Category: Economics

Hurricane season is fast approaching

When I saw that the FTC found no clear price gouging in the aftermath of Hurricane Katrina, I’d planned to discuss the report. Not only because he beat me to it, but because he’s 100% correct, I’ll point you to Kip’s analysis at A Stitch in Haste. He says everything I could’ve hoped to say about the report’s specifics. Read it.

Instead, I want to mention this brief passage with ominous warnings for the future.

A House measure passed earlier this month would raise penalties for price gouging and order the FTC to define the term. But the commission’s report yesterday said that a federal law on gouging could “run counter to consumers’ best interest.” The commission said price gouging “is neither a well-defined term of art in economics, nor does any federal statute identify price gouging as a legal violation.”

[FTC Commissioner Jon] Leibowitz said the FTC report showed that “price gouging is a phenomenon that is hard to nail down.” But he compared it to obscenity: “difficult to define in theory but easily recognized.”

The FCC’s enforcement of “indecency” isn’t the most promising path we can pursue. Perhaps we could try something more sane, say “if you don’t like the price, don’t buy the product”. How’s that sound? I like it because it leaves the power in the hands of the consumer instead of some central planner ruling through threat of official reprisal, with both financial and criminal penalties.

We’re going to pursue the latter, stupid path, of course, because Congress has so little brain power and leadership. What the people want (mob rule) can’t be wrong. Can it? Never, so I suggest we set up the price control board now rather than waiting until the next crisis. We’ll have more time to adjust, at least. And we can learn to live without all the nice essentials luxury items we’ve grown accustomed to having. Thanks.

These are my choices?

I have no idea what political persuasion the authors of this article in today’s Opinion Journal hold, nor do I care to score partisan points, but they clearly bought the idea that current Republican economics is the only way to look at government budgets. Consider:

Voters will elect governors in 36 states this year. And as they decide who to send to the governor’s mansion, they will also be shaping the economic future of their state. On taxes, the gubernatorial candidates fall into one of two camps. Either they believe that the best way to close a budget gap is to raise taxes. Or, like Ronald Reagan and George W. Bush have done from the Oval Office, they believe in raising revenue by growing the state’s economy with tax cuts.

There are a few cursory nods to fiscal restraint later in the article, but overall, it’s a glowing review of supply-side economics as the solution for budget woes. Crazy me, I think it’s clear that we need to look at both sections of a government’s income statement. I also find it amusing disheartening that so many otherwise smart people can so completely ignore the well-ingrained small-government principle. Spending matters, and I dare say it matters more than taxes for long-term growth. Especially when legislators are ignoring the other side of the balance sheet with the spending they’re adding.

Until legislators refrain from dining at the public trough at every opportunity, government will have an insatiable need for growing tax receipts. Low taxes now, high taxes tomorrow. It’s not complicated, unless you’re blind to reality. Everyone will be an economic libertarian eventually. I just wish it didn’t have to come through bankruptcy.

Killing legitimate rights to invent progressive rights

The lede to this article intrigued me.

Liberals and Democrats in search of new ideas might surprise everyone by embracing the cause of states’ rights.

I’m sure this would just be an opportunity to play progressive politics locally, instead of the prudishness played out nationally. While I agree that states can work towards better solutions (not best – try private) than the federal government, due to nothing more than closer proximity to the problems (ditto local versus state), I was right to doubt this article. Consider:

Contrast this week in our nation’s capital with the week in Boston, capital of the Commonwealth of Massachusetts.

Congress was solving the enormously important problem of making sure that wealthy Americans can continue to pay low taxes on their dividends and capital gains.

Phrase the issue that way and I know that ideology is more important than solving the problem, regardless of the rhetoric attached to the proposal. I’ve already addressed this in the past, but here it is again. Just because a tax cut is likely to affect the wealthy, that does not mean it’s inherently bad. Unless you like socialism, in which case you’re doubly wrong. Middle-class Americans own investments and receive dividends. They pay taxes, as well. How you frame the question shows exactly the outcome you want. For me, it would be based on principle. I happen to like “keep what you earn” more than “don’t make too much”.

Still, you can’t require people to buy insurance if they can’t afford it. That’s where Salvatore DiMasi, the Massachusetts House speaker and a Democrat, came in. He suggested combining an individual mandate with an assessment on employers who do not cover their employees. Most conservatives hate “employer mandates,” but why should employers who insure their workers provide an indirect subsidy to employers who don’t?

Why should employers who reach an (implicit or explicit) agreement with their workers that cash is the best benefit be punished for coming to a different conclusion than the socialists? They don’t force other employers to provide health insurance and shouldn’t be punished for having the intelligence to try a better way. The social contract is a larger culprit for our problems than the free market’s “failure” to provide every worker employer-sponsored health insurance. Which brings us to this:

… The federal government should solve problems or, failing that, give states the room, the incentives and the opportunities to solve problems for themselves. It’s amazing what local politicians can accomplish when good ideas and skilled agitators come together.

Only as a last resort should the federal government get out of the way. And only if they get out of the way for state and local governments. Brilliant. This is statism, not states’ rights.

More thoughts at Cato @ Liberty

Solve the costs first

Perhaps the proper definition of frivolous spending should not be based on price or culture, but should include some provision for a cost-benefit analysis:

The debt of the typical American family earning about $45,000 a year rose 33.1 percent from 2001 to 2004, after adjusting for inflation, according to a study based on data compiled from the Federal Reserve Board’s most recent Survey of Consumer Finances. The Fed report, released in February, gave raw numbers on debt levels. The new study analyzed the data more closely to determine the sources of debt. It was conducted by the Center for American Progress, a Washington think tank that describes itself as progressive and is run by former Clinton White House chief of staff John D. Podesta.

Real wages, after adjusting for inflation, have been flat since 2001, according to the study, while the cost of big-ticket items for which families pay the most rose. In the past five years, the costs of medical care, housing, food, cars and household operations rose 11.2 percent, the study said. Many families are trying to make up the difference by borrowing, according to Christian E. Weller, author of the report and a senior economist at the center.

“Very little can be explained by frivolous consumer spending,” Weller said. His views were echoed in a news conference by Elizabeth Warren, a law professor at Harvard University who analyzed the sources of debt that emerge in bankruptcy filings and reviewed the results of Weller’s study.

That’s a lot of build up to show that for me to deliver the punchline. Maybe Mr. Weller and Dr. Warren should’ve talked before the press conference, since they clearly didn’t. Rule number one when dealing with an accomplice is surely “get your stories straight”:

Many families, particularly middle-income households, aren’t acknowledging that declining incomes mean they must radically adjust their standards of living, according to Weller and Warren. Warren suggested that families that can no longer realistically afford their single-family houses should move to condominiums, consider limiting their families to a single automobile, get second jobs to pay off debt, or move to less expensive school districts that may not have the highest test scores but where children perform acceptably well.

Ah, yes. The same way we’re perpetually struggling to get ahead financially the way our parents did because everything is just so much more expensive. We ignore that we now consider an 1,800 square feet home unacceptable, even though we grew up in a home with only 800 square feet and no central air conditioning. When expectations and demands grow ahead of income, something will go wrong. How is debt a surprise?

Of all the examples attributed to Dr. Warren, none clearly indicate anything other than the average American family’s view of reality is askew. Exactly the same way Congress is driving us to bankruptcy, a family that sees its excess spending problem as most immediately solved by more debt should not be surprised by the trouble it encounters. When I spent myself into credit card debt in college because I needed to have the things I didn’t need, and couldn’t afford, I paid for it throughout my twenties with fewer luxury items. When all the cool kids in my income bracket had cell phones, I didn’t. When they had BMWs, I had a Volkswagen. When they lived in the hip, urban part of Northern Virginia, I lived in the lower middle-class neighborhood. Eventually I paid those debts off, which would allow me to catch up materially. I haven’t done it, which was a useful lesson. And I got it without waiting for someone to rescue me from myself.

More thoughts at Cafe Hayek

Solving the gas crisis, one giveaway at a time

Congress is putting our money where its mouth is:

Scientists, inventors and entrepreneurs will be able to vie for a grand prize of $10 million, and smaller prizes reaching millions of dollars, under House-passed legislation to encourage research into hydrogen as an alternative fuel.

Legislation creating the “H-Prize,” modeled after the privately funded Ansari X Prize that resulted last year in the first privately developed manned rocket to reach space twice, passed the House Wednesday on a 416-6 vote. A companion bill is to be introduced in the Senate this week.

Yay? From a budgetary impact, the prize is only $10 million. When the government spends almost $3 trillion, who will miss it? (That’s not a sufficient reason, of course, as there are many “no one will miss it” appropriations.) But here’s a question: what if hydrogen isn’t the eventual best solution to switching from oil? In that scenario, either this incentive pushes entrepreneurs and scientists into sub-optimal research, or the prize is ignored or awarded to the best of the worst ideas to solving the energy crisis. At least Congress did something. No doubt subsidies for hydrogen access (supplies, stations) will follow.

Naturally, many grandiose statements must flow from the hallowed halls of Congress, since no politician wants to avoid credit for the inevitable success.

“This is an opportunity for a triple play,” said bill sponsor Rep. Bob Inglis, R-S.C., citing benefits to national security from reduced dependence on foreign oil, cleaner air from burning pollution-free hydrogen and new jobs. “If we can reinvent the car, imagine the jobs we can create.”

I am imagining them. And so are the entrepreneurs most likely to take the investment risk necessary to create a viable alternative to the gas engine. And so are the automotive unions who will lobby Congress to protect their jobs when the technology changes on them. A rational person understands that economic and technological growth is not a zero-sum game, but he also understands that it’s not an infinity-sum game.

“Perhaps the greatest role that the H-Prize may serve is in spurring the imagination of our most valuable resource, our youth,” said co-sponsor Rep. Dan Lipinski, D-Ill.

Really, I have nothing insightful to say on that, other than score one for Rep. Lipinski for finding a creative way to insert “for the children” into the discussion. I should’ve anticipated it, but I’m not sure I would’ve come up with that. Granted, my view is tainted by my brother, who will enter college in the fall, and his desire to be an engineer. Amazingly, that desire grew without the influence of a $10 million prize from the federal government. I’m sure he’ll study harder because of this, so it’s worth it.

The Ignorant Society creates real unhappiness

In an otherwise interesting article examining how vibrant, growing societies should expect unhappiness as a useful by-product and driving force, Robert Samuelson slips this nugget into his refutation of John Kenneth Galbraith’s “The Affluent Society”:

It’s often said that only the rich are getting ahead; everyone else is standing still or falling behind. Well, there are many undeserving rich — overpaid chief executives, for instance. But over any meaningful period, most people’s incomes are increasing. From 1995 to 2004, inflation-adjusted median family income — for families precisely in the middle — rose 14.3 percent, to $43,200, the Federal Reserve says. People feel “squeezed” because their rising incomes often don’t satisfy their rising wants — for bigger homes, more health care, more education, faster Internet connections.

We feel like we’re falling behind, when in fact we’re progressing rapidly. Whatever the reason we accept the lie, be it politicians, academics, or our own intellectual laziness, the myth about the “good ol’ days” doesn’t die. So, why is it that we must accept, without any other objective criteria, that chief executives are a) overpaid and b) undeserving of the incomes they earn? Perhaps an example from Mr. Samuelson would be useful. Without one, I can only assume he wishes to fall into the trap of believing whatever media story appears on the morning paper’s front page. Why?

Everything else he wrote in the article suggests that the free market works best for satisfying (and creating) needs. This is deemed “good”. But how can we accept that it’s good if the we toss around negative adjectives with only subjective criteria as support? The chief executives negotiated a contract with their employers. We must assume both sides are happy. To a country’s citizens who are not shareholders of the company, the results should count for squat. Don’t like the executive’s pay? Don’t do business with the company. That might even work towards filling unhappiness associated with prosperity.

Making baseless claims about the exception that proves the rule only provides the statists with incorrect ammunition.

Should death certificates cite “Insufficient Socialism”?

I don’t know if this is the alleged cause as determined by the study or if it’s a bias slipped in by the journalist reporting on the study, but this bit from a story on infant mortality rates, and how America is second only to Latvia among the industrialized world in infant deaths. Consider:

The researchers also said lack of national health insurance and short maternity leaves likely contribute to the poor U.S. rankings.

Saying that lack of national health insurance is a cause is the same as saying that I still have student loans because I didn’t have a rich benefactor when I graduated from college. It’s one possible argument, but it’s preposterous to think of it as causative, or even related, really. I have student loans because I racked up credit card debt during college. Where many people my age paid down student loans, I paid Visa.

In the case of this study, health insurance affordability and access may (and probably do) have a significant contributory impact to high infant mortality rates. Preventive care works wonders, as we surely know by now. But there is no way to realistically gauge that national health insurance is the solution to reducing infant deaths. Any reasonable study of economics suggests it could reduce the rate, but at the likely expense of some other group. What trade-offs shall we start making to get the preferred ideological solution to health care in America? Or would it make sense to say that inadequate health care access and affordability are contributing factors, and work to find a solution to that conundrum that leaves open a much broader range of options? Remember, keeping kids alive and healthy is supposed to be the goal.

Will we get a chicken in every pot, too?

I’ve read that Sen. Bill Frist wants to be president. With his support of today’s nonsense, he must think that channeling George W. Bush, circa 2000, is the way to achieve his goal:

Senate Republicans proposed a $100 rebate check for millions of taxpayers Thursday to counter high gasoline costs, but linked the assistance to drilling in an Alaska wildlife refuge, assuring the measure would face stiff opposition from most Democrats.

Majority Leader Bill Frist of Tennessee called the proposal “a bold package that will give consumers some relief” from gasoline prices that have passed $3 a gallon in many parts of the country.

Proper leadership does not include supporting a political solution to an economic non-problem.

I drive, on average, no more than seven miles per day. I drive those miles in a car that gets decent mileage. Danielle drives more than sixty miles per day, in a car that gets decent mileage. My friend Will doesn’t own a car, taking New York public transport instead. Assuming it’s appropriate to bribe voters subsidize the impact of gas prices (it’s not), how will this rebate be implemented to “ease the burden,” as Sen. Domenici promised today, with a little more precision than economic fire-bombing? And haven’t we learned by now that knee-jerk legislative solutions rarely work as intended?

For a little bipartisan fun:

Democrats, meanwhile, were assembling their own package of measures, including a proposal offered by Sen. Bob Menendez, D-N.J., for a 60-day suspension of the 18.4 cent federal gasoline tax and the 24-cent a gallon diesel tax. He said it would provide immediate relief of $100 million a day for motorists.

Apparently Sen. Menendez believes it’s good policy to further burden future taxpayers with a $6 billion liability so that we can continue pretending that economics consequences can be ignored a bit longer. Why not nationalize the oil business now, instead of making us wait?

Idiots, every one of them.

Are voters this easily manipulated?

The United States Senate is filled with those who are either too stupid to understand basic economics, or with those too politically ambitious to care about the damage they cause with reckless threats and action.

Sen. Carl Levin, D-Mich., said he believes gas prices “would come down within a matter of days” if President Bush told oil companies that he was going to support a windfall profits tax.

“But the president will not call the oil companies into his office because he’s been too closely allied with those oil companies, and if he does it’s going to be a window-dressing conversation,” said Levin, who appeared with Specter on CNN’s “Late Edition.”

Right, rising gas prices are a strict conspiracy by President Bush. Whether it’s political pressure driven by low poll numbers, a need to be leaderly, or stupidity, President Bush responded:

President Bush has asked the Energy and Justice departments to investigate whether gasoline prices have been illegally manipulated, he announced in a speech this morning.

The White House is also asking states to guard against unfair pricing.

Essentially President Bush offered every hack prosecutor an excuse to go after gas station owners to advance their political careers protect the public from the threat of supply and demand. Unfortunately the president is protecting himself, too:

The president also moved to temporarily halt deposits to the nation’s strategic petroleum reserve, making more oil available for consumer needs while seeking to ease prices at the pump.

The United States uses far too much oil every day for that to work. Not standing up to the idiocy of the fine folks in the Senate and delivering the hard truth to the masses will haunt President Bush, because when this move inevitably fails to reverse the laws of economics, Democrats will hammer him for it. They’ll be wrong, but they’ll have a cheap win.

At least Bush spokeswoman Dana Perino tempered expectations a little with this bit of logic:

“Nothing is going to be a magic wand that will lower gas prices overnight.”

No kidding. At some point some politician needs to have the guts to admit that price is only a measure of cost. Value is something else entirely. Our refusal to take mass transit and to stop buying SUVs shows that we value our current lifestyles more. It should be no surprise that prices increase with our demands, since short-term supply is less flexible. Reducing contributions to national oil reserves notwithstanding.

Still, Democrats are hammering Bush and his Republican colleagues for failing to come up with a strategy that would cut prices soon. They hope to harness voter anger over the trend and, by Election Day, turn it against the Republicans who control Congress.

And that’s why Democrats are no more qualified to govern than the Republicans they attack. But we knew that. The only new lesson is that Sen. Levin needs to remove his tinfoil hat and grow up.

Individual responsibility should be the new social contract

Will the rose-tinted remembrance of the American social contract please stop? Caterpillar produced spectacular returns by standing up to its unions and demanding that the company move into the new economic reality. This should be applauded, but instead, we’re presented with this:

But now, having pulled off one of the most impressive corporate turnarounds in recent memory, Caterpillar — like the rest of corporate America — must confront a new question: What is the new social contract it has to offer around which a stable political business model can be built?

I think the outcome of a political business model would look a lot more political and a lot less business. We’ve already proven through experience that socialism doesn’t work. Do we need another round of handouts to unions to demonstrate that Caterpillar will see its business diminish from its current progress? Instead, we’re treated to nonsense like this:

Imagine, for example, what the public reaction would have been if [CEO Jim] Owens had announced that, in recognition of the year’s spectacular results, each of Caterpillar’s 22,000 unionized employees would get a special bonus of, say, $3,000. I can assure you it would have been widely noted in the press and praised as a significant first step toward a new social contract. And who knows how much extra loyalty and commitment it would have engendered from Caterpillar’s blue-collar employees.

Unions seek to guarantee a specific benefit for their members. When performance exceeds those requirements, why should they share in the excess? They traded risk for security. If I invest in t-bills because I don’t like the possible negative returns of the stock market, I don’t have the right to demand a higher interest payment when booming business causes federal tax receipts to soar beyond expectations.

In the author’s hypothetical example, Caterpillar should redistribute $66,000,000 from the shareholders, the rightful owners of the capital, to earn praise from the press and to create the beginnings of a new social(ist) contract. Why? And what kind blithering idiot gives away $66,000,000 for a plan that the might engender extra loyalty and commitment from employees? If you’re a “free agent”, sure, I can say that might make sense. But those employees signed an actual contract, something more explicit than any social contract could ever be. Do they no longer have to honor that, even though they’ve begged for that security and risk mitigation? Sorry, but I believe in economics and contracts. Caterpillar’s recent experience suggests I’m right.

Oh, yes, I can just hear the dismissive response from corporate types now. They’d point out that Caterpillar investors who earned a record $4.21 a share would hammer the company stock if that figure were reduced by even a penny. They’d point out that unions like the UAW have traditionally opposed performance pay, or traded it away for higher guaranteed pay or benefits. And they warn ominously that this kind of “excess” compensation would quickly render the company uncompetitive again.

Guilty.

But none of that really matters. Because the real world choice for the corporate elite is now quite clear — not just here in the United States, but in Europe, Latin America and Japan, as well. Either the members of the business community will have to come up with an improved social contract that allows them to run competitive companies while ensuring that the gains of globalization are spread more equitably, or they will have to face the almost certain prospect that angry and anxious voters will roll back globalization in ways that will hurt the global economy and their newly globalized companies.

Or to put it another way: It’s time for the Jim Owenses of the world to show the same backbone and ingenuity in dealing with the excessive and unreasonable demands of Wall Street that they previously showed in dealing with workers and labor unions.

The central planners should stop reading Karl Marx and start reading Adam Smith. And maybe throw in a few viewings of Wall Street without Oliver Stone whispering sweet nonsense in their ears.