Coyote Blog

If I asked you what three major American consumer products saw the largest steady price rises in the last decade (as opposed to price volatility, as we see in commodities like gasoline) one might well answer “housing, medical care, and college tuition.”

Two or more of each of these share a number of features in common

• Long, sustained government programs to increase access / ownership / usage
• Substantial portion of pricing paid by third parties.
• Easy to obtain, government subsidized debt financing.

The housing bubble has of course burst.  Obamacare, by further disconnecting individual use from the true costs of the services, will likely push health care costs ever higher.  And then there is the college bubble.  I am a bit late on this, but this is truly a remarkable chart:

I have already heard the leftish talking point on this, which is that this increase in debt is the fault of (surprise!) private lenders and loan originators.   This is a similar argument to the one made in the mortgage bubble, arguing that all the bad loans are the results of unscrupulous private originators and securities packagers.

And certainly there were many private companies originating awful mortgages and selling them to Fannie and Freddie.   But what we forget in hindsight is that the government was begging for them to do so.  Fannie and Freddie had active programs where they were encouraging mortgages with Loan-to-value of 97% or more.  This kind of leverage is absurd, particularly for American-style no-recourse home mortgages.  Sure, it was crazy to write them, but they were getting written only because the government was asking for them to be written and buying them all up.

In fact, in student loans, almost all of this loan growth is eagerly being underwritten by the Feds, not by private lenders.  Note the only consumer credit line really growing below is the “federal government” line (in red), which is primarily being driven by federally backed student loans.

One might argue that this is once again due to private originators going crazy.  But the Feds took over origination of all federal student loans in 2010.  You can see that much of the growth has occurred after the Feds took over origination.  In fact, I think most of us can understand that when the origination decision is shifted from being a business decision to a political decision, student lending standards are certainly not going to get tougher.  We can see that in home lending, where Fannie and Freddie have already returned to most of their worst pre-crash origination standards (here is an example of government promotion of these low down payment programs).

The other day my mother-in-law argued that the student lending business (particularly private lenders) needed reform because some students were being charged exorbitant rates.  Having not been in the market for student loans lately, I wondered if this were the case.  But the first thing that caught my eye was this stat:  The 2-year default rate (not lifetime, but just in the first 2 years) of student loans was 8.8% last year, and 12% if one looks at the first 3 years.  Compare that to credit card default rates which are around 6%.  And recognized that these are apples and oranges, the student loan numbers actually understate lifetime default rates.

Based on that, the interest rate on student loans should be in the twenties.  Against this backdrop, the rates I see online seem like a screaming deal.  Probably too good of a deal.  Which is why so many people are piling into these loans on the explicit promise society has made to them that their college degree will pay off, no matter what the cost.
Beyond the absurd price increases in both public and private education, here is the 900 pound gorilla in the room — some majors are simply more valuable than others.  A computer programming grad is going to have a lot more earning potential than the average poetry or gender studies major.

What we really need is tiered lending standards based on a student’s major.  Banks don’t treat the earning potential of a dog-grooming business and a steel mill the same, why treat a mechanical engineering degree the same as a sociology degree?  But, of course, this is never, ever going to happen.

Years ago I had these thoughts along this line, in response to a Michelle Obama rant about the cost of education

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

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

Postscript:  Kids who find they cannot pay their student debts and think bank home foreclosures are the worst thing in the world are in for a rude surprise — home mortgage default consequences are positively light in this country.  The worst that happens is that you lose the home and take a ding on your credit record.  Student debt follows you for life, with wage garnishments and asset losses.  People walk away from home debt all the time, the same is not true of student debt.

My Forbes column is up this week and it presents some quick reactions to the Obama jobs speech last night.  A brief excerpt:

Overall, I found the package to be an incredible mish-mash of already tried and failed steps to rejuvenate the economy.   Even if I were to buy into the Keynesian stimulus logic, everything in this package is so under-scale as to be rounding errors on the larger economy.  This is basically a smaller version of the last failed stimulus repeated.

This plan is absolutely in the Obama style, offering goodies to many constituencies without a hint of how they will be paid for.  Presidents often offer a chicken in every pot when they are campaigning, but usually are forced into reality once they enter office.  Not Barack Obama.  Time and again, from health care to the most recent budget fight and last night’s speech, Obama wants to be loved for offering perks, and then wants someone else to take the fall for the unpopular steps required to pay for them.  He is like grandma endearing herself to the grandkids by buying them Christmas presents on dad’s maxxed out credit cards, leaving dad to later figure out later how to pay for them or face the ire of the kids by returning the gifts.

My new column is up at Forbes, and discusses why politicians, particularly this administration, think they can allocate capital better than the market

The problem is that this top-down override of market capital allocations is almost certain to destroy wealth, because there are at least two problems with it (beyond the obvious liberty and property rights issues).

First, the decisions are being made by, at most, a few hundred government workers.  There is no possible way these workers can ever gather the knowledge and information posessed by millions of private actors making similar investment decisions.  Like monkeys throwing darts, some of the investments will work out, but on average their success rate has to be far lower than the network of individuals in the broader economy.

Second, and probably more important, government decisions-makers have terrible incentives when making these investments.  Seldom, if ever, are government re-allocations of capital made with an expectation of earning a return.  In fact, many of these programs promote themselves explicitly as shifting capital to investments no rational private investor would touch.  These investments are undertaken because they promote some sexy technology, or create jobs among a favored constituency, or even just because they make for a nice bullet point on a politician’s reelection web site.

Obama’s investment of taxpayer money into Solyndra is a great example.  It is clear little due diligence was completed before the loan guarantees to Solyndra were rushed out the door in 2009 in time to meet Energy Secretary Steven Chu’s artificial target date for the first loan of Obama’s green jobs program.  A good, well-timed sound bite on the evening news was more important that the actual details of the investment.

But, in fact, little due dilligence should have been necessary. ….

here.

It’s a wonder how, when over “97 percent to 98 percent” of scientific authorities accepted the Ptolomeic view of the solar system that we ever got past that.  Though I could certainly understand why in the current economy a die-hard Keynesian might be urging an appeal to authority rather than thinking for oneself.

When, by the way, did the children of the sixties not only lose, but reverse their anti-authoritarian streak?

Postscript:  I have always really hated the nose-counting approach to measuring the accuracy of a scientific hypothesis.  If we want to label something as anti-science, how about using straw polls of scientists as a substitute for fact-based arguments?

Yes indeed, the number of people in the newly made-up profession of “climate science” that are allowed by the UN control the content of the IPCC reports and whose funding is dependent on global warming being scary probably is very high.  The number of people in traditional scientific fields like physics, geology, chemistry, oceanography and meteorology who never-the-less study climate related topics that wholeheartedly are all-in for catastrophic man-made global warming theory would be very different

 Decide for yourself – see my video on global warming.  Am I anti-science?

Via Kevin Drum, from Dylan Matthews

Second, the president should do more to help the American worker. He should establish a jobs program. Do the simple math: We are spending more than $110 billion annually in Afghanistan. Stop it. Or scale it back to the sort of covert operations and drone war that is warranted. Savings? Perhaps about $100 billion—per year. Use that money to create up to 5 million jobs at $20,000 each….Just as FDR did during the Great Depression, put these Americans to work in states, counties, schools, parks.

Even Drum considers this unrealistic, though for the wrong reasons (i.e. the evil Republicans in the House would never let us do it).  I have a series of thoughts on this

1. FDR had low paying jobs programs in part because this was the only form of relief — there was not welfare or food stamps or medicaid or unemployment or EITC or social security.  A $20,000 dig-a-hole-and-then-fill-it-in government make-work job would likely just displace about the same amount of other government transfer payments.  I can’t see this doing squat.
2. We are really going to kick-start the consumer market with $20,000 jobs?
3. The Left needs to get its story straight on the stimulative effects of wars.  Democrats blame Bush for the current economy in large part because of his wars, and the author here implies that moving spending out of wars would be a net plus.  But Keynesians believe WWII ended the Great Depression and Krugman wrote just the other day that what we really need is a war with space aliens (I kid you not) to end the Great Recession.  So which is it?

By the way, I think wars are a total economic waste and drag on the nation.  Dedicating scarce resources to blowing stuff up is the worst possible use of capital.  However, diverting this into politically correct, politician-selected make-work projects is not really a lot better.

Via Ed Driscoll, from Richard Cohen in the Washington Post:

The odd thing about the Tea Party is that it uses Washington to attack Washington. This is a version of Hannah Arendt’s observation that totalitarian movements use democratic institutions to destroy democracy. (This is what Islamic radicals will do in Egypt.) Note that the Tea Party is nowhere near a majority — not in the House and not in the Senate. Its followers have only 60 seats in the 435-member House, but in a textbook application of political power they were able to use parliamentary rules to drive the congressional agenda. As we have known since Lenin’s day, a determined minority is hands down better than an irresolute majority.

The Tea Party has recklessly diminished the power and reach of the United States. It has shrunk the government and will, if it can, further deprive it of revenue. The domestic economy will suffer and the gap between rich and poor, the educated and the indolently schooled, will continue to widen. International relations will lack a dominant power able to enforce the rule of law, and the bad guys will be freer to be as bad as they want. Maybe the deficit will be brought under control, but nothing else will. I worry — and I envy (but will not forgive) those who don’t

Yep, those dang totalitarians — always trying to shrink government and diminish its power and reach.

My column in Forbes is up.  Here is how it starts.  Hit the link to see it all.

We Americans are all being held hostage.  The ransom demand:  Trillions of dollars in new taxes.  The threat:  the shut down of any number of economic activities, from retirement payments to mortgage lending.

Megan McArdle, blogging at the Atlantic Monthly, posted a hypothetical list of what government activities would have to cease if we bumped up against the debt ceiling and 40% of government activity (ie the amount currently funded by deficit spending) had to cease immediately. Here are two examples from her article:

The market for guaranteed student loans plunges into chaos. Hope your kid wasn’t going to college this year!

The mortgage market evaporates. Hope you didn’t need to buy or sell a house!

Terrorists have tried for years to find some way to threaten the whole of America and have, with the exception of 9/11, never really succeeded.  Who knew that all they really needed was not to buy guns and bombs, but to get elected to Congress.   How did we ever get in this position, where a handful of men and women in Washington had the power to hold the entire economy hostage?

 

This is right on the mark

His description of what Keynesians believe is correct. It’s why Keynesians, including the President, thought that government spending would stimulate the economy. As Klein points out, “Obama didn’t just have a team of Keynesians. He had the Keynesian all-star team.”

Right, but then Klein gets it wrong: “The idea [behind Keynesian economics], in other words, is not about whether the government spends money better than individuals.”

Yes it is! Obama and Klein think that during a recession, “the financial system scares business and consumers so badly that they hoard money, which worsens the damage to the system.” Therefore, the government must take money away from individuals, and spend it elsewhere. Eric Cantor correctly pointed out that the theory is: “government can be counted on to spend more wisely than the people.”

Part of the problem here is in nomenclature.  People don’t think of saving as spending.  So I will shift a word a bit.  The idea of Keynesian economics is that the government can deploy your money better than individuals can.

The cause of the asset bubble for this argument is almost irrelevant.  Households, finding themselves over-leveraged, want to deleverage by buying fewer things and saving more money.  The Keynesians explicitly wanted to prevent this by taking the money that would have been saved and spending it.  This destroys value in two ways.  As Stossel points out, it shifts money from being deployed with an eye on productivity to being deployed with an eye on politics.  From a value-creation standpoint, this has to destroy value.  In addition, by slowing the process of deleveraging, it slows the recovery, unless individuals in the mean time can be convinced that they really don’t need to deleverage.  And is that really the post-bubble message we should be sending out?

One might think a line like about Greek finances was printed just this week

What followed could only be described as a comic progression of populist pandering [and] the spread to the national economy of a series of parasitic labor unions and cabals

But in fact it is describing Greek conditions circa 1944.

A while back I observed that the difference between Greek and US finances is that the US needs to return to a spending level circa 2007, while Greece has no similar default state of relative fiscal sanity it can return to.  This article in Finem Respice reinforces this premise by discussing the absolute insanity of Greek fiscal management before and after and even during WWII, which was characterized by all the exact same problems that have driven the current crisis.  Good background reading.

Greece, then as now, was dominated by an expensive public sector funded insufficiently by a tax system that did not work.  As may happen soon, Greece was not able to borrow, so all they could do was print money and inflation soared.  Only one man was able to stop the inflation, and I won’t spoil the ending by the humorous way he did so.

Kevin Drum had a post lamenting that Congress is doing nothing when it could be spending money that would, in his view, stimulate the economy out of a recession.  All well and good, and predictable based on his assumptions.  But he ended with this

We are ruled by charlatans and cowards. Our economy is in the tank, we know what to do about it, and we’re just not going to do it. The charlatans prefer instead to stand by and let people suffer because that’s politically useful, while the cowards let them get away with it because it’s politically risky to fight back. Ugh indeed.

I was horrified by this sort of discourse, and wrote back:

It is so tiring to see both parties ascribing horrible and hostile motivations to their political opponents.  Your last paragraph is just absurd, implying that everyone agrees with your economic prescriptions and that the only reason everyone is not following them is either a) political self-interest or b) loathing for the poor and helpless.

Is it really so hard to understand that well-intentioned, intelligent people who honestly want the economy to get better might disagree with you about the benefits of deficit spending? The literature is at best mixed on this topic and certainly there is nothing about the last stimulus that causes me to become a believer.

Those of us who believe strongly that diverting trillions of dollars of capital from private to public hands (ie from hands focused on productively employing it to hands focused on politically employing it) makes the economy worse by necessity are just as motivated by trying to improve the economy as you.

I really don’t understand this absolute insistence on ascribing bad motivations to those with whom one disagrees.  Is it ego, or just insecurity?  If one admits his or her opponents can be smart and well-motivated, it certainly creates an edge of doubt and uncertainty.  Deal with it.  That’s healthy.  It keeps us intellectually honest.

The latest stimulus analysis out of the Administration is yet another crock.  It claims 2+ million jobs created, but has absolutely no evidence for this.  All it does is take the same hypothetical Keynesian multipliers it used when it proposed the stimulus, and reapply them.  In other words, the models basically say X jobs should have been created per billion dollars spent, so they run the models that then announce that X jobs must have been created per billion dollars spent.  Surely.  Somewhere.  We swear.

This notion of confirming your original predictive model runs with new runs of the same model is the same kind of BS that has become so popular in climate science.  The fact is, the net effect of the stimulus is almost impossible to measure in a complex economy where so much is changing.  It’s possible, perhaps  (though this is surprisingly difficult to do right) to measure each person employed in a stimulus project, but this does not answer the question of how many jobs would have been created if the $800 billion had been left in the hands of private actors rather than spent by the government.

For those on the Left who wish to return to the economic organization of the 1950′s, recognize that this era of more uni0ns and a greater dominance of the economy by hard-core manufacturing also had strong social inhibitions to half the adult population working paid jobs.  As women entered the work force in droves in the 1970′s to the present, most of the jobs they found were in the new service industries whose displacement of manufacturing you lament.

A picture is worth a thousand words, so here is the Battleship game box my son found in a stack of old games at his grandparents house.   The boys having a blast while the girls are washing the dishes.

Update: More from Matt Welch and Michael Barone.  Money quote:

The ongoing left-of-center brainscrub of its own 20th century anti-authoritarianism remains one of the great curiosities of our time.

Kevin Drum doesn’t buy the regime uncertainty argument as a partial explanation of the slow recovery.

Here’s what’s remarkable: Carter, a law professor at Yale, apparently never once bothered to ask this guy just what regulations he’s talking about. Is he concerned with general stuff like the healthcare law? Or something highly specific to his industry? Or what?

Regardless, I’ve heard this kind of blowhard conversation too often to take it seriously. Sure, it’s possible this guy manufactures canisters for nuclear waste or something, and there’s a big regulatory change for nuclear waste storage that’s been in the works for years and has been causing everyone in the industry heartburn for as long as they can remember. But the simple fact is that regulatory uncertainty is no greater today than it’s ever been. Financialuncertainty is high, but the Obama adminstration just hasn’t been overhauling regs that affect the cost of new workers any more than usual. The only substantial exception is the new healthcare law, and if you oppose it that’s fine. But it was passed over a year ago and its effects are pretty easy to project.

First, the costs of the health care law are NOT easy to project, and are made even harder when your company might or might not get waivers from certain provisions.    Second, he seems to forget cap and trade, first by law and then by executive fiat; the NLRB’s new veto power over corporate relocations it exercised with Boeing; the absurdly turbulent tax/regulatory/permitting regime in the energy field, and particularly oil and gas.  How about trillion dollar stimulus projects, that until very recently Obama was still talking about replicating (and Krugman begs for to this day).  I could go on and on.  This is spoke just like a person who never had to run a business.

Further, I wrote this in the comments section:

I think you are both right and wrong.  I am sure the discussion about this is to some extent overblown.  But you are thinking about business and hiring much too narrowly.

You seem to have a mental model of business showing up at the door, and someone turning that business down because they don’t want to hire an employee to serve it (or out of sheer petulance because Fox News told them to sit on their hands, lol).  You find it unlikely anyone would refuse the business, and so do I.

But I run a small to medium size business, and a lot of hiring decisions don’t work that way.    I do have some situations that fit your model – I have a campground that is really busy this year, so we hired more people to serve the volume.   No problem.

But most of my hiring decisions are effectively investments.  I am going to create a new position, pay money to train that person, and pay their wage for a while in advance of demand.  Or I am going to open a new site or department or location and make a lot of investment, and the return on investment may be very sensitive to small changes in labor or regulatory costs.

For our business, with labor costs over 50% of costs, the issue is definitely labor costs.  Our pre-tax margins are in the 6-7% range.  So if labor costs are 60% of revenues, then a 10% change in labor costs might wipe out the margin entirely, and a much smaller change in costs might flip the investment from making sense to not making sense.

We run a seasonal business with part-time workers who are older and on Medicare.  Regulations about exactly how much we will have to pay under Obamacare have not been written, so we have no idea how much our employment costs will go up in 2014, so we sit and wait.  I have cancelled two planned campground construction projects in the last 6 months because we have no freaking idea if they will make money.

If I am having trouble with just this one law figuring out whether to make investments, what are, say, oil companies doing in evaluating investments when they have absolutely no idea what their taxes will be, whether they will be permitted or not to drill, or whether they will be subject to cap and trade?

One other thought, it strikes me that there is a lot of good scholarship that suggests that the Great Depression was extended by just this kind of regime uncertainty.  Now, of course, the proposed structural changes to the economy being proposed at the time were more radical than anything on the table today.  The National Industrial Recovery Act was essentially an experiment in Mussolini-style economic corporatism, until most of it was struck down by the Supreme Court.   Nothing so radical is being proposed (unless you work in health care).

Look, I know the Left has convinced itself that only consumer demand matters in an economy, but business investment has simply got to matter in a recovery.   If the returns on future investments are harder to predict, and therefore riskier, businesses are going to apply a higher hurdle rate to new investments, meaning they don’t stop entirely, but do invest less.

One interesting may to confirm this some day would be to look back and see if larger corporations with political access invested more than smaller ones or ones with less access.  Did GE, who clearly can get whatever it wants right now from the government, invest more than a small company or even than Exxon, which is on the political outs?  If so, this in my mind would confirm the regime uncertainty hypothesis, because it means that the companies doing most of the investing were the ones confident that they could shape the mandates coming out of the government in their favor.

Beyond regime uncertainty, if you want to talk about Obama and the recovery, you have to mention that a trillion dollars was diverted from private hands to public hands.  Does anyone believe that taking a trillion dollars out of whatever investments private actors would have used the money for and diverting most of it to help maintain government payrolls is really the way to increase the strength and productivity of the economy?

My column this week in Forbes is about the declining rate of entrepreneurship and startups in the US.

A recent study by the Beauru of Labor Statistics confirmed a potentially disturbing trend — that the number of new startup businesses in the United States has declined since 2006, and the number of jobs created by those startups has been in decline for over a decade.

This is not just a result of the recent recession.  These declines pre-date the current recession, and besides, startup activity has always held up well in past recessions as unemployed workers try entrepreneurship as a path back to prosperity.

There are likely a myriad of economic and demographic reasons for this decline, but certainly the growth of government power in the economy must be seen as a major contributor.  Government intervention in commerce nearly always favors large companies over small, even if that was not its specific intent, for a couple of reasons:

1. Increasingly complex and pervasive regulations on everything from labor practices to salt content tend to add a compliance cost burden that is more easily born by larger companies
2. Large, entrenched competitors are becoming more facile at manipulating government to create barriers to competition from upstart companies with different business models.

The role of government in throttling entrepreneurship has been evident for years, in the enormous differentials between US and European business startup rates.  Historically, the US has had entrepeneurship rates 3-4 times higher than in the large European industrial countries, due in large part to the barriers these latter countries place in the way of business creation.  But the US, with its current bi-partisan drive towards a corporate state, may soon be engaged in a race to the bottom with these other countries.

I go on to discuss each of these two points in more depth.

Scene 1, History AP:  My son asked me how WWII ended the Depression.  I said that the draft soaked up a lot of excess workers, which reduced unemployment, and British buying for the war helped our economy but that the war generally destroyed rather than created wealth.  He said, “Dad, you can’t tell it to me that way.  The guy grading the AP is going to be a Keynesian.”  So we talked multipliers and aggregate demand.

Scene 2, Spanish AP:  My son hands me a list of Spanish words he is trying to learn.  They are the Spanish words for things like “social justice,”  ”poverty”, “exploitation”, etc.  I told him it was an odd selection of words.  He said that nearly every Spanish essay in every Spanish textbook he had ever had were about revolution and stopping the rich from exploiting the poor and fighting global warming.  So he wanted to be prepared for a similar topic on the AP.    After the test, I remembered this conversation and asked him what the essay was.  He said the topic was “show why the government of poor countries should give free bicycles to the poor to fight global warming.”

Don Boudreaux had these two rejoinders to the notion that the GM bailout is a success simply because GM is making a profit.

Economically literate opponents of the Detroit bailout never denied that pumping hundreds of millions of taxpayer dollars into Detroit automakers would restore those companies to health.  Instead, they argued, first, that bailing out Detroit takes resources from other valuable uses.  Because he doesn’t even recognize that other valuable uses were sacrificed by this bailout, Mr. Dionne offers no reason to think that the value of saving Detroit automakers exceeds the value of what was sacrificed to do so.  No legitimate declaration that the bailout is successful is possible, however, without evidence that the value of what was saved exceeds the value of what was sacrificed.

Economically literate bailout opponents argued also that it sets a bad precedent.  By signaling to big corporations that government stands ready to pay the tab for the consequences of their poor decisions, big corporations will more likely make poor decisions in the future.  It’s far too early for Mr. Dionne to conclude that this prediction is mistaken.

I would offer a third concern — that the government has kept hundreds of thousands of skilled workers and billions of dollars of physical assets under the management of the same group that have decidedly underutilized these assets in the past.  A bankruptcy without Federal intervention would likely have shifted assets and skilled workers into new companies with different management teams and cultures pursuing different strategies with different information.

I always have trouble explaining this issue to people.   Think of a sports team with great players but a lousy coach and management team.  Having the government ensure that the lousy management stays in control of the great players is a waste for everyone.  I explained it more in depth in this post, where I concluded

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as “management” but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together “management”, we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case – Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA…

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

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

About 20 years ago I did a rail transit study for McKinsey & Company with a number of European state rail companies, like the SNCF in France.   With my American expectations, I was shocked to see how overstaffed these companies were.  At the time, the SNCF had more freight car maintenance personnel than they had freight cars.  This meant that they could assign a dedicated maintenance person to every car and still get rid of some people.

Later in my consulting career, I worked for Pemex in Mexico, where the over-staffing was even more incredible.  I realized that in countries like France and Mexico, state-run corporations were first and foremost employment vehicles run for the benefit of employees, and, as  distant second, value-delivery vehicles and productive enterprises.

Over the last 20 years, I have seen more and more of this approach to public agencies coming to the US.  If nothing else, the whole Wisconsin brouhaha hopefully opened the eyes of many Americans to the fact that public officials and heads of agencies feel a lot more loyalty to their employees than they do to taxpayers.

I see this all the time in my business, which is private operation of certain state-run activities (e.g. parks and recreation).  I constantly find myself in the midst of arguments that make no sense against privatization.   I finally realized that the reason for this is that they were reluctant to voice the real reason for opposition — that I would get the job done paying people less money.  This is totally true — I actually hire more people to staff the parks than the government does, but I don’t pay folks $65,000 a year plus benefits and a pension to clean the bathrooms, and I don’t pay them when the park is closed and there is not work to do.  I finally had one person in California State Parks be honest with me — she said that the employees position was that they would rather see the parks close than run without government workers.

Of course, if this argument was made clear in public, that the reason for rising taxes and closing parks was to support pay and benefits of government employees, there might be a fight.  So the true facts need to be buried.  Like in this example from the Portland transit system, via the anti-planner.

In 2003, TriMet persuaded the Oregon legislature to allow it to increase the tax by 0.01 percent per year for ten years, starting in 2005. In 2009, TriMet went back and convinced the legislature to allow it to continue increasing the tax by 0.01 percent per year for another 10 years. Thus, the tax now stands at $69.18 per $10,000 in payroll, and will rise to $82.18 per $10,000 in 2025.

At the time, TriMet promised that all of this tax increase would be dedicated to increasing service, and as of 2010, TriMet CFO Beth deHamel claims this is being done. But according to John Charles of the Cascade Policy Institute, that’s not what is happening.

Poring over TriMet budgets and records, Charles found that, from 2004 (before the tax was first increased) and 2010, total payroll tax collections grew by 34 percent, more than a third of which was due to the tax increase. Thanks to fare increases, fares also grew by 68 percent, so overall operating income grew by about 50 percent, of which about 7 percent (almost $20 million) was due to the increased payroll tax.

So service must have grown by about 7 percent, right? Wrong. Due to service cuts made last September, says Charles, TriMet is now providing about 14 percent fewer vehicle miles and 12 percent fewer vehicle hours of transit service than it provided in 2004 (comparing December 2004 with December 2010). TriMet blamed the service cuts on the economy, but its 50 percent increase in revenues belie that explanation.

By 2030, according to TriMet’s financial forecast (not available on line), the agency will have collected $1.63 billion more payroll taxes thanks to the tax increase. Yet the agency itself projects that hours and miles of service in 2030 will be slightly less than in 2004.

Where did all the money go if not into service increases? Charles says some of it went into employee benefits. TriMet has the highest ratio of employee benefits to payroll of any transit agency. At latest report, it actually spends about 50 percent more on benefits than on pay, and is the only major transit agency in the country to spend more on benefits than pay. This doesn’t count the unfunded health care liabilities; by 2030, TriMet health care benefits alone are projected to be more than its payroll.

Donna Laframboise discusses 18th century transportation issues, and particularly the horse manure problem:

The Superfreakonomics authors draw heavily on the work of Eric Morris, whose urban planning Masters thesis explored the reality of horse-based transportation in 19th-century cities. A user-friendly encapsulation of his research appears in an 8-page article here. (It was published in Access, a U of California transportation publication. The entire issue is available here.)

Morris points out that, by the late 1800s, large urban centers were “drowning in horse manure.” Not only were there no solutions in sight, people were making dire predictions:

In 1894, the Times of London estimated that by 1950 every street in the city would be buried nine feet deep in horse manure. One New York prognosticator of the 1890s concluded that by 1930 the horse droppings would rise to Manhattan’s third-story windows.

The automobile helped solve this growing ecological problem.  Back in 2006, I had considered the same thing with a hypothetical blog post from 1870 which is pretty close to the Times of London article quoted above (which I had never seen):

As the US Population reaches toward the astronomical total of 40 million persons, we are reaching the limits of the number of people this earth can support.    If one were to extrapolate current population growth rates, this country in a hundred years could have over 250 million people in it!  Now of course, that figure is impossible – the farmland of this country couldn’t possibly support even half this number.  But it is interesting to consider the environmental consequences.

Take the issue of transportation.  Currently there are over 11 million horses in this country, the feeding and care of which constitute a significant part of our economy.  A population of 250 million would imply the need for nearly 70 million horses in this country, and this is even before one considers the fact that “horse intensity”, or the average number of horses per family, has been increasing steadily over the last several decades.  It is not unreasonable, therefore, to assume that so many people might need 100 million horses to fulfill all their transportation needs.  There is just no way this admittedly bountiful nation could support 100 million horses.  The disposal of their manure alone would create an environmental problem of unprecedented magnitude.

Or, take the case of illuminant.  As the population grows, the demand for illuminant should grow at least as quickly.  However, whale catches and therefore whale oil supply has leveled off of late, such that many are talking about the “peak whale” phenomena, which refers to the theory that whale oil production may have already passed its peak.  250 million people would use up the entire supply of the world’s whales four or five times over, leaving none for poorer nations of the world

To the last point, my article on how John D. Rockefeller and Standard Oil saved the whales is here.

Every time you see a politician claiming he created jobs with some expenditure of taxpayer money, you have to ask yourself, what would private investors have done with that money had it not been taken away from them?  Via John Stossel

In a new article, “The Myth of Green Energy Jobs: The European Experience”, the environmental scientist and a resident scholar at the American Enterprise Institute writes,

“Green programs in Spain destroyed 2.2 jobs for every green job created, while the capital needed for one green job in Italy could create almost five jobs in the general economy.”

Several years ago, I offered the following hypothesis to a reporter:

I would argue that the current obsession with small changes to trace levels of CO2 in the atmosphere has in fact gutted the environmental movement.  Nothing else is getting done. … My prediction– 10-20 years from now, environmentalists are going to look back on the current global warming hysteria as the worst thing ever to happened to the environmental movement.

Here is an example of that effect.  A study comes out that says the following about the health of the Great Lakes:

The Commission is troubled by nearshore eutrophication, aquatic plant growth caused by excessive nutrients, which causes adverse effects on ecosystems, the economy, recreation, and human health.  The reemergence of algal blooms is likely due to multiple factors, including inadequate municipal wastewater and residential septic systems; runoff from increased impervious surface areas and agricultural row-crop areas; discharges from tile drainage which result in more dissolved reactive phosphorus loading; industrial livestock operations; ecosystem changes from invasive mussel species; and impacts from climate change which include warmer water and more frequent and intense precipitation and stormwater events.

Of these listed potential causes, only the last, climate change, is not addressed at all in the main study document, nor is addressing climate change on their list of recommendations, which in fact emphasize that solutions tend to be local.   In fact the tone of the study is that the causes are complex and poorly understood, but never again beyond this sentence is climate change mentioned or any evidence of increased precipitation or runoff presented.

One is left with the impression it was a toss-in on the list, included because climate change is “hot” and sexy and a magnet for funding and attention.  Certainly the report provides no other evidence or detail as to why it is included in the list.  Certainly any intelligent reader would understand that the climate change item was, at best, included to round out the possibilities of a complex and poorly understood problem, but that the study points to many of the other items on the list as more productive places to seek solutions.

So, given this, what do environmental reporters pick up?  Here is the headline environmental reporter Cameron Scott uses on his SFGate blog “the Thin Green Line”:

Climate change threatens Great Lakes

Yep, he latched on to the last, least important item that is completely un-adressed by the main report.  By doing so, he is in effect helping to distract attention from the real causes that can be addressed and diverting attention to issues that are tangential at best.  The solution will likely involve better managing agricultural runoffs and dealing with municipal wastewater plants which are under-treating discharges.

This is why I say that the global warming hysteria will be looked back on as a dead time for the environmental movement, when obsession with trace amounts of CO2 either caused folks to lose attention on important issues, or even caused environmentalists to advocate for ecologically detrimental programs (e.g. biofuels).

From Slate.com via Carpe Diem:

“Maybe it is not the growth that is deficient. Maybe it is the yardstick that is deficient. MIT professor Erik Brynjolfsson explains the idea using the example of the music industry. “Because you and I stopped buying CDs, the music industry has shrunk, according to revenues and GDP. But we’re not listening to less music. There’s more music consumed than before.” The improved choice and variety and availability of music must be worth something to us—even if it is not easy to put into numbers. “On paper, the way GDP is calculated, the music industry is disappearing, but in reality it’s not disappearing. It is disappearing in revenue. It is not disappearing in terms of what you should care about, which is music.”

As more of our lives are lived online, he wonders whether this might become a bigger problem. “If everybody focuses on the part of the economy that produces dollars, they would be increasingly missing what people actually consume and enjoy. The disconnect becomes bigger and bigger.”

But providing an alternative measure of what we produce or consume based on the value people derive from Wikipedia or Pandora proves an extraordinary challenge—indeed, no economist has ever really done it.

Ditto Facebook, free flash games, ichat, etc.  I think the point is dead on, though I have no idea how to fix it.  Maybe as a value of the consumer’s time?  If your time is worth $15 an hour, and you spend it on Facebook, then your benefit must have been at least $15?

Thinking about this, it strikes me that there is no GDP credit for leisure time, either.  There is almost nothing more valuable to me .  If everything in my life stays the same but I can use technology or other factors to restructure my time to get one extra hour of leisure, isn’t that of huge value?  But there is no credit for it in GDP or earnings accounts.

The article discusses consumer surplus, which strikes me as the heart of the matter.  GDP and earnings metrics track what we pay, not how much value we receive.  If one hypothesizes that consumer surplus is rising as a percentage of purchase price, then we are missing a lot of wealth creation.

Many of you may know that my business is engaged in private management of public recreation.  We get a lot of pushback from certain sectors who believe access to government lands or services should be free — ie already paid for by their income taxes.

I often argue that this notion of discretionary services (like parks and campgrounds) being run with high cost government labor and funded by general revenue taxes is a dead one – in fact it has been dead for at least 10 years.  Just look around at public parks organizations.  Odds are that your state is facing parks closures and is very likely not fully funding park maintenance. I wrote about this failed model here.

In the future, anything discretionary government program that can charge use fees or be privatized or both will do so.  Or else it will be provided at terrible quality with long queues and frequent closures.  Don’t believe me?  Lets look at the US government budget data from last year. This chart has been making the rounds — I have not checked the data source but I presume it is correct (as usual click for larger version)

I have some interest in the science of chartmanship.  McKinsey & Company did a great job teaching me how to make a presentation, a skill I have honed somewhat in way too many planning and strategy jobs that seemed to revolve around Powerpoint  (one of the criteria for my current job is that it did not involve Powerpoint).

This chart is a case where the author used the wrong chart type.  The pie chart is not appropriate to show a changing total (as the author does with the size of the pie).  The eye has trouble assessing volumes.  I have taken the same data and put it in a slightly different form.  I did not take time to make it pretty, but I think it works better in this format:

Now do you see my point about discretionary spending?  Last year government taxes just about covered entitlements and interest on the debt.  Had we not borrowed, there was no money left over for any discretionary spending, including all of the Defense budget!  Now, even without action, the picture will improve in 2011 as taxes go up with a rising economy and some of the unemployment spending goes down.  But this might just get us to still having a defense department.  Either large swaths of discretionary spending is going to have to be zeroed out, or some sort of entitlement restructuring is necessary.

Of course, tax increases will likely be part of the mix as well, but look at the individual income tax bar.  Even doubling it would not close the budget gap!

This article by Mark Perry seems right to me — the lightest touch (and probably the most effective) approach to bank regulation is to return to a regime that puts its major emphasis on capital requirements.

We can talk all day about causes of the recent financial crisis, but in my mind the root cause was taking real property with a volatile underlying value (e.g. homes) and leveraging the absolute crap out of it.   In the initial transaction, home buyers were allowed to come to the table with less and less equity, until deals were being cut with more than 100% debt.  This stupidity was a true public-private partnership, as the government kicked off the party and encouraged its growth via various community development policies as well as policies atFannie and Freddie, but private originators as well as home buyers eagerly jumped into the fray.

This debt backed by property that was already too highly leveraged was thrown into portfolios that were themselves highly leveraged, and then further leveraged again through CDS’s and other derivatives.  And then the CDS’s were put into leveraged portfolios.  I would love to figure out the effective leverage in the AIG portfolio.  For ever $1 million in real property that secured the mortgages they insured, how much equity did they have?  A thousand bucks?  Less?

These investors felt protected by diversification that didn’t really exist.  The felt safe with AAA ratings from agencies who really didn’t understand the risks any better than anyone else did.  They relaxed assuming everything was watched by government regulators who were in way over their heads.  But more than anything, they felt protected by history.  The system of putting mortgage risks into tranches, such that the top tranches could only be affected by default rates consider then to be wildly improbable, had never to that point failed to deliver its promise.   Default rates had always stayed withing expected norms.

And this is the most dangerous risk — the risk that something will happen that has never happened before.  Default rates that seemed impossible suddenly became reality.  Tranches that were untouchable suddenly were losing large chunks of their value.  Sure, there were warning signs, but at the end of the day what happened was that events occurred that were worse than people had thought was the worst case scenario  (there is a whole body of interesting behavioral study on how humans tend to overestimate their understanding and underestimate the width of a probability distribution).

As new financial products are created and the economy evolves and the government pursues new forms of interventions in commerce, new failures can occur that have never happened before.  And never has there been invented a micro-regulatory approach that guards against new-type failures (they don’t even do a very good job against old-style failures).  Capital requirements are the one approach that guard against catastrophic failures even for unanticipated risks.

It can be argued that this will raise the cost of capital, at it is true interest rates at any one point of time would have to go up.  But one can argue that the low interest rates of the 2000′s greatly understated the true cost of capital, and that those additional costs were paid in a sort of balloon payment at the end of the decade.

I am still thinking this through — I don’t think any regular reader would be mistake me for someone who favors regulation in general, but I am coming around to some extent on the notion that banks are different.  I would ideally like to see a self-policing market where companies that choose to cut equity too fine just go bankrupt.  But the reality of the political-financial complex today is that this never happens — costs of large failures are socialized, and executives who made bad choices get fat gold parachutes and Treasury jobs.

Postscript:  I have arguments all the time about whether the financial melt down was mainly caused by government or private action.  Was it a public or private failure.?  My answer is yes.

One thing that those of us who promote private action over public can never repeat enough is this:  Our support for private action does not mean that private actors don’t screw up, that there are not bad outcomes, that people don’t make bad decisions, etc.  They do.  Lots of them.  When these constitute outright fraud, there should be prosecution.  For the rest of the cases, though, libertarians believe that in a free society there are automatic corrections and sources of accountability.

Make a bad product – people stop buying it.  Sign a union contract with wages that are too high – you go bankrupt.  Treat your workers shabbily – and the best of them go work for someone else.  Take on too much risk – you will fail and lose all your capital.

The problem with our financial sector is not that it is not regulated — it is the most regulated sector of the economy.   The problem is that, as always happens, there has been substantial regulatory capture.  There has been an implicit deal cut by large financial institutions – regulate me, but in return protect me.  In a sense, as is typical in a corporate state, large corporations and government have become partners.

As a result, many of the typical checks and balances on private action in a free economy have been disrupted.  In effect, certain institutions became too big to fail, and costs of failure and risk taking were socialized.

That is why the answer is not one or the other.  Certainly the massive failures were driven by the actions of private actors.  But they were driven in part by incentives put in place by the government, and their stupid behavior was not checked because traditional private avenues of accountability had been neutered by the government.    This is why the recent financial crisis will always remain a sort of political Rorschach test, where folks of wildly different political philosophies can all find justification for their position.

I thought this article interesting – the hypothesis that communist countries pursued a sort of cargo cult economic policy.  Since they did not really understand economics (and as communist countries have banned many of the most important processes for economic growth), communist leaders tried to emulate successful western nations by copying high-profile bits of their economy.  For example, since Western nations were prosperous and had early on built big steel industries, communist leaders decided that building big steel industries would make them prosperous.

It falls somewhat short as a framework for explaining communist economies, but I do think that this cargo cult mentality was an important part of their thinking and even is a part of progressive thinking today.  After all, if you willfully deny classical economic theory as well as the power of individual action and private initiative, you have to fill in the blanks somehow.

High speed rail and mass transit strike me as classic modern examples — great cities of the world have large mass transit systems so therefore if our city builds a rail system we will become great.

(via Popehat) one of the writers at Balloon Juice offers this test of a “reasonable” Conservative blog

1) Do you believe in evolution?

2) Do you believe that the average temperature on earth has increased over the past 30 years?

A few semi-random thoughts:

• Count me as a yes for both
• Is the best test of the likely reasonableness of a political blog really to ask two questions about science that such a blog might never even touch?  This is not an entirely rhetorical question — just the other day I linked the data that suggested that asking your date about beer might be the best way to test their views on sex.  Sometimes odd cross-correlations exist, but I don’t think these would be my first test
• I find the Left’s obsession with evolution as a litmus test for political thought to be funny, as the theory of evolution is largely irrelevant to any political questions except fairly narrowly the question of teaching evolution in schools.   I find it funny as much of the Left does not believe in a science – micro economics (very specifically differentiated from macro) – that is also fairly old and well understood and is much more relevant to typical political blog discourse.  I had a debate on national TV a few weeks ago with a man who claimed, as many on the Left will, that raising the minimum wage will increase employment.   If we want to test blogs based on scientific questions, why wouldn’t a far more relevant question in public discourse be “do you believe demand curves slope down” or perhaps something like “do you believe breaking windows stimulates the economy?”
• The second test is not a bad test of any site writing about global warming and climate change.  I don’t know many science-based skeptics who would deny that global temperatures have likely increased over the last 30 years  (from a data base without UHI or alarmist manual adjustments or large data holes, the trend is something like 0.1C per decade).   I say “likely” because it could be argued that 0.1C is within the error bar of the measurement. Even so, this wouldn’t be my first test, even for climate sites
• I would tend to have four tests of the liberal and conservative sites I read
  • Is it interesting to read (after all, this is a freaking unpaid hobby)
  • Is the data-analysis-to-name-calling ratio fairly high
  • Are they willing to step out of team politics and question their own team from time to time
  • Do they have interesting perspectives on individual liberty.  I can plow through Marxist economic posts on progressive sites if from time to time they have a useful perspective on, say, indefinite detentions or gay marriage.  I can plow through some social Conservatism if they have useful posts on economics and fiscal policy.

This post from Nick Gillespie is sort of relevent, in which he talks about CPAC and social conservatives.  One line that struck me

A person’s choice of sexual partner in no way means he or she can’t be in favor of less spending on farm subsidies.

If I weeded out every blog that held some sort of view with which I disagree (or might even call “unreasonable”) I would be down to about 3 blogs in my reader.