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Monday, December 24, 2007

Have a Moderate Christmas

According to psychologist John Masterson, Christmas is the perfect day for moderation:
Christmas Day is the one day when you can indulge so many of your pleasures that you end up doing each in moderation -- a little gin and tonic, a little champagne, a little white wine, a little red wine, a little dessert wine, a little port...
That's my kind of moderation!

Have a Merry, but Moderate, Christmas all!

Thursday, December 20, 2007

From Every Mountain Top ...

I found this Walter Williams column of interest:
All too often defenders of free-market capitalism base their defense on the demonstration that free markets allocate resources more efficiently and hence lead to greater wealth than socialism and other forms of statism. While that is true, as Professor Milton Friedman frequently pointed out, economic efficiency and greater wealth should be seen and praised as simply a side benefit of free markets. The intellectual defense should focus on its moral superiority. Even if free markets were not more efficient and not engines for growth, they are morally superior to other forms of human organization because they are rooted in voluntary peaceable relationships rather than force and coercion. They respect the sanctity of the individual.

acts such as murder, rape, and theft, whether done privately or collectively, are unjust because they violate private property. There is broad consensus that collective or government-sponsored murder and rape are unjust; however, government-sponsored theft is another matter. Theft, being defined as forcibly taking the rightful property of one for the benefit of another, has wide support in many societies that make the pretense of valuing personal liberty. That theft, euphemistically called income redistribution or transfers, is often defended by lofty phrases such as: assisting the poor, the elderly, distressed business, college students, and other deserving segments of society. But as F. A. Hayek often admonished, “[F]reedom can be preserved only if it is treated as a supreme principle which must not be sacrificed for any particular advantage. . . .” Ultimately, the struggle to achieve and preserve freedom must take place in the habits, hearts, and minds of men.

Or, as admonished in the Constitution of the state of North Carolina: “The frequent recurrence to fundamental principles is absolutely necessary to preserve the blessings of liberty.” It is moral principles that deliver economic efficiency and wealth, not the other way around. These moral principles or values are determined in the arena of civil society.

For individual freedom to be viable, it must be a part of the shared values of a society and there must be an institutional framework to preserve it against encroachments by majoritarian or government will. Constitutions and laws alone cannot guarantee the survival of personal freedom, as is apparent where Western-type constitutions and laws were exported to countries not having a tradition of the values of individual freedom.

Societies with a tradition of freedom, such as the United States, have found it an insufficient safeguard against encroachment by the state. Why? Compelling evidence suggests that a general atmosphere of personal freedom does not meet what might be considered its stability conditions. As is often the case, political liberty is used to stifle economic liberty, which in turn reduces political liberty.

If we were to rank countries according to: (1) whether they are more or less free-market, (2) per capita income, and (3) ranking in Amnesty International’s human-rights protection index, we would find that those with a larger free-market sector tend also to be those with the higher per capita income and greater human-rights protections. People in countries with larger amounts of economic freedom, such as the United States, Canada, Australia, Hong Kong, Japan, and Taiwan, are far richer and have greater human-rights protections than people in countries with limited markets, such as Russia, Albania, China, and most countries in Africa and South America. That should tell you something.

Economics, politics and social order are all intertwined. Economic freedom can be foundational to advancing political freedom and human rights. These are all effected by culture and attitudes.

Wednesday, December 19, 2007

Skeptical Optimist Watch: You Pay for It!

As regular readers of this blog know, I have no problem with the government borrowing money in order to finance its spending, especially with the deficits relative to GDP at the current low levels. However, whether government spending is financed with taxes or borrowing, it has an immediate cost when the spending occurs. The cost is not deferred just because the money is borrowed instead of being paid for by taxes.

In a recent post, Steve Conover wrote:
... the false premise [is] that everything the government buys must be paid for right now with tax receipts or spending cuts, or else we shouldn't do it.
Everything the government buys incurs a cost right now. Every new program is paid for now by foregoing other potential consumption and/or investment. Either it's paid for by foregoing other specific government programs, or it is paid for by consuming or investing less in unforeseeable ways in the private sector. Just because you can't identify exactly what consumption and/or exactly which investments don't happen does not mean you're not redirecting current resources. It also doesn't much matter if taxes or borrowing are used to suck resources from the private sector into the government.

What I'm pointing out is the distinction between the financing of spending and the spending itself. I absolutely agree that financing by borrowing is perfectly okay, especially when in the range of just a few percent of GDP. However, the cost is immediate at the point of spending. Resources (labor, tangible capital assets, etc.) are now deployed because of the spending. When the government spends money, those resources are no longer available for other productive purposes.

Again, the financing method chosen in order to deploy the resources is immaterial. But when scarce resources like labor are deployed somewhere, they cannot also be deployed somewhere else. That is an immediate and unavoidable cost which we have no choice but to "pay" as we "go".

There are possible exceptions. If unemployment is quite high, then labor intensive programs don't necessarily have much of a cost since those resources were not deployed anyway. However, I believe that 4.7% is low enough such that incremental government spending on labor will transfer resource from the private sector to the government. The lower the unemployment, the closer to unity this effect will be.

I have no problem with the government spending money. But let's not pretend that there's no cost just because we use borrowing as the method of financing that spending. There is cost, and it's incurred at the point of spending (deploying the resources), unless those resource would not have been otherwise deployed.

No matter what, when the government spends money, you pay for it.

Wednesday, December 12, 2007

Cool New Warming Research

Though the global warming consensus is supposedly etched in stone (we're all gonna die!!!), there's been quite a bit of new research in the last few months that calls some of it into question (maybe we'll live after all).

Much of the general freakout is due to the belief that the 20th century was the warmest of the last millennium. This belief is based on reconstructions of past temperatures using tree ring data. However, Loehle recently combined a group of other, non-tree ring temperature reconstruction proxies and got significantly different results. As shown in the figure above, the 20th century wasn't anomalous at all according to Loehle's temperature reconstruction. Indeed, it was nearly exactly average for the last 2000 years.

Loehle's results were published in the lowly (according to the consensus scientists) Energy and Environment journal and have been mostly ignored. However, these results are different enough from the current reconstructions and his methods, while not perfect, are good enough such that at least some scientists are taking notice. I wouldn't be surprised if there are some revisions to climate theory due to Loehle's results.

In a second publication, Monckton asks:
The fact of warming tells us nothing of the cause. Yet the scientific consensus is that, though the rapid climatic warming from 1906 to 1940 was a natural recovery from the historically low temperatures of the Little Ice Age, it is we who are chiefly to blame for the equally rapid warming from 1975 to the present. Since some climatologists challenge this consensus, can we settle the debate by predicting with models and then detecting by observation a characteristic “signature” in the climate data that allows us definitively to distinguish between anthropogenic and natural warming of the Earth’s atmosphere?
The answer according to Monckton, as you may have guessed, is yes. Furthermore, the IPCC models seem to all agree on the "signature":
The UN’s fourth assessment report on climate change (IPCC, 2007) confirms that computer modeling predicts the existence of a unique and distinct signature or fingerprint of anthropogenic warming caused by our emissions of greenhouse gases. That signature is the instantly-recognizable tropical, mid-troposphere “hot spot” about 10km above the Earth’s surface. In the “hot spot”, the models predict that the rate of increase in atmospheric temperature, measured in degrees Celsius per decade, will be two or three times greater than at the Earth’s surface. In IPCC (2007), this predicted “hot-spot” signature of anthropogenic greenhouse warming is clearly visible on plots of modeled greenhouse forcing and of all forcings including the dominant greenhouse forcing, but is not visible on plots of solar, volcanic, tropospheric and stratospheric ozone, or sulphate aerosol forcings. The UN’s models accordingly distinguish clearly between greenhouse warming and other climate forcings: at least five separate general-circulation computer models of the climate all predict the existence of the “hot-spot” signature of anthropogenic greenhouse warming in the tropical mid-troposphere.
In other words, anthropogenic greenhouse warming should show different and predictable warming trends at different altitudes and latitudes. So how do the trends predicted by the models match real world data? Apparently, very poorly:
Yet in the plot from the Hadley Centre’s radiosondes, showing actual, observed temperatures in the troposphere, presented in the same altitude-vs-latitude fashion as the predictions made by the five computer models, the computer models’ repeatedly-predicted “hot-spot” signature of anthropogenic greenhouse warming is entirely absent. Indeed, very nearly all observational data on mid-tropospheric temperature trends over the past half-century show no tropical “hot-spot” at all; and, in the one record that shows it at all, the magnitude of the observed effect is insufficient to justify the UN’s choice of a very high central estimate of climate sensitivity to anthropogenic enhancement of the greenhouse effect. Our own small experiment also fails to demonstrate even the existence of the “hot-spot” fingerprint of anthropogenic warming, still less a magnitude sufficient to justify the IPCC’s high climate sensitivity. These surprising results present a very real difficulty for the conventional “global warming” theory – a difficulty that is not resolved either in CCSP (2006) or in IPCC (2007).
What Monckton is basically saying is that there is absolutely no sign of the greenhouse (or anthropogenic) component of global warming predicted by all of the models that have been used to predict catastrophic global warming.

The response of the global warmenists is that the observed data must be wrong (or very noisy) but their climate models are valid. Monckton's response:
Thorne et al. (2007) have attempted to resolve this difficulty by suggesting that the error-bars in the observational datasets are so large that they could in theory encompass the model-predicted “hot-spot”, that the datasets are not designed to identify small temperature trends, and that the outputs are exceptionally sensitive to the choice of limiting dates. However, it is on the basis of the observed data that the models are contrived, and, if the observed data are inadequate for drawing conclusions about whether the characteristic fingerprint of anthropogenic greenhouse warming exists, then a fortiori the outputs from theoretical models founded upon those data will be inadequate, and no conclusion about the magnitude of the temperature response to anthropogenic enhancement of the natural greenhouse effect can be legitimately drawn.
In other words, garbage in - garbage out: either the models are based on faulty data and they are therefore crap or they are based on good data and are therefore crap (because they don't predict the good data). In either case, the models, upon which all catastrophic global warming is based, are crap, especially since there are alternative answers:
The very close correlation between anomalies in tropical outgoing long-wave radiation and anomalies in global lower-troposphere temperatures, taken with the near-total absence of correlation between monotonic increases in CO2 concentration and chaotic temperature anomalies, suggests that it is the computer models, not real-world observations that are likely to be at fault.
Maybe the seas won't boil after all:
On this analysis, “global warming” is unlikely to be dangerous and extremely unlikely to be catastrophic.
Other new research sheds light on parts of the climate models that might be crap:
The widely accepted (albeit unproven) theory that manmade global warming will accelerate itself by creating more heat-trapping clouds is challenged this month in new research from The University of Alabama in Huntsville.

Instead of creating more clouds, individual tropical warming cycles that served as proxies for global warming saw a decrease in the coverage of heat-trapping cirrus clouds, says Dr. Roy Spencer, a principal research scientist in UAHuntsville's Earth System Science Center.

That was not what he expected to find.

"All leading climate models forecast that as the atmosphere warms there should be an increase in high altitude cirrus clouds, which would amplify any warming caused by manmade greenhouse gases," he said. "That amplification is a positive feedback. What we found in month-to-month fluctuations of the tropical climate system was a strongly negative feedback. As the tropical atmosphere warms, cirrus clouds decrease. That allows more infrared heat to escape from the atmosphere to outer space."
Well, that'll make a difference. Using just the increase in CO2 expected over the next century, the corresponding expected temperature increase would be about 1.2 C. The current models assume a significant cloud amplification increasing the estimate over the next hundred years by about a factor of three. If Spencer's observations are right, then the warming due to anthropogenic greenhouse gases will actually be substantially less than 1.2 C. In other words, the current models might be over predicting warming by an order of magnitude.

I've guessed that the feedback loops involved with greenhouse gases would be negative feedback loops. If they weren't, it seems unlikely to me that the climate would've been stable enough so far for life to have survived to this point.

But here we are.

Friday, December 07, 2007

Manufacturing Again

Howard recently had a post listing the top 5 economic myths in the United States today. I want to focus on number 4: "America is de-industrializing, and manufacturing is dying." This myth is far, far more pervasive than the rest of them. Even those who are very positive on the economy often believe it and discount it by saying something like, "yeah, but advanced economies don't manufacture."

Well, yes they do. Especially so for the United States. Our manufacturing capacity has increased over virtually all time frames for at least as long as data has been collected. As I've written previously, "U.S. manufacturing output has actually increased dramatically, more than eleven-fold from 1940 to 2000." As you can see from the chart on the right (HT: Cafe Hayek), after a brief dip starting in 2000, manufacturing output continues up, up, up and may even be accelerating with the weakening dollar. Manufacturing output has even nearly kept pace with the growth of the rest of the economy.

We still manufacture more than any other country in the world, even China, which has more than four times as many people. We manufacture very advanced products (think Boeing's aircraft) while countries like China manufacture the plastic toys for McDonalds' happy meals.

Manufacturing is alive and growing in the United States and will continue to be an important sector of our economy for a long time to come.

Thursday, December 06, 2007

Giving up on Trackbacks

For someone reason our posts weren't loading for me due to waiting for Haloscan, the provider of this blog's trackback service. Since no-one has linked a trackback in years, I've disabled trackbacks for now.

Taxes and GDP

Depending on how you measure it, the United States the governments' (fed, state, and local) share of the annual Gross Domestic Product (GDP) is a bit less than 1/3. The governments' take is, therefore, around $4 trillion.

Let's quickly define what "share" and "take" mean. Consider a pie. The "share" (S) is simply a fraction of the pie. The "take" (T) is the weight of the given piece of pie. Given a pie that weighs W, the equation is T = S⋅W. Simple enough.

Clearly, for T to increase, either S or W need to increase (or both). However, in the case of the American pie called GDP, there is also a relationship between S and W. As the governments' share (S) of GDP increases, the pie makers (the private sector) make a relatively smaller pie, so W decreases. Therefore it's not clear if the governments' take will go up our down if they choose to increase their share. If GDP decreases faster than S increases, the take would decrease. If GDP (W) decreases slower than S increase, the take T would increase.

Let's say for a moment that the governments wanted to exactly maximize its take. To do so they would pick the share that maximizes the equation T = S⋅W and therefore the change in W would exactly offset the change in S if S increases or decreases. Let's say the governments have successfully done so and that the current share of 1/3 maximizes their take. If so, we would predict that for each percent increase (or decrease) of the governments' share of GDP, GDP would decrease (or increase) by approximately 3%.

Sure enough, according to a recent paper by Christina and David Romer of the University of California, Berkeley, tax revenue increases are a significant negative for the economy and the relationship between share of GDP and size of GDP happens to exactly maximize the governments' take:
Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.
Governments exist only to exert and extend their power via a parasitic relationship with their economic host. One-third GDP maximizes our governments' take so that's what they take. No more, no less.

Corporate Taxes

Over at the Market Center Blog via The Center for Freedom and Prosperity they draw upon this article and link to their youtube video.

Word is that the Bush Administration will soon propose a cut in the U.S. corporate income tax, following House Democrat Charlie Rangel's proposal this fall to cut the rate to 30.5% from 35%. As a new study makes clear, such a reduction would give a lift to the U.S. economy when it really needs it.

The study, from the National Bureau of Economic Research, looked at corporate taxes in 85 countries from 1996 to 2005. Economists from the World Bank and Harvard University calculated the effective business tax rate for each country, because some nations have so many tax loopholes that the rate paid by companies can be one-half to one-third the statutory tax rate. The study found that corporate taxes have a statistically significant negative effect on economic performance.

High business taxes were found to reduce a nation's domestic capital investment, the amount of foreign investment into that country, and its overall growth in GDP. The authors conclude that "corporate taxation reduces the return on capital and thus discourages investment" and "reduces the cash flow of the firm" in such a way as to reduce the after-tax capital available for reinvestment.

The researchers also found that high corporate levies reduce entrepreneurship, which drives new industries and job growth. In many nations the corporate tax rate is paid both by large corporations and small businesses. In the U.S., small businesses are often organized under Subchapter S of the tax code and thus pay the personal income tax rate.

Did they do a good job with the video? Is it an effective form of communication?