September 16, 2014 | 2 Comments
I continue to await lower oil prices. It's been a long wait. But I've enjoyed following the innovation in shale oil and gas drilling, and fast expanding oil production, especially in Texas.
Maybe the notes below will be of interest to Daily Speculations readers.
The Short Shale Oil Investment Horizon
Shale oil production is booming across Eagle Ford and Permian Basin in Texas. Lower taxes and regulations, and quick drilling permit approvals speed the process. In a recent post Riding Down the Cost Curve: Shale and Oil Sands Extraction, I noted Eagle Ford production continues to exceeded projected production.
A Motley Fool post dated May 2014, noted that Eagle Ford production started with just 358 barrels of oil equivalent a day in 2008 and: "Today, Eagle Ford output now tops one million boepd." The author further tells readers: "And based on projections by Benteck Energy, production is expected to surpass 1.5 million boepd by 2018."
Well, welcome to 2018! Eagle Ford production is now projected by Energy Information Agency to hit 1.5 million a day this month. Horizontal drilling and hydraulic fracturing has brought the nearby Permian Basin field back as well, with production rising through 1.7 million barrels a day.
U.S. shale oil production that the Energy Information Administration had predicted just a month ago would slow by 800,000 barrels a day in 2015, it now predicts will rise 1 million a day, to reach a total of 9.53 million (though being off by 1.8 million barrels a day in just a month suggests at least the second decimal point in EIA's prediction is optimistic).
Shale oil skeptics claim the shale oil boom is unsustainable, and maybe these skeptics influenced EIA projections. Shale skeptics note that new fields play out quickly and many are barely profitable. Shale pessimists think investors are being taken for a ride.
Shale oil enthusiasts argue that this same short life of shale oil wells allows shorter time horizons for investors, making shale plays uniquely sustainable and predictable. The billions invested to reach down to massive deep water reservoirs require many years to break even and turn profitable. Success with deep water investments off the coast of Brazil, Ghana, or Nigeria turn on continued high oil prices a decade into the future, and just as important, depend upon stable governments a decade into Brazil's, Ghana's, and Nigeria's future.
Shale oil operations are much less expensive, requiring just millions and paying off costs then returning profits to investors in just a few years. If oil prices fall off a cliff next year, shale oil drilling will quickly slow or stop until prices recover.
Smaller initial investments allow hundreds more small firms to launch shale oil operations, plus encourages a range of experimental innovations to improve yield, lower costs, and speed production. With shorter investment horizons and less uncertainly, shale oil drilling draws in more marginal operators. The most efficient producers are making lots of money, but less efficient producers keep operating. Marginal shale oil operations that require, say, $90 a barrel oil to survive, can keep drilling with oil prices at $95, since short-term hedging can lock in a similar price for a few years.
So the race is on for shale oil operators to ramp up across the many U.S. shale oil fields, applying newly advanced expertise to yet unexplored fields. Last Tuesday at the Kansas State Fair I talked with a farmer from Salina who from time to time over the years had earned $4 or $5 an acre for oil and gas leases. No firms had yet drilled, but he enjoyed the extra cash. After some years with no leases, a small firm recently offered to lease his land, but this time at $185 an acre.
One is accustomed to the contumele of certain parties, especially when I point out, as the loose cannon Mr. Kora, who could ruin us all by posting such good stuff, shows that 8 or 8 such events led to substantial profits, a point which one intentionally omitted so as not to self destruct the list. But one is very surprised on a list with so many free market devotees, albeit a conservative here and there, that one doesn't consider the right of a personage to better himself. If an immigrant can gain gainful improvement and housing in this country, why in the world should we stand to prevent his pursuing his happiness and bettering himself. And of course it's good for both parties.
Jordan Neuman writes:
The Chair is correct of course– ceteris paribus. Unfortunately, it is not ceteris paribus. For example:
In 2009 (based on data collected in 2010), 57 percent of households headed by an immigrant (legal and illegal) with children (under 18) used at least one welfare program, compared to 39 percent for native households with children.
Immigrant households' use of welfare tends to be much higher than natives for food assistance programs and Medicaid. Their use of cash and housing programs tends to be similar to native households.
A large share of the welfare used by immigrant households with children is received on behalf of their U.S.-born children, who are American citizens. But even households with children comprised entirely of immigrants (no U.S.-born children) still had a welfare use rate of 56 percent in 2009.
Gary Rogan writes:
I would like to add that eventually these immigrants start to vote and they vote, by a huge margin, for big government because (a) to them it's a significant net benefit (b) they know of no other way of thinking about the role of the government. Additionally, they are used as pawns by said big government in every way imaginable to maintain itself as the master of us all. And additionally, large flexionic business absolutely love these immigrants because they work for less (good) but as their families are subsidised to an enormous degree by the taxpayers, these business do not bear the full brunt of their cost. As these flexionic businesses are enormously powerful with the government, being flexionic and all, this creates an almost unbeatable coalition of government and crony capitalists to import a certain kind of immigrants to the detriment of us all.
Greg Rehmke writes:
Research supporting the benefits of immigration to the U.S. is compelling. Welfare programs continue to be expensive and distorting, but vary by state. "Generous" welfare in California is more expensive and damaging to immigrants than Texas programs. But recent studies show the services provided and taxes paid by immigrants (legal and illegal) outweigh the cost of welfare programs including govt. education.
Immigrants run or are key technology people in half of Silicon Valley tech firms, for example. But even low-skill immigrants free U.S. workers to concentrate on higher skill jobs. Immigrant workers in hospitals and nursing homes provide key services.
I have links to various articles here.
Stefan Jovanovich comments:
Qui bono? As long as it is that marvelous construct — the economy, "immigration" always wins; and the trivial question about whether or not people are following the Constitutional rules for naturalization can be conveniently discarded. When the question becomes who pays for the price effects of competition from illegal immigrants, obfuscation is needed. But then what else are "studies" good for if not to tell ordinary Americans that their common sense is not good economics.
I do wish Greg would read the footnotes. Mr. Powell is distorting the truth beyond all recognition when he writes that "George Borjas is probably the most established academic critic of immigration. But even he admits that immigrants create net benefits for the native-born." What Professor Borjas actually stated was this:
"The evidence indicates that the wage of the skill groups–defined in terms of educational attainment and labor market experience–that experienced the largest influx of immigrants grew most slowly over the 1960-2000 period. It has been estimated that the wages of native workers in a particular skill group will decline by about 3-4 percent for every 10-percent increase in the number of workers that can be attributed to immigration."
I have come to the conclusion that Libertarianism is, at heart, a theology that wants ownership of property, including the property of citizenship, to always be subordinated to the idea of liberty. Yet, at the same time, people should not be free to exercise the freedom to truck and barter in credit. We are back, once again, in the world of Fourier and George Ripley and Brooks Farm.
Greg Remkhe replies:
I can’t speak for libertarians or economists in general, and I don’t believe economic gain is the most important thing. I think justice is. People have rights and deserve freedom and justice before the law. Welfare state programs and business regulations distorted the immigration process for California in ways very different from Texas. Texas government policies are more open to enterprise and its booming economy is putting latin american immigrants to work. Welfare is harder to qualify for in Texas and enterprises are easier to start and expand.
It is important to separate the consequences of immigration from the consequences of dysfunctional U.S. immigration policy (and distorting state welfare and business regulation).
New competition benefits consumers,but can challenge or hurt existing producers. Immigrants are producers in the labor market and where they compete with existing producers–American workers–they challenge and can hurt both unskilled workers and high-skill tech and engineering workers.
But the challenge part matters too. Imported cars from Japan challenged U.S. car companies to improve their cars. Many U.S. firms met the challenge of imported goods and improved to regain market share and also export. The tens of thousands of immigrant workers employed by U.S. firms helps them compete overseas, and that helps U.S.-born workers in those firms.
And now U.S. companies like Boeing, Ford, Apple, Dell, HP and others are global with goods and services produced by a mix of U.S. employees plus employees and subcontractors overseas. Plus Honda, Toyota, VW and other foreign car companies invest billions and employ hundreds of thousands of U.S. workers, engineers, and designers.
Robert Guest’s “Borderless Economics ” is I think one of the most compelling discussions of the dynamics of the new global economy.
The benefits to the U.S. from immigration and from outsourcing is one part of the story. But the benefit of immigrant entrepreneurs returning home to energize China’s and India’s economy is another major benefit. Hundreds of millions have been helped overseas by the return of inspired entrepreneurs trained at American and European firms. And these now wealthier producers and consumers in China, India, Brazil and Mexico now buy more goods and services from American companies and workers.
All that said… I must agree that a combination of crummy schools and corrupt government in Mexico and other Latin American countries shapes new immigrants, legal and illegal who come to the U.S. to live and work. Crummy schools and corrupt governments in the U.S. make matters worse.
Someone noted that we don’t need to make a wall around the U.S. but instead to make a wall around the welfare state. Over the last couple years, I’ve been recommending the Krieble Foundation’s Red Card proposals. They argue that Mexican working in the U.S. now and those who wish to come should apple for a worker visa Red Card that provides documentation and insurance, but not access to welfare programs.
This table tennis video shows a crowd-pleasing point and players with strong skills.
But the contest is held at a casino and the big dramatic play seems as much to entertain the crowd as to win the point.
It is fun to play way back and with experience, a surprising number of deep shots can be returned, just as many NBA players can regularly hit 30- and 40-foot jumpers.
Still, skills for winning a game differ from skills that entertain audiences. Flashy tennis players can return shots between their legs, but just because they can doesn't mean they should. Sinking a jump shot from half-court is impressive, but also signals bad judgement, poor planning, or both. When the shot goes in, the crowd goes wild, but whether a hit or miss, few reflect on the poor play that forced the desperate shot.
So when does the fun of wowing an audience with rare skills overwhelm caution and get us into trouble in the first place? Is a steady and modest return so boring that the chance for a flashy score draws us to danger? In table tennis, when the room is large enough, it is so easy to hit a soft shot then move back to try some deep returns. But if your opponent is skilled and serious, you'll quickly be crushed.
In markets, how often do skilled players drift toward difficult positions where they believe their deep speculating skills can be called upon to save the play, as an approving audience looks on?
December 21, 2012 | Leave a Comment
I have revised this essay from some years ago. It is my take on the market economics in Dicken's A Christmas Carol.
Maybe Daily Speculations readers would enjoy it.
The Economics of Scrooge, Speculation, and Wages
by Gregory Rehmke
Charles Dicken's Ebenezer Scrooge has been brought to life on stage and screen a great many times. Mister Magoo's Christmas Carol from 1962 was my first introduction to the story. Years later a George C. Scott’s 1984 television version of A Christmas Carol shows Scrooge as a competent businessman who just finds Christmas and philanthropy a waste of time and money. His eyes are opened (as were Mister Magoo’s), through a series of nightmarish dreams. The book and various movie versions are offered today as indictments of greed and business. Dickens saves his Scrooge from his self-centered world and awakens him to celebrations of the joys of family, Christmas, and giving to those less fortunate.
Market-savvy viewers can look at this classic story through pro-market lenses and see deeper lessons than those who mistrust the business and investment world. Market enthusiasts can imagine a new last chapter to the story with Scrooge living a happier life but still running a productive and profitable business.
I would argue that a better interpretation of the story is simply that people—including successful businesspeople—can get too wrapped up in their work, and lose touch with the rest of their lives. Engagement in civil society brings many unexpected and hard-to-quantify pleasures. Philanthropy feels satisfying to the giver, sometimes more than it is helpful to the receiver. A Christmas Carol concludes with an enlightened Scrooge helping the poor through his private philanthropy. Anti-business readers may believe Scrooge caused the problems by paying low wages and speculating in grain. But this view I think reflects a misunderstanding of economic forces.
The story begins with Scrooge successful in business but having let his personal and social world fade. He long ago let his love relationship drift away and deep down regrets the loss. After a difficult childhood, he gradually gained a kind of comfort in solitude and emotional isolation. As is usual in novels and movies, nothing positive is said about his work. No glimmer of understanding that successful business people are likely providing valuable services in order to stay in business and earn profits. But we can agree that focused businessmen like Scrooge can lose track of their family and social lives and find themselves years later wealthy but alone.
Second, the story features an interesting, if subtle, attack on government welfare. Scrooge is asked to donate to a relief fund. He answers that he pays taxes for just such purposes. Why don't the homeless go to existing poor houses or to prisons he asks? The private-relief fund-raisers ask him if he has ever seen the government relief houses. Scrooge answers no, he hasn't. He is responding reasonably and so are they. (Should we expect a socially-responsible Scrooge of today to donate to well-run private charities, or to agitate for repair of failing government welfare programs?)
Tax-supported relief houses give the emotionally-distant Scrooge an excuse not to feel personal responsibility for the poor. He has already paid through his taxes. He uses government-funded welfare agencies as an excuse to avoid supporting private relief agencies. With no state-run poor houses in England, he might still have said: “Bah, Humbug!” and been tempted to “free-ride” on donations of others. That is, he might free-ride (an economics term) by relying on others to donate to help beggars. Scrooge would benefit from beggar-free streets without spending a dime on donations (he is greedy in the story, after all).
Few of us enjoy seeing and dealing with homeless people begging on the street or in front of the neighborhood Trader Joe's. Scrooge could well have been drawn into private relief just to keep beggars out of his way. Still a selfish motive, but one that would require helping others in order to help himself. He could have invested in enterprises that create job-expanding opportunities to help the unfortunate or unwise get back on their feet. Consider too that Scrooge's current business, speculation, could very well be helping the poor more effectively than any charity he might choose to support (more on this possibility below).
Had Scrooge invested in a job-training firm, for example, he could carry business cards promoting his services to put in the cups of those asking for help. In this way he could have helped the needy and profited as an investor in training-services at the same time. Many for-profit as well as Christian and secular nonprofit organizations provide job-training services and generate income through job-placement. The poor learn skills and pay a portion of their later salaries back to the job-training/job-placement organizations.
My great-great-grandfather, Dr. Thomas Guthrie, helped start the Ragged Schools for Children in Scotland and England. He went to the Scrooges of his day (the 1840s) and convinced them to contribute. With 192 Ragged Schools in operation at its peak, 20,000 destitute children attended each year, learning skills through work, and receiving an education. An estimated 300,000 attended overall, from 1840s to 1880s. The English government apparently saw the Ragged Schools as unwanted competition to their poor houses and new government-funded schools, and worked to undermine the Ragged Schools. (Students apparently preferred the industry-training education at the Ragged Schools, and voted with their feet. The government filed lawsuits to force students out of Ragged Schools and into government schools. Glimpse this fascinating story here: www.infed.org/walking/wa-shaft.htm). The Christian emphasis of the Ragged Schools was scorned by the enthusiasts for the emerging utilitarian welfare state.
Because Scrooge had already been taxed to provide for the poor through state-funded poor-houses, he lacks any voluntary or civil society connection with charities for the poor. He doesn't bother looking into the management and operation of poor houses because their tax-funding insulates them from private reform. He knows he wouldn't be allowed to withhold his taxes if he found them badly managed.
Had he donated to a private charity, Scrooge would have an incentive to investigate how his donation was used. He doesn't do much investigation after being saved, in the George C. Scott version. He just gives a big donation to the private relief effort he refused the day before. But even so, he will surely take an interest in that private relief project after donating a huge sum to it. He would be angered as well as embarrassed if the relief effort he supported turned out to be ill-managed or a fraud.
Thanks to tax-funded welfare state programs, Scrooge is less likely to be drawn into civil society philanthropies that might have opened up his life. The holiday season is rich with Christmas gatherings for charities of various stripes, and these social occasions allow donors to meet others of similar interests and hopefully to learn more of the good deeds their donations enable.
Scrooge's very skeptical eye would be a valuable service for private charities, as he seems to understand that good intentions matter less than good results. He would likely be a better trustee of a private charity than his "do-gooder" nephew, for example.
George C. Scott's Scrooge notes with disapproval his nephew's offer to overpay Cratchit's son. Scrooge understands that overpaying for a young person's first job can have negative consequences. It breaks the connection between a person's productivity and their pay. It confuses charity with wages in the mind of both the employee and employer.
The intricate dance toward “just” or market wages not only pits each worker against others willing to take on a job, it pits each employer against other employers willing to pay higher wages for productive workers. When employers get greedy and try to hold wages below the marginal earnings each worker brings the firm, other employers have a profit opportunity, if they can hire that worker away.
The push for profits in the labor market leads employers to a bidding war that narrows the gap between what workers earn for firms and what they are paid. Competition for workers is endlessly frustrating for employers who hire and train new employees only to find them lured away by better offers. The core source of Bob Cratchit’s low pay is likely his limited responsibility and productivity at the firm of Scrooge and Marley. In fairness to Mr. Cratchit, it may not be his fault that Scrooge has been holding on too tight and not delegated enough. Perhaps the late partner Marley offered Scrooge more opportunities to learn and share responsibilities at the firm than Scrooge had so far given Cratchit. Either could be blamed, but it seems reasonable to find fault with the side most capable of changing the situation: the boss.
Seeing the Ghost of Famine Future
Some are visited by the ghosts of terrible futures that never happen, but might have. Imagine Ebenezer Scrooge dreaming a terrible famine would soon strike. Perhaps nightmare tariffs on imported grain coupled with bad harvests in England drive corn prices beyond the reach of the poor and spread famine across the land. Or maybe a Civil War in America will soon block cotton imports, shutting down textile mills that employ millions.
Famines in Scrooge’s time were not rare and he would have lived through one in his youth. The Europe-wide famine of 1816/17 followed poor harvests across Europe and the general destruction of the Napoleonic Wars. Crop yields in Western Europe fell 75 per cent triggering wide-spread famine and death.
For a businessman like Scrooge, such a vision might lead to careful (and costly) review of weather news across Europe as harvests approached. News of potentially bad harvests or of bad politics raising the chance of conflicts, could be a reasons for taking a major investment position in grain. Early on in the movie George C. Scott’s Scrooge visits the city grain exchange to do some business. He holds out for a higher price for corn in his warehouse, and is accused of hurting the poor through his greed. But is holding out for higher prices really hurting the poor? Yes and no.
His “hoarding” is speculating on grain futures and does raise the price today. But it also has the consequence of pushing prices down in the future. Scrooge has seen a vision of scarcer grain and higher prices in the future (otherwise he would sell at today’s prices). He is raising the price of grain for the poor (and everyone else) today, in exchange for lowering the price in the future. If his vision proves true, he will have performed a service for society by pushing all to conserve now a resource that will be more scarce in the future.
The businessmen in the movie claim Scrooge is raising grain prices for the poor today by holding back. These less visionary businessmen may lack the weather or foreign politics information Scrooge could have gathered. Or they may just wish to buy Scrooge's corn at lower prices either to help the poor today or to help themselves. How can we know they would pass these lower prices on to consumers? Perhaps they would just pocket gains from below-market prices themselves. In any case, I will argue that raising prices now can in fact help the poor. (How is that for a Scrooge-like claim!)
Speculators like Scrooge are time-shifters. Whether or not inspired by ghostly visions, they trade goods through time. Scrooge fills his warehouse with corn then turns the dial on a time-machine to transport them to the future. It is an expensive and risky enterprise. Who knows what the future will bring? Such businessmen make informed guesses, they speculate about the future. If they are right, their fourth-dimension transportation system earns profits, even after paying rent on warehouse space and counting the interest lost on money tied-up over time. If they guess wrong they lose money. And after too many wrong guesses, both Scrooge and Cratchit would be looking for new work.
Across Europe, in old city-centers, you can often find the grain exchange building. Here sellers and buyers of grain would gather each day to buy, sell, and speculate. Farmers are just one part of working agricultural markets. Weather and harvests are hard to predict. Grain can be stored for some time, though at a cost. Grain prices embody the collective guesses of hundred or thousands of people about what the future will bring for the supply and demand of grain. Prices change each day as news of hundreds or thousands of events small and large filter into the buyers, sellers, and speculators on the grain exchange.
Steam powered ships opened vast lands in American and Argentina to supply grain the Europe. And steam-powered railroads allowed Ukraine to become a bread-basket to the world. Transportation costs dropped gradually, then rapidly through the 1800s. Low-priced grain from the America's “flooded” Europe with less-expensive grain, leading European landlords, the landed Aristocracy, to lobby Parliament for tariffs on imported grain. The landed Aristocracy of the time favored “fair trade” not free trade. Lower grain prices led to lower rents on their farmland. Struggling workers who benefited from lower food prices had less opportunity to explain the benefits of lower food prices whilst playing whist at the club.
Scrooge was neither a landed aristocrat born with a silver spoon, nor a farmer, nor a manufacturer. How did Scrooge happen to have the corn in his warehouse in the first place? Economists argue he is performing a service by warehousing corn and releasing it when demand is strong. In the movie he is presented as being greedy and pushing prices higher, thus hurting the poor. But by aiming to make profits speculating on corn, his early purchase pushes prices slightly up and encourages conservation now. By speculating in corn he is a visionary. He guesses that in the near future, current plentiful corn supplies will turn scarce. Those lulled by relatively low corn prices to use it casually today would regret it later–but by then it would be too late. Only by taking action ahead of the shortage can some of today’s relative plenty be set aside for tomorrow.
No one can really see into the future and know what corn, oil, or copper prices will be next week, next month, or next year. No one can know the future, but professional speculators invest time and resources to make educated guesses. When they are wrong, they lose their own money, but when correct they make money by better coordinating consumer behavior through time. The warning from a Ghost of Famines Future alerts speculators to act today. Consumers angry now at rising prices benefit in the future when Scrooge’s warehoused corn is released, easing the shortage and stabilizing or lowering the future’s higher prices. Scrooge profits by coordinating consumption through time.
Yet, interestingly, his actions also generate incentives that can eat away at his potential earnings. By warehousing corn and pushing prices higher now, he not only signals conservation by consumers, but also new production. Higher than expected prices signal farmers to work to expand output, to bring new land into production. These behavior changes caused now by Scrooge’s purchases and warehouse will take time to bear fruit. So when the future shortage and perhaps famine arrives some farmers will have expanded production without ever having seen a ghost themselves. Scrooge’s vision and visionary action, signal invisibly through higher prices today that high or higher prices are expected in the future.
Such “excess” grain production does not help Scrooge profit, in fact it will lower his potential gains as the expanded harvests come to market. Still, Scrooge could not expect to feed all of London from his warehouse. He will likely profit enough even with his speculating having spurred production. The ghost of possible famine will fade in the face of both grain sources. All this happens invisibly through changing prices, trusted contracts, and private property. (And not only happens invisibly, but stays invisible for 160 years!)
Back to Cratchit, Wage Rates, and Responsibility
Many have been written of the economics of A Christmas Carol. But some I think hit a sour note by attacking Cratchit as incompetent and painting the early Scrooge as a hero. We have the luxury of writing our own postscript to the story, one where Scrooge gains some friends, socializes some, and continues to run his business profitably. In our free-market postscript, Scrooge can take an active interest both in supporting well-run and effective charities, and in agitating for government to shut down poorly-run poor houses.
After his conversion, Scrooge gives Cratchit a raise, doubling his salary. Does that mean he was just exploiting him earlier? Or that Cratchit was not particularly competent? No, I think the raise can be seen as a very reasonable decision, part of Scrooge's change of heart, that he wishes to give Cratchit more responsibility at the firm. Scrooge met his own mortality in his dreams that night. He dreamed himself standing before his own grave. Mortality creeps up quietly on all of us, perhaps especially on busy and successful businessmen. With no board of directors to push for a “succession plan” for the firm of Scrooge & Marley, he had avoided the issue.
Scrooge likely didn't pay more earlier because he hadn't given Cratchit enough responsibility to enable him to be worth more. With Scrooge’s change of heart, higher pay would go hand in hand with higher productivity from Cratchit, which would follow from additional responsibilities. And Scrooge will need to free up his time for board meetings at the charities he will be asked to join–word of unexpected large donations gets around fast in the nonprofit community.
Consider too that giving Cratchit more responsibility and more knowledge of the business could dramatically raise Cratchit's income earning ability for the firm. Scrooge might make even higher profits from a better-paid Cratchit.
It could be claimed that Cratchit is incompetent, but nothing indicates bad work habits in the movie, apart perhaps from showing up late to work–but that could be blamed on the overlarge and unexpected turkey Scrooge himself donated the day before. The audience, unfortunately, sees only the seemingly arbitrary nature of pay. Bosses can apparently double someone's pay if only spirits scare them half to death in nightmares (something politicians and labor unions have tried to do ever since).
So I recommend George C. Scott’s A Christmas Carol to students. They will enjoy it, though perhaps not as much as the Mr. Magoo’s cartoon version. So Hollywood can offer lessons in sound economics. It just takes a little reading between the lines.
Gregory Rehmke is a writer and economic educator based in Seattle. He directs Economic Thinking, a program of the nonprofit E Pluribus Unum Films. More information at www.EconomicThinking.org.
(Revised and expanded from 2004 article quoted in December 17, 2004 Toronto Star article "The Politics of Ebenezer Scrooge")
Higher gas prices impact the economy, pulling spare cash from other retail expenditures.
And so do sales of smartphone and higher monthly data plans. Apple, in addition to booming sales of MacBooks, sold 172 million "post PC devices" in 2011, that is, iPhone, iPods, and iPads. And all iPhones with pricy data plans.
Today Apple announced the iPad 3, which will use more expensive higher-speed data plans.
Those who have the original iPads or iPad 2 will want an iPad 3. And those who resisted the iPad and iPad 2 will find it harder to resist the iPad 3.
So… will huge iPad 3 sales, many with monthly data plans, sink the rest of the retail economy? Let's hope gas prices start falling to leave some spare change for the rest of the retail world.
November 1, 2011 | 2 Comments
Last summer I gave talks to students about money and monetary history at Foundation for Economic Education, Independent Institute, and Economic Thinking seminars. I explained how the government had dramatically reduced the value of the dollar (students rarely guessed how Motel 6 got its name, for example). I played a fun YouTube clip from an Austin Powers movie where Dr. Evil, after hibernating through the high-inflation 1970s, returns to ransom the world for "a MILLION dollars".
But after giving these presentations a number of times, explaining how the gold standard maintained the value of the dollar, and arguing the benefits of commodity-based money, I started wondering if financial innovation had addressed some of the concerns of government paper money losing value.
Have most Americans already returned to a commodity-based system? People have bank and investment accounts containing money market funds, stocks, bonds, and other liquid assets. How much money do most people keep in paper currency on any given day? On payday, they receive a check or electronic payment that converts assets from the employer's portfolio (stocks, bonds, money market funds, gold) to cash–for a few hours or days–until the cash enters the employee's bank account, and is spent on goods and services, or allocated from checking, savings or money market accounts to various commodities or investments.
So much of the physical world has been sliced up into paper (or computer bits) representing tiny slices of every imaginable asset. Most can be converted back and forth, to and from cash, quickly by tapping keys on a home laptop, and exchanged for goods on Amazon–goods that may arrive just a few hours after the transaction is processed.
The commodity exchange system is based on trust. Sellers trust buyers, and buyers trust sellers and intermediaries like Amazon, Visa, and American Express. People may not trust the government and the Federal Reserve, but as people convert their assets to money for purchases, their wealth is exposed as fiat currency for only a few days, hours, or just minutes, on its way to be exchanged for goods or services purchased.
Technologies allow most people protection from paper money uncertainties. Inflation raises the value of their assets as it raises the prices of the goods and services they purchase.
This Thursday, April 7, junta at 7 pm at The Mechanics Institute (30 W. 44th street) will feature Greg Rehmke talking about the road to prosperity. Greg has been instrumental in student debate uplifting for 20 years, and is one of the most uplifting and most original speakers we have had at the junta. We are looking forward to a lively augmentation, and all are invited.
March 10, 2011 | 2 Comments
In 1883 Emma Lazarus wrote "The New Colossus" as a donation to a Statue of Liberty building fund. The poem concludes with these lines:
"Give me your tired, your poor, Your huddled masses yearning to breathe free, The wretched refuse of your teeming shore. Send these, the homeless, tempest-tossed to me, I lift my lamp beside the golden door!"
Since the fall of communism in Eastern and Southern Europe, China, and the former USSR, and the move from nationalism and socialism in India and much of Africa, huddles masses have been streaming to fast-expanding cities around the world. Lacking economic freedom and rule of law institutions, wealth creation in cities of the developing world is distorted and slower than it could be. But technology advances dramatically reducing the price of food, transportation, and clothing in recent decades partially compensate.
Edward Glaeser in "Triumph of the City" comments that there is "a lot to like" in the shanty towns of the developing world. They seem terrible places for homeless families, and for the homeless without families, but compared to what? Compared to the reality of rural poverty in the developing world, urban poverty turns out to be a step up for most. A Manhattan Institute review observes: "Even the worst cities—Kinshasa, Kolkata, Lagos—confer surprising benefits on the people who flock to them, including better health and more jobs than the rural areas that surround them."
It is very, very good news for the coming decades to have hundreds of millions of people on the path to prosperity that often begins by looking for work in cities. As labor becomes more plentiful, capital becomes relatively more scarce, and returns on capital will improve.
Paul Romer's "Charter Cities" proposals are among the many ideas for improving cities and speeding the development process. (Another is the Hernando de Soto's project to push governments to recognize the informal legal norms that operate among the poor.)
These issues matter because the nationalist delusion confuses our thinking about international issues like Iraq, Libya, and Afghanistan. These are make-believe countries left over from colonial times. It is up to tribal people living in the cities within the borders of Libya to decide if they want a future democratic nation-state to continue to rob them, or whether a formal or informal alliance of cities might suit them better.
Nationalist scholars have long bewitched the public into thinking national governments are sources of stability and prosperity. Every crisis brings breathless media reporting on government officials meeting, then announcing plans, initiatives, and policies, pretending they know what is going on and what should be done about it. Congress, the Federal Reserve, and Federal regulatory agencies claim to be fine-tuning the economy, protecting workers and consumers from predatory business practices, and securing the general welfare. (And states run the schools to teach children civics and the history of wise governments.)
Not states but cities are the dynamic engines of economic development. People gathering together in cities create ever more opportunities for gains from trade, gains from specialization and division of labor, and gains from cross-fertilizing technologies and enterprises. Successful cities don't need to be as big or a prosperous as New York City or Boston or London, but they do need enough economic freedom to maneuver around local officials and entrenched elites. Cities like Cleveland and Detroit are burdened with thousands of regulations, licensing restrictions, arbitrary taxes, and corrupt city agencies, and now lack prosperous industries creating enough wealth to cover their tax and regulatory overhead.
A century and a half ago, New York City was as poor as any big city in today's developing world. A few months ago I read the Horatio Alger, Jr. novel, "Ragged Dick or Street Life in New York with the Bootblacks." This short novel is full of scenes of 1860s New York City street life. Though written for young people, Alger's novels on "Street Life in New York City" are realistic, fun, and fascinating. They tell stories that are true in all times and places: success is never certain, but progress depends on the everyday virtues of honesty, savings, and self-improvement.
And Alger's novels are full of scoundrels. Young americans would do well to learn more of the many deceptions and cons that surrounding them, always preying on those wishing too much for too little. Each day we hear get-rich-quick advertisements on talk radio (conservative talk radio especially), we read or glance at endless email scams (as we check or spam folders), and we regularly hear of multi-level marketing claims, stock and commodity promotions, and, of course, the misleading statements made daily by politicians. These are all tricks and deceptions similar to those practiced daily in 1860s New York City.
On the other side of the planet a century and a half later, the Chinese movie of rural China, "Not One Less" tells the touching story of a young girl teaching at a village school. The movie's realistic portrayal of rural poverty explains why tens of millions of Chinese migrate illegally to cities. The young teacher is told she will be paid only if no students run away to the nearby city.
The movie has a surprise at the end, and there is a key scene when the runaway boy is being driven back from the city and is interviewed by TV reporters. They ask him about city life (where he was alone and hungry before clearing tables at a small restaurant): "The city was wonderful," he says, smiling.
I wonder if Horation Alger novels are available in the developing world? I just finished "Ben, the Luggage Boy" and it includes footnotes where Alger cites newspaper articles or personal interviews with the real boys whose stories are part of the novel. I expected in Alger's novels to have fanciful rags to riches themes ("Horatio Alger stories"). But the five or six Alger novels I have read so far are more "rags to a new suit and stable income" stories. The key is always the decision to think ahead, and the decision to begin savings and self-improvement. Each young man is struggling upward, through a world of opportunities, but also through a world teaming with con-artists, thieves, bullies, and occasional friends.
Here is link for "Ben, the Luggage Boy" at Project Gutenberg: http://www.gutenberg.org/ebooks/28381
In this book a stubborn ten-year-old runs away to New York City after a fight with his father. Arriving in the city, he looks around for work and learns quickly from other street kids. Like a cat gone feral he gradually comes to get by making enough day-to-day, but also gradually forgetting his early home life and book-learning. He adjusts to enjoy life in the city, with its wide variety of work and fun, including occasional cheap cigars and evening entertainment. Later on an incident motivates "our hero" to reform and start savings.
What does all this have to do with investing? Well, consider the numbers: New York City in 1870 was home to over 1 million of which at least 500,000 were immigrants. In 2010, New York City is listed as having nearly 10 million, and 350 cities around the world have over one million residents. None are as economically free as New York City was in 1860, but now all have relatively cheap clothes, Internet, and cell-phones. Increased trade, travel, and international investment, combined with communications technologies, open the door for tens of thousands of new textile, light manufacturing, and service enterprises. Teenagers in rural India advise grandfathers in America how to operate their cell phones and computers (though partly because U.S. regulations make it difficult for U.S. teens to provide consulting services for pay). Communications technologies cheap in any city open windows to the world.
For energy or resource crisis, every disaster scenario fear-mongers can dream up (and politicians sometimes turn to reality), a hundred astounding advances stand ready to stimulate the mental energy and active innovation and collaboration of young people around the world. Millions of young people have only just arrived in a city, and their eyes, ears, and minds are just opening as they tap into the the worldwide streams of new ideas. Every day around the world, an 1860s version of New York City lifts a lamp for the "huddled masses yearning to breathe free" after endless generations of rural poverty.
Stefan Jovanovich comments:
A minor quibble: the immigrant populations in New York, San Francisco and the other American cities in 1870 were almost all adults. Passage to America in 1870 was still expensive enough that it had to be worked for; few families in Ireland, Italy and Poland could then afford the cost of bringing the kiddies. That came later with the acceleration of the steam engine revolution; that order of magnitude expansion in the efficiency of steam propulsion reduced ship and rail transport costs to the point that entire villages would empty overnight once the news reached them that a month's wages could buy a ticket to New York and beyond. Lazarus' poem became famous precisely because it was so prescient a prediction.
1. Wal-Mart innovation and distribution efficiency has done more to delivery quality products that poor and middle-income people can afford–in American, Mexico, and other countries–than any or all government agencies (one of many articles here: "Walmart's Bottom Line")
2. Oil companies continue to discover, develop, and deliver reasonably-prices oil and gas to Americans, even as they face complex and often arbitrary regulations, high taxes, and generally ignorant media coverage.
3. Private contractors lower the costs and dangers of war for American taxpayers and soldiers. Unfortunately, lower-cost military contracting may make various marginally-important overseas conflicts more plausible to interventionists.
4. Monsanto brings astonishing increases in crop yields, reducing land under cultivation so leaving more land for conservation and wilderness. Biological pests and blights work 24/7 to adapt and consume world crops. Millions would likely starve if anti-biotech activists are able to block GMO research and development by Monsanto and other firms. Large numbers die now in Africa in part because European farmers and anti-GMO activists block use of pest-resistent GMO crops in Africa.
5. Microsoft has a monopoly of Microsoft products, and they are seeing the sand shift under their feet and 70% of college students use Macs and iPods. But Microsoft earned its market power by developing top-rated software (Word, Excel) and dramatically lowering prices for consumers. Microsoft's early commitment to developing for the early Macintosh's graphic platform gave them a key advantage over competitors in the DOS world.
6. The FTC blocked smaller tobacco companies advertising their low-tar cigarettes in the 1950s. Before advertising was banned by the FTC, the Tar-Wars reduced smoking more than any federal campaign, as companies promoted the benefits of their brands with repeated scenes of smokers hacking and coughing with competitor's cigarettes. The FTC blocked these ads perhaps to protect established companies and brands (claiming more research was needed to prove health claims of low-tar cigarettes). This episode is mentioned, among others, in this Regulation article.
7. Remote controls can instantly banish Fox News from any TV (and remotes can be programmed to not even pass Fox stations). And a quick call to the WSJ can stop home delivery. Unlike NPR and PBS, citizens are not forced to pay taxes to promote political and ideological views they may disagree with.
8. Regulated utilities have a long and peculiar history in American. Major public relations campaigns by AT&T and Chicago Edison subsidized newspaper articles and even economics textbook authors to promote the claim that some monopolies were "natural." Private firms were awarded monopoly power and granted guaranteed profit margins. Notes here:
In the early 1900s, electric utility pioneer Samuel Insull of Chicago Edison led a nationwide public relations campaign to convince politicians (the easiest), newspaper editors (a bit harder) and the general public (the hardest) that utilities should be regulated as monopolies rather than be subject to competition. Historian Marvin Olasky has found that as president of the National Electric Light Association (NELA), a major utility trade group, Insull's goal was to "show the public that competition in public utilities was unfeasible." Other major executives shared Insull's view, as well as his strategies to promote regulated monopolies. Insull's first strategy was to "heighten fears of socialism in order to promote acceptance of government-regulated monopoly as a less-undesirable alternative." The NELA advanced its agenda, according to Olasky, with the unwitting help of the news media: "Annual payments of $84,000 from Insull's NELA allowed Hofer [an Oregon public relations firm] to send out almost 13,000 newspaper articles annually. The articles usually appeared as unattributed, 'original' editorials."
9. McDonald's serves amazingly healthy food. From fresh eggs and orange juice for breakfast to a variety of salads and fruit smoothies. But they don't force people to eat their salads and smoothies. Like Wendy's, Burger King, and other fast-food chains, the options for healthy and inexpensive fast-food has never been better. Jamba Juice, Panera's Chipotle, and many other chains bring tastier and healthier international foods to American consumers, just as McDonalds, Starbuck's and other U.S. firms take their food and drink options to overseas consumers. Each firm relies on persuasion rather than force to survive.
Most of the companies I used to hate have gone out of business. Only the regulated monopolies are still here, and still making steady profits. Most all the government agencies I used to and still do hate are now larger and more intrusive than they used to be. The great exception is the Civil Aeronautics Board (CAB), which happily was abolished (the great Commanding Heights segment is here.
A Time to Reverse Caloric and Cash Accounts
America and Americans face very small problems. It is just that a hundred million small problems combine to loom large. And a decade of small daily choices made poorly combine to wreak the health and finances of American families.
The great news is that slight alterations to daily protocols can turn surpluses to deficits and deficits to surpluses. Slight rule changes in a few institutions would alter incentives, turning dead zones to flourishing ecosystems.
Through most of human history social institutions combined with known technologies to produce monthly money surpluses but caloric deficits. Responsible people and societies knew to preserve and set aside food from the few days of successful hunting, harvests, and fishing for the long winter months when nature would yield no calories. A high savings rate is the standard habit of mind for the poor. Americans after the great depression counted their pennies (when pennies still had value). Hundreds of millions across China–the recent or still poor–have equally high savings rates. Woven deep into social institutions is the reality that without high savings in good times, a single season of too much or too little rain will starve all families without buying power set aside.
A very interesting review of Cormac Ó Gráda book, Famine: A Short History updated my understanding of famine through history, but confirms that Malthus was wrong in his pessimistic claim that population growth would lead to famine. Ó Gráda confirms that combinations of bad weather, war, and bad government have ever been the sources of great famines.
Good money is the means for the poor to survive crop failures. But governments have a habit of seizing surplus crops and debasing money. (Amazon automation is, as I write this, busy picking and packaging my just-purchased copy of Benn Steil's "Money, Markets, and Sovereignty" which was just yesterday highly recommended by a friend.) Hard money is the great technology for converting via the marketplace, daily and weekly food surpluses into the means to survive occasional harvest, hunting, and fishing failures.
But in the modern world, in America at least, historical reality has been turned on its head. The average American can hardly last a few hours in caloric deficit. For so many centuries the central challenge was setting aside food surpluses in summer and fall to survive winter (one stratege: a parade of harvest feasts to accelerate weight gain through summer and fall). The modern lack of winter is the new challenge. (Ships and airplanes filled with Southern Hemisphere harvests allow us to avoid even the canned food common a decade ago.) Restaurant chains serve millions of feasts to constantly celebrating Americans morning, noon, and night. Omelets that would feed a village hang over plate edges each morning at IHOPs across America, with hash browns stacked alongside, and a separate plate for hotcakes or toast.
Overstuffed with food, Americans find it hard to think about savings (or about anything else for an hour or two as all available blood is allocated to digestion).
It used to be so much easier because it was infinitely harder. Most jobs required exercise so most people were fit. Only the very few rich had enough leisure and wealth to systematically overeat, and gout provided one of nature's many punishments for the undisciplined aristocracy.
America's major problems are just this simple to solve: exercise, eat, and save responsibly. Vast billions of future health care spending will be avoided when Americans learn the long history of famines and the rich and very unusual world they were born into. Daily labor that is no longer an exhausting enterprise providing a free on-the-job health club. So now volition is required to stay fit.
People have to notice and take responsibility. With so much food so easy to find, people no longer have the natural urge to set aside daily surpluses. Yet a modest savings rate and a sound currency would solve most of today's economic and financial problems. A savings rate as slight as ten percent would go entirely unnoticed in at least ninety percent of American households. Saving twenty or thirty percent would be little challenge for most households. Just waiting six months to a year before purchasing the next big-screen television, car, or computer, would allow the price to drop enough to set far more savings aside.
But without a great book, movie, faith, or movement to push the social reset button, it is not clear how people will come to think clearly about these simple things. Chains of habit long forged are hard to break. A politicized public is distracted repeating what they hear about corrupt politicians, greedy corporations, and other external causes for claimed social calamities. It is easy to miss the most basic reality that in the modern world's market economies of the modern world we have an historically rare opportunity to take responsibility for our own daily cash and caloric accounts.
Though bottom up changes work better than top-down reforms, if insurance companies could fully charge overweight customers for expected higher medical expenses, that cash cost would add to the daily discomfort of being overweight and spur change. And if airlines could charge more for heavy customers, fewer people in the future would suffer being mashed in the middle seat between obese and obviously unhappy people (as I was on Thursday).
With voluntary exchange, both parties benefit, or expect to. Charity is no different, especially in a wealthy society. Local knowledge is key for effective charity, and it makes sense for a reality TV show, where an outside audience shares the vicarious pleasure from philanthropy, to research the family in need before documenting the transaction.
Gertrude Himmelfarb’s “The Idea of Poverty” and “Poverty and Compassion” discuss the rich history of compassion for the poor, and the challenge of helping the “deserving poor”. Elites developed charities to provide support with the least disruption of incentives.
Both parties benefit. Those who give money to improve the lives of others prefer that expenditure to alternatives. They gain great satisfaction from giving that makes a difference, and some givers also gain from the sense that their peers will be impressed by their skill in effective charity.
So three cheers for reality TV series entrepreneurs who highlight philanthropy entrepreneurs and draw additional funds from advertisers and cable subscribers to give to the deserving poor.
Two recent scientific theories I find interesting: first, bacteria causing rain ("bacteria infects a plant, multiplies, is aerosolized into the atmosphere and then delivered to a new plant through atmospheric precipitation.")
Second: plankton causing hurricanes. Bacteria plays an intermediary role producing DMS, and "Sulfur in the DMS sticks together in the air and creates tiny dust-like particles. These particles are just the right size for water to condense on, which is the beginning of how clouds are formed."
Individual bacteria have quite limited thinking power (and bacteria politicians presumably have less), but with 5,000,000,000,000,000,000,000,000,000,000 (five million, trillion, trillion), that's a lot of bacteria action in response to scarcity.
People carry an estimated two to nine pounds of bacteria, all working on particular projects, with 2-4 pounds in our digestive track. 85% is said to be beneficial to digestion and particularly beneficial containing the evil designs of the other 15% plotting to do us harm.
We should be able to develop theories of bacteria influencing financial markets.
Also in a related theory: bacteria cause heart disease. As I finished my earlier post I received an email from our college intern telling me her father had just had a heart attack. I remember her earlier telling me her mother was diagnosed with lyme disease. The connection is proposed in the theory of oral spirochetes that cause both gum disease, lyme disease and heart disease/inflammation.
Apparently government regulations make it difficult for MDs studying heart disease to venture into the oral domain of periodontists: "We also discussed whether Physicians have the right to treat Oral Lyme Disease (Periodontal Disease). He felt that he had the legal right since it was a systemic disease and Physicians are responsible for the whole body, not just everything other than the oral cavity. Also, he is looking into getting an Hygienist. This is a very significant step for a Physician, but he realizes the systemic implications of oral spirochetes."
I have no idea if William Nordquist's research in this area has been independently replicated (his is author of "The Stealth Killer: Is oral Spirochetosis the Missing Link in the Dental-Heart Disease Labyrinth?". But the history of medical research is replete with unexpected connections between different fields of research (as when it turned out that bacteria caused most ulcers). That story is told in Fortune, and here, (and Barry Marshall later did win the Nobel Prize. His lecture is here.
This Forbes article, also notes bacteria's role in heart disease ("Today the idea that bacteria and viruses can cause chronic diseases, such as many cancers of the throat, stomach and cervix, is well established. The bacterium Chlamydia pneumonia is strongly suspected of playing a role in coronary heart disease.")
Arbitrary tolls and regulations restrict economic freedom and distort economic development.
In From Poverty to Prosperity, Nick Schultz and Arnold Kling discuss the work of economists like Douglass North whose research shows how institutions promote or hamper prosperity. The authors also discuss the World Bank study which claims some 80% of a country's wealth is in intangible capital. Natural resources and regular capital contribute less to wealth than protocols or recipes that are the evolved spontaneous orders assisting everyday producers and consumers.
New Jersey could create more gas station jobs by insisting tire pressure be checked on every car (also increasing mileage and reducing carbon footprints). This would be a regulation creating thousands of "green" jobs and would raise costs just a bit.
But these bits add up. How many tens of thousands of American engineers now focus each day on green technology projects? How many millions of hours do Americans spend recycling each year in ways that don't increase the value of their waste? How many millions of minutes do people spend now waiting for their mercury lamps to stop blinking, or trying to figure out how to stop them from humming or buzzing?
What percentage of the cost of new housing is lost through antiquated building codes, arbitrary regulations, waiting for building permits, or spent trying to qualify for some weird state or federal "green" certification or subsidy? A friend of mine builds yurts for a movie stars' nonprofit and my sister tells me they are popular in one of the San Juan Islands because land use regulations prevent new housing (so people live in yurts instead). Like the thin buildings in Amsterdam that resulted from taxing building width, we suffer silently and invisibly from myriad prosperity-decreasing taxes and regulations. They raise the price of gasoline (leading us to plan part of our lives to buy gas in a nearby state if we live near a border), they raise the price of ice cream with regulations that raise labor costs and regulation milk production, they dramatically distort the financial system, leading to a stream of barely-tested financial instruments designed in part to avoid regulations limiting past financial innovations.
Millions of solar panels and thousands of windmills have been produced and installed in Western Europe and the U.S. and the great majority cost more to produce and install than the value of energy they produce. If, like the production of organic vegetables, such green energy was funded by green consumers willing to pay more for a product they think more valuable, we would have no particular reason to complain.
Solar panels and windmills may eventually be great technologies to reduce fossil fuel consumption, but today's aren't, they are political technologies thrown on markets through taxes and subsidies. Like politically-protected dirty coal from West Virginia, they distort natural technology development and make people poorer.
Other regulations prohibit coal-fired power plants from upgrading to more cost-effective and cleaner technologies (because regulations both mandate "best available" technologies with upgrades and grandfather in older more polluting technologies).
Deep-ocean drilling using novel technologies is a response by oil companies to being blocked from shallow water and land drilling by politicized governments in Mexico, Venezuela, Russia, Iraq, Iran, Nigeria, the U.S., and other places where plenty of oil and gas is in much easier to find and drill places that are off-limits for political or institutional reasons.
An interview with Shultz and Kling from Reason.tv is posted here.
Like great music in movies.
They say a great movie soundtrack is one that contributes much to the movie but isn't noticed apart from the movie.
I would like to offer a word of thanks to whoever finds the wonderful pictures to accompany posts on DailySpeculations. The pictures always seem to make the posts better, but they don't intrude. Instead they somehow add meaning, insight, and depth to posts. DailySpeculations pictures are usually striking and thought-provoking, yet they somehow don't distract. And when the pictures change for a post, it usually suggests a new perspective.
I just want to say thanks to the entrepreneur at work here.
Maybe too we could inquire if there are lessons to be learned from the quiet value pictures and design add. Is there prediction value in noticing which firms figure out how to produce attractive products? Dell, HP, and Microsoft are usually overshadowed by the ultra-beautiful design and graphics of Apple. But those involved in the early days of personal computers remember that Microsoft software was always professionally designed and usually more attractive than competitors' products. Was this a clue that could have tipped off early investors?
Amazon's webpages were always attractive as well as functional. Target stores are well-designed compared to competitors like K-Mart. Starbucks stores and products were always well-designed. Not everything well-made is beautiful of course. Subarus seem well-made and functional but avoid looking too elegant.
In the investment world, what can we learn from the design and images in Annual Reports? When they are too pretty, is that a sign firms are hiding mediocre results in fancy packages? But DailySpeculations pictures aren't always beautiful, instead they always seem appropriate and meaningful.
Are there investment signals to be found from Annual Reports with attractive and relevant pictures, compared to those and those whose pictures may be fancy but somehow don't fit? What about company websites? If a company's President and staff don't notice or care what their website looks like, is that a sign of mismanagement elsewhere in the firm? Could a team of graphic designers give us investment advice from reviewing Annual Report pictures and company website design? They would know when pictures are too professional and expensive and unnecessary for websites and reports.
Virginia Postrel's book The Substance of Style sports an elegant and interesting cover. Should investors be concerned about too much style with company products? The elegant design of Apple products seems matched by the value inside, at least as measured by Apple's steadily climbing stock value.
In any case, three cheers for those who take the time to find the right pictures for DailySpeculations posts…
Craig Mee's post noted that emergency room doctors were missing hidden stab wounds, and wondered if traders could learn from studies of such errors. I wonder too if major hidden frauds play a role in major market bubbles? Could major frauds be the hidden stab wounds that distort prices, inflate asset bubbles, and later kill these markets? We know artificial credit expansion makes long-term investments look artificially attractive by pushing down interest rates, which contributes to asset bubbles. But I wonder if major investment frauds also distort markets by creating the illusion of large and safe investment funds like Madoff's providing high and stable returns. Madoff's ever-expanding fraud was feeding false information into investment markets year after year, distorting the expectations of investors as well as influencing operations of major investment funds.
With the ongoing property bubble in China and possible return of a summer oil price bubble, it is interesting to speculate on what major firms in these markets might now be partially or largely fraudulent. How significant a role did major frauds play in past malinvestment manias? China's housing market resembles the U.S. before the crash with obvious real estate bubbles in certain overheated regions and cities. Remember that U.S. newspapers ran many major articles through 2006 and 2007 claiming U.S. real estate prices were in a bubble. People got tired of these articles as they watched prices continue to rise. Many manias and bubbles have their origins in easy money policies that artificially lower interest rates, encouraging too much long-term capital investment. The Chinese government released huge levels of easy credit intended to stimulate Chinese industry out of the 2008 crash. The last crash is often at the root of the next bubble.
Lots of this cheap Chinese government credit flowed into real estate investment and speculation. This easy money gets leveraged by local government officials with various infrastructure dreams, like the Chinese city with no people:(begins at 1:10 into the video clip). How many empty cities and airports of the future are under construction now across China? These capital investments are started on cheap credit, not enough savings will be available to complete them all. For an overview of the various interventions that fed the U.S. housing bubble and 2008 financial crash, see the FEE essay "The House that Uncle Sam Built".
Looking to the past for similar stories, an online essay argues that the British Railway mania of the 1840s was the largest speculative bubble and financial panic. I am reading Andrew Odlyzko's online essay "Collective hallucinations and inefficient markets: The British Railway Mania of the 1840s". I don't know this author, but am enjoying his essays and notes. Odlyzko argues that the railroad mania of the 1830s and the larger railroad mania of the 1840s demonstrate market failures similar to the dot.com and recent real estate bubbles in the U.S. and Europe.
I wonder to what degree major frauds played in fueling these distant and recent bubbles. Market prices can confuse and misguide investors if a significant portion of market prices are distorted by fraudulent schemes. WorldCom and Enron late in the game were both large and established firms whose fraudulently overvalued investments sent signals out to investors and other companies. These price signals and false profits continued to draw capital into a wide range of similar and complementary ventures far past the true market peak.
The Madoff fraud altered expectations for investments in large and well-regarded investment firms. How did other investment firms alter their investment strategies to provide investors competitive returns? To do this they likely took on more risk than they might otherwise in trying to match the trusted steady success of Madoff's funds. Investors who could not or did not invest in Madoff funds would expect similar returns from other established investment firms. Were the expectations created by the fast-growing Madoff funds and its feeder funds enough to distort investment behavior across the U.S., Europe, and Japan?
I don't know how large fraudulent railroad ventures were relative to the non-fraudulant (but vastly overvalued) British railroad ventures of the 1840s. The corruption generated by such frauds is portrayed in the book and BBC miniseries "How We Live Now."
The vast funds poured into fiber-optic cable networks the the late 1990s seem like similar overly optimistic misunderstanding of the possibilities of new technologies. But WorldCom and Enron's apparently massive market value for their fiber optic assets and Enron's trading operations, drew ever more funds into competitive networks and trading operations. Samuel Insull's fraud at Chicago Edison similarly misled investors in the new electric utility industry.
Trains and railroad lines, electric power and power lines, Internet firms and fiber optic lines: each share the same technology profile of major advances in transporting goods, creating vast potential gains for firms that produce and transport. Early railroads reduced transportation costs by some 70%-80%–a drop so dramatic it disrupted industry and forced quick revaluation and reorganization across a wide range of companies. But projections of railroad income would have been off if major frauds claimed much higher returns. In these new technology worlds, changing economic reality already makes valuation and prediction difficult. Which is probably why major frauds are easier to conjure, or to slide into as investment hopes go astray. So these frauds and false profits inflate new visions even further, attracting even more capital to false profit opportunities until apparent returns and risks bring them inline with other industries.
So with oil prices over $80 and major investment firms predicting over $110 by summer, we should look around to see if predictions are grounded on reasonable assumptions about the world economy. What role might environmental frauds (such as were revealed in the climate emails in regard to global warming), play in limiting or threatening oil exploration and production in the U.S. and Canada?
What if a significant percentage of cash released by the Chinese government to stimulate the economy found its way into speculating in and stockpiling oil?
Questions about oil prices arise in part because today's prices are over twice as high as equivalent energy in natural gas. Natural gas fields in Qatar next near will produce over 300,000 barrels a day of clean gasoil next year (in addition to shipping vast amounts of LNG). Some argue the gas-to-liquids technology in this $18 billion venture is too expensive and energy intensive. But if for a few million dollars a small-scale production facility could be developed and installed above a Pennsylvania shale gas field, that would be significant.
The Saudis have something like 2 million barrels a day in extra capacity they can open if they view higher prices hurting the world economy. Oil fields in Iraq are now under development and will add millions more barrels a day of production. Huge oil exploration and development projects are underway around the world, as usual.
The high oil prices of a couple years ago, coupled with the media, government, and green energy wishful thinking that high prices were here to stay, led to hundreds of billions of investment dollars poured into alternative energy technologies. And higher prices led Exxon and others to pour smart money into alternative energy, as well as ramp up traditional exploration and development.
Few fire and brimstone sermons paint Hell as horrific or as certain as the free HD Google Video documentary, Home (www.youtube.com/watch?v=jqxENMKaeCU ). "Scientists tell us that we have 10 years to change the way we live…" claims this hauntingly beautiful and thoroughly misleading documentary.
This beautiful Earth is shown endangered by trade and commerce and threatened most by one black flowing demon, the oil that feeds global agriculture, transportation, factories and homes. Our world is fragile, claims the narrator, and fated to fail catastrophically as the world economy hurtles off a Peak Oil cliff while still pouring CO2 into the atmosphere's heat-trapping blanket.
It is hard not to be moved by these 2 gigabytes of free eco-Ministry (made possible in part by the excess fiber laid down in the late dot.com years, and Google fortunes created by these cheap fiber networks). Over 6.6 million people have watched Home online, absorbing claims like: "Increasingly insatiable desires and profligacy. We know that the end of cheap oil is immanent, but we refuse to believe it." Maybe this meme beamed out to computer and high-def TV screens across the world calls wealthy investors and government officials to pour more millions into green energy promotions, just as the grand speech to investors in "The Way We Live Now" paints the dawn of a new age of railroads, calling men to action: to buy more stock and make great family fortunes with the railroad's rising sun.
Consider too that soon the entire U.S. strategic petroleum reserve will be unnecessary (or more unnecessary). As major oil fields in U.S. lands and waters come onstream, and algae-based fuels ramp up into large scale production, the U.S. won't need these reserves any more than we needed rubber trees to tap during WWII. If President Obama wants to boost his popularity and Democratic chances for the next election, he could begin to release oil from the Strategic Reserve as he announces major biofuel and U.S oil production increases.
So, how can investors and speculators spot anomalies in booming industries that might be signs of major price-distorting fraud?
Robert McTeer had an interesting post on StreetTalk. He responded to a TV commentator who claimed the recent BLS employment numbers showed: "Not a single new job has been created." McTeer called the claim misleading because it implied "a stagnant economy dead in the water." McTeer notes that though jobs have been lost on net over the last two years, "The gross jobs numbers behind the negative tell a far different story." Though 8 million jobs were lost in the second quarter of 2009, McTeer notes that "6.4 million were created (674,000 more than in the first quarter)."
A gain of 6.4 million new jobs in a quarter shows a dynamic economy. But I sent an email to Mr. McTeer suggesting there is more to the story. The 8 million jobs lost, I argued, are in some ways as good for the economy as the 6.4 million new jobs.
Eight million people losing jobs means eight million in the market for "better for the economy" jobs, if not at first higher-paying jobs. If these workers were destroying wealth at their old jobs (though no fault of their own), just stopping is good for the economy.
The huge number of union jobs lost in the auto industry is good news for U.S. economy as well as car buyers. Overpaid and badly organized auto industry workers are disruptive for a free society, apart from the problems of high labor costs and uneven auto quality. All these jobs were privilege jobs gained by connections and legal protections. Auto companies could have hired and trained workers at 1/2 or 1/3rd the pay, but were prevented by various labor law interventions from doing so.
The economy has to continue the adjustment out of industries like housing construction and related goods and services, and those resources and workers have to be redeployed into more productive industries and professions. Figuring out and coordinating redeployment to wealth-producing occupations has to be a complex and time-consuming process.
Though a great many job losses could be blamed on taxes and regulations of various kinds, and on uncertainty created by state and federal policies, the lion's share of unemployment was caused by adjusting to new realities after the real estate and financial bubble. What the new realities and opportunities are isn't immediately clear. That is what has to be figured out by millions of entrepreneurial employers and job searchers.
Losing a job creates trade-offs and potential benefits. People for a time lose productivity from established skills and business networks. But as they look for new jobs, the searching process, though labeled unemployment, is actually work collecting information and developing search and self-knowledge skills.
Think how many millions were likely underemployed or by accident in the wrong industries for their personal preferences and skill sets. Most wouldn't leave a secure job, even if they strongly suspected it was somehow not right for them. Though most would prefer underemployment to unemployment, most have probably also been surrounded by employment or entrepreneurship opportunities they lacked adequate incentives to investigate.
If an unemployed worker hired someone else to spend 30-40 hours a week searching for new employment, and to evaluate job-retraining opportunities, that would cost money and likely generate value. Those who lose jobs become self-employed in this informal home-based employment search industry.
Some of the unemployed are not working at job searching (or at "off-the-books" work), so they are taking advantage of opportunities for leisure that a wealthy society like ours affords. This can also have long-term benefits.
Losing my job at the Foundation for Economic Education in 2003 was one part difficult and disorienting, but nine parts a great opportunity to innovate and launch new economic education projects and programs.
Paolo Pezzuti comments:
I agree on the assumption that the economy has to continuously adjust to redeploy workers into more productive industries and professions. Old, low productivity and low added value industries have to be abandoned to move into more remunerative sectors. I do not dispute this because this is the tenet of growing economies and capitalism. This process may be painful for many workers laid off that have to retrain to find better or equal pays in their new jobs, but it brings progress and growth for the individual and the society.
However, I am starting to have doubts that this can be applied to the present situation of western economies, where jobs are simply cancelled to be created somewhere else in the world. This process is negative and is developing in parallel to the healthy process of adjustment I was referring. Jobs are transferred very quickly to areas of the world where labor is less expensive. Our economies cannot adjust adjust timely and fast enough to create enough jobs in the new sectors because the speed at which this transfer of wealth and jobs is occurring is unprecedented. This requires an impressive education system to adapt the professionality and retrain millions of workers very fast. This requires huge investments in high tech and higher value added areas. This takes time, capital, new infrastructures, a government that favors entrepreneurship.
How to manage this transition is the main issues and all elements of the society should be involved in this debate. I am convinced that the governement in the economy is inefficient and should be limited as much as possible. At the same time, without government support, the situation could be disruptive for millions of families while the process of adaptation develops.
Finally our competitors are not looking at us wihout doing anything. They are also moving quickly to acquire the technologies and move their production up the scale toward higher returns industries. They are working to put us out of the market and not be competitive.
Flexible and adaptable economies will be advantaged, but the process is going to be very painful. The transitory will be very long in any case because of unprecedented scale of what is happening. The challenges are huge and success is not ensured even for the most dynamic countries. The outcome, if we are not able to adapt, could be to see our economies and standard of living decline sharply in favor of others. We could simply see unemployment and poverty increase structurally.
Paolo Pezzutti is the author of Trading The U.S. Markets, Harriman House, 2008
Pitt T Maner III adds:
Touring around in Europe in the early 80s you couldn't help noticing the number of young Australians and New Zealanders. Many of them apparently just decided to do a "walkabout" and wait out the bad unemployment situations back home. If you are willing to rough it there are many cheap places to live outside the US. Hanging out for a couple of years in the right "socialist" country with good food, beer, healthcare, law-abiding citizens, low cost education, history and culture would seem to be an option–at least you would get an opportunity to see the pluses and minuses of other systems. No its not the American way. Are citizens of other countries more flexible with respect to moving around the globe to where there are opportunities?
Do today's youthful short-term free riders outside their native country that avoid permanent bumdom become tomorrow's long-term tourists and multilingual global investors?
Russ Sears writes:
While simply based on anecdotal evidence from those I know, I think you will find that "funemployment" is almost exclusively the domain of the youth, still riding on Mom and Dad's pocketbook. It seems to me to be the result of being taught: "you can be any thing you want","you are the star at everything" and most important parents never letting their kids fail– meeting the reality of this job market.
January 5, 2010 | Leave a Comment
I wonder about energy stocks going forward. No one can know the "right" price for oil. The Saudis though used to believe that current prices were way too high.
Official Saudi policy used to focus on keeping world oil prices below $25 a barrel. Dollars have lost value since then, but the logic behind earlier Saudi policy is worth remembering. The Saudi economy suffered greatly from the unintended consequences of the huge price increases of the late 1970s (the early price increases were just adjusting for the falling value of the dollar).
The oil price collapse of the 1990s followed the huge investments high oil prices attracted to oil production, and the new innovations and subsurface analysis that increased the reach and accuracy of oil-drilling equipment. North Sea oil came onstream. Prudhoe Bay drilling and development received a political okay over environmentalist objections only because of high oil prices from the Middle East. OPEC's share of total oil production fell significantly as world exploration was spurred by much higher prices.
High prices slowed demand and pushed supply dramatically up, which should not have been a surprise. But high oil prices were such a gift to the legions of true-believers invested in green visions. They wished for smaller more fuel-efficent cars, for recycling, for green energy. Environmentalists and governments got on board with investments, grants, and tax-credits for solar panels and wind turbines (ones that were way, way less efficient than today's still not good enough solar and wind technologies).
The elites wanted to believe. Oil producers wanted to believe that finally oil prices would go up and stay up. Wealthy environmentalists wanted to believe oil and other natural resource were running out, as they had been taught in college by textbooks like Herman Daly's "Steady-State Economics" (which was one of my textbooks in my "Social[ist] Economics" course). We had been taught that economic growth and overpopulation were the great dangers of the modern world.
Ph.D. economists were hired by the hundreds to staff energy economics research agencies and private consulting firms. Some 400 energy reporters eagerly covered the energy beat and rushed to cover each OPEC meetings and Energy Dept. briefings where they thought future policy and prices would be decided. (OPEC meetings were the IPPC meetings for that past alarmist generation.) Everyone was engaged and happy. Everyone except everyday Americans who now paid far more for gas and home heating.
Energy reality struck, dropping oil prices well under $20 a barrel, which wreaked the oil-producing economies in the Middle East as well as the fragile Russian economy. Early alternative energy companies and investments were wiped out, and half the major oil companies were swept into the mergers that gave us so many hyphenated oil companies.
Fast forward a bit to new turmoil in the Middle East and the oil price spike of 2007-08. High prices helped crash the U.S. economy and stall other major economies, and attracted billions and billions of new investments in alternative energy firms. Huge revenues from high prices raised investments by the majors as well.
More important, tens of thousands of top engineers and scientists turned their eyes and minds to oil and alternative-energy technologies.
The wishful thinkers again wished it would be different this time: that high oil prices were here to stay. The dot-com guys thought the tech party would continue on, the housing enthusiasts though the same, and now many oil investors think $75 a barrel oil is "only the beginning." Many say energy supplies are constrained in new ways.
The last ten years saw stunning economic growth around the world, especially in China, India, Indonesia, Brazil (Tyler Cowen discusses this in his recent NYT article. This economic expansion increased energy consumption beyond what was projected by pessimists. So energy prices spiked and oil companies that had downsized in the 1990s tried to restart and rebuild various departments and production ventures.
Maybe this vision of billions of new oil consumers led the Saudis to believe that this time entrepreneurs would not be able to summon enough innovation to respond to the higher demand and prices. But among the billions of new energy consumers are tens or hundreds of thousands of new scientists, engineers, and entrepreneurs who are searching, finding, developing, processing, inventing, and imagining new energy technologies and sources. The stunning natural gas discoveries across the U.S. suggest similar reserves can be found in Europe.
Exxon is less likely than wealthy environmentalists to waste investments in alternative energy. When Craig Venter gets his hands and mind on Exxon's $600 million for an algae fuel project, that is a very different thing than Department of Energy minions or Al Gore throwing money at plausible green-energy projects.
The drilling technology, biotechnology, and computing power available today to search both for new energy reserves and for biological energy processes is far, far beyond what was available or even imagined 30 years ago.
Just a couple years ago natural gas supplies seemed hopelessly constrained and processing and shipping LNG to the U.S. was thought the only option. Small firms kept drilling and experimenting across Ft. Worth, mostly ignored by the majors. But natural gas price spikes in 2005 and 2008 spurred them on, giving them access to new investment dollars.
Now natural gas is in vast supply. Somehow people can't imagine that similar technology advances could quickly find new oil supplies and other technology advances could discover scalable biofuel sources. How many energy price spikes and crashes should we expect over the next ten years?
I recommend the Jerry Seinfeld documentary “The Comedian” for explaining the hard work of comedy. It is great because consumers of comedy (and movies) don’t realize the complex distillation, the months of reworking and practice, that goes into each minute of stand-up comedy.
And every other industry is about the same. Consumers benefit from this distillation combined with division of labor, and each product and service around us embodies hundreds or thousands of hours of design and development work (work that has value only if consumers approve).
Each good and service tends to require a much smaller slice of manufacturing labor. So once Seinfeld finishes thousands of hours and months of development on his stand-up routine, millions can enjoy the routine on cable or TV, and similarly once the thousands of hours of design and development work are finished and tested for a MacBook or iPod, millions of identical copies can be manufactured with very little human labor expended per unit.
Technology brings great progress for computers as well as comedy.
At our local Bob Evan's Restaurant I note on occasion a waiter dressed in all black with a high button collar — resembling the workers of old in the dining car on a train, who wore all white and were usually people of color.
At our Bob Evan's table-servers make a flat $2.13 per hour and have to hustle to make the rest on tips. What does tip mean? "To Insure Promptness"? It could come from old English "Tip of the hat". Jimmy Hatlo used that phrase in his comic strips some years ago.
In hard times people eat out less, which means less tipping. The table-servers thus suffer economically. I have one favorite waitress at Bob's. She knows what I drink when I sit down and knows I like real butter with my rolls. She is pleasant and takes very good care of me. I always leave her a nice tip. Many will say that Bob's and others should pay more so patrons will not have to tip.
Gregory Rehmke writes:
Tipping varies by country and culture. I was surprised when spending some weeks in Buenos Aires and regularly taking taxis, that tips were neither expected nor welcome. My only explanation was that taxi service was highly elastic, so if tips came to be expected that would push down quantity demanded enough to hurt the industry. It makes sense. If you are expected to tip, that figures into your decision to take a taxi. Plus tips don’t make for better taxi rides as they can with restaurant service.
I would have liked, however, to have been able to pay a “headlight fee” so taxi drivers would use their headlights at night. It seemed a strange custom to drive at night with headlights off, only flashing them at approaching cars. But maybe in an earlier time headlight lamps were expensive or alternators faulty. On a long nighttime drive through the countryside, in a small rental car, a bank of bright lights suddenly flashed on behind us. A large truck driving without headlights had caught up with us on a two-lane highway. Scary.
Dr. Rehmke is the author of The Complete Idiot's Guide to Global Economics, Alpha, 2008
Medical care is, of course, a right, and one that should be protected by the federal government. Instead, federal and state governments actively restrict the right to offer medical care. The expensive, complex, cumbersome, ridiculous health care bill in Congress would only make matters worse by increasing demand and doing nothing to free supply.
A Forbes column by Daniel Fisher (Medical Emergency) discusses the restrictive policies engineered by medical schools, mandatory residency programs, federal subsidies and hospitals. (Paul Starr's fascinating history "The Transformation of American Medicine" tells the bigger story of government intervention in medical care.)
Economic freedom for medical care would simply mean removing government force from the supply side of the equation. Investors would be able to develop and staff new hospitals and medical schools, foreign doctors and nurses would be able to apply to enter the U.S. to gain certification to practice medicine. Insurance companies would be free to reimburse medical care provided by new or expanded hospitals and clinics.
Wal-Mart, Walgreens, and other firms would be free to expand medical services offered in their stores, hire new doctors and nurses, and even develop their own online and in-service medical training programs. Insurance companies could choose not to reimburse care from new providers if they believe such care to be substandard.
The Forbes article notes especially the coming shortage of primary care doctors, estimating that the shortage would reach 40,000 in ten years even without expanded "free" medical services if pending "health care" legislation passes. With medical schools and residency slots locked down by special interests with state power, supply cannot rise to meet demand.
How many competent nurses, after five or ten years on the job gaining experience and expertise, might choose to take on training to become primary care physicians? We won't know until such economic freedom became available to nurses. Insurance company executives often insist on extensive physicals before writing million-dollar insurance policies. And they often insist the physicals be done by nurses rather than doctors, who as a rule take more time.
How much should a primary care doctor earn? Before government intervention in medical care, they earned about what other professionals earned. If government officials and the American public were to somehow be roused from their ignorance of the history and economics of medical care, and insist that freedom of contract be again protected, tens of thousands of competent primary care physicians would soon emerge from new training programs and medical schools to offer quality medical care for Americans of all income levels. People would likely pay modest fees for service in cash or with credit cards, using medical insurance only for catastrophic medical problems. Mutual aid societies like the local Eagles, Masons, Moose, and Sons of Italy, might again hire "lodge doctors" to provide medical care to members. More likely thousands of the nations health clubs might offer a range of "health care" services to members with part-time staff doctors and nurses.
Specialty hospitals operating on broken bones and joint replacements would not also treat people with infections. Medical costs from accidental infections would drop dramatically. (See another Forbes article, Bad Medicine, for this regulatory disaster story.
Competent primary care doctors carry a vast amount of diagnostic information and experience in their heads. Alternatively, medical care providers could have a more modest degree of information and experience in their head, but know how to quickly search vast computer databases and diagnostic software for cutting edge information. Imagine a world where all our diagnostic and repair services for cars, airplanes, and other machinery relied upon what mechanics could remember learning about or had fixed before.
Editors note: we find this PajamasMedia article highly relevant.
Jeff Watson points out:
One place that provides medical care for children is the network of 22 Shriners Hospitals in the United States. Run by the Shriners, an organization of Free and Accepted Masons, this network provides free medical services for children without any financial obligation or insurance requirements from the families. Entirely supported through donations, Masons raise around five million dollars a day to fund the network of Shriners Hospitals. The quality of these hospitals is first rate, and the facilities are state of the art. Many Shriners Hospitals offer training and residency programs for MDs. All Shriners Hospitals are committed to the uplifting and complete care of sick children in a family-friendly environment. The burn units are among the best in the country. Donations to the Shriners Hospitals are tax free, and much needed as current conditions and increased expenses might require the closing of six hospitals. The Shriners are desperate to keep the endangered facilities open and provide critical care for the communities they serve.
In his WSJ article this weekend, Prof. Boudreaux argues that insider trading shouldn't be illegal, as price-movement from such trading transmits better information about company value to the public. Presumably this also extends to legalizing burglary, as burglars perform valuable tests on home penetrability of use to homeowners not yet foreclosed on.
Relatedly, one thought the currently unfolding grand experiment in US socialism would have been considered bad for free-markets and the securities used to capitalize on them. Current and planned government control, confiscation, and regulation appears to be the biggest since the New Deal (bigger not adjusting for inflation). To put a little lip-gloss on this porcine, here is comparison between SP500 (via tradeable SPY, including dividends) weekly returns under Democrat and Republican presidencies since 1993 (Clinton + Obama so far, vs GWBush):
Two-sample T for DEM WK vs REP WK . N Mean StDev SE Mean DEM WK 457 0.0036 0.0228 0.0011 T=2.41 P=0.016 REP WK 415 -0.0005 0.0265 0.0013
Michael Moore would pop a suspender to learn that not only do stocks do better under recent Democrats, but ALL the positive returns since inception of SPY (Jan 1993) occurred under Clinton and Obama. Note, as is often the case, this happened with less volatility:
Test for Equal Variances: DEM WK, REP WK 95% Bonferroni confidence intervals for standard deviations . N Lower StDev Upper DEM WK 457 0.0212 0.022 0.024 REP WK 415 0.0246 0.026 0.028 F-Test (normal distribution) Test statistic = 0.74, p-value = 0.002
How can this be? Shouldn't high taxes, government spending, socialized medicine, pay controls, huge deficits, and trading restrictions reduce profits and stock returns?
Then on this morning's run, the Homer Simpson (DUH) moment hit in the form of a question: Who does better as government deepens its grip on the means to production, and un-levels the playing field? Not the public - at least not mom and pop 401K. The smart people do better. The ones with the brains and resources to find loopholes in a byzantine regulatory and tax environment. Wall Street firms. Hedge funds. Large banks able to package off bad bets to taxpayers.
OK if that doesn't Liberate you, listen to this while thinking about who gets to pay for political bubble remediation:
Alston Mabry replies:
I always thought it would be interesting to make insider trading legal, within a framework that included real-time reporting of trades made by those registered as "insiders". (And perhaps any employee of a company would be considered an insider.) Then the information contained in the trades would at least get transmitted to the markets quickly and overtly. You could extend it so this system would apply to any trades made by insiders in their industry.
Laurel Kenner notes:
The Loeb Award has been the most prestigious in financial journalism since it began in 1957. It's ironic that the founder's methods are now against the law…
Gerald Loeb, co-founder of E.F. Hutton, created the award to encourage methods that "inform and protect" individual investors. He himself relied almost exclusively on working his contacts for information. He would then publish the information for his clients. It's all there in his book, "The Battle for Investment Survival."
My goodness, how else are you supposed to get tradeable information? Are we all supposed to wait with our hands out for handouts? I guess that is the socialist model: handouts and no work.
Gordon Haave objects:
Legalize insider trading? Sure, in theory — but in reality nobody is going to play in a game where he feels his opponent has an edge on him. All you have to do to see how this works is to look at a place like Mexico [& many other emerging markets], where insider trading is rampant and blatant. The average person doesn't play.
Gregory Rehmke writes:
Some years ago Virginia Postrel argued that "insider trading" rules should be left to companies and to the various exchanges to decide. Exchanges will want to reassure investors and would fine members who broke the rules. I also think it is interesting that we only hear when "insider trades" make money. Such information is usually imperfect, so many trades based on this information lose.
September 29, 2009 | 2 Comments
Editor's Note: We do not usually publish material from other sites. But we thought this scintillating review from Michael Covel, a unique and pleasantly surprising source, is so good it is worth republishing.
A friend recently invited me to a private screening of Michael Moore’s new film Capitalism: A Love Story. The September 16th invite not surprisingly leaned a certain direction:
“[Michael] Moore takes us into the homes of ordinary people whose lives have been turned upside down; and he goes looking for explanations in Washington, DC and elsewhere. What he finds are the all-too-familiar symptoms of a love affair gone astray: lies, abuse, betrayal and 14,000 jobs being lost every day. Capitalism: A Love Story…is Michael Moore’s ultimate quest to answer the question he’s posed throughout his illustrious filmmaking career: Who are we and why do we behave the way that we do?”
Considering Moore was going to be there for a Q&A after (moderated by Arianna Huffington), I quickly signed on. Now before painting a picture of Moore’s new film let me be honest: my belief set is essentially libertarian (‘Government out of my bedroom and my pocketbook’). Not only do government solutions not excite me, they scare the living blank out of me. Remember when George Bush declared, “I’ve abandoned free-market principles to save the free-market system…to make sure the economy doesn’t collapse”? He might as well of said, “Hide your money, kids – ’cause I’m coming to take it!”
Oh sure, in theory I would like to see everyone with their own homestead, money in their pocket for regular shopping frenzies and no health worries despite eating at Burger King 24/7, but arriving at those goals is not exactly doable unless government robs Peter to pay Paul and or starts up the printing press.
And that view of course puts me in opposition to Moore since he has no problem with government as his and our father figure. That is his utopia. He truly believes warehouses of Washington, DC-based federal workers remotely running our lives is the optimal plan. He is an unapologetic socialist who really doesn’t care why the poor are poor or the rich are rich, he just wants it fixed. So not surprisingly, and with some generalization as I proffer this, Democrats like Moore and Republicans don’t.
However, I was excited to see a ‘mainstream’ film that was backed by big Hollywood bucks conclude capitalism as ‘evil.’ Arguably the most successful documentarian ever, a man who has made untold millions of dollars, was going to legitimately make the case that there was an alternative to capitalism. I sat down in a packed Mann’s Bruin Theater in Westwood, CA eager to see how his vision could possibly flesh out.
Moore is a rather simple guy. He is likable. He sees the world as good guys (people with no money) and bad guys (people with money). His Flint, Michigan union worker upbringing is his worldview. If you did not have that upbringing or if your life started less severe than his you are an evil capitalist. If on the other hand you were a laid off factory worker with a sixth grade education you are the true hero. I don’t care one way or the other that he has that view and I am not knocking union workers, but Moore sees the world through a class warfare lens resulting in a certain agenda: force wealth to be spread amongst everyone regardless of effort. Within minutes it was clear where Capitalism: A Love Story was headed. The ‘highlights’ included:
* We listen to heartbreaking stories of foreclosed families across America, but we don’t learn why the foreclosures happened. Did these people treat their homes as piggy banks? Were there refis on top of refis just to keep buying mall trinkets and other goodies with no respect to risk or logic? We don’t find out.
* We meet one family who was just foreclosed on so desperate for money that they were willing to accept $1,000 for cleaning out the house that they were just evicted from. Was it sad? Yes. But, should we end capitalism due to this one family in Peoria, IL?
* We are introduced to a guy whose company is called ‘Condo Vultures’ buying and selling foreclosed properties. Since he acted like a used car salesman, the implication was that he was an evil capitalist. However, Moore doesn’t tell us if his buyers were ‘working class’ people making smart buying decisions after prices had dropped.
* We listen to Catholic priests who denounce capitalism as an evil to be eradicated. What they would put in its place and how would the new system work? The priests don’t tell us.
* We learn that Wal-Mart bought life insurance policies on many workers. We are then told to feel outrage when Wal-Mart receives a large payout from an employee death while the families still struggle with bills. I saw where Moore was heading here, but this was a reason to end capitalism?
* We hear a story from a commercial pilot so low on money that he has to use food stamps. Moore points out that many pilots are making less than Taco Bell managers and then attributes a recent plane crash in Buffalo to underpaid pilots. This one crash is extrapolated out as yet another reason to end capitalism.
I was pleasantly surprised at Moore’s attempt at balance. For example, he included:
* A carpenter, while ply-wooding up a foreclosed home, says, “If people pay their bills, they don’t get thrown out.”
* A dressing down of Senator Chris Dodd (D) by name. Moore calling out a top Democrat? He sure did. He nailed him.
* A lengthy dissertation on the evils of Goldman Sachs. He rips Robert Rubin and Hank Paulson big time and I agree with him. In fact, I said to myself, “Moore you should have done your whole film on Goldman Sachs!”
Throughout the various stories and interviews he also weaves a conspiracy (all Moore films do this). The plot goes something like this: America won World War II and quickly dominated due to no competition (Germany and Japan were destroyed). We had great post-war success where everyone lived in union-like equality. Jobs were plentiful and families were happy. However, things start to go bad in the 1970s, and Moore uses a snippet of President Carter preaching about greed. This clip was predictably building to Moore’s big reason for all problems today: the Reagan revolution.
Moore sees Reagan entering the scene as a shill for corporate banking interests. However, everyone is happy as the good times roll all the way through into Clinton times. Moore does take subtle shots at President Clinton, but nails his right hand economic man Larry Summers directly as a primary reason for the banking collapse. So, while Moore sees Japan and Germany today as socialistic winners where corporations benefit workers more than shareholders, he sees America sinking fast.
So is that it? That was the proof that capitalism is an evil to eliminate? Essentially, yes, that’s Moore’s proof. What is his solution? Tugging on your idealistic heartstrings of course! Moore ends his film with recently uncovered video of FDR talking to America on January 11, 1944. Looking into the camera a weary FDR proposed what he called a second Bill of Rights – an economic Bill of Rights for all regardless of station, race, or creed that included:
* The right to a useful and remunerative job in the industries or shops or farms or mines of the nation.
* The right to earn enough to provide adequate food and clothing and recreation.
* The right of every farmer to raise and sell his products at a return which will give him and his family a decent living.
* The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad.
* The right of every family to a decent home.
* The right to adequate medical care and the opportunity to achieve and enjoy good health.
* The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment.
* The right to a good education.
As FDR concluded and the film ended, I was shocked at the reaction. The theater of 400+ stood and cheered wildly at FDR’s 1944 proposal. The questions running through my head were immediate: How does one legislate words like “useful”, “enough”, “recreation”, “adequate”, “decent”, and “good”? Who decides all of this and to what degree? At past points in history to voice an opposition opinion in the middle of such a single-minded herd would have certainly been my physical demise! Interestingly, during the Q&A Huffington and Moore discussed bank failure fears during the fall of 2008. They asked for a show of hands of how many people moved money around or attempted to protect against a bank failure. I had the only hand that went up.
FDR’s plan hauled out by Moore six decades after it was forgotten reminded me of another interchange – this one from the 1970s. Then talk show master, the Oprah of his day, Phil Donahue was interviewing free market economist Milton Friedman and wanted to know if Friedman had ever had a moment of doubt about “capitalism and whether greed’s a good idea to run on?”
Friedman was quick in response, “…is there some society you know that doesn’t run on greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? The world runs on individuals pursuing their separate interests. The great achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way. In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history are where they have had capitalism and largely free trade. If you want to know where the masses are worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear: that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.”
Donahue (and the video of this on YouTube is classic) then countered saying that capitalism rewards the ability to manipulate the system and not virtue. Friedman was having none of it, “And what does reward virtue? You think the communist commissar rewards virtue? …Do you think American presidents reward virtue? Do they choose their appointees on the basis of the virtue of the people appointed or on the basis of their political clout? Is it really true that political self-interest is nobler somehow than economic self-interest? …Just tell me where in the world you find these angels who are going to organize society for us?”
Friedman’s logic was what I was remembering as a theater full of people cheered wildly for a second Bill of Rights. How did this film crowd actually think FDR’s 1944 vision could be executed? Frankly, it was clear to me at that moment capitalism was on shaky ground. Starting with Bush ‘abandoning’ capitalism to bailouts for everyone to Obama gifting away the future – we seriously might be past the point of no return toward a socialization of America.
Figuring someone else must see the problems with this film, I started poking around the net for other views. One critic declared that the value of Capitalism: A Love Story was not in the moviemaking, but in its message that hits you in the gut and makes you angry. This film did not make me angry, but it did punch me in the gut. The people in that theater with me were not bad people, including Moore. They just seem to all have consumed a lethal dose of Kool-Aid! And at the end of his Q&A Moore pushed the audience to understand that while they don’t have the money, they do have the vote. He implored them to use their vote to take money from one group to give it another group. Did he really say that openly with no ambiguity? Yes, sadly.
Dr. Covel is the author of Trend Following: Learn to Make Millions, FT Press, 2009
Greg Rehmke offers:
I enjoyed your description of the film. And it is great especially that you took the time to go see it and to write about it. One problem with ideological documentaries is that only people who already agree go to see them, just as with Fox News or the many ideological magazines and blogs. So most people hear only cherry-picked stories that support their biases and beliefs. I have a few quick notes on the "Second Bill of Rights – an economic Bill of Rights for all…" that see them through the lens of "freedom to" rather than "freedom from":
* The right to a useful and remunerative job in the industries or shops or farms or mines of the nation. [Rehmke comment: On first glance, this sounds like "freedom from" unemployment. But is can also be seen as calling for an economic right to launch industries, shops, farms, and mines. Few people today can succeed, either individually or as small teams, in getting permits to start any of these enterprises. The rich can because they have lawyers, tax accountants, contacts in state and local government regulatory agencies, and contacts with government-backed bankers. Corporate farming thrives on subsidies, pushing out family farms. Inner city entrepreneurs in Detroit need 70 permits for home-based businesses, etc. This is all the fruit is state-capitalism, and is the status quo for much of the economy. If the poor could legally provide transportation services to each other, that would create both a million more jobs and provide cheap transportation for poor people to nearby employment and social services.]
* The right to earn enough to provide adequate food and clothing and recreation. [Rehmke comment: Minimum wage laws and payroll taxes combine to make low-wage jobs generally hard to find for the low-skilled (because low-wage jobs are made expensive for employers). Technology innovation and fairly free trade has dropped the price of clothes so today's poor can afford what middle-income Americans in the 1940s could only dream of. Food is inexpensive too, even with all sorts of tariffs, taxes, and agricultural price supports. In 1944, single people lived with families or as borders. Inexpensive housing is also blocked by local zoning and building codes. If group housing, borders, and factory housing were not banned by most local zoning, the poor today would live much better on below-minimum wage jobs than middle-income Americans of the 1940s. "Average home size has doubled from the 1950s" yet most families are smaller.]
* The right of every farmer to raise and sell his products at a return which will give him and his family a decent living. [Rehmke comment: Well, the farmer should have the right to try, without being badgered by regulators. Farms and orchards in California, Oregon, and Washington require inexpensive and reliable workers, and many of these hard-working people are from Mexico. They are regularly harassed for not having adequate documentation to prove they have permits from the federal government to work in the U.S. as free and responsible human beings. (The Krieble Foundation guest worker plan would resolve end illegal immigration.) Without inexpensive labor, few family farms can survive, especially as farmers get older.]
* The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad. [Rehmke comment: Governments create and maintain monopolies. State capitalism has created vast swaths of monopolistic professions across America. From doctors to electricians, hair stylists to legal advisors, teachers to nurses, transit drivers to bed & breakfast operators–expensive permits, government-sanctioned "training", dense regulations, and special taxes are the rule rather than the exception. Mercantilistic regulations make business services more costly, and restrict business opportunities to those how have skills not only to run a business, but also to navigate regulations usually erected by established competitors, plus complex tax codes and labor laws. Plus established competitors can often find a way to litigate new competitors out of business.]
* The right of every family to a decent home. [Rehmke comment: Again, freedom to build and live in homes would be helpful. Builders could construct 1944-size homes very, very inexpensively, if they were legally allowed to by local zoning boards and urban planners. Government has driven up the price of housing, prodded by elites already in comfortable homes and not wanting too many neighbors, especially poor ones. Randy O'Toole's book, Best Laid Plains, tells this sad story. Housing and land use regulations not only raise the cost of housing but contribute to regular housing bubbles.]
* The right to adequate medical care and the opportunity to achieve and enjoy good health. [Rehmke comment: I agree that access to medical care should be free. If it were, hundreds of thousands more people would quickly move into medical fields, being quickly trained to provide diagnostic services with support of sophisticate software and teleconferencing with doctors). Thousands, then tens of thousands of highly-trained doctors would move to America from India and Mexico (and tens of thousands more would gain access to training in those countries). Hundreds of thousands of trained nurses would move to America from the Philippines and Kenya. Incomes for many of today's doctors and nurses would drop, but services for the poor would expand. Wal-Mart and other firms would likely provide free or near-free medical services just to bring in customers (though they might expect a blizzard of malpractice lawsuits that activists would likely hit them with). "Enjoying good health" requires people exercise and eat healthy foods. This behavior would be encouraged if insurance companies were allowed to set catastrophic insurance rates on the basis of exercise, diet and other behaviors that influence medical risks. Government shouldn't hector overweight people to diet and exercise, but medical insurance premiums $100 or $200 a month higher, based on actuarial data, would provide strong and reality-based stimulus for active lifestyles and healthy diets.]
* The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment. [Rehmke comment: the above suggested reforms would move Americans toward these goals. Sound currency would encourage savings just as unsound currency punishes saving for old age. Transfer-based Social Security and Medicare are unsustainable, so individual retirement accounts of some kind would provide the financial safety net that would provide adequate protection. Government tax policy distorts medical-insurance, and people should be allowed to opt-out of government welfare/social security programs.]
* The right to a good education. [Rehmke comment: A dose of freedom would improve education. James Tooley's excellent book "The Beautiful Tree" looks at successful private schools for the poor across Africa, India and other poor countries. If only America's inner-cities could enjoy the freedom to educate that the poor have in Latin America, Africa, India, and communist China. America's thriving homeschool movement is developing into hundreds of fast-growing firms offering a wide range of quality educational services, and innovative private schools are expanding too. Again, here as with other areas, entrenched elites operate and benefit from an expensive government education "monopoly" that offers mediocre or poor education with expensive, watered-down, politically-correct and colorful but boring textbooks.]
Dr. Rehmke is the author of The Complete Idiot's Guide to Global Economics, Alpha, 2008
The period from the decline and failure of the Second Bank of the United States [1833 to 1841] to the discovery of gold in California  is usually written about as a magnificent process of Westward expansion. The reality was homesteading beyond the Ohio country slowed to a trickle. Only the most desperate people, like Lincoln's parents, kept moving West; and only the most desperate people from abroad – the Irish from their famine, the German and other political refugees from continental Europe after the failures of the revolts in 1832 — came to the United States during that period. Unlike the Great Depression that began in 1930 the slump of the 1840s was largely limited to the United States. Its cause was the collapse of the states and cities' international credit-worthiness after the Panic of 1837 and the shriveling up of domestic credit. The inability to borrow or get actual money explains the extraordinary fever that surrounded every "discovery" of gold during the period and the sense of almost divine intervention that greeted the realization that the California discovery was the greatest in history and – thanks to the Mexican War and the Bear Flag Revolt — it was all ours. The discovery at Sutter's Mill literally allowed the U.S. to get out of hock.
G_d may look after fools, drunks and the United States of America, but He may be busy with other things these days. In 1929 in the U.S. the ratio of debt to GDP was 190%; in 2000 it was 275%; in Japan in 1989 it was 270%. The pattern has been for the ratio to increase when the credit/speculative bubble bursts and economic growth declines. In the nine years after the height of their bubble, the Japanese saw the debt-to-GDP ratio increase to 350%. In the U.S., since 2000, the ratio has increased to 375%. The question isnot whether the U.S. will now share the Japanese experience of weak income growth. That seems certain. What one has to ask is whether the next decade of bust will have the productive result of lowering the overall level of debt to national income. The current debt to GDP ratio in Japan is 110%. The Japanese have been persistently criticized for not resolving their problems by allowing failures to be liquidated: but I wonder how likely it will be ten years from now that we supposedly hard-nosed Americans have done more to write down assets to their market values than the Japanese have done in the last decade. Where will we Americans find the pot of gold at the end of the debt rainbow this time?
Gregory Rehmke explains:
It depends what debt is used for. High-yield bonds funding an array of innovative companies in the U.S. might reasonably be purchased by folks overseas looking outside their stagnant economies. Garage start-ups funded with family loans and credit cards increase debt, but shouldn't be mixed up with consumption-debt used for boat-loans, car-loans and loans for vacations. And given that Congress has made it nearly impossible to fund new companies with IPOs, financial markets search for ways to fund start-ups with debt instruments. Of course the easiest place to throw debt was at home and commercial mortgages. As that disaster continues to unfold, will debt now fund new firms that boost productivity by inventing better technologies and products?
George Parkanyi responds:
If it were up to the west-coast Indians, one ripping potlatch would sort it all out. "OK everybody — fresh start tomorrow at sunrise. One loincloth each!"
I very much enjoyed the movie The Astronaut Farmer. I highly recommend it. I am working on a "Space Travel Economics" course and look forward to promoting this movie along with The Right Stuff and some others.
When the Clintons came to power they pushed hard for socialized medicine via national health care. And that helped bring Republicans to power in Congress two years later. When the President is a Democrat and Congress is controlled by Republicans, that seems the best combination (short of having both controlled by Jeffersonians).The new trillion-dollar Fed infusion is standard monetarist policy, I think. A Forbes columnist recommended it a month ago. The MV in the monetary equation means that when velocity slows down dramatically, which it did, money supply drops dramatically.
So the Fed pumps in a trillion to rebalance the equation. This at least is better than Congress spending another trillion on pork-barrel infrastructure and green-energy projects.I would prefer a private currency system, or a gold-standard, but I don't see the Fed move as a disaster. Better the Fed try to deal with monetary problems than Congress and the Administration. Of course when velocity picks up, the Fed has to pull all that cash and credit back out.
Private firms and individuals trying to cope with heavy debt loads sell assets. The Federal Government has a vast array of assets to sell, from commercial lands in the west, to off-shore acreage, to buildings, parks, freeways, airports, unneeded military bases, etc. Moving these mismanaged and underutilized assets from opaque bureaucratic ownership to transparent publicly-traded firms (or to non-profits in the case of parks and wilderness areas), is an attractive option for soaking up dollars when the time comes, and shrink the physical size of the Federal Government in the process.
Last week's newspapers headlined the news that $11 trillion in American wealth "vanished." The articles complained that economy and American wealth is back where it was in 2004. But in 2004 Americans were the most prosperous people in the history of the world, with the highest living standards, most disposable income, cleanest environment, best working conditions, biggest houses, safest cars, and on and on.
The U.S. economy was heavily regulated then, and now it is more heavily regulated. Americans were heavily taxed then, with the upper 1/10, 1/5 and 1/3 of taxpayers paying way more of the tax bill than the bottom 50% (and getting little in the way of services besides traffic jams, foreign wars, and tax and regulatory confusion). Now upper-income Americans will face higher tax rates. This will likely lead to lower tax revenue for the government, as it has in the past, which could again lead to reducing tax rates.
China and India are in terrific shape compared to 2004 or to any year before that. "Millions are unemployed" scream the headlines. But what were these folks doing in 2004? How many were planting rice by hand in their villages. James Fallows article in the April Atlantic Monthly ("China's Way Forward") makes clear that the average Chinese worker is well aware of how much better off they are than just a few years ago.
Wealth has increased dramatically in China and India, and billions upon billions of dollars worth of incredibly productive machinery has been deployed across their economies for hundreds of millions of moderately-skilled workers. Skill levels are rising driving productivity up in places where production has stagnated for centuries. People who are used to working 60 hours a week with wood ploughs and old shovels now work with modern machinery. Farmers are increasing productivity (where they have property rights and access to markets), and have cell phones to track prices and nearby markets. This productivity train has been gathering momentum for over a decade in India and over two decades in China. Even without an additional capital and consumption push from the U.S., India and China are adjusting and coasting forward, lifting living standards for hundreds of millions more.
In Eastern Europe, Southeast Asia, and Chile, Brazil, Peru, and Mexico in Latin America, market reforms and new machinery lift productivity and living standards. The dramatic drop in U.S imports of clothes and other goods (our closets and kitchens were stuffed full anyway), will encourage firms to market their goods and services across their own economies, where vast numbers are reaching productivity and wage levels that allow them to enjoy living standards the U.S. and Western Europe enjoyed a century ago.
So… I am optimistic. Had the current Administration come to power with a strong and growing economy, I don't think anything would have stopped the rush to national health care, green taxes via cap and trade, and pervasive new government intervention across the economy. Now at least we have a chance of avoiding these long-term disasters.
January 1, 2009 | 7 Comments
What is the benefit from dramatic falls in valuation such as we have seen this year? Market prices embody the judgements of millions of minds. How could so many be so wrong, either before the crash or after? Maybe the $50 billion in fraud-induced value coupled with the distorting effect of millions of dollars in falsified returns each month can account for a small slice of the distortion. Asset bubbles stoked by monetary authorities and securities mischief can account a bigger slice of the overvaluation.
But maybe there is a separate but larger "purpose" in the crash. Art Laffer and Steve Moore have a new book The End of Prosperity where they argue that steady economic growth and vast increases in prosperity followed the tax cuts enacted in 1983. Economic and financial chaos opened the door for significant deregulation and tax cuts.
But as the economy prospered, state and federal governments have steadily ratcheted up taxes and regulations. Businesses and investors have developed strategies to adjust to this growing tax and regulatory burden, trying various financial innovations, like replacing working capital with revolving debt, outsourcing, and leveraging investments.
A huge financial crises lets Atlas shrug off the great burden of state taxes. Heavily regulated and taxed General Motors now received all of its past corporate taxes back in the form of a bailout. And the firm won't be paying taxes anytime soon. Neither will the millions of investors and firms who have lost so much in the crash.
Across the country newspaper are reporting that state governments are in "crisis" due to falling tax revenue. This though is a good thing. When corporations suffer downturns and have cut expenses by 20 or 30%, they try to cut the least productive parts of their operations. The result is that many firms grow leaner and more competitive, and assets spun off go are often revived under new management. Government regulators and bureaucrats let go are of two-fold benefit to the economy. They are no longer tasked with eating taxes and burdening private commerce. And when employed by private firms they are trained and motivated to actually create value.
Politicians, bureaucrats, agencies and government contractors live off of private sector taxes and fees. As the economy expands, so do these parasites and predators. Panda bears similarly expand during good times. A Giant Panda consumes 20-30 pounds of bamboo a day. From the Giant Panda's perspective, the purpose of a bamboo forest is food. Over the years, the growing Panda population becomes a burden for bamboo forests.
Bamboo forests have developed an interesting response to parasites and predators. Each species of bamboo forest has its own internal clock, and across its entire habitat, all trees flower and die at the same time. For some forests the die-off are from 60-100 years apart. This mass die off causes a significant die-off of species that live off bamboo. Lots of fat Giant Pandas are left with little to munch on, and their populations decline dramatically. The new forest grows healthy and strong and many years pass before parasite populations catch up.
So maybe bamboo stocks and corporate stocks die off for the same reason: to rid themselves, at least for a decade or two, of predators and parasites. (A more extensive version of this will appear in an upcoming issue of The Freeman.)
December 7, 2008 | 4 Comments
Economic news is the mainstay of media reporting, especially between natural disasters. Unfortunately, economic news seems only worth reporting when it is bad news. The media has had economic news generally backward over the last few years. The housing boom was reported as great news. Middle-income and low-income people were getting loans to buy their first homes, thanks to Congressional pressure on the Fed and banks. Everyday Americans were seeing their home equity increase significantly, so they could borrow money to travel and buy. This was all great news for the retail industry and new retail chains blossomed.
Home building was creating millions of jobs nationwide, and generating fast rising sales for Home Depot, Lowe's, as well as lumber, window, and appliance companies. And times were especially great in the home town of New York Times reporters, as Wall Street was generating vast fees from new mortgage-backed securities (after Congress had over-regulated business IPOs).
We now know that much of this news was misunderstood and misreported. We now know that new federal regulations and Congressional pressure on Fannie and Freddy, combined with weak oversight of mortgage brokers and NGO threats against banks to expand loans to minorities, led to way too many home loans handed out to unqualified and under-qualified home buyers and speculators.
Just as governments has unique powers to create financial crises, markets have unique powers to quickly clean up the mess. The press is again misunderstanding and misreporting the clean-up process. Government interventions throughout the US economy led to complex distortions in health care, energy, education, as well as housing and many other sectors.
In housing, the clean up process starts with redeploying millions of workers from the housing industry to other industries. If financial interventions encouraged companies to build a million too many homes, it is important for home builders to slow down and let real market demand for homes catch up. The government has also been cracking down on immigrants, shipping or scaring hundreds of thousands back to their home countries. That lowers demand for housing and for all the other goods and services they were purchasing while in the U.S.
So PBS is reporting the millions who have lost their jobs as bad news. Would it be better news if all these workers were to continue building homes, pouring concrete, taping drywall, and all the other tasks that surround the homebuilding industry?
The New York Times reports similar news of expanding factory closures and growing unemployment in China. Thousand of the factories that were producing goods for export have apparently closed as export orders from the US have stalled. Is this really bad news? Is there some reason why workers and factories in China can't be reoriented to produce goods and services for 1.3 billion Chinese people, nearly all of whom lack adequate housing and dream of the home appliances we take for granted? Markets work, and when companies lose overseas orders, they look to for other opportunities. If company owners and managers can't find profitable opportunities, they lose their claim on capital and labor. The sell their assets to other managers or return them to creditors. New managers take over, as they should. If the U.S. auto industry cannot figure out how to build cars that people what to purchase, they similarly lose their claim on auto industry capital and labor.
The great advantage the U.S. has compared to over-regulated Europe is that U.S. firms can quickly release assets and workers to new opportunities. John Stossel, in a segment from a ten years ago on outsourcing, reported that the US had lost 391 million jobs since the 1980s but had also created 411 million jobs. While European welfare states were mandating lengthy unemployment payments to laid off workers–creating strong incentives to stay unemployed–across the U.S., shrinking firms let workers go by the millions so they could retrain and staff millions of new firms in growing sectors of the economy. Stossel reported on a Levis factory in Tennessee that shut down, laying off hundreds of workers. But it was remodeled into a college, and most workers found better jobs in other industries (we have a link to this online Stossel segment here.
So job losses, reported as terrible news, and as open invitations for the next administration to massively intervene in the U.S. economy, are in fact good news. Job losses are good news in the sense that a hangover is good news. The discomfort of a hangover is our body adjusting to the abuse visited upon it the night before. It is both a warning against future abuse, and a call by the body to replenish lost liquids, salts, and generally readjust operations. Some heavy drinkers fight hangovers with Bloody Marys and other alcoholic drinks in the morning. They generally die young.
October 10, 2008 | Leave a Comment
As disorienting as the financial panic is, it is interesting that the U.S. economy is generally strong, apart from finance and housing industries, and unionized automakers. Home prices fell the most where they were some distance from job centers. The long commute to the Bay Area from Stockton and Modesto allowed those locked-out of Bay Area housing by local government home-building restrictions to commute from distant but reasonably-priced homes to well-paying jobs.
Easy money and and Congressionally-promoted bad lending practices inflated the price of new homes in Stockton, Modesto, and other distant suburbs, but high gas prices made them much less attractive. Gas over $4 a gallon made it harder to pay mortgages, and the demand for these homes fell.
High gas prices stalled SUV and truck sales, both profit-centers for US automakers (and slashed boat and RV sales). And high oil prices raised transportation costs across the US economy, reducing the economic advantage of America's integrated production and distribution inside the world's largest free-trade zone. And high prices hurt airlines and all those who operations depend on inexpensive business and tourist travel.
So now we have oil prices crashing down as demand falls and production in Asia and elsewhere has risen in response to higher oil prices. The media likes to emphasize the slowing economy as the cause. But though the housing and financial industries are down, the rest of the economy has continued to grow. Miles driven dropped dramatically as prices rose, but American industry expanded quarter by quarter.
Newspapers report that oil production rose unexpectedly in Asia this year. Production increases in response to high prices are unexpected only to reporters. In the U.S., increased oil production is banned by regulations on exploration and development in western US, and offshore, where state and federal socialism prevails. And environmentalists stand ready with litigation and lobbying as exploration and drilling bans are relaxed. But in Brazil, Africa, China, and the Middle East, energy enterprises enjoy more freedom to explore, drill, and produce, and both oil reserves and output are rising.
With oil prices down to $84 today, transportation costs fall dramatically across the U.S. economy from July highs, and leave consumers with more disposable income. Consumers will have more money to spend, and businesses will see energy costs drop. Housing in the far suburbs will become more attractive to workers willing to commute. Should we look this energy gift horse in the mouth and once-again fear dependence on foreign oil? I would argue that the only thing we have to fear is government itself.
Congress stands ready to protect consumers from lower energy prices with "renewable" windmill and solar mandates, and managed to stuff 100 pages of new alternative energy regulations, subsidies and carbon audit decrees (preparing the way for the coming carbon tax) into the financial bailout bill. Now that the bill has passed, Congressmen and the rest of us will have time to read through this new tangle of wishful thinking and special interests that has become the law of the land.
So, the U.S. economy has a few months to recover with lower oil and natural gas prices, until the next Congress slaps on a massive Carbon Tax to fund the vast array of government programs they were unable to slip into the recent bailout bill.
September 13, 2008 | 5 Comments
I wrote earlier (April 1) to argue that the increase in oil prices over the last few years was providing a vast stimulation both to further oil exploration and development, and to expand effective (i.e. private sector) research and development of alternative energy and electric cars.
I asked then how far oil prices would fall as new energy supplies came on-stream and Americans purchased smaller cars and reduced their driving. Of course oil prices continued up since that April 1 post ("How Low Will Oil Prices Go? "). My frustration then was with the media's continued calls for government to intervene, and reporter's lack of understanding or appreciation of markets. New York Times reporters seem always surprised when automobile use declines in response to higher gas prices. And reporters usually claim oil prices have fallen only because world economies are in recession or teetering on the edge. (For many reporters, recession fears will end only when a democrat is again confidently pushing and pulling the levers of executive power.)
I was in error, in April, in assuming that consumers around the world were paying higher prices for oil, as they were in the US. If $3 and $4 a gallon oil was significantly reducing driving in the very rich US, it should have had a larger impact in poor countries. But of course governments in China, India, Indonesia, Russia and elsewhere have even less faith in markets. Price controls and subsidies there insulated their population from higher oil prices. Distorting or blocking price signals prevents recalculation of transportation resources. Transporters keep driving older inefficient (and heavily-polluting) vehicles instead of trading up to cleaner, higher mileage vehicles. Subsidized gas and heavy taxes on new cars are a source of air pollution in Cairo that is 10 to 100 times acceptable standards. Removing taxes on new cars and allowing fuel prices to rise would help clean the air at minimal net cost. (And if state governments in the US would suspend sales taxes on new and used cars, consumers at all income levels would quickly trade up to cleaner, more fuel-efficient cars.)
Without price signals, industries in poor countries can't tell which are creating wealth and which are actually reducing the value of inputs. To claim that industry and transportation in developing countries are too poor to adjust to higher prices is to ignore reality. People and governments in these countries are too poor to burn oil and dollars wastefully though gasoline subsidies. Market reforms and economic progress over the last ten years in India and China provide exactly the flexibility needed to adjust to higher oil prices. If Chinese bureaucrats had not been so fixated on stockpiling diesel for the Olympics, and keeping prices fixed to avoid protests while in the world spotlight, the recent oil and diesel run-up would not have been so severe.
Economic progress over the last ten years has been the fastest for the most people in the history of the world, thanks mostly to expanded economic freedom and investment in India and China. And what's past is prelude: the pace and scope of world economic progress will accelerate and expand over the next ten years. Technology has cleared the path, and international information and investment flows will widen it.
I have mentioned before Michael Cox’s metaphor of four men dropped in a jungle, but only one has a machete. Who gets out first? The surprise answer is that they all emerge at about the same time. The man with the machete clears the path, and the others, once they find it, sprint along to catch up. Everyday people in England, Western Europe, the U.S. and Japan, cleared the path with thousands of agricultural, banking, and industrial innovations over the last few centuries. And now everyday people in China, India and Eastern Europe are putting in long days both to deploy long-available world technologies in their once isolated lands, and to create valuable goods and services for businesses and consumers in already-wealthy countries.
This a good thing. Billions in India and China are earning money (and saving much of it) producing goods and services for others. Both parties in all voluntary trades benefit. Astonishingly, this progress is being achieved against hostile, incompetent, and corrupt governance impeding investors, workers, and entrepreneurs in China, India, Europe, and South American (and, of course, in the U.S.).
A recent Book Forum at the Cato Institute featured the 2008 book “India: The Emerging Giant.” Both the author, Arvind Panagariya, and Cato commentator Swaminathan Aiyar, emphasized that India’s progress was in the face of India’s trademark government corruption, incompetence, and deeply interventionist regulations. Both speakers emphasized the good news for developing countries in the information age: if India can achieve sustained 7, 8 and 9% economic growth with its current government, well, any other poor country can too. More good news: the recent Indian government shake-up may bring more market reforms and partial privatization of Indian electricity, airlines, and other state-owned enterprises.
India prospers through expanded international trade and investment only as it creates wealth for its trading and investment partners. This means wealth is also created on the other side of those trades in the United States, Europe, China, and Japan. Over the coming years hundreds of millions more in India, as in China, will train and work hard to provide goods and services to Americans and Europeans and will purchase high-quality goods and services produced in America and Europe. And trade doesn't just expand. It deepens and grows more complex. Call center and software consulting teams intertwine advanced and entry-level services across continents, for example, and evolve unexpected divisions of labor and comparative advantages.
Indian government universities graduate 30,000 Indian engineers each year, but private colleges in India are graduating 400,000 engineers a year and expanding rapidly. “From 1990 to 2003 the number of engineering colleges alone [in India] rose from 337 to more than 1,200 (of which almost 1,000 are in the private sector)” –WENR
Informal private schools are also expanding rapidly across India, providing inexpensive and high quality private education for poor children—by far the largest work force in the world (one of ever four new workers in the world over the coming years will be in India). James Tooley’s research found over 300 “informal” unregulated private schools in just one slum area in part of the Old City in Hyderabad.
My first draft of this essay was written on July 15, and the day's headlines claimed a “plunge” of oil prices to $139 a barrel. This seemed a joke. A real plunge would take oil below $100 a barrel, which is still way high. Decades of federal government regulations restricting oil exploration and drilling, restricting the building of new refineries and new coal-fired and nuclear energy, have long restricted energy supplies in the US. And governments around the world mismanage monopoly oil exploration and development.
Price controls keep gasoline subsidized in many countries, so price increases don’t slow demand. Governments eventually allow prices to rise slightly and then have widespread protests. Government interventions overseas have turned citizens there into energy cripples, dependent upon the state, just as interventions in retirement savings here has turned most Americans into financial cripples, dependent on bankrupt Social Security and Medicare.
Government mismanagement of production in Mexico, Nigeria, Iran, Iraq, Venezuela, Libya and Russia limit incentives to boost oil production. People respond to incentives, and if those in government and with monopoly oil companies don’t benefit from expanded exploration, drilling, and production, they will instead focus their attention on activities that provide tangible personal gains.
Speculating on oil, food, and other commodity prices on the side has been one particularly enriching activity enjoyed by government officials in China, India, Indonesia, Africa, and South America. Just as Congressmen and Fannie Mae executives have taken advantage of “special” loans and donations, so local government officials around the world have tried their hand speculating with the commodity purchases they control. Chinese officials put in charge of making sure their district has enough iron and copper ore, diesel fuel, and rice, have purchased extra quantities to warehouse against possible shortages (they say) and price increases (they hope). Teapot Dome scandals may be waiting to be uncovered around the world. If governments are responsible for providing rice to “their” people, you can count on eventual rice shortages, along with ongoing spoilage, theft, and corruption. (See “Rice Hoarding Pressures Supplies" from May WSJ).
We can expect these public/private speculators to be wiped out as commodity prices crash on further fears that financial institutions and economies are faltering, and as new oil and natural gas supplies come to market. The silver lining in this financial cloud: governments faced with massive losses might be willing to strip government agencies of the power to play with commodity and finance fire. Maybe the U.S. government will give up backstopping home-loans as it faces absorbing a few trillion dollars in bad debts.
The great, great news is that people around the world will prosper, along with their financial institutions, as energy, food, and commodities move to more open markets directed by transparent and private firms. As governments get out of the way, supply-side and demand-side innovation and entrepreneurship will quickly boost production and drive commodity prices down, as free-markets have over the last few thousand years.
John Tierney, in another great article in Science Times. "The Future is Now? Pretty Soon, at Least", includes energy predictions from scientist Ray Kurzweil, "Solar power may look terribly uneconomical at the moment, but with the exponential progress being made in nanoengineering, Dr. Kurzweil calculates that it'll be cost-competitive with fossil fuels in just five years, and that within 20 years all our energy will come from clean sources."
We have heard similar predictions before, but now oil over $100 a barrel is deploying billions of smart investment dollars into both alternative energy and new oil exploration and drilling. Billions of dumb investment dollars are flowing too, with government subsidies and tax credits pushing wind power, ethanol, and other projects that distort markets and wasting scarce resources.
Solar and hydro power are another matter. Some solar installations spend millions to physically move solar panels to follow the sun across the sky. But new solar membranes will grab all solar radiation from all angles and wavelengths, transforming them to electricity. The race along dozens of separate solar technology pathways will decentralize and localize solar power. Just as computing innovations brought low-cost, high-power computers into the home (and five into my home), low-cost, high-efficiency solar technologies will feed better, cleaner power into home electronics and soon, into plug-in hybrids and all-electric cars.
Just five years? Well, five years for solar energy to be cost competitive. Another five to ten for wide distribution of local and home-based solar technologies and significant percentages of plug-in cars. I live in Seattle, and if the climate here keeps cooling, solar for us will be further in the future. (It snowed here last week!)
Bloomberg reports yet another large oil discovery in Brazil. With the Saudi's agreement to increase output, new output due soon from Iraq, and increases from many other sources, the question is whether deep and expensive oil from Brazil will come on-stream in time to sell at high prices. The answer may be yes, since expensive and sophisticated solar, hydro, and nuclear installations that will be widespread in the U.S., Japan, and Western Europe may stay out-of-reach for most of China, India, and Latin America.
But once the billions of dollars have been spent on deep sea drilling and build-out of infrastructure, well, these sunk costs will be twice sunk. Just as billions spent to build homes now empty, or billions spent earlier on fiber-optic cables long dark, this boom-time infrastructure can serve future consumers, if not current investors.
My short-term prediction is half-price oil within six months. I figure the current President or the next is likely to release Strategic Oil Reserves after announcing we have an extra supply, thanks to major foreign policy successes. The current President can claim stability in Iraq makes the world safer and less in need or extra-large U.S. oil reserves. The next President can claim that vast reserves of high-quality oil available free to the military would encourages foreign adventures. Plus pundits can claim the reserve was a plot by a President too-friendly with oil companies, to help his oil buddies. Whatever cover is offered, releasing a hundred million barrels would push prices down and make politicians popular. The strategy may be to wait until new drilling is approved in the U.S. and off-shore, before releasing reserves that in a few years, with higher domestic supplies, will seem as necessary.
As for hydro power, the key insight is that water is a lot heavier than air, and flows downhill all the time while wind blows only some of the time. Unfortunately, private property rights don't exist for U.S. rivers and streams. State and Federal government claim authority to mismanage these resources, so private firms are both unable to restore salmon runs and habitats, and unable to generate safe and clean power from fish-friendly, in-stream turbines.
HydroVolts, a "Micro-Hydropower" company, offers "Hydrokinetic Turbines" for generating energy from modest stream and irrigation flows (the only flows sometimes privately managed). The turbines float from anchors and generate power from river or tidal flows. A proposed 16 MW tidal power project for Tacoma Narrows was not approved, but the technology works well for smaller rivers and streams. Right now though, lack of property rights frustrate most efforts to deploy this technology.
At least with solar power, government are less able to regulate or block the sun (much to the the dismay of candle makers both in France and the U.S.).
For decades we listened to the squeal when radio stations ran mandated tests of the Emergency Broadcast System. And when there is a real local or national crisis, most TV and radio stations break in quickly to give us the details.
When the Strategic Petroleum Reserve was established by legislation in 1975, and began receiving oil in 1977, oil had recently risen from $2 a barrel to $12. In today's prices, oil rose from $9.68 a barrel in 1973 to $43 in 1977. This big jump followed an inflation-induced fall in real price over many years. Oil rose to an inflation-adjusted price of $104 in April 1980, following the turmoil of the Iranian Revolution.
The federal government had imposed prices control from 1971 to 1974, so the private sector had little incentive to stockpile oil against future supply disruptions. Oil storage firms would need to charge higher prices during disruptions to recover storage costs. But companies like Exxon were busy buying computer, office equipment, and other companies in part to shield themselves from threatened nationalization.
In any case, the strategic value of a petroleum reserve can be appreciated as oil prices fell in the 1990s. Oil from the Middle Eastern could be produced at prices below $10 a barrel, and these low prices led U.S. oil firms to dramatically cut back exploration and development. The fear that oil prices could be pushed back below $10 led U.S. oil firms to hold back on expensive exploration and development projects. Even as oil prices rose to $20, $30 and $40 a barrel, firms knew that cheap production from the Middle East could quickly drive prices back down.
Now however, oil prices are well above the $50-$70 a barrel cost for profitable oil production in dozens of major and hundreds of smaller operations around the world. These high prices are spurring major oil development and production in diverse on-shore and deep-water locations around the world, and dramatically reduce the need for a large strategic oil reserve.
Congress has passed legislation to halt additional oil purchases when current SPR contracts expire in July. The President could test the SPR emergency "oil cast" system by pumping out 100,000 to 1 million barrels a day through June. Why wait for a full-scale emergency to see if someone forgot to properly design or build some key pieces of the emergency system. Three of the four major SPR facilities are designed to draw down over one million barrels a day. But can they? Who knows.
An added benefit would be income the federal government could use to reduce federal debt and perhaps strengthen the dollar. And, as I suggested in an earlier post, the federal government could use this opportunity to establish a long-term oil futures market by selling, say, 100 million barrels of oil over the next few months and offering to purchase this oil back at, say, an inflation-adjusted price of $50 a barrel in five to ten years.
Another interesting consideration is that the recent rapid rise in gasoline prices has likely drained the nation's most effective strategic petroleum reserve–the one 100 million U.S. households have in their two automobile gas tanks. At high prices people run low on gas more often, and have less reserve in times of local crises. If other people's behavior is similar to mine, most have gas tanks at least half as full now as they have when prices are stable or dropping (this could be tested with data from recent average gas station purchases–far fewer people now fill up at the gas station).
So if 50 million barrels of oil from the SPR are returned to the private sector over the next few months, with each barrel providing 20 gallons of gasoline (plus other petroleum products like jet fuel), that one billion gallons could be nicely distributed across 200 million gas tanks providing an average cushion of 5 gallons for each American car. With lower prices, people are more likely to keep their own "strategic" reserve.
Turmoil in Nigeria adds to oil uncertainty, but behind the scenes the big oil question keeping prices up seems to be Ghawar. This one massive Saudi oil field produces five million barrels a day, 60% of Saudi production and 7% of world oil production (more than all U.S. wells combined, says the WSJ). Matt Simmons and other peak oil advocates claim this 20 by 175 mile field is in significant decline. The secretive Saudis won't say, but a recent Sanford Bernstein study cites satellite data to claim Ghawar is okay. "Junk science!" says Matt Simmons of the satellite data. Saudi mismanagement of Ghawar in the past–perhaps when oil prices were very low–may be causing severe problems today (NYT 2004 article). Many new wells are now being drilled, but with steeply higher prices, that is to be expected.
With so many oil "experts" issuing reports on oil development and production around the world, it is hard to tell whether new oil finds and production will over-balance declining production in old wells, turmoil in countries like Nigeria, and industrial and transportation expansion in China, India, Mexico, Brazil, and Eastern Europe.
Delta Airlines faced similar problems some years ago researching airline data on seat availability. How could Delta determine when competitors were selling lots of seat on particular routes? What data could they trust regarding ticket sales for future flights? The answer came from economist F.A. Hayek. Prices reveal information about supply and demand and a Delta executive well-versed in Hayek realized he could judge competitor's seat availability by watching changing prices. As ticket prices rose for a particular route and flight, that meant the seats were filling up.
Similarly, though oil experts don't have perfect or even partial data on the Ghawar field, recent rising prices might reveal the reality of serious problems. Saudi Aramco may be secretive regarding Saudi oil production, but hundreds of oil field workers and consultants have detailed information. It is unlikely that the best information about Ghawar will come from satellite observations 22,000 miles out when hundreds of oil field workers and petroleum engineers are right on top of Ghawar wrestling daily with production issues. Is there a pathway for their inside knowledge and information to reach oil market and influence prices?
The key problem, as a recent Forbes article ("Give Oil a Future") notes, is the lack of long-term futures market in oil. If major oil companies could lock in even $50 a barrel for oil over 20 years, they would pour funds into developing many more fields than are now active.
Perhaps the Strategic Petroleum Reserve could provide this service. The Federal government should privatize the reserve, selling up to 500 million barrels (leaving far more in the reserve than has ever drawn down in crises, according to recent NYT op-ed). Income from oil sales could be set aside to guarantee purchase of 500 million barrels at $50. That would allow companies to lock in that minimum price now.
Of course the Federal Government has a poor track record speculating in commodities. For example, in the 1980s, the the Dept. of Agriculture had millions of pounds of cheese stuffed in Kansas City area caves (an expensive Strategic Cheese Reserve). ["In the limestone caves and above-ground storage space of the Kansas City area is the largest single share of the nation's dairy surplus. According to the Department of Agriculture, the area stores about 25 percent of the country's 473 million pounds of surplus butter and about 20 percent of its 876 million pounds of surplus cheese." NYT, July 1983.]
[Forbes offers a nifty chart of nominal and real oil prices from 1868 to the present here. Of course the prices are misleading as they are not adjusted for true cost (hours of average labor per barrel), or for much increased automotive miles per gallon of gas/barrel of oil.]
So, is the high price of oil a distillation of hundreds of experts thousands of investors, and millions of consumers, or are market prices distorted by fear and wishful thinking? A problem is that everybody except one group enjoys high oil prices. Environmentalists cheer as people buy fewer SUVs and drive less. Urban transit folks like it as more ride their mismanaged mass transit. National Defense people welcome high prices that improve "energy security" by leading to billions invested in traditional and alternative energy production in the U.S. And the energy industry and energy investors are happy with higher prices and profits.
The only group not gaining are everyday consumers who pay more and have to cut back other expenses and adjust their travel plans to cope with high prices.
Increasing wealth around the world drives demand for particular products, and early speculators in those key goods can get rich. Western European wealth and population grew in the 1500s. Total population was up 50% over 100 years at the same time as average wealth rose 15%. Not impressive at all by today's standards, but major progress compared to earlier centuries. Demand for spices to flavor food and hide the odor in meat (and kill microbes), grew dramatically. Plus nutmeg was believed to help cure the plague and other grave diseases.
The book "Nathaniel's Nutmeg: The True and Incredible Adventures of the Spice Trader Who Changed the Course of History," tells the story of European merchants establishing direct trade with the Spice Islands–trade that had for centuries gone through India and the Middle East. English merchants in 1602 present a letter from Queen Elizabeth to Ala-uddin Shah, the powerful Sultan of Achin in Sumatra. After two pages of praise for Ala-uddin and attacks on Portuguese and Spanish pretensions, the Queen requests opportunities for commerce, writing: "Trade not only breeds intercourse and exchange of merchandise .. but also engenders love and friendship betwixt all men." (p. 88)
Trade may engender love and friendship, but competition among state trading monopolies tends to spill much blood first, sending sailors, soldiers, and merchants alike to their graves. The Dutch, with their superior capital markets, raised more money and sent fleets faster and larger to roust out the Portuguese and set up trade networks.
Nutmeg and other spices were valued pound for pound far more than gold in Europe, and nutmeg was the prize of the early spice trade, growing at first only on tiny Run island. After long battles between the British and Dutch, the Dutch gain control of Run island by treaty, in exchange for British control of New Amsterdam.
I am rereading too "Nutmeg of Consolation" and reflecting on the Aubrey's ruse to draw a French ship close in for battle. Edmund Scott, the British East India company's factor on the spice island of Bantam, had somewhat the opposite problem: "Scott soon realized that one of the main reasons why they faced the constant threat of violence was that the native Javanese were unable to distinguish between the English and Dutch. The Hollanders, who lived in Bantam in considerable numbers, paid scant regard to the sensitivities of the local population and thought nothing of staggering home through the streets of this staunchly Muslim town after a lengthy drinking bout. … The situation was made worse by the fact that some of the Dutch would pretend they were English if they thought it would be to their advantage when buying spices."
The English came up with the idea of staging an elaborate celebration for the anniversary of Queen Elizabeth I's coronation, dressing themselves up in white silk and scarves of red and white, to "make 'a flagge with the redde crosse thorow the middle." The fourteen English traders marched up and down the town streets attracting hundreds of curious Javanese. The locals asked why the other "English" were not celebrating, and were told they were Hollanders and had no King. "The day ended in triumph. As a constant stream of shot was fired in celebration from the English factory a procession of children wound through the street shouting "Oran Enggrees bayck, orak Hollanda jahad," which is "the Englishmen are good, the Hollanders are naught."
We hear today of securities markets seized up because investors can't tell reliable securities from dodgy ones. Maybe it is time for a major advertising campaign by British firms who can claim they answer to a higher authority, and another Queen Elizabeth.
April 14, 2008 | 9 Comments
It is true we can't predict if, when or how far oil prices will fall. But we can predict that vast investments will continue to flow into oil exploration and development.
The NYT recently ran a story on the huge Bakken Formation in North Dakota (but only page A19). This oil is spread widely along a deep and thin layer and can be recovered only with new horizontal drilling technologies. According to a recently released U.S. Geological Survey study, 3 to 4.3 billion barrels can be recovered with current technology. Higher prices and new drilling techniques raised proven reserves in this field way up from 151 million in 1995. A billion here, a billion there, and pretty soon we are talking about a real oil find.
Three billion barrels of oil "created" with new technology in just 10 years–and that's just in North Dakota and eastern Montana. Who says oil is a depletable resource? And who knows how much more oil might be discovered if most of the western U.S., Alaska, and off-shore were not federally-owned and off-limits for oil exploration.
Of course it will take time to build out the infrastructure to bring significant quantities of this oil to markets. And no doubt an array of special interests will line up to slow development and search for endangered North Dakota species (only nine animals and one plant listed so far).
Consider too that the Bakken field could lower prices today if the federal government had the good sense to choose North Dakota for a second Strategic Oil Reserve. The federal government could loosen oil supplies and push prices down today by stopping oil purchases for the current 700 million barrel reserve. And oil prices might be pushed down further–and the Federal Deficit reduced–by slowly drawing down today's reserve to, say, 500 million barrels, as a new North Dakota reserve were established.
The Federal government could contract with private firms to drill and cap a second 500 million barrel reserve in North Dakota, and expedite permits for infrastructure supporting the North Dakota reserve. And with a few billion barrels already "stored" in the ground in North Dakota, the federal government would not have to buy and ship it from Saudi Arabia to pour into expensive underground chambers in Texas, Louisiana, and Mississippi.
Current strategic reserves are located near major refineries so they are available if oil imports are cut. Allowing firms to build new Western and Midwestern refineries capable of handling North Dakota crude would further diversify U.S. supplies of refined product. State and federal governments need only get out of the way of private firms who have long tried to build new refineries and refining capacity.
If the New York T!mes tripled its subscription price, how many would immediately call-up to cancel? Most would probably wait until their subscription ran out and not renew. And many would start looking around for alternate sources of business, political, and entertainment news. The NYT itself would probably publish stories claiming economists' price "theories" don't apply to "needs" like reading the NYT, so the price change should have no impact.
So it has been with oil and gas prices. Prices jumped dramatically, and NYT reporters repeatedly claim consumers are not driving less and not switching to sanctified high-mileage cars. Sitting in their NYC offices and traveling on expense accounts tends to shield reporters from much of everyday life. In the real world, large-scale shifts are taking place on both the demand side and supply side, just as they did when oil prices jumped in the 1970s. Rental car lots quickly filled up with unrented SUVs and mini-vans, and after some months, car dealers have large unsold inventories SUVs and mini-vans. Real-estate prices have crashed the hardest in communities with long commutes to jobs, for example. As usual, the NYT didn't retract, correct, revise, or even comment on their earlier "high prices aren't reducing demand" stories.
Market-failure stories in the New York T!mes come in various flavors. There are the "high prices don't change consumer behavior" stories run whenever politicians and environmentalists are pushing for new taxes and regulations to make people "do what's right." And then there are the equally popular markets "overreacting" stories about corporate lust for profits leading to "over-investment" chaos that somehow hurts "the little guy."
Reporters regularly blame markets for overreacting (though often the culprit is an earlier intervention or regulation). Still, much can be accomplished by overreacting in life. Men propose marriage (an obvious overreaction). Others, temporarily frustrated at work, quit their jobs and regret it at first, but are later thankful. Are oil companies overreacting to high prices, throwing money at a dizzying array of energy projects? Shell claims to have fifty new projects in the works. Gas exploration firms are investing large amounts in British Colombia (after Alberta arbitrarily raised energy taxes). Brazilians are investing in new deep-sea projects. Of the thousands of energy exploration projects that looked promising at $50 a barrel, each now looks like a slam-dunk, and tens of thousands of new energy projects look promising at $75 a barrel.
And on the alternative energy side, we see a similar story. As coal prices and political threats against coal burning have risen, solar, hydro, wind, geo-thermal and other alternative energy projects become more attractive. New millions (or billions?) are being invested in improving solar cell technology, and deploying current technologies. And when better car batteries enable new electric and hybrid cars to recharge at home from the grid, or to "fill-up" with pre-charged batteries at gas/battery stations, demand for expensive gasoline will begin the big slide.
So how far will oil prices fall as these demand-side and supply side investments come on-stream? A lot depends upon the Saudis, as usual. Those who remember the 1970s, remember the abuse heaped upon Milton Friedman and other free-market economists who claimed that cartels always fall apart. The OPEC cartel of major oil producers, let by America's "friend," the Shah of Iran, seemed to hold together, restricting oil sales and keeping prices high. (The joke was that Milton Friedman had proven OPEC wasn't a cartel… because it hadn't fallen apart.)
But before long OPEC did fall apart for just the reasons economists predicted: the urge to cheat and reap outsized rewards is just too strong. Saudi expenditures rose quickly to absorb oil income, as the Saudis wasted billions growing wheat and building new cities in the desert. OPEC would meet and members would promise to keep to their quotas in the interest of all cartel members. Then they would return home and push to secretly expand production and sales as much as possible. If everyone else held back, each member would reason, they could boost output and make a killing at the higher prices.
Oil profits were a magnet that drew vast capital into oil exploration, and new discoveries in North Sea and other non-OPEC developments soon pumped new oil supplies into the market. Higher prices allowed the Saudis to expand their exploration and upgrade their equipment. Before long new non-OPEC supplies, combined with widespread OPEC cheating, flooded world markets and drove oil prices way, way down.
As many analysts have emphasized, it was these years of low prices that are at the root of today's high prices. Conflicts in Iraq and Nigeria, along with government confiscations in the USSR and Venezuela, have played a role, but the low prices that essentially bankrupted the Saudis in the late 1990s also stopped development and even maintenance in Saudi Arabia and around the world. The majors laid off tens of thousands and most merged and downsized into the Chevron-Texaco, Exxon-Mobil, Conoco-Phillips two-name firms we know today.
So now the Saudis have all the billions to expand supply that they could ever wish for. And so does Shell, Exxon, Chevron, Total, Petrobras, along with hundreds of private-sector exploration and development firms large and small. It is true that more major oil reserves are owned and mismanaged by corrupt governments now than in the 1970s. But the earth is a big and mostly unexplored place. High oil prices paired with high-tech exploration and development innovations will bring new supplies to market, maybe just as alternative energy innovations take hold to lower energy use.
If so, the New York T!mes will have yet another opportunity to complain of markets "overreacting" to lower oil demand and boost oil supplies "too fast." Only government taxes and regulations, the NYT will argue (again), will be able to save billions of dollars invested in nifty green energy.
I have been thinking a lot about hands, wrists, and markets over the last three weeks. The miracle flexibility and dexterity in human hands gave our distant ancestors unmatched power over the birds and beasts. Any that early humans could not reach to club could soon be speared, hooked, or hit with arrows.
Man's hands pushed his mind forward, as any and every natural object was lifted to our gaze, rotated, pondered, and then chipped, chopped, or shaped to something useful, or else discarded. The term "dexterity" originated in the 16th Century as a "mental adroitness." Do our minds direct our hands, or do our questing hands draw our minds forward?
Launching the industrial era were modern securities that allowed investors to lift, examine, and reach in to finance an endless array of early enterprises. Enterprises could be freed from the arbitrary control of single minds, who by accident or past achievement gained dominion over productive resources. Just as yesterday's costs are today sunk, so yesterday's management has value only in looking forward. The powerful — eventually weakened from pride, sloth, age, or just error — could be separated from suffering assets. Financial capital could flow to fund brilliant but poor or outcast entrepreneurs. And when successful businessmen lost their edge, management control could be quickly shifted to new leaders.
Marketable securities gave investors flexibility and liquidity to diversify and to shift their assets among productive enterprises smoothly without disrupting the enterprises themselves.
But with the wondrous flexibility of our complex wrists and fingers comes fragility. Our knees and ankles are far less flexible joints, but can bear and launch into the air the full weight of our bodies, something I learned three weeks ago that our wrists cannot manage.
We have seen over the last few months an expected fragility in securities markets. As we search among possible causes, one seems to be a mixing of two very separate sets of games and players.
Over centuries and especially the last few decades, the securities market evolved ever more complex capabilities to deliver capital to productive enterprises. Booms and busts erupted from time to time, usually as governments changed rules, expanded money supplies, or defaulted on debts. But my thought is that though securities markets have long developed financial instruments to diversify investments in stocks and bonds, real estate-based securities were an innovation whose different nature was not fully appreciated.
Real estate assets and debts have turned out to be beasts not so easily tamed by securities and diversification. Maybe real estate play is somehow more of a brute-force game. The houses and office buildings are fashioned from the earth and there they stand for decades, their value dependent upon outside demand. The value in homes and buildings is a more inert thing, and a building will never astonish the world with a new microprocessor, search engine, jet engine, or miracle drug. Value can evaporate as fast or faster from productive enterprises, of course, and I don't suggest home mortgage debt is somehow bad while corporate debt is better. But a business is an ongoing creative enterprise that can reward investors in ways homes and office buildings cannot. All assets can as easily drop in value as rise, but not all assets though can give birth to new assets (Apple unexpectedly created iPods for example, and Microsoft created Xboxes).
So when government regulators severely limited the U.S. securities industry and sent IPOs overseas, U.S. firms vastly expanded securities derived from beastly real estate.
Securities from the somehow brute-force real estate industry flowed into the ultra-sophisticated world of modern investment and hedge funds. The mortgages (literally, from Old French: 'dead pledges') were dressed like financial securities but their nature was subtly different. They played a different game, and when push came to shove, fragile securities firms hit the wall.
So it was for me, three weeks ago this evening. I was invited to play an evening game in a 30-and-over basketball league. The opposing team wore basketball uniforms, but played rough. I scored well in the first half, but early in the second half set a screen and was pushed hard from behind. Then I was shoved again, as if I was being blocked, and was launched forward. I hit the wall hard and broke both wrists. I had surgery on both a week later. And since then I have had plenty of time to contemplate the fragility of hands, wrists, and markets.
Tech stocks are always a wonder. We wonder which few new tech firms will explode onto the scene reaping billions in future sales. The net benefits of injecting thousands of significant new improvements into the world economy each year in enormous. New technologies and innovation are more than enough to strengthen the sinews of market economies that each year must carry heavier burdens of parasitic taxes, predatory litigation, and monopolistic regulation.
These new technologies don't roll out on cue from government research labs. Though billions are spent each year by governments chasing politically-correct technologies, little fruit emerges from this politicized spending. Half a billion will be "invested" this year in West Virginia, thanks to earmarks from Senator Byrd. (Federal research labs and other such projects are called "Byrd-droppings" by West Virginians.) The World Health Organization is now complaining that its political funding is overmatched by malaria research funded by the private Gates Foundation. Who would you rather trust malaria research to, a team assembled by Bill Gates, or the United Nations?
Next year's national high school debate topic calls for the federal government to expand alternative energy use. Now that the billions poured into ethanol mandates, regulations and subsidies have been show to be wasted (recently published studies in Science magazine), the federal government can cast around for nifty new ideas that will help them win votes, win the Iowa caucuses, generate special interest donations, and…. have at least the potential to generate tax-funded alternative energy. But real progress with alternative energy will follow a very different path.
The history of technology and innovation is fascinating. There are endless examples of technology breakthroughs coming from unexpected sources. I was reminded of this while watching an episode of The Sarah Conner Chronicles. Like most guys, I have been a Terminator fan since the first movie. The first Terminator was a huge success for some of the same reasons technology advances come from unexpected places. Big corporate, university, and government research labs have money to hire the leading researchers in any field, buy the best equipment, and pour money into the most promising theories and technologies.
But tomorrow's leading researchers and technologies, like tomorrow's leading actors and directors, are mostly scrappy unknowns today, and they push the envelope chasing new and less popular theories, technologies (and scripts). The first terminator used mostly unknown actors. Before Terminator in 1984, Arnold had starred in Conan, Stay Hungry and Hercules in New York–but mostly he was a former Mr. Universe learning to act. What better role than a futuristic robot? Terminator lacked a big-budget for special effects, so it relied instead on path-breaking creativity and innovation. The $6.5 million production budget didn't even allow for filming in stereo, for example. But the film was a huge success. Human creativity always trumps big budgets in movies as well as research labs. The most recent Terminator movie had a $170 million budget and the next (Terminator Salvation) has a budget "in excess of $185 million." Sequels are usually stale for similar reasons heavily-funded research labs headed by leading scientists are usually stale. They are sequels too, attracting funding only because earlier innovative research work was a success. This was the theme of an earlier Schwarzenegger movie, "Stay Hungry."
A key technology breakthrough from an underfunded and unknown researcher can be seen in the new Terminator series, The Sarah Conner Chronicles. (Interestingly, the robot in the series, Summer Glau, who was in the great Firefly series, also is said to lack certain acting skills). In the new series, Summer Glau is the "good" robot from the future and has eyes that shine blue in the dark. The older model Terminators from the future (Arnold Schwarzenegger in the movies) had eyes that shine red. The future, looking ahead from 1984, did not include the then-impossible blue Light Emitting Diodes (LEDs).
When the first Terminator movie was made in 1984, the blue LED had not been invented. The top electronics companies and research scientists in the world spent tens of millions trying to develop a blue LED. But they could only figure out how to make green and red ones (and without blue, no while-light LEDs could be produced).
Then Shuji Nakamura, a scientist in Japan, not even with a major company, but an unknown working in a small lab away from major research centers, figured out how to make blue LEDs. The Japanese government, with it's reputation for funding new technologies, failed to find Dr. Nakamura. Working alone, he tried materials that top researchers never dreamed could work. (Read more in "Dream of the Blue Laser Diode"). This story is more the rule than the exception in technology, and has been far more common than progress from government-funded research. John Jewkes' study of twentieth century technology breakthroughs reports on the ways and reasons that private-sector interdisciplinary research so often yields major technology advances (see his essay: "The Sources of Invention", a short summary of his book of the same title).
New advances in alternative energy will come from similarly unexpected sources: from researchers, tinkerers, and investors far out of the mainstream. The challenge for investors is to separate the charlatans and crackpots from inspired and visionary inventors. I often recommend to students they look at a picture of Albert Einstein. We know him to be a genius. But if you didn't know him, he looks more like a crackpot.
Reading the papers over the last few weeks, it is weird how thrilled financial reporters seem to be at the idea of a major recession. Maybe the excitement is just that a bone-jarring recession is so rare. Like a volcano exploding after a long dormancy, it is big, big news. Most reporters were taught in college to expect market failures and fragile markets jolting everyday folks with greed-fueled mergers, takeovers, downsizing, and spectacular corporate frauds and flameouts. Instead, by and large, the American economy has powered ahead for a couple decades creating millions of new jobs and trillions in new wealth.
Twenty years ago recession fears were more justified. But modern recessions may be a far different and less dangerous animal. (The stock market drop may more reflect the reasonable fear that hapless politicians will overreact to a short recession with a wide range of monetary mischief and fiscal pork spending.)
Across developed economies, manufacturing coordination depended on months and years of lead time. Factories carried vast inventories of parts and raw materials. When demand for cars, houses, machines, or clothes dropped unexpectedly, sunk inventory costs had to be written off. Unions ruled, and when labor demand fell, wages were fixed and payrolls hard to reduce.
But the dot.com boom that brought the dot.com bust and the housing boom that brought the housing bust are much, much smaller distortions than the inflation and price and wage controls that distorted the U.S. economy in the 1970s. Prices carry vast flows on information driving adjustments and innovations. Price controls stop all that, whether in Zimbabwe today or the U.S. (Nixon's 1971-74 wage and price controls). So for a few years the economy ran blind, facing backwards and using past prices to guess the way ahead.
The very good news for investors today is that the hint of recession may blast the latest speculative boom in commodities. Novice day-traders that brought foolish bets and blew air into the last years of the dot.com bubble, moved after the crash into leveraged real estate investments, and those that survived that debacle are now in oil, minerals, and gold. I don't claim to know how much of the recent boom in these materials is driven by inflation and how much is speculative. But the third factor for the boom in oil, coal, and other minerals is the long fall in prices of the 1990s. As many others have noted, much of today's oil high prices are a consequence of the very low oil prices of the early 1990s. Major oil companies dramatically cut back exploration and sacked thousands of workers. New oil exploration was not profitable at $15 a barrel oil, and industry had nifty new exploration technology based on every cheaper computer processing power. Oil industry executive imagined they coast to new oil discoveries and scaled by expensive exploration.
But on the demand side, billions of people in China, India and Eastern Europe gained economic freedom and prospered far faster than economists expected, pushing energy demands up faster. And on the supply side, government interventions hampered new exploration and investment in Russia, the Stans, Africa, Indonesia, and Latin America. Suddenly, not only had investment in new exploration and technology been scaled way back by low prices, but the vast barely-explored territories expected to be available for current technology, was again buried in murky red tape and corruption.
High energy prices, however, bring new minds to both the supply side and demand side of energy. We have today a vast array of massive investments in energy production, both new and old. Government regulations and subsidies are of course wasting billions on the wrong technologies (like corn-based ethanol, wind, solar, and hydrogen power), but high prices are pushing energy production and raw materials expansion like never before.
Dozens then hundreds of huge new oil, gas, coal, and mineral production operations will come on stream in the coming months and years. A hint of economic slowdown now may shake out overly-leveraged resource speculators and drop prices significantly. But once the tens of billions of dollars have been invested in new infrastructure in Australia, Brazil, Africa, and the Middle East, these resources will flow to markets based on marginal costs, so price drops won't slow the flow.
So, for the U.S. economy the news is good. Energy and resource prices will fall. And these prices aren't even considered much of a problem in today's economy. Reporters have no idea how fast today's firms can adapt to shifting demands for their products. (They are learning, though, how media firms respond to dropping circulation and advertising, and the public's reduced demand for distorted print media stories.)
Modern service and manufacturing industries no longer depend on extensive parts inventories and cumbersome long-term supply contracts, so production can be slowed at much lower cost. Suppliers have the same flexible and just-in-time relationships with their suppliers, who can shift production and throttle back with much less disruption.
For transportation, instead of the heavily regulated trucking industry of the 1970s and 1980s, America today has hundreds of fast-evolving trucking and logistics firms. And hundreds of companies now rely on Penske and other truck-leasing firms for a significant part of their distribution, so they can reconfigure or downsize cheaply.
Booms are disruptive and slow-downs are healing. Boom times are when money too easily made flow to careless investments colored by vain optimism. The easy-money and bubble mentality throws money at many ventures that maybe might work, but always drawing human and material resources from less exciting but more proven ventures.
We see this in Silicon Valley today. The smartest and best-positioned people in the world are spending their lives and fortunes to address the non-problem of CO2 emissions. The newspapers and magazines are all aglow with news of the super-cool electric sports cars and alternative energy projects where high-tech venture capital and venture capitalists are pouring their money and time. What is the opportunity cost of having folks like Al Gore shaping technology investments? Well, what are they not doing and funding? A billion people in India are mostly impoverished, and the richest Indian in Silicon Valley spends his time and money on wind and solar power projects for America. Where is his real expertise? (At least Bill Gates has the good sense of focusing his philanthropic efforts on what is actually killing people in the developing world.) Will the Google's leadership in search engine suffer from endless Google alternative-energy projects?
The Great Eye of the Market is a fusion of millions of minds focused on specific tasks. The Great Eye today searches all aspects of natural resource markets. Every undiscovered underwater drop of oil and underground lump of coal is being searched for by the largest pool of capital and array of technology in the history of the world. As powers greater than the greatest armies of the past wrestle with these challenges, millions more around the world search of ways to save energy, invent new energy, and find substitutes for expensive minerals. The fruit of the massive worldwide search will come to market over the next decade, no matter how far oil and mineral prices over the next decade.
The Great Eye of the Market is a vast collective force, but driven by free thinking individuals set on finding and funding new innovations. As millions around the world turn their manic energy to finding and developing energy sources, energy technologies, energy innovations, they push the energy and natural resource envelop, and some few will no doubt uncover dramatically disruptive undreamt-of discoveries. Markets may overreact, but in the process they push billions of dollars and focus millions of minds at making a better world.
At our Economic Thinking workshops for students, we often show a segment from John Stossel's great ABC News Special "Is America #1?". Stossel contrasts life and economics freedom in India, America, and Hong Kong. He shows the crippling consequences of economic regulation in India as the Permit Raj debated the merits of various businesses, denying many and delaying all.
The great news in the years since that ABC special was taped is millions of Indians experiencing economic opportunities they never dreamed would be possible. There is still plenty of poverty in India, but the progress is new, to say the least, for a society that seemed adjusted to centuries of stagnation.
Still, nearly 3/4 of India's population still lives in deep poverty (real international poverty, not trailer park/used car/cable TV American poverty). And with 1/3 of India's population under age 15, a recent Wall Street Journal article notes nearly 1/4 of the increase in the entire world's working age population will be in India.
The very good news is that planting rice by hand and guiding plows behind oxen won't be the preferred job titles for this 1/4 of the world's workers as the enter the workforce. As in China, millions are migrating to cities to take jobs with new firms.
Maybe the Indian stock market is overvalued today, but its rapid appreciation is a magnet drawing capital flows from around the world. How much capital is too much for hundreds of millions who, whenever they manage to escape India, prosper in whatever country they escape to? As economist Julian Simon argued, people are the ultimate resource. The caste system long enabled Indians to survive (well many of them, anyway) without much capital. People expected to live as their parents had and expected their children to share the same fate.
Now however, the optimism that comes with economic freedom is filtering out to impoverished Indians both in the cities and in rural areas. A great Wall Street Journal article (Nov. 28, page 1), "India's Surging Economy Lifts Hopes and Ambitions: Socialism and Castes Begin to Give Way," relates some of these hopeful stories: "My son would have followed in my footsteps 10 years ago," says an Indian worker earning $5 a day at the same job his father had. Now he says "I want [my children] to go into business, get educated, get a respected profession, learn computers, and earn for themselves."
America's modest openness to Indian emigrants over the last decade or two has allowed thousands to work and learn here and earn good livings. Now thousands (or tens of thousands?) are returning to India from America and Europe with skills, networks, and capital.
"There has been a psychological breakthrough" according to the Indian Council of Social Science Research. "Substantial sections of the Indian population believe that they are as good as anybody." (Of course America public school students are taught similar rubbish as they score low on all manner of tests. People are as good as they make themselves through their own effort and ingenuity. But in rural India, as in inner city America, few have opportunities to learn economic principles or free-enterprise first hand.)
Hundreds of millions of everyday Indians will get a taste of economic freedom in the coming years, and will have access to capital to multiply their productivity. No economist knows what returns on capital to expect from investments in India. But as in China, a sizable slice of the world's population is beginning to catch up with the developed world.
Years ago economist Michael Cox described the process: imagine four men in a dense jungle and only one has a machete. Clearly this capital equipment allows that one to cut a path faster out of the jungle. The vast capital generated by market-based economies in Europe, America, and more recently Japan, have generated tools to cut our way out of poverty. Cox continues the analogy though, noting that when the others find the trail, they can run even faster.
The late Milton Friedman, in "Is America #1?", expressed his amazement that Hong Kong, in just over fifty years, managed to race ahead of the United Kingdom with its centuries of industry and capital accumulation. By 2006, Hong Kong's per capita GDP has risen to over $37,000. How was this accomplished? Friedman concludes: "Economic freedom, absolutely, economic freedom."
November 29, 2007 | 3 Comments
You might not think manhole covers float, but they do. As readers of a recent New York Times story learned, they float to New York City all the way from India ("New York Manhole Covers, Forged Barefoot and Sweaty in India," Nov. 26, p. A1). Every other Nov. 26 front page story was about play (college football) and foolishness (politics). But this one story was about hard work "eight thousand miles from Manhattan." Without much capital, Indian workers without shoes carry and pour molten iron by hand. It is a story of early capitalism but set in 2007 instead of 1857 or 1907. Why only now? India missed the boat when it blocked innovations and capital investment nearly a century ago.
Virginia Postrel's excellent 2001 New York Times article "Wealth Depends on How Open Nations Are to Trade" cites an MIT Press book "Barriers to Riches"  by Parente and Prescott . Postrel quotes from the book: "poor countries are poor because some groups are benefiting by the status quo," and those groups use the law to block change. India has a long history of this. In the early 20th century, strikes kept Indian textile mills from increasing the number of looms each worker operated, and the government protected the old ways through steep tariffs on foreign textiles. As a result, from 1920 to 1938 textile productivity rose by only a third as much in India as it did in Japan, which was beginning its climb to prosperity." Established French textile firms similarly blocked advances and innovations by competitors a century earlier.
Government regulations in India blocked capital from iron foundries as well as textile mills. Jobs were saved, but not the sort of jobs that should have survived to the 21st Century. Even without enough capital, iron from India is competitive with U.S. foundries. India might seem a long way from New York City, but for manhole covers it is probably closer than Pennsylvania. Transportation costs are key to costs for heavy and inexpensive goods like manhole covers. Wikipedia says manhole covers weigh more than 100 pounds. Whether cast in India or Pittsburgh they have to be shipped (or "railed"?) to New York City. Going by ship has always been less expensive than over land. Railroads with their overland rivers of steel closed the difference (but dense railroad regulations widened it again). England, Western Europe, and America benefited greatly from cheap transport along plentiful rivers and ports connecting cities, compared to expensive overland transit in Eastern Europe, China, India, and Africa.
Shipping is cheap from India but capital is still in short supply. Iron foundries in India need capital to boost productivity (and, at the least, to buy shoes for workers). What rivers or rails will direct capital flows to India? Well, foreign aid and the World Bank is one tried and false route. Hundreds of millions have flowed to various projects over the years. One bright-idea from development economists was a large recycling plant for India. Millions were spend importing the high-tech recycling equipment, but India lacked enough junk to keep it running. With armies of underemployed workers sifting through waste for anything valuable, not enough valuable waste was left to feed the imported recycling plant. Another failed aid project added to the one (or two?) trillion plus dollars wasted (so far) on foreign aid.
Stock markets are different than foreign aid projects. With private stock markets, firms announce to investors their plans and offer shares of the profits to investors. A stock offering for a recycling plant for India would not have attracted many investors who knew anything about reality in India. But an iron foundry making manhole covers for New York City might. Though the average investor will have trouble discerning opportunity from fraud in faraway India, Eastern Europe, or Latin America, my friends Stefan, Simona, Ana, and Verena, from Sri Lanka, Romania, Moldova, and Argentina, along with thousands of other emerging market advisors, can help investors evaluate opportunities overseas. Young men and women from Ukraine, Romania, Kenya, Moldova, Argentina, and dozen other countries work for Morgan Stanley, T. Rowe Price, Credit Suisse, Fortis, and other investment banks and fast-growing emerging market funds.
In a sense, stocks are smarter than commodities and bonds. Stocks don't know the future and are not bound by the past. They are free to grow unbound, remaking the world sector by sector. Money is invested in an idea with no outer limit. Returns are not fixed at inception, they grow with the dreams of free men and women. Diversified portfolios can fund a range of new ideas with only few needing to succeed.. My cousin in Seattle was invited to invest $50,000 in his best friend's sister's boyfriend's new company. Who could know what the upside might be? He invested in silver instead. (Bill G.–his best friend's sister's then boyfriend– found other investors). Silver and gold might rise in value, or might fall, and as insurance they have a place in any portfolio. But neither gold, silver or bonds are ever likely to awake one morning with dreams of Windows, Excel, iPods, or iPhones.
The power of open-ended inspiration is shown in a nice WSJ piece (Nov. 28, p. D1) that compares stocks and bonds over the last 80+ years. I don't know if the 1925 start date biases the findings, but one million dollars invested in bonds in 1925 would yield an annual interest income of $48,000 a year today vs. $33,000 in 1926. Inflation, sadly, drops the purchasing power of today's income to "less than a tenth of spending power of $1 in 1926." That same one million invested in "large-company stocks" [journalistic shorthand for S&P 500 type stocks] would have done better, a lot better. "[Y]our $1 million would have ballooned to $111 million over 81 years–and your income would have jumped from $54,000 in 1926 to almost $2 million in 2006." Not bad. Stock gains shouldn't be expected every year though. Average stock prices fell in 15 of the years from 1925 to 2006, but prices rose in the other 65 years.
Why have long-term returns from stocks been so much higher than returns from bonds and commodities? Well, look at the picture accompanying the NYT manhole cover article. In the center is a man carrying a pot of molten iron glowing just inches from his fast moving bare feet. He, and the men in front and behind are thinking beings. Each day as they work (or at home, after they have recovered), some search for ways to improve their lives. Workers and managers search for productivity gains. When free to pursue opportunities they will move to better jobs, or find ways to boost production at their current firms. But without capital from savings somewhere, there is limited scope for their dreams and ideas to take hold.
As trade and investment restrictions have fallen in recent decades, capital can again cross borders. To China, India, Africa, Eastern Europe, and Latin America, fast-growing investment firms are opening the gates to capital flows from rich western investors to capital-starved millions in the developing world.
"Give me a fulcrum," Archimedes is reported to have said, "and a place to stand–and I will move the world." The place to stand is in India, or China, or Latin America, or Africa. And the fulcrum is capital from stock markets and investors around the world.
November 26, 2007 | 5 Comments
Crises sell newspapers, so the press is eager to find them. Here is my "translation" of a recent Associated Press disaster article :
Saturday November 24, 12:02 am ET
AP headline: "New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario"
Reality: New Wave of Mortgage Failures Have Created a Nightmare Economic Reporting Opportunity
AP reports: "…some experts say [the crisis] could spread from those already battered banks into the general economy. … The worst-case scenario is anyone's guess, but some believe it could become very bad."
Reality: Of course the "worse-case scenario" won't actually be "anyone's guess" but "AP's guess" because the AP will only report guesses that ominously predict vast economic disasters (and then call for government intervention).
AP reports: "We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times [well, he seems to be? -GR]– but, as an expert on the global credit crisis, he speaks with authority. … "Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."
Reality: The Depression wasn't a "downturn" nor caused by a downturn. It was a depression caused by a series of government interventions in the economy. Lawrence Reed's essay "Great Myths of the Great Depression" nicely outlines the Great Depression's various phases. The stock market downturn would not have led to a long term depression without government intervention. Maybe that is what Mr. Gross of PIMCO expects from Congress as it tries to jump into markets to keep them from clearing, or to invalidate loans and other contracts. Mr. Gross warns of the downturn's "effect on future lending attitudes" as a problem. But is was past "lending attitudes" that were the problem (the attitude, for example, of not bothering to check a borrower's ability to make monthly payments). If people have less equity to extract from their homes to buy stuff, they will indeed spend less and probably purchase a different mix of goods and services. Prices, markets, and the economy will adjust. Of course, until the downturn not a week went by without the media complaining that people were buying and consuming too much anyway. Where are the experts the media used to quote who informed us that America's consumer society was bad, bad, bad, and people shouldn't buy so much stuff?
AP reports: "Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy. … The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots such as California, Nevada and Florida."
Reality: If this "crisis" pushes housing prices down and way down, how does that make housing less affordable? Will the banks dismantle repossessed housing, or put it back on the market at lower prices? Will people forced out of homes they couldn't afford stay out on the street, or rent apartments, or move into smaller homes, or maybe move into the same homes once they are 40% less expensive? What other solution is there for "once-hot real estate spots" where housing mania pushed prices rapidly up 40% or more? It was the boom that created the mess. The bust is just the needed clean-up process.
AP reports: "Based on historical models, zero growth in the U.S. gross domestic product would take the current unemployment rate to 6.4 percent. That would wipe out about 3 million jobs from the economy, according to the Washington-based Economic Policy Institute."
Reality: Would it be better for these 3 million people to continue building houses and other goods, and providing services that people don't want or can't afford? Again, the problem was the bubble that led to manic overproduction and over-pricing of housing in some markets.
Millions gambled that housing prices would keep rising, allowing them to quickly gain equity and refinance at lower interest rates. The vast majority of new home-buyers over the last five-ten years won this gamble, gained equity, refinanced, and now live happily in homes they would otherwise have not been able to afford. But some came too late to this particular party, especially in some overheated housing markets. And others, confused by good fortune with early housing purchases, bought more homes hoping to make a killing, or at least to retire early. They may instead retire late.
AP reports: "Many Americans are unaware that a borrower defaulting on a loan can have an impact on everyone else's well-being and that of the nation. After all, the amount of mortgages due to reset is just a fraction of the United States' $14 trillion economy."
Reality: Many Americans are unaware of a lot of things. Unfortunately, they are likely to be even less aware after reading AP scare stories like this one.
October 31, 2007 | 5 Comments
When tech stocks were rising fast and drawing in numerous active but inexperienced investors, two problems arose. First, most had experience only with rising stocks so thought of each leveling off or dip as the market "catching its breath" for the next climb. As new investors experienced gains and experimented with leverage, they realized how much more they could have made had they leveraged earlier investments. And seeing their portfolio gained most with tech stocks, they poured even more into stocks in order to make even more.
For most though, it was much less clear how to "invest" in falling stocks, or how to leverage such bets. To what extent did this asymmetry about speculation contribute to the unfortunate final year or so of the dot.com boom? This is not so much a question of optimists vs pessimists, but one of rates of growth. Even optimists prefer stock prices not rise faster than reasonable present values of future returns. So tech stocks finally crashed wiping out many who just wanted to invest in the future and hadn't thought market valuations could be so far off (Sun Microsystems stock dropping 90%, for example).
Next came the housing crunch. Baby-boomers burned by the dot.com crash turned to "safer" investments in housing. Tens or hundreds of thousands purchased larger homes or a second or third home, using modest down payments for easy leverage. I thought housing prices were way high when I moved to Seattle in 2003, so I chose to rent. But prices went way higher, and anyone then speculating in housing doubled and tripled their money. But it is much easier to buy five or ten houses as investments or speculation than it is to sell five or ten houses on speculation. So again the asymmetry pushed prices up. People who felt housing prices were too high could sell houses they owned, but could not easily sell houses they did not own.
Now, as housing prices stagnate and drop, investors and speculators will lose much, though homeowners will lose only the imaginary valuations of the last few years. Those burned but not educated by tech stocks and housing, are looking for another "hot" investment. How many have turned to energy stocks and oil?
Again, for new investors, it seems like oil prices can only go up, and stabilize just to catch their breath on the inexorable march to 100 dollars a barrel and beyond. Environmental investors are on board too, and perhaps think of their oil and energy bets as helping "save the Earth" as well as sticking it to SUV owners (not to mention the hope of making big bucks for themselves, of which they silently pledge to donate a portion to eco-charities).
Many of course expect oil prices to fall, especially at some future point when the U.S. government stops threatening to bomb or invade major oil-producing countries. But still, the oil skeptics are overwhelmed by the legions of newby investor-speculators betting on higher and higher oil prices.
Apart from the media misinformation on oil scarcity and peak oil, is there an asymmetry with investment tools for oil that tilts oil investments toward prices increases, as seemed to be the case with housing and tech stocks? Or is it just as easy for the average investor to bet on oil prices falling as it is on rising prices?
September 14, 2007 | Leave a Comment
It is debate season and high school debate students nationwide are researching and debating public health aid to Sub-Saharan Africa. I write articles and give talks on the economics of each year's debate topics, and on Tuesday spoke to some 500 students and teachers at the Kansas State Fair. I was providing economic comments after a series of demonstration debates.
Debaters on the negative in one round ran a off-topic China DA, that is, a China Disadvantage. They argued that the affirmative's plan for Africa would cost billions and those extra billions added to the current deficit would push the U.S. economy over a cliff. The "brink" would be that the extra debt would cause China to sell its holdings of US debt which would wreck the U.S. economy and lead directly to global thermonuclear war.
The strategy for debaters is to link the affirmative's plan with unintended consequences so terrible that the judge should vote negative just to be safe.
I commented mostly on other issues covered in the debate, but spoke briefly on the China DA. Thousands of top high school students attend debate camps each summer, and they all learn market-failure arguments, so if any Daily Speculations readers have responses to the ongoing "China could destroy the U.S. economy" fears please add your comments. I will promote them to the high school speech and debate community.
Here is what I said: Could China destroy the U.S. economy by selling all or most of its U.S. debt holdings? No. The Chinese government can try to sell large quantities of U.S. Treasury bonds, but who would buy them? If the Chinese government tries to sell too many, "dumping" them on the bond market, the price of these bonds would likely fall. The cheaper the bonds are to purchase, the higher their effective yield, so the more attractive they become. These are bonds already issued and each provides a fixed interest rate that the U.S. government has promised to pay over the life of the bond. The Chinese government has already purchased these bonds. When they are sold on secondary markets that doesn't change U.S. government obligations.
Natural market processes dampens erratic moves in markets. When investors are spooked for some reason (say, for example, by negative reporting by journalists and bears seeped in market-failure ideas in college), and the price of stocks falls, the further bond prices are pushed down, the more attractive the stocks look to other investors. Dividends look more attractive when stocks are cheaper and lower stock prices don't directly hurt company earnings, so investors are drawn to the stock to capture dividends or expected future appreciation or both.
When bond markets are spooked and scared investors sell bonds, prices similarly fall and effective interest rates paid rise. Again, if the Chinese or Japanese (who hold more U.S. debt than the Chinese according to the U.S. Treasury), sold large amounts this could indeed start a brief "panic". But what "panic" selling means to the media is not what it means to the market. Even small dips in bond prices and small upticks in yields are big news. The idea that a U.S. bond-selling contagion could grip the world and push prices down dramatically is like pushing an object toward the speed of light, it takes dramatically more energy as you get close to limits, and infinite energy to push bond prices to zero.
And the worst case scenario: interest rates for U.S. Treasuries rise significantly. That makes it more expensive for the U.S. to issue new debt, that is, harder for the U.S. government to borrow more money to waste on building bridges to nowhere and thousands of other pork-barrel earmarks. Higher interest rates would encourage the U.S. government to spend less and borrow less. And that would not be a bad thing.
So, these are were my general comments on the "China DA." If Daily Speculations readers and writers have further comments, observations, and insights that might help students better understand financial markets, please post them.
There is a higher purpose in every substantial market move. The higher purpose of the recent moves in stocks, the largest weekly decline in a week in five years, includes getting the Fed to reduce interest rates, reducing the rate on mortgages, which are now back to year-end levels, providing the opportunity to show that there is grave concern for the small person, the chance to move the dollar lower, and the clearing of the brush and canopy so that the sun can shine through and growth can be even more vigorous in the future.
The February 27th decline accomplished it in one day. This time it took two weeks, and 750 Dow points. Without making a prediction for the future, let us all stand back and applaud the beauty of this grand scheme.
Hany Saad comments:
And here I thought the decline of 300+ of the 26th was to give the shorts, who were at the point of throwing in the towel after the magnificent rise, some hope to feed the system the little change they have left in their pockets. But Friday’s decline was more interesting. It is the clever mistress's way to console the shorts and lead them to believe that this time it's different from the other declines when the market retraced the down move with a following up day of similar magnitude.
I was lucky enough to be out of markets, albeit not short, these two days. But I can clearly see the luck changing with a long position in case of a down Monday open.
Greg Rehmke adds:
For the New York Times, last week’s downturn shifted liquidity stories dramatically. For weeks the stories have all complained about too much liquidity flooding into every conceivable scheme to enrich hedge funds and investment firms taking companies private or bringing them public–each reported as a bad idea hurting workers, damaging small investors, and weakening businesses to enrich financial manipulators.
Now the bad news is all of vanished liquidity. All sorts of reasonable business ventures suddenly and ominously can’t secure funding. Story after story fill the business pages and NPR interviews. The porridge was too hot, and now it is too cold! Newspaper reporters seem to suspect evil intent whenever markets change, as they do whenever climates change. A tornado is a natural though violent event, transporting energy and serving a higher climate purpose. Maybe occasional market "tornadoes" are similarly necessary.
One of the few pleasures I have in old age is traveling by automobile. We have journeyed around more than half of America, highways and byways.
We arrived at Lake Chelan without a reservation and stopped at Best Western, the nearest lakeside accommodation. The place was nearly full if the parking lot was an indicator. I inquired the rate and was told $200 plus per night. I said it was too high; is there a place around for half that, like $100?
As a senior citizen with a shaved head and no teeth my appearance must have induced empathy. She said she might be able to find an alternative. She picked up the phone and called a compatriot in town. She got us a room at a riverside inn for $105 with tax.
As we left I asked the desk clerk "what if I get there and I don't like the deal?" "If you come back I'll give you a 40% discount." She indicated her recommendation was so convincing in appeal I would not be returning.
Sure enough, the place she recommended was very suitable for $100, set by a small park, on the river bank with a walking path around the river via two bridges set a few blocks apart. Lots of trees for shade in the Eastern Washington heat.
Not only that, the small motel had been renovated with new electric outlets, plumbing and paint. The room was very small, but efficient. The place had been done with a maritime theme. The owner was a retired submarine commander.
Naval symbolism was everywhere. The restroom adjacent to the dining area was labeled "Head." Photos of subs were on the wall; a painting of the commander between two photos of his submarine. Nautical terms were used for items. Bollards and cleats were in the yard, an anchor too.
I did not feel comfortable around the commander. When talking to him his gaze was too pinpointed, too direct, almost aggressive, as if his vision was penetrating, x-raying my brain. I mentioned my work as a tankerman and he said he had seen us in his periscope.
Greg Rehmke writes:
I highly recommend Lake Chelan. I spent many summer weekends there through my twenties. Lake Chelan is 50 miles long, winding into steep hills to the small town of Stehekin, which you can get to only on foot or by boat (a long ride on the Lady of the Lake). Most of my friends in Chelan were in the apple business as the lake was long surrounded by rich green orchards. Now many more houses are scattered among remaining orchards, and in recent years, vineyards. Tsillan Cellars opened next door to my friend Steve’s place. Wapato Point is on the far side of the lake, past Chelan.
President Bush signed an act of Congress for a 99-year lease in March to allow a new development nearby in the town of Manson, on Lake Chelan. This Bureau of Indian Affairs land is apparently managed by BIA for 33 American Indians who are descendants of former Chief Moses. And of course, there is a casino nearby (Mill Bay Casino).
A short article in the July 12 issue of The Economist, When the Wells Dry Up, takes an upbeat look at future prospects from deep-sea oil field technologies developed in Aberdeen, Scotland, around North Sea oil operations. The story surveys Aberdeen's subsea technology industry that now earns half its total $3.4 billion from exported technology and services.
But the title of the article and the background claim of North Sea oil running dry is curious. The Economist cites a recent International Energy Agency statement that the drop in North Sea production has been "steeper than expected." The next expert quoted is a "former offshore worker" who opines: "There'll be nothing here in 15 years time." Britain was the world's sixth-largest oil producer in 1998 and has now fallen to 12th place.
This chart shows the steep drop. The sky is apparently falling on North Sea oil production. But wait, what is that shaded part that starts right after the uptick in actual oil production? Was the uptick forecast in earlier projected declines of North Sea production? Oil production also fell significantly from 1985-87 or so. Were further production declines predicted then? (Or maybe the projected declines reflect the British government recent decision to raise corporate taxes on oil firms to 50%, while other firms are charged 30%.)
A sidebar story, "Every Last Drop," explains that though total North Sea production so far has been 34 billion barrels, some 20 billion remain untapped deep under the sea. "Big finds are the exception" assures The Economist, "and the rise in output will be only a small blip in the downward trend." Production this year is up to 3.1 million barrels a day from 2.9 million in 2006 as the new 500 million barrel "Buzzard" field went into production. Nearby, the 170 million barrel Jura field is due to start producing in 2008.
"Every Last Drop" notes that oil companies are considering exploring west of the Shetland Islands where "billions of barrels of hydrocarbons, mostly natural gas" are thought to reside.
Is it at least possible that oil exploration and technology development are influenced by oil prices? I realize this is wild speculation on my part, but what if we compare the North Sea production chart with one of world oil prices?
North Sea production peaked in 1998. You can find 1998 on the chart of Crude Oil prices, it is the downward spike that thrust deep into the exploration budgets of world oil companies. Oil dropped below $15 a barrel in 1998, after jumping above and below $25 for ten years. At $15 a barrel for oil, how enthusiastic were oil companies to expand North Sea production, or exploration and production anywhere else in the world?
Most companies stopped or slowed research and development of the kind of cutting-edge (!) technologies needed to develop difficult oil fields. The steep rise in oil prices in recent years looks a lot like the steep rise from 1973 to 81. As oil companies commit tens (or hundreds?) of billions of dollars for new exploration and development services and technologies, they must still cast a wary eye on the 1981-87 downside of the last upward crude oil spike.
The oil industry is a technology industry more than a natural resource industry. There is not much "natural" about extracting hydrocarbons from thousands of feet under the sea or boiling them from tar sands in frozen Canada. Technology responds to prices, though with a lag as scientists and engineers are pulled off other projects (or out of retirement!) to focus again on extracting hydrocarbons from deep earth and sea. (For realistic and optimistic articles on the energy and the environment, I recommend Robert Bradley's EnergyRealism website. And for a sound energy textbook, see his Energy: The Master Resource).
A common complaint is that investors run in herds, throwing new money at whatever seemed to work yesterday. The huge success of the movie Gladiator led Hollywood studios to fund a series of genre knock-offs.
The unexpected success of Steven Levitt's Freakonomics, a popular introduction to innovative (mostly market-failure) economics, led book publishers hoping for another hit to sign book contracts with many articulate economists. So we have: John Lott's Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't; Tyler Cowen's, Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist; and Steven Landsburg's unfortunately-titled, More Sex is Safer Sex: The Unconventional Wisdom of Economists.
I haven't purchased or read any of these so don't yet know the secrets promised in the titles. I think it is worth noting in regard to the Landsburg's More Sex title, that more sex for an economist is still not very much (with the possible exception of Joseph Schumpeter).
Sex aside, I highly recommend the short article by Landsburg linked at the end of Stefan Jovanovich's post, titled A Brief History of Economic Time. If those who teach history in our high schools and colleges were less ignorant about economics and economic growth, these straight-forward facts about progress over the last century would be less unconventional and less completely unknown to the public.
A more detailed look at economic progress in America can be found in the excellent annual report essays from the Dallas Fed by W. Michael Cox. The 1993 essay "These are the Good Old Days" is a classic.
We will see if sex and weird titles help new economic titles sell. (I wonder if Naked Economics: Undressing the Dismal Science sold better than The Undercover Economist: Why the Rich are Rich, the Poor are Poor–and Why You Can Never Buy a Decent Car?
A recommended alternative is Common Sense Economics: What Everyone Should Know About Economics and Prosperity. And most highly recommended is Paul Heyne's textbook, The Economic Way of Thinking. The new edition is expensive, but the earlier editions are great and cheap.
June 9, 2007 | 1 Comment
Is China still a good place to invest? Sure. Maybe the best place in the history of the world. People are the Ultimate Resource, and China has the most with still a low capital-to-people ratio. And now the Chinese, with their high savings rate, have their own capital to invest. The complicated part is finding the right Chinese enterprise to water with outside capital. If I could, I would invest in a single person: "the girl who can get things done." A glimpse of her life shines out from a recent National Geographic article: "China's Instant Cities."
With NG's usual great pictures, the story gives us a landscape and lifescape as if from another planet, a bewildering eye-witness account of China's still-booming economy rippling out to once rural villages. Imagine a country where local government taxing authority is tightly restricted, and the main revenue source is selling land for development projects. People in government, like people everywhere, respond to incentives. Across hundreds (or thousands?) of Chinese cities and villages bureaucrat developers are leveling land as fast as they can summon dynamite and bulldozers.
Petter Hessler's National Geographic story focuses on one factory's instant birth in the Lishui Development Zone. This 21,500 square-foot bra-ring factory is designed before Hessler's eyes on a scrap of paper in a little over an hour. The contractor, scrap of paper in hand, is asked at 3:48 pm if he can have the building quote "this afternoon." Three months later the factory is complete and the main bra ring machinery tested. It doesn't work, but disassembly, tinkering, and reassembly gets things going. Next, handwritten signs advertising for workers are posted: "1. Ages 18-35, middle-school education, 2. Good health, good quality, 3. Attentive to hygiene, willing to eat bitterness and work hard".
The Lishui Development Zone emerged from 5.6 square miles of "rugged farmland" after leveling "108 hills and mountains." Launched in 2002, 30,000 migrant workers were hard at work in 200 factories by 2006. The Lishui Yashun Underdress Fittings Industry Co., Ltd. was just one. The firm quickly hired the 19 workers needed for operations and then took names for replacement workers. The next girl in line however insisted she be hired as well. She argued energetically and creatively with the factory boss's father, who was in charge of hiring. The employee list was then lengthened to 21 (since 20 was deemed an unlucky number), but she was warned "if the boss says 21 is too many, then it'll have to be 19." Hearing this, employee number 20 returned to the desk and: "Five minutes later, her name was squarely in the middle of the sheet." When she finally left, the man shook his head admiringly and said 'That girl knows how to get things done.' "
Later Hessler learned "the girl who could get things done" had used her 17-year-old older sister's ID card, and was herself just 15. She was hard-working, competent, dreamed of running a shoe factory and of building a nice home in her grandparent's village. "When I asked about the grandparents," Hessler writes, "the girl's eyes filled with tears, and then I didn't ask about that anymore."
Various books and movies can give us some sense of what her grandparents' lives were probably like. For all the hardship of poverty in China today, it pales against the deeper poverty and famine experienced by recent generations.
"Hungry Ghosts: Mao's Secret Famine," is filled with first-hand accounts of what happened in villages across China after farms were collectivized and various government industrialization schemes launched. In China, as in Africa and Latin America, enthusiastic government planners taxed and confiscated agricultural goods to fund factories, foundries, and manufacturing. Peasants everywhere were impoverished by these projects, which quickly fell apart. The Chinese people, as the poorest, suffered the most. From 1958-62 whole villages even regions starved to death. At least 30 million starved to death.
Today's Chinese factory sweatshops are no one's idea of ideal. As the traditional pathway from poverty, they are as awful by today's standards as sweatshops were in England in the 1800s and in the U.S. in the early 1900s. Those upset with poverty, inequality, and injustice in China today I don't think appreciate the truly stunning disasters this young woman's parents and grandparents probably lived through in China.
"The Rise of China," William Overholt's excellent 1994 book, gives us a glimpse of pre-sweatshop China. I have long quoted Overholt's book from memory in various talks to students, telling of the over 50,000 Chinese that lived in caves, and the "one-pants families" in villages so poor only one family member could go out at a time. (This level of poverty seems impossible, but I just checked the internet and the book to confirm. Turns out I misremembered the numbers. An online source mentions 800,000 living in caves, and in "The Rise of China," on p. 26, Overholt writes, "Even today [about 1992] about 40 million people live in caves in China's northeast, and the people in 520 of China's 1,903 counties have annual incomes below $35 per person. Such desperate circumstances gave rise to the phenomenon of the one-pants family in many areas of rural China. The one-pants family, so widespread in China it was studied by Chinese sociologists–but never for publication in the west–is a family possession only enough clothing for one member."
This level of poverty is so incomprehensible, that I kept lowering the numbers with each retelling of the story.
So yes, there is poverty and inequality in China today, but compared to what? Capitalism is transforming China even through layers of corruption. In the early years after reforms tens of thousands of overseas Chinese returned to their villages to make small then gradually larger investments (40 million Chinese now live outside China). "The first dozen years of foreign investment," notes Overholt, "attracted $20 billion in foreign investment, including 30,000 individual ventures…" but "In 1992 alone, the government approved an additional 47,000 investment projects." Well, 1992 was 15 years ago and now millions of wealthy and middle-income Chinese are investing their own money in new enterprises.
Big corporations poured money in through Beijing, but the real revolution was first at the village level as farmland privatized by 99-year leases awakened the entrepreneurial spirit in hundreds of millions of farmers. In one year China was transformed from food importer to food exporter. Next, small and decentralized investments were allowed in the early free-enterprise zones in the south and along the coast. From there knowledge, capital, and economic opportunity spread among impoverished hard-working Chinese, where economic freedom was like kerosene poured on a fire (with property rights as the oxygen).
So somewhere in China is "the girl who knows how to get things done." She is working long hours, pushing her productivity higher, and probably bargaining hard to capture a high percentage of the wealth she is creating. And if she can't win higher wages she will walk to the next factory and insist on being hired there.
Many seem to think wages are low in China because so many tens of millions are looking for work. But wages are being driven up by productivity gains and competition for skilled workers between hundreds of thousands of factories. Workers-who-can-get-things-done are both working and watching. They can share insights to raise productivity and wages, or they can jump ship to put their own ideas into action.
Whether mixed-up incentives will lead local Chinese governments to develop too many debt-funded industrial zones is hard to tell. How many Instant Cities are enough? That depends I think on how many in China are still poor and are willing "to eat bitterness and work hard" to put that poverty behind them.
Like most people I prefer my end-of-the-world scenarios in movies rather than the evening news. Like most people, but not all. Today I was on a Global Warming panel at a Seattle prep school. Nearly 300 students attended and we were asked to address what students should do to reduce global warming. What could students do, "now that the science has been settled." I don't agree the science on global warming is settled, but wanted to participate.
One panelist insisted the U.S. should cut greenhouse gas emissions in half, then in half again. He told students how terrible it was that countries like India and China have to stop growing because the U.S. and Western Europe have already filled the world's CO2 quota. Another speaker, Washington State's Meteorologist, told students that air travel creates tremendous GHG emissions, and recommended they stay home and go to movies instead of vacations. He recounted how as a kid he and his friends had a fun one evening just watching trains go by.
At the panel's introduction, our host, a science teacher at the school, apologized for "yet another assembly on global warming" and said he knew they had all covered global warming in their classes. I can't help but wonder how much they have been lectured on how CO2 "pollution" and climate change will wreck much of the planet.
In my few minutes I argued that global warming fears are similar to past environmental fears: overpopulation, world famine, running out of resources, pollution, topsoil erosion, species extinction. These fears turned out not to be world-ending problems, and two billion people in China and India have much more to eat on the road to prosperity, even with their semi-communist and semi-socialist governments. As people's incomes pass $6,000 or so, more is invested in cleaner air and water. Prosperity allows people to take practical steps to clean the world around them, according to their own priorities.
Investment capital flows to nearly every corner of the world, bringing agricultural tools, water purification, cell phones, medicine, books, the Internet, factories, and call-centers. The air is clearing inside millions of homes now linked to electrical and natural gas grids. Sometime recently humanity passed the threshold when less than half the world's women are no long searing their lungs cooking over wood and dung-burning stoves. (Though maybe sometime soon over half of American men will be cooking over outdoor barbecues.)
All this wealth, all this gradually emerging prosperity, is burning hydrocarbons, and sending CO2 into the atmosphere. As President Bush calls for world politicians to somehow deal with GHG emissions, they know, or should know, that CO2 emissions will rise by 70% over the next 15-20 years. And that will be a very good thing for the hundreds of millions breathing cleaner air, drinking cleaner water, and living longer lives.
Still, if I would have said these last points at the assembly, I don't think I would be invited back to the school.
So I came home and watched an end-of-the-world movie to mark the day's adventure, a movie also inspired by the day's news. If the end were to come for much of the human race, I think it would come as presented in Terry Gilliam's Twelve Monkeys.
The news emerged through the day of the jet-setting, super drug resistant TB patient, who, amazingly enough, has a stepfather working on drug-resistant TB at the Center for Disease Control. In Twelve Monkeys, the man who releases the virus is an environmental wacko, a research scientist who believes man's footprint is wrecking the planet. Since the move was made in 1995, millions more have been taught various kinds of environmental and climate alarmism.
Only a worldwide pandemic would enable humankind to reach the greenhouse gas emission goals set by many environmentalists, politicians, and prep school guest speakers. We have to hope that quite and desperate types at the CDC don't try to take GHG goals into their own hands.
I hope the world doesn't end. But if it does, you heard it here first.
Many years ago I paid the Big Apple a visit for a weekend, staying at the apartment of an uncle who spent the weekends in the country. It was an amazingly, even frighteningly, neat apartment. For some reason that Sunday morning, in the dining room, curtains closed to avoid sun damage to the antiques, I remember reading a lengthy article in the Sunday New York Times.
A doctor wrote it about his own father. It was about the end-of-life indignities and useless and seemingly unending expensive tests, the fitful flurry of prodigal procedures, and the futile activities. The motive, in the writer's opinion, is eagerness to get as much spent as possible before the patient expired.
It was a gripping tale, particularly as the son was a doctor himself, and still was unable to stem the tide of pre-last rite spending. Curious to read an article on Mahalanobis today, so little different from that of twenty, maybe even thirty, years ago.
Greg Rehmke adds:
This may not be the same article, but is probably a similar story and followed from the same poor incentives of government-regulated, third-party payer heath care.
I remember the article because health care reform was the national high school debate topic and we reprinted this article in our monthly publication for high school debate clubs.
[FROM THE NEW YORK TIMES, APR. 25, 1992]
Making a Living Off the Dying
(BY NORMAN PARADIS)
It has been more than a year since my father died, and I have come to believe that the circumstances of his death demonstrate much of what is wrong with our medical system.
As I grew up, I heard so much about what a good and gentle physician my father was that at first I ran from the idea of becoming a physician myself. But at 35, I was well along in my own medical career and with pride brought him to Britain to hear me deliver a paper. He had trained there and wanted to find out what had become of his classmates. He seemed to lose some vitality when he heard they were all dead. In perfect health his whole life, he began to complain of back pain. …
Don Boudreaux's letter to the Wall Street Journal reminded me of the wider benefits of trade. I noticed today the label on a reasonably nice bath towel from Target ($1.50). It was made in Vietnam, of all places. Johan Norberg, in his book, In Defense of Global Capitalism (and his excellent Globalisation is Good documentary), starts in Sweden then visits Vietnam, along with Taiwan, interviewing workers whose stories give solid evidence of the benefits of international trade and investment.
Elderly Taiwanese multimillionaires discuss the early sweatshops of the 1950s, and comment that machinery was less safe then (they show their fingers missing digits as evidence). In Vietnam Norberg visits a Nike factory with workers both pleased and getting wealthier. The only complaints come from Nike managers irritated their skilled employees are being hired away by other firms for higher wages.
Somewhere in Vietnam is the textile factory where my Target towel was made. Someone got up that day and rode to work by bicycle or car to labor on my towel along with hundreds or thousands of others before returning home. Instead of following the communist ideas forced on their parents, Vietnamese people today enjoy the fruits of capitalism and economic freedom.
Similar thoughts cross the minds of millions of Americans when the notice their clothing, towel, and bed sheet labels. Much is from China (but where in China?), but much comes from mystery countries few of us know much about. Each label serves to prove gains from trade. Somewhere far away someone made this thing. And it traveled the world to give comfort and warmth. Maybe this is why most Americans seem more comfortable with international trade and globalization. Not the media pundits of course, but everyday people. The hysterical anti-globalization campaigns of the 1990s have faded.
I think textile unions and Congress helped change public opinion in favor of free trade. Unintentionally, of course.
Legislation empowered the Federal Trade Commission to mandate U.S. content and country-of-origin labels for textiles and cars: "Title 16, Chapter I, Section 303.33 (a)(1) Each imported textile fiber product shall be labeled with the name of the country where such imported product was processed or manufactured."
U.S. textile companies and unions lobbied for legislation to force importers and retailers to reveal the country of origin (the legislation applies only to textiles and cars). Most people don't really care where their clothes are made, of course. They care about quality, feel, design, and comfort of clothing, sheets, towels, etc.
Maybe unions and U.S. textile producers thought Americans would shun foreign clothing. Instead, each time Americans found an unexpectedly good deal for comfortable clothing, it was tagged with the name of a distant and mysterious land. Most of us have been amazed to discover nice clothing labeled from Jordan, Bangladesh, Vietnam, and a dozen other countries we never thought of as producing and exporting quality clothing.
And for all the negative things politicians and pundits might say about China, most American only gain from quality goods from China. (Had FTC rules forced firms to reveal the Chinese province of origin, we would likely know more now about Chinese geography).
Years ago The Freeman published a great Frank Chodorov article titled "The Humanity of Trade." Trade has a powerful civilizing force, and goods from far away lands lead most to wonder about people and places far beyond their everyday horizons.
The trade deficit figures that pundits and politicians regularly report are misleading in more ways than one. Trade serves as a conduit for ideas as well as for goods and services. Observes Chodorov:
"We think of trade as the barter of tangible things simply because that is obvious. But a correlative of the exchange of things is the exchange of ideas, of the knowledge and cultural accumulations of the parties to the transaction. In fact, embodied in the goods is the intelligence of the producers; the excellent woolens imported from England carry evidence of thought that has been given to the art of weaving [woolen goods are covered by separate FTC regulations…], and Japanese silks arouse curiosity as to the ideas that went into their fabrication [silk enjoys much lower tariffs, by the way]. We acquire knowledge of people through the goods we get from them. Aside from that correlative of trade, there is the fact that trading involves human contacts; and when humans meet, either physically or by means of communication, ideas are exchanged. 'Visiting' is the oil that lubricates every market place operation."
So it is, I think, that Congress has accidentally accomplished a good deed in forcing firms to label clothing, towels, and sheets with their country of origin. Every day and night we walk and sleep in greater comfort thanks to workers in faraway places. Each time we notice a tag with the name of some distant land, we momentarily reflect, wonder, and appreciate.
The long upward swing of the stock market reflects not only amazing technological advances deployed throughout the economy, but also the billions of people newly welcomed to the world of capitalism and freer trade. Returns to capital rise with its increasing scarcity relative to labor (as others have pointed out). Hundreds of millions are newly free to work with the tools and machinery long denied them by their governments. From China and Vietnam to India and Eastern Europe, the decades since the fall of communism have allowed capital to seep steadily and intelligently into impoverished and once controlled lands.
The scope of world trade is rapidly expanding and along with it new gains from the division of labor. And this process is just starting. How many hundreds of millions (or billions?) still plant crops by hand and for capital have recourse to only ox and plow?
January 23, 2007 | Leave a Comment
Stock prices reflect the marginal value of traded stocks — where a stock's sellers and buyers meet. In M.U.L.E., the great Atari game from the 1980s, sellers use joysticks to move their icons down the screen to show the price they are willing to sell for, while buyers move their icons up the screen. When the two icons touch, transactions take place at that price. Either player can move their icon away to stop transactions. But the price for trades reflects only goods traded, not the entire inventory.
Similarly, the price of houses in "booming" or "collapsing" times shouldn't be stretched to value an entire area's housing stock. The market price of homes represents the marginal prices for houses for sale. In Seattle, Miami, Los Angeles, and other cities where demand for houses has been strong, state and local regulations long delay builders' efforts to construct new housing. The limited stock of houses for sale and the artificially restricted stock of homes allowed to be built make up the supply side of the market. In economically more free cities like Wichita and Houston, builders develop and build new homes faster when demand expands.
So housing prices jumped 20% in Los Angeles, Miami and Washington DC in 2005, and only 5% in Houston, Atlanta, and Dallas. These price increase differences reflect the limits on new houses in growing but regulated regions compared to less-regulated regions. Regulations delaying housing construction also push price swings wider. Major new housing developments come on the market years later, feeding the boom and worsening the inevitable downturn. Prices send signals that would coordinate behavior, with higher prices leading more homeowners to sell and homebuilders to build. But governments dampen and distort these price signals through regulations and taxes.
The House of Oil
Regulations in the oil industry delay development of new oil supplies around the world. While the Chinese economy is blamed for driving demand for oil, it is the Chinese, Russian, Saudi, Iranian, Venezuelan, Nigerian, Angolan, and other governments that mismanage oil operations and development. Expanded economic freedom in China, India and elsewhere boosts oil demand, but new production is constrained by the corruption and incompetence of governments around the world. (The sharp drop in oil prices in the late 1990s also played a role as major oil companies downsized, slowing efforts to restart various exploration projects.)
The U.S. government continues to play its part mixing state intervention with energy entrepreneurship. Among other blunders, state and federal governments restrict oil exploration and development in the near 50% of Western land it controls, as well as coastal waters out to 200 miles, and Alaska.
Government ownership and regulation of oil exploration and development has played a major role in recent oil price increases, along with fast growing demand and the slow ramping up of exploration and development (after the extreme downsizing of the late 1990s). These artificially high prices are pushing vast expansion in oil, tar-sands, and ethanol production. As these new oil and oil-substitutes come on-stream they will probably push prices hard. The high prices are pushing a vast expansion of oil drilling equipment as well (how many companies in China are now manufacturing oil drilling equipment? 50? 100? 500?).
Consider that everyone in the oil industry, from multi-billion dollar corporations to guys with single rigs, just five years ago planned for $15-$20 oil. At $40-$50 a barrel, a whole new range of oil development materializes, along with a wider range of oil substitutes. It used to be official Saudi oil policy to keep oil prices below $25 a barrel to discourage just these production expansions, as well as to discourage wider conservation technologies.
(A recent Economist article on a new cow-dung powered 100 million-gallon-a-year ethanol plant, reports that when the 73 ethanol plants under construction are added to 110 current ethanol refineries, they will supply 11.4 billion gallons a year ("Even in Texas" January 6, 2007. p. 26). Of course federal subsidies fuel these plants, along with cow-dung. Happily for the oil industry, ethanol supplies, though a drain on taxpayers, are unlikely to push down gas prices — it seems producing ethanol consumes as much or more energy as is contained in the final product.)
So like housing price swings in statist cities, oil price gyrations reflect not just shifts in demand but worldwide government control and intervention. The U.S. government responded to high oil prices in the 1970s by both subsidizing and heavily regulating oil shale development in Colorado. Tar sands development in Canada faced less regulation. Maybe new oil shale technologies will find ways around regulations to release shale oil in significant quantities this time. But why risk such investment? The Colorado or federal government could re-regulate, tax, or just ban oil shale as a source of intolerable greenhouse gases, or perhaps for endangering some newly-discovered spotted toad.
Meanwhile, high oil prices encourage infinitely diverse conservation efforts worldwide, many private and effective, others government-sponsored and foolish. For those who lived through the oil crisis and ensuing politicization of energy in the 1970s, it is deja vu all over again.
(Add color for the 200 miles of coastal waters the government now controls. Oil production is allowed only in parts of the Gulf of Mexico.)
Greg Rehmke further adds:
This year I would have purchased some [Apple stock] before Macworld, for the reasons I outline in my earlier article. I think the iLife software fits so well with LCD televisions that the new AppleTV will be popular. I videotaped my nephew's basketball game on Saturday, and we burned a DVD with nifty scene transitions and titles in ten minutes. My sister's family was watching the game an hour later. I think as the level of film clip production develops (above YouTube, but more local or varied than TV and Hollywood), Apple products will be well positioned to encourage creation of content as well as deliver it to big screen TVs. I didn't know much about the iPhone, though that made the big headlines.
Last week, Gabriella Megyesi and I spoke to about 35 homeschoolers near Charlotte, NC (27 students plus some parents). Six or seven of the students had laptops open. Four were white iBooks, two or three were Windows. I read reports that the Macintosh share has risen to 5%, but more important is the age distribution. If Macs have risen much higher among 14-22 year-olds, that would be very interesting.
I think too that as Mac and iPod popularity rises, more people are drawn into the Apple world, and more will watch Macworld for the first time. It is quite a show and will continue to excite investors. The show is streamed on the web beginning at six pm. I don't know how many to watch, but they would enter the market the next day. I think the news from Macworld has a different impact than the jobs' presentation. What other companies get this platform for presenting directly to consumers and investors? It is key to have surprises that have "wow" factors and are newsworthy.
By the way, relating to my oil and housing article, I have bumped into oil people in Wichita and Houston who are busy investing in production of oil drilling equipment in China. I wonder how many (hundreds of) others in various corners of the oil industry have made similar investments. I wonder how much of the world's steel is pouring into the "sure thing" of oil drilling equipment. "Everybody knows" oil is high and will stay high, and oil rigs are out-of-sight expensive. Cheap manufacturing in China is weirdly similar to ethanol plants for farmers. A magic new opportunity to make a killing by pouring capital into the energy industry.
January 3, 2007 | 2 Comments
When a company like Apple decides to reward and motivate employees through grants of stock options, shouldn’t they be able to choose between the number of options granted and the date (thus price) of options? Shareholders want both effective ways to motivate employees, and minimal dilution of their holdings caused by new share issues via employee options. Apple can’t know when and by how much stock shares will rise or fall, so they have an incentive to issue options at the lowest possible price. They would naturally pick the lowest share price during the quarter.
Management’s goal is to both offer the least-cost compensation to employees and the least-impact-to-shareholders compensation and motivation. So if the goal is to provide $100,000 to an employee via options (and the marketplace of similar tech companies influences what employees expect or think just..without enough compensation, Microsoft hires away more key Apple employees), the fewer share options Apple offers to equal a $100,000 value, and the less the dilution to shares outstanding. Do New York Stock Exchange or SEC regulations require Apple to report on a day-by-day basis the number of share options granted? Or must they report potential “exposure” to shareholders from possible dilution that options grants might cause? Yesterday’s news report on Apple says:
“The company also said that the scale of the manipulation of share options grants was much wider than previously revealed, extending to 6,428 grants for executives and other employees on 42 separate occasions”
“Apple is the highest-profile of more than 160 companies under investigation for turbo-charging executive pay by backdating share options. By pretending they were granted on dates when the share price was low, companies were able to artificially inflate the profit made when the options were exercised.”
Why can’t a company like Apple just issue 100,000 shares of stock to itself and dole out to employees options for that stock at any price the company wishes? I assume tax issues are key along with SEC regulations. Or are there major shareholder concerns? I would think the main Apple shareholder concern now is that federal government regulators will continue to distract Apple executives from their work. The whole thing should be a matter for the stock exchanges to deal with. No one knows what the ideal rules should be for granting options. Competing stock exchanges have an incentive to discover and enforce them. The SEC has no such motivation.
November 28, 2006 | Leave a Comment
I thought there were a couple interesting aspects of Steve Leslie’s Nov. 22nd post. He concludes: “Success in poker is like success in life. It is attainable but not easy and it requires lots of work. That is why so few attain it.” Yet if everyone, or a significant number, were to follow professional advice, the quality of poker play could jump nationwide without any change in levels of success (though perhaps many would gain by feeling less stupid about losing, since bad luck rather than bad play would be responsible).
Similarly with sports. Every NBA or NFL team could raise their quality of play 20% with no change in levels of success.
Except in international competition. NBA teams and players, as well as gamblers, might do better in world competition following a popular U.S. book, lecture tour, or movie that somehow inspires competitors to higher quality play.
Unlike gambling and sports, which are zero-sum games, (apart from the mental or physical pleasure gained through competing), investing is a positive-sum game. Higher quality investing directs funds to higher quality projects. Insight into foolish corporate or commodity projects and positions, provides both returns to winners and instruction to losers. Losers don’t just lose pots or games, if left alone they continue to misdirect and waste capital and labor resources. “Capital” belongs to people and “labor resources” are people. Misdirecting them wastes the time and money of people in production, and deprives consumers of goods and services that could have been produced with better “play” by investors (assisted by speculators).
The question arises whether there might be a similar difference in the quality of play across cultures. If the game is basketball, U.S. beats China. If the game is ping pong, China beats U.S. (for now, at least). I don’t know how good the Chinese are at poker, though I hear gambling is very popular. As hundreds of millions of everyday Chinese gain enough wealth for everyday gambling, there will be some thousands or tens of thousands wealthy enough for big-time gambling as well as big-time investing and speculating.
As these newly minted big-time speculators jump into the game, will they make systematic “newby” mistakes? I don’t know enough about Chinese culture to know what to expect. But with commodity prices jumping up and down in front of tens of millions of gambling-prone newly capable investors what might we expect? (Plus, thousands of local government officials seem able to gamble and speculate illegally with local bond revenue.) Markets will draw in an influx of low-skill, limited-experience players, flush with success from one culture and range-of-experience (wealthy Chinese manufacturers), trying their hand with commodity speculation.
Academic resumes — itemizations of where you went to school, your grades and (even) your test scores — became common only after World War II. Before that time the questions on any job interview were about what jobs had you worked who you knew. My Dad attributed the change to the GI Bill, and he wisely anticipated that the change would lead to a dependence on standardized testing not only for schools, colleges and universities, but also for all licensed occupations. However, the rule that he followed as an extremely smart student and a future textbook publisher was not "parrot the textbook." He was shrewd enough to know that every teacher prided himself on being smarter than the textbook. The key to straight As was to attend every lecture, take copious notes and "parrot" exactly what the teacher said. Following that rule and working at it industriously each day earned him a Phi Beta Kappa key just as it has earned his granddaughter one. "Thinking for yourself" is fun and has its own rewards, but it is guaranteed to get you a 2.7 GPA. That has been the state of American education for over half a century. It is the reason the "rednecks", among others, have lost their faith in "education". They see it as an extended exercise in obsequiousness. They are right, of course. They are also right to be skeptical about the benefits of academic certifications. Getting a Class 4 license has proven a much more profitable investment over the past decade than completing a graduate degree. In my limited travels here in Northern California I see any number of signs for "Truck Drivers Wanted". I have yet to see a single advertisement reading "PhD in (Gender Studies, etc.) wanted; Steady Pay; Great Benefits". Instead, I see the poor grad students trudging to their classes at the local universities like so many helots marching to the silver mines.
Prof. Charles Pennington responds:
I guess Stefan is using hyperbole, but just in case: PhDs do not do all that badly out there, and better than truck drivers. I had a high school friend who became a truck driver for a while, and he confirms that it's quite stressful and boring and not really all that well paid.
The students who got PhDs in my group have jobs at Pfizer, Intel, University of Hawaii (Associate Professor, not post-doc!), Varian, the Mayo Clinic, Keithley Corp., and Intermagnetics. I don't know exact salaries, but I think they're probably centered around $100K. They do interesting work, too. Most of them are doing things with magnetic resonance imaging, including "functional" magnetic resonance imaging where you literally watch what's happening in someone's brain while he's thinking some designated thought.
I agree though, sort of, on the topic of how to get As from professors. The most efficient way to get As is to attend all the lectures, and, as a first priority, write down everything that's said out loud and written on the chalkboard. If you can understand it in real time, fine, but if you can't, review your notes as soon as possible after the lecture, and try to figure out what was being said. You might figure out 90% of it then and there. Later you'll still have to cram for the test, but you'll be miles ahead.
Professors always feel like they're trying to give everything away, leading the horses to water and begging them to drink. I always tried to design my tests so that a student could get 80% of the answers through diligence alone, though it did require above-average diligence. 15% required some thinking, some creativity, and some aptitude, and maybe 5% could be answered by only the top one or two students in the class.
Sure, there's a lot of alcohol and 420 consumption at universities, but if you looked around at the students at Ohio State, you would find much to admire (insert Professor/coed joke here). Many, many students there had jobs working 20 or more hours per week along with their full course loads, and the curricula, at least in science and engineering, were not designed with that in mind. Plenty of students really do develop their minds and abilities more than they ever thought possible going in, and they experience much satisfaction from that. It is much better to go to college than to become a truck driver.
Stefan Jovanovich responds:
For those lucky and skilled enough to be in your rather select group, the rewards of serious scientific academic study are unquestionable. The point I thought I was making was that for "ordinary" people the traditional academic game is proving to be an increasingly bad bet. For those for whom the choice is "education" in the generic sense of survey courses, breadth requirements and a non-rigorous major vs. a Class 4 license, the Class 4 license is currently looking to be a better deal. That is clearly the conclusion of the masses who are voting with their feet in favor of junior colleges and trade schools. I apologize if I am stepping on someone's rice bowl, but I doubt very much that the current relative values of a certification to operate heavy machinery vs. a B.A. in Anthropology can be questioned, given their respective acquisition costs and likely future incomes.
The utility of formal education must be measured in more than monetary terms, but for the people taking out student loans (whose repayment, under the new bankruptcy laws, cannot be so easily ignored) the question of what a degree is worth and what it costs is hardly academic. As you acknowledge, "the curricula, at least in science and engineering, (are) not designed" for students who have to work to pay their way through school. That is a change for the worse and testimony that the land grant public universities no longer offer genuine opportunities to the poor, bright student. My Dad bussed dishes at the dining hall to make it through the University of Colorado, and my father-in-law slung hash in the kitchen of a fraternity to earn his undergraduate and masters degrees in geology at Texas and Oklahoma. I have never been either as poor or as smart as Dad or Buster; but, if I had not worked a job serving process, I would not have been able to afford to make it through law school at Cal (and the world would have been spared one more tax attorney).
One of my father's very few serious regrets at the end of his life was that in the early 1980s he could not persuade the directors of the public company that he ran to go into the for-profit education business and offer "trade school" educations. The directors feared that the public school teachers would rise up in anger and boycott their textbooks. Dad thought the risk was worth taking since he saw the profit margins in the textbook business evaporating before the advance of high-speed copiers, readers and used book resellers. The capital markets have proven him to be right. The upstart University of Phoenix and its cohort of U.S. for-profit publicly-traded educational companies - which were just being started 3 decades ago - now have a greater market capitalization than all of the world's textbook publishers.
J. T. Holley replies:
My father was a truck driver for 25 years. Boring it's not (regular change of scenery), and the pay is great compared to other jobs in rural areas. But I'll grant it's stressful due to the other drivers on the road. For a young man in the rural U.S. to leave and go to the "U", he must ask a deep deep question: "do I leave my family?". It's easy for those raised in the city or town that the "U" is in, but those living in towns like Grundy, Damascus or Martinsville in Virginia don't make that decision as fast. Being a truck driver allows them the opportunity to "get out" and come back weekly and be around the family. This is usually one of the highest paying jobs in the area if it exists. Now, I'd rather be the "dumb human than the smart pig" as Plato proposed, but in rural redneck America the smart pig might be the better option. In a small town, having a PhD might get you a loan from the bank to start a business, but that's about it. I had a kid from Kansas on my ship in the Navy. He couldn't swim. He asked me why I joined the Navy and I gave him the usual "college money" reply. Feeling a sense of obligation I then asked him why he joined. He said "to see the ocean". Seeing the seriousness on his face I asked him if he'd ever heard of a vacation. He said "It just doesn't work that way up in the Smoky Hills".
Russell Sears responds:
Perhaps I misread the post. But as the good teacher, Adam Robinson says in his book, the smart student learns to parrot the textbook. After all its generally the teacher ego that picks one book over another. Perhaps it has not quite sunk into this "quant" that in the real world you need to think for yourself. That this was an exercise in peer review, not textbook writer worship.
If I am right what is sad, is the state of education at MU. Perhaps, a word of "real world experience" could change this youths direction.
GM Nigel Davies adds:
Consider the incentives in education. What is taught in the classrooms is not necessarily what is required by the world at large, but rather the interpretation thereof by people who are elected and/or appointed to decide such matters. The students have an incentive to toe the line and will be unified in saying that the system/their qualifications are good because it gives them an edge in the jobs market. And the establishment has an incentive in making the system look good in order to maintain funding. Who's going to question its value? Looks like it's only Ken Smith, some truck drivers and maybe a Grandmaster or two.
Greg Rehmke responds:
Whether driving a truck or pursuing a PhD, I suspect results turn on what people read, discuss, and write. Audio tapes from Books-on-Tape, The Teaching Company, and Knowledge Products can provide both truck drivers and commuters a wide-ranging education. I especially recommended is the "Giants of Political Thought" series available from Knowledge Products.
As truck-drivers relax after meals or before sleep, what they read shapes what they understand and how they think about the world. If they read, for example, William Easterly's recent book White Man's Burden, or Rodney Stark's The Victory of Reason, they will better understand why the western world prospered while Africa and Latin America are still stuck with poverty. If, instead, they read the New York Times and watch the evening news, and if they listen to talk radio and NPR instead of thoughtful audiotapes, their minds will be full of some combination of things that aren't true and things that don't matter. (I listen to NPR sometimes because I enjoy it, so I end up with a fair number of not true/doesn't matter items bouncing around my head.)
Graduate work can expand understanding and insight, as well as research and writing skills. But most Masters programs in the social "sciences" waste time, money, and minds. I remember a stand-up comic telling of a professor encouraging him to pursue a Political Science Ph.D. after finishing his undergraduate degree. "What do Political Science PhDs do?" he asked. "They teach other students about political science" was the answer. "What do they do with their political science degrees?" he continued. "They teach still others" was the reply. The comic concluded that political science was a giant Ponzi scheme. And so, unfortunately, are many of the social "sciences."
I am enrolled in the Masters program in Economics at San Jose State University. Classes are in the evenings and most masters students work full-time. At least a dozen SJSU economics profs are accomplish market-oriented scholars (Jeffrey Hummel, Mark Brady, Ed Stringham, Ben Powell, Lydia Ortega, Edward Lopez, and others, many with Austrian/Public Choice educations from George Mason University). Each semester hundreds of undergraduates learn economics, but also learn Austrian and public choice insights that usually remain hidden from students at higher-ranked universities.
In the end we each choose whether we pursue our own course to wisdom and understanding, or just float along in the media mainstream. We could spend a decade in college, as thousands do, but learn little either true or useful. Or we could spend a decade crossing the country by truck accompanied by the greatest thinkers in world history.
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