Quotulatiousness

January 1, 2015

The Laffer Curve at 40

Filed under: Business, Economics, Government, USA — Tags: , , , , , — Nicholas @ 11:39

In the Washington Post, Stephen Moore recounts the tale of the most famous napkin in US economic history:

It was 40 years ago this month that two of President Gerald Ford’s top White House advisers, Dick Cheney and Don Rumsfeld, gathered for a steak dinner at the Two Continents restaurant in Washington with Wall Street Journal editorial writer Jude Wanniski and Arthur Laffer, former chief economist at the Office of Management and Budget. The United States was in the grip of a gut-wrenching recession, and Laffer lectured to his dinner companions that the federal government’s 70 percent marginal tax rates were an economic toll booth slowing growth to a crawl.

To punctuate his point, he grabbed a pen and a cloth cocktail napkin and drew a chart showing that when tax rates get too high, they penalize work and investment and can actually lead to revenue losses for the government. Four years later, that napkin became immortalized as “the Laffer Curve” in an article Wanniski wrote for the Public Interest magazine. (Wanniski would later grouse only half-jokingly that he should have called it the Wanniski Curve.)

This was the first real post-World War II intellectual challenge to the reigning orthodoxy of Keynesian economics, which preached that when the economy is growing too slowly, the government should stimulate demand for products with surges in spending. The Laffer model countered that the primary problem is rarely demand — after all, poor nations have plenty of demand — but rather the impediments, in the form of heavy taxes and regulatory burdens, to producing goods and services.

[…]

Solid supporting evidence came during the Reagan years. President Ronald Reagan adopted the Laffer Curve message, telling Americans that when 70 to 80 cents of an extra dollar earned goes to the government, it’s understandable that people wonder: Why keep working? He recalled that as an actor in Hollywood, he would stop making movies in a given year once he hit Uncle Sam’s confiscatory tax rates.

When Reagan left the White House in 1989, the highest tax rate had been slashed from 70 percent in 1981 to 28 percent. (Even liberal senators such as Ted Kennedy and Howard Metzenbaum voted for those low rates.) And contrary to the claims of voodoo, the government’s budget numbers show that tax receipts expanded from $517 billion in 1980 to $909 billion in 1988 — close to a 75 percent change (25 percent after inflation). Economist Larry Lindsey has documented from IRS data that tax collections from the rich surged much faster than that.

Unintended consequences – charities suffer due to US anti-terror measures

Filed under: Economics, Government, USA — Tags: , , , , — Nicholas @ 11:31

It’s actually rather amazing how powerful the US government can be … and we’re not talking about military power here. US banking laws are being exported to other nations without their consent or consultation, and there’s nothing non-US governments can do about it:

Now here’s a real surprise. The various anti-terror laws, terrorist financing laws, know your customer, illicit money tracking laws which now festoon the financial system have costs. Really, who would have thought it that bureaucratic regulations have real costs out there in the real world? It’s something of an amusement that it’s a rather lefty think tank, Demos, that brings us this news. For, of course, it tends to be those who are rather lefty who tell us that regulation is the cure for all our ills and no, of course not, regulations never have any costs they only do good things. You know, the Elizabeth Warren approach, piles of regulations on finance will be just wonderful, no one will ever lose out.

It particularly interests me as I’ve a very vague connection with a charity, Interpal, that has been hit by these sorts of regulations. Not, I hasten to add, that I am actually connected with that charity, only that I was once on a TV program with the head of it discussing their difficulties in gaining access to a bank account. The basic problem was that the Americans thought that they were less than kosher (the charity themselves obviously disagree) and that thus they shouldn’t have access to the banking system. This shouldn’t be all that much of a problem as they’re a UK charity and they were looking for access to the UK banking system. But that isn’t how it all works. If the Americans decide that they don’t think someone should have access to the banking system then they tell the bank that, well, you wouldn’t want us to come looking at your American banking licence if you were to offer an account with your UK licence, would you? And thus there is the leverage required to extend US law to other countries.

[…]

It’s not particularly the British government that is causing these problems although they have a part in it, to be sure. It’s the general international rules over who a bank may deal with, what they’ve got to know about them and what they’re doing with the money. Everyone seems quite happy with this as it stops (or hinders at least) drug dealing, money laundering and tax abuse. But it does have costs. Absolutely any set of regulations will affect people who are not the target of said regulations. If you insist that banks make a large effort to understand what their customers are doing then the banks will simply reject some customers as not being worth the candle. If perhaps handling money for some Islamic terrorist means bankers go to jail then bankers won’t handle the money of anyone who might be an Islamic terrorist: nor anyone who wanders around in Huddersfield in Islamic robes and states that they’re raising money to help the poor of Gaza. The manager of, say, Lloyds Bank in Huddersfield doesn’t know what the heck is going on in Gaza, who is linked to Hamas, who is not, who is delivering food and who is doing other less reputable things. And there’s no reason why she should either. So, the laws to prevent the one will lead to the other not gaining access to a bank account. This is really simple, simple, stuff.

This is what happens when people regulate.

December 30, 2014

Economics of SF writing – the fall of the short story and the rise of the novel

Filed under: Books, Business, Economics, Media — Tags: , , — Nicholas @ 09:48

Charles Stross outlines the reason SF writers pretty much stopped writing short stories en masse in the mid-to-late 1950s:

A typical modern novel is in the range 85,000-140,000 words. But there’s nothing inevitable about this. The shortest work of fiction I ever wrote and sold was seven words long; the longest was 196,000 words. I’ve written plenty of short stories, in the 3000-8000 word range, novelettes (8000-18,000 words), and novellas (20,000-45,000 words). (Anything longer than a novella is a “short novel” and deeply unfashionable these days, at least in adult genre fiction, which seems to be sold by the kilogram.)

[…]

Genre science fiction in the US literary tradition has its roots in the era of the pulp magazines, from roughly 1920 to roughly 1955. (The British SF/F field evolved similarly, so I’m going to use the US field as my reference point.) These were the main supply of mass-market fiction to the general public in the days before television, when reading a short story was a viable form of mass entertainment, and consequently there was a relatively fertile market for short fiction up to novella length. In addition, many of these magazines serialized novels: it was as serials that Isaac Asimov’s Foundation and E. E. “Doc” Smith’s The Skylark of Space were originally published, among others.

For a while, during this period, it was possible to earn a living (not a very good living) churning out pulp fiction in short formats. It’s how Robert Heinlein supplemented his navy pension in the 1930s; it’s how many of the later-great authors first gained their audiences. But it was never a good living, and in the 1950s the bottom fell out of the pulp market — the distribution channel itself largely dried up and blew away, a victim of structural inefficiencies and competition from other entertainment media. The number of SF titles on sale crashed, and the number of copies each sold also crashed. Luckily for the writers a new medium was emerging: the mass market paperback, distributed via the same wholesale channel as the pulp magazines and sold through supermarkets and drugstore wire-racks. These paperbacks were typically short by modern standards: in some cases they provided a market for novellas (25,000 words and up — Ace Doubles consisted of two novellas, printed and bound back-to-back and upside-down relative to one another, making a single book).

The market for short fiction gradually recovered somewhat. In addition to the surviving SF magazines (now repackaged as digest-format paperback monthlies) anthologies emerged as a market. But after 1955 it was never again truly possible to earn a living writing short stories (although this may be changing thanks to the e-publishing format shift — it’s increasingly possible to publish stand-alone shorter works, or to start up a curatorial e-periodical or “web magazine” as the hip young folks call them). And the readership profile of the remaining magazines slowly began to creep upwards, as new readers discovered SF via the paperback book rather than the pulp magazine. With this upward trending demographic profile, the SF magazines entered a protracted, generational spiral of dwindling sales: today they still exist, but nobody would call a US newsstand magazine with monthly sales of 10,000-15,000 copies a success story.

A side-effect of dwindling sales is that the fixed overheads of running a magazine (the editor’s pay check) remains the same but there’s less money to go around. Consequently, pay rates for short fiction stagnated from the late 1950s onwards. 2 cents/word was a decent wage in 1955 — it was $20 for a thousand words, so $80-500 for a short story or novelette. But the monthly magazines were still paying 5 cents/word in the late 1990s! This was pin money. It was a symbolic reward. It would cover your postage and office supplies bill — if you were frugal.

The humble pallet … and a shipping revolution

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

It’s very easy to let your eye skip over the humble pallet, yet it represents a huge improvement in how products get from the factory to you:

The magic of these pallets is the magic of abstraction. Take any object you like, pile it onto a pallet, and it becomes, simply, a “unit load” — standardized, cubical, and ideally suited to being scooped up by the tines of a forklift. This allows your Cheerios and your oysters to be whisked through the supply chain with great efficiency; the gains are so impressive, in fact, that many experts consider the pallet to be the most important materials-handling innovation of the twentieth century. Studies have estimated that pallets consume 12 to 15 percent of all lumber produced in the US, more than any other industry except home construction.

Some pallets also carry an aesthetic charge. It’s mostly about geometry: parallel lines and negative space, slats and air. There is also the appeal of the raw, unpainted wood, the cheapest stuff you can buy from a lumber mill — “bark and better,” it’s called. These facts have not escaped the notice of artists, architects, designers, or DIY enthusiasts. In 2003, the conceptual artist Stuart Keeler presented stacks of pallets in a gallery show, calling them “the elegant serving-platters of industry”; more recently, Thomas Hirschhorn featured a giant pallet construction as part of his Gramsci Monument. Etsy currently features dozens of items made from pallets, from window planters and chaise lounges to more idiosyncratic artifacts, such as a decorative teal crucifix mounted on a pallet. If shipping containers had their cultural moment a decade ago, pallets are having theirs now.

Since World War II, most of America’s pallet needs have been met by several thousand small and mid-sized businesses. These form the nucleus of not just an industry, but a sprawling, anarchic ecosystem — a world, really, complete with its own customs, language, and legends, with a political class, with its own media. This world is known as “whitewood.” There are approximately forty thousand citizens of whitewood, ranging from pallet pickers (who salvage pallets from the trash) to pallet recyclers (who repair broken pallets and make them whole) to pallet manufacturers, pallet consultants, pallet academics, pallet thieves, and pallet association presidents. Whitewood includes people who crisscross the country selling pallet repair machinery, preaching the gospel of tools such as the Rogers Un-Nailer.

Not all pallets belong to the world of whitewood. The most important other category — and whitewood’s chief antagonist — is the blue pallet. These blues are not just a different color; they are also built differently, and play by different rules, and for the past twenty-five years, the conflict between blue and white has been the central theme in the political economy of American pallets. The person most identified with this conflict is a soft-spoken, middle-aged man from Kansas named Bob Moore. Currently embroiled in a legal battle over a pallet deal gone bad, Moore is a singular figure in the industry and a magnet for controversy. When not in federal court, he can sometimes be found piloting a Mooney Acclaim Type S airplane, which he prefers, when possible, to flying commercial. The Mooney is a good place to concentrate, one imagines. And it is important to concentrate when plotting the future of pallets.

Tax-splaining a headline

Filed under: Business, Economics, Law, USA — Tags: , — Nicholas @ 03:00

The headline that grabs attention says that a vast number of US corporations pay absolutely no corporate taxes. Tim Worstall explains that this is quite true:

Timothy Taylor has a nice piece here on the subject:

    More than 90 percent of businesses, representing more than one-third of all business activity, in the United States are structured as flow-through entities — businesses that do not pay the corporate income tax, but rather pass profits through to owners who pay tax under the individual income tax.

    We have two (actually, more than two, but this is the distinction that matters to us here) forms of business ownership. The first is the C Corporation, what we all normally think of as a corporation. The second is an S corporation (in taxation, very like a partnership). And the important thing is that C corporations are the only ones that pay the corporate income tax. S corporations don’t: their owners pay individual income tax on the profits. So, if we saw a move from C to S corporations as the method of organisation then we’d see a reduction in corporate income tax paid. But not, possibly, a reduction in total tax paid on business profits.

And that is what seems to have happened at least in part:

    Back in 1980, nearly 80% of business income went to “C” corporations–so named after the applicable part of the tax code that governs them–which are what most of us think of when we think of a “corporation.” Back then, the remaining 20% was almost all sole proprietorships, which were just taxed as individual income. …..(…)…But C corporations now account for only about 30% of all business income. The share going to sole proprietorships hasn’t changed much. But much more corporate income is going to partnership and S corporations….(…)…Back in the 1960s, the corporate income tax often collected 4-5% of GDP. Since about 1990, it has more commonly collected 1-2% of GDP. Part of the reason is that a smaller share of business income is flowing through the conventional C corporation form.

That really is a large part of the explanation. It’s not that business profits are not being taxed, it’s that they’re being taxed in a different way. And that explains much of the fall in the corporate income tax revenues: and all too few people are over on the other side looking at the increase in individual income tax payments stemming from corporate profits.

So a legal change has drawn a lot of corporations to change how they are structured, so that profits are taxable in the hands of their individual owners, rather than in the imaginary hands of the corporate person. And another US tax quirk explains even more of the headline:

There is another point to be made here, about how we measure the share of corporate profits in the US economy. This has very definitely risen, this is absolutely true. And the tax bill hasn’t, that’s also true. A goodly part of the explanation is the above, about C and S corporations. But there’s this one more thing. Profits in the US economy includes all profits made in the US, by both Americans and foreigners. But it also includes foreign profits made by US corporations. Those tens of billions being made abroad by Google and Apple, Microsoft, they’re all included in the US profit share. And as we also know, those foreign profits aren’t paying the US corporate income tax because, entirely legally, they’re being used overseas to reinvest in those foreign businesses. My stick my finger in the air estimate of the difference those profits make is about 2% of US GDP. Meaning that if we measure US profits as 10% of GDP, then look at tax payments, we’re only seeing the tax payments from 8% of GDP (before we even look at the C and S corporation thing).

December 26, 2014

Normalizing US relations with Cuba

Filed under: Americas, Economics, Government, USA — Tags: , , — Nicholas @ 03:00

The United States has been in a Cold War state of tension with one of the poorest countries in the western hemisphere for half a century. The benefits of this strategy are hard to find (and harder to justify), but the drawbacks are pretty stark. The recent move by the Obama administration to move to more normal diplomatic and economic relations with Cuba may be driven by short-term petty political considerations, but the move is correct and rational on the larger scale. In The Federalist, Tom Nichols tries to talk the conservative base in off the window ledge by pointing out that there’s a strong conservative case as well:

Okay, everyone. Calm down.

There are a lot of reasons to be worried about the president’s decision to normalize relations with Cuba. Not least among them is that this is the least-adept foreign policy team in post-Cold War history (yes, I include the Carter and Bush 43 White Houses in that evaluation), and after six years of being taken to the cleaners by bad regimes, it feels like it’s happening again. It also looks too much like a quid pro quo for the release of an imprisoned American. And it’s being rationalized by the president himself in terms that show little understanding of the origins of the entire policy he’s about to overturn.

With all of that said, it’s still the right thing to do, and conservatives oppose it at their political peril.

Before we go any farther, however, what exactly are we actually talking about? To judge from the reaction of some conservatives, President Obama just proposed to send Fidel Castro a personal masseuse in a bikini stuffed with hundred-dollar bills. The fact of the matter is, we don’t know what will come from this, other than “normalization:” that is, the ability to establish an embassy, carry on diplomatic relations, and negotiate over trade. Congress — dominated by Republicans for the next two years — will have a large say in how all of that proceeds. So it’s important to maintain some perspective here, especially since there is only so much the president can do by fiat.

[…]

First and foremost, conservatives need to think carefully about the argument that Cuba is simply too evil a country to have a relationship with us. There is a moral “whataboutism” trap in that position, and liberals will gladly (and rightly) spring it. Many of the people thundering that we cannot even think of dealing with the Castros are the same conservatives who celebrate our massive, and utterly immoral, trade relations with China, a nominally Communist giant whose human rights abuses and mischief in the world dwarf Cuba’s.

Is our indulgence on China only because China is huge? Very well: I also note no similar outrage over our healthy relationship with much smaller Vietnam, a country in which American boys were killed and tortured, often with Chinese weapons and Chinese assistance. Other examples abound.

Yet we normalized relations with both nations. How many of us are wearing clothing with a “made in Vietnam” label right now? (I still can’t get used to that.) Think of it this way: all that cheap junk at your local department store eventually funds nuclear missiles aimed directly at the United States. Are we all ready for a China boycott and closing our Beijing embassy, or is moral outrage reserved only for small nations too broke to buy their way out of our condemnation, however justifiable?

December 25, 2014

Repost – The market failure of Christmas

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

Not to encourage miserliness and general miserability at Christmastime, but here’s a realistic take on the deadweight loss of Christmas gift-giving:

In strict economic terms, the most efficient gift is cold, hard cash, but exchanging equivalent sums of money lacks festive spirit and so people take their chance on the high street. This is where the market fails. Buyers have sub-optimal information about your wants and less incentive than you to maximise utility. They cannot always be sure that you do not already have the gift they have in mind, nor do they know if someone else is planning to give you the same thing. And since the joy is in the giving, they might be more interested in eliciting a fleeting sense of amusement when the present is opened than in providing lasting satisfaction. This is where Billy Bass comes in.

But note the reason for this inefficient spending. Resources are misallocated because one person has to decide what someone else wants without having the knowledge or incentive to spend as carefully as they would if buying for themselves. The market failure of Christmas is therefore an example of what happens when other people spend money on our behalf. The best person to buy things for you is you. Your friends and family might make a decent stab at it. Distant bureaucrats who have never met us — and who are spending other people’s money — perhaps can’t.

So when you open your presents next week and find yourself with another garish tie or an awful bottle of perfume, consider this: If your loved ones don’t know you well enough to make spending choices for you, what chance does the government have?

December 23, 2014

Turning the United States into something like Scandinavia

Filed under: Economics, Europe, Government, USA — Tags: , — Nicholas @ 05:13

In his daily-or-so Forbes post, Tim Worstall explains the real reason why it will be somewhere between difficult and impossible to turn the United States into a Scandinavian mixed economy like Denmark:

The essence of the argument is that sure, we’d like quite a lot of equity in how the economy works out. Wouldn’t mind that large (but efficient! of which more later) welfare state. We’d also like to have continuing economic growth of course, so that our children are better off than we are, theirs than they and so on. And we can have that welfare state and equity just by taxing the snot out of everyone but that does rather impact upon that growth. So, the solution is to have as classically liberal an economy as one can, with the least regulation of who does what and how, then tax the snot out of it to pay for that welfare state. Not that Sumner put it in quite those words of course.

The lesson so far being that if the American left want to turn the US into Scandinavia, well, OK, but they’re going to have to pull back on most of the economic regulation they’ve encumbered the country with over the past 50 years.

The other point is an observation of my own. Which is that those Scandinavian welfare states are very local. To give you my oft used example, the national income tax rate in Denmark starts out at 3.76% and peaks at 15%. There’s also very stiff, 25-30% of income, taxes at the commune level. A commune being possibly as small as a township in the US, 10,000 people. The point being that this welfare state is paid for out of taxes raised locally and spent locally. Entirely the opposite way around from the way that the American left tells us that the US should work: all that money goes off to Washington and then the bright technocrats disburse it.

Instead they have what I call the Bjorn’s Beer Effect. You’re in a society of 10,000 people. You know the guy who raises the local tax money and allocates that local tax money. You also know where he has a beer on a Friday night. More importantly Bjorn knows that everyone knows he collects and spends the money: and also where he has a beer on a Friday. That money is going to be rather better spent than if it travels off possibly 3,000 miles into some faceless bureaucracy. I give you as an example Danish social housing or the vertical slums that HUD has built in the past. And if people think their money is being well spent then they’re likely to support more of it being spent.

[…]

So, the two things I would say need to be done as precursors to turning the united States into Scandinavia are the following. First we need to move back to a much less regulated, more classically liberal, economy. Secondly we need to push the whole tax system and welfare state provision down from the Federal government down to much smaller units. Possibly even right down to the counties. The first of these will generate the economic growth to pay for that expanded welfare state, the second make people more willing to pay for it.

If you find any American leftists out there willing to agree to these two preconditions do let me know. Because I’ve never met a single one who would think that those were things worth doing in order to get that social democracy they say they desire.

December 22, 2014

Gift-giving, explained

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

Tim Harford recounts the surprising results of several studies on the very different views of gift-givers and gift-recipients:

Father Christmas might seek guidance from a set of studies conducted by Gabrielle Adams and Francis Flynn of Stanford, and Harvard’s Francesca Gino.

Gino and Flynn surveyed married people, asking some to reflect on wedding gifts they had received, and others to think about wedding gifts they had given. Gift givers assumed that gifts chosen spontaneously would be just as welcome as those chosen from a wedding registry. Recipients felt otherwise: they preferred the gifts that had been on the wedding list. Such lists seem charmless but they work.

Gino and Flynn found similar results from a survey about birthday presents: again, givers thought that gifts they’d chosen themselves were more appreciated but recipients preferred the gifts that they’d specifically asked for. The lesson: you might feel that it’s awkward and unnecessary to ask what gift would be welcome but the recipient of the gift sees things differently and would prefer that you asked rather than guessed.

Gino and Flynn conducted a third study in which people created wish lists. Other participants were asked to choose an item on the list to be sent as a gift; a third group were asked to peruse the wish list but then to choose some other present of equivalent value. It’s not surprising to discover that recipients preferred the items from their wish list — but what’s remarkable is that they felt the wishlist gifts were more “personal” and “thoughtful”. We think that picking an item from a wish list is lazy and impersonal but the person receiving that item doesn’t see it that way at all.

For good measure, a fourth study by Gino and Flynn found there was one thing people appreciated even more than an item from their own wish lists: money.

There’s more. Adams and Flynn surveyed newly engaged couples about engagement rings. The givers assumed that more expensive rings were more appreciated. The recipients felt differently. A similar result came from asking people to think about a particular birthday present they had received or given: recipients were just as happy with inexpensive gifts, to the surprise of givers.

In short, there is a vast discrepancy between how we see the world when giving gifts and when receiving them. The gift giver imagines that the ideal present is expensive and surprising; the recipient doesn’t care about the money and would rather have a present they’d already selected. We should spend less than we think, and we should ask more questions before we buy.

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, Food, 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

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