Elections and Courts

This is depressing. I hope the Texas delegate selection doesn’t end up in court. If that happens, the legitimacy of the Democratic nominee will be forever questioned. The Bush administration has been operating under a cloud ever since the Supreme Court intervened in his election. Court involvement cast doubt (at least in some places) about the legitimacy of his election. Of course, the alternative was to have the Florida Supreme Court decide the election, which strikes me as even worse. The moral is that politicians should stay out of court except in the most egregious circumstances.

Where’s Herbert Hoover When You Need Him?

Ritholtz is at it again, this time telling us why the Fed is compelled to lie to Congress. I think he’s basically correct, although I would split hairs over a few things (for example, I don’t think we’re suffering from a lack of regulation). The economy is, at the very least, headed for a rough patch. That’s cause for concern, but when you add to it the fact that the Democratic candidates for the Presidency have the same economic mindset as Herbert Hoover, it’s almost alarming. Still, I am constantly surprised by the resiliency of economies, as long as politicians don’t interfere too much. Fat chance.

UPDATE: There’s another view - maybe the Fed is deceiving itself!

More NAFTA Thoughts

I commented earlier about how Senators Clinton and Obama’s position on NAFTA strikes me as immoral. To add fuel to the fire, Investor’s Business Daily points out even more problems. The bottom line:

Threatening to renege on a permanent treaty — as Clinton and Obama are doing through their identical vows to “opt out” of the deal — signals loudly that America’s word is no longer its bond.

Is this how they intend to restore American prestige?

The Caped Crusader

OK, this is funny. Actually, I think some of Obama’s policies stink, but some of the criticisms stink even more.

Better Than Dental Floss

My humble blog has been reviewed by Blogged.com and ranked as “Very Good”. This apparently entitles me to be showcased in their economics section. I am flattered. Of course, economics blogs are only slightly more popular than blogs about dental floss, so my expectations are pretty low. But, if nothing else, this has inspired me to look at some blogs that I don’t ordinarily read (why do they think these other guys are better?), and something good may come of that.

Department of Moral Lapses

I was disappointed in Senator Obama and Senator Clinton’s debate remarks on NAFTA. Of course, I can imagine them re-negotiating NAFTA to make a few little tweaks and then declaring victory with no harm done. But that’s a thin reed. I was inspired by Don Boudreaux’s analysis of the anti-trade rhetoric. There needs to be more discussion of the morality of the anti-trade arguments. There are two related moral issues.

Restrictions on trade limit choice and increase costs for consumers. The biggest impact comes to the poorest members of society. The moral issue is this: is it right to punish the poor in order to preserve the cushy jobs of the relatively affluent?

In developing country, free trade and exports provide an upward path from a level of poverty than we can barely imagine here. Should it be American policy to thwart the improvement of foreigner’s lives who are desperately poor?

Despite all the fancy rhetoric, the policies that the Senators advocate would amount to an attack on the poor, both domestically and overseas. In my book, that is a serious moral lapse.

Stagflation

Robert Samuelson has a great article on stagflation, including how and why it may be coming our way. The choice, as is so often the case, is between short term pain and long term pain. The problem comes from politicians. Politicians are elected in short term cycles, so their incentives are mostly to address short term problems. In our political system, few can afford to think long term. So fasten your seat belt - the next decade or so could be really ugly.

Cuba

With the retirement of Fidel Castro, all of the normal suspects have shown up to talk about how wonderful Cuba is - after all, they have universal health care! Well, any country can have universal health care if they set the standards low enough. For example, there is a severe shortage of anesthesia in Cuba. Care to go there for some minor surgery? Read the reviews (and some interesting side-issue comments).

Profits

After reading a bunch of blogs about the economy, I’m convinced that most people don’t understand the rudiments of business and business accounting. There is much outrage expressed about corporate profits. I imagine most people know that profits = income minus expenses. But they overlook the fact that profits are measured at a point in time. Suppose Company X has a cumulative million dollar profit at the end of November, but in December spends that million on upgrading equipment. They then have no profit other than what they might make in December. But if they wait and invest in equipment upgrades in January, they will show a million dollar profit for the previous year. Nothing real has changed, other than a one month delay in equipment upgrades. Profits are meaningful, but they don’t mean what many people think.

Profits mostly fund future expenses. So, when politicians rail against excessive corporate profits, they are really arguing about investing more in those businesses. Our current crop of politicians seem dead set against investing in medical research and energy. They seem to think that your life is too good already.

Monetary Theory for Dummies

On Cafe Hayek, a commenter wrote a very clever description of monetary theory without using any conventional economic explanations. I quote:

Suppose you and I arrive at a frontier of civilization with nothing but the clothes on our backs. You’re a carpenter, and I’m a woodsman, and we need houses. You are only a carpenter, and I am only a woodsman. We want to work simultaneously to build two houses, but neither of us has money to exchange for the services we can’t perform ourselves, so I credit you with $1000 worth of lumber, and you credit me with $1000 worth of carpentry services. We create these “dollars” from nothing. We don’t even produce notes or coins. The dollars are only accounting entries in a ledger or in our memories.

We also agree on a price for lumber and a price for carpentry services, so $1000 pays for one house worth of lumber and one house worth of carpentry services. As I harvest trees and produce lumber, you pay me for half the lumber I produce. I pay you to build me a house with the other half, and you simultaneously build yourself a house with your half of the lumber. In this scenario, neither of us has anything of value to lend the other before we extend the credit. We have only the expectation of value.

Alternatively, a banker could credit both of us with $1000. I then pay you for carpentry services while you pay me for lumber, and we both repay the banker plus interest for his accounting services. The banker doesn’t “lend” anything in the sense of providing something of intrinsic value at the moment he extends the credit. He provides an accounting service by requiring you to build my house in a timely manner (to obtain the money required to repay the loan) and requiring me to provide your lumber in a timely manner. We only outsource our credit accounting to him. We might then build the banker a third house. He pays us for his house by extending himself credit. He pays us for a house, and we pay for his services with this money.

This process begins with three factors of production, three laborers, and no money. I’m not asserting a labor theory of value. The forest is common property for the sake of simplicity. The process ends with three laborers, a smaller forest, three houses and no money. No more money exists at the end than existed at the beginning. We could add a blacksmith and a farmer and a tailor to this illustration as well, all credited at the outset, all providing their goods and services to the organization, all ending the process with a house and no money.

In terms of this illustration, “inflation” occurs when we don’t build the houses fast enough to repay the loans. Then we borrow and repay more, so we end up paying $2000 per house instead of $1000 for example.

As long as we all pay each other on time for whatever services we deliver, the accounting works out. We needn’t actually produce anything. We could end up with no houses, or we could build the houses more slowly than expected and stretch out the loans at lower interest rates to keep the prices the same. This outcome is “stagnation”. This way, a corporative state may report ever higher nominal output without actually producing more.

If we aren’t repaying the loans on time and we decide that justice somehow requires everyone to slow down or stop working while we decide who should get what he’s nominally owed and who shouldn’t, that’s recession. I hope we aren’t headed in this direction now, but the more leveraged we are, the more likely this outcome seems.