December 19, 2014

In Stephen Harper’s Canada, politics beats economics every time

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

Stephen Harper gets a lot of criticism for being an ideological hard-liner, but he gets nearly as much flak from small-government conservatives for being no better — and in some cases, much worse — than Jean Chrétien and Paul Martin. Earlier this month in Maclean’s, Stephen Gordon explained some of the reasons for Harper’s political and economic actions:

Politics, not economics, has also determined [Harper’s] strategy for achieving this goal [a smaller government-spending-to-GDP ratio]. If you asked an economist for the best way of reducing revenues, she’d probably prepare a list with the taxes that are the most harmful to the economy at the top, and the taxes that are the least harmful at the bottom. The GST would rank at or near the bottom of that list. (Here is a representative reaction to the Conservatives’ 2005 campaign promise to reduce the GST; here is an explanation for why economists think the GST is a good idea.) In economic terms, reducing the GST was probably the worst possible option available to the Conservatives.

But as far as politics goes, it was an inspired choice. It helped win the election, and — perhaps even more importantly — reducing the GST has made it that much harder for any future government to reverse the trend to lower spending. If the Liberals and the NDP were to ask an economist to provide a list of ways of generating the most revenues at the least economic cost, increasing the GST would be at or near the top of the list. But those two GST points are not going to come back to fill federal coffers in the foreseeable future. Both the Liberals and the NDP have campaigned at some point on anti-GST platforms, and history has not been kind to provincial governments that have raised the HST without an electoral mandate to do so. (The NDP’s proposal to increase corporate tax rates is the doppelgänger of the Conservatives’ GST cut. In economic terms, an increase in corporate taxes is probably the worst possible choice for generating revenues, but it’s a potential vote-winner. Maybe it will work for them as well as it did for the CPC.)


This brings us to the “starve the beast strategy” described in detail here: the reduction in revenues is now a justification for reducing expenditures. But, once again, the strategy is driven by politics, not economics. The elements are as follows (see also here and, most recently, here):

  1. Let transfer payments to individuals grow at the rate of GDP.
  2. Let transfer payments to provinces grow at the rate of GDP.
  3. Hold nominal direct program spending constant.

These elements have been in place in every budget since 2010. The economics of this approach are very dodgy: the economically efficient way to approach the problem of reducing spending is to perform a cost-benefit analysis and eliminate the programs that don’t pass the test. But the politics are something else. Cuts in transfer payments directly affect peoples’ personal finances, and could be reversed at no political cost. The same is true for cuts in transfer payments to the provinces; much of the Jean Chrétien-era cuts to the provinces were rescinded a few year later. The path of least political resistance is through direct program spending: the cost of paying federal public servants’ wages.

QotD: The twin rise and fall of unions and manufacturing

Filed under: Business, Economics, History, Quotations, USA — Tags: , , — Nicholas @ 00:01

Unions only help if the underlying economic situation is that the employer is able to charge a great deal more for the amount of product generated per worker-hour than the worker is getting — there is headroom for the worker’s wage to expand into while the manufacturer still makes a net profit. (If the manufacturer doesn’t make a net profit the business collapses and nobody gets paid.)

During the age that manufacturing nostalgisists remember nostalgically, this was true. For most of that period (roughly 1870-1970), the capital goods required to manufacture in a way price-competitive with the U.S. were so expensive that almost nobody outside the U.S. could afford them, and in the few places that could they were mainly preoccupied with supplying their domestic markets rather than the U.S. World War II prolonged this period by hammering those “few places” rather badly.

In that environment, U.S. firms could profit-take hugely, benefited by being scarce suppliers not just to the U.S. but (later on) to the whole world. And unions could pry loose enough of that margin to make manufacturing jobs comfortably middle-class.

All that ended in the early 1970s. A good marker for the change is the ability of the Japanese to make cheap cars for export and sell them for the U.S.

In the new world, the profit margins on manufactured goods narrowed dramatically. The manufacturing firms could no longer effectively ignore overseas competition in the U.S. domestic market. U.S. consumers no longer had to to pay the large price premiums required to sustain domestic manufacturing wages at pre-1970 levels, and they jumped right on that option.

In this environment, unions don’t help because they have almost no negotiating room. If they bid up workers’ wages, the jobs will evaporate or move overseas – not because corporations are being “greedy” but because they can no longer charge the prices that would allow such high wages to be sustained. Too much foreign labor and capital is ready to pounce on the first hint of price-taking.

Eric S. Raymond, “Why labor unions have lost their moxie”, Armed and Dangerous, 2014-11-29.

December 16, 2014

Affluence and the rise of major modern religions

Filed under: Economics, History, Religion — Tags: , , , , , — Nicholas @ 07:30

Colby Cosh linked to this article in Popular Archaeology, which discusses an interesting idea about what triggered the rise of Christianity, Judaism, Hinduism, and Islam:

It seems almost self-evident today that religion is on the side of spiritual and moral concerns, but that was not always so, Baumard explains. In hunter-gatherer societies and early chiefdoms, for instance, religious tradition focused on rituals, sacrificial offerings, and taboos designed to ward off misfortune and evil.

That changed between 500 BCE and 300 BCE — a time known as the “Axial Age” — when new doctrines appeared in three places in Eurasia. “These doctrines all emphasized the value of ‘personal transcendence,'” the researchers write, “the notion that human existence has a purpose, distinct from material success, that lies in a moral existence and the control of one’s own material desires, through moderation (in food, sex, ambition, etc.), asceticism (fasting, abstinence, detachment), and compassion (helping, suffering with others).”

While many scholars have argued that large-scale societies are possible and function better because of moralizing religion, Baumard and his colleagues weren’t so sure. After all, he says, some of “the most successful ancient empires all had strikingly non-moral high gods.” Think of Egypt, the Roman Empire, the Aztecs, the Incas, and the Mayans.

In the new study, the researchers tested various theories to explain the history in a new way by combining statistical modeling on very long-term quantitative series with psychological theories based on experimental approaches. They found that affluence — which they refer to as “energy capture” — best explains what is known of the religious history, not political complexity or population size. Their Energy Capture model shows a sharp transition toward moralizing religions when individuals were provided with 20,000 kcal/day, a level of affluence suggesting that people were generally safe, with roofs over their heads and plenty of food to eat, both in the present time and into the foreseeable future.

Anton Howes on what caused the industrial revolution

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

In the first post at his new blog, Anton Howes lays out one of the biggest questions about the 19th century:

What caused the Industrial Revolution?

By the term “Industrial Revolution”, the broadly accepted meaning is of (1) innovation-led, (2) sustained and (3) replicable economic growth.

Each of those adjectives are the source of some of the other important questions in the social sciences. Here are some brief summaries of the issues at hand, which I’ll maybe expand upon separately.

(1) Innovation-led

Innovation-led growth distinguishes itself hugely from what we might call ‘Ricardian’ or ‘Malthusian’ economic growth (it’s usually called ‘Smithian’, but that’s a topic for another time). Capital accumulation, population growth, conquest, and education, can all result in initial surges of economic growth. But this is soon brought to a standstill by the brutal reality of diminishing marginal returns, depreciation, and food shortages.


(2) Sustained

Innovation existed before the Industrial Revolution. Of course it did – you need look no further than the invention of agriculture, writing, bronze, crop rotations, horse collars, windmills, gunpowder, printing presses, paper, and bills of exchange to know that innovations have occurred throughout history before the IR.

The difference is that these were few and far between. Some of them, often grouped together, resulted in Golden Ages, or “Efflorescences” as Jack Goldstone likes to call them. The 1st Century early Roman Empire; the 8th Century Arab World; 12th Century Sung Dynasty China; the 15th Century northern Italian city-states; and 17th Century Dutch Republic are all good examples.


(3) Replicable

Perhaps most importantly, this miracle quickly spread. First to Belgium, across the Atlantic to the new-born USA, and then to the Dutch Republic still winding down from its own Golden Age, France, Northern Italy, and the multitude of German principalities.

In the last Century it spread to Japan, South Korea, Singapore, Hong Kong, China, Vietnam and Eastern European countries escaping the shadow of Communism.

In this Century it appears to finally be taking root in various African countries. Kenya, Tanzania and Rwanda in particular seem to be leading the way.

The more recent recipients of the IR are experiencing an unprecedented rate of growth, which in itself provides a further miracle in economic history. Britain’s sustained growth only initially manifested itself at less than 1% per year. It took about 100 years for Britain’s first doubling in GDP to occur.

More recent recipients can expect to grow at 7-10% every year, and sometimes even higher. To put that in perspective, growth at 7% per year would result in a doubling of the size of the economy in only 10 years. 10% a year in only 7 years.

December 12, 2014

QotD: Apple isn’t worth the same as Switzerland

Filed under: Business, Economics, Quotations — Tags: , , , — Nicholas @ 00:01

It is true that Switzerland’s GDP is around $700 billion. But GDP is a measure of value added in a country in one year. That is, it’s the income of the place. Apple’s $700 billion valuation is the total value of the company: this is akin to wealth, not income. And of course the value of a stock is the net present value of all of the future income from it. So, that $700 billion for Apple is the current value (as the market estimates it) of everything that Apple will ever do in the future. The valuation of Switzerland, that $700 billion, is what the place made this year alone. Two very different numbers.

To get to something comparable for Apple we need to work out this year’s added value. A rough and ready definition of that is profits plus wages paid (this is approximately equal to the labour and profit shares in GDP which don’t quite equal total GDP but good enough for rough comparisons). Apple’s profits are around $40 billion, it employs a little under 100,000 people directly. Say each of those is paid $100,000 a year (obviously, some get very much more but when we add in the Genius Bar folks that might be reasonable enough as an average) which gives us another $10 billion. Not entirely accurate but reasonable enough to say that Apple’s value add, the equivalent of GDP, is some $50 billion.

When we go looking for a country at around that we find The Sudan and Luxembourg jointly on some $55 billion. And Luxembourg is some 400,000 people, and roughly half of the people in a country work (take out the kiddies, pensioners, housewives etc, roughly correct) giving us a Luxembourgois workforce of 200,000 people. 100,000 people in one of the most profitable companies on the planet produce about the same value as 200,000 rich world people in a country. OK, that’s impressive for Apple but it’s a much better indication of the company’s economic size than any other measure. It is, around and about, fair to say that Apple produces the same economic value as Luxembourg. […]

And to repeat the point at the top, we’re never going to really understand corporate power or the size of the corporate sector (or corporations) until we start to understand what these different numbers being bandied about as valuations and value of production etc really mean. Corporations really are very much smaller than countries: even the largest and most valuable of corporations is really only comparable to a city sized country. To give you a much better idea of the size of Apple relative to economic output of an area then Apple’s about the size of Raleigh, North Carolina, Omaha Nebraska, maybe, just maybe as large as Forth Worth, Texas, or Charlotte, North Carolina. Somewhere in that range at least. Or to use States, perhaps around Rhode Island or Maine.

Corporations just aren’t as large and economically powerful as some seem to think.

Tim Worstall, “Apple Isn’t Worth Switzerland But It Is Worth All The World’s Airlines”, Forbes, 2014-11-22.

December 10, 2014

QotD: Quality, innovation, and progress

Filed under: Economics, Liberty, Quotations, Technology — Tags: , , , , — Nicholas @ 00:01

Measured by practically any physical metric, from the quality of the food we eat to the health care we receive to the cars we drive and the houses we live in, Americans are not only wildly rich, but radically richer than we were 30 years ago, to say nothing of 50 or 75 years ago. And so is much of the rest of the world. That such progress is largely invisible to us is part of the genius of capitalism — and it is intricately bound up with why, under the system based on selfishness, avarice, and greed, we do such a remarkably good job taking care of one another, while systems based on sharing and common property turn into miserable, hungry prison camps.

We treat the physical results of capitalism as though they were an inevitability. In 1955, no captain of industry, prince, or potentate could buy a car as good as a Toyota Camry, to say nothing of a 2014 Mustang, the quintessential American Everyman’s car. But who notices the marvel that is a Toyota Camry? In the 1980s, no chairman of the board, president, or prime minister could buy a computer as good as the cheapest one for sale today at Best Buy. In the 1950s, American millionaires did not have access to the quality and variety of food consumed by Americans of relatively modest means today, and the average middle-class household spent a much larger share of its income buying far inferior groceries. Between 1973 and 2008, the average size of an American house increased by more than 50 percent, even as the average number of people living in it declined. Things like swimming pools and air conditioning went from being extravagances for tycoons and movie stars to being common or near-universal. In his heyday, Howard Hughes didn’t have as good a television as you do, and the children of millionaires for generations died from diseases that for your children are at most an inconvenience. As the first 199,746 or so years of human history show, there is no force of nature ensuring that radical material progress happens as it has for the past 250 years. Technological progress does not drive capitalism; capitalism drives technological progress — and most other kinds of progress, too.

Kevin D. Williamson, “Welcome to the Paradise of the Real: How to refute progressive fantasies — or, a red-pill economics”, National Review, 2014-04-24

December 5, 2014

The urban light-rail mania

Filed under: Economics, Environment, Politics, Railways, Technology — Tags: , , — Nicholas @ 00:04

If you live in a city, chances are that the politicians of your ‘burgh are talking light rail. Unless, of course, you already are suffering under the burden of a light rail project snarling traffic during construction … and snarling traffic in operation. Light rail, in general, is an attempt to resurrect the streetcar era by vast infusions of tax dollars. It’s an attempt to solve a traffic management problem in one of the more inefficient ways possible: to get a few people out of their cars and into modern streetcars instead.

I’m not anti-rail by any means. I travel five days a week on a heavy rail commuter train that does a pretty fair job of getting me where I need to go in a timely and economical fashion. Worse than that, I’m a railway fan — as I’ve mentioned before, I founded a railway historical society. I’m not against light rail due to some sort of anti-rail bias … I’m against it because it’s almost always too expensive, too inflexible, and too politicized.

Georgi Boorman wonders why so many cities are still falling into the light rail trap:

In a previous piece, I discussed the radical ideological roots of the mass transit scam. There are some, such as Seattle City Councilwoman Kshama Sawant (who urged Boeing factory workers to seize control of the plant and begin building mass transit) who believe centralization and a complete shift to mass transit are crucial for cities’ futures. Others simply buy into this myth that light rail and trolleys will somehow elevate their cities to the next level of sophistication — the very prospect of which is ignorant, at best, and self-indulgent, at worst.

The overwhelming evidence shows that these mass transit projects do little to improve our quality of life, in terms of easing congestion and expanding access to jobs and, despite popular perception, have no significant net environmental benefits since they rarely succeed in their express goal of removing cars from the road or decreasing congestion-induced idle times, a frequently cited contributor to greenhouse-gas emissions. As the satirical online newspaper The Onion reported, “98% of Americans favor public transportation for others.” That statistic may be fake, but we’ve all experienced the sentiment.

Even the writers of The Simpsons seem to understand the comical nature of light-rail adoption in American cities, brilliantly satirizing the salesmanship by transit authorities. The salesman, “Lyle Lanley,” begins by comparing the Simpsons’ town of Springfield to Shelbyville. “This is more of a Shelbyville idea,” he says slowly, turning his back to the crowd. “Now, wait a minute!” the Springfield mayor responds hastily, “We’re just as smart as the people of Shelbyville—just tell us your idea and we’ll vote for it!”

Gleefully, Lanley begins his presentation; with a grand sweeping gesture, the salesman uncovers a model of the city, complete with buildings, trees, and a brand new Springfield Monorail zooming through the town on its miniature tracks. Holding up a map labeled with all the towns to which he’s sold monorails, he exclaims, “By gum, it put them on the map!” Continuing his pitch, Langley heightens the townspeople’s imaginations and sells them on the “novel” idea of their very own monorail.

In other words, the buy-in had nothing to do with demand for a certain kind of transportation, and everything to do with wanting do the same as other cities that have, or are building, the same thing. Of course, 50 years ago the Seattle Center monorail (built by the German company Alweg) could easily have been said to have elevated the Emerald City at the 1962 World’s Fair, being the cutting-edge of rail technology at the time; but building monorails, light rails, and streetcars in 2014 is a regressive move that mirrors the past rather than engages with the present while leaving room for future innovation.

December 4, 2014

Fully Fitted Freight (1957)

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

Published on 29 Nov 2013

How freight was moved around Britain by rail in the 1950s, although in reality a lot of it was unfitted.

If you think your mortgage is bad, here’s a bit of perspective

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

Britain is deeply in debt, like most western countries, but some of the debt is much longer term than usual:

Britain will pay off all of its debt used to fund World War One next March, when it redeems a government bond first issued more than 80 years ago to help pay for the conflict.

The finance ministry said on Wednesday that it would redeem the 1.9 billion pound ($3 billion), 3.5 percent War Loan — a perpetual bond which means it has no fixed maturity date — on March 9 next year.

Issued in 1932, the War Loan was used to refinance debt accumulated during World War One, which ended in 1918.

Some market experts said they would miss the bond as a rare historical curiosity in modern finance.

“For those of us who’ve been looking at the gilt market for a long time, a little bit of magic has fallen out of the market,” said Barclays fixed income strategist Moyeen Islam.

What needs to be pointed out however, is that they’re not actually paying off the WW1 debt: they’re eliminating that particular interest-bearing bond (because it’s now paying a higher rate of interest than the UK government’s other debt instruments). The money to pay off the current holders of those bonds will be borrowed on the market at current market rates. That’s the government equivalent of paying off one credit card with another … you still have a debt, it’s just being held by a different lender now. Tim Worstall explains:

As background, yes, Britain ran up big debts in WWI. Those were those National War Bonds. And interest rates changed a bit, finances moved around, and in 1927 it was decided that those National War Bonds should be changed. And the change was to turn them into perpetual bonds: the capital would never be paid off, there would just be a stream of interest off into the indefinite future. The government retained the right to buy them in at any point (a “call option” on them) which is what Osborne is exercising now. One more thing: there were other bits and pieces of debt lying around. Odd bits and pieces from the 19th century, debt from the Crimean War, from those (not large enough) attempts to deal with the Great Famine in Ireland, bits and pieces relating to the Napoleonic Wars and even, would you believe it, some parts that related all the way back to the South Sea Company and the South Sea Bubble of the 1720s (although that connection is pretty remote).

All of these pieces were dumped into the same pot and “consolidated” into these perpetual bonds. They were and are thus known as “Consols”.

What Osborne is going to do is exercise that call option and bring those bonds back in. But he’s not actually “paying off” those debts. He’s going to issue other, more conventional, gilts in order to have the money to give to those sending in their Consols. He must be doing that: the government really is borrowing £100 billion a year and change at present. This is no more “paying off” those debts than my taking out a bank loan to pay off my credit card is paying off debts. It might well be a very good idea to do that, given the difference in the terms of the debts and the interest rates, but it’s still not paying off, is it?

H/T to Elizabeth for the original link.

December 3, 2014

QotD: Money in the “paradise of the real”

Filed under: Economics, Quotations — Tags: , , — Nicholas @ 00:01

Money is a symbolic system, the purpose of which is to facilitate exchange and to act as a recordkeeping technology. That money is so very important to our everyday lives and yet has no real connection with physical reality is the source of many apparent paradoxes and contradictions. These are the best of times, these are the worst of times.

Measured by money, things look relatively grim for the American middle class and the poor. Men’s inflation-adjusted average wages peaked in 1973, and inflation-adjusted household incomes for much of the middle class have shown little or no growth in some time. The incomes of those at the top of the distribution (which is not composed of a stable group of individuals, political rhetoric notwithstanding) continue to pull away from those in the middle and those at the bottom. The difference between a CEO’s compensation and the average worker’s compensation continues to grow.

But much of that is written into the code. If, for example, you measure inequality by comparing the number of dollars it takes to land at a certain income percentile, with a hard floor on the low end (that being $0.00 per year in wages) but no ceiling on the top end, and if you have growth in the economy, then it is a mathematical inevitability that incomes at the top will continue to pull away from incomes at the bottom, for the same reason that any point on the surface of a balloon will get farther and farther away from the imaginary fixed point at its center as the balloon is inflated. This will be the case whether you have the public policies of Singapore or Sweden, and indeed it is the case in both Singapore and Sweden.

Purely symbolic systems are easy to manipulate, which is why any two economists can take the same set of well-documented economic data and derive from it diametrically opposed conclusions.

With economic models, we are a little like Neo in The Matrix, before he takes the red pill: We are not in the real world, but in a simulacrum of it, one that has rules, but rules that can be manipulated by those who understand the code. Economic models and analysis are very useful, but it’s worth taking the occasional red-pill tour, leaving behind the world of pure symbolism and taking a look at the physical economy.

Welcome to the paradise of the real.

Kevin D. Williamson, “Welcome to the Paradise of the Real: How to refute progressive fantasies — or, a red-pill economics”, National Review, 2014-04-24

November 30, 2014

Working for free

Filed under: Cancon, Economics — Tags: , — Nicholas @ 11:12

In Maclean’s earlier this month, Colby Cosh addressed the brief flare-up of controversy around comments by the Governor of the Bank of Canada on the topic of doing work for free:

It is inherently difficult to feel sorry for the guy whose signature is on the money. But the governor of the Bank of Canada, Stephen Poloz, has been receiving what must be an unfamiliar burst of catcalls for comments he made about underemployed youth on Nov. 3 and 4.

Canada, Poloz was explaining, is making a somewhat gimpy recovery from the financial bubble-burst of 2008-09. A lot of the lost employment has been superficially replaced, but an unusual quantity of the new work consists of part-time jobs being performed by people who would like full-time ones, and there are some 200,000 young people who are “out of work, underemployed, or trying to improve their job prospects by extending their education.

“I bet almost everyone in this room knows at least one family with adult children living in the basement,” he added. “I’m pretty sure these kids have not taken early retirement.”

The next day, at a hearing of the House of Commons finance committee, Scott Brison followed up, asking if Poloz anticipated a long-term “scarring” effect on young people whose entry into the labour market has coincided with a lingering recession. Poloz’s response has been summarized as: “Go work for free.” What he actually said was: “When I was asked yesterday, I suggested, as I have privately to young folks who ask me what they should be doing in this job environment, that people volunteer to do something which is at least somewhere related to their expertise, so that it’s clear they are gaining some learning experience during that period.”

In fewer words: yeah, go work for free. The remark led to a curious revival of this year’s earlier controversy over unpaid internships, particularly in the magazine industry. Poloz hadn’t technically said anything about unpaid internships, which are hardly the only means of amassing job experience by working for free, and in many cases probably not the best one. (If you want magazine work, don’t take an internship. Start a blog.) Nonetheless, there was a fresh round of recrimination for companies that faced legal and moral pressure months ago and stopped providing internships as a result.

One gets the sense that Poloz and his critics are talking past one another. The critics complained that not every underemployed young person has the luxury of living with his parents. But it is hard to see how that would contradict his personal advice to those who do have it. Everybody should make maximum use of their advantages in creating a career path. And a comfortable basement with no rent attached is one of the most widely available.

Bad politics, bad economics and the “great chocolate shortage”

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

Tim Worstall explains that the fuss and bother in European newspapers about the “market failure” in the chocolate supply is actually a governmental failure (a market sufficiently bothered by legislation and regulation):

The last few days have seen us regaled with a series of stories about how the world is going to run out of chocolate. That would be, I think we can all agree, almost as bad as running out of bacon. So it’s worth thinking through the reasons as to why we might be running out. After all, cocoa, from which chocolate is made, is a plant, it’s obviously renewable in that it grows each season. So how can we be running out of something we farm? The answer is, in part at least, that there’s some bad public policy at the root of this. As there usually is when something that shouldn’t happen does.

Here’s the basic story in a nutshell:

    A recent chocolate shortage has seen cocoa farmers unable to keep up with the public’s insatiable appetite for the treat–and the world’s largest chocolate producers, drought, Ebola and a fungal disease may all be to blame.

Much of the world’s chocolate comes from West Africa so the disruption by the Ebola outbreak is one obvious part of it. But the shortage is not something immediate, it’s something that has been coming for some years. Ebola is right now, not a medium term influence. Drought similarly, that’s a short term thing, and this is a medium term problem. It’s also true that as the world gets richer more people can afford and thus desire that delicious chocolate.


Ahhh…the government is paying the farmers £1 a kg or so and the market is indicating that supply and demand will balance at £1.88 a kg. So, what we’ve actually got here is some price fixing. And the price to the producers is fixed well below the market clearing price (although the government most certainly gets that market price). So, we’ve a wedge in between the prices that consumers are willing to pay for a certain volume and the price that the farmers get for production. So, therefore, instead of it being the price that balances supply and demand we end up with an imbalance of the supply and demand as a result of the price fixing.

This is how it always goes, of course, whenever anyone tries to fix a price. If that price is fixed above the market clearing one then producers make more than anyone wants to consume (think the EU and agriculture, leading to butter mountains and wine lakes). If the price is fixed below the market clearing one then producers don’t make as much as people want to consume. This is why it’s near impossible to get an apartment anywhere where there is rent control. And if prices are fixed at the market clearing price then why bother in the first place? Quite apart from the fact that we’ve got to use the market itself to calculate the market clearing price.

November 20, 2014

“The Piketty Gang ride in, a hollerin’ an’ a whoopin’ and take all the money from Scrooge McDuck”

Filed under: Economics, Media — Tags: , , — Nicholas @ 12:30

At Forbes, Tim Worstall explains why — despite the headlines — Piketty didn’t actually change economics:

That optimal taxation theory really rests on two things that we’re pretty sure are true. The first being that Laffer Curve thing. No, this doesn’t mean that all tax cuts pay for themselves. Rather, that it’s possible for tax rates to be so high that they actually reduce the amount of tax revenue being collected. A nice example of this is the latest rise in New York’s cigarette tax: less money in total is now being raised even though the tax rate has risen. Given that our primary purpose in taxing is to get the money we need to run the government that we must have (as ever, my opinion being that we might want to have less government, and thus lower taxes, than we currently do but that’s another matter) having a tax over the revenue maximising rate just isn’t sensible.

The second pillar is that we know that different taxes destroy different amounts of economic activity for the same revenue collected. As above, we want to gain revenue but obviously we also want it at the least cost. That means getting as much of it as we can from the low deadweight costs taxes and as little of it as we can manage from the high cost ones. We also know how the spectrum looks. At the lowest deadweight costs we have repeated taxes on real property (say, a land value tax), then taxes upon consumption (VAT or sales taxes) then on incomes and highest of all, upon corporates and capital. There’s one off the spectrum, transactions taxes like the financial transactions tax, but that’s so silly that no one serious is suggesting it.

So, standard and general theory insists that we shouldn’t be taxing corporates and capital at all if we can manage it and also that we don’t want to have very high taxes rates on anything.

So, if for political (or even emotional) reasons you think that we really should be gouging the rich then you’re going to have to go find yourself some new economic theories. And that, I think, is really what is going on here with Piketty and the gang (slightly catchy that, isn’t it? The Piketty Gang ride in, a hollerin’ an’ a whoopin’ and take all the money from Scrooge McDuck?). They want to find a reason to tax wealth, something conventionally contraindicated, and they want to have very high income tax rates, something also contraindicated by conventional theory. So, rather than try to overturn that conventional theory they’re bypassing it. Ignoring it even and just bringing up the idea of inequality instead to see if that will convince people.

November 19, 2014

A worthwhile Zambian initiative

Filed under: Africa, Economics, Law — Tags: , — Nicholas @ 07:43

Tim Worstall unexpectedly finds himself on the same side of an economic and political question as a Green Party politician from Zambia:

This strikes me as being one of the very few good ideas that has been put forward at any recent election in any country that I’m aware of. A Zambian politician has decided that, given that the world seems to be moving toward legal medical marijuana at least, if not full legalisation, then that country should make use of its comparative and absolute advantage in growing the stuff and thus supply it to the rest of the world. […]

It’s slightly disconcerting to find myself agreeing with a politician, let alone one from the Green Party, but as I say this strikes me as an excellent policy.

Let’s start from the beginning: all of us liberals (whether economic or social liberals) agree that allowing people to legally toke is a thoroughly good idea. The drug itself is almost entirely harmless (obviously less so than tobacco for example, and those stories about it bringing on schizophrenia and the like are more to do with people becoming schizophrenic self-medicating than anything else) and being banged up in a jail cell, convicted of a felony, for having possession of a joint or two is going to do far more harm to your life chances than actually smoking them.

If we’re going to agree to that (and I agree people not liberals of any flavour may not) then similarly clearly we would like the best dope we can get at the lowest possible price. Given that this is true of every other product we consume it’s going to be true of this one too. And that means that if other places around the world can produce it better, or more cheaply, or some combination of the two, than we can then we should be trading with them.

November 18, 2014

Finland’s Great(est) Depression

Filed under: Economics, Europe — Tags: , , — Nicholas @ 00:03

Lars Christensen explains why — economically speaking — Finland is suffering through an economic phenomena even worse than the Great Depression:

In my post from Friday — Italy’s Greater Depression — Eerie memories of the 1930s — I inspired by the recent political unrest in Italy compared the development in real GDP in Italy during the recent crisis with the development in the 1920s and 1930s.

The graph in that blog post showed two things. First, Italy’s real GDP lose in the recent crisis has been bigger than during 1930s and second that monetary easing (a 41% devaluation) brought Italy out of the crisis in 1936.

I have been asked if I could do a similar graph on Finland. I have done so — but I have also added the a third Finnish “Depression” and that is the crisis in the early 1990s related to the collapse of the Soviet Union and the Nordic banking crisis. The graph below shows the three periods.

Three Finnish depressions


The most interesting story in the graph undoubtedly is the difference in the monetary response during the 1930s and during the present crisis.

In October 1931 the Finnish government decided to follow the example of the other Nordic countries and the UK and give up (or officially suspend) the gold standard.

The economic impact was significant and is very clearly illustrate in the graph (look at the blue line from year 2-3).

We have nearly imitate take off. I am not claiming the devaluation was the only driver of this economic recovery, but it surely looks like monetary easing played a very significant part in the Finnish economic recovery from 1931-32.

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