Quotulatiousness

February 15, 2011

US budget from a different universe

Filed under: Economics, Government, Politics, USA — Tags: , , — Nicholas @ 07:10

You’d have to assume that President Obama and his team really do live in a different universe than this one, as the latest budget fails to rein in spending in any meaningful way:

The budget has 2012 spending falling a bit from record 2011 levels, but that’s because “stimulus” spending is winding down, war costs are supposed to fall, and unemployment benefits should decline as the economy improves. Let’s look at some of the new budget data (all data for fiscal years):

  • Total federal spending jumped from $2.98-trillion in 2008 to $3.82-trillion in 2011. Obama’s budget has outlays at $3.73-trillion in 2012, but that’s still up 25% from 2008. Spending in 2011 is the highest share of GDP since the Second World War at 25.3%.
  • Non-defence discretionary spending jumped from $522-billion in 2008 to $655-billion in 2011. Spending is supposed to fall to $611-billion in 2012, but that’s still up 17% from 2008.
  • Defence spending jumped from $612-billion in 2008 to $761-billion in 2011. Spending is supposed to fall to $730-billion in 2012, but that’s still up 19% from 2008.
  • Entitlement spending jumped from $1.59-trillion in 2008 to $2.19-trillion in 2011. The budget has entitlement spending at $2.14-trillion in 2012, which is up a huge 35% from 2008.

[. . .] In the administration’s mind, apparently absolutely nothing has changed on fiscal policy in the last year. Obama hasn’t shifted toward fiscal responsibility an inch. The Tea Party movement, the November elections, the government debt crises in Europe, and the Obama Fiscal Commission have all been totally ignored in the new federal budget.

Even in economic good times, this would be an irresponsible budget. It’s far worse as the US economy is still crawling out of a deep hole.

February 14, 2011

So, how big is the US federal debt, really?

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

H/T to Jon, my former virtual landlord, who asks:

Should “unfunded liabilities” be counted as the guy is counting them here? While some of those things are promised — such as Medicare and Medicaid — the amounts that will actually be paid out might be less. For example, many of those who are unemployed might starve to death before they rack up Medicare bills, so the actual Medicare costs will be less than the projected unfunded liability.

Whether they’re counted as he suggests or not, it’s still a freaking huge pile of bills.

February 13, 2011

QotD: The hardest economic question is “What comes next?”

Filed under: Economics, Quotations, Technology — Tags: — Nicholas @ 00:09

The hardest economic question is, What comes next? What, in other words, are the new sources of economic value? How can businesses grow and our standard of living rise?

Sometimes the answer is simply more of the same. Growth comes from rolling out existing goods and services to new markets, until there’s a chicken in every pot and a car in every garage. This kind of progress may be hard to achieve, but you at least start with a clear notion of what it would look like.

That’s why catch-up economies like China today or South Korea in the past can grow so fast. Their businesses don’t have to figure out what to make or sell. They know what’s possible by looking abroad, and have a reasonable idea of what consumers, local or international, want to buy. Refrigerators and air conditioning are popular; so are shampoo and disposable diapers.

At the economic frontier, the hardest question gets much harder. You no longer have a clear vision of the future. You know neither what’s possible nor what people want. You can only guess. Starbucks or FedEx may sound obvious in retrospect, but they were once crazy ideas.

Virginia Postrel, “Would Bogie Wear Gore-Tex?: The next big thing often consists of lots of little things”, Wall Street Journal, 2011-02-12

February 12, 2011

Deeper implications of the rise of “3D printing”

Filed under: Economics, Technology — Tags: , , , , — Nicholas @ 10:49

One of the most interesting things happening in the manufacturing world is the rise of a technology that may well make huge swathes of factories obsolete: practical 3D printing. What was originally just a neat way to develop small prototypes for mass production is quickly becoming a viable way to replace the entire mass production step. The technology is still limited to a small range of materials, but the price has been dropping steeply enough that small 3D printers are within the reach of hobbyists already.

The Economist points out that this will not be an unmixed blessing (as technological revolutions ever have been):

Others maintain that, by reducing the need for factory workers, 3D printing will undermine the advantage of low-cost, low-wage countries and thus repatriate manufacturing capacity to the rich world. It might; but Asian manufacturers are just as well placed as anyone else to adopt the technology. And even if 3D printing does bring manufacturing back to developed countries, it may not create many jobs, since it is less labour-intensive than standard manufacturing.

The technology will have implications not just for the distribution of capital and jobs, but also for intellectual-property (IP) rules. When objects can be described in a digital file, they become much easier to copy and distribute — and, of course, to pirate. Just ask the music industry. When the blueprints for a new toy, or a designer shoe, escape onto the internet, the chances that the owner of the IP will lose out are greater.

There are sure to be calls for restrictions on the use of 3D printers, and lawsuits about how existing IP laws should be applied. As with open-source software, new non-commercial models will emerge. It is unclear whether 3D printing requires existing rules to be tightened (which could hamper innovation) or loosened (which could encourage piracy). The lawyers are, no doubt, rubbing their hands.

Just as nobody could have predicted the impact of the steam engine in 1750 — or the printing press in 1450, or the transistor in 1950 — it is impossible to foresee the long-term impact of 3D printing. But the technology is coming, and it is likely to disrupt every field it touches. Companies, regulators and entrepreneurs should start thinking about it now. One thing, at least, seems clear: although 3D printing will create winners and losers in the short term, in the long run it will expand the realm of industry — and imagination.

So, even if you don’t have immediate plans to buy a 3D printer, you could do worse than to dust off your old drafting book and learn a bit of CAD. You may be using those skills sooner than you expect.

There’s more information (from 2009) on the 3D printing process here.

February 11, 2011

How “those evil speculators” actually provide a very useful public service

Filed under: Economics, Food, History, Liberty, Politics — Tags: , , — Nicholas @ 07:59

Tim Worstall has a very good summary of Adam Smith’s explanation of the very useful public service provided by speculators:

Back to food: this is exactly the argument that Adam Smith put forward to explain the activities of a wheat merchant (Wealth of Nations, Book IV, Chapter V, start at para 40, here, for a decent dose of 18th century prose). When wheat is plentiful (although he calls it corn — the English did not call maize corn until some time later), say after a harvest, the merchant buys it up and stores it. He then waits until prices have risen before he sells it. If his expected shortage in the future doesn’t arrive then he’s shit out of luck and loses money. If it does, then the happy populace now have wheat to eat. For, and here’s the crucial point: what our merchant, our speculator, has done is move prices through time.

If we all ate wheat like it was that bounteous time just after harvest all the time then we would run out of wheat entirely before the next harvest. Prices would, at that point, become really rather high. However, by buying in the time of plenty, he’s raised prices in that time of plenty: thus making everyone consume a little less in that Harvest Festival gluttony. He’s also lowered prices in the Hungry Time (in medieval times, the six weeks before the harvest was indeed known as this, it was the worst time of year for food supplies) because he has at least some grain available rather than none.

So we’ve reduced price volatility, stretched the available supply over more time, possibly even stopped some starvation, by someone being enough of a bastard to speculate on food prices.

Now note, this is physical speculation, actual purchase, taking delivery and storage.

Derivatives speculation, using futures and options, has less effect on prices. It gives us information about what people think prices might be in the future, for sure, but it will only affect today’s prices if high future prices lead to that actual physical storage and hoarding. Which could happen, to be sure, but won’t necessarily.

All of this leads us to what people like M Sarkozy are trying to say and what the WDM are screaming about. The latter, in their report linked above, come right out and say that as more people are playing with food derivatives, this is what has been pushing up food prices. This is nonsensical, in the absence of any physical hoarding. For a start, WDM seems not to realise than a futures market is zero sum: for any profit made by someone then someone else must have made an equal and opposite loss. For everyone going long (betting on a price rise) someone else must have made an equal and opposite bet going short (betting that prices will fall). That’s just how these markets are. It really doesn’t matter to spot (current) prices whether three people are betting £50 or 30,000 are betting $50bn: there will be an equal and opposite number of people long as there are short, by definition.

So it absolutely cannot be that “more people speculating increases food prices”.

WDM’s second point is that more speculation means more volatility in prices: something that almost all economists would regard with a very jaundiced eye. For the general assumption is that futures act upon prices as does Smith’s wheat merchant: they reduce price volatility. Fortunately, the WDM, in its own report, provide us with an example of this. In the 2006/8 price rises, it notes that there’s a deep and liquid speculative market for wheat and corn (maize), while there’s only a very thin one for rice. And yet it was rice that was vastly more volatile in price in this period: despite the fact that it was wheat and maize which people were turning into ethanol for cars (the true cause of the price rises) rather than rice.

The price of a good is also a signal of availability: the more scarce the item is, the higher the price will go. The higher the price goes, the greater the incentive to either limit the use of the item or to search for substitute goods. This is a key feature of free markets: without the price change signalling, consumers cannot accurately guage whether to increase or decrease their use of a particular good. This is why the worst possible reaction to a sudden price increase is price controls: remember the first oil crisis in the 1970s? Price controls meant that people could still buy gasoline at the “old” price . . . until there wasn’t enough to go around. Controlling the price creates artificial shortages and fails to rationally indicate to consumers to conserve or limit their consumption.

Taming the US defence budget

Filed under: Bureaucracy, Economics, Military, USA — Tags: , , , , — Nicholas @ 07:29

The US government is in a financial bind — that’s not exactly news. What is new, however, is that the military may actually have to take cuts, not just smaller increases in the annual budget:

On one side of the argument are fiscal hawks like Rand Paul, newly elected senator from Kentucky, who fear that a national debt heading towards 100% of GDP by the end of the decade is in itself a menace to the nation and defence must take its share of the pain. The sheer size of America’s defence budget puts it in the crosshairs. At around $700 billion a year including war expenditures, it as big as those of the world’s next 20 highest military spenders combined. Last year American defence spending exceeded the average spent during the cold-war years by 50% (adjusted for inflation), while in the past 10 years it has grown by 67% in real terms.

[. . .]

Mr Gates, a canny operator whom Barack Obama retained after he took over from George Bush, began to sniff which way the wind was likely to turn in 2008. He calculated that if he took the initiative, he might stave off deeper and more unwelcome cuts. So he curbed or cancelled more than 30 weapons systems including the army’s Future Combat System, the F-22 Stealth fighter, two missile defence systems and the Zumwalt-class destroyer. Last year he went further, proposing the closure of the Joint Forces Command in Virginia and a 10% reduction in the budget for contract workers for each of the next three years. He asked the armed services to find at least $100 billion worth of “efficiency savings” over the next five years, which he promised to reinvest in other programmes.

[. . .]

Buck McKeon, the Republican who now leads the House Armed Services Committee, has responded with predictable fury to the Gates plan, saying it was “a dramatic shift for a nation at war and a dangerous signal from the commander-in-chief”. Mr Gates can take some comfort from the fact there has been at least as much “incoming” from critics who say he has not gone nearly far enough. They point out that what is being planned is not so much a cut as a small reduction on what the Pentagon had been planning to spend over the next four to five years. The budget will still creep up in real terms until it flattens off in 2015. Given his intention to retire from office later this year, Mr Gates may not have the stomach for attempting anything more radical on his watch.

February 10, 2011

Reason.tv responds to Hillary Clinton

Filed under: Economics, Law, Liberty, Politics, Wine — Tags: , , , — Nicholas @ 12:55

The Netherlands go nuke, downplay wind power

Filed under: Economics, Environment, Europe, Technology — Tags: , , , , — Nicholas @ 09:50

Of all the EU states, the last one you’d expect to give up on wind power would be the one that everyone associates with windmills:

In a radical change of policy, the Netherlands is reducing its targets for renewable energy and slashing the subsidies for wind and solar power. It’s also given the green light for the country’s first new nuclear power plants for almost 40 years.

Why the change? Wind and solar subsidies are too expensive, the Financial Times Deutschland, reports.

Holland thus becomes the first country to abandon the EU-wide target of producing 20 per cent of its domestic power from renewables. This is a remarkable turnaround from a state that took the Kyoto Agreement seriously and chivvied other EU members into adopting renewable energy strategies. The FT reports that instead of the €4bn annual subsidy, it will be slashed to €1.5bn.

I did a quick Google image search for a typical Dutch windmill image, and decided that this one was too amusing to pass up:

Some basic sense about mergers

Filed under: Economics, Media, Technology — Tags: , — Nicholas @ 00:08

Megan McArdle thinks back to the great fiasco that was the AOL/Time Warner merger:

Austan Goolsbee (now the head of the CEA) spent a class getting us to describe all the reasons that the deal was a good idea — and then systematically demolishing all of our rationalizations. Mergers are not a good idea merely because one company has an asset the other company can use (in the case of the AOL/Time Warner deal, the idea was that AOL’s content and Time Warner’s delivery mechanism were two great tastes that taste great together.) AOL had a perfectly good way to get access to Time Warner’s cable network: the companies could contract to share space. When you buy a company, the price the owners will want you to pay is going to be at least as much money as they could make by holding onto the stock, so there’s no way to generate profits by buying some company simply because it has assets you want to use. In order for the merger to make sense, there has to be something that you can’t do as a separate firm, but can do together.

And that thing has to be pretty profitable in order to make up for the costs of the merger. Acquiring firms usually pay a premium for the companies they buy, which means that the new entity needs to exceed the combined profits of the old just to break even. Beyond that, mergers are extremely costly to the organization. Integrating redundant departments takes up enormous managerial time, involves most of the company in vicious internicene battles to protect their turf, and often involves sacking some of your most talented people simply because there’s an equally talented person already doing their job. Unless it’s a really hands-off acquisition — in which case, why bother? — the conflict between corporate culture often saps morale.

The couple of times a former employer of mine got “merged”, the pattern just about exactly matched what Megan describes. In neither case did the merged entity reap the expected scale of benefit that must have motivated the acquisition in the first place.

February 9, 2011

Real usage-based billing might work, but not the current form

Filed under: Cancon, Economics, Media, Technology — Tags: , , , , — Nicholas @ 12:25

Tim Wu contrasts the way the UBB issue is being presented and how it might actually be successful:

The issue of usage-based billing is a little tricky because such systems are not inherently evil. When you think about it, we usually pay for things on a usage basis. Gasoline, electricity and even doughnuts are generally billed based on how much you use. And the fact that usage-based billing sounds reasonable in theory is surely why the Canadian Radio-television and Telecommunications Commission approved the new rules.

But take a closer look and something far more insidious is going on. If bandwidth were actually billed like electricity or water, that might be fine. But what the CRTC approved is something different. Claiming that its profit and consumer welfare are exactly the same thing, Bell wants to remake Internet billing. It wants to make use of the most lucrative tricks from the mobile and credit-card industries by preying on consumer error to make money. And this ought not be tolerated.

Any rule that asks the consumer to guess at usage, and punishes you if you’re wrong, is abusive. Imagine being asked to guess how much electric power you need every month, with a penalty for mistakes. Yes, that’s what cellphone companies do — or get away with — but that hardly makes it a model. It’s a system of profit premised on human error, and this begins to explain Bell’s deeper interest in usage-based billing. Bell wants to make the horrors of mobile billing part of the life of Internet users. And that’s a problem.

H/T to Michael O’Connor Clarke for the link.

LSE to buy TSX

Filed under: Britain, Cancon, Economics — Tags: , , — Nicholas @ 07:36

It’s a crafty move, but it’s not clear whether it’s the buyer or the seller being the craftier:

London Stock Exchange Group Plc, the 210-year-old bourse operator, agreed to buy Toronto Stock Exchange owner TMX Group Inc. for about C$3.2 billion ($3.2 billion) in stock as the companies cut costs to counter lost market share. LSE surged to a two-year high.

LSE shareholders will own 55 percent of the company, while TMX investors will hold the rest, the exchanges said today in a statement. TMX shareholders will receive 2.9963 LSE shares for each they own, valuing the Toronto-based company at about C$42.68 a share, 6 percent more than yesterday’s closing price.

Xavier Rolet, LSE’s chief executive officer, will reduce 35 million pounds ($56 million) a year in costs and expand into new businesses such as derivatives as competition from alternative trading platforms increases as do mergers among rivals. His predecessor Clara Furse fought off five takeover offers in two years and bought the operator of the Milan stock exchange. The LSE’s share of U.K. equity trading was 63.8 percent last quarter, compared with 75 percent in 2009, data from the London- based company show.

It could be a way for London to diminish the impact of European rules on their business (by having a non-EU place to land if necessary) or it could be a way for the EU to extend their rule-making to the Canadian market. Or, and this is the least believable scenario, it might just be an ordinary acquisition by a company that happens to run stock markets.

Update: What is presented as a take over in other markets is being positioned (spun?) as a “merger” for domestic consumption:

TMX Group, which operates the Toronto Stock Exchange, and the London Stock Exchange announced Wednesday they are merging to create one of the world’s largest stock exchanges.

The merger, which is subject to regulatory approvals, is unanimously being recommended by the boards of both exchanges.

The merger, if approved, would give the new firm a value of just over $6 billion (Cdn.) and give LSE shareholders just over 50 per cent of the combined company.

TMX Group is valued at $2.99 billion, while the London Stock Exchange Group’s value is slightly higher, around $3.25 billion.

The new company will have the world’s largest number of listing, more than 6,700 companies with an aggregate value of $5.8 trillion, the partners said in a statement early Wednesday.

[. . .]

The company will be co-headquartered in Toronto and London with Xavier Rolet, the CEO of the London Exchange, retaining that position with the new company. The president will be Thomas Kloet, the CEO of TMX. The FO will be Michael Ptasznik, who currently holds the same post with TMX, and the company director will be Raffaele Jerusalmi, the Milan-based CEO of Borsa Italiana.

Expect this deal, even if it eventually gets regulatory approval, to drag on for most of this year.

February 8, 2011

Hookers with Blackberries on Facebook

Filed under: Economics, Politics, Technology, USA — Tags: , , , , — Nicholas @ 07:17

The latest round of moral posturing by politicians has accomplished great things: more sex workers now use Facebook to communicate with prospective clients, fewer are using Craigslist. Success?

A study by sociology professor Sudhir Venkatesh on trends in the world’s oldest profession, published by Wired, estimated that 25 percent of hookers’ regular clients came through Facebook compared to only three per cent through Craigslist.

Five years before that, in 2003, nine per cent of the prostitutes regular clients came through Craiglist and none through the then infant Facebook.

“Even before the crackdown on [Craigslist’s] adult-services section, sex workers were turning to Facebook: 83 per cent have a Facebook page, and I estimate that by the end of 2011, Facebook will be the leading on-line recruitment space,” Venkatesh writes.

Venkatesh says that there’s another key indicator for those who frequently hire prostitutes:

Curiously, he found one of the three main ways a sex worker can boost her earning potential is not to get a boob job but to buy a BlackBerry. “This symbol of professional life suggests the worker is drug- and disease-free,” Venkatesh explains.

Of prostitutes that own a smartphone, 70 per cent have BlackBerries while just 11 per cent own iPhones. Feel free to write your own hilarious jokes using that information.

February 7, 2011

Licensing as a tool for restricting competition

Filed under: Bureaucracy, Economics, Government, Law — Tags: , , , — Nicholas @ 12:21

Stephanie Simon addresses the pro and con positions on licensing for various jobs:

[E]conomists — and workers shut out of fields by educational requirements or difficult exams — say licensing mostly serves as a form of protectionism, allowing veterans of the trade to box out competitors who might undercut them on price or offer new services.

“Occupations prefer to be licensed because they can restrict competition and obtain higher wages,” said Morris Kleiner, a labor professor at the University of Minnesota. “If you go to any statehouse, you’ll see a line of occupations out the door wanting to be licensed.”

[. . .]

At a time of widespread anxiety about the growth of government, the licensing push is meeting pockets of resistance, including a move by some legislators to require a more rigorous cost-benefit analysis before any new licensing laws are approved. Critics say such regulation spawns huge bureaucracies including rosters of inspectors. They also say licensing requirements — which often include pricey educations — can prohibit low-income workers from breaking in to entry-level trades.

Texas, for instance, requires hair-salon “shampoo specialists” to take 150 hours of classes, 100 of them on the “theory and practice” of shampooing, before they can sit for a licensing exam. That consists of a written test and a 45-minute demonstration of skills such as draping the client with a clean cape and evenly distributing conditioner. Glass installers, or glaziers, in Connecticut — the only state that requires such workers to be licensed — take two exams, at $52 apiece, pay $300 in initial fees and $150 annually thereafter.

California requires barbers to study full-time for nearly a year, a curriculum that costs $12,000 at Arthur Borner’s Barber College in Los Angeles. Mr. Borner says his graduates earn more than enough to recoup their tuition, though he questions the need for such a lengthy program. “Barbering is not rocket science,” he said. “I don’t think it takes 1,500 hours to learn. But that’s what the state says.”

In harder economic climates, expect to see a push towards trying to get some form of certification or licensing imposed in new fields. For example, I’ve seen several attempts to introduce mandatory certification for technical writers, usually with the intent of limiting access to the (reduced) pool of writing jobs in the field. Usually the biggest fans of certification are those who think they’re in a good position to dictate the requirements for certification (and often run courses/seminars which, I assume, would automatically appear in the final list of requirements).

February 3, 2011

How bad is Ireland’s banking situation? Try “spectacularly bad” and you’re close

Filed under: Economics, Europe — Tags: , , — Nicholas @ 17:28

Michael Lewis tries to provide some idea of the scale of the problem to American readers:

It had been two years since a handful of Irish politicians and bankers decided to guarantee all the debts of the country’s biggest banks, but the people were only now getting their minds around what that meant for them. The numbers were breathtaking. A single bank, Anglo Irish, which, two years before, the Irish government had claimed was merely suffering from a “liquidity problem,” faced losses of up to 34 billion euros. To get some sense of how “34 billion euros” sounds to Irish ears, an American thinking in dollars needs to multiply it by roughly one hundred: $3.4 trillion. And that was for a single bank. As the sum total of loans made by Anglo Irish, most of it to Irish property developers, was only 72 billion euros, the bank had lost nearly half of every dollar it invested.

That’s one of the three big banks the Irish government had to help. The other two may be in worse shape. You could say Ireland’s banks are awful:

Even in an era when capitalists went out of their way to destroy capitalism, the Irish bankers set some kind of record for destruction. Theo Phanos, a London hedge-fund manager with interests in Ireland, says that “Anglo Irish was probably the world’s worst bank. Even worse than the Icelandic banks.”

Ireland’s financial disaster shared some things with Iceland’s. It was created by the sort of men who ignore their wives’ suggestions that maybe they should stop and ask for directions, for instance. But while Icelandic males used foreign money to conquer foreign places — trophy companies in Britain, chunks of Scandinavia — the Irish male used foreign money to conquer Ireland. Left alone in a dark room with a pile of money, the Irish decided what they really wanted to do with it was to buy Ireland. From one another. An Irish economist named Morgan Kelly, whose estimates of Irish bank losses have been the most prescient, made a back-of-the-envelope calculation that puts the losses of all Irish banks at roughly 106 billion euros. (Think $10 trillion.) At the rate money currently flows into the Irish treasury, Irish bank losses alone would absorb every penny of Irish taxes for at least the next three years.

As mentioned in this post yesterday, the Irish who can do so are starting to head to greener pastures. A thousand a week in net emigration over the last year and a half.

H/T to Tyler Cowen for the link.

Bipartisan big government

Filed under: Economics, Government, Politics, USA — Tags: , , , , — Nicholas @ 12:47

Bruce F. Webster addresses the “Clinton Budget Fallacy” by downloading some publicly accessible numbers and doing a bit of simple math:

Put simply, from 1999 to 2010, the US population grew by 10% and inflation reduced the value of the dollar by about 30%. Combine those two, and Federal spending should have gone up roughly 43% over that period. Instead, it went up 135%, or three times what it should have. Setting aside some of the bailouts, etc., that are in the budget, it’s still clear that almost every Federal line item went up at least twice what it should have during that period. Almost nothing (other than “general government”) grew a “mere” 43%.

I fully blame Bush and the 2002-2006 Republicans as much as I blame Obama and the 2006-2010 Democrats. The real question is whether the 2010 Republicans have the brains and the will to turn back the tide.

The smart money, I’m afraid, is betting against that outcome.

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