Category Archives: Economics

Ramblings About Big Box Stores

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Karl Denninger likes to pick on Best Buy. The reason is Best Buy is a big nationwide chain like Home Depot or Walmart , except they lose money.The reason for that is not price or on-line competition. The reason is Best Buy offers no added value. There’s no reason to go into a best Buy, other than shoplifting and killing time. Why would anyone pay even a small premium for a product from Best Buy? Karl’s answer is they won’t and they don’t, which is why Best Buy is a dead man walking.

That’s a fine argument, but what explains Home Depot? When I need something for a project, I’ll stop there for supplies. They never fail to disappoint. Yesterday I stopped for some solvent to degrease a bike chain. Cleaning a bike chain is not a black art, but you don’t just soak it is gasoline either. I ride a Specialized carbon fiber bike so that means taking care when tuning it up for the season. Instead of spending fifty bucks at the bike shop, I thought I’d get something for half the price.

I asked three different people where they keep solvents. No luck. After walking up and down the store twice, I gave up. Like Best Buy, the help runs from you if you look like you are about to ask a question. You just about have to tackle them. As I was leaving, I walked past half a dozen employees bullshitting with one another, totally disinterested in why I was leaving empty handed. Home Depot may be cheap, but it sucks. How in the hell do they prosper and Best Buy fails?

I stopped at some little auto parts shop I never knew existed and found what I wanted right away. The guy at the counter knew exactly what I was looking for and he also sold me some space age spray lubricant I figure I can use on my brake cables. I paid twelve bucks. Maybe Home Depot would be cheaper, but I don’t want to spend all day finding something just to save a few bucks. Time is money too.

Maybe people like spending hours browsing Home Depot. That certainly seems true of garden customers. I always see some poor guy with his wife in the garden center. She’s looking for plants and he is looking for some way to hang himself. The shopping carts shaped like race cars, so the kids can come along says Home Depot is not targeting just men. There’s something I’m missing, as the fact remains that Home depot exists, while Best Buy is headed to bankruptcy.

Neo-Taylorism

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This post over at Marginal Revolution by Alex Tabarrok is a good example of the neo-Taylorism growing like a fungus over the ruling class. A century ago, the new technocrats that were born of the Industrial Revolution, were sure you could use engineering principles to fix human society. Just as you could organize people inside a factory or even in an army, you should be able to use the same strategies to organize society a a whole. It was technocratic utopianism.

Now, guys like Tabarrok are not trying to use engineering or even corporate management techniques to reorder society. Instead, they come at the problem from articles of faith within modern economics. They believe they can reform society by using the right combination of incentives. In fact, they reject the very notion of society and instead see nothing bu collections of moist economic units. Adjust the market conditions the right way and those economic units will respond accordingly.

Now, Tabarrok  is a fanatic. For instance, his enthusiasm for open borders is slightly deranged at times. This post is a good example. One can reasonably debate immigration. There’s no debating a fanatic celebrating Open Borders Day. Santayana said, “Fanaticism consists in redoubling your efforts when you have forgotten your aim.” That seems to be the point of the open borders crowd. They no longer know why they worship at that alter. They are certain they must do so every day.

Anyway, this is what stands out in his post:

Politics, however, began to intrude into this Coasean world in the 1940s and 1950s. Auto sales accounts for some 20% of sales taxes and auto dealers employ a lot of people so when it came to a battle in the state legislatures the auto dealers trumped the manufacturers. The result was franchise laws that were increasingly biased towards dealers. In essence, exclusive franchises became locked into place, manufactures lost the right to add dealers even with population expansion, quantity forcing became illegal and dealer termination became all but impossible.
A common feature in this crowd is the excessive use of the word “Coasean” whebever they are pushing a policy. Ronald Coase was a brilliant economist. The Nature of the Firm is a wonderful piece of work that has stood the test of time. He was not, however, a prophet. The priests of this cult have turned him into exactly that. They compulsively yammer about Coasean markets and Coasean outcomes. If Jesus was the son of God, Coase was the son of Efficiency, the top of their chain of being.

The result of dealer rent seeking has been higher auto prices for consumers, about 6% higher according to one (older) study by the FTC. Consumers have been stiffed in other ways as well. In some states, for example, manufacturers were required to reimburse dealers for a repair under warranty whatever amount the dealers would have charged consumers for the same repair not under warranty. As a result, dealers had an incentive to increase their price to consumers because that increased what they would be reimbursed for repairs under warranty. The franchise laws have also resulted in a highly inefficient distribution of dealers as populations have moved but dealers have been frozen into place. The inability to close, move or consolidate dealers has impacted the big-3 American firms especially because they have older networks. As a result, a typical GM dealer sells 377 cars a year while a typical Honda dealer sells 1,062 and a Toyota dealer 1,488.

Tesla wants to sell directly to the public but more generally what we need is to restore the Coasean balance, put dealers and manufacturers back on a equal footing and let the market decide the most efficient means of retailing and distributing automobiles.

That’s the thing with neo-Taylorism. The adherents talk a lot about freedom, liberty, choice and free markets, but when it gets down to it, they just want to impose their morality on everyone else. New Jersey has free and open elections. The people are as sovereign there as they are in any other state. Their representatives are just as crooked and dishonest as any other politicians, but that’s a constant in human societies. Any economic theory, religion or ideology that fails to recognize that is lunacy.
For the new utopians, God is a frictionless, efficient market. Just as Christians measure human action against the ideals of Christ, these guys measure public policy against the ideals of their faith. Like all iterations of the materialist creed, it willingly tramples on any human that gets int he way. In the case of New Jersey, Alex would love nothing more than to throw the men and women working in the car dealerships into the streets and see them starve if it pleases Efficiency.
Libertarian economists always bring to mind Whittaker Chambers take down of Ayn Rand. Like Libertarianism, this sub-cult is a sterile and pitiless dogma. If the choice is between crushing the citizenry in the gears of commerce and paying a little extra for a sedan, these people will feed your kids into the machinery without a moments hesitation. It also has the sort of foolishness to it that Kipling had in mind. It is is why neo-Taylorism is a good label for them, even if a little clunky.
The misappropriation of math and science to areas of life outside of pure math and science has its risks. Using statistics to judge baseball players is harmless entertainment and a reasonable way to determine the market for light hitting shortstops. Using arithmetic to dispose of the unfit is monstrously self-destructive. Economists will claim that the gas chambers are outside the bounds of their morality because of the harm it caused specific people. That’s fine, but they open it up for debate. Any moral code that leave open the possibility of murder being moral is inherently defective.
That’s what you see with Tabarrok. He is all for letting one group of people murder another group of people if it leads to cheaper cameras or cheaper lawn care. He does not put it in those terms because even Randian fanatics understand marketing. You’re not getting far advocating murder, but it is murder none the less. If one group of people invade the lands of another, replacing the native culture with their own, it is murder. It’s ethnic cleansing. Instead of being directed by an easily identified villain it set in motion by economists hiding behind the walls of their university.

Why The West Is Losing

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This column is interesting. First off, Tyler Cowen is a professor of economics. Why was he commissioned by the New York Times to ruminate on foreign policy? That’s not his area of expertise, even if we want to pretend that economics is an area of expertise. His credentials don’t add authority to his analysis and they don’t suggest his analysis is based in anything ore than his own ruminations. If he was a professor of game theory, then it would maybe make some sense.

Now, Cowen is a smart guy, who has many interesting things to say, so maybe he gets some leeway. Still, it used to be that no one would ask an economist to discuss anything outside of economics and even that was a very narrow topic. Today, the local economist feels free to poke his nose into everything. They are the court magicians and the local soothsayer. Serious men consult them to divine the will of the gods. Maybe they should be required to dress like Gandalf.

In another era, religious leaders routinely commented on the morality of public policy, including foreign policy. Today that role is filled by members of the local economics faculty. The reason is the morality of Christianity has been replaced by a new materialist morality among the ruling classes. It is why passing a Byzantine health care bill was treated as a moral triumph. An economist somewhere said it would add wealth to the nation and there can be no higher good than increasing the GDP.

The flaw in this is that the benefits of public policy often lie well over the horizon, while the costs are often right now. Of course, the reverse is often true. The benefits of debt creation, for example, are immediate, while the long term costs are passed onto future generations. The result is a form of short term thinking about public policy that veers into the myopic. In America, the “live for the moment” morality has produced a nation of amnesiacs incapable of remembering yesterday or contemplating tomorrow.

In foreign policy, this new morality is at the heart of our troubles with Russia. The Russian elite reject the materialism of the West. They look at the Crimea as a part of their cultural history and a part of their patrimony. It is a part of what they hope will be their shadow, in which future generations will stand. That changes their cost-benefit analysis. Putin is willing to sacrifice now, for what he assumes will be a legacy passed onto his people. The West cannot understand such reasoning.

The other thing is just how deeply our elites are marinated in cultural nihilism. Top to bottom they think culture is witchcraft from a bygone era. Their extreme egalitarianism leads them to assume all people are the same. Everyone wants what we want, loves what we love and hates what we hate. In domestic policy we see this all the time. Education starts with the assumption that everyone can be above average, as Bush hilariously claimed. Diversity demands that no one notice the diversity of man.

In the competition with Putin, the West’s inability to see his motives through his eyes is leading to one error after another. John Kerry throws a temper tantrum thinking it will have the same effect it has when he does not get seated on time at the club. Instead Putin sees a weak, feckless man who is no threat to him. In Obama, he probably sees a guileless provincial surrounded by equally inept courtiers. The fact that Obama and his people cannot imagine that being the case means we have informational disequilibrium.

Consider this from the Cowen post:

A more reassuring kind of deterrence has to do with the response of Russian markets to the crisis. Russia is a far more globalized economy than it was during the Soviet era. On the first market day after the Crimean takeover, the reaction was a plunging ruble, and a decline in the Russian stock market of more than 10 percent. Russia’s central bank raised interest rates to 7 percent from 5.5 percent to protect the ruble’s value. Such market reactions penalize Russian decision makers, who also know that a broader conflict would endanger Russia’s oil and gas revenue, which makes up about 70 percent of its export income.

In this case, market forces provide a relatively safe form of deterrence. Unlike governmental sanctions, market-led penalties limit the risk of direct political retaliation, making it harder for the Russian government to turn falling market prices into a story of victimization by outside powers.

The underlying assumption is that Putin wants what we want. He and his people love what we love, hate what we hate and see themselves as citizens of the world, just like Tyler Cowen! Maybe the folks running Russia put a high price on having swank Miami condos and houses in Switzerland. It is just as likely they love their country, their forebears and their own place in the Russian time-line more than those trinkets. The elites int he west are no longer able to understand such thinking.

All The World Is A Nail

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In a previous post on the economics profession, I singled out the profession’s weird belief that public policy is about efficiency. Posts like this one are a good example of the weird myopia. How is it possible that fully formed adults cannot know efficiency and efficacy are of no concern to the welfare state?

If anyone really gave a damn about helping the poor, they would stop welfare altogether. You would think people in a racket allegedly designed to study markets would know you get more of what you subsidize. Paying people to be in the underclass means you get a steady supply of people in the underclass.

Welfare is, in part, about buying grace. The over-class loves these cost-free (relative to them) ways to help the poor. Guys like John Forbes Kerry and Joe Biden don’t give real money to charity. Instead, they give other people’s money to these programs. The added bonus is they get to go around the country bragging about how good they are to poor people, despite the fact they are trying to create more of them.

Even better, their kids get to work in non-profits, funded by government, that allegedly help the poor. That way when they take over for dad in the political rackets, they too can brag about being generous with your money. The politicians in a democracy is like a fireman who runs around setting fires he can heroically battle. They create the conditions for an under-class, then claim to helping the under-class.

Another aspect of welfare is aimed at the middle-class. It is riot insurance. Let the Koreans open their cash businesses in the ghetto. Let the cops figure out how to keep the ghetto savages penned up. That’s where welfare comes in. Give them cash to buy a forty ounce, some weed and some bling. Let ’em sell drugs and shoot one another. If that’s what it take to keep them on the reservation, so be it.

The middle-class looks at welfare as a cheap way to deal with the ghetto. Instead of doing the hard work of enforcing social policy that rewards the fit and punishes the maladapted, they happily pay higher taxes to maintain urban reservations. They move to exurbs without public transport in order to avoid the problem. Welfare is not about helping the poor. It is about political piety and reality avoidance.

The Coming Collapse

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On the excitement scale, pension reform is down there with Swedish land reform and women’s basketball. Even for accountants, it is considered dull. It is the small boring things that tend to bring down society. The best example is the Yersinia pestis, which was carried by the fleas on mice. Christendom was nearly wiped out by a tiny pest carrying an even tinier pest. Anyway, this post about pension reform is an example of the small boring stuff that will turn out to be quite important.

The regular session of the Louisiana Legislature is right around the corner and one of the most depressing aspects of it is what won’t be discussed. Pension reform isn’t going to be a prominent topic.

In fact, what could happen is lawmakers will make things worse. That’s because bills to give retired state workers a 1.5 percent cost of living raise have not only been filed but, according to the early handicapping, are likely to pass.

It’s been eight years since the last raise, which is a long time in any context other than one in which the private sector is enduring stagnant wages and chronically high unemployment for years. That is to say, like now.

Under the bookkeeping formulas kept by the state, the money is there for the COLA boost. Now. It may be better to give than to receive, but a pension increase, like a raise, is a gift that keeps on giving for the recipients. This is no bonus forun a job well done, it’s something that stays on the books and has to be met going forward even if balances cause that accounting formula to change.

When economists talk about public debt, they seldom mention the mountain of promises to government employees. If I promise you a job and regular raises for the next 30 years, that’s a debt I owe you. It is no different than borrowing the money and handing it to you. Those promises by state and local government to pay people long into the future cannot be discharged in court in most states, either due to the state constitution or the fact states cannot declare bankruptcy.

Furthermore, it’s no secret that state and municipal governments face few if any looming financial crises greater than pensions. Some governments have taken piecemeal steps to address this, largely copying moves made by the private sector.

More specifically, defined contributions plans like 401ks are now recognized as far more sensible than the rich defined benefits schemes that were once the norm.

Nevertheless, whether the fiscal bombshells created by defined benefit plans — which guarantee a certain payment for life — can be defused remains an open question. By no means is this all the workers’ fault. Lawmakers in states across this great land have frequently underfunded pensions, and states have stuck to a very respectable and probably outdated “anticipated” rate of return of 8.5 percent.

I can provide the answer here. They cannot be defused. They will explode when the cash runs out in the next decade. No one should shed any tears for the workers. They knew, or at least they should have known, that these lavish benefit packages were out of line. They live in the same world as the rest of us. They also knew the money for those lavish pay and benefit plans comes out of their neighbors paycheck. To put it bluntly, they have been screwing the rest of us for decades so too bad for them..

Translated, that means not enough money has been poured into the pension systems and investment returns will have to be forever rosy.

But the relationship between unions – whose power is increasingly concentrated in the public sector – and lawmakers means handsome deals have been struck between decidedly non-adversarial parties. Besides, it all involves other people’s money, and the unions have always provided handsome returns to friendly politicians’ campaign war chests.

Taxpayers are now looking at the monstrous bill produced by such cozy extravagance.

Louisiana, fortunately, doesn’t have as gigantic a burden as states like Connecticut face. That doesn’t mean it isn’t a huge problem in the Pelican State – to the tune of somewhere between $20 billion or nearly $75 billion, depending on which alarming report you consider more accurate.

Louisiana hasn’t adopted sensible reforms like raising the retirement age and moving to defined contribution plans. Louisiana taxpayers are still stuck with an antiquated and expensive arrangement where the defined benefit plan rules supreme.

In 2012 the Legislature did pass a law requiring future state hires to enroll in defined contribution plans, but led by the teachers’ unions and other interested parties – staffers, boards, lobbyists, investment salespeople, accountants, lawyers and the rest who ride like remoras on this bloated whale – the law was repealed.

Of course. Letting public employees unionize was never about the state employees. It was about the democrat politicians hoovering off billions in tax dollars through the unions. The hacks running the unions funnel money to the politicians, who play ball with the unions. The union leaders also keep a nice share for themselves.

It’s hard to predict how deeply we must dip the gourd into the magic fountain of other people’s money to make good on the state’s current obligations. What is clear is regardless of whether one goes with the rosy estimates floated by those in the pension business or the much scarier numbers arguably more objective analysts reach, it would take tens of thousands out of Louisiana wallets just to plug the existing gap.

In other words, what Louisiana and practically every other state across this great land faces is a system that is — all together now — unsustainable.

It is beyond belief everyone doesn’t see this, which means everyone does. The state workers drawing these handsome pensions want them. They fight like cornered tigers over having to contribute another dollar to what they regard not as some extraordinarily generous entitlement paid for by folks who have no such protected eggs themselves, but as some kind of right, confined to them, as sacred as free speech.

There is no magic solution. Detroit is the example states may follow. Over the next decades services will be reduced and budgets cut in areas like public recreation and road maintenance. As the crisis grinds on, bond holders will be hit with demand from states to forgive some debt to avoid defaults. Eventually they will come back to pension plans and force cuts on them. The unions will sue, like they are in Illinois, but you can’t get blood from a stone. When the money runs out, the party is over.

The Coming Collapse

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Nothing lasts forever. Human societies rise, reach their peak and nthen go into decline, or possibly collapse. The US has had a great run the last 100 years or so. Even Rome did not have the global influence we see with the USA. Like Rome, American culture is altering the cultures of the world. How much of a lasting influence it has is up for debate. What is not up for debate is that America and American influence is in decline.

Here’s an interesting bit of math on the state of the country.

In 1935, the year that FDR signed the Social Security Act into law, the birth rate was 18.7 per 1,000. In 1940, when the first monthly check was issued, it had gone up to 19.4. By 1954, when Disability had been added, the birth rate at the heart of the Baby Boom stood at 25.3.

In a nation of 163 million people, 4 million babies were being born each year.

By 1965, when Medicare was plugged in, the birth rate had fallen back to 19.4. For the first time in ten years fewer than 4 million babies had been born in a country of 195 million. Medicare had been added in the same year that saw the single biggest drop in birth rates since the Great Depression.

There could not have been a worse time for Medicare than the end of the Baby Boom.

Today in a nation of 317 million, 4.1 million babies are being born each year for a birth rate of 13.0 per 1,000. 40.7% of those births are to unmarried mothers so that it will be a long time, if ever, before they pay back into the system, and most will never put back in as much as they are taking out.

 According to people who measure these things, the United States generates $50,000 of income per person. That’s the sum of all income divided by the population. That ties out to GDP close enough for economics. Experience says the American economy can tolerate about 25% of tax at the federal level before bad things start happening. That’s $3.7 Trillion in spending that the tax base can support. Once you exceed that you have to borrow and that creates trouble in future years.

Liberals and libertarians both act as if the crisis facing us can be fixed if we take more from the “wealthy elderly” or give them less. The crisis is born of demographics. It can’t be fixed by targeting the elderly because they haven’t been the problem in some time.

It’s the same crisis being faced by countries as diverse as Russia and Japan. The difference is that Russia is autocratic and has little concern for its people while Japan shuns immigration and has a political system dominated by the elderly.

The United States however takes in a million immigrants a year. In his 2013 State of the Union address, Barack Obama praised Desiline Victor, a 102-year-old Haitian woman who moved to the United States at the age of 79 and never learned to speak English, but did spend hours waiting in line in Florida to vote for Obama.

Between 1990 and 2010, the number of immigrants over 65 doubled from 2.7 million to 5 million. Twenty-five percent of these senior immigrants were over 80. Elderly immigrants are also much more likely to become citizens, in part because the requirements for them are lower. Many, like Desiline Victor, don’t even have to learn English to be able to stand in line and vote.

15 percent of senior immigrants come from Mexico largely as a result of family unification programs. If amnesty for illegal aliens goes through, before long the country will be on the hook not just for twelve million illegal aliens, but also for their grandparents.

Decades ago, Milton Friedman noted that you can have a welfare state or immigration, but not both. Cities and states tested this in the last fifty years by offering generous welfare benefits. What they found is they became welfare magnets. America is now the premiere welfare magnate in the world. If you are a poor person in Guatemala, getting to America is your only goal. Since cheap labor makes the ruling class rich, they are happy to import world’s poor into your neighborhood.

The welfare state has been spending more money with an unsustainable demographic imbalance. There are fewer working families supporting more elderly, immigrants and broken families. The Russians invest money into increasing the native birth rate. Instead we fund Planned Parenthood because liberal economic eugenics dictates that we should extract “full value” from working women as a tax base to subsidize the welfare state while discarding the next generation.

The “modern” system that we have adopted with its low birth rates, high social spending and retirement benefits is at odds with itself. We can have low birth rates, deficit spending or Social Security; but there is no possible way that we can have all three.

And yet we have all three.

In the European model that we have adopted, men and women are supposed to spend their twenties being educated and their thirties having two children. These Johns and Julias will work in some appropriately “modern” field building apps, designing environmentally sustainable cribs for the few children being born or teaching new immigrants to speak enough English to vote. Then they plan to retire on money that doesn’t actually exist because they are still paying off their student loans.

John and Julia began marriage with tens of thousands in debts, only one of them will work full time, while the other balances part time work, and they will do all this while being expected to support social services for new immigrants and a native working class displaced by the outsourcing of manufacturing jobs, not to mention the elderly and the entire bureaucracy that has grown around them. If John and Julia are lucky, they will find work in a technology field that is still growing, or, more likely they will pry their way into the social services bureaucracy which will keep on paying them and cover their benefits until the national bankruptcy finally arrives.

In this post-work and post-poverty economy, those most likely to have children are also least likely to work or to be able to afford to have those children.

Birth rates for women on welfare are three times higher than for those who are not on welfare. Within a single year, the census survey found that unmarried women had twice as high a birth rate as married women. These demographics help perpetuate poverty and feed a welfare death spiral in which more money has to be spent on social services for a less productive tax base.

Children raised on welfare are far more likely to end up on welfare than the children of working families.

Fertility rates fall sharply above the $50,000 income line and with a graduate degree; that has ominous implications in a country whose socio-economic mobility rates continue to fall.

Progressive activists still talk as if we can afford any level of social service expenditures if we raise taxes on the rich, but workers can’t be created by raising taxes. Everything that the left has done, from breaking up the family to driving out manufacturing industries to promoting Third World immigration has made its own social welfare spending completely unsustainable.

By 2031, nearly a century after the Social Security Act, an estimated 75 million baby boomers will have retired. Aside from the demographic disparity in worker ages is a subtler disparity in worker productivity and independence as senior citizens are left chasing social spending dollars that are increasingly going to a younger population. ObamaCare with its Medicare Advantage cuts was a bellwether of the shift in health care spending from seniors to the welfare population.

Increasing welfare is only a form of Death Panel economic triage that doesn’t compensate for the lack of productive workers. It’s easy to model Obamerica as Detroit, a country with a huge indigent welfare population and a small wealthy tax base. The model doesn’t work in Detroit and it’s flailing in New York, California and every city and state where it’s been tried.

After a century of misery, the left still hasn’t learned that there is no substitute for the middle class. It’s not just running out of money, it’s running out of people.

The welfare state has no future. It is only a question of what terms it will implode on and what will happen to the social welfare political infrastructure when it does. The violence in Venezuela and the slow death of Detroit give us insights into the coming collapse of the welfare state.

The flaw in the math posted above is that income is not distributed equally. Half of the population is made up of children. Some portion is too old to work, 10-15 percent, and some are broken in some physical or mental way. We know that half the work force is not working. That means the bulk of earnings are in the hands of a tiny minority. The super rich don’t pay taxes. It is why the Reason Magazine guys noted that there seems to be a hard cap of about 19% on tax receipts.

Economists, who have been wrong about every prediction they have made since Keynes first published, argue that the gaps can be bridged with credit creation from central banks and unlimited borrowing. This is being tested now. Obama has been borrowing and spending like you would expect from his kind. Debt is piling up at record rates to record levels. The fact that we have not had an Argentine collapse is proof it will never happen, according to the profession that is never right.

Chained Weighted CPI

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Behind the degeneracy of language lies the degeneracy of ideas. Those seeking to corrupt the minds of their fellow man, naturally seek to corrupt the language. One way is to expand the definition of words to include things previously excluded. Another is to coin new terms that presumably capture new ideas, but in reality conceal some truth that could be stated in plain language. Chain Weighted CPI is an example.

An alternative measurement for the Consumer Price Index (CPI) that considers product substitutions made by consumers and other changes in their spending habits. The chain-weighted CPI is therefore considered to be a more accurate inflation gauge than the traditional fixed-weighted CPI, because rather than merely measuring periodic changes in the price of a fixed basket of goods, it accounts for the fact that consumers’ purchasing decisions change along with changes in prices. Because the fixed-weighted CPI may consistently overstate inflation by ignoring the disinflationary effect of quality improvements and new technology, in addition to the substitution effect, the U.S. Bureau of Labor Statistics maintains that the chain-weighted CPI is a closer approximation to a cost-of-living index than other CPI measures.

That sounds wonderful, but it no more of an empirical truth than the claim that vanilla ice cream is better than chocolate ice cream. The word to key on is “better.” That’s not an empirical term. Fred may be better than Joe, in the opinion of Fred’s mother, but Joe’s mother will hold a different opinion. On the other hand, if Fred is taller than Joe, that’s not a disputable opinion. It is an empirical fact. We can measure both men and arrive at the correct answer. Height is not a matter of opinion.

Economists at the BLS may feel one measure is better than the other, but that is meaningless. The rest of us are not living our lives to make the BLS happy. We make our value judgments based on all sorts of personal and cultural factors. We think sports cars and better than sedans, because of the cultural connotations. We may like chicken better than steak, because of personal taste, but the market place thinks steak is better, because more people prefer steak. Speaking of which,  from Investopedia:

For example, consider the impact of two similar and substitutable products – beef and chicken – in the shopping basket of Mrs. Smith, a typical consumer. (Let’s ignore for the moment the fact that the “core” inflation rate ignores food and energy prices because they are too volatile.) Mrs. Smith buys two pounds of beef at $4 / lb. and two pounds of chicken at $3 / lb. A year later, the price of beef has risen to $5 / lb. while the price of chicken is unchanged at $3 / lb. Mrs. Smith therefore adjusts her spending pattern because of the higher price of beef, and buys three pounds of chicken, but only one pound of beef.

The fixed-weighted CPI measure would assume that the composition of Mrs. Smith’s shopping basket is unchanged from a year earlier, and would compute the inflation rate as 14.3% (i.e. the difference between the total price of $14 and $16 paid for two pounds of beef and chicken a year apart). The chain-weighted CPI measure would, however, consider the effect of Mrs. Smith substituting a pound of beef with a pound of chicken because of its lower price, and would compute the inflation rate as zero (because the total amount spent is unchanged at $14).

Now, we can pretend that chicken and beef are interchangeable products, even though they are not. We can also pretend that consumers value both equally, even though we know they don’t. We can also pretend that people value living in a nice neighborhood the same as living in a ghetto. We can pretend that people value walking to work the same as driving, particularly in driving rain storms.  In other words, the mischief potential makes this an entirely worthless method for measuring inflation.

Of course, economists refuse to acknowledge this rather obvious problem. When you bring it up, the response is “how can we know people prefer X over Y and are not just responding to price?” In other words, confirmation of the defect is denial as long as it is in the form of a question. Then they quickly change the subject and lard up their response with meaningless jargon. It is why macroeconomics is not a serious field, outside of some basic observations about human behavior.

Economic Nonsense

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I’m fond of saying that economics is closer to tarot card reading than physics on the empiricism scale.  It is not just a pithy put-down. Economics is the one area of practical mathematics where getting the wrong answer is of no consequence. The reason is no one ever gets the right answer. I’m not talking about predicting the future. The future is not written, at least we don’t think so, which means conditions can change between the time you make a prediction and the point in the future being predicted.

Economics, I’m talking macroeconomics, deals is loads of complexity. The economy of the United States is the daily economic activity of 300 million people, plus every country with whom we conduct business. The millions of variables in play makes forecasting problematic. Even long after the fact it is hard to really know how much economic activity took place in a certain place at a certain time. Despite this, economists act as if they possess the ability to accurately forecast the future.

It is not quite superstition, but the guy with the bone in his nose is within hailing distance of the town’s economist. The witch doctor thinks he is tapping into some universal truth that transcend time and place. That gives him the ability to diagnose the present and predict the future. Economics takes the same view. Every human action has some perfect model in the stars that only the economist can see. They can therefore look at current activity and predict the future compared to the world of forms.

Immigration is a great example. To the sane person, it is obvious that the people of a nation hold the exclusive right to determine who can and who cannot enter. To an economist, not such right exists. Any passing opportunist must be free to set up camp because the economist believes it will please the gods of efficiency. The fact that none of them would let you borrow their pencil much less pitch a tent in their yard is dismissed as irrelevant. Economics is modern shamanism.

Here’s a good example of how this weird religion has spread like kudzu across the West. The Scots will decide if they will to remain a part of Great Britain or become independent. From what I’ve read, they will not actually be independent as London will continue to rule their foreign policy. Scotland will become something like Puerto Rico without the rum and fine weather.

To an uncultured ear, that sounds like a reasonable thing. Scotland has been in Great Britain since 1707 and done pretty well as a consequence. If they now think it is better to go it alone, that’s for them to decide. Patriotism, tradition, nostalgia and mere taste are probably the primary motivations for the voters. That’s what sane people should expect. Instead, the smart set says things like this:

I’m against Scottish independence because I’m horrified at the prospect of our country being dismantled. I’d also argue that an independent Scotland is an economic nonsense. I’m not saying a country of 5m people, with a wealth of know-how, couldn’t survive. The problem is that the cultural, historic and commercial ties that bind us are too tight to safely be cut.

They can be symbolically severed, yes, with the creation of yet another expensive layer of Scottish government, with all the special advisers, civil servants and juicy public sector per diems that would bring to Edinburgh’s already cosseted political elite. But as far as the rest of the world is concerned, we’re one entity — a reality that’s prevailed for centuries, long before the 2012 Olympics.

Crucially, Scotland’s still extremely precarious financial services industry is viewed as UK-backed — and that means the Bank of England. The Scottish commercial banks, with their vast liabilities, and still unresolved off-balance-sheet losses, will always physically reside in Britain.

A perfectly good argument against this vote is based in history and tradition. The English can argue that he likes his country the way it is and will not go along with changing it. He may respect the Scots desire for independence, but it is not in the best interest of the British, who happen to be in charge, so they will not permit the vote or Scottish independence. Put another way, the English answer to the Scottish demand can be “No, because we said so. Discussion over.”

Instead, the writer feels it necessary to work through a bunch of pseudo-scientific reasons as to why the maths say it is a bad idea. Everyone in the West is petrified to stand up and say they want what they want because they want it. Cultural pride is so taboo we have otherwise reasonable people claiming the maths are on their side in the same way Druids thought the gods were on their side. The West is slipping into paganism and the economics profession is supplying the shamans. Worse yet, we are slipping into a tyranny of shamans. At least the old priesthoods knew their limits. I say if you see an economist, beat him. He will know why.

More Fraud Book

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Facebook sent a notification to all of their users about a new feature. They report 200 million clicked on the link to make a video. That’s a lot of people, but only a fraction of their claimed user base. Given the feature requires very little from the user, they cannot claim that the other one billion users just lacked the time to do it. In other words, 200 million is probably their active user base.

How “sticky” those users are is debatable, but the volume of active users is consistent with other on-line results. People forget that Facebook did not invent social media. It was around for a couple of decades before FB came along. As a result we have a lot of data on it. The people claiming to know about this stuff lack the institutional memory to think about these earlier efforts at social media, but it exists.

Message boards, bulletin boards and so on are a lot like talk radio. That is, you have many more passive users than active users. Talk radio knows they have roughly one caller for every 100 listeners. They also know that the set of possible callers has a subset of regular callers that follows the Pareto principle. That’s how they can tell how many people are listening to a show. If the lines are lit up, they have a big audience.

Message boards will have 90% of their posts from five percent of users. About 10% of users visit daily. The rest drift by weekly and monthly. Back when sites like Scout and Rivals were looking for investors, they would claim user counts that were technically true, but not reflective of active users or paying customers. The ratio was 10:1 free accounts to paying accounts. That’s a different metric, but it reinforces the larger point.

There’s another thing with Facebook. How long are the users on-line? When I had an account, I’d check in most mornings with my coffee. Three minutes later I was reading another site. Mobile users are on the site for brief clips throughout the day, but not enough to be called active users. A billion users logging in for thirty seconds a day is not much of user base when you revenue depends on them clicking your ads.

Add to this the click farm stuff and you have to wonder if Facebook is not one giant confidence game. Even if that is too strong, how in the world can you justify a $165 billion market cap for an ad engine touching 200 million worldwide? Many of those “users” are living in huts or are children with no money of their own. How many are just robots that click on everything? The quality of those clicks count for everything.

Fraud Book

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There is no way to check the details of this, but the fact the video has not been struck down the creator has not been sued, suggests it is not a slander of Facebook. Indian is known for hosting click farms and similar scams. One of the weird products of global village is the village idiots are easy to spot. Hindus will patiently sit in click farms, creating fake traffic for web sites. Russians, on the other hand, will never do it. Instead, they are better at gypsy scams like selling fake shoes and penis pills. The Philippines is another great place to setup click farms. The new thing is to setup outbound call center there because most speak English. That’s another job Russians would never do.

Anyway, it is a good idea to be suspicious of Facebook. It is one of those services that is great as long as it is free. If they start charging for it, the whole thing collapses. That leaves advertising, but that’s a limited game as well. Plaster the site with ads and people get turned off. Plus, ads are often the source of malware and most users have ad blockers. Then you have the mobile problem. Microscopic ads on a phone are worthless. The quality of advertising is another issue. Like a most internet advertising, the stuff on Facebook is aimed at the impulsive and stupid.

Now it seems the scam is different. They are getting companies to setup pages and then pay to get traffic to their page. Since no one in their right mind goes to a corporate FB page, they are using robots to fool the companies. It is a clever scam, but an old one. Pyramid schemes often work this way. Psychics have always used plants to trap suckers. They were also caught putting stuff on people’s home pages that was supposedly liked by a friend. It was pretty ham handed and they said it was an error, but no one should believe Mark Zuckerberg. Everything about that guy screams grifter.