Flit(tm)

Bear Stearns By the Numbers

E J Dionne's fatuous analysis of Bear Stearns led me to take a look at their stock chart. Bear Stearns has 118.1M shares outstanding. A month ago they were valued at 80 dollars a share. Over the weekend the Fed forced a sale at 2 dollars a share to JP Morgan/Chase. That's a haircut of 97%. Essentially Bear Stearns stockholders are being told that their thrashing around bleeding cash is worth a "go away" payment of 3%. For E J Dionne, that's Wall Street turning into "a bunch of welfare clients".

The real story is that Bear Stearns executives do seem to have tried to mau mau the Fed but the Fed instead forced a sale whose terms are so harsh that Bear Stearns shareholders may not approve, a threat realistic enough that bondholders (who make out better in the Fed forced deal) seem to be buying up stock and bidding BSC's share price to 5 dollars Monday and almost 6 dollars Tuesday.

It's going to be an interesting episode in managed capitalism but educational only if you pay attention to the details, especially the numbers.

Big Oil Being Squeezed?

Tom Barnett makes this interesting observation:

NOCs, or national oil companies, directly control less than 40% of global reserves currently, but by 2030, according to the IEA, they’ll directly account for 75% of all production, meaning “big oil” companies are being slowly squeezed out of the picture, with investors increasingly looking at the NOCs and bypassing the remnants of the so-called seven sisters.

If the IEA has gotten this right (and I have my doubts about them as an organization due to their oil price predictions) it's in the fiduciary duty for Big Oil to do two things, muscle out the NOCS by eliminating as many national oil monopolies as possible (allowing Big Oil entry into more fields) and seriously adding alternative sources of energy to their portfolio so that their shareholders can escape the effects of the NOCs squeezing them out of oil market influence.

Big Oil has long been exhibit A in the amoral tendency of big companies to enter into corrupt bargains with national governments to limit competition. They have been implicit villains for quite some time. We're now entering the predictable long-term end game with Big Oil itself so excluded that it's losing influence in its core market. There's always somebody's cousin who's going to be able to out corrupt the foreigner. If Big Oil has finally figured this out, that turns them into a long-term friend of capitalism. If they haven't, isn't it time some shareholders taught them?

The 2nd implication is also interesting. It provides a very real motivation why Big Oil is really going whole hog on alternative fuels. They want to expand the energy pie so that they can control enough of the market no matter how many NOCS there are and how many oil fields they are excluded from. This provides stock price stability and a safe long-term path to corporate growth isolated from political risk. That's a rationale that will make sense in the boardroom but not one that has penetrated into the general public's consciousness.

Apres Ahmadinejad, le deluge

So, according to this, Iranian interest rates were set in two tiers. State banks were offering interest at 14% while private lenders were offering money at anything between 17% to 28%. Officially, inflation is at 15% in Iran, but is believed to actually be much higher. Based on the higher private rates, it's probably bouncing around the 20-23% range with a 5-8% risk premium. Rates under the actual inflation rate were for the well connected who wanted their bribes couched as sure ways to make money.

But now Ahmadinejad has taken Iranian interest rates and lowered them, King Canute style, to a 12% fixed rate for both state and private institutions. The result is predictable. Lending will collapse, capital will flee, the economy will tank. So why do such an ill conceived, desperate maneuver, straight out of the Nixon economic playbook? Unlike Nixon, Ahmadinejad already knows that this is a bad idea. He bucked his domestic economic experts to issue this decree who no doubt explained to him how painful this is going to be for the economy. There is no rational reason to do this unless you're at the end of your rope and you want to stave off the revolution for a few months longer.

Of course, that isn't what the mainstream media is talking about. It isn't even what the alternate press is talking about. No doubt I'm off my head and there is some cunning plan for creating large negative interest rates by political decree. I'd love to hear it. It's a pity that nobody's supplying any sane reason.

HT: Instapundit

Wealth

Prof. Howard Gardner is Hobbs professor of cognition and education at the Harvard Graduate School of Education so it's really not appropriate to call the man a moron but one is left struggling for a better word when reading the tripe he wrote in Foreign Policy magazine who somehow thought that a paleolithic socialist screed was fit to be called one of "21 Solutions to Save the World".

There are two modest and generous ways to change this situation. First, no single person should be allowed annually to take home more than 100 times as much money as the average worker in a society earns in a year. If the average worker makes $40,000, the top compensated individual may keep $4 million a year. Any income in excess of that amount must be contributed to a charity or returned to the government, either as a general gift, or targeted to a specific line item (ranging from the Department of Veterans Affairs to the National Endowment for the Arts).

Second, no individual should be allowed to accumulate an estate more than 50 times the allowed annual income. Thus, no person would be permitted to pass on to his or her beneficiaries more than $200 million. Anything in excess must be contributed to charity or donated to the government.

To those who would scream “foul” to such limits on personal wealth, I would remind them that just 50 years ago, this proposal would have seemed reasonable, even generous. Our standards of “enough” have become irrationally greedy. Were these proposals enacted, I predict that they would be accepted with amazing speed, and individuals would wonder why they had not always been in effect.

Let's start with a fundamental truth. There is no actual standard, neither today nor 50 years ago called "enough wealth" in law. This is a fiction upon which the whole sad edifice of this piece is based on. While socialists have advocated such schemes their effects where they have been tried have been universally pernicious. The capable flee such regimes or slide into sloth once they have hit the societally permitted maximum and society loses the hard work and inventiveness that they otherwise would have contributed. A century ago, you might have some argument for trying it out, "just to see". But we've seen and the results all over the socialist bloc (both hard and soft) are disappointing, sometimes devastating.

Absent throughout this piece is any real examination of why wealth limitation for honestly earned income is a good thing. The closest he comes is a throwaway line that "it is as likely that there will be clear winners and losers, as that all will benefit from a market economy". This is simply not the case. You can certainly find societies where the rich rig the markets and it is impossible to get into the club because the politicians have been bought by the oligarchs. But this is not a market economy but rather one with fairly heavy state intervention in favor of the existing rich to the detriment of the hard working "would be rich" who are artificially kept in poverty.

Where such political market rigging is absent, inventiveness, hard work, and luck all play a role in a continual shrinking of the poor as they rise to the middle class and even become rich. Sloth, unimaginativeness, and luck also create downward mobility for the rich. Poor investments, a lack of diversification, simply not paying proper attention has led to the fall of many an obscenely rich family as fools and their money are soon parted.

This is a singularly poorly thought out essay and that it was written by such a prominent professor and published in such a prominent elite magazine makes me shudder. It is as if the elite were trying to talk itself out from the realization that socialism just doesn't work, that all the death and destruction of the marxian experiments meant nothing.

At heart there is some sort of unspoken moral case here, one that I see time and time again that concedes the moral ground to the socialist and (so far) only grudgingly recognizes capitalism for its practical effects at production efficiency. Regarding this situation, Rand was right that there must be a moral underpinning to capitalism for the system to be sustainable in the long term. I'm not a great fan of her particular take on how that morality should be but essays like this prove her point. Until people like Prof. Gardner are shamed not only for their practical economic illiteracy but also for their immorality this is just never going to end.

Shame on you, Prof. Gardner. You've not only written bad economics, but your position is inherently immoral. It is simply immoral to punish talent.

The Foolish Economics of Conservation

Two of the silliest things that one can do in looking at the world is to assume that a particular factor is a variable when in reality it is a constant and vice versa. It is especially bad in the prediction business as Victor Davis Hanson shows in his recent analysis on oil. It's quite poor.

First the good:

What it does mean, though, is that the vast imported-petroleum needs of the West, India and China, and the resulting huge profits that pour into oil-exporting states, have super-sized the Middle East’s problems.

Currently, much of the Islamic world is struggling to come to grips with modernity and globalization. Yet while the West pays little attention to disenchanted Muslims in India, Indochina or Malaysia, we focus our attention on Iranian and Arab radicals. They alone, thanks to oil, have the cash to fund jihadists and hate-filled madrassas.

Then the bad:

If the United States could curb its voracious purchases of foreign oil by using conservation, additional petroleum production, nuclear power, alternate fuels, coal gasification and new technologies, the world price might return to below $40 a barrel.

That decline would dry up the oil profits of those in the Middle East who now so desperately use them to ensure that their own problems must also be the world’s.

The ugly truth is that the US is a mature economy and conservation is really only going to affect the marginal demand on petroleum. It might slow down the increase. But there are literally billions of new sources of demand in the form of the chinese and indian consumer out there and their basic needs for a high energy lifestyle have not been met. High petroleum prices have been and will continue to slow their entry into the market but conservation that lowers western consumption will allow marginal asian consumers to enter into the market and the demand overhang is huge. No reasonable level of conservation of 300 million americans will offset the demand of 2 billion indians and chinese (leaving off the vietnamese et al who are also coming on-line). High prices will remain until the overhang of consumers is settled.

Shifting to a multi-fuel economy where energy inputs like bio-fuels, petroleum, wind, solar, et al. go through an energy middleware transformation (electricity and hydrogen are the two major contenders) would have a much more profound effect as the barrier to entry of new producers all over the world would dilute OPEC producer power. The increase in possible energy sources and overall usable energy will reduce the potential consumer overhang much more rapidly than any possible conservation measures could.

But beyond speeding up the day when energy prices can start coming down again, enlarging the producer pie reduces OPEC influence by making the removal of any particular OPEC member from the markets a sustainable enterprise. Right now the Kingdom of Saudi Arabia produces so much of the world's transport energy that a regime change would be catastrophic. If the percentage of world supply satisfied by KSA drops below a certain level, they lose their "get out of jail free card" and their behavior in supporting terrorism through the madrassas they fund will end, one way or another.

Worldwide demand outside of the US is not a constant. It is a variable and one that is significantly changing year to year, mostly in Asia. The very good changes in India and the PRC, liberating the free market in both countries will put (in fact are already putting) huge pressure upwards on prices. All we can do is figure out how to increase the supply pie in like fashion. Conservation will simply not get us there.

Israel's Pipeline Revisited

In 2003 I wrote about Israel's potential as a transshipment point from the Mediterranean oil market to the Asian oil market. I viewed it as a potential for Russia to arbitrage away the up to $3/bl "Asia premium". Today, it seems that the project still lives but the rationale and players have changed. Russia has stepped back and Turkey has stepped up. Now it's not just an anti-OPEC move but also an anti-Russia move.

The appeal of the Israeli pipeline is obvious. It's just a matter of who is going to take advantage of the geographic facts.

Discounting software

I was looking for a way to upgrade my current email to a .mac family pack. Surprisingly, there are certain restrictions on converting accounts but even more surprisingly to me, the service is highly discounted. It appears that discounts go up to 50% if you go through one of Amazon's associated resellers. You can only find Amazon's price if you start going through the motions of buying it.

Apparently there's agreement that Amazon can sell for what it likes but it can't advertise what it likes. There's some sort of "minimum advertside price" (MAP) that they get around by simply teasing you with the idea that you have to put it in your cart to find out the price. Odd, a timewaster, and it must increase the number of abandoned carts that Amazon's software has to deal with.

An Interesting Blog

Dr. Housing Bubble provides a sort of train wreck comic relief look at the Souther California housing bubble. It's too late now but so many low to mid income homeowners could have cashed out, reduced their costs by moving someplace that *wasn't* in a bubble and gotten their families a more decent life outside the difficult suburbs outside Los Angeles.

Global Warming Financial Illiteracy

Some cases for global warming are reasonably plausible. This case for global warming is embarrasingly stupid. Putting aside whether $1.6T in 2006 spending will actually save us $11T in foregone growth in 2100 there's the whole question of whether the expenditure is worth it. Spending $1.6T now to avoid $11T in expenses in 2100 means that the Present Value of $1.6T has to be less than $11T in 2100 and we have to assume that science will not produce any surprises that lower the future expenditure, the economic cost of not preventing warming incurred in 2100. If we gain sufficient economic growth in the meantime, it would not be worth spending the money even if (and this is disputed) the study is correct about the financial consequences.

One of the key factors is economic growth. If worldwide economic growth is high enough, $1.6T turns into $11T by 2100. The economic growth rate to achieve that turns out to be 2.07213%. Current economic growth is 4%. Economic growth from 1950-2003 is 2.1%.

If you assume that we're headed for more of the same, spending the money now means over the next century, you've lost $40.5B or $431.3M annualized. If you think that we're entering a new era where 4% worldwide economic growth is going to be the norm, the losses are $1.3T or an annual loss of $14B. In other words, the financial numbers don't make any sense even if you take the most pessimistic assumption that the lab boys aren't going to figure out how to make cleaner energy over the course of the 21st century. It also assumes that present trends towards freedom and higher economic growth won't continue upward so these damning numbers are really quite conservative.

Ah but what about biodiversity? We could be losing species! While this is true, we could also be gaining them. Historically biodiversity is much greater in warmer climes than in cold ones. Life is tough in the cold and few species (relative to warmer climes) can adapt to harsh conditions. Warming is going to be tough for cold weather specialists but it will be a boon for warm weather ones.
Update: (just a note, I calculated it all in Excel using the PV formula)

Why So Little Fischer Tropsch So Far?

One of the great mysteries of energy, for me, has been why on earth have we had $70+ oil when we can make $32 diesel from coal. Sure, the investment is stiff but with that much profit on tap going forward, this is a no brainer. Today, the clues came together

First here:

I absolutely get the idea that actual costs matter, but you know, maybe I can explain what I mean by "population response" by looking back at Toyota and GM. The future we got (Ford and GM in various states of trouble) came not from actual prices, but from those players inability to predict (or accept) them.

I saved a link from back in July '05 when a GM spokeswoman said something astonishing:

"Our indicators show that oil will go down, not up," she said, pointing to information she gets from the federal Energy Information Agency, which is part of the Department of Energy.

By 2010, the agency expects a barrel of oil to fall to $26, she said.

Now, I get that CTL and GTL will be driven by actual prices ... but will also be driven by who's believing the EIA's $26 estimates, yes?

So off to the EIA which publishes yearly estimates of energy prices. Their current 2010 estimate for crude oil prices is $47.50 (averaging their high and low estimates). That's a huge difference, the difference between very good profitability and going bust on an enormous capital investment. Looking back at the previous year's estimates, I couldn't find high and low numbers and the estimate wasn't actually $26. It was $25.

But even today, the EIA's low price estimate drops down below $32/bbl in 2013 and stays there through 2030. That means that there's significant risk that a plant built today might turn unprofitable prior to making a decent return on the investment. For that risk to go away with today's numbers, FT synthesis cost would need to drop below $28/bbl to shake loose the most conservative of investors.

Then again, EIA issues numbers every year. Next year's low price projections might be beyond $32.

EU Specialization in Trade Negotiation

Well, Doha not only appears to be dead, the EU wants to point fingers. To recap, the Brazil led developing bloc wanted deep cuts in agricultural subsidies. The EU wanted to give in the least and the US took the middle ground position between the two. The talks break down and now we have Peter Mandelson blaming the US for the collapse of the Doha round because the US would not be sufficiently flexible with the EU position. What is this guy smoking?

Mandelson's engaging in a long-time EU specialty, finger pointing. It doesn't matter that they've scuttled the talks. What really matters is that the right people get the blame.

Gasoline Lying

I just tripped across an almost textbook case of lying through statistics. This one's from the PRC and it's a brazen attempt at minimizing how the PRC is a major contributor to the world's oil crisis.

Oil is usally measured in barrels (32 barrels to the US gallon) and priced in dollars, the PRC raised the allowable sell price on gasoline 300 yuan per ton (most likely metric ton) at the retail level. It sounds impressive but let's move that back into the currency that oil gets traded in and it's $37.50. How many barrels in a metric ton? It depends on the specific gravity of gasoline. here's how to do the calculation for crude oil and plugging in this page's figure for vehicle gasoline (0.74 instead of 0.88) you get 8.5 barrels of gasoline per metric ton. Divide the price increase of $37.50/8.5 and you get $4.111 rise per barrel and $0.129 per gallon increase.

Prior to the hike, gasoline was $43 a barrel which translates to $1.344 per gallon ($0.355 per liter). After the price hike we're all the way up to $1.473/gallon ($0.389 per liter) at a price set by the State. Great gasoline prices, if you can get them.

So who can get them? Certainly the people of the PRC can get them and so can the businesses relocating to the PRC. The energy subsidy is an important factor in relocation considerations, especially as labor costs in the PRC are rising.

Now it's obvious that the PRC government can't subsidize gasoline costs to this extent forever. It's also obvious why the market for gasoline isn't reacting normally. There's at least one huge, inefficient, market participant that is choosing to subsidize the price of gasoline to the point where there is greatly reduced pressure to improve efficiency and cut demand.

Now here is a WTO complaint I can really get behind. 40%-50% retail gasoline subsidies supplied by the state is a huge government subsidy that distorts economic relationships across the board and makes economically profitable operations that should simply not be in business. The longer that it goes on, the worse the eventual crash is going to become. The PRC is now large enough that we're going to feel that crash when it comes. The only question is when and how.

China Peak II

A year ago today, I wrote about the PRC's coming labor shortage, linking to a story in the NY Times a day before. Here I am, exactly 1 year later, linking to another NY Times story, itself a year after the prior one, examining how the PRC's labor shortage is growing. They're starting to have to recruit for labor, increase wages, provide better working conditions, offer improved benefits, and are still having trouble meeting their labor force needs.

This is an economy that is moving into the frothy part of the business cycle. A year or two of labor shortage, businesses making worse and worse decisions in order to keep the labor pipeline going, and the inevitable crash will start.

The government is terrified of this, of course. In fact, all governments are terrified of this. When the PRC crashes, it's very likely to land hard. The PRC government will want to avoid the creation of all those angry, newly unemployed workers that a recession would cause so they're very likely to worsen the crash by trying to delay it, making the eventual dislocation even worse.

If you can, save. If you can't, save anyway. It's going to be bad.

HT: The Glittering Eye

Laffering All the Way to the Bank

Every year, the CBO estimates how much money is going to come in. It changes those estimates based on changes in the tax law and will also research speculative estimates when legislation is under consideration. Donald Luskin reports that the 2003 capital gains tax cut turned the prior CBO estimate of $125B in revenue for 2004-2005 into one of $98B. The actual figure for capital gains tax revenue is $151B for those two years.

In other words, we have $26B in the US Treasury that we wouldn't have had had we kept prior tax policy. We gained actual money by lowering tax rates on "the rich".

This is a very good thing for the country. It also happens to vindicate standard conservative economic theory, specifically the Laffer Curve. I do wonder if Democrats will take note?

Securing Against EMP

All I could think of when I read this scare story regarding an EMP attack is "Why aren't people insuring themselves against this?" and I still can't imagine why not. It's not really that hard to set up a reasonable scheme. You talk to manufacturers and get them to license the production of certain replacement components in their current lines, the ones that would be vulnerable to EMP blast. Your license to produce only kicks in after there has been an EMP attack so their current supply chain has no problems with this new arrangement. Even if their equipment would survive, there's no way they could deal with the surge in demand at the time so they're not really losing anything.

You offer EMP insurance for reasonably low prices in the form of guaranteeing the existence of hardened production facilities to create the parts needed to replace EMP damaged components and granting the right to buy when an EMP blast goes off. You have a small factory that is created to produce very short runs of electronics quickly with stock sealed to prevent EMP damage. Under normal conditions, such a plant is uneconomic but if nobody is operating due to component failures, such a plant is worth pure gold in restarting factory lines or in replacing hard to find, discontinued parts.

Alternatively, you offer safe, secure storage for the necessary parts in bunkers designed to withstand any EMP blast and simply store these parts for your clients, something like a safety deposit box. It's a reasonable solution for larger institutions like UPS that might need thousands of truck computer replacements to get their fleet back up to snuff. A secondary line would be selling off that inventory of replacement parts for your clients when they change equipment models and no longer need the parts they had been storing.

Prime customers would be the very SCADA system managers that the authors fear would lead to cascading societal failure. However, if the system could be made efficient enough, paying insurance to maintain idle, expensive, hardened production capacity might be a fairly standard rider offered by all sorts of existing property insurance, such as renters, auto, and home insurances as well as part of extended warranty offers on lots of electronics.

A Small Thought On Inversion

Rates have recently started to flatten and even started to invert. This means that it costs less to borrow money for the use of the US government for 10 years than it does to borrow it for 3 months. Considering our mammoth debt, why would we issue *any* short term paper at all? Why not just issue only 10 year notes or longer, pushing up the long rate with extra supply and lowering it on the short end with lower supply?

It's something of a puzzle.

Medical Price Controls

Next time you are waiting for a doctor in the US, you might pass on the outdated newsweeklies and ask a bit about how prices are determined. The results should shock you. For the vast majority of medical practices, their prices are set for them the institution ultimately setting them is the federal government. The entity doing it is called HCFA, commonly known as Medicare. They don't do it alone but they do the heavy lifting. The American Medical Association (AMA) defines a long list of numeric codes for each mainstreatm recognized medical procedure. Medicare then takes each of those procedures and assigns both an resource value unit (RVU) and a price for each of those CPT codes. You are, by law, not allowed to charge patients more than those tables permit whether you participate in the Medicare program or not. Your doctor's participation only moves him from one reimbursement column to another.

Since a huge chunk of medical dollars are run through the government, that's a socialist pricing model that has broad influence. But the RVU system is far more pervasive than that in its real-world effects. Most health insurers do nothing more than take the Medicare RVU values and blanket raise or lower them by a set percentage. This means that if a government bureaucrat misprices a procedure, every private health insurer will also misprice that procedure.

This, in short, is insane. The longer version is that nobody has ever successfully allocated resources via government pricing in any field and there is no reason to think that medicine is priced correctly. Our only salvation is that our systemic transparency makes the insanity clear a bit earlier than most other countries that adopt socialized medicine and spend a great deal of effort in propagandizing in favor of the system and hiding the inequalities and injustices of government pricing.

This propagandizing/hiding function can have drastic, real world consequences. The timing of the invasion of Poland has been alleged to have been at least partially driven by the need to hide the coming collapse of the Third Reich's disastrous economic policies Germany, under Hitler, made tremendous strides by eating up its seed corn and juggling the books in the most shameless ways. You can't hide that forever but you can hide it a lot longer if you start invading other countries and robbing them of their wealth.

Germany's present day malaise can largely be explained by its political class being unwilling to be honest with the German people and explain exactly how much past administrations of all parties have robbed future generations of a decent standard of living. The same can be said of all the european social-model states on the continent. Fortunately, their malaise extends to their militaries and thus the old solutions of the last century are no longer practical. But nobody seems to have a better solution than to kick the problem down the road and hope for a miracle.

A major driver of that future impoverishment across the 1st world is the state provision of healthcare. It's not the only one, state pensions are also a huge problem. Healthcare is the largest component of the problem and even though President Bush was willing to try to reform Social Security, his contributions to healthcare reform have been very modest indeed.

Get $50 a Barrel Oil, Today

You can buy $50 a barrel oil today. There's just one catch. It's in the PRC. The PRC is forcing a $20 per barrel domestic subsidy on fuel. It's completely unsustainable. There are gasoline shortages. Refiners are threatening the government. There are strong worries about civil unrest if fuel prices rise to market levels. There are strong worries about civil unrest if fuel shortages persist.

In short, it's a complete mess, unsustainable over the long run, and a good candidate for the reason which will eventually take down the PRC's ruling party. For those of us who remember President Carter, the gas lines and unhappy people are pretty much what we all expect but it's been 25 years and a lot of people don't remember the '70s as something they personally experienced. Now they can get cheap gas in the PRC along with long lines, closed stations, and very angry people. And to think, yesterday I listened to Michael Savage actually call for gasoline price controls.

God save us from idiots and worse.

The Non-Breaking Point

I just got through the NYT Magazine article The Breaking Point about the problem of managing an oil economy. A long article, it had a little bit of everything in it, the scary apocalyptic chicken little, the former oil executive who is quietly pessimistic, and the PR flak who smiles and assures that all is well. What it didn't have was any sort of information about what the switchover points would be to something else.

The baseline assumption of almost the entire article was that there would be no significant switching over to alternative fuels. This is economic illiteracy at its worst. The apocalyptic, Simmons, completely ignores the idea that indirect competition will lead to substitution and predicts triple digit oil prices, and not "low triple digits", either.

What if natural gas shifts to become the fuel of choice, whether burning it or using it as feedstock for fuel cells? What happens to oil demand projections? They get thrown away as the new energy demand is fulfilled by cheaper alternates, primarily natural gas, but not exclusively. A growing portion of the machinery running the global economy will be multi-fuel friendly fuel cells starting the end of the decade. Indirect competition to gasoline and other petroleum products will largely become direct competition in a hydrogen economy.

It would be extremely obtuse to think that oil executives don't closely follow their indirect competitors. The article even says that a switch to alternatives is a fear of all the oil executives. But nowhere are the questions asked, "What is your most formidable alternative energy competitor in the medium to long term? What was the price point at which switchover would happen five years ago? What is the price point today? What will it be five years from now?". All in all a long, interesting read for a Sunday that is a huge missed opportunity for those who wanted serious insight into what's going on with oil.

An Opportunity For Profit

Here's an Austin Bay guest blog for Glen Reynolds that got me thinking:

"What's the biggest problem plaguing corporate America?" he asked rhetorically. “Weak corporate boards that fail to protect shareholders rights."

One of his indicators of weakness: the prevalence of “golden parachutes” for executives.

“There's no penalty for executive failure,” he said. “The board members think it’s easier to cave in and pay off a failed CEO. Shareholders lose.”

So if shareholders financially lose by irresponsible corporate behavior in pay and perks, why isn't the behavior measured and corporations ranked on it? It seems that if shareholders pay for it and lose out in unrealized profits, investment money would be wise to steer itself towards companies that do a bit better in compensating for performance, not for mere presence in the executive suite.

The Cell Phone that Doesn't Ring

Like Holmes' famous dog that didn't bark, Tom Friedman's cellphone that doesn't ring is interesting because of what isn't happening. What isn't happening in the NYC subways is that small, innovative upstarts aren't jumping in to provide service in little patches. It's not like there isn't space down there. I'm sure the magazine seller in xyz station wouldn't mind at all if somebody provided a regular, stable income for him by renting out a small portion of his kiosk. So why isn't it happening?

I would guess that microtowers don't happen because the regulatory environment doesn't let it happen. The FCC would have to approve as well as the various transport bureaucracies in the NYC subway. Somewhere along the line is a group of bureaucrats who don't look kindly on upstarts and is adept at squashing them, so adept that people have stopped bothering to try.

So, is a government program the answer? Only if you want increased inefficiency and poor service. The real solution is to identify the blocking government action, remove it, and let the free market fix the problem.

Another Job Germans Won't Do

I think that David's Medienkritik is spot on in lambasting German Leftist xenophobia by IG Metall, Germany's largest union. It really is a rerun of the classic german anti-capitalist propaganda from the '30s. But David misses a trick in that he doesn't answer the question, where are the Germans?

In any economic biosphere there are producers and decomposers. The decomposers are essential to sustainable growth and stability in the system. By taking out firms that are sucking up inordinate amounts of capital and not performing, such economic actors as "Blackstone, KKR, Investcorp" serve the same essential purpose as fungi, earthworms, and bacteria in the worldwide biosphere. They unlock essential resources and make them available for use by other actors.

So where are the Germans? Why is their domestic "decomposer" sector inexistent or so anemic that it is being shouldered aside by the American "bloodsuckers" (IG Metall's term)? Is this highly paid, lucrative, essential economic role work that Germans just won't do? What's wrong with German financiers?

Letter to the Paper ILV

John Cole decides that normal economics doesn't apply when it's all about the evil drug companies. I'm not particularly happy with using fascist economics to counteract communist economics but it's somewhat better than the "Atlas Shrugged" alternatives of just letting the companies go down the tubes.

To say "without the current drug companies, there would be new drug companies" is nonsense. That's functionally saying that without the current railroad companies, we'd just have new ones. We proved the latter wrong at the creation of Amtrack because there were no private companies left to take over the bankrupt ones. The prior century's idiotic railroad regulation made sure of that.

Drug companies are the creation of bright inventors combined with capitalists who think that, globally, they can achieve at least an average return. Globally, they have to accept a below average return in most markets.

The US is the last major holdout in free market pricing and the one reason keeping the capitalists from withdrawing their capital and redeploying it elsewhere. For the green eyeshade types that invest the bulk of money everywhere, they go to jail if they purposefully deploy capital at lower returns for non-financial reasons. This is called fiduciary duty. It's not reasonable to expect somebody to go to jail just because your particular disease hasn't got a cure yet.

If you have globally above average returns, you attract new capital and you get new companies entering into the market. If you have below average returns or government mandated losses, people won't invest and you won't have new company formation.

Generic producers aren't affected by this reasoning. They make their money off of production, not new pills. We won't lose our current crop of cures. What we will lose is the financing to push forward our new ones. That is likely to cut down the introduction of new drugs by about 50% (public research will still be around).

We can only hope that our neverending race against the drug resistance is winnable with the remaining 50%. If it's not, you can add advocating mass casualties in a pandemic to the current sin of bad economics.

America's Natural Rate of Growth

For decades, the natural rate of growth of the US economy was 3%. In a decidedly mixed article The Economist pegs it at 3.5%-4%. This is a huge difference. At 3%, the US started surpassing western Europe as their soft socialism sclerotized their national economies. If we're truly entering an era where our economy naturally grows even faster, the gap will not only persist, will not only keep growing, the gap's growth will accelerate.

I do wonder if this natural growth rate estimate is real. The Economist's pessimists would have nothing to hang their hat on regarding the most recent quarter's growth. At 3.1% it is slightly above the decades long postwar consensus on the US' natural rate of growth. It's only against this new, higher estimate that it falls somewhat short. The preceding quarter's growth figure, which was preliminarily estimated at the same 3.1% generated similar concerns until it was revised to 3.8% as better data came in.

So, is the US economy just in an unusual growth spurt that will settle back to the old 3% figure over the long haul? We're certainly in an era of longer cycles. I recall earlier articles in the conservative press worrying that we were headed toward an era of 2.5% long term growth. Those overly pessimistic articles might be matched by overly optimistic estimates today. In any case, it's useful to keep the long-term history in mind when reading the latest "are we falling behind" article.

Shrink the Gap, Shrink the US Trade Deficit?

Robert Samuelson argues that a global glut of savings is behind the US trade deficit. The fiscal imbalance caused by all that money pouring into the US creates a situation where we don't save much ourselves, our currency becomes overvalued, and we import an awful lot while exporting relatively little. What Samuelson doesn't examine is the effect that adding new countries into the mix of decent homes for FDI. The US would get less FDI as more opportunities for investment became profitable in India, the PRC, Angola, or Libya. We would sink into a Red Queen economy where we had to work harder, export more, just to tread in place as a destination for FDI.

In other words, gradually improving our security picture gradually undoes the investment imbalance. There are both opportunities and perils in that. There are also important lessons to learn for our allies and adversaries. Because military action ties back into a pretty ticklish economic situation for the US domestically, we are likely to neither go "faster please" in bringing the Gap to an end, nor are we likely to give up the project entirely.

We'll work moderately to shrink the Gap but not so fast that we suffer a domestic economic crisis as the new investment opportunities we have created suck up the capital necessary to make a smooth adjustment out of our unsustainable economic course. In other words, the use of geopolitical dynamite that characterized the Iraq big bang is not likely to be repeated, or at least repeated quickly.

Germany's Labor Disaster

German unemployment is so high in the former DDR that german workers from there are poised to outnumber Turks as guest workers in neighboring Austria. It's so bad that unemployment in the territory of the former DDR is topping 25% with FRG unemployment as a whole, a nasty 12%. So, why do easterners simply drive down wages and provide cheap labor for W. Germans? Germany's inflexible labor laws and social democracy make it impossible.

Instead, you get international labor mobility and desperate germans on the move across Europe looking for work. The FRG can no longer afford to pay them to stay home and do nothing and is cutting benefits thus setting the visible crisis in motion but the problems have been gathering for decades.

Germany, if it doesn't get its act together is going to end up in a decade or two feeling weak, humiliated, and looking for alternatives. It's even money whether those alternatives will come in the form of nationalist extremism or free market policies. If we get to that point, batten down the hatches.

HT: NoonShadow

Japan Inc. Redux

Thomas Bleha must love the movie Rising Sun. There's an awful lot of Japan envy in that film, with bumbling Americans always one step behind the wily Japanese. There was a lot of that sort of thinking in the 70s and 80s. Japan was cleaning our clocks, their bureaucrats were promoting key industrial players, managing competition, and increasing efficiency. We were doomed to play second fiddle to the land of the rising sun.

It didn't work out that way.

Here's an article that fits right in with those pessimistic times. The Japanese are picking winners, subsidizing broadband, and will reap the fruits of all that fiber in the ground to gain a new broadband future with lots more economic growth. And you know what? He might be right. The managed competition method, like a stopped clock, does work every once-in-awhile. The benefits of the model are and have always been highly visible. It's the costs that are hidden and remain hidden.

The costs of subsidizing bandwidth vary by population density and the US has one of the lowest population densities of the entire 1st world. Australia beats us out but nobody really talks about their amazing broadband national coverage and it's for the same reasons.

Aside from a throwaway line ("The United States' vastness no doubt complicates the task, but it is no excuse for not undertaking the job") the problem of wiring the US remains largely unexamined. Canada has the happy circumstance that its population is largely concentrated in a band on its southern border. US population is concentrated in several noncontiguous megalopoli, the NE corridor that starts around Boston and runs along the coast to around DC, the West Coast Megalopolis that runs largely between San Francisco and Los Angeles, The Great Lakes megalopolis starts in Wisconsin and stretches all the way to western NY. There is also a South Florida one and several other wannabees like the emerging Texas "Triangle Cities" one.

With clumpy population separated by large distances, the cost of wiring a national infrastructure goes up while the relative benefit goes down. Network effects mean that the larger your network, the better your results. We're trying to cover 10 times the area to gain twice to three times the population node connectivity of Japan. That means that the cost to benefit ratio is somewhere between three to five times better for them.

The natural result of this is that we're going to lag. We're going to wait for costs to drop and use cheaper networking methods as they arrive as our . Goosing progress by dumping money into a national network infrastructure initiative is not only risky in that it will tend to give us bad habits, it is also going to cost us more for less benefit.

The geography of our nation, the distribution of our population, all mean that we're forced to play the "second mover advantage" game when it comes to broadband, at least until we figure out how to take a couple of zeroes out of lift costs per kg or some other sort of way to get data networking platforms up above us cheaply.

We can go expensive now or we can adopt a multi-platform competitive approach and try to encourage new entrants so that they quickly improve the cost to deploy and maintain bandwidth infrastructure. This, essentially is our current position with the FCC trying to spur innovation so that a national broadband rollout makes sense. Waiting patiently has never been a US strong suit but we're doing it now and actually playing the game pretty well. It would be a shame to ruin things and merely imitate solutions that do not scale to our particular density profile.

Should Oil Wheeling be Illegal?

Imagine three people in a line, A, B, and C. A and B both have a commodity that C wants. A has three units and needs to use one, B has one unit and needs to use two and C has zero units and needs one. Let's further say that it's cheaper for B to sell C his unit and buy two from A than for C to buy from A and B to buy from A. Should B be allowed to make the more efficient deals?

Illegalizing that sort of trade seems to be what Sen Ron Wyden is after. The US can sell Alaskan oil to Japan for less money than Japan can get it from the Gulf. The US then increases imports from Venezuela to make up the difference, saving on net shipping costs. Japan saves money, the US makes a small profit on the deal, and Venezuela sells its crude closer to home instead of shipping to further off customers.

No doubt, if we were to get into some sort of national crisis, we'd keep our oil home and the Japanese would have to pay the Gulf States' "Asia premium" of up to three dollars on each barrel. So who should get the extra money? Gulf producers or should US oil companies split the money between them and worldwide consumers?

Unfortunately it takes 2-3 paragraphs to explain why such trades are a good idea and only one sentence or two for demagogues to argue that they're against the national interest, crying economic treason.

China Peak

It looks like the labor threat from the PRC is peaking. If we can just survive a few more years, rising wages will reduce the threat from the PRC and US manufacturers will no longer be swimming against impossible competitive conditions.

I've lived this story before. In the 80s it was the Japanese who were supposed to do us in with their unbeatable system of a manic workforce with industrial planning from the MITI led top. The Japanese threat receded, the PRC threat is about to. All that is left is greater creativity, greater production, lower prices, and a more varied culture commercially available all over the world.

Before I shuffle off this mortal coil, I expect to hear this story again but the PRC and India were the big ones. No other possible rising power can swamp globalization by putting so many money starved workers on the world market and caused the developed economic Core to recoil in horror, replicating the pre-WW I withdrawal from globalization's promise.

It's a very good year.

Scary EuroSoc Fact of the Day

The Telegraph, writing about the EU's sad joke of a process to liberalize service employment buries this bombshell on paragraph 13

Last Monday, Sweden's largest trade union admitted that the official 5.5 per cent unemployment rate is hiding a "real unemployment" of 20 to 25 per cent, which includes those claiming long-term sick pay or having taken early state retirement.

I can't even begin to imagine what a 25% unemployment rate would do to this country. This is depression level unemployment in any normal context but for Sweden, it's just another day of eurosocialism business as usual.

The really infuriating part is that you can still find people that, to this day, claim that Sweden is a model society pointing the way towards a peaceful implementation of socialism.

25% unemployment, amazing.

HT: Marginal Revolution

Chaos Investing

Russ Nelson is unhappy with historical economics, or using past data to make predictions of future stock price moves. I'm 90% of the way with him but I do have a 10% caveat. Stock prices, as part of a complex system, are chaotic, in the sense of Chaos theory. In that sense, finding whether there are attractors or strange attractors should be able to increase your profit potential based on past data analysis. The patterns won't entirely hold but even small increases in predictability can lead to large increases in profit. Chaotic patterns don't hold, but they almost do, and almost may well be good enough to increase profitability over strict fundamentals investing.

Copyright Musings

Tyler Cowen steps into the copyright debate, prompted by the Supreme Court's addressing the issue of P2P. He decides to take an economist's point of view. Or does he?

His first point (of three) is puzzling.

In ten year's time, what will happen to the DVD and pay-for-view trades?  BitTorrent allows people to download movies very quickly.  Note that DVDs already account for more than half of Hollywood domestic revenue.  Furthermore the process will be eased when TVs and computers can "talk" to each other more readily.  Yes, I am familiar with Koleman Strumpf's excellent work showing that illegal file-sharing has not hurt music sales.  But a song download can be a loss leader for an entire CD or a concert tour.  Downloading an entire movie does not prompt a person to spend money in comparable fashion.

First, bemoaning the death of an industry because new technology destroys its business model is very rarely economic thought. You might as well bemoan the decimation of the buggy whip industry with the coming of Ford's Model T. The creation of IP has little to do with the DVD or pay-per-view trade. If content creators can find a way to make more money via new methods, the passing of intermediary mediated pay-per-view will not be a tragedy.

It's simply not true that movies prompt no further sales. Some do so today and quite shamelessly as any parent knows. If you knew that every bit of clothing, furniture, or other items that appeared in a movie were available at the movie's website for easy purchase, a significant revenue stream would be had, for instance. If the ancillary revenues from selling products placed in the movie were enough, free distribution would increase revenues to the producers of the movie. While this would shake up the distribution industry, perhaps even as much as the buggy whip manufacturers were shaken up by the introduction of the model T, it's no loss that an economist should be crying over.

Tyler Cowen's 2nd point is betterr, but not by much.

Perhaps we can make file-sharing services identify (and block) illegally traded files.  After all, the listeners can find the illegal files and verify they have what they wanted.  Grokster, sooner or later, will be able to do the same.  Yes, fully decentralized and "foreign rogue" systems may proliferate, and any identification system will be imperfect.  But this is one way to heed legitimate copyright suits without passing the notorious "Induce Act."

This is half right. Any economist worth their salt should know in their gut that there are at least two solutions to most problems, one major being the stick of legal enforcement, another being the carrot of superior product/service tempting people to do the right thing. In this case, Tyler lays out some "stick" related reasoning but entirely ignores the possibility of carrots. Apple's iTMS shows the way here. Price your product reasonably, make it easy to get, and you'll explode the available market. Here's a case in point. The 2003 Galactica pilot is available on DVD for about $20. I'm not paying $20 for it, the price is too high. If it were available at Hollywood Video I'd rent it for a buck or two. If it were available as a download, I'd probably pay $5 because it's worth $3-$4 to avoid the hassle of ripping. You price your wares too high, you use distribution chains that are too expensive and your market shrinks.

So which model is right, the carrot or the stick? That's an entirely other question but it's a good bet that both have their uses. The stick works an awful lot better when there are plenty of pleasant, legal carrots around to munch on and carrots increase their appeal when a stick is handy to discourage the use of illegal alternatives.

Turning to Tyler Cowen's 3rd (and final) point, he goes downhill again.

I question the almost universal disdain for the "Micky Mouse" copyright extension act.  OK, lengthening the copyright extension does not provide much in the way of favorable incentives.  Who innovates with the expectation of reaping copyright revenues seventy-five years from now?  But this is a corporate rather than an individual issue.  Furthermore economic research indicates that current cash flow is a very good predictor of investment.  So the revenue in fact stimulates additional investment in creative outputs.  If I had my finger on the button, I still would have pushed "no" on the Mickey Mouse extension, if only because of the rule of law.  Privileges of this kind should not be extended repeatedly due to special interest pressures.  But we are fooling ourselves if we deny that the extension will benefit artistic output, at least in the United States. 

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One of the major problems of the copyright extension act was that it actually stopped the flow of product from protected to public domain. That means that the creative "watering" that new public domain material provides is gone from the US scene for the next 20 years for any extended product. Extension could have been done 6 months every year for the next 40 years and achieved the same eventual length as the actual legislation but it wouldn't have dried up the well completely. Of course, such legislation wouldn't have been nearly as popular. That change in popularity would have been telling.

The truth is that the people have suffered a taking without compensation and we're in danger over the next two decades of forgetting the original intent of the system, temporary protection and eventual shifting to public domain, reasserting the fundamental right to copy, in exchange for increased creative product on average. When, 15 years from now, the next extension bill wends its way through Congress, an entire generation will be out there that will not have felt and understood the utility of public domain intellectual product. That's a danger to our constitutional system as corporate interests try to creep us back to the old English system of permanent IP protection. That system is gone because it led to stagnation. If economic analysis doesn't fit the historical data, there's something wrong with that analysis.

Sinclair and Shareholder Primacy

Professor Bainbridge wrongs the cause of shareholder primacy in his analysis of Sinclair over the showing of Stolen Honor.

Bainbridge quotes Tom Smith extensively on the matter to the effect that the Sinclair effort is a textbook case of shareholder activism gone amok. In fact, it is just the opposite.

The threat that Bill Lerach and the NYS controller issued was, essentially, to beat down Sinclair's share price via politically motivated selling and judicial action below Sinclair's normal market clearing price. This is a profit opportunity in big screaming capital letters. Yet nobody came to Sinclair's rescue to the benefit of their investors.

No similarly sized market player came and announced that they would be glad to take the money of the pensioners of the State of NY in favor of their own fund holders at bargain prices. If the pension funds of TX, OK, and GA did that, the NYS pension fund threat would evaporate and people in the pension system in NY would start complaining that their agent, the controller of NYS was not acting in their interest. In a better world of shareholder activism, significant chunks of the pension system funds would be taken from the controller's control over the affair.

The Lerach threat of lawsuit was toothless as Prof. Bainbridge himself noted except as an invitation to actual shareholders to sell stock. With a major seller appearing and preannouncing a major sale and no major buyers stepping up to the plate, Sinclair capitulated. But it is the imbalance between activist sellers and activist buyers that caused the problem, not the existence of sellers and buyers acting outside their obvious economic interests. Furthermore, the entire affair is mischaracterized as a war between agents and shareholders but it was not because the true owner of the money isn't the state of NY but rather the pension holders who have imperfect control over their own agent. It was a fight between one form of agent (corporate directors) and another (fund management directors).

Shareholder activism is imperfectly done in the US today and there is a political imbalance among activists that is of concern. That imbalance is at least partially caused by Prof. Bainbridge and others like him who, I suspect, get a much more favorable hearing on the right than on the left.

No matter how much people tut tut over the crass shareholders exercising their rights to buy and sell as they please, some are going to do it on non-economic grounds. It would improve things if we institutionalize the practice and have activists on all sides in that fight. Otherwise we are going to get repeat after repeat of this sort of browbeating from the left.

The Little Guy

Amy Ridenour stands up for the little guy getting ahead by serving the fat cats who attend the inauguration. It's a transfer of wealth, not a waste of it. Her post reminds me of the old "luxury tax" that was imposed years ago. Democrats put it in as a blow against the rich but took it right out as ordinary people who built yachts and other luxury items for the rich saw their incomes evaporate as the tax kept rich people's money inside their wallets.

The argument is similar here. Spending your wealth increases economic mobility as the rich slow their rise or move down a bit in wealth and the ordinary service workers maybe get enough extra money to work on that nest egg to start their own businesses or expand.

But this kind of wealth transfer doesn't have the State involved so it's not to Democrat government unions' liking. They don't get their cut and that makes it illegitimate in their eyes.

So sad.

Free Electricity

I just read a fascinating interview of Paul Wolfowitz in Prospect Magazine. The entire article is worth a read but I learned a key fact about Iraq in it that absolutely left me shocked. Electricity is not metered, not even charged for in Iraq.

I can't think of a single country where free electricity wouldn't cause shortages in capacity, not one. Yet in over a year of reporting on electricity shortages, I never heard anybody ever mention the fact that Iraq prices electricity at $0.00 or lists that as a cause of the shortages. That includes both US and international press. It's scandalous that nobody even mentioned it. It's basic economics 101 that if you artificially set the price low, you'll get shortages. Toss in a war, infrastructure sabotage, and pre-war infrastructure negligence and it's a miracle that the electricity system is as functional as it is.

It all really makes me question how much else I've missed on Iraq.

Libertarian Clueless II

Tyler Cowen grumbles about the idea of private forced savings accounts. The problem is that he takes the marketing job much too seriously. The reality of forced savings accounts is that they provide savings for those who would not otherwise be able to save due to their payroll taxes sucking up so much of their disposable income. Thus in the real world, you're replacing some government taxation with money that is conditionally yours but has restrictions on it so you don't end up on the dole.

For those who are richer, a different effect than providing a private pension out of what would otherwise be tax dollars kicks in. These are people who are already saving privately both in tax advantaged and taxable accounts. The net effect of the new system (post transition) is that the amount of tax advantaged savings is increased so for the vast majority of us who do not think that government pensions are enough, this is merely a new account we can dump our savings into without paying the tax man.

A world with private retirement accounts would be a world that is better than today's where leftists still get away with an awful lot of mindless tripe about how the average person is incapable of planning their own retirement. With the creation of private accounts the battleground shifts to an examination, in minute detail, over each regulation that prevents irresponsible speculation. Over time, we are likely to see successive, small shifts toward true ownership without restriction until the remaining regulations are mostly symbolic, low impact rules, that are more trouble to remove than they are worth.

Removing the debate over retirement to the question of how financially responsible people are versus whether they should have any responsibility whatsoever, fundamentally moves the political debate in a very libertarian friendly direction. The battle of how responsible people are with their own money is something that can be measured, improved, and is likely to generate a string of libertarian policy wins. Libertarians should be on board for that process as the Bush administration kicks off the first draft for market reform.

HT: The Bit Bucket

Kuttnerian Idiocy on Flu Shots

Robert Kuttner embarrasses himself in a recent article on the US flu shot availability problem. It's a mix of bad economics, anti-capitalist agitprop, fear mongering, and most amazingly pro-indentured servitude. Talk about a target rich environment for criticism.

First things first, the reason we have a shortage of flu shots and other countries do not is that the FDA has higher standards for flu vaccines, thus fragmenting the market into "vaccine good enough for the US" and everybody else. The extra regulatory burden isn't trivial to meet so you can't just swoop down and buy from the rest of the 1st world when something goes wrong here anymore than you can ship gasoline into Chicago from out of area when the local refinery has a hiccup and prices soar (thank the EPA for that particular market fragmentation). Canadians do not have a flu vaccine shortage because they didn't adopt absurdly high standards over other first world nations and not "thanks to their national health system". If they were to suffer a vaccine production mishap, they can dip into the wider market in a way that the US, with its extra high standards cannot.

What profits are to be had in the US vaccine market are largely soaked up by legal bills as trial lawyers have circled the industry picking off one participant after another. Here is Kuttner's one good idea, cutting down the lawsuit opportunities by act of Congress.

But even here, Kuttner gets it wrong as out of control torts are sucking the lifeblood out of America across the board. Their pernicious effects regarding vaccines just happen to be more visible. His idea would only apply a one issue band aid on a very deep wound in our legal system. General tort reform has long been a Bush administration goal but no credit is given here by Kuttner to Bush administration foresightedness and trial lawyer pig headedness. The trial lawyer-in-chief in Congress is, of course, Sen. Edwards who is the number 2 on the Democratic ticket this year.

Things go downhill from this bit of half-right thinking. Kuttner wants to force companies to participate in making vaccines. He wants to be able to compel their labor and force them to sell at a particular price. He labels this level as a "normal profit", something that is likely to neither be normal or profitable.

But imagine the precedent here. Just because there are insufficient market participants in markets on which people's lives depend, the government has the right to compel labor from companies engaged in related production. You might as well say that software coders could be forced into defense production work at "normal profits" or "normal wages" no matter that they have no interest in the field nor would the money be equivalent to what they are making elsewhere for the same effort. Doctors could be forced into the VA system, whether they liked it or not. After all, just like the pharmaceutical companies, without public research and government licenses, Doctors wouldn't be where they are today.

But wait, there's more. In an early paragraph the specter of avian flu makes its appearance. It has nothing to do with this year's flu crisis but casually tossing around the idea of mass human casualties after railing at Bush administration incompetence is about as subtle as interspersing pictures of jews and rats. It's just vile.

The bad economics shows up in the staggering assumption that government is a superior allocator of scarce resources than the private sector. The fact that this has been disproven time and time again for decades does not seem to have made an impression on the writer who seems to be in an economic time warp back to the interbellic years when the Reds were on the march.

He also plaintively asks "Do we really need Cialis, and Levitra and Viagra?" as if price competition created by new market entrants were an entirely foreign concept to him. In fact, yes, we do need them for both health and economic reasons.

The economics I've covered above but there are people who have a real need for help who cannot take one or two of these drugs without dangerous side-effects that do not show up in the third. Some small number can't take any of them safely and effectively and await further new entrants into the market for their conditions to be relieved by the pharmaceutical revolution.

Robert Kuttner doesn't care about these people. They're a minority of sufferers interspersed throughout the healthcare population and are not very united. Kuttner doesn't care about who he'll delay cures for as long as the choice of where pharmaceutical research money gets to be more politicized, more socialized, more nationalized.

Can we have a rousing verse or two of the Internationale? Go ahead, start without me. I'll just be off to the side being sick. Don't mind me...

Sinclair and Shareholder Primacy

Professor Bainbridge wrongs the cause of shareholder primacy in his analysis of Sinclair over the showing of Stolen Honor.

Bainbridge quotes Tom Smith extensively on the matter to the effect that the Sinclair effort is a textbook case of shareholder activism gone amok. In fact, it is just the opposite.

The threat that Bill Lerach and the NYS controller issued was, essentially, to beat down Sinclair's share price via politically motivated selling and judicial action below Sinclair's normal market clearing price. This is a profit opportunity in big screaming capital letters. Yet nobody came to Sinclair's rescue to the benefit of their investors.

No similarly sized market player came and announced that they would be glad to take the money of the pensioners of the State of NY in favor of their own fund holders at bargain prices. If the pension funds of TX, OK, and GA did that, the NYS pension fund threat would evaporate and people in the pension system in NY would start complaining that their agent, the controller of NYS was not acting in their interest. In a better world of shareholder activism, significant chunks of the pension system funds would be taken from the controller's control over the affair.

The Lerach threat of lawsuit was toothless as Prof. Bainbridge himself noted except as an invitation to actual shareholders to sell stock. With a major seller appearing and preannouncing a major sale and no major buyers stepping up to the plate, Sinclair capitulated. But it is the imbalance between activist sellers and activist buyers that caused the problem, not the existence of sellers and buyers acting outside their obvious economic interests. Furthermore, the entire affair is mischaracterized as a war between agents and shareholders but it was not because the true owner of the money isn't the state of NY but rather the pension holders who have imperfect control over their own agent. It was a fight between one form of agent (corporate directors) and another (fund management directors).

Shareholder activism is imperfectly done in the US today and there is a political imbalance among activists that is of concern. That imbalance is at least partially caused by Prof. Bainbridge and others like him who, I suspect, get a much more favorable hearing on the right than on the left.

No matter how much people tut tut over the crass shareholders exercising their rights to buy and sell as they please, some are going to do it on non-economic grounds. It would improve things if we institutionalize the practice and have activists on all sides in that fight. Otherwise we are going to get repeat after repeat of this sort of browbeating from the left.

Revising Poverty Statistics

There seems to be a new understanding that poverty is becoming disproportionately a problem of the recently arrived. The large amounts of new immigrants coming to the US are driving down income statistics and masking real improvement among those who have been awhile.

Why not add a simple question to the income stats asking how long you've been in the country? It would allow researchers to track how incomes improve as immigrants integrate into the US economy. It would allow progress in resident incomes to show up even if an influx of poor immigrants swamps the overall income statistics. After all, if you're investing in new entrants who will get jobs and rapidly climb the economic ladder, their initial income statistic effect should not weigh as heavily as the poverty of a permanent underclass that has little mobility, year to year.

Pessimist Propaganda on Hydrogen

Nature has picked up a paper(pdf) by the Oswald brothers published in the journal Accountancy.

I can't recall the blog I first read describing the paper but it looked fishy enough to write and protest that the numbers weren't right. Jim Oswald did respond and his response made it very clear that whatever they were talking about, they were not talking about the hydrogen economy as most people conceive of it.

1. The calculations are for hydrogen burned in internal combustion engines (ICE), not hydrogen fuel cells. Virtually everybody views the hydrogen economy as a fuel cell economy with hydrogen run through the cells to directly create electricity, not burnt in cylinders that drive pistons, that turn a wheel or drive a generator.

2. Like all other ICE type motors, hydrogen ICE are limited in efficiency as they are Carnot heat engines. At realistic temperatures, fuel cells can have 3x the efficiency of ICE. This means that even with hydrocarbon created hydrogen, you lower pollution with hydrogen as everybody except the Oswalds in this scenario look at it.

3. The Oswalds deliberately and artificially narrowed the available sources of hydrogen to nonpolluting sources that are commercially viable today with no technological progress allowed for, nor any thought to how rising petroleum costs would make other sources of hydrogen become viable as energy prices rose.

4. Energy is lost in transportation with the shorter you go, the less you lose. Hydrogen is likely, on average (and certainly for the US & UK) to be produced closer to home than our current oil supplies. This effect is unaccounted for.

When all the constraints and fudges are made explicit and clear, the Oswalds' paper is a somewhat useful teaching tool to drive home the point that a totally clean hydrogen economy is going to be hard work. But that's not how Nature interpreted it and it's not how most people will read it who know nothing but the buzzwords of a "hydrogen economy". While the Oswalds are honest enough to freely admit their constraints when asked, they're not doing their duty to the truth in bludgeoning even science journalists to get the story right about the narrowness of their actual claims.

Iraq Insurance Market

According to Iraq The Model, for the past 10 years prior to the invasion there was no life or theft insurance available. You couldn't get your car insured, nothing. Premium income just wasn't enough so the state owned insurance company just stopped insuring things and shut down. Well, now in the "unstable", "dangerous", "chaotic" Iraq, insurance policies are once again being issued and honored.

Kerry's Unemployment Distortion

The Jawa Report has an excellent analysis of Kerry's oft repeated untruth that GWB is the first president since Herbert Hoover to lose jobs. Apparently, of the 14 post WW II presidential terms, 7 were net job gainers and seven (including the current one) were net job losers according to the Bureau of Labor Statistics.

Now it's not very flattering to be among the 7 negative job growth presidents but it's certainly better than being the first since Herbert Hoover. With current trends continuing, a reelected GWB would replicate Reagan's record of having a net positive jobs record by presiding over a boom in his 2nd term, sufficient to erase the job losses of his first term.

Global Capital Shortage

In comments in the recent thread An Interview With Dr. Barnett the subject of capital shortages came up and it's gotten to the point where I think it's better broken out as an article in itself.

First of all, there is no such thing as a capital shortage apart from a specific project. Capital is a particular good that has a supply. In a perfect market, you list all projects in order of ROI, you allocate your capital until you run out and you find your market clearing level of capital using economic projects. If capital supply shrinks, you need a higher ROI to get funding at the new market clearing point. All projects that do not meet ROI requirements see a "capital shortage" but it's just an artifact of their not being profitable enough to make the cut.

When you have a project like shrinking the Gap in order to avoid more 9/11s (and worse, the loss of entire cities) things change. The ROI of not losing Chicago is huge but the connections between that and a water project in Afghanistan are too diffuse to meaningfully assign even though driving average income in Afghanistan above the $3k per year level would likely take that country out of the Gap and could prevent just such a city loss 20 years from now.

The problem is that taking one nation or another from the Gap doesn't really solve the problem. It just makes monitoring the rest of the Gap nations easier as you have less and less territory and population to cover. Instead of using Sudan as a headquarters, Al Queda moved to Afghanistan. Further moves are likely from Gap nation to Gap nation. So you have to tote up the price tag of doing all of them. Instead of a global list, you make up a list of individual Gap nations and projects that would economically benefit them (again in ROI order but this time by country). You draw the line at how many projects would have to go forward to raise incomes to the $3k level at which point you start to see significant middle class formation and internal civic society strength reaching the point where a critical mass wants into the Core and has the resources to get that wish into national public policy.

Once you create those lists and tote up the total costs, you see that there just isn't enough money out there to elevate all these Gap nations out of the economic danger zone, not enough troops to remake the political apparat in the nations who don't want to get with the program and certainly not enough willpower in the international community to starve Core economies of more profitable uses of capital locally in order to ship money to Gap nations so they can graduate to the Core.

We end up having to take what money is available and concentrate them on high value targets, such as the axis of evil countries where you have the worst of the security risks grouped. You end up driving the terrorists from base to base that way but doing that reduces their ability to attack in the Core while you shrink the Gap as fast as you can.

That's not the best strategy there is out there. It's the best one we've got as long as a capital shortage constrains our action in bringing all nations in the Gap into the Core.

Front v Back Loading

While reading an IBD article meta-analyzing a Washington Post analysis of Bush spending plans it became clear that the bulk of Bush spending, as scored, were in transitional costs to avoid the impending insolvency of Social Security.

John Kerry's proposal is not to cut benefits and not to privatize. That leaves raising taxes (the amounts are too huge to politically support) or borrowing the money. Since the crisis won't happen in the next 10 years, Kerry's spending score on this issue is much better than Bush's. The problem is that by back loading the expense, it makes the adjustments more rushed, more painful for all of us when they come, and it makes it that much more likely that the political pain at the time will see the end of Social Security and the loss of a decent sized chunk of an awful lot of people's retirement plans.

Front loading any large entitlement fix is the fiscally responsible and compassionate thing to do. George Bush is doing his part, and getting punished for it.

Defending Bush Economics

I have a great deal of respect for Russ Nelson "The Angry Economist" but I can't really go along with him on his anti-Bush economics rant. I have two reasons, both sufficient by themselves.

The first is that security has an economics component. A US that is not secure, that has decided to allow an "acceptable" amount of casualties from terrorism because it can't be bothered to really fix the problem also ends up with a worse economy. There ends up being a security tax on everything and I'm sure that Russ would agree that a tax increase is no way to promote good economic times.

The second reason is a bit more directly economic (more specifically politico-economic). George W Bush is something that we haven't seen since before WW II, a conservative politician who is confident of a durable conservative majority. Ever since FDR broke the back of conservative confidence and political dominance in the US, whenever conservatives gain power, it's been in short spurts and progress is measured by how much you can get done in a rush before the inevitable reassertion of the liberal majority. Imagine it as hit and run raiding tactics.

But the Congress, absent self-interested party switchers, hasn't been in Democrat hands since January 1995. It's quite likely that we're entering another period of conservative dominance and it's about time we started to act like it because some of the big reforms just don't work well if done in one fell swoop.

Given the Bush administration's razor thin Congressional majorities, maintaining those majorities, and being able to use them to forward your agenda is a very ugly process, necessitating a lot of smiling and insisting you wanted it after taking it in the shorts.

The core of Bush's contribution to furthering free market economics in his first term is that he has insisted on measuring the results of policies. Over the long haul, what drives economies into the ground is not a mistake here or there in policy. What destroys national economies is when the law creates a system where the normal measurements and feedback loops are either wildly distorted or removed by government fiat. George Bush, while giving in on a variety of here and now issues, has consistently insisted on measuring the results of these systems, starting the process of bringing the 'drunk' (power drunk government in this case) to that crucial moment of clarity where all serious reform starts.

The political history of the modern free market movement in the US is littered with all sorts of failed projects which were tried without adequately preparing the political ground. In a highly challenging Congress, George Bush is steadily reestablishing broken feedback loops so that people can once again start seeing the maddening consequences of government intervention in the economy.

If you want to challenge George Bush's economic compromises, you have to ask whether you think the same compromises would have been made with 5 more conservative members of the Senate, 20 more conservative House members. If George W Bush is such a protectionist, why were the steel tariffs withdrawn?

With prescription drug funding, it is important to remember that surgery costs more than pills. The system prior to getting this bill passed subsidized elder care surgery while leaving pills unsubsidized. This made tremendous perverse incentives and was just one example of a hugely distorted market. The healthcare market is distorted to the breaking point and the forces of stasis, of keeping the dysfunctional system running just a few more years has been a powerful actor for decades in this market.

The current situation, like it or not, is going to see several more bills come out in the near to mid future correcting the problems in the prescription drug bill. We're going to see greater costs on pills but be surprised that surgery costs will drop. The unspoken truth is that dynamic effects in medical care aren't measured by the government any better than dynamic effects in tax policy. Where will we end up net? We don't know yet but a pernicious incentive towards more expensive surgery has been removed and some good measurement systems have been put in place so that the data will favor the free market reformers in the next round.

Health Savings Accounts (HSA) are a tremendous advance. In areas with significant HSA usage, doctors will be able to actually set up true free market practices where they set their prices via a market, bargain, watch their pennies, and even offer discounts and sales in ways that they are currently prohibited from doing by their insurance company provider contracts.

As free market medicine reappears on the american scene and shows that it's a superior alternative, the combination of measurements showing the failure of state alternatives and free market medicine's reappearance will create a long term majority in favor of unwinding our current healthcare policy mess. But the first step always was breaking the decades old logjam halting reform of any type. George W Bush accomplished that and he should be proud of it.

The free market often looks to be cruel, heartless, and just plain mean when a plant closes down, when real wages drop, when any of a hundred different unhappy economic events happen to good people. What sustains the belief in the free market is that these painful adjustments, freeing labor to be repurposed to other uses over the long haul creates a superior long term result. It's disappointing that some free market advocates aren't taking a properly long view on the Bush economic record.

Iron Blog Subjects: Balanced Budget

The concept of a balanced budget in government finances is intimately tied together to the concept of what is government good for. If you accept, a priori, that you are providing services to the population of today that cannot be accomplished as well privately and you are building things for tomorrow that, again, cannot be better provided by the private sector, you agree to the same sorts of calculations of national interest that families do around their kitchen table when they plan on buying a house or taking on other major expenditures.

Some things are just unaffordable, some things aren't worth doing even if you have the money, and some things are worth going into debt over. To be a fetishist over a balanced budget means that you think that there is nothing so important that it isn't worth going into debt over.

Now, as a libertarian, the list of things that I think the private sector can't do better than government is a lot closer to zero than your everyday average centrist. But it's not zero. Financing a war is probably the most common and biggest effort that is a justifiable reason to run a deficit. Military related expenditures like GPS satellites are also on the list.

Expansion expenses, such as purchasing from sovereigns who would not sell to any but a national entity is another legitimate expenditure. I don't find the Louisiana, Gadsen, or Alaska purchases to be illegitimate and certainly they have paid off over the years. Expenses undertaken to establish law and legitimate security operations in new territory also fit the bill.

So even in a libertarian world view, it's legitimate to go into debt. The expenditure must be for the survival of the country or an investment that cannot be done privately and will benefit the general public over the long haul.

Bargain Hunters

Just did a bit of shopping for a client (Macromedia Studio MX with Flash) and it really is amazing how Amazon is willing to undercut its own software sales by listing new products and 3rd party sales at vastly lower prices on the same page. What's more the 3rd party sales are guaranteed by Amazon.

Where Bush's Immigration Strategy is Coming From?

Global Transaction Strategy is the title of an older Dr. Barnett article. There's lots of good stuff about how the world is shaping up and how it needs to continue for us to all survive this dangerous time. One of the neat things about broad thinkers is that you can go back and find nuggets that you didn't notice the first (or the fifth) time you read a piece:

In effect, emigration from the Gap to the Core is globalization's release valve. With it, the prosperity of the Core can be maintained and more of the world's people can participate. Without it, overpopulation and under-performing economies in the Gap can lead to explosive situations that spill over to the Core. One hopeful sign of the future: The Philippines has demonstrated that such flows can be achieved on a temporary deployment or "global commuting" basis without resorting to permanent emigration or generating increased xenophobia in host nations.

I can't think of a better description of President Bush's worker visa proposal than a real attempt to put the above paragraph into policy for the US to create a real pressure release valve. Politically, the guest worker visa program never has made much sense. What xenophobes there are in this country are disproportionately on the right side of the political spectrum which means when they're not voting fringe, they'll tend to vote Republican. So why would President Bush take the political risk that this portion of his voting coalition will sit on its hands come November?

Business interests don't mind the current situation too much. Plenty of labor moves into the country in the current situation and they aren't hounded by 'la migra' as in the bad old days of mass immigration raids which shut down business and could decimate a workforce. A minor tweaking of some specialized skills categories would have made business pretty happy without rocking the boat too much.

It's only when you look at it as a national security issue, providing a safety valve while you thin out the infrastructure of illegal border crossing does this initiative make any sense and Bush apparently feels strongly enough about it to risk losing some of the immigration averse vote that he might otherwise have.

To Gamble or Not To Gamble

My cousin is taking very imprudent bets. He offered 3:1 for Kerry to win in November to a roommate. He doesn't even like Kerry, he just is convinced that he's going to win. He was taken aback at the idea of Tradesports with its politics contracts currently running at 26:24 in favor of GWB. His roommate could bet on Bush at Tradesports, laying off the risk of the bet entirely, and make a profit no matter who won the election.

We banter back and forth on this idea that Kerry's got it in the bag so he got fed up and offered me 2:1. Now I've got to figure out whether I want to truly gamble or just take the guaranteed profit. What do you folks think?

On a broader note, Internet betting on anything is likely to kill the medium to long term amateur betting phenomenon because if you run out of alignment with what the experts are offering (in either direction) you're just giving your betting partner free money. Or maybe not, Vegas, after all, hasn't dried up yet.

Making the World Love Us

After a night's sleep and a bit of reading, I think I know what the price will be for a Kerry success in making our traditional allies love us again. As I've noted in the past one of the major player factions on the global stage is a group of people who thrive on monopoly/monopsony profits, providing the spider thin controlled connectivity that most Gap states have to the Core in order to supply the elite's whims for expensive cars, jet setting travel, and PS2s.

The US has played along with this game in the past but the major unforgivable sin of this Bush administration in old Europe has been threatening all these sweet, cosy deals by wanting to open connectivity wide and bring in all the world's major players into these countries, bringing prosperity and freedom to the Gap while costing the established players their ultra-fat profits.

This is the heart of France and Germany's beef with us, the reason why they are so implacable in their enmity. Major contracts are threatened, established relationships would largely be rendered worthless, and a high amount of unpredictability would ensue with US firms winning an awful lot of those new opportunities. The problem is that Bush wants to bring too much competition, too much free market, too much rule of law into the Gap. Pace, Dr. Barnett this is not a neo-marxist critique but rather a very capitalist one.

Kerry has an opportunity to reestablish peaceful relations with Germany and France, Russia and the PRC by letting them maintain and expand their network of spider-thin connectivity webs, by running the GWOT as a war without Gap shrinking. Satisfy these established powers, don't force rule set resets in the Gap, and all will be right with the world. We will have glowing press releases. The UN will bless our military endeavors. All we have to give up is any hope of ending the war by appeasing the implicit villains.

We would end up in an Orwellian nightmare, 1984 writ more complex with a kaleidoscope of ever shifting enemies in the Gap, reaching out and striking us in unpredictable, bloody ways but with us unable to do much more than we did in the Clinton administration. The major difference is that the tents will not be empty, individual terrorists will be killed. The only problem is that we will be accelerating their creation with every strike.

If the opposition we're encountering in old Europe is truly centered around the hidden villains, Kerry's boxed himself into authorizing a perpetual war. It'll be containment v. rollback all over again with GWB being the early rollback guy and Kerry accepting aggressive containment as the best we can do without losing France and Germany again.

Do we really need another four decades of continuous cool war before another heir to Reagan comes along and rolls back the Gap? I certainly hope not.

Iron Blog Subjects: Alternative Energy

Going through the Iron Blog topic list:

There was a day when petroleum seeps were an alternative energy source. Then the supply curves radically changed, the price at which you could get petroleum in large quantities became affordable and the age of oil began. Today, there are lots of other ways to get energy. Like petroleum, before modern drilling and extraction techniques revolutionized things, these alternative energy sources are generally expensive, in short supply, and only feasible in limited application or with government subsidy.

Nobody can really predict when we're going to have our next eureka! moment but the incremental progress that is being made shows that it will quite likely be within our lifetimes. The question of alternative energy really is what role should government play in encouraging things, moving technologies ahead with subsidy and with R&D funding? The day you can run some new motor running on another fuel cheaper than petroleum burning internal combustion engines at every conceivable practical price of oil is the day that a massive switchover will start to occur naturally. The free market will switch over the world without a great deal of state intervention because switching over will be cheaper than buying new ICE equipment.

Most government support is likely to be counterproductive because the money too often goes to the best proposal writers instead of the best avenue of inquiry and those government money fortified R&D boys develop an instant dislike to all their potential competitors for the brass ring of replacing ICE burning petroleum and they tend to express that dislike in efforts to bury their competitors. We only do energy source changes very infrequently. We need to ensure that the best alternative will win out for the next energy age. Throwing in government subsidies is not going to help us get to that point.

Chaos Theory & Economics

SDB's recent wide ranging post on chaos theory got my creative juices flowing as I also have long been fascinated by chaos theory. In the pedantic column, the base of chaos theory is rightfully included in mathematics (I believe) though people seem to have discovered it in observing various disparate phenomena, from weather prediction to stock market behavior, to economics. The formulas they derived to talk about it really don't vary so a base science like math is a good place for it. Your mileage may vary.

One of the things about chaos theory and economics that I find highly useful in policy is how chaos theory affects statist economics. The natural order of things in economics seems to be a slow, secular form of progress with high variation, the boom and bust cycle. The busts, in particular, have very cruel and nasty results and a major form of human effort into the science of economics is how to ameliorate or end the bad effects of the busts. One of Marx's basic predictions regarding capitalist society is that the boom/bust cycle will grow ever wilder, to the point where the whole societal system cannot stand the magnitude of the economic perturbations and something else will arise to take its place, that something else being communism.

This kind of chaotic system perturbation is seen in biology in the way that heart attacks happen. Of course, like heart attacks, this is something that you want to avoid.

The empirical reality of a century of various economic experimentations across the world has given us a body of knowledge that demonstrates that Marx's analysis was fatally flawed. Any interference in correcting the busts seems to have two side effects. It reduces the booms, and it lowers the slope of the secular path in an unpredictable manner. You manage things too much, too long, and the secular upward path turns into a secular downward path and the natural virtuous circles of the economy turn into vicious circles as the country goes down the drain.

But "there is a lot of ruin in a nation" and free market advocates have long had poor records of predicting when, exactly the bad effects will come out. This is because, like everything else in the system, the side effects appear chaotically. But appear they will and it is a remarkable betrayal of the intergenerational societal compact to just kick the can down the road.

But we're all guilty of doing it.

We've fairly well enough established that total government control of the economy leads to horrendous negative effects. The two ideas left are lassez faire economics buttressed by a private charitable safety net and lightly managing the economy in order to pluck the economic goose but still get enough golden eggs to maintain the secular upward trend.

The problem is that politically, the temptation is always to pluck just a bit more in order to gain political advantage over your electoral rivals. Inevitably, this intersection of political interest and economic danger leads to US style stagflation and today's eurosclerosis.

For today's budding statist, the trick is to push out the economic bad news until after your political career is over. FDR's new deal is breaking down decades after he passed away and was enshrined as a great president. LBJ's great society ended up being a net negative to poor people sometime around Ronald Reagan's second term. Few curse him for the harm he has done to the poor and disadvantaged of today and tomorrow. The distance between cause and effect are too much for political purposes but the link is real.

Burch on Lutas on Burch on Energy

B-)

Greg Burch answers my critique on the idea that Beijing will quickly become cleaner thanks to the birth of the hydrogen age. He rightly points out that the PRC government has enormous resources to dump into a vanity project to clean up Beijing smog. This is the option of virtually every totalitarian government out there. They can always rob 5 peters to pay 4 pauls.

What I had left out of my prior analysis was a very big assumption that, being implicit, might have been missed. The assumption is that the PRC leadership is in a huge bind, racing somewhat ahead of a disaster of popular disappointment and revolution. The problems of their rotten banking sector, pervasive corruption, lack of jobs, huge economic drains of State Owned Enterprises, and just general lack of legitimacy makes the exercise of shifting money out of current uses to a pollution cleanup that doesn't make economic sense very dangerous to regime stability. The PRC apparatchiks are already juggling just as many balls as they can handle and I think they're just about out of the ability to add more glamour projects that don't make economic sense.

As the PRC grows rich, clean technology will become worth it for them. Until they get rid of their unemployment problem and/or other regime threatening crises, it isn't likely to happen.

Clean Energy Won't Clean the Third World (Any Time Soon)

Greg Burch is in Beijing and notes the ungodly pollution in that city. He links finding a replacement for oil, a new source of energy, with cleaning up the city. Here he's in error. Beijing will become clean as it becomes rich, not as new sources of energy come on line. The reason is that the rich are the leading edge and the poor form the trailing edge in the adoption of just about every technology. Very new technology has yet to recoup its R&D costs so it is invariably expensive. It often also requires ancillary expenses (in this case a new energy distribution system) that make its adoption even more likely to be concentrated among the rich.

Even if hydrogen with fuel cells were to cross over and become cheaper than oil used with internal combustion engines (ICEs) ICEs would still abound. As long as it's cheaper to continue to operate old equipment rather than purchase new equipment, the old polluting stuff is going to stay in service. Even new purchasers in poor countries that can afford the new technology will be leery of being an early adopter because they know very well that they are living in a trailing edge country and that their maintenance expenditures are going to be sky high for much longer than they would be in the first world.

Thus, you're going to see adoption first in the 1st world and then a filter down effect. Since energy competition is going to be a major factor in the transition period, we're going to see progress on price in one area creating a ceiling on prices in the other. As hydrogen drops, oil for ICE producers will find that there is only a certain amount they can charge without losing major customers to hydrogen fuel cells, customers who will never return. This shrinking market will constrain their ability to raise prices and we should see gasoline prices trend downward along with hydrogen as new energy comes on line (pace energy pessimists, I know you don't believe it's going to happen, but for this scenario, it's an assumption that it will).

Cheaper gasoline will reduce the incentives for those on the trailing edge to move to hydrogen. In short, Beijing and 3rd world capitals are going to be the last to be clean because they're going to be the last to adopt the new technology.

Public Domain Follies

Tyler Cowen blows it when he analyzes the idea of perfect copies of paintings. He quotes a piece speculating on the results:

Economically, I assume that the acceptance of copies would devastate the resale value of originals of everything except the first-tier work. But for the first-tier work--the owners of which would have the exclusive right to reproduce it--the amount of money to be made selling copies might well rival current market value.

Tyler Cowen suggests that people prefer the inferior artworks that they are using as wall decorations right now. What he misses is that intellectual property is not true property. You don't have permanent reproduction rights and most great art works predate the 20th century. Reproductions without controls are inevitable for public domain pieces, the more famous the greater the likelihood.

Perfect duplication of the genius of times past will always be popular, though what is viewed as genius will change with modern sensibilities and taste. Public domain, though beaten down by modern commercial interests, is still a powerful force. It was a missed opportunity not to take it into account.

US Agricultural Mafia

Tyler Cowen notes a remarkable story. A lobbying group is pressuring academics not to provide their expertise in WTO court cases when their consistent free market ideology stands in the way of US agricultural protectionism. Daniel Sumner, a Bush 41 administration member, is turning into a living demonstration of the proposition that the current worst enemies of capitalism are capitalists.

The truth is that 1st world agricultural market barriers (which raise food prices domestically) are a huge impediment for the 3rd world. The 90%+ of the population outside the farming industry benefit every time that subsidies are cut and quotas are lifted. Yet the agricultural lobbyists cry treason when a free market economist goes out and speaks the truth because his academic position is with a public university.

It's very simply unamerican, what the lobbyists are doing. Shame on them.

Tyler's Right, Parapundit's Wrong

Tyler Cowen is right that increased PRC demand for oil does not impoverish the US. And Parapundit is wrong in thinking that higher prices will necessarily enrich current OPEC nations at oil consuming nations' expense.

The secret is in the difference between oil reserves and oil endowment. We are currently ending an era in the oil market where Saudi Arabia (SA) has kept a great deal of its production capacities off-line so it could serve as a swing producer. This kept high cost producers off the market because SA could, at will, make them take a loss for as long as SA wanted, bankrupting anybody foolish enough to bet against the Saudis. But SA has announced that they don't have any more significant unused production reserves. They're going flat out like most everybody else. This means that marginal, high cost producers like Canada's oil tar sands operations can expand in economic safety. Nobody's going to drop the price of oil below their $12/barrel production costs. Thus, high prices will increase supply and we will all come to a new equilibrium with Canada becoming a major oil supplier.

In fact, a bunch of countries that are outside of OPEC have huge endowments of oil that are not counted as reserves because they fail the test of being economical to extract at current prices. Sure, PRC demand will raise energy prices but it will also enlarge the economy. On net, it will be a boon to the world, including the US, for the PRC to grow rich