FOR years now, many businesses and individuals in the United States have been relying on the power of government, rather than competition in the marketplace, to increase their wealth. This is politicization of the economy. It made the financial crisis much worse, and the trend is accelerating.
Well before the financial crisis erupted, policy makers treated homeowners as a protected political class and gave mortgage-backed securities privileged regulatory treatment. Furthermore, they allowed and encouraged high leverage and the expectation of bailouts for creditors, which had been practiced numerous times, including the precedent of Long-Term Capital Management in 1998. Without these mistakes, the economy would not have been so invested in leverage and real estate and the financial crisis would have been much milder.
But we are now injecting politics ever more deeply into the American economy, whether it be in finance or in sectors like health care. Not only have we failed to learn from our mistakes, but also we’re repeating them on an ever-larger scale.
Tyler Cowan, “Where Politics Don’t Belong”, New York Times, 2009-09-12
September 14, 2009
QotD: Depoliticizing the economy
September 3, 2009
Was Fukuyama correct after all?
Scott Sumner has an interesting post up about Francis Fukuyama’s “end of history” thoughts of the late 1980s:
So the obvious choice for most successful prediction is Francis Fukuyama’s 1989 claim that “history was ending,” that the great ideological battle between democratic capitalism and other isms was essentially over, and that henceforth the world would become gradually more democratic, peaceful, and market-oriented.
[. . .]
I get very annoyed when I see people say “the Chinese case proves that economic development doesn’t inevitably lead to political liberalization.” There are so many problems with this sort of statement that one hardly knows were to begin. China has seen incredible political liberalization since 1978, indeed even some progress since 1998. But what about western-style democracy? To answer that question, consider the list above. I would argue that China most resembles Thailand. Both have similar per capita GDPs, both have a huge split between the urban elite and the rural poor. My hunch is that consciously or subconsciously, the urban residents of China are not thrilled by the idea of a pure democracy that would effectively turn the country over to the rural poor. But wait a few decades, when China goes from being 60%-70% rural, to 60%-70% urban, and from mostly poor to mostly middle-income, and from mostly undereducated to mostly educated. Then let’s see how Fukuyama’s thesis holds up.
History is still ending. Or maybe I should say “his story” is ending, the story of war, revolution and voyages of discovery. The Illiad and the Odyssey. And “her story” is beginning. A world focused on improving education, health care, cuisine, leisure time, the arts, communication, animal rights, the environment, etc.
August 24, 2009
The odd economics of post-Prohibition Pennsylvania liquor laws
I’d just finished dinner at a restaurant within a short walk of my hotel, and I thought it’d be nice to have another beer when I got back to the hotel (in Pennsylvania, you buy less-than-case amounts of beer from licensed bars). I went up to the bar, and ordered six Sam Adams. The server looked at me a bit oddly, then went back to pick up my order.
When she came back, she said, “You know this is going to be very expensive, don’t you?”
“Uh, just how expensive are we talking here?
“Well, six bottles at $4 per bottle expensive. You could probably buy a case for that at [name of nearby beer warehouse].”
Two gents at the bar chime in that I’m crazy to pay that kind of money for just six beers, but they’d happily take any extras from the case I should buy at [nearby beer warehouse].
The three of them then gave me carefully simple instructions on how to find my way to [nearby beer warehouse], where I picked up this:
One of the most hoppy IPA brews I’ve ever tasted . . . for slightly more than what I would have had to pay for six at the bar.
August 22, 2009
US daytrips to Canada drop significantly
Megan McArdle has an interesting post about the precipitous drop in US visits to Canada:
Kevin Drum is puzzled:
Well, here’s today’s [chart]: day trips to Canada are down. Way down. It’s not clear why, either. The accompanying story blames it mostly on new passport rules, along with “other factors, including the recession and the higher Canadian dollar.” But that doesn’t really hold water. The downward spike from May to June might be due to new passport rules, but the chart makes clear that travel has been steadily decreasing ever since it recovered from 9/11 in early 2002. Obviously passport rules have nothing to do with this 7-year trend, and neither does the recession or the strength of the Canadian dollar.
Megan points out that the strengthening Canadian dollar does actually account for much of the change, with the passport requirement only being the final nail in the coffin. Security theatre, as pointed out in the comments, probably accounts for some of the decline as well.
The comment thread is quite interesting, as both facts and “facts” get deployed to support pre-existing positions. Do read through them.
I’m finding this an interesting discussion, as I’m headed the other way tomorrow . . . I’m taking a week-long course near Pittsburgh. I remember the days of the cheap Canadian dollar, when we used to use terms like “Canadian Peso” or “TundraMicroBuck”, and I don’t particularly miss them. I don’t know if I’ll be doing much shopping while I’m in Pennsylvania, but the price differences are much smaller than they were the last time I was in the states.
August 18, 2009
The economic value of high speed passenger trains
Another article pointing out the economic issues with the current US administration’s sudden love for high speed rail:
In April, President Barack Obama claimed “my high speed rail proposal will lead to innovations in the way we travel” and new rail lines “will generate many thousands of construction jobs over several years, as well as permanent jobs for rail employees and increased economic activity in the destinations these trains serve.”
Even House Minority Whip Eric Cantor (R-Va.), who voted against the stimulus bill, now wildly praises rail’s job-creation potential, writing, “It is estimated that creating a high-speed railway through Virginia will generate as many as 185,500 jobs, as much as $21.2 billion in economic development, and pull nearly 6.5 million cars off the road annually. Providing a high-speed rail service from Washington, D.C. to Richmond will drive economic development throughout our region for many years to come.”
High speed railways (HSR) work well in certain conditions: in areas of high passenger density over medium-length journeys. HSRs can’t replace regular passenger trains running on joint freight-passenger rail lines because the HSR trains require more expensive dedicated lines with different signalling and control systems. Running an HSR train on unimproved track would merely give you a slightly faster passenger train: it would not allow the much higher running speed required to allow the HSR to show its capabilities.
The need for dedicated lines in high population areas means that no private railway could afford to buy the necessary right of way and additional land for associated station, maintenance, and storage facilities. Inhabited, densely developed land is expensive: governments need to get involved by using their powers of eminent domain to condemn and requisition land from private owners.
The proposed HSR line from Washington to Richmond might be economically feasible, setting aside the costs to the individuals and companies whose property will be taken to build the new line, but it will be politically difficult because the people whose property will be at risk will be highly motivated to oppose the development in any way they can.
Passenger rail currently carries a very small portion of city-to-city travel — the market targeted by high-speed rail — and it’s likely to remain modest well into the future. In 2008, Amtrak carried 28.7 million passengers. By comparison, there were 687 million airline passengers in 2008, in part because air service provides frequent high-speed travel to geographically distant cities. Then there’s our well-developed highway network that makes automobiles very competitive with rail for distances under 200 miles. In most cases, once travel and wait times to train stations are factored in, travelers will spend as much time in route on the train as they will in a car.
That last point is why the “high speed” part of HSR is critical . . . if you’re going to use the train for part of your journey, you need that portion of the trip to be appreciably faster than the other options, or you won’t make the extra effort to use the service. For example, commuting into Toronto using the (non high-speed) GO train service saves me an average of 5-10 minutes per trip, but if I miss the train, I’ll be an hour later getting there. Driving in is more flexible, time-wise, but a bad traffic jam or construction en route can make an already long commute that much more frustrating . . . and I can’t read while driving. It’s a bit of a wash, from my point of view. The costs are slightly in favour of taking the train, counting parking and gas costs (but the GO train fare is subsidized by the provincial government, so I’m only paying half the actual cost of my ticket: everyone else in Ontario pays the other half).
August 17, 2009
I hope he’s right
Publius has some interesting insights into the evolution of the Canadian economy from highly dependent on regional conditions (that is, largely tied to US markets) to a more independent one:
What the FTA and NAFTA did was to help fundamentally restructure the Canadian economy over the last two decades. While economic nationalists warned of increased dependency on the American juggernaut, the exact opposite has happened. NAFTA in particular allowed Canada to follow the laws of comparative advantage, shifting our economy away from manufacturing toward services. Nations have historically traded with countries nearest to them due to obvious transaction costs. When the wealth of nations is increasingly intellectual (which includes figuring out how to extract natural resources), those transactional costs become nearly irrelevant. A service economy is one less dependent on trading with nearby partners, instead it can reach out to the world. Buoyed by Canada’s traditional strength in natural resources — fur, fish, timber, wheat and now oil — we have become to a surprising extent decoupled from the American economy. Even in bulk products like oil and minerals, our clients are increasingly global. There is a massive glut of cheap shipping — refer to the Baltic Dry Index — to take our natural bounty where ever customers beckon.
We weathered the 2001 American recession easily, and we are weathering this one rather well. Harper knows this. He knows Barack Obama is shackling and regulating the American economy into near term stagnation. In the past this would have proven disastrous for Canada, today it will be an advantage. For decades Britain and the City of London have proven a relative free market haven to international businesses seeking to invest in Europe. There is no reason Canada cannot, and will not, play that same role in North America. In a year or so Canada may very well be leading other OECD countries in economic growth, all while the American giant is stuck in a slow motion recovery. The Prime Minister’s moderately statist approach will seem to many voters as a work of pragmatic genius. Not too much intervention, not too little. Just right. Harper the Helmsman. More image than reality. Such is the game of politics.
August 13, 2009
QotD: Interpreting the Fed’s message
After two days of satanic worship, no-safeword BDSM and blackface minstrel performances, the Federal Open Market Committee (FOMC) announced today that it will stay the course on currency manipulation. According to the post-meeting press release, the Federal Reserve will maintain its effective negative target range for the federal funds rate. With economic activity “leveling out,” “signs of stabilizing” in household spending, “tight credit,” continued business cutbacks and a “gradual resumption of sustainable economic growth in a context of price stability,” the Fed expects inflation to “remain subdued for some time.” But the Fed is also standing by its plan to discontinue purchases of Treasury debt this fall [. . .]
The plan to phase out Treasury purchases is a bet that inflation will be kicking in by the fall, as Americans gear up for the harvest festival that marks their winter solstice. Will Santa be bringing you a wallet full of degenerated dollars? Some early signs: The greenback spiked right after the FOMC’s announcement, but has been falling against the currencies of countries with adult supervision. Demand for the the 10-year Treasury note followed the same pattern — with the FOMC’s statement triggering a brief flurry after a disappointing auction of $23 billion in new government debt earlier in the day. Maybe the market took the boilerplate about “subdued inflation” seriously. Or maybe it’s easier to believe the economy will heat up when the Fed doesn’t say so.
Tim Cavanaugh, “Fed Thinks It Has Conjured Inflation”, Hit and Run, 2009-08-12
This is a mind-boggling level of debt
As soon as the money being discussed passes a billion dollars, for most people it might as well be imaginary . . . here’s a bit of perspective:
To put some context on a new estimate that puts this year’s federal deficit at $1.8 trillion, consider this: That amount had never been spent by the federal government in a single year until 2000, let alone borrowed.
That’s right. As the decade began, the US government spent $1.8 trillion in a year for the first time. Now it’s poised to spend that much in excess of its tax revenues.
The Treasury released the latest figures Wednesday, showing spending of about $3 trillion in the past 10 months, and revenues of only $1.74 trillion.
With two months to go in the fiscal calendar, the Obama administration is projecting that the imbalance will end up totaling $1.84 trillion, more than four times last year’s record-high. The monthly deficit for July, also reported this week, came in a bit above what economists had expected.
Now all the talk about replacing the US dollar with some other currency as the international reserve makes rather more sense. The US government is going to be a long, long time paying off all that new debt . . . or repudiating it and triggering a world-wide financial melt-down. Either way, prudent investors will be looking at non-US investments for future attention. This will make it that much harder for the US economy to grow its way out of debt.
It will take a lot of political courage to stay the course, pay down the accumulated debt and avoid going for what the domestic audience will see as the easy option (declaring national bankruptcy). It’s hard to imagine any current American politician with the fortitude to take the hard option (cutting government spending and paying off the debt).
August 10, 2009
August 7, 2009
July 27, 2009
Audax toujours
Thaddeus Tremayne may appear to have gone off his medications when he proposed this:
I think it behooves us to begin spreading this idea: that people who work in the public sector should be exempt from having to pay tax. All tax.
But he really does have a valid and interesting point:
No, what I am proposing is the stripping away of a fig-leaf that disguises the very important distinction between tax-payers and tax-consumers.
Currently, only those who earn their living in the private or voluntary sector are tax-payers and while public sector employees do file tax returns and, on the face of it, pay their taxes too, this is a mere bookkeeping fiction. They are the recipients of tax, adding nothing to the public purse. The number of people who fail to understand this distinction, holding instead that “we are all taxpayers” is alarmingly high. By forcing the public sector to lead tax-free lives, we make their true status not just clearer but undeniable.
Consider the meme-spreading to have started.
July 25, 2009
QotD: the last honest trash collector
There are lots of levels of fear and complaint about the government getting involved in business. First and foremost, of course, is incompetence. We actually have experiential evidence about this. In England, all the English car companies were beginning to circle the drain in a series of well-deserved failures and bankruptcies, earned by making lousy products with very poor production at high prices. So, the government, back in the ’70s, nationalized all the British car companies. The result was British Leyland, a name that perhaps doesn’t resonate much with you. Many of your friends probably drive Humber Super Snipers, or perhaps not. [Laughs.] That’s certainly one thing that we’re headed for. The other thing is that there’s a very good reason that governments aren’t supposed to compete with private-enterprise companies. Governments have monopolies on certain things, like eminent domain and deadly force. What’s another example of an organization that gets into the same business that you’re in, except that their guys have got guns? That would be the Mob. Ford is like the last honest trash collector in the New York metropolitan area, the last one that’s not mobbed-up. How long is that gonna go on for?
P.J. O’Rourke interviewed by Gregg LaGambina, A.V. Club, 2009-07-16
July 24, 2009
More on scapegoating plastic bags
Back on the old site, I posted an item that related tangentially to the issue of plastic bags in supermarkets. Russ LeBlanc sent me a note, which I published as an update to that post. He’s now expanded on that idea, with a letter to newsdurhamregion.com:
You’d think in these tough economic times our public officials would avoid “trash talk.” Enough already!
Get to the real issues. Dwelling on emotional fallacies such as the dreaded plastic bag while people are left with little economic hope is unforgivable. Sorry, Camille, banning plastic bags will do less than little to save the planet. It isn’t even a start, but it does sound warm and fuzzy.
If our politicians feel it necessary to spend our hard-earned tax dollars on recycling studies then they should do due diligence and commission a study by independent biologists to find out if the other study is even worth it. Better yet, spend the money where it counts, attracting jobs.
See-through bags and supporting a big-business cash grab for something that represents less than one per cent of a landfill (plastic bags) is irresponsible. Heaven forbid we see a politician questioning this issue.
By the way, Madam Mayor, I’m sure the big retailers would welcome the reward card incentive program (even though it’s really a form of big business getting around the right to privacy issue). Perhaps we can use the points for a garborator?
July 23, 2009
The wrong measure
The economy is struggling, employers are shedding excess workers, the banks are floundering, so what can the government do to make things better? Other than getting the hell out of the way, not much . . . but they can certainly make things worse:
Come Friday, the federally mandated minimum wage will jump from $6.55 an hour to $7.25 — an 11 percent increase. At a time when employers are laying off workers, Washington is going to make it more expensive to keep them.
If you’re a minimum wage employee, your job will pay more, but only if it still exists. These days, most companies are scrutinizing every position on the payroll to make sure it’s worth the cost. Raise the toll, and some employees will find they are no longer valuable enough to make the cut.
Economists generally agree that increases in the minimum wage cause unemployment even when the economy is prospering—something it has not been doing for the last year and a half. David Neumark, a professor at the University of California, Irvine, estimates this rise will destroy some 300,000 jobs among teens and young adults.
The problem is that by trying to forcibly change the relationship between entry-level workers and employers, the government actually hurts both parties. Entry-level workers whose lack of training or aptitude makes their work less economical at a mandatory higher pay rate lose the most: their jobs and their prospects of other minimum-wage jobs. Employers lose out, too, because some work is now uneconomical to have done, it either doesn’t get done at all or is outsourced.
