On the Soapbox

The reality of debts and deficits

Saturday, July 17, 2010
Keywords: Economics

"Reagan proved deficits don't matter." --Dick Cheney

Let us look at some numbers. The Greek public debt is around 130% of their GDP. As we all know, their government was in danger of insolvency, and as a result, Greece became the focus of an European sovereign debt crisis. The United States public debt is projected to reach 100% of our GDP next year. In light of what happened in Iceland and Greece, this sounds rather ominous, does it not? But let us look at one more figure: the Japanese public debt is around 230% of their GDP, and it has been well over 100% of GDP for many years. Yet, there is no danger of Japanese insolvency. There is no Greek-style crisis in Japan, despite the Japanese public debt dwarfing that of Greece. As another example, the United States public debt following the Second World War was 130% of our GDP, yet, aside from a brief economic dip as troops demobilized, the post-war economy was strong and robust; that huge public debt, which was larger than our current debt load, did not adversely affect our economy.

So how are Japan and post-war America different from Greece? Let us look at another number: 94% of Japanese public debt is held by the Japanese. Essentially, Japan owes Japan money. As long as the vast majority of the Japanese government's borrowing is domestic, deficits do not pose a threat of insolvency for the Japanese government (there are, to be sure, other problems with chronic deficits of this sort, but insolvency is not one of them). Likewise, virtually all of the debt that the United States accumulated during the Great Depression and World War II was held by Americans. Greece, however, is in a different situation, as most of their debt is held by foreigners, such as the German and French banks that purchased Greek bonds, and this is why Greece was in danger of insolvency.

What about our current debt load? What about the trillion dollars worth of our debt held by the Chinese? The vast majority—over 70%—of our debt is held by us. Investment portfolios, pension funds, university endowments, etc. all hold treasury bonds. This means that we are not really "leaving our children in (much) debt" because, in the future, to pay off the debt, Americans will have to (mostly) pay back Americans. While the news media seems very fixated on large-sounding numbers such as one trillion dollars of Chinese-held debt, they neglect to point out that one trillion dollars represents less than 7% of our GDP. Treasury bonds have been and are still considered one of the safest investments on the planet, making it attractive to foreigners and may partly explain why our foreign share of debt is higher than that of Japan's: because foreigners want to buy our debt, not because we need them to buy our debt.

Much is also made about the Chinese government's stash of treasury bonds and the notion that the Chinese government can use the threat of a pullout to dictate terms to our government. This is ridiculous because the reason why China holds so many treasuries is because this is their way of illegally manipulating the currency markets and keeping their currency, the RMB, grossly undervalued (using the spread between the nominal and PPP GDP per-capita as a rough estimate, the RMB is valued at nearly half of its true value). The undervalued RMB is how China maintains chronic trade surpluses, and as such, we neither need nor want them to hold so many treasuries. If they pull out, the RMB will rise against the dollar (something that Americans have long been calling for), and manufacturing would flow from China back to the United States (something that Americans have been longing for). In short, a Chinese abandonment of treasury bonds would hurt the Chinese government much more than it would hurt us, which is why there is no risk of that happening. That, of course, does not stop the Chinese government from loudly beating its chest and making thinly veiled threats, but in reality, those threats are empty and it is actually the United States who holds the greater leverage.

Finally, like the Japanese, our debt is denominated in our own currency, which, for reasons that are beyond the scope of this discussion, makes insolvency even more unlikely. Yet, despite all this, there are many people who are calling for immediate deficit reductions. While chronic deficits are indeed undesirable, they are necessary in the short term when faced with a deflationary, demand-slack recession (which is the polar opposite of an inflationary, supply-shortage economic crisis like that of Zimbabwe's, though that does not seem to deter some people from comparing them to us). We have been down this path before: Hoover's attempts at deficit reduction in the middle of a demand-slack recession drove us deeper into the Great Depression, and it took an enormous binge of deficit spending (the New Deal and the war, but mostly the war) to create the demand to pull us out of our downward spiral. For some, the problem is one of understanding: after all, it is easy to look at Iceland and Greece and, without any understanding of what fundamentally sets them apart from us or the Japanese, think that we could very well fall into the same trap as them. For others, unfortunately, the problem is one of politics. Whether it is to advance one's agenda or to discredit the current administration, many are making use of unfounded deficit scares. To borrow Upton Sinclair, "It is difficult to get a man to understand something, when his political advancement depends upon his not understanding it!"

I will discuss the current crisis in general in my next post, when I get around to it.

This entry was edited on 2010/07/22 at 22:18:17 GMT -0500.

ABC's earth2100

Tuesday, June 2, 2009
Keywords: Politics, Economics

So I watched ABC's earth2100 tonight. I did not have very high hopes for this show (I often avoid TV in general), but I was pleasantly surprised, though I think their projections were still too optimistic.

First, I think that everyone must read Garrett Hardin's The Tragedy of the Commons, in which he famously declared that "[the] freedom to breed is intolerable." I should add that the amount of moral value that we accord human life is dependent on the quality of life. Historically, even as recently as the early 20th century, we have treated human life with relatively little value; in a country where the euthanasia of one person in a vegetative state could cause an uproar, it is hard to imagine that this same country had embarked on a civilian construction project, the Panama Canal, in which tens of thousands of Americans died. Historically, the amount of value that we accord to life has not been a function of religious awareness or moral advancement, but rather to the quality of life and the amount of capital and resources available per capita. It is no coincidence that the Black Death also marked the start of Western advancement and political reform. Of course, most people are oblivious to history and are thus not aware of this relationship. Perhaps this ignorance of history is why the Catholic Church smugly declares birth control as evil even though such a claim depends on a level of life value that cannot be sustained without population control.

Second, I like that ABC brought up the fall of Rome because most people have the faulty notion that Rome fell because of external invasion. And while external invasion may have been the proximate cause, the Rome's fall was really the result of a breakdown in the economy and trade and the collapse of various regions into autarky. By the time the city of Rome fell, Rome had already long collapsed from within. The result were the Dark Ages in which much of civilization and accumulated knowledge was lost for centuries. Civilization is very fragile, and the sort of collapse imagined by ABC is actually quite possible and had already happened to the civilization that most resembles our own.

Third, I liked the analogy that our problem is that we are drawing from our bank account and that we will soon realize that the account is empty. By consuming at unsustainable levels, we are effectively borrowing from the future, but because that borrowing is covering up for the current shortfall, many people will not recognize that there is a shortfall until the futures starts to collect on those debts.

Finally, our society loves to look for a technical solution to problems, because technical solutions are non-disruptive. But there are limits to what we can achieve with science and technology, and technical solutions can only serve as a catalyst. For example, over the past two or three decades, engine efficiency has steadily increased by 30%, but instead of converting that increase in engine efficiency into energy savings, we have squandered it on larger, heavier vehicles. Across the board, cars today are heavier than comparable models of the same class three decades ago, and compounded with more people driving cars of a larger class (e.g., SUVs), our average aggregate fuel efficiency has actually decreased despite our technical advancements. In another example, instead of ensuring food security, the world has squandered advanced in agriculture by growing in population. As Hardin noted in The Tragedy of the Commons, there is no technical solution. And as such, I think that earth2100 is far too optimistic, because it glosses over the need for a fundamental rethinking of the problem of externalities.

This entry was edited on 2009/06/03 at 00:08:20 GMT -0400.

The Language of Public Opinion

Monday, April 6, 2009
Keywords: Politics, Economics

A sad and unfortunate fact of politics is that the choice of language can have a large influence over public opinion. As defenders of the estate tax learned in the 90's, once the language of "death tax" became common, the battle was lost, as the new terminology obfuscated the debate and led many voters to unwittingly support a measure that ran counter to their own self-interests.

And so it is with great disappointment that I see the widespread use of the word "nationalization" in the policy debates surrounding the financial crisis. Nationalization is a term tinged with statism, evoking images of bureaucratic morass and fears of government-run banks that offer customer service comparable to that of the local DMV. The use of such a word with so many negative connotations in our mostly libertarian society rallies opposition and all but guarantees the failure of whatever plan that has been associated with it.

But aside from the emotional and political obfuscations of the word itself, there is also a significant amount of substantive obfuscation, to the point that the use of "nationalization" in the debate is, quite simply, inaccurate and misleading. The proponents of "nationalization" solutions are adamant that they do not want government to run the financial institutions and that their plans are temporary: government would take control, wipe out the shareholders, replace the management, sell the healthy parts of the institution back to the private market, and hold onto the unhealthy parts, doing damage control and shouldering the losses. The government would hold onto the firm for only as long as it is needed to complete the process. For smaller institutions, this process can literally take place overnight—the government would have "nationalized" the firm for only a matter of hours before it would be privatized again (for huge firms, this could take a few months, which is still a short amount of time). One must keep in mind that, without the string of government financial interventions, the shareholders would have already been wiped out months ago and that these institutions would have ended up in a bankruptcy court. Effectively, a "nationalization" of this sort would not be very different, in principle, from the bankruptcy that would have been dealt to these firms by the free market—anything seized by the government would probably have been forfeited if it were not for the government interventions. As Simon Johnson, one of the most vocal proponents of this approach noted recently, the plan is really just a "managed bankruptcy." A former banking regulator who worked on the savings and loan crisis recently noted, "Ronald Reagan did receiverships. Nobody called it nationalization."

These managed bankruptcies do exactly what needs to be done: it punishes those who deserve to be punished (owners of the troubled firms), and it flushes out the toxic assets so that the financial sector can finally return to health. In fact, these managed bankruptcy plans do what the free market would have done, except in a less chaotic, less destructive, more orderly, and more expedient manner. Economists generally agree that the financial market's return to health is a necessary prerequisite for an economic recovery, and that the fiscal stimulus can work only if the financial sector works as well. Despite the recent string of hopeful news, the financial sector is still far from recovering. The recent increase in credit and lowering of mortgage rates was made possible only by radical, unprecedented actions taken by the Federal Reserve to fill the void left by the financial institutions. While I applaud Bernanke for taking these bold steps, the Fed's involvement cannot be sustained indefinitely and should be seen only as a temporary stopgap measure to buy us time—time that the Obama Administration so far seems intent on squandering.

The managed bankruptcy solution is not radical, either. This is a process that, under the moniker of a "FDIC intervention", is regularly used to deal with small and medium institutions. This was the process used to resolve the savings and loan crisis two decades ago. This was the process that the IMF and the United States government have recommended and prescribed time and time again when financial crises hit other countries. This is a solution that will soothe the anti-bailout sentiment in this country. This is a solution that will please Democrats who want to see Wall Street firms punished. This is a solution that will please Republicans who have been calling for bankruptcy and for the government to stop shielding the financial sector from the judgment of the market.

Opponents of this plan—the Obama Administration under Geithner and Summers—claim that "nationalization" does not work because markets work best. But the proponents of "nationalization" are not suggesting anything that remotely resembles what most people associate with "nationalization"; in fact, it is the "nationalization" plans of managed bankruptcies that are the most faithful to the market—the Obama Administration's plan is nothing more than a dressed-up version of crony capitalism.

Although it is understandable that opponents to managed bankruptcies would seek to smear such plans as "nationalization," it is strange to see its proponents, such as Paul Krugman and Simon Johnson, use that same terminology. Perhaps it is because they are not seasoned political players, but it seems clear to me that the first step to selling this plan is to regain control of the message. So let us take one small step in the right direction and stop talking about "nationalization" and start talking about "receiverships" and "managed bankruptcies" instead.

This entry was edited on 2009/04/06 at 22:05:38 GMT -0400.

Bernanke on 60 Minutes

Sunday, March 15, 2009
Keywords: Economics

The Ben Bernanke interview on 60 Minutes tonight was enjoyable, in part because it's one of those rare instances where the media coverage of the current crisis is actually accurate and decent. There were four points in particular that I found delightful.

First, in a very subtle and coded way, he said that he was opposed to letting Lehman go, and that the fault for that lay with Hank Paulson. He did this by noting that the Fed did not act because the Fed did not have the power to act, the subtle implication of which was that the ball was in Treasury's court (for the dissolution of Bear Stearns, the Fed had a very ad hoc approach that involved acting through an intermediary). Many have attributed the Lehman misjudgment to Paulson's ideology, and it's comforting to know that at least the Fed was on the right track.

Second, Bernanke spoke of the need to stabilize and recapitalize the financial system as a prerequisite for recovery. This is a point that far too many people, especially those in the media, miss. It's reassuring to know that the Fed Chairman recognizes the importance of this, especially given how pitiful the Obama administration's plans on this front have been (I suspect in part due to political considerations, as Republicans seem to be even more blind to this).

Third, Bernanke spoke of the need to grant the Fed more powers, and he also spoke of the need for an easier way for the government to "wind down" financial institutions. Although Bernanke does not say this in the interview, the Fed, being an independent institution immune to political bickering, has done the most in this crisis, often finding creative ways to step beyond its normal boundaries. When this history of this crisis is written years down the road, I doubt many will find fault with the Fed's response. But it still has its limits: it did not have the authority to stop Lehman's collapse, for example. And asking for an easier way to "wind down" bad institutions is just a subtle way of saying, "in the future, we need a way to temporarily 'nationalize' and clean up institutions without having to subject the economy to the uninformed and idiotic bickering of politics"--basically, to expand the ability to do FDIC-like interventions.

Finally, when asked about the causes of this, Bernanke homed in on what I have long thought to be the true root cause of the crisis: a savings glut. Too many people focus on the housing bubble, on derivatives, on Wall Street greed, etc. But while all of these things are relevant and have contributed to the formation of the crisis, they are not the root causes. The problem, as Bernanke puts it, is the massive inflow of capital ("savings") from "China, East Asia, and oil-producing countries" over the past decade or so. An excess of capital without a good place to go is how we form bubbles. This is what happened with the stock market bubble of the 1920's, with Japan's real estate bubble of the 1980's, and with the global real estate asset bubble. If we had tougher mortgage regulations and better bankers, we may have avoided a mortgage bubble, but with all that capital sloshing around, if it wasn't going to be a mortgage bubble, it would have been some other bubble that would have formed and bust, which is why I put the primary blame on the savings glut.

Not only is this one of those extremely rare situations where the large capital inflow is mentioned in the media, it's also a rare situation where China is singled out by name. If there is any single entity that deserves the most blame, it would be China. Normally, when there is a trade imbalance, the exporting country's currency will appreciate in value, making it cheaper for them to import and more expensive for them to export, and this is the market's way of naturally correcting trade imbalances. But the Chinese government manipulates its currency by sending Dollars back to the US (and Euros back to Europe). This keeps the RMB undervalued (which, BTW, hurts the average Chinese citizen) and ensures that Chinese exports are artificially cheap, thus sustaining the trade imbalance. One devastating side effect of this is that by trying to hold down the RMB and prop up the Dollar and Euro, China was also helping create an imbalance of capital flows, which is the cause of the excess bubble-forming savings that flooded Europe and the US. Of course, China was not the only country at fault, but it was probably the biggest. I can only hope that when this is all over, the West will take a harder stance on China's undervalued currency (by the IMF's purchasing power parity estimates, the RMB is nominally valued at half of its true value).

Edit: Fixed link... again.

This entry was edited on 2009/03/15 at 23:05:42 GMT -0400.

Hoover, version 2

Sunday, March 8, 2009
Keywords: Politics, Economics

The words of John Boehner, leader of the House Republicans:

American families are tightening their belts. But they don't see government tightening its belt.

The very reason why people are being forced to "tighten their belts" is because everyone is trying to do some belt-tightening. I find it incredible--stunning, even--that these Republicans cannot grasp the concept that Alice cannot save money unless Alice gets money to save (i.e., Bob needs to buy goods and services from Alice), which is not going to happen if Bob is trying to save money at the same time (which is also a doomed endeavor since Alice is also trying to stockpile money and will not buy from Bob). It is like the economic equivalent of the conservation of momentum: any amount of savings (consider it a "surplus" budget) must necessarily be balanced by an equivalent amount of "deficit" elsewhere, and because everyone has been spooked into saving, the government must embark on deficit spending to counteract this, or else we will be repeating the mistakes that another Republican made 80 years ago.

Boehner has gone as far as push a vote to freeze government spending for the year (the measure failed, but it did get the vote of every House Republican). I sincerely hope that the Republicans are merely engaging in political theatrics, knowing that their destructive policies cannot be passed, since the alternative--that they actually believe that freezing spending will help--is a terrifying prospect.

Another common Republican refrain is that public spending will crowd out private investment and thus worsen the problem. In a recent (and very popular) op-ed in the Wall Street Journal, we hear this tired old line:

[Taxes will] reduce incentives for our most productive citizens and small businesses to work, save and invest ...

I doubt very much that there is any shortage of an incentive to work in this recession; the labor market is very much a buyer's market right now. As for saving and investing, while this argument may hold some water during good times when the economy is running at capacity, the problem of a recession is that we are underutilizing capital due to slackening demand. Both physical and human capital--e.g., factories and talent--are being idled, and the very notion that the solution to underused capacity and idled capital stock is to increase capacity and capital stock is absolutely ridiculous.

Finally, Republicans are fond of raising fears about the effects of high government debt. What they (and the media) fail to mention is that, while our public debt is at historically high levels in nominal terms, our public debt as a percent of GDP is very low: approximately 40%. In contrast, following the Second World War, our public debt as a percent of GDP was nearly 110% and yet we experienced a long post-war economic boom. For further perspective, consider that Canadian, German and French public debt currently exceed 60% of their GDPs, Italian public debt exceeds 100% of their GDP, and Japanese public debt is currently at 170% of their GDP. Aside from a failure to put things into perspective, people also confuse private debt (mortgages, credit card debt, etc.) and public debt (government borrowing). Our problem now (and our problem at the start of the Great Depression) is that private debt had grown to unhealthy levels. While we can all agree that a high level of public debt is undesirable, it is less undesirable than high levels of private debt. Increasing public debt through government spending is an effective way to reduce private debt (think of it as a transfer from private debt to public debt: government spending creates the paychecks necessary for people to pay down their debt), which is the way to dig out of this crisis. This is how we dug out of the Great Depression--the "high" levels of public debt following the war was matched by substantially lower private debt--and this is what needs to be done again today.

The Republican opposition--driven by ideology instead of a pragmatic application of basic economic principles--is harmful in two ways: first, this high amount of political pushback makes it difficult for government to do what needs to be done, and second, the Republicans are destroying themselves, and as much as liberals may rejoice at the spectacle of the latter, a one-party system is not healthy in the long-run.

This entry was edited on 2009/03/08 at 22:45:39 GMT -0400.

Obviously not a student of history

Monday, September 29, 2008
Keywords: Politics, Economics

One of the people to vote against the bailout, Rep. Mike Pence (R-Indiana) said:

Stand up for limited government and economic freedom. Stand up for the American taxpayer. Reject this bailout and vote no on the emergency economic stabilization act.

Perhaps he should ask Hoover how well that strategy worked. Or the Japanese, who, after two decades, still have not yet fully recovered from the meltdown of their financial system.

This is a mess caused by a myopic Wall Street that fell into the pyramid scheme known as the housing bubble. But it seems that Main Street's ignorance (their failure to understand the importance of liquidity) is about to make things much worse. It's appalling how many in Congress do not comprehend the causes of the Great Depression, for if they did, today's bill should have passed with unanimity.

Outsourcing Labor Protests

Wednesday, July 25, 2007
Keywords: Economics

It warms my heart to see just how much vitality there is in market economics: Outsourcing the Picket Line (from the Washington Post)

Is education a public good?

Friday, April 6, 2007
Keywords: Economics, Politics

I read this post in my RSS reader, and it got me thinking about the economics of education.

This is a topic that I have not thought much about before, and if someone asked me about education, I would usually give a canned response about how education is a public good and thus public education makes sense. But the explicitness of the language used in the post that I read caused me to pause and reconsider whether or not education really is a public good.

"... situations where there is very, very little control over who gets the benefits of the good (no matter who paid for the good)."

For starters, I would not make the argument of education as a public good quite that way. If a parent were to spend lots of money on private tuition, their child will be the direct and most significant beneficiary of that expenditure.

This is not to say that education is not a public good, though. In my view, education has what I would call an institutional public good effect. The public good benefits are of an educated public in general...

  1. Democracy requires good, informed public discourse and a public that understands and appreciates the principles of the social contract into which they are bound. We can look at the United States and scoff at the state of our public discourse, but if we look at many other worse-off countries where democracy has stumbled or outright failed, we would see that a poorly-educated public plays a large (though by no means exclusive) role in their failure.
  2. Inheritance is one of the kinks of the libertarian ideal. Dynastic wealth and aristocracy are generally not things that libertarians embrace, and they are most certainly not compatible with free markets. Our notions of equal opportunity and the self-made person necessitate public education (and other things like the estate tax). One could consider the support of these ideals to be public goods.

Those are the two public good arguments that can be made for education. Argument #1 is limited in scope because it really only covers things like reading, economics (that this subject is not a high school requirement is tragic), history, and civics. Argument #2 covers the problem of inheritance (which we would never eliminate unless we establish some sort of Brave New World system where the family unit is abolished), and the public goods argument here is fairly weak and limited in scope as well, since the public good is just the promotion of what we hold to be a positive ideal.

It would seem, then, that my support for public education based on the notion of it being a public good is a fairly weak one, and as I more carefully thought about the role of education in society, it became clear to me that I have been falsely attributing many of the arguments for public education to the weak (though non-dismissible) notion of public goods.

Education is an investment in human capital. In an efficient market, resources will be allocated such that those who would gain the most from the investment will get the most. On some levels, this works. A student with a low IQ who struggles in school will probably not spend much on higher education: either no college or an inexpensive community college, and this person will most likely opt for a job that requires just labor and not labor with a lot of invested capital. Similarly, a student with a high IQ who learns things very quickly will most likely invest more in education: take out large student loans to pay for expensive medical school, for example, and in the end, this student will be in a high paying job that requires that its labor have a lot of invested capital. In such a case, the market has allocated resources efficiently: the factory has a laborer with an appropriate IQ and an appropriate level of education, and the hospital has a laborer with an appropriate IQ and an appropriate level of education. The problem, however, is that family ties make it such that capital is often allocated based on who the child's parents are and not necessarily on the child's abilities or potential. The children of rich parents will often receive a lot of educational investment regardless of their abilities or potential, and children of poor parents will often receive a low level of educational investment regardless of their abilities or potential. The former case is just a waste of resources, while the latter is a more tragic case where someone may be deprived of opportunity. Although some exceptionally bright children will develop very well even with a very low level of investment so that poor resources do not play as large of a role, for many children, the level of educational resources that they receive do play a large role. A higher degree of financial freedom (e.g., student loans, financial aid) along with a clearer picture of each person's abilities make it such that wholesale privatization of higher education makes some amount of sense (and before the post-WWII boom of state universities, this was the norm in higher education), but this is not a sensible approach for primary, or to a lesser extent, secondary education, especially since it is difficult to gauge a child's abilities (and thus the appropriate level of capital investment) until secondary education at the earliest. I would thus say that the most important argument for public primary and secondary education is that it corrects for a market failure brought about by ties of blood interfering with the efficient allocation of resources. And by giving everyone a fair and equal chance, it will also result in a better, more accurate picture of what someone's abilities are when they reach a stage where there is increasing differentiation of investment (e.g., this will increase the likelihood that if a poor child fails to get into college or into an AP class in high school, it is because of factors inherent to the child and not because an unfair lack of educational investment), thus correcting for another market failure brought about by imperfect and distorted information.

Finally, proponents of public education see an educated population as a public good in respect to industries having a better labor pool to draw from. I think that this claim should be dismissed. Instead, I would like to approach this from a different angle and propose the idea that public education encourages more investment in human capital because it diversifies away the risk of this sort of investment. If public education did not exist, then the tax dollars spent on education would end up in the hands of individuals and businesses. Individuals could use that same money to put themselves through private school and businesses could use that money to educate and train their employees, thus resulting in, at least on paper, the same level of education spending as before. However, let us consider a thought experiment where each person has $100 to spend on education. In this thought experiment, $100 spent on education may result in either $220 worth of extra income for a net gain of $120, or it may result in failure, no extra income, and thus a net loss of $100. Assuming equal probabilities of both outcomes, the expected result is a positive gain of $10, or 10%. However, as most people are risk adverse, many will not make such an investment, and society as a whole will miss out on that 10% gain. If, instead, the investment costs were paid by society, the risk is diversified away, and that overall social gain of 10% will thus be realized. Similarly, employers educating their employees about the things that public education would otherwise teach will face similar risks in addition to a free-rider problem where one company can lure away employees educated by another, thus gaining an educated employee while forcing the other company to bear the costs. This will generate risk and will discourage companies from spending too much on human capital investment. Thus, assuming a positive overall return on education, then public spending on education will have a positive overall effect and would thus benefit society as a whole (though, individually, the effects would be mixed).

On the whole, I think that the market inefficiencies introduced by public education are far outweighed by market efficiencies gained from the correction of market failures and from the diversification of risk. That, coupled with the secondary, though still important, public goods arguments, is why I believe public education is an institution that must exist.

Note: Upon further reflection, I suppose I should clarify and say that the arguments for public education are really the arguments for publicly-funded education. Through the use of vouchers, it should be possible to maintain public funding for education while also giving schools an incentive to operate efficiently and effectively. While I do strongly support vouchers in principle, I have many reservations about their actual use because in most cases, vouchers are just a cleverly dressed-up vehicle for people to shield children from secular education and to indoctrinate them in religious schools. Legitimate use of vouchers to transfer a child to a better school do exist, but they account for only a small minority of cases. I also have many reservations about implementation, practice, and how the way reality plays out may differ from the theory on paper.

This entry was edited on 2007/04/06 at 03:04:52 GMT -0400.

Adam Smith vs. Materialism

Friday, December 29, 2006
Keywords: Economics

How many people ruin themselves by laying out money on trinkets of frivolous utility? [...] They walk about loaded with a multitude of baubles [...] of which the whole utility is certainly not worth the fatigue of bearing the burden. [source]

This excerpt was from Adam Smith's 1759 The Theory of the Moral Sentiments, Part IV, Chapter I. Smith also goes on to discuss what economists today call positional goods, with a description of how people will, in a vain attempt to rise above others, seek material goods, but since everyone seeks to do so, people are trapped on a treadmill of seeking more consumption in pursuit of a happiness that they think that they will attain but never do:

For this purpose he makes his court to all mankind; he serves those whom he hates, and is obsequious to those whom he despises. Through the whole of his life he pursues the idea of a certain artificial and elegant repose which he may never arrive at, for which he sacrifices a real tranquility that is at all times in his power, and which, if in the extremity of old age he should at last attain to it, he will find to be in no respect preferable to that humble security and contentment which he had abandoned for it.

Free market capitalism is just a system of the distribution of limited resources through an organic, decentralized mechanism founded on the principle of individual freedom. It is a pity that today, the noble banner of free market capitalism has been subverted and has become that under which the perversions of hyper-materialism operate.

________________
PS: Materialism has been so strongly associated with free markets and anti-materialism with socialism, that many would be surprised that it is Adam Smith, not Karl Marx, who wrote the passages quoted above.

Save the rain forest by avoiding organic

Monday, December 11, 2006
Keywords: Economics

From The Economist:

But not everyone agrees that organic farming is better for the environment. Perhaps the most eminent critic of organic farming is Norman Borlaug, the father of the "green revolution", winner of the Nobel peace prize and an outspoken advocate of the use of synthetic fertilisers to increase crop yields. [...] Thanks to synthetic fertilisers, Mr. Borlaug points out, global cereal production tripled between 1950 and 2000, but the amount of land used increased by only 10%. Using traditional techniques such as crop rotation, compost and manure to supply the soil with nitrogen and other minerals would have required a tripling of the area under cultivation. The more intensively you farm, Mr. Borlaug contends, the more room you have left for rainforest. [source]

Save the rain forest, prove Malthus wrong, and save some money while you're at it: buy artificial!

Rant: The road paved with good intentions

Sunday, December 10, 2006
Keywords: Politics, Economics, Libertarianism

This article in the Washington Post makes me very angry. Especially the last line:

"I still think this is a great country," Hettinga said. "In Mexico, they would have just shot me."

Gee. What consolation that is. But why couldn't this country be even better?

This sort of thing is the main reason why I hate Democrats (and this new breed of equally corrupt big-government Republicans). I am certainly not opposed to government playing a role to correct natural market failures, but why do people always insist that government play a regulatory, rule-making role? If there is a market failure that needs to be fixed (externalities or insufficiently informed consumers), then fix the market failure. Why is there always this itch to go one step further and to start making rules to regulate and control? Want something to happen? Fine, go and incentivize it, don't force it. Even if people don't accept the moral argument against governments forcing behavior, why not the practical argument that regulatory policies--no matter how good-intentioned they may be at the outset--represent "security holes" (to use a software engineering analogy) that almost invariably invite "exploits"--corruption and abuse at some point in time; to those who say that libertarian policy is built upon idealistic wishing, I say that expecting government to always do good is even more unrealistically idealistic.

While I'm on the topic, the recent ban on trans fats in New York City is an excellent example of a gross regulatory overstep. Why is the city imposing a blanket ban on this stuff? Yes, most restaurants can do without it for most foods, but there may be some dishes that require odd ingredients that may contain some amounts of this stuff. Even if that were not the case, why go as far as ban it? Why not just inform the customers by requiring that restaurants post information about the trans fats in their foods, and let the consumers decide if they want to patronize someone using harmful ingredients (given the amount of money that is made hawking heart health products in this country, I think consumers do care very much about their mortality). Or if the city is concerned about the rising health care costs that result from these fats (since health care is taxpayer-subsidized), they could even tax trans fats to offset the costs to the taxpayers and also to give businesses a cost incentive to switch away from them. Any of those methods would've been just as effective and much less blunt (and immoral!) than just tossing in an outright ban.

Christmas as a Deadweight Loss

Wednesday, December 6, 2006
Keywords: Economics

Alice: At least it shows some thought.
Dilbert: It shows defective thought.
[source]

Treating Christmas (or Solstice) any gift-giving as a potential source of deadweight loss (DWL) is nothing new for economists (in fact, it was one of the topics discussed in the very first formal economics course that I took). For the uninitiated, here is a good column that appeared in the Financial Times in 2003 that discusses the DWL of Christmas. Note, however, that these calculations of DWL do not take into account sentimental value, so taking an economic view of gift-giving does not necessarily destroy the "magic" of it, but one could call into question why it is necessary in the first place to use consumerist instruments of gifts and cards to send sentimental signals of friendship or love; are there no other, more efficient means? Also note that it is possible for the gift-giver to correctly estimate the utility curve of the recipient (or at least do an equal or better job of it than the recipient, since people do not always know what they themselves want), thus allowing for individual cases without a DWL; however, when aggregated over all of the gift-giving in society, this is not the case.

A Tribute to Friedman's Libertarianism

Saturday, November 18, 2006
Keywords: Politics, Economics, Libertarianism

Since his death on Thursday, I have read a number of Milton Friedman tributes and obituaries. My favorite one so far has been this one at Salon by left-of-center economist Brad DeLong, which I think captures Friedman's world-view fairly well. DeLong's obituary is both amusing and insightful, and I highly recommend that people read it.

I think that Friedman's particular brand of libertarianism very closely matches my own. He believes in limited government, but unlike Ayn Rand and her wayward ilk, he believes that government does have a role to play because the natural order (e.g., markets) is imperfect and that, as a result, intervention is sometimes necessary. Like all economists, he is aware that perfect free markets do not (and will never) exist for a variety of reasons ranging from externalities to asymmetric information. For example, here is his take on externalities:

"Free markets" is a very general term. There are all sorts of problems that will emerge. Free markets work best when the transaction between two individuals affects only those individuals. But that isn't the fact. The fact is that, most often, a transaction between you and me affects a third party. That is the source of all problems for government. [source]

The DeLong obituary brings up the example of the London congestion tax, and in the case of environmental policy, Friedman has voiced support for controlling atmospheric emissions through a cap-and-trade system (the most well-known example of a cap-and-trade system to reduce pollution is the Kyoto Protocol). I have read comments from the left end of the political spectrum denouncing Friedman as heartless and as not caring about the losers problem of economics. While Friedman did support abolishing Social Security, welfare, and the minimum wage (all three of which I would like to see abolished as well), his calls for their abolition were not made in vacuum. Most people are not aware that he had championed for the negative income tax1 as their replacement. Unfortunately, the NIT never gained political traction, and today, Friedman is remembered more for his attacks against the minimum wage than for his support of the NIT.

Although I agree with Friedman in principle, I sometimes do not come to the same conclusions that he does. For example, while he advocates selling off public lands, I think that the market's tendency to fail to properly price future value (a common problem with non-renewable resources) will make this a bad idea. Friedman justified government intervention based on pragmatic cost-benefit analyses: if the benefit to be gained from a market correction outweighed the cost of giving the government that extra bit of power, then there should be intervention, otherwise, it's not worth it. I personally am not as skeptical of government as he is because, at least amongst civil servants (politicians are a different story), there are many people who genuinely believe in doing good and not abusing power. This is not to say that government can be trusted, but that because people tend to have a non-zero sense of ethics and principle, the cost of granting that power to government may be lower than he estimates, and thus there are a larger number of circumstances where the cost-benefit analysis works out. I also think he sometimes overestimates the efficacy of private institutions that could take over some of the roles of government. In the case of selling off public lands, the private institutions that have power and influence right now are generally industrial in nature (which is partly the fault of government having taken the place of private institutions in conservation and partly the fault of markets being unable to price long timescales), and in the time it would take for opposing private groups to gather in strength to counterbalance industry, a lot of irreversible damage could be done. In any case, the differences in conclusions come mostly from technical points and not from points of principle, which is why I, too, will say that Milton Friedman will be missed.

________________
1 Although I will not go into detail about the NIT here--the pros and cons of the NIT is something that I've been planning to write about in a separate blog post for some time now--the NIT would have not only served the same social welfare functions, it would have actually been even more effective at doing so.

RIP, Milton Friedman

Thursday, November 16, 2006
Keywords: Politics, Economics

Why did the extraction tax initiative fail?

Wednesday, November 8, 2006
Keywords: Politics, Economics

Looks like the extraction tax proposition (#87) is going to be defeated in California. Guess Big Oil's millions spent in that campaign did the trick (they tried to paint the extraction tax as a gas tax that will raise prices for consumers), but I'm still surprised; California, of all places! The thing that the opponents of prop 87 fail to mention is that California is the only state without an extraction tax, and that it is illegal for the extraction tax to be passed onto the consumers. Furthermore, because market demand has driven up the price of oil while extraction costs remain fairly constant, this means that the price of gas is dependent not on its extraction and production cost, but instead on market demand. Because there is no free entry into this market, this discrepancy between the price set by demand and the price that would have been set by production costs translates directly into an economic profit and this also makes it such that such a tax would have no effect on the final price seen by consumers (because those prices are bottlenecked and thus set by demand, not by extraction costs). So not only were the oil company's disinformation ads (which implied higher gas prices) completely misleading and false, this also means that California remains the only state without an extraction tax, making it the most oil-friendly state (what irony!).

Although an extraction tax is not perfect (a perfect solution would be an extraction tax coupled with a gasoline tax), it is important because it corrects for the market's failure to properly deal with exhaustible resources and an extraction tax is a perfectly market-compatible solution (in a state that is very regulation-happy, taxing instead of regulating is a step up for them). And it was defeated. Sigh. This is probably the single most disappointing result of the entire election1, and I don't even live in California any more.

________________
1 For some people, anti-taxes is their main issue. For some, it's pro-abortion, for some, it's anti-abortion, etc. Me? I really don't care about those issues. The one issue that motivates my politics more than anything else is the environment because what the heck do taxes or birth control matter if we destroy this planet? Moderate libertarianism is important, too, and I often couch my environmental views in that context: correcting for the market failures of environmental externalities is perfectly compatible with free-market libertarian ideology, but ultimately, the environment is still the litmus test issue for me, and if I had to choose between a populist anti-abortion environmentalist and a libertarian pro-abortion anti-environmentalist, I'd go with the environmentalist.

This entry was edited on 2006/11/08 at 02:12:04 GMT -0500.

Global Warming and Insurance

Sunday, November 5, 2006
Keywords: Politics, Economics

Here is an idea that I recently read about: why not treat the combating of global warming as a form of insurance? Businesses and industry are no strangers to the notion of insurance: paying a small amount of money now to guard against the unlikely event of a loss of a much larger amount of money in the future. The main stumbling block for environmentalists is the argument that a catastrophe is unlikely because the scientists are overestimating the effects of global warming. While I personally do not believe in this argument (it is the product of an elaborate propaganda campaign against science), there are many people who do take stock in such a view. And therein lies the beauty of marketing of this as a form of insurance because one can now sell the idea of fighting global warming without having to convince people that catastrophe is a likely scenario.

PS: It puzzles me to see conservatives, who are typically very risk-adverse (remember Reagan's rather expensive military-buildup insurance policy against Soviet aggression?), take such a risky position on global warming by refusing to do anything. I suspect that this may be because environmental legislation have historically involved heavy-handed regulations instead of market-oriented methods of rectifying the pricing failures of environmental externalities. On that note, the Kyoto Protocol, which aims to cap greenhouse gases through an emissions-trading market, is a fine example of a market-oriented solution.

PPS: Yea, yea, I know, there is one big glaring problem with this whole insurance idea: The Tragedy of the Commons. But if the marketing is done in such a way as to convince people that they do have a tangible stake in the outcome, then this idea may still be workable.

The Dow vs. the Economy

Sunday, October 29, 2006
Keywords: Economics

For much of this week, when the NBC Nightly News would talk about the economy, it would say something about how the Dow has hit "yet another record high" or something else along those lines, which is a bit annoying because...

  1. The stock market is not necessarily a good indicator of overall economic health. Sometimes it is, but sometimes it is not. As the saying goes, there are lies, damned lies, and statistics. Another statistic (which is not necessarily any better), the GDP growth rate, has fallen down to 1.6%, which is the lowest since 2003.
  2. Even if the stock market is a good indicator (I am not saying that it is not, but that people should be aware that it is can be an imperfect proxy), the Dow, with only 30 companies (and they are price-weighted, not capitalization-weighted, which is highly illogical) is not nearly as representative as, say, the S&P 500. But this Dow-vs-S&P thing is really a long-standing pet peeve of mine and is nothing new. By the way, the S&P 500 is still below its historic high.
  3. Of course, point #2 is not that important because historically, the Dow and the S&P have had similar trendlines and are roughly correlated, and that trend, I suppose, is more important than the nominal value of the index. Speaking of nominal values, economists know to not take stock in nominal values of anything; in this case, the nominal value of the Dow does not account for inflation.

I do not have anything against the stock market and its role as one of the economic statistics, but for the mainstream media to hype up its role without providing any sort of meaningful context is irresponsible.

France, Labor, and Transfers

Monday, April 10, 2006
Keywords: Politics, Economics

"We need revolutions [...] Changes do not come gradually in France; they happen in jolts" Those were the comments (at least, as best as I could remember) that a French interviewee had to offer today to NPR's The World in regards to the protests over the French labor law. One of the most memorable passages that I remember from McKay, Hill, and Buckler's A History of Western Society* was a quote in reference to 1848 by a Briton that was to the effect that the British reform while the French throw up the barricades. With the violent riots of last fall, the recent 1968-esque massive street protests and strikes in response to the labor law, and the general tendency towards mass protests and strikes in France, it seems that this observation is, sadly (and amusingly), applicable to the 21st century.

It seems odd to me that French university students would be so interested in a law that generally does not affect them; for the most part, the labor situation is such that these people would be past the age limit by the time they enter the workforce. Perhaps they were put off by de Villepin's strong-arming the bill through parliament. Or perhaps they see this as a step down the slippery slope of the dismantlement of the French labor system. Whatever the case, whether or not the French are willing to admit it, their labor system is in need of reform: this is a country where the vast majority of young people aspire to hold government jobs for a career. In today's fast-moving economy, an inflexible and protectionist labor market is a dangerous anchor for a country to be attached to.

However, this is not to say that the left's social and moral concerns about the human condition need to be necessarily tossed aside in the name of free markets. Socialists are often quick to point out the problem of externalities in economics. While most people generally think of externalities as someone polluting the air, the externalities that the left is eager to point out are the more subtle ones that affect every economic transaction. For example, by manufacturing automated checkout machines, a company decreases the economic value of a cashier's labor. Those who are familiar with trade theory will recognize this as another way of describing the winners-and-losers effect of trade. The French problem revolves around how one should deal with these externalities. One solution would be to restrict and regulate activity by instating labor protection laws, adopting protectionist trade policies, or enforcing strict rules on factory emissions. This sort of mandate-and-regulate solution is what France has adopted. The other solution would be to harness the power of the market by "fixing" the externality problem through pricing of the externality. The use of high gasoline taxes in lieu of fuel efficiency standards, the adoption of the sort of carbon trading intended for use with Kyoto are clear-cut examples of the externality pricing approach in environmental policy, but what about labor and trade? Transfers. Since trade (which can actually describe all normal economic activity) is a positive-sum game, it means that it is possible to take enough from the "winners" to compensate the "losers" to achieve Pareto optimality without depleting all the gains. Of course, while this sounds nice on paper, is very difficult to implement because the winners and losers are hard to identify and their gains and losses are hard to quantify. The income tax and welfare system is a reasonable approximation of this sort of externality pricing at play. It's not perfect, but it is certainly better than the alternative of dealing with the problem by destroying market forces by creating an inflexible labor market. On that note, perhaps the French should look north towards Scandanavia, where a combination of free and flexible labor markets with lavish social welfare guarantees shows that it is possible to pursue leftist social goals while maintaining a market economy. Unfortunately, if even the well-educated university students in France are unable to see beyond the labor dogma, then perhaps France is indeed in need of a "jolt"... in the other direction.

Afterthought: The opposition to transfers in the United States is based not on the principles of free markets, but instead on deeply-ingrained libertarian ideals. Is it possible to be a libertarian and still believe in transfers? I certainly hope so, as that is what pragmatic economics would seem to dictate. After all, there does need to be a distinction between libertarianism and anarchy (one that the Libertarian Party seems to forget about).

________________
* Given how bad my memory generally is, it surprises me that I was able to correctly recall off the top of my head both the title and authors of a textbook from eight years ago. Well, it was a good book...

This entry was edited on 2006/04/10 at 21:45:51 GMT -0400.

The "Jane Galt" Healthcare Plan

Tuesday, March 28, 2006
Keywords: Politics, Economics

A couple nights ago (I meant to post this earlier, but I kept forgetting :P), libertarian Megan McArdle of The Economist, writing under the "Jane Galt" pseudonym, proposed this interesting healthcare reform plan that is seductively simple and that tries to strike a balance between the moral argument for government payment and the need for market forces.

Have the government pay for all health care expenditures above 15% of adjusted gross income, and cover 100% of health care expenditures by people living under 200% of the poverty line.

The justification and reasoning for this plan is laid out in a series of four blog posts (1, 2, 3, 4), though if you do not feel like reading all four, the last of the four might work as an executive summary. It's not perfect, and the author admits it. For starters, there is an incentive disconnect at the 200% of poverty line, but that is a minor technical problem that can be easily fixed by either using a sliding scale instead of a flat 0% that steps up to a 15% or by exempting any income below that point from this cap calculation. There is the potential problem of freewheeling spending after the 15% cap is reached, but people generally do not visit hospitals for fun and there can always do some basic rationing (no botox injections on the coverage). There is also the problem of how one defines and tracks income, but for better or for worse, we already have that infrastructure in place, thanks to the IRS. (I went into a wee bit more detail on these points in some comments on her fourth post) There are other problems too, but not nearly as many as HSAs or single-payer. Overall, I think it's a pretty nice idea: a nice balance between free market and government, don't you think?

Alternatives and Relativism

Tuesday, March 28, 2006
Keywords: Politics, Economics

Consider this simple quiz problem:

You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton?

(a) $0
(b) $10
(c) $40
(d) $50

Concerned with the de-emphasis of basic economic reasoning in economics, two researchers asked some Ph.D. economists this question. Surprisingly, only 21.6% answered correctly, which is lower than the 25% that would be expected if everyone simply made a random guess. The question is fairly straightforward and explicit in laying out exactly what the next-best alternative was and any necessary assumptions; this was a problem that one might expect to find in the textbook of an introductory economics course. In case you are not sure, the correct answer is (b).

If people who believe themselves to be economists could not correctly and fully grasp the concept of the opportunity cost, what does this mean for public discourse?

Example: Scientology

What prompted me to recall this particular study was the recent South Park vs. Scientology controversy. I became curious, and a bit of Googling lead me to this text by an ex-Scientologist: (Source)

[A]lmost everything that occurs in Scientology that a Scientologist experiences and believes in comes about as the self-suggested result of a kind of auto-hypnosis. Everything that seems to work or be positive is attributed to Scientology, and everything negative is assigned to personal failure or lack of understanding of Scientology.

One might say that this is applicable to many belief systems in general, whether or not they are religious. A friend once told me that he believes that when good things happen and when inspirations come, it is the result of God. To which I responded, what about the bad things that happen and all the many moments of the day when no inspirations flash by? In a non-religious context, one might apply this to optimism or pessimism. Just as the true cost of an action must also figure in the opportunity cost of not executing the alternative action, it is necessary to consider and account for this alternate point of view in order to make unbiased assessments.

Example: Evolution

This principle of considering alternates can be said in defense of evolution. Those who tout intelligent design are quick to point out how seemingly well-suited everything is. But by doing so, they are turning a blind eye to the alternate perspective of how poorly suited many things are. Why do we have a useless colon? Why are our ears so prone to damage from a wide dynamic range? Why is our environment so fragile? For every wonderful thing in this world that "clicks" perfectly, I am sure that people can think of something that does not "click" together so well. (aside: of course, the best argument against ID is still the anthropic principle, which deals with the huge logical fallacy made by ID-proponents of confusing conditional probability with joint probability)

Example: Google in China

The controversy over Google's entry to the Chinese market is another fine example of this sort of principle at play. Those who opposed the entry were highly critical of the Chinese government and of the notion of an otherwise saintly American company cooperating with Beijing. Through public stunts such as the "breakup with Google" on Valentine's Day, they demonstrated their failure the assess and evaluate the alternate course of action. They failed to grasp that not entering the market would do nothing to change the political infrastructure (by giving more market share to local companies, not competing there would actually strengthen Beijing). The protestors either ignored this critical "what-if" question or fell prey to the delusion that the alternate choice was some sort of liberation when it was really a potentially worse version of the status quo.

Conclusion: Using Relativism

In decision making, the value that is used is not the absolute value of something, but its relative value. If you are sitting in a prison cell and for some odd reason the prison is showing a free opera, you would likely attend. If, however, you were free and the alternative was lounging in your backyard instead of languishing in a cell, then it becomes less likely that you would attend (assuming for the sake of this example that your preferences towards opera are similar to that of the majority of the population). And of course, a good economist would talk about this using opportunity costs. In debate, it is never enough to show that the status quo is flawed (an absolute evaluation); one must also show that a change would be better than the status quo (a relative evaluation).

Unfortunately, not everyone fully considers relative values in every circumstance. If given free opera tickets (or baseball tickets or whatever) that cannot be resold, could you imagine that there would be some people who would go anyway simply because they do not wish to "waste" the ticket and end up being bored out of their minds? People who dogmatically disagree with Google's decision in China often cite the absolute evil of such cooperation, and those who expound arguments for intelligent design fail to evaluate how their evidence weighs relative to the counter-evidence.

Relativism is a very broad term, ranging from cultural relativism to moral relativism to epistemological relativism, etc. The "relativism" that I am advocating here is nothing more than rationality: the evaluation of things not based on their absolute value, but how they stack against alternatives. Unfortunately, this is not something that people always do, and as such, it may be the case that in some circumstances, the best way to argue a point is to get the other side to see beyond an absolute value.

This entry was edited on 2006/03/31 at 11:41:40 GMT -0500.

Protectionism, Round 2

Friday, March 24, 2006
Keywords: Politics, Economics, China

Earlier this year, there was the controversy where misleading claims about security serving to veil a mix of protectionism and xenophobia sunk the transfer of operations of six American ports to a company owned by the Dubai government.

Today, the New York Times and C|Net published an article about the criticisms that the State Department is facing over the purchase of 15,000 computers manufactured by the Chinese company Lenovo.

  1. Lenovo is the new owner of IBM's PC division. Its product lines have not changed (they often even include the IBM logo). If the State Department has used IBM computers in the past, it makes sense from a logistical standpoint to continue to use the same product lines and to use the same products that they are already familiar with.
  2. Security is a red herring. In fact, IBM/Lenovo Thinkpad laptops are one of the very few that feature fingerprint scanners for use in security authentication. Putting this irony aside, the real core of the issue is that security comes from how people use the computers, how well the network is administered, and how secure the software is, in roughly that order. Hardware's role in security is all but non-existent.
  3. Dependency on foreign companies is yet another red herring. The vast majority of the components used by all PCs are not manufactured in the United States. For example, every single CD/DVD computer drive manufacturer has its factories located in Asia. Almost all memory chips are manufactured in Asia. Even for the few component manufacturers headquartered in the US (notably Intel/AMD for microprocessors and nVidia/ATi for graphics processors), most of their manufacturing capacity is overseas. All that Lenovo does is buy components from the commodity market and assemble them into a computer, which is really not that glamorous of a task. Whether your PC comes from Texas-based Dell or China-based Lenovo, pretty much every single part of that computer was manufactured overseas.
  4. As the article points out, even though Lenovo is supplying the machines, IBM is providing the support. But even if IBM was not providing support, because PCs are mostly made from standard commodity components, just about any IT professional can provide support.
  5. Finally, protectionism here will not accomplish much. Since most of the components are purchased from the market, assembly constitutes most of Lenovo's business, and like most other computers sold in the United States, these computers are assembled in the United States using American labor. Okay, but what about money at the top: the corporate profits that are going to a foreign company? This business of acquiring components, assembling them, and selling the finished products is not very profitable, and the margins are very slim; why else was IBM so interested in shrugging off its PC division?

Hopefully, people will be sensible enough to make sure that, unlike the ports deal, this does not become overblown and overhyped.

This entry was edited on 2006/03/24 at 11:53:40 GMT -0500.

Book Review: Freakonomics

Monday, February 27, 2006
Keywords: Books, Economics

I went through two books this past week, which is why I have been neglecting this blog somewhat. Titled Freakonomics, the first is a book about "economics" that talks about things that people generally do not associate with economics. Those who know me in real life will know that I am enamored with economics because it deals with human nature in a rational fashion and is in a way a bit like psychology. I am fond of looking at everyday behavior and decision-making--especially my own--in terms of marginal costs and marginal benefits. For people familiar with economics, this is not anything terribly new: about half of the papers that were required reading for the Advanced Microeconomic Analysis class that I took had nothing to do with money or production and instead were more about human behavior. Well, in a nutshell, that is exactly what this book was about. The author tries to introduce to the average person the non-monetary, non-production side of economics that most people are not aware of.

I would categorize this book as light and fun reading. The author looks at an odd assortment of topics from wrestling to parenting to online dating to even the social effects of abortion through the lens of economics, each case meticulously supported by data. My one minor complaint is that there are times when the author segues so far that I often found myself saying "Um, we stopped looking at this economically about three paragraphs ago," but the subject was interesting enough that this did not really bother me. Being already familiar with this dimension of economics, this book offered me no new insights into economics, but because I have never thought about the specific topics discussed from this particular perspective, I still enjoyed the book on a gee-I-didn't-know-that-before level. It is definitely worth a read for non-economists, and for the economist, I would still recommend it just for the interesting data and findings that are presented.

This entry was edited on 2006/02/27 at 21:58:54 GMT -0500.

Clarifying My Previous Post

Friday, February 24, 2006
Keywords: Politics, Economics, Libertarianism

Okay, I'll admit: 2400 words is far too long for a rant. After re-reading what I wrote last night, I realized how lacking in coherency my post was. So here's a condensed version: I think that libertarian ideals can constitute a compelling political platform, but in order for that to become a reality, hard-line libertarians need to recognize reality and abandon some of their dogmatic approach to things. Furthermore, in order to introduce libertarianism to the average person, the very first step that needs to be taken is the abandonment of the sorts of radicalism that the Libertarian Party of the United States advocates. There, how's that for a short 100-word condensed version? :P

This entry was edited on 2006/02/24 at 20:04:39 GMT -0500.

The Libertarian Big Idea

Friday, February 24, 2006
Keywords: Politics, Economics, Libertarianism

This is worth a read: Is the left out of ideas? Here is an excerpt, though you should read the whole thing:

The left used to have a Big Idea: The free market doesn't work, so the government will fix it. The social democrats disagreed with the Socialists and the Scoop Jackson democrats about how much fixing was necessary, but they all agreed on a basic premise, and could sell that simple message to the public. Then, after fifty years or so, people noticed that the government didn't seem to work any better than the free market . . . worse, actually, in a lot of cases . . . and it was awfully expensive and surly. Conservatives stepped in with their Big Idea: the government screws things up, so let's leave more stuff up to individuals, which, if nothing else, will be a lot cheaper. Obviously, liberals disagree with this . . . but they have not come up with a Big, Easily Sellable, Idea With Obvious Policy Prescriptions to replace it. Some of them have just kept repeating the old Big Idea, which it seems to me that fewer and fewer people believe, as the US continues to pull ahead of its economic peers. Others have focused on coming up with lots of little ideas . . . but those take up too much time and energy to attract voters. Gore tried to whang up anger against pharmaceutical companies, and Kerry tried to stoke anger against Bush, as replacement. But in politics, there's just no replacement for the Big Idea.

How about this for a new Big Idea: adopting moderate libertarianism as a new platform. By adopting Bush Sr.'s NAFTA and by slimming down welfare, the Democrats under Bill Clinton have already taken a step in this direction. Why not take it further?

Libertarianism? Surely you jest!

David Boaz of the Cato Institute notes that, according to the Gallup Poll's annual survey on government, 27% of Americans are conservative, 24% are liberal, and a surprisingly high 20% are libertarian. The 2004 exit polls back this up: about 45% of Bush voters supported gay marriage, and 29% of Kerry voters did not believe in big government. As for me personally, I hoped for a Kerry victory only because virtually anyone would have been better than Bush; if there was a third candidate that had even a semi-reasonable chance, I would have rooted for him instead (assuming that he was not worse than both Bush and Kerry, which would have been quite a feat). I think that there is sizeable support, and there would be even more support if the American people were told about it. How many people outside of the educated élite could tell you what the word "libertarian" meant?

Um, there is a Libertarian Party, you know...

What? There is a Libertarian Party? Oh, you mean those folks who could not even manage to pull in one percent of the vote? As you may imagine, I am not too fond of them, but readers of this blog should not be surprised at my stance on this. Hop on over to their website and take a look at their platform. To their credit, the platform is fairly sound on several points, including free speech and crime control, but on a number of other points, their positions are quite remarkable--and I did not intend that as a compliment. I believe that the problem with the Libertarian Party and, most notably, with the objectivist wing of libertarianism, is the absoluteness and tenacity with which they cling on to their basic principles; in short, they are too dogmatic. This is not a trivial condemnation, so I wish to take a few moments to clarify exactly what I mean.

Green grass meets green money, under clear skies...

Let us consider the Libertarian Party's position on the environment. They skirt the issue of environmental protection by ignoring the pollution produced by private entities and instead, shifting the focus to government pollution and mismanagement. I do not doubt that the government is quite capable of polluting, and I do not doubt that the NPS has suffered from instances of mismanagement (they neglect to mention that this has already been mostly fixed by making the NPS largely independent, relying solely on user fees, sales, and donations for its finance), and I do not doubt that reducing the powers and role of government would curb government-produced pollution and the many cases of government serving special interests. This position, however, completely fails to take into account private pollution and, most importantly, externalities. For example, if I dump waste into a stream, it would not affect just the portion of the stream that crosses my property; every person who encounters that stream will be affected. While I would bear the costs (loss of aesthetics, property value, etc.) of polluting my segment of the stream, I would not bear the cost of polluting everyone else's. Lumber companies will suffer the cost of devalued properties when they clear-cut a forest, but when the subsequent erosion leads to severe flooding (as is typical in many developed countries), they will bear none of those costs. Any first-year economics student can tell you about externalities, and every textbook on market economics will note that free markets will work utopian wonders only when, among other conditions, externalities do not exist, which is by no means a reasonable assumption. Yet, this platform fails to acknowledge this basic reality. The case could be made that environmentalism and externalities are very tightly intertwined; indeed, most economics textbooks refer to some form of pollution--whether it be water, air, or even sound--as a canonical example of an externality. If your neighbor's property was laced with various toxic chemicals, how concerned would you be, assuming that there is no way that those chemicals could somehow leak or seep onto your property? Would your concern level be higher if these chemicals could leak or seep onto your property? What if your neighbor was also fond of setting things alight and the smoke billowed through your back yard? It is largely because of externalities that environmentalism even exists, and it is largely because of externalities that government must have a role in protecting the environment.

That having been said, the current decree-style approach to protecting the environment is ineffective. Any sort of decree-style solution is bound to alienate many people, and this alienation has led to the politicization of environmentalism, which has led to absurd claims from both sides (imminent doom claims are often overblown, and the flat-out dismissal of global warming is even more absurd). Let us look at how the government deals with cars. We have very modest gas taxes, EPA fuel efficiency and emissions mandates, tax breaks for hybrid owners, and subsidies to encourage companies to develop efficient technologies. Not only is this complexity undesirable for proponents of smaller governments, but it also increases the opportunities for abuses, from the use of various loopholes by SUV makers to the incentive to lobby the government for favorable regulations. What if a hefty gasoline tax, similar to those in Europe was enacted? First, it would be relatively simple to implement, and this simplicity would result in cutting the administrative costs associated with a myriad of regulatory solutions. Second, it would increase the consumer demand for better fuel efficiency, leading the market to favor smaller and more efficient cars (companies are much more eager to respond to market demand than government regulations). Third, increasing the cost of gasoline would also cause the market to favor gasoline substitutes, thus generating market incentives to develop new fuels. Fourth, since there is a rough correlation between mileage efficiency and emissions, this would help reduce emissions (although there are other factors such as filtering that effect emissions, so this may not suffice to completely replace emissions standards). Finally, as an added bonus to national security, by using gasoline taxes to exert downward pressure on oil demand (rather than letting the prices associated with an ever-shrinking oil supply exert that same downward pressure), this allows the government to capture a portion of the profit instead of the oil producers, which would certainly ease the fears held by neo-conservatives that oil is a tidy jihad fundraiser. For those who would balk at the idea of using taxes to solve a problem, the revenue from this tax could be used to reduce other forms of taxes, such as the income tax. In the end, high gasoline taxes would represent a relatively simple way for government to place a price on the externalities of gasoline consumption.

This digression into environmental policy is, I hope, an illustration of how one might try to accomplish the same sorts of goals that we have today by using a simpler and natural (i.e., market-based) solution. The same could be said for cutting industrial carbon emissions: instead of draconian regulations, set a cap for total national emissions and let companies buy and sell this supply of emission allowances on the open market, just as they would buy and sell any other form of capital. This allows for Kyoto-style compliance and a gradual step-down of industrial emissions, while reducing regulatory overhead and letting the free market guide the implementation. Such solutions would be consistent with the spirit of reduced governments and free markets while also acknowledging that protecting the environment is important and that government does indeed have a role that it must play. Do government policies need reform? Yes. Does this necessitate throwing government out of the picture? No. By viciously denouncing the government while providing no real solution, the Libertarian Party fails to make any worthwhile contribution. For liberals who are skeptical of market-based solutions, I can understand such skepticism. It is important to not confuse the solutions that Bush peddled with true market solutions. This current administration's policies have been mostly opportunistic: it pays market-based solutions lip service while pursuing policies that cater mostly to special interests.

Enough about the environment, already!

Okay, so my foray into environmental policies went on for a bit longer than I had hoped. To be sure, that is not the only area where I think that the Libertarian Party concedes too much to its government-is-bad dogma. Although entirely eliminating welfare and replacing it with private charity may look good on paper if we also just ignore Keynes (which I do not suggest that we do), it is a very radical move, especially when there is little evidence to suggest that charity and a predicted economic boost would be sufficient. Economists have dreamed up of various ways to reform the system, including this one proposed in the 1970's: give every person, regardless of income, a fixed stipend. This would slash the enormous social services bureaucracy needed to administer the current system, make the system more "fair" by giving everyone a stipend, eliminate the penalties that people suffer when they try to move out of welfare by getting a job, and reduce somewhat the moral necessity for progressive taxes. Yes, it would involve higher taxes, but for most people, the stipend makes up for it, and yes, there are a number of other potential problems with this, but I do not wish to jump off on another lengthy tangent tonight. It also seems foolish on both moral and pragmatic grounds to abolish foreign aid, especially given its relatively low cost and the benefits that stability would offer if one wishes to enact the sort of open immigration policies favored by libertarians. Their calls to privatize utilities may be a good idea, but what about the natural monopolies? A heavily-regulated private utility is not much different than a public utility. Education should never been fully privatized because an education is an extremely important positive externality: it is crucial for democracy (and there are some moral arguments about equal opportunity as well). I could go into much more detail and specifics about these and other platform points, but I will save that for another day; what I hope to establish tonight is the notion that government does serve a purpose and that careful reform could reduce the size and role of government while at the same time achieving the same sorts of goals. As I have argued here and in another entry that I wrote a few weeks ago, one of my gripes against the most prominent versions of the libertarian ideal is that it can sometimes be blind to reality. As I am often fond of saying, pure libertarian ideals are very much like an object sliding on a frictionless surface, attached to a massless pulley, and economics represents a more pragmatic, but realistic approach to things. In the end, the best policies are those that embody the spirit of libertarian ideals while also acknowledging reality, and it appears to me that the Libertarian Party is too caught up in its doctrine to recognize this.

So, why the heck not?

If the economic morass that is Europe is any indicator, free market economics have been vindicated. The political climate in the United States would also suggest this. What resistance remains in the United States comes from a misguided fear of globalization (a topic for another day) and the ease with which the average person mistakes corrupt corporatism with true free market economics (i.e., one that compensates for externalities, natural monopolies, and at least some of the most serious issues of information asymmetry), which is a misunderstanding that the Republican party's special interests are partly to blame for. Market economics must be embraced; if liberals, excluding the far-left, have nothing beyond a few specific cases of corporatism and a paltry mix of globalization fears to use as ammunition, then it is time to finally accept market economics and its flaws. Mainstream liberals today do not directly condemn market economics, but by failing to embrace it and by couching some of their causes in strongly populist tones, they send an odd message. They should embrace markets while acknowledging the responsibilities that need to be undertaken to ensure that markets work, and by adopting a well-defined moderate libertarian platform, they can offer themselves as a shining alternative to an ever opportunistic Republican party that has grown too dangerously close to religious fundamentalists. Unfortunately, political realignments like usually happen over the course of many decades--if they happen at all--so I will not be holding my breath.

This entry was edited on 2006/02/24 at 02:25:52 GMT -0500.

Europe's Woes

Wednesday, February 8, 2006
Keywords: Politics, Economics

I just finished reading a very well-written essay titled "Is 'Old Europe' Doomed?" published by the libertarian Cato Institute. Incidentally, just a few days ago, I was reading an article in the latest issue of The Economist that explored in some detail the economic side of this issue in France. From the Economist article: "This year, for the first time, almost the entire proceeds of French income tax will go to pay interest on public debt." Anyway, go give the essay a read. Edit: Here is a reply essay.

This entry was edited on 2006/02/08 at 04:46:11 GMT -0500.

Google vs. Verizon

Wednesday, February 8, 2006
Keywords: Technology, Economics

Here's yet another article about the recent lust for content taxation that seems to be infecting various broadband ISPs. Read the article.

As if asymmetrical up/down bandwidths aren't enough, they are incensed that content providers don't have the right to use their pipes for free. Excuse me, their pipes? Their arrogance is extremely infuriating. Of course, Verizon owns the pipes, but the millions of Verizon customers pay a hefty monthly toll, and as a result, these customers should be expected to have the content that they want come through those pipes without meddling; by no means is Verizon giving away its pipes for free, contrary to what they would like for the public to think. If Verizon feels that its fees are not enough to cover the costs of maintaining those pipes, then it perhaps it should charge those people who requested the data, which it won't do because it can more easily get away with squeezing money out of various Internet companies than its customer base. Google is not enjoying a free lunch, either. It has to pay a hefty price for its bandwidth and for its connection to the Internet, though those payments do not necessarily go to Verizon. If someone makes a phone call, the caller is paying his local phone company for the right to use the lines to make outgoing calls and then the callee is paying her local phone company to for the right to use the lines to receive incoming calls. If this sort of thing goes through, it would be akin to forcing the caller to pay twice--once on his end and again on her end for the call, even though the callee is still paying on the receiving end, for a total of three charges.

In the end, Verizon and the other ISPs are doing this because they feel that they are in a position to dig into the profits of Google et al. and also because they fear that as Internet voice calls and other services become more common, they will lose out. Bundling their own (mediocre) services with their connection service is akin to Microsoft bundling their own software with Windows. While vertical integration can often be a good thing, this sort of alliance between content provider and connection provider is dangerous as the latter is monopolistic in nature. It produces a conflict of interest that has led to them toying with the idea of charging rival content services, which would be a gross abuse of market power, much akin to Microsoft charging rival companies for the their software to run on Windows.

This is a perfect example of when a small amount of government regulation is necessary (simply affirming the principle of network neutrality would suffice). Although there may be some token competition, the cost of switching ISPs and the impracticality of multiple companies laying multiple lines make it such that broadband ISPs wield near-monopolistic powers (and in some places, they do wield monopolistic powers). They are natural monopolies, which governments have the obligation to regulate in order to protect the free market, and if nothing is done to reign in abuses of power, then the Internet--one of the finest specimens of free market economics--will suffer. Much like the railroads of long ago, the Internet is the essential connecting fiber that binds our New Economy together, and we can ill afford the 21st-century equivalent of railroad robber barons.

Side note: I was greatly disappointed by the article, as it mostly dwells on arguments given by John Thorne, the Verizon executive, and the prominent placement of biased language such as "free lunch" will not help the average reader of this mainstream newspaper fully grasp both sides of this issue. That the arguments against the Verizon plan are presented very briefly and almost in passing at the very end is also unfortunate.

This entry was edited on 2006/02/08 at 12:50:23 GMT -0500.

The Economist vs. Oil Addiction

Monday, February 6, 2006
Keywords: Politics, Economics

I was delighted to see a brief article in 4 Feb 2006 issue of The Economist titled "The pusher-in-chief" gleefully taking punches at Bush's State of the Union energy policy proposals. In addition to the objections that I made last week, The Economist touched on a good point that I did not mention. It notes that last year's Energy Act handed out billions of dollars to the energy industry, but it did so without any sort of guidance. By failing to force the pricing of externalities (e.g., carbon taxes and raising efficiency requirements), the administration has failed to generate the market forces necessary to guide the money spent. The problem with energy policy is not money; the major energy companies are swimming in revenue. The problem is the lack of market forces to guide that money towards useful solutions. This failure to force the market to correct its lopsided pricing, in my opinion, suggests that while Mr. Bush claims to be on the side of market economics, he really is not (to be cynical, I personally think that he chooses market solutions not out of principle, but only when it is politically convenient). In addition, his utter failure to recognize that "oil is a fungible, globally-traded commodity" in his ill-constructed speech certainly does not help his economic credentials. To quote the article, Bush "is firmly on the side of the pusher, not he addict."

This entry was edited on 2006/02/06 at 16:30:30 GMT -0500.

Reconciling Libertarianism and Socialism

Sunday, February 5, 2006
Keywords: Politics, Economics, Libertarianism

As the people who read this blog already know, my core philosophical/political principles are libertarian, and as such, I am a free market economist. But at the same time, I am also very centrist, and I view platform of the Libertarian Party as a platform of cold anarchy. Worse yet, I am a free market economist who is intrigued by Karl Marx--not the radical Karl Marx of the Communist Manifesto, but the economist Karl Marx of Das Kapital. I have long turned this around in my mind trying to find a way to reconcile and to unify these beliefs, and here is my (hopefully concise) attempt at doing so.

Libertarianism was born out of government abuses. It is believed that governmental powers pose the greatest threat to freedom, and as such, libertarians prefer a hands-off approach to virtually anything. Libertarians (generally) do not support anarchy, however, as they believe that the government is needed to provide justice (i.e., a way to deal with thieves, etc.) and to provide certain (limited) public goods. Marxists believe that the preservation of freedom involved eliminating concentrations of capital so that economics does not become a means of enslavement. The difficulty here is that this violates the property rights that libertarians hold dear, and although there are no specific provisions on precisely how reallocated capital should be managed, this, realistically, necessitates the transfer of authority to some form of governing body (though ideally, this would not be the case).

I want to start by trying to define what our goal is. Both conflicting views advocate freedom, but how should we define this freedom? I propose that we define it in terms of power. Random House Webster's dictionary defines it as the possession of control or command over others, which I think is a suitable definition for this purpose. Thus, in the absence of government, people can exert power on others through physical coercion (e.g., seizing of property, killing, etc.), and when government is formed, people surrender the right of physical coercion to the government, thus instituting and protecting freedoms such as property and life. Libertarians believe that government should not do much more beyond confiscating the powers of physical coercion, fearing (rightfully so, as history attests) that governments with too much power will tend to exert them in ways that suppress individual freedom. What is lacking from this perspective, however, is economics. In a world of abundant resources (capital), this may not have been a serious oversight, but it is nevertheless an oversight, and in our world, it is a serious one. But to what extent is economics power? If Mr. Smith decided to do work for Mr. Jones so that Mr. Smith would have the money to buy korfball equipment for his hobby sport, should this be viewed as Mr. Jones exerting economic power over Mr. Smith or should this be viewed as a voluntary economic exchange initiated by Mr. Smith in which he trades some amount of his time for equipment for his pet sport? What if the situation was a little different? Let's say that Mr. Smith is struggling to pay the rent on his run-down low-cost apartment and barely has any money for meager amounts of food, and he is working for Mr. Jones to pay for just these basic necessities of life. Would Mr. Jones' ability to have Mr. Smith do work on his behalf constitute power in this case? Would it make a difference if Mr. Jones was the only employer or if Mr. Smith could choose between different employers? A distinction needs to be made between economic activities where the parties act voluntarily and where there is a coercive element (a non-economic example of such a distinction would be Mr. Doe deciding whether to go to a police station so that he can interview the police chief versus Mr. Doe deciding whether to go to a police station because he's surrounded by policemen with guns drawn--while he technically has the option to resist, the consequences of that option are such that the option does not realistically exist). The study of free market economics addresses this to some extent with the notion of market power: monopolies, monopsonies, etc. and the notion of inelastic demand: demand for food and shelter, etc., but how does this fit into politics?

Classical libertarianism is somewhat myopic in this regard, as it focuses on the protection of people from the coercive powers of government and pays little attention to the possibility of coercive powers from other sources, mostly because a perfect free market economy would necessarily be free of these problems. However, just as many people could claim that a perfect Marxist society is an impossibility, so is the notion of a perfect free-market economy. Just as the frictionless surfaces of physics textbooks do not exist in the real world, many of the assumptions of free market economics are limited only to textbooks: perfect symmetrical information, lack of externalities, no natural monopolies, perfectly rational people, perfectly mobile capital and labor, etc. It is true that much of the power held by the rich are really the product of misapplied governmental powers (fine examples include the federal grants that established the crooked railroad monopolies of long ago and the corruption of government through lobbyists) and that a general reduction of governmental powers would reduce the amount of power that could be "bought" and abused, but there are many cases where power could be had without the help of a corruptible government, through deception (it has been proved mathematically that asymmetric imperfect information will produce undesirable economic results in a free market model), natural monopolies, natural monopsonies, the disregard of externalities, etc. Alan Greenspan's 1961 paper titled Antitrust is a perfect example of the commonplace libertarian view that economic problems like trusts are caused by government and that, had government not meddled in the first place, there would be nothing to fix. This perspective, as I have just argued, is flawed because while it may be true for certain cases (such as the railroad example brought up by Mr. Greenspan that so conveniently fit his argument), it is by no means all-encompassing. It should also be noted that even if the economy was perfect enough that it is able to correct itself, the process of correction can oftentimes be slow. It took about a decade for U.S. Steel to lose its grip on the market, Alcoa did not lose its monopoly until after a number of decades and a government jump-start of its competitors.

While classical libertarianism is naive in respect to the economy, Marx was blind in respect to government and the power and efficiency of free markets. Although Marx does not advocate a government per se, reality implies the necessity of granting government a lot of power if reallocation of capital of the scale he imagines is to take place, hence my motivation for a perspective that takes both concerns into account.

I would like to see a version of libertarianism that takes into account the realities of the economy and thus tries to address the kinds of issues that Marx tried to address without taking a radical approach to the allocation of capital. Locke believed that, as a whole, people were good and that if it were not for the small minority of aggressors, government would not be necessary. If these concessions can be made for the imperfections of human nature, why can they not be made for the imperfections of economics? While excessive government intervention in economics is undesirable (e.g., agricultural supports), government intervention is necessary to establish the foundations necessary for a true free-market economy, which in turn will ensure freedom. Laws are needed to regulate information disclosure, to force the pricing of externalities (e.g., pollution and gasoline taxes), to regulate natural monopolies (e.g., utilities), to regulate mergers and other anti-competitive activities, etc.

I suppose the difference between what I am advocating and socialism is that, as a libertarian, I believe in a different standard to which these laws must be held. Their purpose is not to help specific groups of people, but instead, they should be carefully targeted at the natural defects of the economy in the hopes that all groups of people will benefit once a true market economy exists, and as such, these laws need to be limited so that they grant the government only as much power as necessary. In the end, I believe strongly in the power and efficiency of a market economy. One needs to look no further than the high unemployment and discontent in Europe to see that, ultimately, free markets are the best that we have, and that with some ironing out of the natural kinks (a process that many hard-line libertarians oppose), it could do wonders for the world.

Anyway, this is just a short (though not as short as I was aiming for) preliminary sketch of my take on libertarianism. One of these days, I should flesh this out to something more carefully researched and written, but for now, I'm just curious to see what people think of it.

This entry was edited on 2006/02/07 at 19:23:43 GMT -0500.

Hollow Words: Breaking the Oil Addiction

Wednesday, February 1, 2006
Keywords: Politics, Economics

As expected, there was not anything really new in the State of the Union address, as it was more or less a rehash of policies that the public has been hearing about for quite some time (which, to be fair, is typical of modern State of the Union addresses from Presidents of both parties). There was one thing that stood out, and that was Bush's remark about our addiction to oil, and indeed, it is quite an addiction, with an extraordinary inelasticity of demand. I must applaud him for finally acknowledging that this is a problem, but beyond that, there is little worthy of praise.

First, cutting 75% of our reliance on Middle Eastern oil by 2025 is hardly a monumental endeavor, especially since only 20% of our oil comes from that region. Most of our oil supplies come from much closer sources, such as Canada and Latin America. A 15% reduction in oil consumption in the course of nearly two decades is hardly remarkable, especially since this does not necessitate any reduction in energy consumption, and I would even venture a guess that the natural maturing of technologies such as hybrid engines or ethanol algae farming would have brought about modest changes of comparable scale without the help of a Presidential speech. One does not inspire with such restrained numbers. Additionally, it is projected that the production rate of Middle Eastern oil has reached its apogee (or is close to it) and that rates of oil production will fall as existing wells are tapped out and the remaining reserves become increasingly difficult to extract at current rates. Companies are now looking at places such as Africa for oil supplies, so a reduction in the Middle East's share of the global oil market over the course of the next two decades is an inevitability that is more or less written in stone.

Second, Bush's call for a reduction on Middle Eastern oil imports suggests a defective understanding of economics. Reducing dependence on imported Middle Eastern oil will not insulate us from the effects of a Middle Eastern oil supply shock. As a global commodity, oil from Canada or from Latin America is by no means priced independently from Middle Eastern oil, and a sudden collapse of Middle Eastern oil supplies will raise oil prices and crimp supplies for the United States even if the United States did not depend on even a single drop of Middle Eastern oil: the effect of an oil shock would be identical regardless of whether 100% of our imports were from the Middle East or if 0% of our imports were from the Middle East. The only real solution would be to cut our dependence of oil, regardless of origin.

Finally, his remark about our "addiction" is in contrast to previous positions taken by the administration that put strong emphasis on expanding oil capacity. That this comes so late and bears such contrast suggests to me that he was more or less forced by circumstances to make this admission. Criminals seem more willing to renounce their ways after hearing the gavel of a judge than before. Without the help of a couple of hurricanes and Iran's President (and to a lesser extent, Venezuela's President), would this initiative have found its way into the State of the Union?

In short, while I do like the public direction that Bush has taken, it would seem that this initiative is deceptively hollow: they are, in my opinion, well-crafted words to calm the masses and nothing more.

Potpourri (Random Stuff)

Wednesday, January 25, 2006
Keywords: Economics, Politics, Technology, Potpourri

"Dark Matter" in Economics

As mentioned in the latest issue of The Economist, there is a recently-published economic theory about something called economic "dark matter", which tries to explain why, despite having a huge negative account balance (i.e., our debt to the rest of the world), the US has a net positive flow of capital returns, which suggests a positive account balance. The idea here is that we are underestimating our true foreign account balance, much like how "dark matter" in physics serves as a fudge to account for what appears to be an underestimation of the amount of matter in the universe.

In depth: http://www.rgemonitor.com/blog/setser/113810

Ignoring the Facts

There's an interesting article about how people, once they have made up their minds on an issue, will tune out things that contradict that view, hampering rational judgment and discourse. This comes as no surprise. For example, I've noticed this in the debate about abortion, and even in personal interactions (i.e., how one's perceptions of others' actions are very strongly colored by how one already views other people). It's just interesting to see a scientific confirmation of this.

On that note, I wonder if this is how religions work: there are some who tend to attribute positive things that happen to them to God while glossing over the many neutral or negative events. And to be fair, I've also spent quite a bit of time wondering how much of this "filtering" colors the views of atheists.

Google Reader

There's a shocking lack of good RSS readers for Windows. Sage is nice, except that the interface is a bit awkward (probably because it's a Firefox extension). Thunderbird displays the whole page instead of just the content from the feed (plus, I don't use Thunderbird anyway). Opera's reader was okay, except that I don't use Opera. And all the other readers are either bloated, slow, .NET-based (eewww), and/or clumsy in implementation. I was so tempted to just write my own. But I thought that it might be worthwhile to try some web-based readers, so I first tried Bloglines, but the interface was clumsy at best. And then, I discovered Google Reader, and I'm impressed. A well-written software reader would still be better, but this comes close enough.

Google Sitemaps

Although the Google Sitemaps tool has been around for some months now, I didn't know that it existed until today. I'm going to try it out tonight; it looks like it could be pretty useful.

This entry was edited on 2006/01/25 at 17:36:13 GMT -0500.