance abuse, but Shankar's entry into government science circles may indicate that health insurance objectors and lapsed recyclers could soon fall into a similar category

I am sure there is a grain of truth in this -- all of us likely have examples of where we made a decision to avoid short term pain that we regretted.  But it is hilarious to think that government officials will somehow do better.  As I have written before, the discount rate on pain applied by most legislators is infinite.  They will do any crazy ridiculous thing that has horrible implications five or ten years from now if they can just get through today.  Why else do government bodies run massive sustained deficits and give away unsustainable pension and retirement packages except that they take no consideration of future consequences.  And it is these people Maya wants to put in charge of teaching me about delay discounting?

  • It probably goes without saying, but nudging quickly becomes politicized.  Is nudging 20-something health men to buy health insurance really in their best interests, or does it help keep an important Obama program from failing?

Postscript:  Here is a great example of just how poorly the government manages delay discounting.  In these cases, municipalities are saddling taxpayers with almost certainly bankrupting future debt to avoid paying any short-term costs.

Texas school districts have made use of another controversial financing technique: capital appreciation bonds. Used to finance construction, these bonds defer interest payments, often for decades. The extension saves the borrower from spending on repayment right now, but it burdens a future generation with significantly higher costs. Some capital appreciation bonds wind up costing a municipality ten times what it originally borrowed. From 2007 through 2011 alone, research by the Texas legislature shows, the state’s municipalities and school districts issued 700 of these bonds, raising $2.3 billion—but with a price tag of $23 billion in future interest payments. To build new schools, one fast-growing school district, Leander, has accumulated $773 million in outstanding debt through capital appreciation bonds.

Capital appreciation bonds have also ignited controversy in California, where school districts facing stagnant tax revenues and higher costs have used them to borrow money without any immediate budget impact. One school district in San Diego County, Poway Unified, won voter approval to borrow $100 million by promising that the move wouldn’t raise local taxes. To live up to that promise, Poway used bonds that postponed interest payments for 20 years. But future Poway residents will be paying off the debt—nearly $1 billion, all told—until 2051. After revelations that a handful of other districts were also using capital appreciation bonds, the California legislature outlawed them earlier this year. Other states, including Texas, are considering similar bans.

Or here is another example, of New York (the state that is home to the mayor who tries to nudge his residents on everything from soft drinks to salt)  using trickery to consume 25 years of revenue in one year.

Other New York deals engineered without voter say-so include a $2.7 billion bond offering in 2003, backed by 25 years’ worth of revenues from the state’s gigantic settlement with tobacco companies. To circumvent borrowing limits, the state created an independent corporation to issue the bonds and then used the money from the bond sale to close a budget deficit—instantly consuming most of the tobacco settlement, which now had to be used to pay off the debt.

By the way, I recommend the whole linked article.  It is a pretty broad survey of how state and local governments are building up so much debt, both on and off the books, and how politicians bend every law just to be able to spend a few more dollars today.

Chutzpah of the Day

It is interesting that the buck just never stops at this President's desk.  Apparently, the reason for the delay in approval of the Keystone Pipeline is the Republicans.

The approval process for the Keystone XL pipeline has been delayed by Republicans playing “political games,” Treasury Secretary Jack Lew says.

Lew said that the economy is “strong” and more resilient after 40 months of growth but the economic recovery is not fast enough, which led Chris Wallace on “Fox News Sunday” to ask whether approving the pipeline would help speed up job growth.

“If you’re so interested in creating more jobs, why not approve the Keystone pipeline, which will create tens of thousands of jobs?” Wallace asked of the pipeline under review.

“There were some political games that were played, that took it off the trail and path to completion, where Republicans put it out there as something that was put on a timetable that it could not be resolved. It caused a delay,” Lew said. “Playing political games with something like this was a mistake.”

 

Blast from the Past

I have not reread this little classic article from 9 years ago, until a customer in California found it and complained that it was outrageous that the state would actually allow such a person as its author to operate anything in a state park.  So I suppose it is worth relinking, if just for that reason.  Most of it holds up pretty well, though I regret the jab implying that progressives supported suicide bombers.  Here is an example:

Beyond just the concept of individual decision-making, progressives are hugely uncomfortable with capitalism.  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.

Progressive elements in this country have always tried to freeze commerce, to lock this country's economy down in its then-current patterns.  Progressives in the late 19th century were terrified the American economy was shifting from agriculture to industry.  They wanted to stop this, to cement in place patterns where 80-90% of Americans worked on farms.  I, for one, am glad they failed, since for all of the soft glow we have in this country around our description of the family farmer, farming was and can still be a brutal, dawn to dusk endeavor that never really rewards the work people put into it.

This story of progressives trying to stop history has continued to repeat itself through the generations.  In the seventies and eighties, progressives tried to maintain the traditional dominance of heavy industry like steel and automotive, and to prevent the shift of these industries overseas in favor of more service-oriented industries.  Just like the passing of agriculture to industry a century ago inflamed progressives, so too does the current passing of heavy industry to services....

Take prescription drugs in the US - isn't it pretty clear that the progressive position is that they would be willing to pretty much gut incentives for any future drug innovations in trade for having a system in place that guaranteed everyone minimum access to what exists today?  Or take the welfare state in Continental Europe -- isn't it clear that a generation of workers/voters chose certainty over growth and improvement?  That workers 30 years ago voted themselves jobs for life, but at the cost of tremendous unemployment amongst the succeeding generations?

Phoenix Spent $1.4 Billion To Cannibalize Buses

I have written many times about my problems with Phoenix light rail -- examples are here and here.  We paid $1.4 billion in initial capital costs, plus tens of millions a year in operating losses that must be subsidized by taxpayers, for a line that carries a tiny tiny percentage of Phoenix commuters.  Capital costs equate to something like $75,000 per daily round trip rider  -- If we had simply bought every daily rider a Prius, we would have save a billion dollars.

But, as with most things the government does, it is worse than I thought.  Over the last several years, I have been treating these daily light rail riders as if they are incremental users of the area's transit system.  In fact, they are not, by Valley Metro's (our regional transit authority) own numbers.  Here is the key chart, from their web site.

ridership report chart graphic

Compare 2009 to 2012.  Between those years, light rail ridership increased by just a hair under 8 million.  In the same time period, bus ridership fell by just a hair over 8 million.  So all new light rail ridership is just cannibalizing buses.  We have spent $1.4 billion dollars to shift people to a far more expensive transit platform, which does not offer any faster service along its route (the light rail has to fight through traffic lights on the surface streets same as buses).

This is a pattern seen in most cities that adopt light rail.  Over time, total ridership is flat or falls despite rising rail ridership, because rail is so expensive that it's operation forces transit authorities to cut back on bus service to balance their budgets.  Since the cost per rider is so much higher for light rail than buses, a dollar shifted from buses to light rail results in a net reduction in ridership.

Postscript:  Looking at the chart, light rail has achieved something that Valley Metro has not seen in decades -- a three year period with a decline in total ridership.  Sure, I know there was a recession, but going into the recession the Valley Metro folks were arguing that a poor economy and rising gas prices should boost their ridership.

 

 

A Couple of Thoughts About Reinhart & Rogoff

As quick background, R&R had a study that found that higher government debt levels correlated to lower, even negative, economic growth.  More recently, others have found computational errors that exaggerated this result, and have criticized their methodology, particularly their approach to weighting data from different countries and years.

A few thoughts:

  1. A major reasons the errors were found is that R&R actually made their data available for replication.  This is apparently rare - certainly it is rare in the climate world.  I am glad they are getting kudos for this and hope the academic world can find a way to incentivize / force more data sharing
  2. I would not have expected a direct relationship between country debt levels and economic growth.  What I would expect is that growth can still be good at higher debt levels, but the risk of hitting a tipping point starts to rise dangerously with debt levels.  Eventually levels get so high that an interest rate shock or liquidity shock is almost inevitable
  3. More than a relation between GDP growth and absolute debt levels, I would have expected a relationship between GDP growth and changes in debt level.  Absolute government debt levels may represent resources removed from the productive economy years and decades earlier.  Increases in government debt represent recent decreases in capital available for productive use.

Some Friday Bastiat

There are people who think that plunder loses all its immorality as soon as it becomes legal. Personally, I cannot imagine a more alarming situation. However that may be, one thing is certain, and that is that the economic results are the same...

Moral: To use force is not to produce, but to destroy.

Selected essays on a political economy.  I love how Bastiat writes, and 165 years has done absolutely nothing to harm his relevance.  Its amazing that we hare having the exact same economic battles today.

How Much Is Sucking Up To The Government Worth in the Corporate State

One potential gauge can be seen in, of all places, advertising during the Masters golf championship.

I am not a huge golf fan, but enjoy watching the Masters and the British Open (if you have never been in Britain during the Open, it is a fun experience -- people are in bars at 9AM watching).  The Masters is unique among sporting events in that it eschews getting the maximum advertising check, and instead only accepts a tasteful 2-3 corporate sponsors, who run just a few minutes of advertising an hour.  This year the sponsors were AT&T, IBM, and ExxonMobil.

AT&T and IBM had generally non-specific ads that played up their companies' innovativeness, telling well-heeled golf viewers that they would be a good business partner on technology issues.  Exxon did something very different.  They ran ads over and over about how much they cared about education, and in particular in support of common core curriculum.

In our modern mixed economy, the worst thing you can have as a corporation is a bad image.  It means that politicians will look to score points for the next election by gutting you like a fish.  ExxonMobil is the perennial leader on this dimension, though Walmart occasionally grabs the number one spot.  So one purpose of the ads is clearly to improve its image and make people like it.  It is telling that ExxonMobil does not bother to do so in its core business.  There is a great story to be told about how much technology and capital must be invested over long time horizons to get gasoline as cheap as three or four dollars to the pump, but ExxonMobil has obviously given up on this message.  Instead, it works to be liked on a subject, education, largely tangential to its core business.

But its strategy at the Masters seemed to go further.  By actively shilling for the common core curriculum, an Obama-favored initiative to further Federalize k-12 education, they are essentially sucking up to this administration.

I and most of my family worked for Exxon.  I only worked a few years at Exxon (in beautiful Baytown, Texas) but members of my family worked for Exxon their entire lives, and I have known and still know a number of Exxon execs.  And I can say with good confidence that few if any of them really believe that shifting control of education from local agencies close to parents to Washington is really going to help education very much.

So, if you watched yesterday, you saw a multi-million dollar suck-up. And the pathetic thing is that it was probably a useless exercise. The bullied often try to end bullying by sucking up to the bully -- it seldom works.

Matt Yglesias is Reinventing History

Matt Yglesias and I certainly do read history differently.  He writes recently in a Salon article:

The basic economic foundations of industrial capitalism as we've known them for the past 150 years or so have an activist state at their core. Building political institutions capable of doing these things properly is really difficult, and one of the main things that separates more prosperous places from less prosperous ones is that the more prosperous places have done a better job of building said institutions. There's also the minor matter of creating effective and non-corrupt law enforcement and judicial agencies that can protect people's property rights and enforce contracts.

The point is, it takes an awful lot of politics to get an advanced capitalist economy up and running and generating wealth. A lot of active political decisions need to be made to grow that pie. So why would you want to do all that? Presumably because pie is delicious. But if you build a bunch of political institutions with the intention of creating large quantities of pie, it's obviously important that people actually get their hands on some pie. In other words, you go through the trouble of creating advanced industrial capitalism because that's a good way to create a lot of goods and services. But the creation of goods and services would be pointless unless it served the larger cause of human welfare. Collecting taxes and giving stuff to people is every bit as much a part of advancing that cause as creating the set of institutions that allows for the wealth-creation in the first place.

This is counter-historical crap.  Unfortunately, my real job is taking all my time today so I can only give a few quick responses rather than the thorough beating this deserves

  1. Capitalism is not a "system."  It is an un-system.   It is an order that emerges from individuals exchanging goods and services to their mutual self-interest.  While it requires a rule of law, those rules can be exceedingly simple -- at their core they are "don't deal with other people via force or fraud."  Sure, case law can be complex - what happens to a land deed that has one boundary on a river when the river moves.  But I don't think this is what Matt is thinking of.  
  2. Yglesias is following the typical socialist-progressive line that our modern wealth creating capitalist economy was somehow created by the government.  I am sure this line works with the low information voter, but that does not make it any more true.  Industrial capitalism arose long before the government even acknowledged its existence.  The US economy was generating wealth - for everyone, rich and poor - long before politicians stuck an oar into the economic waters.  Go back even 85 years and you will not see anything in the "political economy" that would be recognizable to a modern progressive.  In other words, the wealth creation came first, and then the politics came second.
  3. Again we see this bizarre progressive notion that wealth creation is this thing apart, like a water well in the desert.  Income distribution in this model is a matter of keeping the piggy rich people from hogging all the water.  But in a free society, the economy and its gains are not separate from people, they are integral to the people.  Gains are not somehow independent variables, but are the results of individual gains by each person in the system.  People operate by mutual self-interest.  When I work for you, I get a paycheck, you get your products made -- we both gain.  Steve Jobs grew wealthy selling iPads, but simultaneously my iPad made me vastly better off.
  4. It is wrong to say that all distributions of wealth are arbitrary.  In a free society, there emerges a natural distribution of wealth based on people's exchange with each other.  And contrary to the progressive mythology, that system was floating all boats, not just the rich ones, long before the government gained the power to redistribute wealth.  Yglesias is right in saying that income distribution in a progressive political economy is arbitrary.  In fact, income in any government-managed economy is distributed arbitrarily to whoever can gain power.  I am always amazed at progressives who somehow have this vision that there will be some group of people with absolute power who wukk make sure there will be a flat and equitable income distribution.  When has that ever happened?  Name even a single socialist country where that has happened.
  5. What political decision has ever been made the grows the pie, except perhaps to keep the government's hands off pie creation?  When "political" decisions are made to grow the pie, what you actually get is bailouts of Goldman Sachs, wealth funneled to connected billionaires like Elon Musk, and Solyndra.  Politics don't create wealth, they are a boat anchor lashed to the wealth creators.  The only thing politicians can do productively is make the boat anchor lighter.

End Sports Cronyism

Florida editorial via the Crony Chronicles

The problem with [the theory that sports subsidies help the economy] is that there is scant evidence that such economic benefits actually occur. Numerous studies done over the last 25 years have found that professional sport teams have little, if any, positive effect on a city’s economy. Usually, a new team or a new stadium location doesn’t increase the amount of consumer spending, it merely shifts it away from other, already existing sources. Entertainment dollars will be spent one way or another whether a stadium exists or not. Plus, the increase in jobs is often modest at best — nowhere near enough to offset the millions invested in the projects.

It's amazing they got the local paper to print this.  Most local papers would be defunct without a sports page.  As a result, local newspapers generally bring to bear tremendous pressure in favor of subsidies to attract and keep new professional sports teams.   Our local paper the AZ Republic tends credulously publish every crazy, stupid benefit study of sports teams on the road to promoting more local subsidies for them.

An Insane Theory of Product Liability

Via the WSJ today:

Can a drug company be held liable for damages caused by generic drugs it didn't produce? That's the expansive new theory of "innovator liability" on parade in Alabama, where a recent ruling by the state Supreme Court could do damage throughout the U.S. economy.

In Wyeth Inc. et al., v. Danny Weeks et al., Mr. Weeks says he suffered from side effects from taking the generic version of an acid-reflux drug called Reglan. He sued Wyeth for fraud and misrepresentation, though the company didn't make the drug he took and had exited the Reglan market in 2002, five years before he took it. The court ruled 8-1 that Wyeth could be held liable for injuries because the generic manufacturer couldn't change the warnings on the product it copied.

First, this is nuts -- being held liable for problems with a product you did not make, simply because you invented it years before.   Are we going to start suing the estate of Thomas Edison every time someone buys a bad lightbulb?

But second, note how helpless Wyeth is now.  Drug makers are used to insane law suits that drain all the profit from helping millions of people to pay off a few folks who had adverse side effects (this same process literally destroyed the vaccination business until the government gave them special liability protection).

But let's accept the court victory - perhaps the drug really has a problem that has been discovered.  If the maker was being sued, he could just pull the drug from the market (as has happened any number of times after adverse suits) either forever or until the FDA will approve new warning language.

But in this case, Wyeth can't do this.  The generic drug makers will keep on selling the product - after all, they are not getting sued, and Wyeth will keep paying.  Wyeth does not even have standing to try to get the FDA to change the warnings on the drug.  If Wyeth tries to buy out the generic maker and shut it down, and new seller will simply takes its place.    If this case stands, Wyeth can be steadily bled to death and there is nothing they can do to stop it.

Finally, I don't want to get away without a mention of just how broken the FDA drug regulation regime is.  The original Supreme Court decision that led to the generic maker being immune to suits really turned on the impossibility of getting the FDA to change even one word on a drug's warning label.

Soviet Spy Harry Dexter White

I thought this was an interesting article on Harry Dexter White, an important American architect of the post-war monetary system who spied for the Soviets for over a decade.  The one disconnect I had was this:

Over the course of 11 years, beginning in the mid-1930s, White acted as a Soviet mole, giving the Soviets secret information and advice on how to negotiate with the Roosevelt administration and advocating for them during internal policy debates. White was arguably more important to Soviet intelligence than Alger Hiss, the U.S. State Department official who was the most famous spy of the early Cold War.

The truth about White's actions has been clear for at least 15 years now, yet historians remain deeply divided over his intentions and his legacy, puzzled by the chasm between White's public views on political economy, which were mainstream progressive and Keynesian, and his clandestine behavior on behalf of the Soviets. Until recently, the White case has resembled a murder mystery with witnesses and a weapon but no clear motive.

Only in academia could folks see a "chasm" between admiration for the Soviets and an American progressive who grew up a supporter of Robert La Follette and later of the New Deal.  The problem, I think, is that White seems to have shared the gauzy positive view of Soviet economic progress and success that was also rooted deeply in American academia (not to mention the NY Times).  I don't know what the academic situation is like today, but as recently as 1983, for example, I had a professor at Princeton who went nuts at the mere mention of Hannah Arendt's name, apparently for the crime of lumping Stalin's communism in with Hitler's fascism as two sides of the same totalitarian coin.