Search This Blog

Tuesday, November 28, 2006

Kind of electrifying!

Ever since I read The Bottomless Well I've been looking for the signs that we would move away from the use of internal combustion gasoline engines and heavy complex mechanical drivetrains in our cars. Even if a variety of sources for supplying the electricity competed(diesel generator, hybrids, batteries, other?) the car itself was likely to become an electric appliance as Peter Huber predicted. Superior performance and environmental characteristics and improving economics of power chips and electric motors make this almost inevitable. This has already happened in some very large commercial vehicles like earthmovers. Now we are at the early stages of this happening in cars. Here is an enthusiastic review of the Tesla Roadster:
I've always marveled at how long the antique internal-combustion engine has survived. By 2006 standards, my car's power plant is a noisy, heat-blasting, poison-spewing monster with way too many moving parts. One spin in a Tesla made me realize that the gas engine might finally be on its last legs—and not because electric cars will help wean us from Saudi oil and save us from global warming. Rather, the Tesla Roadster is a rolling demo that proves electric cars now outperform their gas-guzzling counterparts in comfort, convenience, and, best of all, speed.

Eberhard says traditional carmakers have failed with electrics for two reasons. First, they market them as "penalty boxes" for environmental do-gooders and gas-mileage-obsessed penny-pinchers. Second, they just don't understand batteries. The Tesla's giant lithium-ion battery pack gives it the power to hit 60 in four seconds, to run 250 miles without a recharge, and to charge rapidly at its home charging base (a one-hour charge will take you 80 miles; it takes a 3.5-hour charge to go 250 miles). You can even plug into a wall socket at a roadside stop in a pinch. That makes the Roadster a viable commuter car and weekend day-tripper. The company claims energy costs as low as a penny per mile.
Check out the tesla website. Here are some pertinent technical points:
When you build a car that’s electric, you start with one built-in advantage: Electric cars just don’t have to be as complex mechanically as the car you’re probably driving now. Sophisticated electronics and software take the place of the pounds and pounds of machinery required to introduce a spark and ignite the fuel that powers an internal combustion engine.

Most of the subsystems in the Tesla Roadster are completely electronic and under direct software control. But unlike all other cars, these systems are not a hodge-podge of independent systems — instead, they are designed as an integrated system, the way complex network and computer systems are designed today.

Top Speed
Battery Life
Way, way cool!!!

Monday, November 27, 2006

Exercise great care

In a post titled Statistics are Indispensable, But.... Don Boudreaux makes the important point:
Statistics seem like straightforward, unambiguous facts; they're not. Care is required not only in their gathering but also in your interpretation of them.
Data may be as advertised by the label but no longer have the same meaning or relevance. They may have been a useful crude approximation but are now wildly misleading because of the methodology or accounting construct employed. As Don points out, care is required.

We get an additional caution to exercise care via this post about Alan Reynolds new book which I am looking forward to reading.

Conventional wisdom tells us that: (1) the vast majority of US households have experienced no increase in real income for more than a quarter century; (2) real wages have been stagnant for that same period; (3) low-wage burger-flippers have replaced high-paid factory jobs; (4) only the top one percent or ten percent have benefited significantly from rising productivity or asset prices; and (5) the once-robust middle class has been shrinking.

Just about everybody treats those assertions as if they are facts. That includes politicians on both sides, talking-head partisans, economics correspondents, and columnists—many with undisguised or thinly-veiled political agendas. They are supposed to be the experts, and the masses (like me) have to trust them; after all, our busy lives permit us only a limited amount of time for paying attention to politicians and the press. When the experts are nearly unanimous, that’s a good signal that the five conventional wisdom assertions have to be true . . . isn’t it?

That brings us to the big surprise, which Alan Reynolds sums up clearly and concisely: “Not one of those statements is even remotely close to being true.”

Why, then, do so many people seem to accept the false conventional wisdom without question? I have a guess: Each of us likes to think the person we heard it from must have done their homework; otherwise they wouldn’t be talking like that. Let’s face it, assumptions like that save us a lot of work. In this case, however, I now realize that, by trusting conventional wisdom, I was being too lazy—and I strongly suspect that most of our country’s so-called “economics correspondents” are guilty of the same thing I was.

I am thankful that Alan Reynolds is one who actually did the homework on this subject, then wrote a book laying out his findings. His attitude is one we should all adopt: “I accept nothing as an article of faith. I want to hear the logic and see the evidence. And you should demand nothing less. In the absence of logic and evidence, you should not give a hoot about my opinion. Reality is not a matter of opinion.”

In a recent on-air discussion with guests Art Laffer and Jared Bernstein, Mr. Bernstein of EPI asserted that by any and all measures the average person was worse off during the recent past and that it wasn't open for discussion. Don't you love such intellectually open approaches to analysis? Why do I doubt that he read Alan Reynolds book or the work of Cox and Alm?

Cox and Alm sound a timely warning: What we don't know about the economy could hurt us. Many of the suggested remedies to problems that don't exist may leave us worse off. Myths of Rich and Poor, therefore, gives us the facts that could help ward off further government interference in the economy. It may even help us turn the clock back to a better day, when Americans were truly free.

By pretending to know what just ain't so we risk doing more harm than good. Exercise great care!

Friday, November 24, 2006

Globalization ala Reisman

Have a look at a rather good essay by George Reisman titled Globalization: The Long-Run Big Picture.
Globalization, in conjunction with its essential prerequisite of respect for private property rights, and thus the existence of substantial economic freedom in the various individual countries, has the potential to raise the productivity of labor and living standards all across the world to the level of the most advanced countries. In addition, it has the potential to bring about the radical improvement in productivity and living standards in what are today the most advanced countries, and to provide the strongest possible foundation for unprecedented further economic advance everywhere.

This article shows that by incorporating billions of additional people into the global division of labor, and correspondingly increasing the scale on which all branches of production and economic activity are carried on, globalization makes possible the unprecedented achievement of economies of scale—the maximum consistent with the size of the world's population. First and foremost among these will be the very substantial increase in the number of highly intelligent, highly motivated individuals working in all of the branches of science, technology, and business. This will greatly accelerate the rate of scientific and technological progress and business innovation. The achievement of all other economies of scale will also serve to increase what it is possible to produce with any given quantity of capital goods and labor.
Change is certainly disruptive but the benefits are enormous. Reisman does a good job of addressing many though not all concerns.

Thursday, November 23, 2006

The real story of Thanksgiving

Giving thanks to the Lord for the abundance of capitalism! This from Rush:

On August 1, 1620, the Mayflower set sail. It carried a total of 102 passengers, including forty Pilgrims led by William Bradford. On the journey, Bradford set up an agreement, a contract, that established just and equal laws for all members of the new community, irrespective of their religious beliefs. Where did the revolutionary ideas expressed in the Mayflower Compact come from? From the Bible. The Pilgrims were a people completely steeped in the lessons of the Old and New Testaments. They looked to the ancient Israelites for their example. And, because of the biblical precedents set forth in Scripture, they never doubted that their experiment would work.

"But this was no pleasure cruise, friends. The journey to the New World was a long and arduous one. And when the Pilgrims landed in New England in November, they found, according to Bradford's detailed journal, a cold, barren, desolate wilderness," destined to become the home of the Kennedy family. "There were no friends to greet them, he wrote. There were no houses to shelter them. There were no inns where they could refresh themselves. And the sacrifice they had made for freedom was just beginning. During the first winter, half the Pilgrims – including Bradford's own wife – died of either starvation, sickness or exposure.

"When spring finally came, Indians taught the settlers how to plant corn, fish for cod and skin beavers for coats." Yes, it was Indians that taught the white man how to skin beasts. "Life improved for the Pilgrims, but they did not yet prosper! This is important to understand because this is where modern American history lessons often end. "Thanksgiving is actually explained in some textbooks as a holiday for which the Pilgrims gave thanks to the Indians for saving their lives, rather than as a devout expression of gratitude grounded in the tradition of both the Old and New Testaments. Here is the part [of Thanksgiving] that has been omitted: The original contract the Pilgrims had entered into with their merchant-sponsors in London called for everything they produced to go into a common store, and each member of the community was entitled to one common share. "All of the land they cleared and the houses they built belong to the community as well. They were going to distribute it equally.

All of the land they cleared and the houses they built belonged to the community as well. Nobody owned anything. They just had a share in it. It was a commune, folks. It was the forerunner to the communes we saw in the '60s and '70s out in California – and it was complete with organic vegetables, by the way. Bradford, who had become the new governor of the colony, recognized that this form of collectivism was as costly and destructive to the Pilgrims as that first harsh winter, which had taken so many lives. He decided to take bold action. Bradford assigned a plot of land to each family to work and manage, thus turning loose the power of the marketplace.

"That's right. Long before Karl Marx was even born, the Pilgrims had discovered and experimented with what could only be described as socialism. And what happened? It didn't work! Surprise, surprise, huh? What Bradford and his community found was that the most creative and industrious people had no incentive to work any harder than anyone else, unless they could utilize the power of personal motivation! But while most of the rest of the world has been experimenting with socialism for well over a hundred years – trying to refine it, perfect it, and re-invent it – the Pilgrims decided early on to scrap it permanently. What Bradford wrote about this social experiment should be in every schoolchild's history lesson. If it were, we might prevent much needless suffering in the future.

"'The experience that we had in this common course and condition, tried sundry years...that by taking away property, and bringing community into a common wealth, would make them happy and flourishing – as if they were wiser than God,' Bradford wrote. 'For this community [so far as it was] was found to breed much confusion and discontent, and retard much employment that would have been to their benefit and comfort. For young men that were most able and fit for labor and service did repine that they should spend their time and strength to work for other men's wives and children without any recompense...that was thought injustice.' Why should you work for other people when you can't work for yourself? What's the point?

"Do you hear what he was saying, ladies and gentlemen? The Pilgrims found that people could not be expected to do their best work without incentive. So what did Bradford's community try next? They unharnessed the power of good old free enterprise by invoking the undergirding capitalistic principle of private property. Every family was assigned its own plot of land to work and permitted to market its own crops and products. And what was the result? 'This had very good success,' wrote Bradford, 'for it made all hands industrious, so as much more corn was planted than otherwise would have been.' Bradford doesn't sound like much of a..." I wrote "Clintonite" then. He doesn't sound much like a liberal Democrat, "does he? Is it possible that supply-side economics could have existed before the 1980s? Yes.

"Read the story of Joseph and Pharaoh in Genesis 41. Following Joseph's suggestion (Gen 41:34), Pharaoh reduced the tax on Egyptians to 20% during the 'seven years of plenty' and the 'Earth brought forth in heaps.' (Gen. 41:47) In no time, the Pilgrims found they had more food than they could eat themselves.... So they set up trading posts and exchanged goods with the Indians. The profits allowed them to pay off their debts to the merchants in London. And the success and prosperity of the Plymouth settlement attracted more Europeans and began what came to be known as the 'Great Puritan Migration.'" Now, other than on this program every year, have you heard this story before? Is this lesson being taught to your kids today -- and if it isn't, why not?

Can you think of a more important lesson one could derive from the pilgrim experience? So in essence there was, thanks to the Indians, because they taught us how to skin beavers and how to plant corn when we arrived, but the real Thanksgiving was thanking the Lord for guidance and plenty -- and once they reformed their system and got rid of the communal bottle and started what was essentially free market capitalism, they produced more than they could possibly consume, and they invited the Indians to dinner, and voila, we got Thanksgiving, and that's what it was: inviting the Indians to dinner and giving thanks for all the plenty is the true story of Thanksgiving. The last two-thirds of this story simply are not told.

Now, I was just talking about the plenty of this country and how I'm awed by it. You can go to places where there are famines, and we usually get the story, "Well, look it, there are deserts, well, look it, Africa, I mean there's no water and nothing but sand and so forth." It's not the answer, folks. Those people don't have a prayer because they have no incentive. They live under tyrannical dictatorships and governments. The problem with the world is not too few resources. The problem with the world is an insufficient distribution of capitalism.

Happy Turkeyday to the socialists of all parties and to everbody else.

Update: other sources for this story are here and here.

Thursday, November 16, 2006

Milton Friedman R.I.P.

I like Donny Baseball's post on the matter.

A major source of objection to a free economy is precisely that it ... gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.

Wednesday, November 15, 2006

Getting into the game

Winning against the radical Islamists requires doing much better at the media game. Realizing how they use our media to manipulate public opinion in the West is important but knowing what circulates in the media in the Middle East also matters. Evidently, Glenn Beck is giving it a try with this special report on CNN Headline News - Exposed:The Extremist Agenda.

This article is a wakeup call to the West from someone who should know. The man holding forth wants us to get serious.

Dr. Tawfik Hamid doesn't tell people where he lives. Not the street, not the city, not even the country. It's safer that way.

This medical doctor, author and activist once was a member of Egypt's Al-Gama'a al-Islamiyya (Arabic for "the Islamic Group"), a banned terrorist organization. He was trained under Ayman al-Zawahiri, the bearded jihadi who appears in Bin Laden's videos, telling the world that Islamic violence will stop only once we all become Muslims.

He's a disarmingly gentle and courteous man. But he's determined to tell a complacent North America what he knows about fundamentalist Muslim imperialism.

"Yes, 'imperialism,' " he tells me. "The deliberate and determined expansion of militant Islam and its attempt to triumph not only in the Islamic world but in Europe and North America. Pure ideology. Muslim terrorists kill and slaughter not because of what they experience but because of what they believe."

"The first thing you have to understand is that it has nothing, absolutely nothing, to do with poverty or lack of education," he says. "I was from a middle-class family and my parents were not religious. Hardly anyone in the movement at university came from a background that was different from mine.

"I've heard this poverty nonsense time and time again from Western apologists for Islam, most of them not Muslim by the way. There are millions of passive supporters of terror who may be poor and needy but most of those who do the killing are wealthy, privileged, educated and free. If it were about poverty, ask yourself why it is middle-class Muslims -- and never poor Christians -- who become suicide bombers in Palestine."

"We're not talking about a fringe cult here," he tells me. "Salafist [fundamentalist] Islam is the dominant version of the religion and is taught in almost every Islamic university in the world. It is puritanical, extreme and does, yes, mean that women can be beaten, apostates killed and Jews called pigs and monkeys."

I can tell you what it is not about. Not about Israel, not about Iraq, not about Afghanistan. They are mere excuses. Algerian Muslim fundamentalists murdered 150,000 other Algerian Muslims, sometimes slitting the throats of children in front of their parents. Are you seriously telling me that this was because of Israel's treatment of the Palestinians or American foreign policy?"

He's exasperated now, visibly angry at what he sees as a willful Western foolishness. "Stop asking what you have done wrong. Stop it! They're slaughtering you like sheep and you still look within. You criticize your history, your institutions, your churches. Why can't you realize that it has nothing to do with what you have done but with what they want."

The PostModernist delusion and baby boomer self absorbtion make this difficult to accept. Then again, it may be even more in our face sooner than we think.

It takes moral clarity

A great Ralph Peters column speaks the truth. Can you handle the truth?

With Iraqi society decomposing - or, at best, reverting to a medieval state with cell phones - the debate in Washington over whether to try to save the day by deploying more troops or withdrawing some is of secondary relevance.

What really matters is what our forces are ordered - and permitted - to do. With political correctness permeating our government and even the upper echelons of the military, we never tried the one technique that has a solid track record of defeating insurgents if applied consistently: the rigorous imposition of public order.

That means killing the bad guys. Not winning their hearts and minds, placating them or bringing them into the government. Killing them.

If you're not willing to lay down a rule that any Iraqi or foreign terrorist masquerading as a security official or military member will be shot, you can't win. And that's just one example of the type of sternness this sort of fight requires.

To master Iraq now - if it could be done - we'd have to fight every faction except the Kurds. Are we willing to do that? Are we willing to kill mass murderers and cold-blooded executioners on the spot?

If not, we can't win, no matter what else we do.

Arrest them? We've tried that. Iraq's judges are so partisan or so terrified (or both) that they release the worst thugs within weeks - sometimes within days.

How would you like to be one of Iraq's handful of relatively honest cops knowing that any terrorist or sectarian butcher you bust is going to be back on the block before your next payday? And yeah, they know where you live.

Our "humanity" is cowardice masquerading as morality. We're protecting self-appointed religious executioners with our emphasis on a "universal code of behavior" that only exists in our fantasies. By letting the thugs run the streets, we've abandoned the millions of Iraqis who really would prefer peaceful lives and a modicum of progress.

We're blind to the fundamental moral travesty in Iraq (and elsewhere): Spare the killers in the name of human rights, and you deprive the overwhelming majority of the population of their human rights. Instead of being proud of ourselves for our "moral superiority," we should be ashamed to the depths of our souls.

We're not really the enemy of the terrorists, militiamen and insurgents. We're their enablers. In the end, the future of Iraq will be determined by its people. The question is, which people?

Our naive version of wartime morality handed Iraq to the murderers. Will our excuse for a sectarian bloodbath be that we "behaved with restraint?"

Any code of ethics that squanders the lives of tens of thousands and the future of millions so we can "claim the moral high ground" is hypocrisy worthy of the Europeans who made excuses for the Holocaust.

If we want to give Iraq's silent - and terrified - majority a last chance, we would have to accept the world's condemnation for killing the killers. If we are unwilling to do that, Iraq's finished.

Doing the right thing is not about feeling good or seeking praise from others!

Healthcare policy - Hillary style

It's not often that we get a gem like this from a liberal economist like Brad Delong, but anything is possible. Hey Brad, thanks for sharing.

My two cents' worth--and I think it is the two cents' worth of everybody who worked for the Clinton Administration health care reform effort of 1993-1994--is that Hillary Rodham Clinton needs to be kept very far away from the White House for the rest of her life. Heading up health-care reform was the only major administrative job she has ever tried to do. And she was a complete flop at it. She had neither the grasp of policy substance, the managerial skills, nor the political smarts to do the job she was then given. And she wasn't smart enough to realize that she was in over her head and had to get out of the Health Care Czar role quickly.

So when senior members of the economic team said that key senators like Daniel Patrick Moynihan would have this-and-that objection, she told them they were disloyal. When junior members of the economic team told her that the Congressional Budget Office would say such-and-such, she told them (wrongly) that her conversations with CBO head Robert Reischauer had already fixed that. When long-time senior hill staffers told her that she was making a dreadful mistake by fighting with rather than reaching out to John Breaux and Jim Cooper, she told them that they did not understand the wave of popular political support the bill would generate. And when substantive objections were raised to the plan by analysts calculating the moral hazard and adverse selection pressures it would put on the nation's health-care system...

Hillary Rodham Clinton has already flopped as a senior administrative official in the executive branch--the equivalent of an Undersecretary. Perhaps she will make a good senator. But there is no reason to think that she would be anything but an abysmal president.

I think this says quite alot!!

Tuesday, November 14, 2006

Healthcare - hold-off the collectivists long enough

It would be great if this doesn't get anywhere.

"(Hillary) also said Democrats would focus on improving the quality and affordability of health care _ a touchy matter for the former first lady, who in 1993 led her husband's calamitous attempt to overhaul the nation's health care system. The failure of that effort helped Republicans win control of both the Senate and House the following year.

"Health care is coming back," Clinton warned, adding, "It may be a bad dream for some."

Whereas incremental steps in this direction might help.

...a recent New York Times letter-writer asserted, "a human right and a universal entitlement."

Sounds noble. But not everything that is highly desirable is a right. Most rights simply oblige us to respect one another's freedoms; they do not oblige us to pay for others to exercise these freedoms. Respecting rights such as freedom of speech and of worship does not impose huge demands upon taxpayers.

Healthcare, although highly desirable, differs fundamentally from these rights. Because providing healthcare takes scarce resources, offering it free at the point of delivery would raise its cost and reduce its availability.

Medicare, Medicaid, and tax-deductibility of employer-provided health insurance created a system in which patients at the point of delivery now pay only a small fraction of their medical bills out of pocket.

This situation leads to monstrously inefficient consumption of healthcare. Some people consume too much, while many others with more pressing needs do without.

Because the wasteful consumption caused by heavily subsidized access drives up healthcare costs, taxpayers must pay more and more to fund Medicare and Medicaid, while private insurers must continually raise premiums. The sad and perverse result is that increasing numbers of people go without health insurance.

The solution is less, not more, government involvement in healthcare. Market forces have consistently lowered the cost and improved the quality and accessibility of food - which is at least as important to human survival as is healthcare. There's no reason markets can't do the same for healthcare.

It's ironic but true: Only by abandoning attempts to provide healthcare as a "right" that's paid for largely by others will we enjoy surer access to it.

If we can avoid the pitfalls of even more socialized medicine, we can reach here.

Something needs to be done in medicine and the entrepreneurs and technologists of the telecosm are the exact people to do it. It involves moving diagnostic medicine into the hands of the consumers—taking the diagnostic and technological tools of medicine and making computer peripherals out of them, as well as making on-person monitors and turning the Internet into an interpretive tool, so that the consumers of medicine can evaluate the product that they receive and medicine itself could be turned into a therapeutic industry competing on the basis of quality and price.

Listen to the podcast linked to above to hear Arthur Robinson and Andy Kessler. Great stuff!

Monday, November 13, 2006

What is Saving?

In any given year, we more or less consume what we produce. There are a surprising number of caveats to this seemingly simple assertion. For example:
  1. Who's "we"? Because of trade, "we" includes everybody in the world. If one day with trade with extraterrestrial aliens, then the definition of "we" will have to be expanded to include all sentient trading beings in the entire universe. It also includes all groupings of all sentient trading beings including not only individuals, but businesses, and governments as well.
  2. Why "more or less"? Things like changes in inventories and delays between production and distribution mean that some years we consume slightly more or less than what we produce, but this effect is pretty small. Also, occasionally some goods are produced that nobody wants (centrally planned economies are exceptionally good at causing unwanted goods to be produced).
  3. What does it mean to "consume"? I'm using a very inclusive definition here. An average college student can consume a can of beer in a few seconds. On the other hand, it takes about a decade to consume a car and a century to consume a house. Of course, neither durable goods such as houses and cars nor capital equipment are generally thought of as being "consumed", but it's not a bad approximation to consider that about a tenth of each car that lasts ten years and a hundredth of each house that will last one hundred years are consumed each year.
So given those and a few other minor caveats, the statement is a very good approximation. We clearly can't consume more than we produce (after depleting inventories), because the goods and services that haven't been produced simply don't exist and can't be consumed. We generally don't produce more than we consume because otherwise there would be mounds of rotting food, acres of rusting cars, etc.

So if we consume what we produce, what does it mean to save? What exactly is being saved? Is it just pieces of paper and/or bits in some bank's computer? Are those pieces of paper and bits part of the same infinitely large pool that the Federal Reserve controls? Is it just some sort of accounting gimmick? Or is there something more tangible that's being saved? Why is saving important at all?

I ask these questions for two reasons. First, I'm intending to write a series of posts on savings and debt and these are the fundamental questions I'll examine. Granted, my intentions and action don't always match regarding my blogging, but these are interesting questions to contemplate anyway. Also, my co-blogger Howard (feel free to jump in anytime) can write about these topics at least as well as I can in case I fall down on the job.

Second, if you hear someone say something like "the savings rate of the United States is way too low" then I suggest you start by asking that someone the above questions. If they can't answer them clearly, then I suggest you don't take them too seriously.

Friday, November 10, 2006

It's magic

Now that the donkeys are in a position of power, the relentlessly gloomy news should let up. Instapundit posts this:

THE DEMOCRATS WIN, AND THE SUN STARTS TO SHINE! "Poll: Afghans express confidence in country's direction, security."

Who knows what else will suddenly get better this week?

Maybe other positive elements on the foreign policy front will see the light of day in the media.

Perhaps the biased reporting about the economy will cease and we will hear about the amazing resilience of this economy.

Over the last 3 years, the US has averaged 3.5% annual GDP growth, which is exactly at the long-term trendline. The unemployment rate is lower than it has been for 35 of the last 38 years, with seven million jobs being created in the last 3 years. What is remarkable is that in this period, a number of factors that have caused recessions in the past have occurred, even as new negative forces have simultaneously emerged, and all these have not derailed economic growth.

Just like magic, snap!


I realize that sufferers of BDS also hate Rummy. He himself realizes that history will be his judge. This piece of satire is pretty funny. This article is a rather fine tribute. This speech delivered at the Landon Lecture Series at K-State was quite good and the Q&A(not included) was excellent.

Tuesday, November 07, 2006

Skeptical Optimist Watch: Paying off the National Debt

Steve Conover's recent post questions the wisdom of those who advocate paying off the national debt. Me too. It is a bad idea and below I'll give some reasons why.

Unfortunately, I think Steve's explanation has some problems. The central graphic basically shows a pile of money representing last year's after (federal) tax disposable personal income (last year's GDP minus last year's federal taxes) of $10 trillion of which nearly half is chewed up by a surtax in order to pay off all of the national debt in one fell swoop.

Admittedly, I got stymied by the mere mechanics of the example. A surtax of $4.9 trillion in a single year would probably be uncollectable, and even if it could be collected, would almost certainly destroy the economy in the process, likely rendering the currency worthless. Even if somehow the surtax was collected and didn't destroy the economy, it would also be nearly impossible to actually track down and buy back all treasury instruments within a single year period.

I pointed this out to Steve who replied, "Okay, just assume my example is the sum total effect of paying of 49 billion a year for a hundred years with inflation of zero percent." Sure, but then let's consider the graphic. Suddenly, the pile of money from which we're gonna pay the debt off is not $10 trillion, but $1000 trillion (a $Quad, now that's real money!). Suddenly, that $Quad pile is over 200 hundred times as high as the $4.9 trillion debt pile. Suddenly, it doesn't seem like a very compelling example. Another part of his explanation is that the government should keep borrowing so his grandchildren can inherit treasury bonds which doesn't strike me as compelling either.

I don't like Steve's explanation, but I do agree with his conclusion. I have several reasons why I think federal government debt is both beneficial and necessary.

The Fed injects liquidity (i.e. money) into our economy (and the world's economy) by purchasing treasury instruments (bonds) from the market (just like everybody else) and essentially tosses the purchased bonds in the trash (or the bit bucket). The entity from which the bond is purchased now has a credit for the amount of the purchase and the debt represented by that bond is cancelled creating a net credit which is the same thing as creating money. Virtually all money is created by this method. It's an extraordinarily efficient, effective, and inexpensive way to create money.

There are other methods by which the Fed can create money, but the other methods rely on demand for money (in the form of loans) in order for new money to be created. If the economy enters a deflationary phase or something bad happens (like a stock market crash), demand for loans from those with good credit ratings tends to drop and thus the demand for money drops rendering the other methods unreliable. My favorite analogy for this is that the Fed holds a string and maintains tension on the money supply. As long as there is demand for money they can apply just the right amount of tension to control the money supply. If the demand for money evaporates, the Fed is left trying to push on a string, which just doesn't work too well.

Having government debt guarantees that there is always tension on the string. Having an adequately large pool of government debt guarantees that the tension on the string is large enough that the Fed can inject any conceivable amount of necessary liquidity without the market even noticing. In other words, having a large market in government debt instruments is key in enabling the Fed to provide necessary liquidity in a smooth and stable manner. Having a large market for government debt requires a large amount of government debt.

Government financing of expenditures using debt costs less than most people think (I think). First of all, taxes are expensive. By that I mean that it costs a lot to collect them. As I wrote here, "[a]ccording to a report by the Tax Foundation, the cost of complying with the income tax code in 2005 represented 22 percent of the income taxes collected from individuals, businesses, and nonprofits." That means for every dollar collected in taxes, $1.28 of GDP is required. On the other hand, it costs next to nothing for the government to borrow money, so debt financing has a big advantage right out of the chute. Given the government borrows at a real interest rate of around 2%, even if you have a problem with government interest payments, it takes more than a decade before debt "costs" more than taxes, no matter how you look at it.

Every dollar that is debt financed is a dollar not taxed. Every dollar not taxed is either spent on goods and services (increasing demand) or remains available for investment. Demand creates need, which is the mother of invention, which leads to inventions being born, which creates IP, which raises productivity and creates new products, which makes everybody bettter off. Demand also boosts employment. Investment is an important enabler of the chain reaction just described.

It's interesting to consider that the government typically borrows at a real rate of around 2 to 3 percent and the private sector can take the money not taxed because of that borrowing and get a real rate of return of over 6% from the stock market. That's quite a good deal!

Lastly, the interest payments made on the debt aren't a problem either. I make this statement knowing full well that virtually nobody will agree with it, but what the heck, I feel compelled to try. The interest on the debt, paid in dollars, goes to somebody. That somebody either spends or makes the money available for investment. Spending is demand which leads to the wonderful chain reaction described above and boosts employment. As above, investment enables the chain. It makes absolutely no difference if that money was spent by the government or is spent by individuals collecting interest or is spent by individuals not paying taxes because the debt was foolishly paid off and there is no interest. It also makes no difference if the individual is foreign or not. I know that it's an inate genetic thing to hate interest payments, especially to them durn foreigners, so that's why I put this reason last.

So you might be thinking, if debt is so wonderful, why not just finance all government expenditures using debt? Good question. I'll address that in another post...

Saturday, November 04, 2006

When Alabama Gets the Bomb

Gotta love this TimesOnline headline:

Six Arab states join rush to go nuclear

Algeria, Egypt, Morocco, Tunisia, UAE and Saudi Arabia seek atom technology...

Why does it remind me of this old song by Tom Lehrer?
First we got the bomb and that was good,
'Cause we love peace and motherhood.
Then Russia got the bomb, but that's O.K.,
'Cause the balance of power's maintained that way!
Who's next?

France got the bomb, but don't you grieve,
'Cause they're on our side (I believe).
China got the bomb, but have no fears;
They can't wipe us out for at least five years!*
Who's next?

Then Indonesia claimed that they
Were gonna get one any day.
South Africa wants two, that's right:
One for the black and one for the white!**
Who's next?

Egypt's gonna get one, too,
Just to use on you know who.
So Israel's getting tense,
Wants one in self defense.
"The Lord's our shepherd," says the psalm,
But just in case, we better get a bomb!
Who's next?

Luxembourg is next to go
And, who knows, maybe Monaco.
We'll try to stay serene and calm
When Alabama gets the bomb!
Who's next, who's next, who's next?
Who's next?
Yup, I'll try to stay serene and calm when Alabama and all the Arab states get the bomb!

Friday, November 03, 2006

Somebody's Got it Right

A number of economists commented on the October jobs numbers in the Wall Street Journal. Here's my favorite:

Such large revisions raise doubts about the abilities of the Bureau of Labor Statistics' sampling procedures. Amplifying those doubts, the BLS last month indicated that it estimates the annual benchmark revisions will add some 810,000 to nonfarm payrolls as of the March 2006 benchmarking month. Against the backdrop of such large revisions, it's hard to have much confidence in any inferences to be drawn from the reported data. -- David Resler, Nomura Economics

Revisions of a million jobs here, a million jobs there - pretty soon you're talking real employment! I don't know if the BLS is using a bad methodology or what, but when the size of the revisions is substantially bigger than the original data, the statistics are unusable. The other economists making comments based on the BLS's data must just like to see themselves in print, because comments based on useless data are, well, useless.

The Fed Makes a Mistake

Richard W. Fisher, of the Federal Reserve Bank of Dallas recently wrote:
In retrospect, the real fed funds rate [in 2002 and early 2003] turned out to be lower than what was deemed appropriate at the time and was held lower longer that it should have been. In this case, poor data led to a policy action that amplified speculative activity in the housing and other markets. Today, as anybody not from the former planet of Pluto knows, the housing market is undergoing a substantial correction and inflicting real costs to millions of homeowners across the country.
But this isn't the mistake as far as I'm concerned. Even assuming that monetary policy was a bit looser than optimal, what harm did it really do? Was unemployment unacceptable? Was GDP per capita growth god-awful? Did productivity plummet? Looks to me like the answers were "none", "no", "no", and "no", respectively. The economy did really well during that period.

You might point out that we're gonna have to pay the piper now, but I don't think that's quite true. I think it's more accurate to say that we're likely to pay the piper now because the Fed Funds rate has been raised hundreds and hundreds of basis points (I'll admit I lost track of just how many basis points). I'm not so sure that the correction from a little housing bubblet due to a wee bit of extra money floatin' around inherently meant that we have to suffer for it now.

What I'm saying is that the real mistake is the Fed's reaction to its supposed mistake. Fixing a supposed loose monetary policy mistake with a tight monetary policy is a mistake in my book. It seems to fall in the let's punish ourselves to teach ourselves a lesson approach and that approach makes no sense whatsoever to me.

Thursday, November 02, 2006

Skeptical Optimist Watch: Bankruptcy

English is a fluid and massive language, and different words have somewhat different meanings to different people speaking different slightly different dialects. The dialect spoken by CFOs and ex-CFOs is likely different from much of the rest of the population.

Today, I'd like to consider the word "bankruptcy". From we get the following definition:
bank‧rupt‧cy[bangk-ruhpt-see, -ruhp-see]
1.the state of being or becoming bankrupt.
2.utter ruin, failure, depletion, or the like.
Definition (1) includes the concept of being legally bankrupt and I can imagine that is what comes to mind when CFOs hear the word. Definition (2) is pretty broad and allows "bankruptcy" and "bankrupt" to be used correctly in a much wider variety of contexts.

In a recent post by the "Skeptical Optimist", Steve Conover asks:
Next time we hear anyone warning us of impending "bankruptcy," let's interrupt and ask, "Wait, don't you mean 'hyperinflation' instead of 'bankruptcy'?"
But isn't 'hyperinflation' virtually synonymous with "utter ruin"? Has there ever been a hyperinflation that didn't leave an economic system in shambles? Certainly a hyperinflation represents some sort of "failure", no? Thus, I think that if one means 'hyperinflation' it would also be correct for one to say 'bankruptcy'.

Steve asks us to reread the following sentence:
In any scenario short of hyperinflation, it is impossible for the federal government of the USA to become incapable of paying its obligations in money backed by the federal government of the USA.
While I agree that it's unlikely, it's definitely not impossible. For example, Mexico became "incapable of paying its obligations" on its debt in the early 1980s, but there was no associated hyperinflation.

If the United States takes on obligations that aren't specified in dollars, is it possible that it will be unable to meet those obligations. For example, if medical breakthroughs push average life spans to 200 years, and most people continue to retire in their sixties, it is possible, perhaps even likely, that the United States may not be able to meet both its Social Security and Medicare obligations given the current relevant legislation. Would the United States hyperinflate, or default, or change the program, or do something else because it can't meet its obligations? Who knows, but in each case, the entitlement would face "failure" and "depletion".

In other words, the programs would be bankrupt.