August 30, 2015

Argentina’s decaying armed forces

Filed under: Americas, Economics, History, Military — Tags: , , , , — Nicholas @ 02:00

Argentina is, once again, suffering the consequences of populist-but-incompetent governance, and the state of the armed forces clearly reflect the economic woes of the country. Last year, Rowan Allport contrasted the Argentinian military in the late 1970s leading up to the Falkland War with the hollow shell of today:

It is difficult to believe from the vantage point of 2014, but in 1978, Argentina came within hours of invading Chile. The scheme arose as a result of a conflict between the two countries regarding the ownership of the Picton, Nueva and Lennox islands, which are situated at the western entrance to the Beagle Channel – a waterway running between the Pacific and Atlantic Oceans. The plan envisaged the seizure by the Argentine military of these and a number of other islands, to be followed shortly after by an invasion of mainland Chile, with the intent of capturing the capital Santiago and other key population centres. From this position, the Argentine leadership believed that it would be in an unassailable position to force Chile into a beggar’s peace regarding its territorial demands. Whilst the operation was ultimately aborted at the last minute, it was the then government’s belief that Buenos Ares had the ability to exercise hard power on a substantial scale – together the domestic economic crisis it was experiencing – that ultimately led it to once again travel down the path of aggression with the invasion of the British-governed Falkland Islands in 1982. Although Argentina did not expect the British to attempt to retake the territory and ultimately lost the conflict, its armed forces were – in addition to performing the initial amphibious assault which captured the islands – able to deploy a carrier group, surface action groups and submarines into the South Atlantic, and managed to inflict significant losses on the British using modern anti-ship weapons and a substantial fleet of jet aircraft.

Flashing forward over three decades, the Argentine Armed Forces find themselves in a calamitous state. The depleted Argentine Navy rarely puts to sea, is desperately short of spare parts, and much of the ordinance carried by its ships is past its expiration date. 2012 saw the training ship ARA Libertad seized in Ghana on the orders of a hedge fund seeking reparations from the Argentinian government [blogged here]. Shortly afterward, the corvette ARA Espora was stranded in South Africa for seventy-three days after the German company hired to repair a mechanical fault refused to carry out the work as a result of the Argentine government’s unpaid bills. Then, in a final indignity, 2013 saw the sinking of the decommissioned destroyer ARA Santísima Trinidad in port as a consequence of poor maintenance [blogged here]. The Argentine Air Force largely consists of a collection of obsolete aircraft mostly dating back to the 1970s, which are frequently grounded due to poor serviceability. The Argentine Army has deployed on operations without some of even the most basic equipment and rarely has the resources for training.

So how did this situation arise? As with most such calamities, the root causes are both financial and political. The story of Argentina’s economic fall from grace – both historical and contemporary – is well known. In 1914, Argentina was the tenth wealthiest country in the world, but a century later it has fallen to fifty-fourth place. The last three decades has seen the country careen from crisis to crisis. During the 1980s, Argentina was crippled by inflation and external debt. The free market reforms begun under President Carlos Menem allowed a short reprieve, but a succession of financial crises in Mexico, Brazil, Russia and South East Asia during the 1990s – combined with a failure to tackle numerous underlying domestic economic issues and corruption – sowed the seeds of further catastrophe. In 1998, Argentina’s economy fell into a depression, climaxing with the largest debt default in human history. Though a commodities boom and a currency devaluation allowed room for a brief recovery, the increasing use of interventionist economic policies by the government, along with the 2008 global financial crash and attempts by so-called ‘vulture funds’ to obtain payment for debts on which Argentina had previously defaulted led the country back into crisis, forcing another default in 2014.

So how bad is it now? Argentina is being forced to retire the last of their supersonic jet fighters because they can neither maintain nor replace them:

According to IHS Janes

    “The Argentine Air Force is drastically cutting staff working hours and decommissioning its last fighter aircraft amid continuing budget issues.

    A recently published daily agenda indicates that the service’s working hours have been significantly reduced, from 0800 to 1300; rationing of food, energy consumption, and office supplies has been directed headquarters staff and property residents; and only the minimum personnel required to staff headquarters, directorates, and commands are working.

    These orders, issued on 11 August, take effect 18 August. A next step will cut Monday and Tuesday as working days. Moreover, air force officials said any aircraft taken out of service will not undergo maintenance for now.”

This leaves the Argentine military with just two types of jet aircraft A-4’s and IA-63’s and both are subsonic, decades old and barely serviceable. Argentina had looked into buying new Gripen’s from Sweden via Brazil but this was vetoed by the United Kingdom which makes a large number of internal components for the aircraft. They had also looked at JF-17’s from China, but the JF-17s proved too expensive to modify.

August 29, 2015

The bad news about good news

Filed under: Economics, Media, Politics — Tags: , , , — Nicholas @ 03:00

At Strategy Page, an explanation for why most people think the world is going to hell, despite the facts pointing in all kinds of positive and hopeful directions:

One of the ironies of the post-Cold War world is that most people get the impression that things are getting worse and worse while for the majority of people on the planet life is getting better. Worldwide poverty and death rates are plummeting while income and reported (via opinion surveys) satisfaction are way up. Many major diseases (like tetanus and polio) have nearly been eliminated and malaria, the disease that has killed more people than any other throughout history, is in decline because of medical advances. War related deaths have been declining since World War II ended in 1945 and that decline continued after the Cold War eliminated most communist governments in 1991. Why do most people think otherwise? You can blame the mass media and their most effective marketing tool; FUD (Fear, Uncertainty, and Doubt).

Mass media first appeared in the mid-19th century with the development of the steam press, which made cheap-enough-to-reach-a-mass-audience newspapers possible. Editors quickly learned that FUD sells best. Politicians, rebels, and even advertisers found that FUD was a very effective tool to grab attention and change attitudes. Put another way, excitement sells, and the best way to excite readers is to scare them.

Modern terrorism, based on using murderous mass attacks on the public to trigger a flurry of media coverage, came out of this. The 19th century anarchists, followed by the Bolsheviks (communists), several fascist movements (like the Nazis), and many others, all used this media proclivity to jump on terrorist acts in order to scare readers into buying more newspapers, or supporting some extremist cause or another. The terrorists got the publicity and attention they wanted, which sometimes led to acquiring political power as well.

Radio appeared in the 1930s and this made it even easier to reach literate as well as illiterate populations. Combining radio and FUD allowed communism and fascism to spread far and fast in the 1930s. The sad fact is that this situation is not unknown among journalists. Many of them have been complaining about it for over a century. No one has been able to come up with a solution. Good news doesn’t sell. And the pursuit of scary headlines that do has created a race to the bottom.

It’s probably rational for mass media outlets to concentrate on the vivid, shocking bad news … because it grabs the attention and sells more newspapers and encourages more people to watch video reports. Good news? Well, it’s nice to hear, but it’s neither urgent nor compelling (except cat videos on YouTube, of course). You might like to hear it, but it’s not urgent and compelling … you can catch up on that anytime. A flood? An earthquake? A breaking story about a hostage situation? You’ll pay attention whether you want to or not. And that sells newspapers and gets ad revenue for networks.

August 27, 2015

Comparative Advantage Homework

Filed under: Economics — Tags: , , , — Nicholas @ 02:00

Published on 25 Feb 2015

Make sure you’ve completed the homework introduced in the Comparative Advantage video before you watch this video, as we’ll be going over the answer. We take a look at our example which compares shirt and computer production and consumption in Mexico and the United States. At the end of this video, you’ll have a better understanding of why it makes sense for countries to engage in trade.

August 26, 2015

Harper’s “boutique” tax credits

Filed under: Cancon, Economics, Government, Politics — Tags: , , — Nicholas @ 03:00

Colby Cosh explains why Stephen Harper is so fond of certain kinds of tax system distortions (tl;dr — they work … politically if not economically):

On Sunday, Conservative Leader Stephen Harper announced that his government, if re-elected, would introduce a tax credit for memberships in service clubs like the Canadian Legion or the Kiwanis. This modest measure — and Harper himself emphasized its modesty — is already being greeted with some derision. Apparently this is because a tax break for service clubs is an absurd, baroque complication of the tax code, unfit to stand alongside sensible traditions like the Prince Edward Island aerospace tax credit, the Nova Scotia digital media tax credit, the British Columbia book publishing tax credit, the Ontario computer animation tax credit, the Manitoba odour control tax credit for farms, Quebec’s tax credit “for the modernization of a tourist accommodation establishment” or the various items exempted almost randomly from the GST, such as condominium fees and music lessons.

One senses that the Canadian media have decided, curiously late in the country’s history, that tax-code wrinkles introduced with the aim of social engineering are ridiculous, if the aims thereof are conservative ones. Furthermore, we have concluded that lifting taxes on Elks or Knights of Columbus memberships, and thus putting them on more or less the same footing as religious tithes, is especially ridiculous.

The Conservative party will be awfully disappointed if the press does not engage in some snickering here. The work of the Kinsmen or Rotary is not especially visible if you never cross Eglinton Avenue; the very names of these groups have a rustic flavour on the tongue, carry a whiff of old-school WASP dominance and gray-flannel respectability. Break out into the smaller cities, if you dare, and the traces become somewhat clearer: a seniors’ centre here, an air-ambulance fundraiser there. In smaller towns, service clubs are often practically synonymous with capital-S Society. Laugh at the idea of a tax break for the Legion, but make sure you are still laughing on election night.

August 24, 2015

Billionaires, good and bad

Filed under: Business, Economics, USA — Tags: , , — Nicholas @ 05:00

In the Washington Post, Ana Swanson examines the good and bad (for economic growth) of the billionaire class:

Over the past few decades, wealth has become more concentrated in the hands of a few global elite. Billionaires like Microsoft founder Bill Gates, Mexican business magnate Carlos Slim Helú and investing phenomenon Warren Buffett play an outsized role in the global economy.

But what does that mean for everyone else? Is the concentration of wealth in the hands of a select group a good thing or a bad thing for the rest of us?

You might be used to hearing criticisms of inequality, but economists actually debate this point. Some argue that inequality can propel growth: They say that since the rich are able to save the most, they can actually afford to finance more business activity, or that the kinds of taxes and redistributive programs that are typically used to spread out wealth are inefficient.

Other economists argue that inequality is a drag on growth. They say it prevents the poor from acquiring the collateral necessary to take out loans to start businesses, or get the education and training necessary for a dynamic economy. Others say inequality leads to political instability that can be economically damaging.

A new study that has been accepted by the Journal of Comparative Economics helps resolve this debate. Using an inventive new way to measure billionaire wealth, Sutirtha Bagchi of Villanova University and Jan Svejnar of Columbia University find that it’s not the level of inequality that matters for growth so much as the reason that inequality happened in the first place.

Specifically, when billionaires get their wealth because of political connections, that wealth inequality tends to drag on the broader economy, the study finds. But when billionaires get their wealth through the market — through business activities that are not related to the government — it does not.

Comparative Advantage

Filed under: Economics, History — Tags: , , , — Nicholas @ 02:00

Published on 25 Feb 2015

What is comparative advantage? And why is it important to trade? This video guides us through a specific example surrounding Tasmania — an island off the coast of Australia that experienced the miracle of growth in reverse. Through this example we show what can happen when a civilization is deprived of trade, and show why trade is essential to economic growth.

In an economy with a greater number of participants trading goods and services, there are more ways to find a comparative advantage and earn more by creating the most value for others. Let’s dive right in with an example from our new friends, Bob and Ann.

August 22, 2015

Division of Labor: Burgers and Ships (Everyday Economics 2/7)

Filed under: Economics — Tags: , , , — Nicholas @ 04:00

Published on 24 Jun 2014

A simple example of hamburgers being made at home versus at a restaurant can help illuminate the explosion of prosperity since the Industrial Revolution. The story of the division of labor and development of specialized tools is not a new one — Adam Smith began The Wealth of Nations with this concept. Yet it still has tremendous explanatory power about the world we inhabit.

August 20, 2015

Frédéric Bastiat

Filed under: Economics, Europe, History — Tags: , , , , — Nicholas @ 05:00

Lawrence W. Reed makes the case for Frédéric Bastiat to be awarded a Nobel Prize … if they awarded them posthumously, anyway:

If a posthumous Nobel Prize was awarded for crystal-clear writing and masterful storytelling in economics, no one would be more deserving of it than Frédéric Bastiat (June 30, 1801–December 24, 1850). He set the standard over a century and a half ago.

This remarkable Frenchman was an economist in more than the traditional sense. He understood the way the economic world works, and he knew better than anybody how to explain it with an economy of words. He employed everyday language and a conversational tone, an innate clarity that flowed from his logical and orderly presentation. Nothing he wrote was stilted, artificial, or pompous. He was concise and devastatingly to the point. To this day, nobody can read Bastiat and wonder, “Now what was that all about?”

Economic writing these days can be dull and lifeless, larded with verbosity and presumptuous mathematics. Bastiat proved that economics doesn’t have to be that way: the core truths of the science can be made lively and unforgettable. In literature, we think of good storytelling as an art and stories as powerful tools for understanding. Bastiat could tell a story that stabbed you with its brilliance. If your misconceptions were his target, his stories could leave you utterly, embarrassingly disarmed.

If you aspire to be an economist or a policy maker or a teacher or just an influential communicator, take time to study at the feet of this 19th-century master.

August 19, 2015

Canada looks very good on an international ranking you won’t hear about from our media

Filed under: Cancon, Economics — Tags: , , , — Nicholas @ 05:00

Our traditional media are quick to pump up the volume for “studies” that find that we rank highly on various rankings of cities or what-have-you, but here’s someone pointing out that Canada’s ranking is quite good, but it’s not the kind of measurement our media want to encourage or publicize:

First, we must identify a nation’s currently employed population. Next, all public sector employees are removed to obtain an adjusted productive workforce. It may be objectionable that certain professions, like teaching, nurses in single payer systems and fire fighters, are classified as an unproductive workforce, but as our system is currently designed, the salaries of these individuals are not covered by the immediate beneficiaries like any other business but are paid through dispersed taxation methods.

Finally, this productive population is divided into the nation’s total population to identify the total number of individuals a worker is expected to support in his country. To remove bias toward non-working spouses and children, the average household size is subtracted from this result to get the final number of individuals that an individual must support that are not part of their own voluntary household. In other words, how many total strangers is this individual providing for?

The Implied Public Reliance metric does a far better job of predicting economic performance:

Canada - implied public reliance

Greece, the nation with the debt problem, is currently expecting each employed person to support 6.1 other people above and beyond their own families. This explains much of the pressure to work long hours and also explains the unstable debt loads. Since a single Greek worker can’t possibly hope to support what amounts to a complete baseball team on a single salary, the difference is covered by Greek public debt, debt that the underlying social system cannot hope to repay as the incentives are to maintain the current system of subsidies. To demonstrate how difficult it is to change these systems within a democratic society, we just have to look at the percentage of the population that is reliant on public subsidy.

Canada - reliant on public funding

Oh, and by the way … Greece is doomed:

The numbers imply that 67 percent of the population of Greece is wholly reliant on the Greek government to provide their incomes. With such a commanding supermajority, changing this system with the democratic process is impossible as the 67 percent have strong incentives to continue to vote for the other 33 percent — and also foreign entities — to cover their living expenses.

The Big Ideas of Trade

Filed under: Economics — Tags: , , — Nicholas @ 02:00

Published on 25 Feb 2015

Trade makes people better off, but how? In this video we discuss the importance of specialization and division of knowledge. Specialization leads to improvements in knowledge, which then lead to improvements in productivity. For instance, physicians who specialize are able to learn more about one specific area in medicine, and we benefit from better health care because of this.

What does specialization have to do with trade? What can we learn from Star Trek about the division of knowledge? Is globalization a good thing? We’ll answer these questions and others in this introductory video on the big ideas of trade.

August 15, 2015

Still suffering from the injustices of a caste system? Just apply capitalism

Filed under: Bureaucracy, Economics, India — Tags: , , — Nicholas @ 03:00

Swaminathan S. Anklesaria Aiyar explains how the introduction of free market practices is rapidly undermining the ancient caste system in India:

Karl Marx was wrong about many things but right about one thing: the revolutionary way capitalism attacks and destroys feudalism. As I explain in a new study, in India, the rise of capitalism since the economic reforms of 1991 has also attacked and eroded casteism, a social hierarchy that placed four castes on top with a fifth caste — dalits — like dirt beneath the feet of others. Dalits, once called untouchables, were traditionally denied any livelihood save virtual serfdom to landowners and the filthiest, most disease-ridden tasks, such as cleaning toilets and handling dead humans and animals. Remarkably, the opening up of the Indian economy has enabled dalits to break out of their traditional low occupations and start businesses. The Dalit Indian Chamber of Commerce and Industry (DICCI) now boasts over 3,000 millionaire members. This revolution is still in its early stages, but is now unstoppable.

Milind Kamble, head of DICCI, says capitalism has been the key to breaking down the old caste system. During the socialist days of India’s command economy, the lucky few with industrial licenses ran virtual monopolies and placed orders for supplies and logistics entirely with members of their own caste. But after the 1991 reforms opened the floodgates of competition, businesses soon discovered that to survive, they had to find the most competitive inputs. What mattered was the price of your supplier, not his caste.

August 13, 2015

The Hockey Stick of Human Prosperity (Everyday Economics 1/7)

Filed under: Economics, Health, History — Tags: , — Nicholas @ 02:00

Published on 24 Jun 2014

In this series, Professor Don Boudreaux explores the question economists have been asking since the era of Adam Smith — what creates wealth? On a timeline of human history, the recent rise in standards of living resembles a hockey stick — flatlining for all of human history and then skyrocketing in just the last few centuries. Without specialization and trade, our ancient ancestors only consumed what they could make themselves. How can specialization and trade help explain the astonishing growth of productivity and output in such a short amount of time — after millennia of famine, low life expectancy, and incurable disease?

August 11, 2015

The range and striking power of the Card and Krueger study

Filed under: Business, Economics, Politics — Tags: , , , , — Nicholas @ 05:00

At Coyote Blog, Warren Meyer explains how one particular economic study wields far more influence in the fast food/minimum wage debate than any other similar study:

Pick a progressive on the street, and in the unlikely event they can name any economic study, that study will probably be Card and Krueger’s study of the effect of a minimum wage increase in New Jersey. Sixty bazillion studies have confirmed what most of us know in our bones to be true, that raising the price of labor decreases demand for that labor. Card and Krueger said it did not — and that a minimum wage increase may have even increased demand for labor — which pretty much has made it the economic bible of the Progressive Left.

What intrigues me is that Card and Krueger specifically looked at the effect of the minimum wage on large chain fast food stores. In this study (I will explain the likely reason in a moment) they found that when the minimum wage increased for all businesses in New Jersey, the employment at large chain fast food restaurants went up.

So I wonder if the Progressives making this ruling in New York thought to themselves — “we want to raise the minimum wage. Well, the one place where we KNOW it will have no negative effect from Card and Krueger is on large fast food chains, so…”

By the way, there are a lot of critiques of Card & Krueger’s study. The most powerful in my mind is that when a minimum wage is raised, often the largest volume and highest productivity companies in any given business will absorb it the best. One explanation of the Card & Krueger result is that the minimum wage slammed employment in small ma and pa restaurants, driving business to the larger volume restaurants and chains. As a whole, in this theory, the industry saw a net loss in employment and a shift in employment from smaller to larger firms. By measuring only the effect on larger firms, Card and Krueger completely missed what was going on.

August 10, 2015

Price Controls and Communism

Filed under: Economics, History — Tags: , , , — Nicholas @ 06:48

Published on 25 Feb 2015

What happens when the prices of all goods are controlled? Under communism, or a command economy, this is exactly what occurs. As a result, all of the effects of price controls become amplified: there are even more shortages or surpluses of goods, lower product quality, longer lines and more search costs, more losses in gains from trade, and more misallocation of resources. As we have seen, universal price controls destroy market coordination and create a system of planned chaos in which it becomes more difficult for consumers to get the goods and services they want and need.

August 9, 2015

Bob Rae then, and Bob Rae now

Filed under: Cancon, Economics, Politics — Tags: , , — Nicholas @ 04:00

I missed when Colby Cosh started writing for the National Post a while back, and only just remembered to pick up the RSS feed for his column, so this one is nearly a month old (I’m hoping that the Post has given up on their goofy licensing idea for bloggers, which was why I stopped reading or linking to the paper when they introduced it):

Ever since May, when Alberta raised the orange flag of rebellion and keelhauled its Progressive Conservatives, we have heard much about the danger that Rachel Notley will turn out to be another Bob Rae. Every time I have heard this, I have asked myself a question: which Bob Rae?

I know they mean the callow young Rae who, as premier of Ontario, blew up the welfare rolls, fiddled with rent control and pay equity while the treasury hemorrhaged and struggled tumultuously against NAFTA. But what, I wondered, if Notley turned out to be more like Liberal-elder-statesman Bob Rae, who is often a more eloquent defender of markets than just about any Conservative politician one can name? (Fine: I’ll spot you Maxime Bernier.) The older he gets, the more explicit Rae becomes about his Damascene conversion to the primacy of economic competitiveness.

In May, Rae wrote a little-noticed article about Notley that was essentially a warning: don’t be me.

“Keeping spending on operations (health care and education in particular) in check has been the greatest challenge for social democratic governments around the world,” Rae wrote. “From the Labour government in the U.K. in the seventies, to the travails of François Hollande in France, the examples are legion. It ain’t easy.” The heavy sigh is almost audible.

“Government can’t defy gravity,” Rae added, taking what unreconstructed socialists would now call a “pro-austerity” position. “There’s a limit to what any government, of any stripe, can borrow, tax and spend.… The laws of economics are not exactly like the laws of physics, but reality has a way of rushing in.”

When it comes to Rachel Notley and the New Democratic Party, the truth is that Alberta, nauseated by the banana-republican habits of its PC caste, took a conscious gamble. Notley put forward an economic platform with a minimum of utopianism, and upheld the icons of relatively successful, fiscally austere prairie New Democrats: Roy Romanow, Gary Doer.

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