Not Quite So Poor and Stupid

Unless you happen to govern a third world country, you probably don’t care about capital flows. Economists do. Economic theory says that liberalized capital flow should result in more capital, greater productivity, and higher wages. It’s nice to see some empirical data show up to confirm the theory. But, as you might expect, a lot of third world politicians are dead set against liberalized capital flow for reasons of national pride. And, as you might further expect, poor countries with stupid governments will remain poor countries until their governments change.

Of course, we’re not all that much better. Theory and evidence also encourage the free flow of goods and labor, both of which we strive mightily to restrict. We do a pretty good job on capital, so I guess that makes us not quite so poor and not quite so stupid, but still far below our potential.

Unkept Promises

Here is a great explanation of the credit crisis. But read it carefully. You might conclude that current economic conditions are the result of low interest rates. However, as the author points out, low interest rates are normally a good thing. Did interest rates get too low?

I doubt it. While I generally adhere to the Austrian belief that central banks can mess things up badly by allowing central bank interest rates to deviate from market interest rates, I have to note that central banks are responsible for only 15% of money and credit (which, for all practical purpose, are the same thing). Central banks are less powerful than they were back in the day and they simply can’t push interest rates around to the extent they did in the past.

If blame is to be placed, it has to go to investors in general and pension funds in particular. Corporations (private pensions) and taxpayers (public pensions) have underfunded their pension funds. As the author points out, this forces pension funds to accept greater and greater risk in order to meet their payout objectives. High risk is called high risk for a reason, and it’s just a matter of time until the worst happens. We simply have had too much capital invested in the wrong things and not enough in the right things. Markets can correct for that, and they are, as painful as it might be. But markets can’t correct for people making promises they can’t keep,  which is where I believe we are.

If you plan on being the beneficiary of a pension fund, whether public, corporate, or union, you’d better have a fallback position!

Coming Attractions

It is likely that the federal and state governments will see a huge shortfall in tax revenue over the next few years. The consequences will be different in different states, but every state will face pressures to cut spending, raise taxes, or both. Cutting spending will mean cutting popular programs, mostly entitlement programs for the feds and a variety of things at state levels. There will be populist calls for higher taxes on the rich. Of course, tax incidence means it won’t just be “the rich” who are impacted: taxes on producers ultimately are paid by consumers. Remember, all this was caused by people who tried to live beyond their means by gambling on real estate. You’ll pay for their mistake. And when we try to bail them out, youl’l pay even more. Get ready to tighten your belt.

Perspective of Affluence

With all the talk about how terrible the economy is, it’s nice to get some perspective. Ours is an affluent society and even poor Americans have a standard of living which strikes most of the world as incredibly luxurious. But I suppose it’s not human nature to be greatful, so we complain. Of course, things could be better, and they will be, as long as we avoid tampering with the wealth producing engine that got us this far. But many of us seem devoted to the idea that we should abandon methods that work and adopt methods that have repeatedly failed or try bold new experiments based on some clever new theory. This is a luxury that only a wealthy country can afford.

Addicted to Oil?

Politicians of all stripes keep bleating on and on about our addiction to foreign oil. At last, someone (Robert Higgs) has described why this is a nonsensical argument. The concept of opportunity costs is close to the heart of economics, even more fundamental than the division of labor. Still, the idea seems a mystery to the political class.

Obama’s Tax Plan

Well well. This analysis shows that Senator Obama’s “tax cut for the middle class” is actually a tax increase for at least some of the middle class. This happens because of the complexity created by tax credits and tax credit phase-outs. I’m sure the good Senator doesn’t intend to increase middle class taxes (or, at the every least, doesn’t intend for people to know). These kind of problems result from the bewildering complexity of the tax code and Congressional attempts to micro-manage the economy. Regardless of what policitians propose, further complication of the tax code will make it harder to predict consequences. Obama may want to reduce taxes on the middle class, but without simplifying the tax code, the actual results are unpredictable. It’s a shame that tax simplification isn’t a big campaign issue.

Big Oil

This post got me thinking: do people think that the oil industry is in some way fundamentally different from other industries? You hear a lot about “Big Oil” but not so much about “Big Shoes” or “Big Hamburgers” or “Big Dairy”. Why the attention and enmity toward companies in the petroleum industry?

Here’s a theory: with oil, the time from exploration to production of gasoline is exceedingly long, often decades. Short term supply can change some by changing pumping rates, but major structural change occurs very slowly. Demand, on the other hand, can and does change quickly.

While a few other industries have a similar profile (jetliners, for example), few others are so directly tied to consumers. I’ll never buy a Boeing Dreamliner, but I buy gasoline all the time. The supply and demand behavior for gasoline is very different from the supply and demand behavior of most things I purchase. Unless you’ve really thought about it, and understand some economics, gasoline pricing seems arbitrary and maybe even corrupt. It’s that suspicion of corruption that causes the enmity for “Big Oil”.

Of course, gasoline isn’t totally unique. A few other products have long term suply and short term demand issues. The one I can think of is prescription drugs. And you know how everyone feels about “Big Pharma”.

Naked Short Selling

…not as exciting as it sounds! If you need a good in depth analysis of short selling, naked short selling, and the dubious nature of the new government restrictions, this article is about as good as it gets.

Economics and Politics

If you have a little time, there’s a fine old (1970) essay by Murray Rothbard that explains the relationship between economics and political theory. It’s the best thing I’ve read of its kind. He wrote a new introduction to it in 1991, which is also worth a read. These are great reading because they connect with first principles which sometimes get overlooked in thinking things through.

White House Economics

We don’t often get to see the “inside thinking” behind White House actions, but this description of why the White House proposed a stimulus package and is opposed to a second stimulus package looks like the real deal.

For sure, the first stimulus package was far better than the proposed second stimulus for the reasons stated. But I’m no fan of the first package, which was simply a wealth transfer from future taxpayers to some current taxpayers. I’m sure this caused some economic activity, but I’ll bet more of the stimulus was spent paying down debt than buying new geegaws.