Posts tagged ‘Italy’

Keynesians Have Shot Their Only Bolt -- How Will They Spend Their Way Through The Next Crisis?

Governments have spent so much, to so little effect, to try to stimulate the current economy, I wonder where they will find the resources to spend more the next time?  Because you can be sure that despite the fact that we are likely near the top of a weak cycle, no one is paying back what was spent in the last recession or proposing to reduce central bank balance sheets.

This is a couple of years old, but tells the story pretty well:

The financial crisis that began in late 2007, with its mix of liquidity crunch, decreased tax revenues, huge economic stimulus programs, recapitalizations of banks and so on and so forth, led to a dramatic increase in the public debt for most advanced economies. Public debt as a percent of GDP in OECD countries as a whole went from hovering around 70% throughout the 1990s to almost 110% in 2012. It is now projected to grow to 112.5% of GDP by 2014, possibly rising even higher in the following years. This trend is visible not only in countries with a history of debt problems - such as Japan, Italy, Belgium and Greece - but also in countries where it was relatively low before the crisis - such as the US, UK, France, Portugal and Ireland.

So over a third of the debt that has been built up in all of history by Western nations was added in just a few years from 2007-2012.  At the same time, the central banks of these countries were adding to their balance sheets like crazy, essentially printing money in addition to this deficit spending.  In the US, the Fed's balance sheet as a percent of GDP hovered around 6% until the second half of 2008.   That had tripled to over 18% in 2012 (source).  At the same time, European central bank assets grew from about 7% to over 16% of GDP.

James Taranto has a regular feature named after a reporter named Fox Butterfield.  The feature takes statements such as "Despite Mary getting a PhD in Peruvian gender studies from Harvard, she has struggled to find a job" and argues that the "despite" should be replaced by "because".

This is certainly true of the statement that "despite record stimulus and Fed balance sheet expansion, the economy has remained sluggish".  That "despite" should be "because of".  The government continues to distort the allocation of capital and wonders why investment is sluggish and tends towards bubbles in certain assets.  Japan has stimulated for 25 years to absurd levels of debt and has gotten 25 years of sluggishness in return.

All this reminds me of a story in one of my favorite business books, "Barbarians at the Gate."  Back in the day, tobacco companies had a practice of jamming inventory into the channel just ahead of the semi-annual price increase.   They called this "loading."  The channel liked it because they got cheap product to sell at the new higher prices.  The tobacco companies liked it because it boosted quarterly revenues at the end of the quarter.  But that boost only happens once.  To show growth the next quarter, one must load even more.  Over time, they were jamming huge amounts of inventory into the channel.  I have never been a smoker, but apparently freshness is an issue with cigarettes and they can go stale.  Eventually, the company was loading so much their sales started to drop because everyone was buying stale cigarettes.

In find this a powerful metaphor for government interventions in the economy today.

Postscript:  I will give another example.  In Arizona, we are on a July-June fiscal year.  Years ago, some government yahoo had the bright idea to close a budget hole by passing a law that all businesses had to pre-pay their estimate of sales taxes due in July a month earlier in June.  For that one glorious year, politicians had 13 months of revenue to spend rather than 12.

But to set things aright the next year, they would have to live with just 11 months of revenue.  No way they were going to do that!  So they did the pull-forward thing again to get a full 12 months.  And they have done it every year since.  It has become an institution.  All this costs a ton of money to process, as the state must essentially process a 13th return each year, presumably paying overtime and temp costs to do it.  All for the benefit of one year where they got the use of one month of revenue early, we have been stuck with higher state operating costs forever.

Congrats Greece! You are Slightly More Free Than Bangladesh, Burundi, And Yemen

The Heritage Foundation ranks Greece #130 on its economic freedom list, which puts it in the "mostly unfree" category.   Of course, these rankings depend a lot on the categories and the weighting, but the story here is still telling.  The next worst European country I can find is Slovenia at #88 and the first EU country I see is Italy at #80, not great but a good fifty spots higher.

Which begs the question, asked by Megan McArdle today, of why Europe wants Greece anyway.  In terms of political-economy, it had little in common with the rest of the continent.  Everyone assumes the EU is trying to prevent a domino effect, with the other PIGS nations defecting from the Euro, but I think the Greek capitulation this weekend shows how unlikely this is -- it is clear Greece will do absolutely anything to stay in the Euro, and so it is reasonable to assume Portugal, Spain, and Italy face the same incentives and are thus not ready to leave the Euro on a whim just because Greece does.

Some More Thoughts on Greece -- When European Charity Runs Out, All That is Left is Inflation

People keep talking about reducing Greek debt to a sustainable level, but part of the problem is that there is not such level.  Even at zero.  The problem is that Greece is running a government deficit even before any debt service, so if creditors were to waive all of its debt, it would still need to be borrowing new money tomorrow.  Debt forgiveness is not enough -- what the Greeks need is for Europe to write off all its debt, and then (having lost all their money on the old debt) start lending new money immediately.  Note also that any bailout agreement reached this month will just put everyone back in the exact same place a few months from now.

This situation cannot be expected to change any time soon, for a variety of reasons from demographics (Greece has the oldest population in Europe, and a relatively rich pension system) to ideology (the current pseudo-Marxist government will never implement the reforms needed to turn the economy around, even if they promise to do so under duress).

With structural solutions unlikely, Greece has only the options of charity and inflation. Greece still seems to be hoping for charity, which they make harder by spewing derision at the same folks whom they are begging for alms.  Europe, certainly Germany, is in no mood to be charitable any longer, but may still do so depending on their calculation about which action -- bailout or exit -- has the worse long-term consequences for keeping Portugal, Spain, and Italy both in the Euro and continuing to pay their debts.

Lacking charity, the only thing left is inflation.  Some folks think I am advocating that option.  I am not.  The best possible hope for Greece is to slash its economic regulation, privatize business, and cut back on the public sector -- but that is not going to happen with the current government.  Or maybe any government.

I say inflation is the only option because that is what balances the budget and "solves" debt problems when politicians are unable or unwilling to make any hard choices.  It is sort of the default.  If they can't balance the budget or figure out how to pay off debt, then inflation does it for them by reducing the value of pensions and outstanding debts**.  This is what will happen with a Grexit -- a massive bout of devaluation and inflation what will greatly reduce the value of any IOU, whether it be a pension or a bank deposit.

Eventually, the one good thing that comes from inflation and devaluation is that the country becomes really cheap to outsiders.  Tourists will flock in and olive oil will sell well internationally as the new drachma loses its value, creating value for people holding stronger currencies and potentially forming the basis for some sort of economic revival.  My wife and I decided a few months back to postpone the Greek vacation we wanted this year -- too much turmoil is still possible -- and wait for it to be a bargain in 2016 or 2017.

 

**Postscript:  This is exactly why the Euro is both immensely seductive and a dangerous trap for countries like Greece.  Seductive, because it could pursue any sort of destructive banana republic fiscal policy it wished and still have a strong currency.  A trap because it can no longer print money and inflate away its debt problems.

What is Normal?

I titled my very first climate video "What is Normal," alluding to the fact that climate doomsayers argue that we have shifted aspects of the climate (temperature, hurricanes, etc.) from "normal" without us even having enough historical perspective to say what "normal" is.

A more sophisticated way to restate this same point would be to say that natural phenomenon tend to show various periodicities, and without observing nature through the whole of these cycles, it is easy to mistake short term cyclical variations for long-term trends.

A paper in the journal Water Resources Research makes just this point using over 200 years of precipitation data:

We analyze long-term fluctuations of rainfall extremes in 268 years of daily observations (Padova, Italy, 1725-2006), to our knowledge the longest existing instrumental time series of its kind. We identify multidecadal oscillations in extremes estimated by fitting the GEV distribution, with approximate periodicities of about 17-21 years, 30-38 years, 49-68 years, 85-94 years, and 145-172 years. The amplitudes of these oscillations far exceed the changes associated with the observed trend in intensity. This finding implies that, even if climatic trends are absent or negligible, rainfall and its extremes exhibit an apparent non-stationarity if analyzed over time intervals shorter than the longest periodicity in the data (about 170 years for the case analyzed here). These results suggest that, because long-term periodicities may likely be present elsewhere, in the absence of observational time series with length comparable to such periodicities (possibly exceeding one century), past observations cannot be considered to be representative of future extremes. We also find that observed fluctuations in extreme events in Padova are linked to the North Atlantic Oscillation: increases in the NAO Index are on average associated with an intensification of daily extreme rainfall events. This link with the NAO global pattern is highly suggestive of implications of general relevance: long-term fluctuations in rainfall extremes connected with large-scale oscillating atmospheric patterns are likely to be widely present, and undermine the very basic idea of using a single stationary distribution to infer future extremes from past observations.

Trying to work with data series that are too short is simply a fact of life -- everyone in climate would love a 1000-year detailed data set, but we don't have it.  We use what we have, but it is important to understand the limitations.  There is less excuse for the media that likes to use single data points, e.g. one storm, to "prove" long term climate trends.

A good example of why this is relevant is the global temperature trend.  This chart is a year or so old and has not been updated in that time, but it shows the global temperature trend using the most popular surface temperature data set.  The global warming movement really got fired up around 1998, at the end of the twenty year temperature trend circled in red.

click to enlarge

 

They then took the trends from these 20 years and extrapolated them into the future:

click to enlarge

But what if that 20 years was merely the upward leg of a 40-60 year cyclic variation?  Ignoring the cyclic functions would cause one to overestimate the long term trend.  This is exactly what climate models do, ignoring important cyclic functions like the AMO and PDO.

In fact, you can get a very good fit with actual temperature by modeling them as three functions:  A 63-year sine wave, a 0.4C per century long-term linear trend  (e.g. recovery from the little ice age) and a new trend starting in 1945 of an additional 0.35C, possibly from manmade CO2.Slide52

In this case, a long-term trend still appears to exist but it is exaggerated by only trying to measure it in the upward part of the cycle (e.g. from 1978-1998).

 

You Know It Is A Small World When...

My son is taking some kind of politics course in Rome (Italy) and the discussion in class yesterday was on Joe Arpaio and immigration.

When Regulation Makes Things Worse -- Banking Edition

One of the factors in the financial crisis of 2007-2009 that is mentioned too infrequently is the role of banking capital sufficiency standards and exactly how they were written.   Folks have said that capital requirements were somehow deregulated or reduced.  But in fact the intention had been to tighten them with the Basil II standards and US equivalents.  The problem was not some notional deregulation, but in exactly how the regulation was written.

In effect, capital sufficiency standards declared that mortgage-backed securities and government bonds were "risk-free" in the sense that they were counted 100% of their book value in assessing capital sufficiency.  Most other sorts of financial instruments and assets had to be discounted in making these calculations.  This created a land rush by banks for mortgage-backed securities, since they tended to have better returns than government bonds and still counted as 100% safe.

Without the regulation, one might imagine  banks to have a risk-reward tradeoff in a portfolio of more and less risky assets.  But the capital standards created a new decision rule:  find the highest returning assets that could still count for 100%.  They also helped create what in biology we might call a mono-culture.  One might expect banks to have varied investment choices and favorites, such that a problem in one class of asset would affect some but not all banks.  Regulations helped create a mono-culture where all banks had essentially the same portfolio stuffed with the same one or two types of assets.  When just one class of asset sank, the whole industry went into the tank,

Well, we found out that mortgage-backed securities were not in fact risk-free, and many banks and other financial institutions found they had a huge hole blown in their capital.  So, not surprisingly, banks then rushed into government bonds as the last "risk-free" investment that counted 100% towards their capital sufficiency.  But again the standard was flawed, since every government bond, whether from Crete or the US, were considered risk-free.  So banks rushed into bonds of some of the more marginal countries, again since these paid a higher return than the bigger country bonds.  And yet again we got a disaster, as Greek bonds imploded and the value of many other countries' bonds (Spain, Portugal, Italy) were questioned.

So now banking regulators may finally be coming to the conclusion that a) there is no such thing as a risk free asset and b) it is impossible to give a blanket risk grade to an entire class of assets.  Regulators are pushing to discount at least some government securities in capital calculations.

This will be a most interesting discussion, and I doubt that these rules will ever pass.  Why?  Because the governments involved have a conflict of interest here.  No government is going to quietly accept a designation that its bonds are risky while its neighbor's are healthy.  In addition, many governments (Spain is a good example) absolutely rely on their country's banks as the main buyer of their bonds.  Without Spanish bank buying, the Spanish government would be in a world of hurt placing its debt.  There is no way it can countenance rules that might in any way shift bank asset purchases away from its government bonds.

Settled Science

I mostly ignore, and tend to be skeptical of, most pronouncements on foods that supposedly kill us and foods that are supposedly superfoods.  I have a solid love of meat and have never let the fear of saturated fat stop me from enjoying a good steak from time to time.

I had heard that a lot of the "settled science" on saturated fat was iffy but I had no idea it was this bad.

Our distrust of saturated fat can be traced back to the 1950s, to a man named Ancel Benjamin Keys, a scientist at the University of Minnesota. Dr. Keys was formidably persuasive and, through sheer force of will, rose to the top of the nutrition world...

As the director of the largest nutrition study to date, Dr. Keys was in an excellent position to promote his idea. The "Seven Countries" study that he conducted on nearly 13,000 men in the U.S., Japan and Europe ostensibly demonstrated that heart disease wasn't the inevitable result of aging but could be linked to poor nutrition.

Critics have pointed out that Dr. Keys violated several basic scientific norms in his study. For one, he didn't choose countries randomly but instead selected only those likely to prove his beliefs, including Yugoslavia, Finland and Italy. Excluded were France, land of the famously healthy omelet eater, as well as other countries where people consumed a lot of fat yet didn't suffer from high rates of heart disease, such as Switzerland, Sweden and West Germany. The study's star subjects—upon whom much of our current understanding of the Mediterranean diet is based—were peasants from Crete, islanders who tilled their fields well into old age and who appeared to eat very little meat or cheese.

As it turns out, Dr. Keys visited Crete during an unrepresentative period of extreme hardship after World War II. Furthermore, he made the mistake of measuring the islanders' diet partly during Lent, when they were forgoing meat and cheese. Dr. Keys therefore undercounted their consumption of saturated fat. Also, due to problems with the surveys, he ended up relying on data from just a few dozen men—far from the representative sample of 655 that he had initially selected. These flaws weren't revealed until much later, in a 2002 paper by scientists investigating the work on Crete—but by then, the misimpression left by his erroneous data had become international dogma.

In 1961, Dr. Keys sealed saturated fat's fate by landing a position on the nutrition committee of the American Heart Association, whose dietary guidelines are considered the gold standard. Although the committee had originally been skeptical of his hypothesis, it issued, in that year, the country's first-ever guidelines targeting saturated fats. The U.S. Department of Agriculture followed in 1980.

Don't these guys know this is settled science?  These saturated fat skeptics must be in the pay of big cattle.

The cherry-picking and small sample sizes are unfortunately a staple of science, but I particularly laughed at the practice of assessing meat consumption during Lent.

On Language Courses

Last time we were in Italy, my wife and I vowed that we would try to learn some Italian before we return (she has some high school French and I have a fair amount of Spanish).   Well, we never did much about it.  I will confess that despite being often skeptical of the paradox of choice, it may actually explain my lack of action.  I could not make up my mind between the various courses.

Then along came my son, who has decided with his roommate that they want to do a semester abroad in Italy next year.  I am not sure why he chose Italy -- I can only assume it had something to do with my euphoric descriptions of finding myself in Milan on Vogue fashion night and being surrounded by Italian models.  You know that language course ad with the guy picking up the Italian course so he can have his one chance at the Italian supermodel?  It's a funny ad, but I fear it may actually hit kind of close to home in my household.

Anyway, my son pushed me over the top to buy a course.  The conflicting online reviews can leave your head spinning, but the general conclusions I came to were:

  • Rosetta Stone is all marketing, but not the best course
  • Pimsleur got the most positive ratings.

So I went with the Pimsleur course.  It is PC-based, which fits how my family works.  It allows four installations, so each family member got one.  And it allows its lessons to be downloaded to mp3 files so you can listen in the car or on your iPod (though you lose out on the other parts of the lesson which are non-audio).

So far, 20 days into the thing, I have been happy.  I have never thought of myself as good at languages but I have decided to trust the process.  So far, I feel like I am learning and retaining a lot.  My son reports that he thinks it is better than Rosetta Stone, which his roommate is using.

The weird part for me, who learned Spanish from a grammar nazi, is to work with verbs without first learning all the conjugation rules.   In fact, the course seems to work this way -- you learn examples and phrases first, then over time go back and learn the grammar behind what you are doing.  It seems to work, for a few reasons.  One is that a lot of the verbs you need early on to say basic things (is, go, like) have non-standard conjugations anyway, so memorizing them is what you would have had to do with any approach.  A second reason is that it is a hell of a lot more fun to say useful things than to spend what I remember to be years farting around with conjugation and use rules for the subjunctive.  After all, I am not trying to write an academic paper in Italian, I am trying to enjoy my tourist experience.  The third reason this is working for me is that I do remember a lot of my old Spanish verb conjugations, and it turns out Italian conjugates (at least in the present tense) very similarly to Spanish.

Postscript:  To the early joke about learning Italian to meet women, I will say we were all laughing through about the first 7 lessons of Pimsleur.  If you had designed a course solely to pick up people of the opposite sex, I am not sure one bit of the first few lessons would have been different.  Seriously, we were repeating phases like "do you want to have a drink at your place or mine?"

A Short Rant on Over-Saturated Photography

I was at a couple of art shows during my vacation, and saw a lot of photography.  A staple of photography are the shots of Italian allies and colorful sea villages.  I have one on my wall that I shot myself, the classic view you have seen a million times of Vernazza, Italy.  My wife observed that these photos at the shows looked different than mine (she said "better").

The reason was quickly apparent, and I am seeing this more and more in the Photoshop world -- all the artists have pumped the color saturation way up.  I had to do this a bit, because the colors desaturate some when they get printed on canvas.  But these canvases friggin glowed.  I see the same thing in nature photography.  Is this an improvement?  I don't know, but I am a bit skeptical.  It reminds me a lot of how TV's are sold.  TV pictures tend to be skewed to over-bright and over-vivid colors because those look better under the fluorescent lights of the sales floor.  TV's also tend to have their colors tuned to the very cool (blue) color temperatures for the same reason.  None of this looks good in a darkened room watching a film-based movie.  Fortunately, modern TV's have better electronics menus and it is easy to reverse these problems, and my guess is there is less of this anyway now that many TV's are sold online based on reviews rather than comparison shopping in a store.

I am left to wonder though how this new super-vivid, over saturated photography would look in a home, and how it wears with years of viewing.  Am I being a dinosaur resisting a technological improvement or is there a real problem here?

European Auster-Yeti

There are people who will swear to this day that, despite all evidence to the contrary, Bigfoot exists and they have seen it.  Paul Krugman similarly is just sure he has seen European austerity.  The rest of us are left scratching our heads for the evidence -- he doesn't even have a blurry photo or footprint.  Just tales from a friend of a friend, who is not only sure there has been austerity, but that it caused an old lady to dry her cat in a microwave and that if you swim 20 minutes after eating you will get cramps.

The official Keynesian story is that the PIIGS of Europe (Portugal, Italy, Ireland, Greece and Spain) have been devastated by cutbacks in public spending. Austerity has made things worse rather than better – clear proof that Keynesian stimulus is the answer. Keynesians claim the lack of stimulus (of course paid for by someone else) has spawned costly recessions which threaten to spread.  In other words, watch out Germany and Scandinavia: If you don’t pony up, you’ll be next.

Erber finds fault with this Keynesian narrative. The official figures show that PIIGS governments embarked on massive spending sprees between 2000 and 2008. During this period, their combined general government expenditures rose from 775 billion Euros to 1.3 trillion – a 75 percent increase. Ireland had the largest percentage increase (130 percent), and Italy the smallest (40 percent). These spending binges gave public sector workers generous salaries and benefits, paid for bridges to nowhere, and financed a gold-plated transfer state. What the state gave has proven hard to take away as the riots in Southern Europe show.

Then in 2008, the financial crisis hit. No one wanted to lend to the insolvent PIIGS, and, according to the Keynesian narrative, the PIIGS were forced into extreme austerity by their miserly neighbors to the north. Instead of the stimulus they desperately needed, the PIIGS economies were wrecked by austerity.

Not so according to the official European statistics. Between the onset of the crisis in 2008 and 2011, PIIGS government spending increased by six percent from an already high plateau.  Eurostat’sprojections (which make the unlikely assumption that the PIIGS will honor the fiscal discipline promised their creditors) still show the PIIGS spending more in 2014 than at the end of their spending binge in 2008.

As  Erber wryly notes: “Austerity is everywhere but in the statistics.”

Italy Jails Scientists for Failing to Predict Earthquake

Unbelievable.  We will be burning witches next.

Six Italian scientists and an ex-government official have been sentenced to six years in prison over the 2009 deadly earthquake in L'Aquila.

A regional court found them guilty of multiple manslaughter.

Prosecutors said the defendants gave a falsely reassuring statement before the quake, while the defence maintained there was no way to predict major quakes.

The 6.3 magnitude quake devastated the city and killed 309 people.

It took Judge Marco Billi slightly more than four hours to reach the verdict in the trial, which had begun in September 2011.

The seven - all members of the National Commission for the Forecast and Prevention of Major Risks - were accused of having provided "inexact, incomplete and contradictory" information about the danger of the tremors felt ahead of 6 April 2009 quake, Italian media report.

This is what I call the layman's "CSI" view of science, which assumes that certainty is possible in analyzing and forecasting complex systems.  I am not going to blame the victim here, but I will note that scientists have to some extent made this situation far worse by insisting that they have levels of certainty they do not have, particularly in highly charged political debates (e.g. economics and climate).

Harvard physicist Luboš Motl argues it will give scientists roughly the same incentives doctors have in areas with lots of malpractice suits:

The verdict de facto lionizes crackpots who were screaming that there had to be a large earthquake and they just happened to be right in that case – while isomorphic and sometimes the very same crackpots are wrong in 99.9% of other cases in which they cry wolf – and it condemns the scientific method. They are wrong in 99.9% of cases because their predictive framework has nothing to do with science – it's all about a psychopathological paranoia – but even a broken clock is right twice a day.

The lesson for the scientists is clear: If you are a scientist who is qualified in a discipline that has implications for the safety of people, you must always recommend precautionary measures to be taken even if you conclude that the probability that something bad will happen is tiny. Italy may expect much more hysteria in various similar science-related situations than it has had so far because a court has declared a war on everyone who is honest and balanced.

Can you imagine that this sick logic would be applied e.g. to surgeons? Surgeons could spend 6 years in prison after every death of a patient whom they or others were optimistic about. It's just insane. People sometimes die, natural catastrophes sometimes occur, and it's just impossible to identify a human culprit in most cases. Only if a professional makes a mistake in which he or she has demonstrably violated some established and functional rules to reduce the risk – and whether or not this was the case may only be determined by another expert – he or she could be considered co-responsible for the deaths.

Scam Alert

Most folks, by now, know to be suspicious of this kind of thing.  My wife is looking at buying a high-end sewing machine (e.g. a Bernina).  Apparently, these machines along with high-end bikes are a hotbed for scam artists.  The story is almost always the same - I had to leave the country suddenly, and am selling my machine which I left with an escrow company in the US.

Example 1, person supposedly in Italy

Example 2, person supposedly in Spain

Both suggested escrow companies, but in both cases the escrow companies smelled bad.  Here was one example link the "seller" sent us.  This is unbelievably sketchy, merely a forum web post rather than an actual web site.  Google searches quickly demolished the credibility of the escrow suggestions, and when we suggested an escrow company we knew to be legit, emails from the sellers ended.

California Schadenfreude

From Zero Hedge:

The hoped-for April spike in personal income tax revenues for the State of California fell once again below theoveroptimistic assumptions used to get the budget to “balance.” Instead of the $9.4 billion that the government had counted on collecting in April, it only collected $7.4 billion, according to the nonpartisan Legislative Analyst's Office. A 21% shortfall! In addition, corporate taxes were $450 million below forecast. After months of “disappointing” tax revenues, the total shortfall in income taxes now amounts to $3.5 billion for fiscal 2012 ending June 30.

The budget, supposedly balanced when it was passed last summer, had been spewing red ink from day one. Tax revenues were one problem. Expenditures were the other. The most recent re-revisions pegged the deficit at $9.2 billion. That was a few weeks ago. Now it’s going to be re-re-revised to nearly $12 billion.

Just how bankrupt does a budgeting process have to be for a budget that is supposedly in balance turn out to be $12 billion overdrawn barely 9 months later?  I have a California state tax refund on my desk -- better cash it quick or else its going to be replaced by scrip again.

The same article has this interesting tidbit about California high speed rail:

The CHSRA plan assumes that it would cost 10 cents per passenger mile (the average cost of carrying one passenger one mile at a given load factor) when international high-speed rail systems averaged 43 cents per mile, according to a report that just surfaced. The low-cost leader was Italy with 34 cents per mile; at the upper end were Germany and Japan with 50 cents per mile; Amtrak’s Acela Express, though not truly high speed, was in the middle with 44 cents per mile. And in California, it’s going to be 10 cents per mile?

The CHSRA correctly assumes that train tickets compete with air fares and the cost of driving, which, despite our incessant complaints, are lower in California than overseas. Thus, the US market requires cheaper tickets. And to make the project appear profitable, and thus more digestible for the taxpayer, the CHSRA lowered its projected operating costs to less than a quarter of the international average.

But if actual operating costs are 43 cents per mile and not 10 cents per mile, annual subsidies of $2 billion to $3 billion would be required just to keep the trains running, according to the report. Yet, AB3034, the California High-Speed Train Bond Act, makes these subsidies illegal. A conundrum that the Legislature, the Administration, and the CHSRA have so far successfully ignored.

Triumphalism Indeed

For years I have argued that most high-speed rail makes no sense economically -- that in fact it is an example of the political impulse towards triumphalism.  Government leaders through the ages have wanted to use other people's money and sweat to build vast monuments to themselves that would last through the ages.

I meant that as ridicule, and assumed most readers would recognize it as such, but apparently not the LA Times, which editorialized in favor of California high speed rail in part because its just like the pyramids

Worthwhile things seldom come without cost or sacrifice. That was as true in ancient times as it is now; pharaoh Sneferu, builder of Egypt's first pyramids, had to try three times before he got it right, with the first two either collapsing under their own weight or leaning precipitously. But who remembers that now? Not many people have heard of Sneferu, but his pyramids and those of his successors are wonders of the world.

As a reminder, this is what I wrote at the article linked above in Forbes

What is it about intellectuals that seem to, generation after generation, fall in love with totalitarian regimes because of their grand and triumphal projects?  Whether it was the trains running on time in Italy, or the Moscow subways, or now high-speed rail lines in China, western dupes constantly fall for the lure of the great pyramid without seeing the diversion of resources and loss of liberty that went into building it.

The Ultimate End of Social-Democratic Labor Policy

When a country

  • Increases the minimum wage, and therefore the minimum skill / productivity needed for a job
  • Adds substantially to the costs of labor through required taxes, insurance premiums, pensions, etc
  • Makes employees virtually un-fireable, thus forcing companies to think twice about hiring young, unproven employees they may be saddled with, good or bad, for decades
  • Puts labor policy in the hands of people who already have jobs (ie unions)
  • Shift wealth via social security and medical programs from the young to the old

It gets this

 

The bitterly ironic part is that when these folks hit the streets in mass protests, it will likely be for more of the same that put them there in the first place.

 
Want to argue that such policies are hurting workers rather than helping?  Good luck, at least in Italy

Pietro Ichino, a professor of labor law at the University of Milan and a senator in the Italian legislature, is known as the author of several “neoliberal” books and studies recommending that the Italian government relax its extraordinarily stringent regulation of employers’ hiring and firing decisions. As Bloomberg Business Week reports, that means that Prof. Ichino must fear for his life: “For the past 10 years, the academic and parliamentarian has lived under armed escort, traveling exclusively by armored car, and almost never without the company of two plainclothes policemen. The protection is provided by the Italian government, which has reason to believe that people want to murder Ichino for his views.”

Memo to US:  Don't get cocky, you are going down the same path

 Update:  Interesting and sort of related from Megan McArdle

An apparent paradox that frequently puzzles journalists is that Europeans work fewer hours than workers in the United States, while in some countries, hourly productivity appears to be the same, or even higher, than that of American workers.
This is not actually a paradox at all.  Much of the decline in European hours worked per-capita came in the form of unemployment.  Rigid labor laws which make it hard to fire (and thus, risky to hire) shut less productive workers out of the market, particularly the young, and those who had been displaced due to disruptive industry change.  So does anything that raises the cost of labor, like, er, loads of mandatory vacation and leave.  When you exclude your least productive workers from the labor force, your measured hourly productivity will be higher, particularly if you use metrics like GDP per hours worked.

Flash: European Finances Still Screwed Up

As I predicted, the various highly touted European debt and currency interventions last month did squat.  This is no surprise.  The basic plan currently is to have the ECB give essentially 0% loans to banks with the implied provision that they use the money to buy sovereign debt.  Eventually there are provisions for austerity, but I wrote that I don't think it's possible these will be effective.   It's a bit unclear where this magic money of the ECB is coming from - either they are printing money (which they refuse to own up to because the Germans fear money printing even more than Soviet tanks in the Fulda Gap) or there is some kind of leverage circle-jerk game going where the ECB is effectively leveraging deposits and a few scraps of funding to the moon.

At this point, short of some fiscal austerity which simply is not going to happen, I can't see how the answer is anything but printing and devaluation.  Either the ECB prints, spreading the cost of inflation to all counties on the Euro, or Greece/Spain/Italy exit the Euro and then print for themselves.

The exercise last month, as well as the months before that, are essentially mass hypnosis spectacles, engineered to try to get the markets to forget the underlying fundamentals.  And the amazing part is it sort of works, from two days to two weeks.  It reminds me of nothing so much as the final chapters of Atlas Shrugged where officials do crazy stuff to put off the reckoning even one more day.

Disclosure:  I have never, ever been successful at market timing investments or playing individual stocks, so I generally don't.  But the last few months I have had fun shorting European banks and financial assets on the happy-hypnosis news days and covering once everyone wakes up.  About the only time in my life I have made actual trading profits.

Thought problem:  I wish I understood the incentives facing European banks.  It seems like right now to be almost a reverse cartel, where the cartel holds tightly because there is a large punishment for cheating.  Specifically, any large bank that jumps off the merry-go-round described above likely starts the whole thing collapsing and does in its own balance sheet (along with everyone else's).  The problem is that every day they hang on, the stakes get higher and their balance sheets get stuffed with more of this crap.  Ironically, everyone would have been better getting off a year ago and taking the reckoning then, and certainly everyone would be better taking the hit now rather than later, but no one is willing to jump off.  One added element that makes the game interesting is that the first bank to jump off likely earns the ire of the central bankers, perhaps making that bank the one bank that is not bailed out when everything crashes.  It's a little like the bidding game where the highest bidder wins but the two highest bidders have to pay.  Anyone want to equate this with a defined economics game please do so in the comments.

Also From the "This Time We Really, Really Mean It" Files

Apparently European leaders are close to an agreement that countries cannot run budget deficits higher than 3% of GDP.  If you are left to wonder, "hey, didn't they already have that rule before" the answer is yes.  Everyone had to promise a really, really stern oath not to run higher deficits before joining in the Euro group.

Of course, these promises meant nothing as there was no penalty for breaking the promise, and so the EU is proposing a new enforcement mechanism

Governments whose debts exceeded three percent of their GDP would be cited by the European Court of Justice, after which a super-majority of 85 percent of European governments would have to agree to impose some sort of sanction against the offending country.

I am not clear if the 85% is of the whole EU  (which would require a vote of 23 of the 27 members) or of just the Euro zone (which would require 15 of the 17 countries that use the Euro as currency).  Either way, I disagree with Drum and can't see how there is any hope at all here.  I am left with a number of questions

  • What is the likelihood that European countries will adopt this Constitutional provision and precedent for reduced sovereignty?  Don't treaty changes have to be unanimous?
  • Even if ratified, does anyone imagine the penalties will be high?  Imagine Greece today if such penalties exist.  How much are they going to worry about fines when they are already bankrupt?  And what will be the optics of the EU adding new costs to countries that are in financial crisis?  If a country in the future is doing things to endanger the euro from too much debt, the last thing the EU is going to be able to do is add to that country's burdens -- in fact, it is doing the opposite now, sending huge checks to all these countries
  • How are they every going to get the votes when this comes up?  Again, think about today.  Would Italy, Belgium, Spain, Ireland, etc. vote to sanction Greece, when they know they are next?

I just can't see this going anywhere.  And I would be surprised if the folks involved do either.  My guess is that they hope this will settle the bond markets so they can kick the can down the road.  Sure, we will have to deal with this all over again the first, inevitable time a country breaches the 3%, but that is later and right now they will accept a few years, even a few months, of survival.

Over the Cliff, My Fellow Lemmings!

I found this 2009 graph and comment by Paul Krugman (dredged up by Megan McArdle) to be a hilarious call to arms for all his fellow lemmings to follow him over the cliff

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[from November 2009]:  Why, people ask, would I want to compare us to Belgium and Italy? Both countries are a mess!

Um, guys, that's the point. Belgium is politically weak because of the linguistic divide; Italy is politically weak because it's Italy. If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we.

Today I spent time arguing with a group of folks about global warming and the precautionary principle.  The others all argued that a slim chance of a catastrophe justified immediate action.  I argued, of course, that they were understating the cost of the intervention, but that is another story.

Its amazing to me that so many on the Left squawk about the precautionary principle in the case of climate, but are ready to continue running up government spending and deficits despite the fact that the disaster of this approach, given the experience in Europe, is no longer even debatable.  Its simply math.

Our problem will play out differently than in Europe.  Long before interest rates on US securities run up to the 6% or so tipping point, the Fed will be running the printing presses.  Don't believe me, well, they already have been.

Savers beware, our path will be devaluation and inflation.

By the way, the speed with which hyperinflation can take hold is astounding.  Here is the inflation rate in the Weimar Republic.  As with the Fed today, the central bank of the Weimar Republic was buying up government debt with printed currency.  Look how fast the inflation took hold:

(source)  Imagine a quarterly meeting of the Fed in August of '22.  They are probably looking at month-old data, and in July it looks like everything is under control.  Boom, three months later, by the next schedule quarterly meeting, inflation is already out of control.  Krugman would say not to worry about inflation, they will have plenty of time to act.  Coincidently, this is exactly what Italy and France and Spain said about their sovereign debt, but in a flash, the crisis was upon them and so far out of control there is nothing they can do.

Italy Going Down the Drain. So Who Is Next?

via

 

Its amazing how many people can shake their heads in despair at the European debt crisis and then continue urging the US to do exactly the same things that got the Europeans into this mess.

Good News, I Hope

I have to take this with a grain of salt, because it is coming from GE, the current American poster-child for rent-seeking, particularly in attempting to be a magnet for green energy subsidies.   But since the statement can be seen as under-cutting the subsidy argument, I have to take it more seriously:

Solar power may be cheaper than electricity generated by fossil fuels and nuclear reactors within three to five years because of innovations, said Mark M. Little, the global research director for General Electric Co.

“If we can get solar at 15 cents a kilowatt-hour or lower, which I’m hopeful that we will do, you’re going to have a lot of people that are going to want to have solar at home,” Little said yesterday in an interview in Bloomberg’s Washington office.

....GE, based in Fairfield, Connecticut, announced in April that it had boosted the efficiency of thin-film solar panels to a record 12.8 percent....The cost of solar cells, the main component in standard panels, has fallen 21 percent so far this year, and the cost of solar power is now about the same as the rate utilities charge for conventional power in the sunniest parts of California, Italy and Turkey.

I am all for that.  I have always had faith that solar would make sense someday, and that we would be ranking out cheap solar conversion surfaces like carpet out of Dalton, Georgia, but every time I have priced it to date on my house, even with huge government subsidies, it has not made sense.    In Europe, it requires 50-60 cent feed in tariffs (basically a subsidy in the form of above-market electricity prices paid by the utility for solar-sourced electricity) to get solar capacity installed, so 15-cents would be great and is approaching the cost of electricity in some high cost areas.

Here in Phoenix, FirstSolar does a ton of thin film.  I have always had mixed feelings about FirstSolar.  On the one hand, they live off subsidies and would basically not be in business if it were not for huge European subsidies of various forms.  On the other, though, they have been one of the few solar companies that actively have talked for years of a development path to a cost position that does not require subsidies.

You Thought I Was Joking About Dictator Retirement Island

Via the Guardian

Efforts appear to be under way to offer Muammar Gaddafi a way of escape from Libya, with Italy saying it was trying to organise an African haven for him, and the US signalling it would not try to stop the dictator from fleeing....

A senior American official signalled that a solution in which Gaddafi flees to a country beyond the reach of the international criminal court (ICC), which is investigating war crimes charges against him, would be acceptable to Washington, pointing out that Barack Obama had repeatedly called on Gaddafi to leave.

Seen and Unseen

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."

Italian Rail

After having my car hit 3 times in one week driving in Italy, I swore this time I would do it without the car.  So I tried rail.  I had almost as much trouble with rail as with driving.

First, never, ever, ever buy a Eurail pass for Italy.  It is way too expensive compared to the train fares.  Its a good deal in Switzerland, so I bought one for Italy before doing the research.  It became a running joke in Italy - every single Italian rail employee we had to show the pass to told us we should not have bought it.  So not only did I pay too much, but I got reminded of it twice a day.

Second, all but the smallest and shabbiest trains require advanced reservations, but these reservations are nearly impossible to make if you are not Italian, because the rail site has some kind of weird block on most all American credit cards (much about this around the Internet).  This means that I can't just have get-on-the train and go flexibility, I have to pick a train I want to use in the future and then stand in line at a rail station to purchase the ticket or reservation.    Lines do not move fast in Italian rail stations.

But the classic story comes from my minor infraction of rail policy that ended up costing me money.  I don't know if this is just government or if it they have a lot of problem with cheating.  Apparently, each day you are supposed to fill that days date in the next slot on your Eurail pass before you get on the train.  I forgot to on one trip, so the conductor insisted I owed a 50 euro fine.  Seriously.  I said, let me add the date right now, but she said no.  They had a couple guys lined up to throw us off in the next random Italian town if we did not hand over the money  (reminds me of this story in England).

I will say, once I calmed down, that in retrospect the lecture from the Italian state employee on why it is important to follow every single rule and to trust our betters in government that all the rules are for a good reason was almost worth the 50-euro price of admission.

It took me a while to figure out what they were afraid of -- I suppose if you did not write the date in advance, and the conductor never came by, you could get an extra day of travel.  Of course, I had paid extra money for a reservation on that particular train, so it was unlikely I was gaming the system (another reason not to get a Eurail pass in Italy, you still have to pay extra for nearly every train).  And it seemed odd that on a 2-hour train ride they thought it a real risk no conductor would come by, though on the very next day we took a 2-hour ride and there was no conductor, so I suppose it is possible.

In that latter case we were in a car where the AC failed on a hot day, and of course it was the only train we rode on the whole trip where the windows did not open.  No conductor took my ticket, but one did stand at the end of the car the whole trip turning away anyone who wanted to get an open seat in the next car -- after all, we were assigned a specific seat and sitting in another would be against the rules.

Our Arizona Governor is Truly Lame

Governor Jan Brewer of Arizona has been insisting for MONTHS that immigrants have been beheading people in the desert.  I wrote about it here,  shande doubled down on the claim in way back in June.   She repeated the claim on a televised debate the other day, and got all the national attention on this idiotic claim that she deserves.  She has reiterated this close-to-outright-racist-paranoid-fantasy any number of times through the whole summer.  So it is grossly disingenuous for her suddenly to act like it was a one-time mis-statement:

Gov. Jan Brewer rose to national fame defending the state's immigration law and warning of rising violence along the U.S.-Mexico border, including a claim that headless bodies were turning up in the Arizona desert.

But the claim has come back to haunt her after her stammering debate performance in which she failed to back it up and ignored repeated questions on the issue from a scrum of reporters.

Brewer has spent the time since backtracking and trying to repair the damage done from her cringe-worthy debate against underdog challenger Terry Goddard.

"That was an error, if I said that," the Republican told the Associated Press on Friday. "I misspoke, but you know, let me be clear, I am concerned about the border region because it continues to be reported in Mexico that there's a lot of violence going on and we don't want that going into Arizona."

That is as craven and mendacious a response as I have ever heard from a politician, and that is saying a lot (it had to be, to bet me worked up enough to blog from a seaside resort in Italy).

More Italy

After several more days and locations (Florence, Cinqueterre via Portovenere) I am left with one question:  Why is it that even supposedly elegant European hotels charging many hundreds of Euros a night for a room are oblivious to the quality of their beds?  I am getting tired of paying tons of cash for rooms with bed linens whose quality is measured in "grit" rather than "threadcount."  The beds are uncomfortable and the pillows are awful.   The blankets are sick polyester jokes that Motel 6 would be embarrassed to offer.  For the price of just one night's room rent I could go to IKEA and outfit the rooms better.  It's not like I am some spoiled princess-and-the-pea sleeper -- I stay in a lot of cheap hotels and I tent camp, for god sakes.  My camping equipment is more comfortable than these beds.  I routinely stay in $70 hotels in the US and never get beds or linens this bad.  Do they not care, or is this what Europeans all sleep on at home?

OK, rant over.  Florence was as great as it always is.  There is way too much stuff to do there ever to get bored, all within just a few minutes walking.   Unlike past visits, we entirely skipped the Uffizi and hit a lot of historic buildings we had missed before (e.g. Medici Palace).  I enjoyed it but if you are on your first visit, the Uffizi is a must.  Also saw a bit of above-average engineering, like this:

Seriously, I wonder if I could have -- without a)  any kind of materials strength data base; b) no structural steel or modern concrete; c) no CAD facility -- designed and built such a thing in the 1400s, even with the Pantheon as a go-by to copy.  Really remarkable.

In Florence, there is a famous bridge called the Ponte Vecchio which is actually covered in buildings:

You can't tell from this picture, but the bridge (open only to pedestrian traffic) is lined with at least 40 jewelry stores.  Seriously, each storefront has bout 6 feet of space, and every one had a window with zillions of gold trinkets.  It got me thinking about the paradox of choice.  It's not hard to buy into the economic theory that too much choice may inhibit purchase while walking along this bridge, though I am told most of these folks do very well (I have never bought into the paradox of choice as social theory -- the one that says people would be happier with fewer choices.  If this were true, we would all be emigrating to North Korea).

Speaking of pedestrian streets, one important takeaway from Italy has been that one should never assume a road is too narrow, even if it is no wider than your pantry door, for a vehicle to come racing through any second.  The other day I was in a really narrow alley I thought was foot-traffic-only when a bus(!) came screaming down the lane like a piston through a cylinder.  Only a well-located doorway got me out of the way, and even then the bus's mirror clipped my arm.

The last few days we have been staying at the port town of Portovenere on the Italian Riviera.

The town itself is attractive with a fair amount to explore for its size.  I experimented some with night photography from my room

I have some other exposures that I want to try with HDR software to try to bring out a bit more of the buildings.   The town was kind of fun on a Saturday night -- in addition to a couple of rowdy weddings, there were also a lot of BIG boats that came in for dinner in the evening.  Very nice (except for my bed).

Portovenere is a convenient gateway to the Cinqueterre, five absurdly picturesque downs laid down in about 1100 AD by Walt Disney to attract American tourists.  You may have not heard their names, but you have likely seen one or all of them the last time you were at an art fair in one of the photo exhibits -- here is one example (though they had the patience to wait for a time of day where the lighting was better, presumably in the early morning).

More than the towns, I enjoyed the walking trail in between, which is an attraction in and of itself.  It winds through wilderness and vineyards along the coast.  All through the vineyards I kept seeing what looked like a guide rail for some sort of gear-driven device.  The rail wound up and down the hills and through the vineyards.  I had assumed that it was some sort of irrigation system where the sprinkler moved along the rail (though I could not figure out how the water supply would work).  Then I found this absolutely awesome piece of steampunk-style tech:

It is hard to tell, but its a little one-person monorail that rides on the rail and pulls a couple of carts behind the "engine."  This is why I could not find any roads or really many trails in the vineyards -- they use these cool things to move about, do maintenance, and bring in the crop presumably.  And the rail does not run on the ground, but 4-5 feet in the air, so one can see over all the vines and brush.  Totally awesome.  And not a seatbelt to be found on it, which made me love it all the more.   I loved it so much, here is another shot head-on (sorry it is overexposed, I don't have the energy to edit it right now).