Category Archives: Economics

Voluntary Obsolescence

Posted on by

Way back in the olden thymes, I was chatting with an acquaintance, who owned a number of small niche publications. Each had five to ten thousand subscribers, who paid $50 per year for the publication. These were monthly hobbyist type things. Printing, postage and content costs ate up most of his revenue, but he was still able to take an upper middle-class salary from the business. He was never going to get rich from it, but he liked the action and it let him turn hobbies into a nice career.

At the time, he was telling me about his plan to move all of his magazines to the web. This was in the 90’s so it was the new thing. Newspapers and magazines were putting up websites hoping to reach a broader audience. He was very excited about it because he saw the cost savings. Printing and postage were his big line items so going digital meant a potential windfall. I remember asking him how he expected to charge people when he was putting his content on-line free of charge. He responded, “Hits. We’ll get more hits and then we can sell advertising.”

At that point I knew he and many others were about to commit suicide. I’ve been inside many banks and none of them ever accepted hits or site traffic as payment. The people rushing to shovel their content on-line simply had no idea why they were rushing to give their product away, but they were sure it was going to be glorious. The result has been the death of newspapers and many magazines. The New York Times, for example, loses money every quarter and only survives because a Mexican billionaire wants access to the American ruling class.

I get that same feeling when people talk about Uber and self-driving cars. From the perspective of an outsider, I see no reason why cities would sanction Uber or any of the other off-the-book taxi services. There’s nothing in it for the municipality. Similarly, why would any of the car companies sign off on robot cars? There’s no advantage for them to do it. Of course, taxi fleets of self-driving cars is about the nuttiest thing imaginable as it just means the death of a number of industries, namely car makers and car insurance firms.

Think about it. Your car sits unused most of the time. You take it to work where it sits all day. Then you take it home where it sits all night. You have a car for convenience, mostly. Pubic transportation,where available, is not good for running errands, going shopping or other tasks. Cabs are fine for some of it, but hailing a cab in the rain sucks compared to walking into the parking garage to get into your car. There’s a reason why rich people have car services and limos. They get the flexibility of their own vehicle with the convenience of a taxi service.

Now imagine that anywhere you are you can order up a Johnny Cab, having it pick you up and take you where you wish, at a low fee. All you do is pull out the phone and order it up and it comes by to haul you to work or take you to the market. It sounds wonderful, especially for old people and alcoholics. The question is, why own a car when you can get the service of a car, without having to own it, store it and maintain it? Hobbyists would still want a sports car or off-road vehicle, but most people have cars for practical purposes only.

Do a little math and you see that you use maybe ten percent of your car’s useful capacity. The hour commute to work and the hour home means two hours out of a day. Throw in some driving on the weekend and 90% of the time your car is sitting idle. Even assuming inefficiency, one care could serve the needs of five people, which means a world of Johnny Cabs is a world with about 80% fewer cars. That means 80% fewer car sales for the car makers. It also means 80% fewer insurance polices, tax stickers and all the other things that are based on people owning cars.

If you are in the car business, the plan should be simple. Buy enough politicians to kill off Uber and the robot car people. For their part, the pols should require little bribing as it is in their interest to kill the robot cars too. Instead, all of the car makers are announcing plans to produce robot cars aimed at the for-hire business. Uber is doing a test run in Pittsburgh with a fleet of driverless cars. Like those newspaper and magazine guys of the 90’s, the transportation industry is fashioning a noose for themselves out the new technology, so they can destroy themselves. Karl Marx must be laughing in Hell right now.

The Tragedy of the Google

Posted on by

In 1833 the Victorian economist William Forster Lloyd published Two Lectures on the Checks to Population, which introduced an idea we later understood as the Tragedy of the Commons. The example used was of a common grazing area and how the interests of the people using this “free” public land would inevitably work at odds with one another in maintaining the public land. Everyone had an incentive to take as much as they could, as quickly as they could, but no one had an incentive to put back.

Today this is best understood in the management of fisheries. You can’t own parcels of the ocean and even if you can assign areas to particular fishermen, the fish don’t pay attention to these boundaries. The fisherman has no incentive to limit his cod harvest because the fish he does not catch will simply swim over to the next guy, who will catch them. In order to maintain the fishery, the state comes in and puts limits on the overall catch and what each fisherman can catch each season.

This fairly well known example is used by certain ideologues to demand socialization of all private property. Environmentalists will claim that the three-toed elephant slug is a common resource so it must be protected by the state. Therefore, anything that impacts the slug, requires permission from the state. That means if you want to mow your lawn or put up a tool shed, you have to file an environmental impact study and spend a bazillion dollars bribing environmental groups. It’s why we can’t build anything of consequence anymore.

Even though the idea has been abused, it is a useful concept when thinking about something like this story in Breitbart. Musicians are quickly seeing their revenue from music sales disappear. Newspapers all over America are near collapse because their content is distributed free on-line. Those that try to charge a fee just see the news given away by someone else, so their efforts to create property lines on-line always fail. Even the pornography industry is being gutted by a flood of free porn.

Now, the music industry has adapted to the fact Google is essentially an open air contraband market. Big shot musicians have teams of lawyers to police this stuff. The small musicians make their money from live shows and selling their music at their events. But, others don’t have this avenue. Photographers, graphic artists and writers just accept that they no longer have property rights to their work. I often see my work posted on other sites and no one from those sites asks my permission. I always give it when asked, but few bother asking.

The big internet operators and their government ignore all of this because they have grown stupendously rich off this racket. Google is essentially operating an open air contraband market with YouTube. Try running a heroin market on your property and see what happens. But, you’re not a billionaire and you can’t afford to buy a government of your own so the rules apply to you. Even banks find they have to report large movements of cash in order to help the government catch drug dealers. Ross Ulbricht is doing life in prison for being the Google of illicit drugs.

When the robot historians look back at the collapse of the West, they may point to the Internet as an institution analogous to slavery in the Roman Republic. Some argue that the flood of slaves in Rome after the victories over Corinth and Carthage altered the economic balance of Roman society. Large farmers could afford to buy up lots of slaves, thus collapsing the market for labor. This also allowed them to crush their smaller competition. The result was the rise of a landed oligarchy at the expense of the small land owners.

The Internet has brought back something that we thought was dead and that is rentier capitalism. This is the economic practice of monopolizing access to any kind of property, and gaining significant amounts of profit without contribution to society. Cable operators are a good example. In my youth, TV was free. It made it’s money from commercials. Today, you pay the monopolist a fee to get access to TV shows, that still run ads. In fact, they run even more ads than when I was a kid. In the case of kid’s shows, the programs are just ads to sell toys.

The other institution is cost shifting. The paint company that dumps its old paint into the river because it is a cheap way to get rid of the waste is shifting some of its costs to the public. Passing laws to prevent it or taxes on the paint maker to pay for the cleanup, is an effort to end the practice of cost shifting. Even today, the smallest mechanical shop complies with environmental rules because the punishments are draconian. These costs show up in the invoice to the customer. When I get my oil changed, I see an entry for oil disposal on the invoice.

The modern Internet giants shift huge chunks of their business cost to the public via all sorts of schemes. The most obvious being the internet providers. In most of the country, technology and/or the law prevents the internet provider from implementing metered service. Everyone pays the same for their internet regardless of usage. That means the guy with three teenagers that spend all day watching YouTube pays the same as the local feminist, who only goes on-line to post pictures of her cats to Facebook.

If the guy with the three kids had to pay for his usage, his bill would be five times that of the local feminist. He would also sharply limit his usage. Google and the other video providers would see their customer base shrink to the point where it may no longer make sense to exist in some cases. My first broadband bill was $12.95 per month. The cheapest in my area is now $69.95 plus a long list of fees and taxes. The service is marginally better, but not five times better. The additional cost is about me subsidizing my neighbors for the profit of the Internet companies.

Similarly, if the suppliers were charged for use of the public roadways, like we tax motorists and trucking companies, they would have to charge vastly more for their product. Instead, those costs end up in your tax bill, because, the government gives tax breaks to the internet providers. If Facebook had to build out a network to supply you their product, the cost would be prohibitive. Instead those costs end up in your cable bill, even if you have no use for Facebook. The internet economy is all about socializing the costs and privatizing the profits.

I’m going long here so let me wrap it up by summarizing a bit. We have created this virtual commons, but we have not come up with a way to manage it like a park or fishery. Further, we have permitted the development of rentiers, who skim from the public good, but contribute very little to it. Worse yet, we have massive cost shifting with the profits going to expand and perpetuate a system that works against the interests of the people. When a firm that made its money from cat videos can dictate terms to the US government, we’re well past the tragedy of the commons and into techno-feudalism.

Dismal Quackery

Posted on by

The other day, I made a crack about the soft sciences, psychology, sociology and so forth, comparing them to astrology and economics. It was in the context of the replication crisis that is roiling fields like psychology. The soft sciences are trying hard to pretend it is problem in all science, but that is not true. Anyway, someone gave me grief for slandering astrology, because the early strides in astronomy and even astrophysics were due to people trying to improve astrology. If you believe in that stuff, precise measuring of the movement of stars and planets is important.

I think most empirically minded people have long ago concluded that psychology is quackery. When I was a kid, talk therapy was the rage. The schools were hiring “counselors” and having kids sit down and talk about their problems. Even as a kid I knew it was nonsense. Talking someone out of being insane or depressed is slightly less nutty than slaughtering a goat and reading the entrails. Imagine if someone claimed they could talk you out of a broken leg or cancer. Quackery seems to stick around much longer than logic says it should.

That is the pattern we are seeing with economics. The colossal errors in the field should have discredited it a long time ago, but economist are still the court magicians of the modern state. This post by Tyler Cowen is a good example of dressing up uninformed opinion with the jargon of economics to make it sound like science. As Steve Sailer pointed out in the comments, economists have yet to offer a plausible explanation for how the post-nationalist world could operate. The only possible answer is that it would be based on force.

Europe is a great example of just how wrong modern economics has been about pretty much everything. The totality of mainstream economics has been cheering the Euro project for decades, even when it was pretty clear that the single currency was a disaster for many of the members. It has all the cyclical defects of hard money and none of the benefits. The open borders part of the project has resulted in a flood of non-Europeans, who have upset the social order, threatening the stability of the Continent.

This is not the first time modern economics has been outlandishly wrong about Europe. This post by Greg Cochran is a great reminder of just how absurdly wrong the field was about the realities of communism. The best estimates by the court magicians overstated communist economic output by two or three times reality. This despite the fact they had firsthand observations of the state of these communist countries. Westerners, including western academics, traveled throughout these countries and could observe the squalor firsthand.

In the 80’s, an acquaintance was getting sent to Moscow on government assignment. His family held a going away party as he was expected to be there for two years. Everyone was asked to bring something he could use in Russia. He got things like cartons of cigarettes, blue jeans and small bottles of liquor. The Russians turned a blind eye to this type of smuggling because they wanted the stuff too. The customs agent would take something for himself and maybe set you up with his cousin Yuri to sell the rest. Everyone, except economists, knew the score.

Of course, the birth of economics as a distinct field from political-economy was roughly one hundred years ago, with the publication of an economic textbook by Alfred Marshall. Economist were just as wrong about reality then as they are today. Prior to the Great War, globalism was all the rage, just as it is today. A 1910 best-selling book, The Great Illusion, used economic arguments to demonstrate that territorial conquest had become unprofitable, and therefore global capitalism had removed the risk of major wars. A few years later Europe was murdering itself in the worst war in human history.

Science gets lots of things wrong. The scientific method assumes this, which is why test results are published, along with the methods, so others can challenge the results. Negative results are still results and add to the stock of human knowledge. In economics, they get fundamental elements of their field wrong and manage to subtract from the stock of human knowledge in the process. The problems facing Europe today are problems people understood well 50 years ago. Thanks to economics, policy makers are now forced to relearn what their grandparents took for granted.

The root of the problem is that statistics are not science and economics is pretty much just statistics applied to commerce. It is not worthless, but it is limited. Probability and correlation can point real scientist in the right direction, but they do not explain the mechanics of cause and effect. We know that smoking correlates with emphysema, but biologists figured out why one causes the other. Per capita chicken consumption correlates with US oil imports and only an economist would suggest one causes the other. Know what is happening is different from knowing why.

Calling back to where we started, most quackery manages to have some benefit, even if it is to just some make people feel happy. Astrology is right about the movement of the stars, at least as far as charting them. Horoscopes are stupid, but a harmless way for people to feel good about the uncertainty of life. Alchemy was a confidence racket, for the most part, but it eventually gave us chemistry. Even climate science has some utility, despite the massive fraud. Economists are fond of calling their racket the dismal science, but that is not fair or accurate. It is really just dismal quackery.

Guaranteed Basic Income

Posted on by

“‘It seemed to me that I had happened upon humanity upon the wane. The ruddy sunset set me thinking of the sunset of mankind. For the first time I began to realize an odd consequence of the social effort in which we are at present engaged. And yet, come to think, it is a logical consequence enough. Strength is the outcome of need; security sets a premium on feebleness. The work of ameliorating the conditions of life—the true civilizing process that makes life more and more secure— had gone steadily on to a climax. One triumph of a united humanity over Nature had followed another. Things that are now mere dreams had become projects deliberately put in hand and carried forward. And the harvest was what I saw!”

–Time Machine

The Swiss are voting on a referendum that if passed, would require the state to supply every Swiss citizen a basic income of 2,500 Swiss francs per month. That is roughly $2500 or £1,755. This story in the BBC does a respectable job of covering the topic. The news suggests the referendum has little chance of passing. The Swiss are a practical people and this proposal has too many unanswered questions. That and the proponents are something less than assuring.

These proposals are following the typical course of reform efforts. They bounce around the academy for a while as intellectuals work over the concepts. Then they are sold to the political class in fits and starts. If the political class is resistant, then maybe an activist group or industry group is enlisted to move the effort. Over time, what was once a radical idea is being discussed by respectable people. Before long, the debate is over who can best implement the new idea.

There are some good arguments in favor of the guaranteed basic income. One is it is simple. Like the flat tax, the GBI replaces the myriad of welfare programs and the government vipers that come with them. The other point in its favor is it addresses the growing problem of mass unemployment. In the robot future, most people do not work so this solves the problem of people not having a way to earn money. There is also the fact that it is value neutral. People get the money to spend on whatever they wish, without the nanny state harassing them.

There are many arguments against it, with the most obvious being that welfare programs never go away. In America, the US Congress has repealed exactly one welfare program in the last century. The WPA was passed in the 1930’s and later replaced by Comprehensive Employment and Training Act, which was such a hilarious disaster, it was replaced by a program called the Jobs Training Partnership Act. That was eventually repealed in the 90’s. That is a long time to kill one horrible welfare program.

The most likely result, at least in America, is a basic income on top of existing welfare programs. There are seventy-nine means tested welfare programs in America. Everyone of those programs has a federal agency employing thousands of people who do nothing but administer welfare programs. Congress will get rid of those right after they do something about the unicorn infestation. Until the inevitable fiscal crisis forces a mass retrenchment of industrial era government programs, there will be no reform of welfare in America.

Putting that aside, there are other problems. Spend time in the ghetto and you see the effects of the dole on the human spirit. A man not working quickly falls into bad habits. Families dependent on public money soon start to act like zoo animals, because they are essentially zoo animals. The state gives them an allowance, tells them how to spend it and supervises their living conditions. Granted, most got into that state because they lack the ability to manage their own affairs, but the corrosive effects of dependency are well known.

Even so, for all of human history, nature solved the problem of too many people by killing off the excess people either through famine, warfare or migration. In other words, supplying enough food, shelter, water and security for the population required all hands on deck. If a society out bred its resource supply, then that meant starvation or expanding territory through conquest in order to get more resources. Often, it just meant killing off a lot of people in wars over resources, thus solving the problem.

We are now able to produce all the food we need long into the future. More important, automated food production is well on the path to producing all the food we could ever need with very little human labor. The robot future has been discussed to death at this point, but even allowing for a fair bit of hyperbole in the predictions, we are facing a future where human labor is decreasingly necessary. That means the value of human capital will plummet, assuming the current economic models.

In a world of scarcity, society can carry the old and very young, along with a ruling elite. The modern industrial society could carry many more people who produced nothing because technology made those who did produce vastly more productive. Welfare programs knocked the edges off the inequality by transferring wealth from the rich to the poor. In the mature technological society, vast numbers will be idle, but provided for as there will be more than enough resources.

How that is resolved will be the greatest intellectual challenge in human history.

Inequality

Posted on by

For generations, Americans, who rejected liberalism, were trained to screech and run out of the room whenever the topic of inequality was raised. After all, anything other than a natural distribution of wealth was socialism and if nothing else, conservative means not being a socialist. It’s fundamentally the problem with all reactionary ideology and why Buckley Conservatism has degraded into a shabby libertarianism, lacking anything resembling a coherent worldview.

The issue of inequality is a perfect example. That French economist wrote a big book on the topic and the response from the Right was to dismiss it without having read it. The libertarian wing thumbed through some reviews so they could pretend to have read it, before dismissing it in a shower of platitudes. They have to pretend inequality is not a real issue because to do otherwise means confronting the contradictions in their ideological safe space.

The fact is, having a small number of people or corporations controlling the nation’s wealth ends in tyranny. This is the lesson of history. If one man owns everything then you have Africa. If a cabal of men control everything through a bureaucracy you have China. The West figured out that a broad distribution of ownership cultivates human capital and maximizes individual liberty. It’s not perfect, but there is a reason we never speak of the African Renaissance.

Part of why both parties are being swamped by what they like to call the fringe is stories like this one.

The rising cash holdings of U.S. corporations are increasingly in the hands of a few U.S. companies, with just five tech firms having grabbed a third of it. And nearly three-quarters of cash held by non-financial U.S. companies is stashed overseas, outside the long arm of Uncle Sam.

Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Cisco Systems (CSCO)and Oracle (ORCL) are sitting on $504 billion, or 30%, of the $1.7 trillion in cash and cash equivalents held by U.S. non-financial companies in 2015, according to an analysis released Friday by ratings agency Moody’s Investors Service.  That’s even more cash concentration than in previous years, as these five companies held 27% of cash in 2014 and 25% in 2013. Apple alone is holding more cash and investments than eight of the 10 entire industry sectors.

Corporate America’s rising pile of cash is becoming increasingly important to investors as profit growth and the stock market stalls. The amount of cash held by U.S. companies rose 1.8% in 2015. Unfortunately for U.S. investors, 72% of total cash held by all non-financial U.S. companies is stockpiled outside the U.S., up from 64% in 2014 and 58% in 2013, as companies try to avoid paying U.S. tax rates.

There was a time when Democrats would make an issue of this based on old school appeals to class. “Look at these fat cats robbing the working man!” The Right was not mute on this stuff either. Wholesale tax avoidance was not always a conservative principle. Conservatives would also note that these firms are run by progressive, nation wrecking wackos. But, that was when conservatives still thought countries were real things.

The reason Faceberg gets to summon media whores like Glenn Beck to his lair and demand they stop talking about his censoring of opinion is because he has 40 billion dollars. He is also allowed to have free access to the internet by the state. The reason for the gross corruption of the popular media is that those concentrated billions can be funneled into operations that buy news reporters and outlets, in addition to politicians.

It’s something I’ve been repeating for a while now, but I enjoy repeating it. Buckley Conservatism was always about anti-communism first and foremost. The whole point of their ideology was to shape the defense of the West against Soviet communism. Reagan is a perfect example. He was willing to concede domestic policy to the Democrats in order to have a free hand on foreign policy. The result was a continuation of the welfare state in exchange for a military buildup.

The problem for the Buckley types is the Cold War ended. Generations of conservative “intellectuals” have been trained to cede cultural issues to the Left. Their default response on domestic issues is to surrender so they can get back to talking foreign policy. It’s made them incapable of fighting a culture war. Those principled conservatives are too busy planning the sack of Carthage to be bothered by the Left’s assault on decency.

It’s why they are being swamped by what we’re calling the alt-right. Talking about special treatment of carried interest to a guy who is watching his town be overrun by foreigners is insulting. That’s why Trump was able to shove everyone aside and win the nomination. Watching those debates, I was reminded of the movie Pleasantville. In this case, Trump was the only guy in color and the rest were in black and white.

Conservatism used to focus itself on maintaining and defending the culture and traditions of the country. Allowing a handful of financial buccaneers, who got rich plundering the economy while riding a sea of credit money created by the state, is the antithesis of conservatism. It conserves nothing. Dealing with these extremes is something the Right cannot cede to the Left or you end up like Venezuela.

The Myth of Free Trade

Posted on by

Fred_Z Writes:

Even so, Trump’s anti-global, anti-trade protectionist rhetoric is quite mad. I like his anti-illegal immigration stance, but that is the only thing that makes sense to economically protect Americans. The American middle and lower classes are not being ravaged by globalism and free trade, they are being ravaged by wage competition from illegals and insane government environmental, regulatory, tax and subsidy policies.

How does Trump expect us to buy your exports if you refuse to buy our exports? David Ricard showed nearly 200 years ago that free trade benefits both sides, even if the other party is dumping below costs, and there is literally no credible counter-argument. Besides, you Yanks are utterly notorious for distorting dozens of markets, from sugar to corn, with ludicrous tax and subsidy policies.

Ah well, may we live in interesting times.

If I were going to list the things that have unraveled conservatism over the last thirty years, the embrace of libertarian trade myths would be high on the list. Trade has become a sacred item in the commentariat that can never be questioned and never be worshiped too much. Even the Left has found it impossible to make arguments against trade deals, instead embracing the globalism of their donors. It’s part of what has motivated Progressive support for Sanders over Clinton.

As is the case with so much of our current politics, trade is no longer a policy to be debated. You either fully support “free trade” or you are dismissed from the conversation. A similar thing happened with immigration over the years. All of the immigration skeptics were purged from the public square, leaving two types of immigration enthusiasts. You either hate white people or you are a shill for the cheap labor lobbies. Trade has followed the same path.

Despite the moralizing, trade is like any other policy. It is about trade-offs. There are benefits from lowering trade barriers, thus increasing trade between countries. There are liabilities that come from liberalized trade too. A good trade policy minimizes these costs so that the result is a net benefit. Bad trade policy fails to address the cost side and is a net negative. There is no free lunch, even with trade. There is always a cost side to every public policy.

Opening up trade with Canada, for example, hurts the America beaver pelt industry. Putting American beaver trappers out of work has consequences. Low cost Canadian beaver hunters will take market share from the Americans. Those workers will be let go, thus adding a cost to America. If those workers can be soaked up by a business that booms due to trade to Canada, then we very well may have a net benefit to America. If not, then not.

Trade with countries like Canada makes a lot of sense because Canada has things we want and we have things they want. Canada is culturally very similar to America, speaks the same language and maintains the same legal traditions. Trade between the two countries will require little additional policing as businesses on both sides have similar expectations of conduct. A Canadian firm that violates US law will show up in the US court to answer for it. Additionally, businesses on both sides know the governments of both sides will enforce the law equally.

On the other hand, trade with Mexico is a different animal entirely. Mexico is much poorer, lacks our cultural traditions and has a highly corrupt government. The reason American firms setup shop in Mexico is to avoid US labor and environmental laws. Carrier is not moving to Mexico because it is better. They are moving there because it is worse, thus allowing them to get away with things that would never be allowed to do in the Anglosphere. If the Mexican government complains, a small bribe solves the problem.

That’s the reality of trade with Mexico. It’s not the indigenous tortilla maker selling us tortillas so he can buy software and legal services from the US. “Trade” with Mexico is a variation of the sort of slavery that unraveled the Roman Republic. Instead of rich businesses bringing slaves in to work, they take the work to the slaves, all for the purpose of undermining their smaller competitors in the domestic market, who cannot afford to exploit the same rules.

Trade with Mexico has largely been a game of cost shifting. Other than weed and meth, Mexico is incapable of producing much of anything other than excess people. Trade deals with Mexico, however, have allowed global enterprise to shift their cost of doing business onto the American middle-class through declining wages, higher taxes and social instability. “Free trade” with Mexico has some real benefits to Americans, but it brings real costs too, costs that outweigh the benefits.

When you look at trade with China, the cost side starts to fill up with all sorts of indirect items. How much has Chinese hacking, theft and piracy cost America? I know a firm that has spent millions to keep China from pirating their product. A trick China uses is to flood the market with a sub-standard version of an American product, thus damaging the reputation of the American firm. How many dogs and cats were killed by Chinese pet food additives? How much will it cost us to defend Japan and Taiwan from Chinese aggression?

The point here is that trade is a good thing, but only when it is a net positive to the American people as a whole. Deals that allow plutocrats to shift their costs to the public so they can privatize profits are not good deals. Trump pointing that out does not make him a protectionist. It makes him a realist. It’s the innumerate phonies, clutching their copies of Atlas Shrugged, desperately trying to shut off these debates, who are divorced from reality. Trade, like all pubic policy, is about trade-offs. Those trade-offs are debated in a healthy society.

Unimaginable Math Problems

Posted on by

In 1980, the US government owed, in one fashion or another, $909 Billion, which was about 35% of GDP. Federal spending that year was $591 Billion. If you adjust these numbers for inflation, the 1980 spending was $1,700 Billion and the debt was $2,615 Billion. Today the government spends over $3,000 Billion and the national debt is $19,000 Billion. The current estimates say the debt-to-GDP ratio will be close to 90% this year and will break 100% sometime in the next administration.

I use 1980 as a benchmark because Reagan ran on the debt issue, making it a popular topic in politics ever since. In that time, Republicans have controlled the White House for 20 of those 36 years. They have controlled the House for 18 of those years. The point here is both parties have had chances to arrest the growth of spending and debt accumulation, but neither team has bothered. As long as the Fed can monetize the debt, the politicians keep spending.

Another reason to think back to 1980 is that no one thought the current debt levels were possible. The NYTimes first used the word “trillion” in the 1970’s. The rationale behind Reagan’s tax plan was that making high taxes politically impossible meant spending would have to decline. After all, who in their right mind would keep buying bonds, even at the elevated rate of 10% for the 10-Year Treasury?

The future turned out to be a very different place than the planners of the 1980’s imagined. That’s important to keep in mind when you see stories like this regarding the nation’s public pension systems.

The US public pension system has developed a $3.4tn funding hole that will pile pressure on cities and states to cut spending or raise taxes to avoid Detroit-style bankruptcies.

According to academic research shared exclusively with FTfm, the collective funding shortfall of US public pension funds is three times larger than official figures showed, and is getting bigger.

Devin Nunes, a US Republican congressman, said: “It has been clear for years that many cities and states are critically underfunding their pension programmes and hiding the fiscal holes with accounting tricks.”

Mr Nunes, who put forward a bill to the House of Representatives last month to overhaul how public pension plans report their figures, added: “When these pension funds go insolvent, they will create problems so disastrous that the fund officials assume the federal government will have to bail them out.”

Large pension shortfalls have already played a role in driving several US cities, including Detroit in Michigan and San Bernardino in California, to file for bankruptcy. The fear is other cities will soon become insolvent due to the size of their pension deficits.

Joshua Rauh, a senior fellow at the Hoover Institution, a think-tank, and professor of finance at the Stanford Graduate School of Business, who carried out the study, said: “The pension problems are threatening to consume state and local budgets in the absence of some major changes.

“It is quite likely that over a five to 10-year horizon we are going to see more bankruptcies of cities where the unfunded pension liabilities will play a large role.”

The Stanford study found that the states of Illinois, Arizona, Ohio and Nevada, and the cities of Chicago, Dallas, Houston and El Paso have the largest pension holes compared with their own revenues.

In order to deal with the large funding shortfall, many cities and states will have to increase their contributions to their pension funds, either by raising taxes or cutting spending on vital services.

That’s one possible future. The important thing to remember is the US government has no money of its own. It either taxes, borrows from foreign sources or creates credit money through the machinations of the Federal Reserve. Given the state of the federal budget and projected debt, it’s unlikely the Feds could bailout the state pension systems completely. The CBO says the total debt could hit $30,000 Billion in ten years.

The other possible future is the pensioners don’t get paid. When a company goes bankrupt, the creditors don’t get paid. At least they don’t get paid in full. When cities and towns can no longer make their pension payments, they will stop making those payments. The old retired employees will sue and petition their legislatures, but you can’t get blood from a stone. The best case is the pensioners take a hefty cut in benefits.

The thing no one discusses is why these funds are in trouble. The reason for the trouble is the artificially low bond rates we have seen for two decades. In order to finance Federal spending, borrowing rates have been driven down to near zero. The biggest buyers of treasuries used to be pension funds. They could expect a return exceeding their target of 7.5% and not carry much in the way of risk. Being a pension fund manager used to be the easiest job in finance.

Olivia Mitchell, a professor at the Wharton School at the University of Pennsylvania, told FTfm last month that US public pension plans face “grave difficulties”.

“I do believe that US cities and towns will continue to suffer, and there will be additional bankruptcies following the examples of Detroit,” she said.

Currently, states and local governments contribute 7.3 per cent of revenues to public pension plans, but this would need to increase to an average of 17.5 per cent of revenues to stop any further rises in the funding gap, the research said.

Several cities and states, including California, Illinois, New Jersey, Chicago and Austin, would need to put at least 20 per cent of their revenues into their pension plans to prevent a rise in their deficits, while Nevada would have to contribute almost 40 per cent.

Mr Rauh’s study claims the “true extent” of funding problems in US public pension system has been obscured because plans calculate both their costs and liabilities on the assumption they will achieve returns of between 7 and 8 per cent a year. The academic believes this rate is “wildly optimistic and unlikely to be achieved”.

Mr Rauh said a more realistic return rate, based on US Treasury bond yields, was around 2-3 per cent a year.

Ultra-low bond rates have forced pension funds into higher risk investments as they try to hit their target of 7% per year. This is fine when the market is performing at or near its historic averages and the fund managers are smart enough to bet the broader market. It also assumes that cities and states pay their pension obligations, without actually borrowing from those same pension funds. Now we know why the pension system is in trouble.

This is just one small aspect of the daunting math facing the United States over the next decade. Again, no one imagined the current math was even possible 35 years ago. If you told 1980 people that the Federal debt would be $19 Trillion, they would have laughed in your face. Maybe ten years from now $50 Trillion is no big thing. The math is unimaginable, but today’s math was once unimaginable. Alternatively, perhaps what’s coming is unimaginably awful. I don’t know, but the math problem facing America beggars the imagination.

Reverse Engineering A Belief

Posted on by

I was watching a documentary on the remains of the ice man from the Æneolithic period, found in the Alps 25 years ago. Ötzi is a big deal for anthropologists, historians, geneticists, biologists etc. The ability to get genetic material for analysis offers up enormous research opportunities. For hobbyists with an interest in these subjects, it is always fun to listen to experts discuss their interests in such a rare discovery.

One of the things they have been puzzling over are the weird tattoos on the man’s body. Initially, they assumed they were for decoration, but further research suggested that was unlikely. The markings were not very decorative, but they did correspond to areas that either had prior injuries or signs of disease. In other words, the tattoos were medical treatments of some sort.

This sounds rather loopy to modern people, but it is not hard to see how people could come to believe such things. Grog gets the evil spirits and is close to death. The local Shaman gives him a tattoo so he is properly marked up for the afterlife and Grog suddenly rallies and recovers from the evil spirits. Everyone assumes it was the tattoo. Before long, tattooing the sick is what everyone does.

Belief is a funny thing in that it is self-reinforcing. The people of Ötzi’s time probably understood that tattoos did not always work, but when they got a good result, they just assumed it was the tattoo. What else could it be? Not doing the tattoo treatment, quite logically, became a high risk choice.

Understanding this dynamic is useful when looking at modern times. For example, we believe smoking tobacco causes lung cancer. At some point in the future, when the alien anthropologists are digging through the remains of our age, they will puzzle over “No Smoking” signs in the same way, wondering why they never found “No Child Molesting” signs in the rubble.

The point here is that you can tease out some things about what people believe based on what they do, even in the modern age where we pretend to be irreligious logic machines. That came to mind reading this rather entertaining comment thread on a Marginal Review post. As is often the case, Steve Sailer was making heads explode by noticing things that are on the prohibited list.

The question Steve kept asking in various ways is why economists have never bothered to study, much less calculate, the value of citizenship. If a citizenship card for Somalia and one for Canada were put up for bid, which would fetch more? How much would each get at auction? Who would do the bidding?

These are very interesting and reasonable questions that should be natural areas of interest for modern economists. After all, immigration is the dominant topic of our age and economists are the shaman class, asked to weigh in on every topic. It follows that the “markets in everything” crowd would have come up with a model for the market for citizenship.

As Steve correctly observes, the better question may be why they refuse to even consider it. Read the comments in that post and you see a lot of undefined panic. They don’t know why they should not be talking about this, but they sense it is a taboo subject so they keep trying to change the subject. In a sense, Steve was asking, “why are we tattooing Grog?”

I’m not much for reductionism so I don’t think there’s a conspiracy. What I see is that these people believe all of the things people in the managerial class believe. One of those beliefs is that citizenship is an artifact of a prior age. They dream of being citizens of the world, hopping from Washington to New York to London to Davos. Being an “American” is, if anything, a little embarrassing for them.

It’s why they are puzzled by the resistance to open borders. They live in these wonderful, bunkered communities that are surrounded by ethnic restaurants and shops. When they meet friends at the Ethiopian place in Fairfax to reminisce about their trip there in grad school, they wonder how anyone would not want this life. For them, open borders are the paradise of their daily life.

The answer to Steve’s query, it turns out, is a question. Why study something that has no value? From the point of view of economics, citizenship is as valuable as unicorn insurance or stock in the flying carpet company. The market for their skills is in climate magic and monetary policy so that’s why we have a million papers on those topics.

There’s another thing to tease out here, returning to the image of the Cloud People gnoshing on fit-fit at the Ethiopian place. To these people, the horny-handed sons of toil are failures. They have failed to reach the managerial class. Therefore, their habits are the habits of failure. Their shouting about patriotism, the dignity of work and joys of family are just confirmation to the Cloud People that they are the elect.

In a world where one is measured by how many of the correct boxes he ticks, there’s no value in even thinking about the wrong boxes. The neo-mandarin system of the modern managerial class rewards recitation, not inspiration. Why puzzle over the plight of the Dirt People when the people grading the exams don’t care about it? It’s simply easier to believe it does not matter than to wonder why.

After years of examining Ötzi, researchers have determined that he did not freeze to death in the snow. That was the working assumption for years. Everyone assumed he got trapped in bad weather on a hunt or a trip. It turns out that he died from an arrow wound. Ötzi was murdered. While those tattoos may have worked against evil spirits, they were not much use against an arrow in the back.

Insurance Versus Taxes

Posted on by

You can make the argument that insurance made the modern world possible, because it made risk quantifiable. The insurer is making a bet that the return on his investment of your premiums will exceed the claims on those premiums. In order to make that bet, he has to have some way to calculate the amount he can reasonably expect to payout in claims.

That’s one half of the equation. The other half is the investment. In order to run a profitable insurance company, you have to invest conservatively. The same guys figuring out the probability of your death this year are using the same mathematical skills to find the safest investments. The result is large pools of premiums moving into the safe investments like bonds. [1]

Niall Ferguson in the Ascent of Money gives a great history of the first modern insurance company, the Scottish Ministers Widow’s Fund. Robert Wallace and Alexander Webster figured out a few things that revolutionized capital. One of the consequences of this innovation was that large pools of capital were created from thousands of small premiums. That capital could then be put to work in new businesses, new industries and new technology.

The interesting thing about the birth of modern insurance is even after centuries of experience, we still can’t understand the difference between insurance and taxation. Social welfare programs, for example, work on the principle of pay-as-you go where current taxpayers cover the expenses of current beneficiaries. Back when the Scots were inventing modern actuarial tables, they knew pay-as-you-go could never work in the long run. Yet, here we are.

It’s also why the public sector pension systems are teetering on collapse. The Scotts figured out that a fixed benefit system had to lock in the benefit side by pegging it to the amount of premiums paid into the system. Once you uncouple the premium from the benefit, the system will collapse. The only question is how long it will take, but the boundary always seems to be one working life, as we are seeing in America.

Similarly, insurance only works when it is voluntary. When the state comes in, points a gun at your head and says you have to buy an insurance policy from the companies they choose or from the state, that’s not insurance. That’s extortion. If you want to be kind, it is a tax. When the state takes money from citizens against their will, that’s a tax, regardless of the intentions.

It’s why American health insurance is collapsing. It has none of the features one must have for a successful insurance system. The insurers are forced to take all customers, regardless of risk. They are not allowed to dump reckless customers or even ask about risky behavior. At the same time, the customers are forced to buy insurance. In many areas, there’s only one or two companies and the rates are set by the state.

Of course, what makes health insurance an impossibility is we will all get sick and die eventually. You cannot insure against certainty. A true health insurance system would combine the logic of whole life insurance to cover the inevitable with the logic of term life insurance to address surprises, like getting hit by a bus. Again, these are things we have known for centuries.

Progressives are now talking about using the same nutty ideas to “remedy” gun violence in America. They want gun owners to carry liability insurance that would pay victims in the event the insured’s gun is used in a crime. No insurance company would sell a policy to a gun owner to cover the cost of them shooting someone. There’s simply no way to shoot someone without being negligent (criminally or civilly) or justified. In both cases, insurance has no role.

The point of this, of course, is to drive up the cost of gun ownership and create a gun registry, but even if it was an honest effort, the gun owner is being held liable for the actions of others. That’s just a click away from collective punishment and contrary to a couple thousand years of western civilization. More important, it is confusing insurance with taxation. In this case, taxing millions of gun owners so politicians can hand out tax dollars to the victims of gangbangers.

All of this brings me to something Steve Sailer has been pushing with regards to immigration and that is forcing immigrants to carry liability insurance. Unlike compulsory gun insurance, the attempt here is not to infringe on a natural right. Steve is cleverly trying to introduce the idea in order to help immigration opponents. In that regard, it is clever and I hope it catches on with the chattering skulls.

The problem here is similar to the other examples of compulsory insurance. It’s really just a tax. We already have a sponsor system where people can bring over relatives and employees, as long as they meet certain financial terms. Sponsors cannot be on welfare, for example. They have to have an income higher than the current poverty line.

Where the insurance should come into play is on the sponsor and employer. If Jose wants to bring his family over, he has to either get a liability policy with a million dollar combined single limit or post assets of the equivalent. Employers seeking H1 visas would do something similar. If Jose gets rich and wants to sponsor his relatives, Jose has to carry enough insurance to cover it. Similarly, the employer will have to factor insurance costs into their indentured servant costs.

[1] I know. I know.

The Economics of Unreality

Posted on by

One of the stranger things about modern life is the rise of economics as a quasi-religion in the West. In another age, the rulers would run to the local witch doctor or oracle before making a big decision. Closer to our age, leaders would pray for guidance, maybe talk with a holy man. Today, the pols run to economists for advice on everything.

What makes it particularly humorous is the shamans of economics are more wrong than the old witch doctors. The reason is the modern economist really thinks he is a man of science, while the old witch doctor knew he was a fraud. Of course, the witch doctor also knew he faced the sword if he went too far out on a limb, so he was careful to never get carried away.

Economists have no such fear of being wrong as being wrong is good for the guild. The more things get screwed up due to their bad advice, the better the employment prospects for the profession. Lucky for them, they get most everything wrong, so the racket is a serpent eating its tail.  A good example is here in this Wall Street Journal article.

Federal Reserve officials this week are expected to raise interest rates for the first time in nine years on the expectation that employment and inflation will hit targets reflecting a healthy U.S. economy.

But Fed officials face a troubling question: Jobs are on track, but inflation isn’t behaving as predicted and they don’t know why. Unemployment has fallen to 5%, a figure close to estimates of full employment, while inflation remains stuck at less than 1%, well below the Fed’s 2% target.

Central bank officials predict inflation will approach their target in 2016. The trouble is they have made the same prediction for the past four years. If the Fed is again fooled, it may find it raised rates too soon, risking recession.

Low inflation—and low prices—sound beneficial but can stall growth in wages and profits. Debts are harder to pay off without inflation shrinking their burden. For central banks, when inflation is very low, so are interest rates, leaving little room to cut rates to spur the economy during downturns.

Full employment? No one walking around America thinks we are anywhere near full employment. Anyone older than 40 should remember the booms of the 80’s and 90’s when employers were offering bonuses to new hires and employing headhunters to poach workers from other firms. That has not happened in a long time.

Of course, the labor force participation rate is at a 38-year low. Some of it is certainly due to demographics. We have more old farts on the dole due to the boomers hitting retirement, but that’s just starting as the first boomers hit retirement. The stunning truth is there’s an employment boom among the geezers. It is the young struggling with the stagnant job market.

That’s one bit of unreality. The other bit is the zero inflation stuff. I’ve gone around and around with economists about chain weighted inflation and the logic applies here. Granny may have substituted dog food for ground beef, but that does not mean inflation is flat. Similarly, every retail container has shrunk over the last decade, even though the prices are generally stable. Shrinkflation is a real thing we all see every day of our lives.

Putting aside those two complaints, which are always dismissed by economists as ridiculously based in observable reality, there is the confidence they have even in the face of being wrong. Exactly no one in the economics profession saw the crash coming and now they can’t figure out why they can’t re-inflate the world economy. But being wrong is juts proof we need more economists!

The site where I saw this story linked had a comment from someone mentioning The Modigliani–Miller theorem in rebuttal to some other comment. For those unfamiliar with that particular tarot card, here’s the definition:

“The basic theorem states that under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed.”

Therein lies the fundamental problem with economics and why it is not a STEM field. The entire profession is based on “all things being equal” or “in the absence of observable reality” statements that would get you laughed out of an empirical field. The only field that is close in the use of hothouse logic is climate science.

None of this is to say we should dismiss economics out of hand. In fact, the statistical study of human behavior should be a part of public policy debates. Where every economist goes wrong is in thinking he has found the philosopher’s stone once he finishes his first statistics course. As a result, the field never gets better. But when there is good money in being wrong, why be less wrong?

It is a pity because we will probably have to go through a near death experience before we figure out the mistakes. The Great Depression finally taught the West that the money supply also includes outstanding credit. The modern economic profession is not learning anything new, despite the fact we have experienced the greatest technological leap forward since the wheel on top of a revolution in credit.