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Economics & the Economy Archive

Friday

13

May 2011

1

COMMENTS

Raj Rajaratnam Convicted for Improving Market

Written by , Posted in Economics & the Economy, The Courts, Criminal Justice & Tort

The government got their man! An evil Wall Street hedge-fund titan will be locked away for up to 205 years(!) for his horrible crime of…bringing more information to the market so it can run more efficiently. Well, that’s not what the government calls it – they call it “insider trading” – but that is in fact what he did.

Insider trading is not harmful and should not be a crime.

But before I get into that, here’s the news:

The widely followed trial exposed the behind-the-scenes dealings of a once-prestigious hedge fund that gained access to highly sensitive information about, among other companies, Goldman Sachs Group Inc. at the height of the financial crisis.

…The counts Mr. Rajaratnam was convicted of carry a total of up to 205 years in prison time, but under federal sentencing guidelines, he is likely to receive 15 ½ to 19 ½ years, according to prosecutors.

…In a statement, Manhattan U.S. Attorney Preet Bharara said: “Unlawful insider trading should be offensive to everyone who believes in, and relies on, the market. It cheats the ordinary investor.… We will continue to pursue and prosecute those who believe they are both above the law and too smart to get caught.”

Preet Bharara, the same thug behind the online poker busts known as black Friday, shouldn’t talk about things he does not understand, and economics is clearly one of those things.

(more…)

Friday

29

April 2011

0

COMMENTS

From Where Do These Magical Regulators Come?

Written by , Posted in Economics & the Economy

George Soros recently penned an interesting Op-ed in Politico, coinciding with an appearance at the Cato Institute (is there a libertarian equivalent to Holy Water, and was it burning?) for an event reflecting on the impact of F.A. Hayek (I think).

I actually found the Soros article rather interesting. In it he recounts his view of an ideological battle of sorts between Hayek and his colleague Karl Popper, under whom Soros studied. There were many things I found wrong with the piece, both in terms of facts and opinions, but I want to address only one here. Soros ultimately claims to find value in both views, but what I really keyed on was the presence of a bit of magical thinking common on the left. First, here’s a snippet of the conclusion to the Soros piece:

Because perfection is unattainable, it makes all the difference how close we come to understanding reality. Recognizing that the efficient market hypothesis and the theory of rational expectations are both a dead end would be a major step forward.

As I see it, the two sides in the current dispute have each got hold of one half of the truth. which they proclaim to be the whole truth.

…I recognize that the other side is half right in claiming that the government is wasteful and inefficient and ought to function better.

But I also continue to cling to the other half of the truth — namely that financial markets are inherently unstable and need to be regulated.

Earlier in the piece, he makes the case that perfect knowledge is not attainable, which inevitably leads to the “inherently unstable” nature of markets. This argument is internally inconsistent and fails on its own premise.

If financial markets are inherently unstable because perfection is unattainable, why would government regulators not be subject  to the same constraints? Are they not bound by the same inability to achieve perfect knowledge? It is a common fallacy of the statists to believe that regulators can magically rise above all the problems faced in the market, but this is not the case. In fact, they face even greater challenges because politics has been thrown into the mix.

As regulators have no greater ability to achieve perfect knowledge than market participants, how does placing more power in fewer hands improve the situation? It seems to me the more stable system is the one that sees less power in each individual hand, while spread out among many more decision-makers.

On a related note, EconStories.tv dropped round 2 of the Hayek vs. Keynes rap. I highly recommend checking it out:

Monday

25

April 2011

0

COMMENTS

World's Last Typewriter Factory Closes; Jesse Jackson Jr. Weeps

Written by , Posted in Economics & the Economy

The world’s very last typewriter factor is shutting down (Hat-tip: George Scoville):

…Even this February, the AFP ran an article explaining that the seemingly-ancient technology was “flourishing” in the nation. Sadly, that era has now ended.

Godrej and Boyce shut down its Mumbai, India plant because of declining orders. The company has only “a few hundred” typewriters in stock, most of which are Arabic language models. “Till 2009, we used to produce 10,000 to 12,000 machines a year,” the factory’s general manager told the India’s Business Standard newspaper. “Now, our primary market is among the defence agencies, courts and government offices.”

Other than those with sentimental attachments to a particular technology this is the kind of development which ought to be celebrated. Economically, it signifies the advancement of technology, and the freeing of labor to produce better products and services than those of previous generations.

This is all part of the process of creative destruction, which sees jobs both lost and gained as old technologies are replaced by new innovations. The net result is greater wealth and prosperity for all.

I know, I know, this is all common sense, right? Sadly, this is exactly the type of development bemoaned by Congressman Jesse Jackson Jr. recently, when he blamed the iPad for “eliminating thousands of American jobs” on the House floor:

[T]his new device… is now probably responsible for eliminating thousands of American jobs. Now Borders is closing stores because, why do you need to go to Borders anymore? Why do you need to go to Barnes & Noble? Buy an iPad and download your newspaper, download your book, download your magazine.

And if you’re Jesse Jackson Jr, please – I beg you – download an economics textbook.

Sunday

24

April 2011

0

COMMENTS

Obama Blames Everyone Else on Oil Prices

Written by , Posted in Economics & the Economy, Energy and the Environment

Despite public demand for increasing domestic oil production, the current White House has sent a clear signal that the U.S. will not be increasing production into the future, despite growing demand. While simply one of many factors impacting the global price of oil, it is a factor. But rather than acknowledge that the price of oil reflects the realities of supply and demand, including anticipated changes in the future, Obama is lashing out at anyone and everyone in an attempt to distract from his failed and misguided leadership on energy.

First, he pulled out that favorite boogeyman of the economically illiterate and blamed the speculators:

“It is true that a lot of what’s driving oil prices up right now is not the lack of supply. There’s enough supply. There’s enough oil out there for world demand,” Obama said.

“The problem is … speculators and people make various bets, and they say, you know what, we think that maybe there’s a 20 percent chance that something might happen in the Middle East that might disrupt oil supply, so we’re going to bet that oil is going to go up real high. And that spikes up prices significantly.”

Yes, they do “place bets,” but it doesn’t matter to speculators whether those bets are for prices to go up or go down, for the long-term or for the short-term, so long as they are right. It is, ultimately, the fundamentals of the market that move prices, not the speculators. It makes as much sense to blame the thermometer for how hot is as it does to blame speculators for the price of oil.

Speculators play an important role by adding additional information to the market. All prices serves as signals, and the more information they can convey, the better. Businesses that rely heavily on oil don’t simply want to know that there is enough supply now. They want to know if there will be enough supply 5, 10 or 20 years from now. If the answer is ‘no’, then they can start investing in alternatives now, when there is still time to adapt. By adding their information into the market system, speculators reduce price volatility. (More on that here)

What the President ignores is that the bets being made are not simply about whether or not instability will overtake production, though that’s certainly part of it. They are also looking at the growth of demand versus the growth of supply. And in so far as the former is out pacing the latter, and is expected to continue doing so, speculators will bring this fact to light by betting on prices continuing to rise. They are, simply put, reacting to reality, not shaping it. The same cannot be said of the President, whose policies are sending a clear signal that U.S. domestic production will be curtailed, or at least not allowed to grow fast enough to match future demand.

The President is also picking on another boogeyman, those dastardly oil companies:

“Four billion dollars of your money are going to these companies at a time when they’re making record profits and you’re paying near record prices at the pump,” the president said at a Nevada town hall. “It has to stop.”

It’s not altogether clear what the President thinks “has to stop.” If he means the fact that we’re paying record prices, it would certainly be nice if it did stop, but the President’s policies are having the opposite effect. Reducing oil production relative to demand, or adopting disruptive cap-and-trade regulations, will ensure that prices continue to rise.

But if he means record profits have to stop, he’s just being demagogic. We know he would be cheering “record profits” from GM, after all. Profits simply serve to encourage more production and investment in a sector, thus providing more of what the public has voted with their wallets that they want.

In either case, the President is clearly exploiting popular ignorances in hopes of distracting from his own economic failures. But he can blame speculators, oil companies, or anyone else all he wants. If prices continue to rise, and the economy continues to struggle, he will be very vulnerable in 2012.

Wednesday

13

April 2011

0

COMMENTS

Are There Limits to Free Trade?

Written by , Posted in Economics & the Economy, Foreign Affairs & Policy, Free Markets

I am a strong advocate of free trade. I also tend to pooh-pooh complaints about “unfair” Chinese trade practices. I even advocate unilateral free trade in the face of international protectionism as a better alternative to domestic protectionism. Despite all this, there might be a time where even I think free trade can be problematic – or more precisely, when other considerations might trump free trade – and that’s when it involves national security.

Two companies are competing for a contract worth up to a billion dollars to supply the Air Force with a new kind of plane designed for light attack and armed reconnaissance (LAAR) missions. One of the companies is Hawker Beechcraft, a Kansas-based company, and the other is Embraer, which is Brazilian owned and operated. I won’t bother evaluating the relative merits of the two companies’ aviation production capabilities, because I wouldn’t know where to begin. I’ll limit my focus instead to the issues of trade and national security, topics of which I am more familiar.

If someone were to ask me if we should buy military equipment from overseas, I would be forced to give that favorite answer of academics and scientists: it depends. It depends on the equipment, on the country or origin, the available alternatives, and of course the various costs of each.

For instance, many might reflexively say it is better from a national security perspective (all economic considerations being equal for the sake of discussion) to build a plane in the U.S. than to buy it from overseas.  Sounds reasonable enough. But my knowledge of trade and globalization forces me to consider a related question: just how American are those American made planes?

Remember that whole auto bailout fiasco? There were many who justified the intervention on the grounds that there would be no American automotive sector without GM, Ford, and Chrysler.Let’s consider the assumption while setting aside the question of whether the companies would have died for good without government help. What about the cars made right here in America by Toyota or Honda? There is foreign investment in “American” GM, American investment in “foreign” Honda, American jobs created by Toyota, and foreign parts in Ford. In fact, Cars.com found a few years ago that the Toyota Camry was the most American vehicle, besting even Ford’s F-150 on the scale of ‘Americanness.’ So much for saving the “American” automobile sector.

Be skeptical of claims that simplify complex global economic systems into “domestic” versus “foreign.” It’s rarely so simple. The idea that we can construct something with as many working parts as a modern plane of war entirely within the U.S. is simply no longer practical. I’d bet money that even “American” Hawker Beechcraft will be using foreign parts.

Of course, this doesn’t exactly settle the question of whether national security dictates that normal economic considerations be overridden and domestic military manufacturing given special favor. For instance, buying a piece of an airplane from overseas is not exactly the same as purchasing the whole kit and caboodle. Unless the piece can only be purchased from that country, the producer really has no leverage over us, as we can always take our business elsewhere if they try anything fishy.

So where does this leave us? It depends. The issues of national security are grave enough, and the answers to these questions murky enough, that I’m willing to set aside my instincts for unfettered free trade and grant at least a slight home field advantage. I don’t think we should demagogue the idea of using the entire world marketplace to build our military forces where practical, but if it comes down to it, we should start the home team with some extra points on the board.

Wednesday

16

March 2011

0

COMMENTS

What a Deceptive Soccer Player Can Teach Us About Excessive Government Regulation

Written by , Posted in Big Government, Economics & the Economy, The Nanny State & A Regulated Society

While the follow video demonstrates a rather blatant example of the behavior, this kind of gaming is not unusual in the sport:

The player in question grabs the hand of an opponent and forces it to hit him in the face. Why would any sane person do this?

The answer is simple: the game gives him incentive to do so. If he successfully tricks the central authority, his opponent is penalized. If he does not, he loses nothing in the context of the game. Thus why soccer is notorious for this kind of fake injuries. Rather than beat their opponents through skill, players have learned that it can be more cost effective to trick referrees into thinking they have been hurt by their opponents.

In an old post giving my thoughts on why soccer has not caught on in the US to the degree it has elsewhere in the world, I noted:

Obviously it’s necessary to have a punishment for certain behaviors. Punching another player in the face, for instance, shouldn’t be allowed. But what happens when such well-intended rules are applied too liberally? The result, to the disgust of many Americans, is the creation of a soccer victim class. These players fall at the drop of a hat and feign injury, all with the hopes of taking advantage of the central regulating authority.

In the real world this might be considered a form of rent-seeking. It is an example of the unintended consequences that can result from well meaning meddling by centralized authorities. The rules of soccer, by failing to provide any sort of punishment for trying to trick the referee (imagine what would happen in the real world if filing a false criminal report was not itself a punishable offense), have given players an incentive to spend less time playing the game, and more time playing the referees. I doubt it was the intention of the rule-makers that this be the result.

The lesson here is that incentives matter and that any interference, by manipulating incentives, can drastically change the environment in which we all live.  This does not mean that rules, or laws, should never be adopted. Rather, it suggests a need for caution when considering new forms of interference in free activities. When even the simplest of rules – don’t hit your opponent in the face – can create unintended consequences, it demands a naturally skeptical stance toward large, complex, or knee-jerk pieces of legislation, which encompasses a vast majority of the bills being produced in Washington DC these days.

Sunday

13

March 2011

1

COMMENTS

The Fallacy of Disaster Keynesianism

Written by , Posted in Economics & the Economy

Whenever a massive disaster strikes, it’s inevitable that misguided, big government economists will pop up to assure that the coming reconstruction boom will provide a silver lining. Paul Krugman, the modern intellectual leader of this type of disaster Keynesianism, opined three days after the 9/11 attacks that the tragedy “could even do some economic good.” In the wake of Japan’s tragedy, many are following in his fallacious footsteps.

Larry Summers, former White House director of the National Economic Council, stated:

“If you look, this is clearly going to add complexity to Japan’s challenge of economic recovery,” Summers said. “It may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place.”

After the Kobe earthquake in 1995 Japan actually gained some economic strength due to the process of reconstruction, he added.

Walter Brandimarte at Reuters trumpets a future “boost from reconstruction.” An International Business Times article similarly looks to “government spending on reconstruction” to lift growth. According to the disaster Keynesians, all the economic activity to rebuild in the aftermath of natural disasters or war strengthen the economy.

It is easy to demonstrate how nonsensical is this proposition by taking it to its logical conclusion. If 9/11 was an economic boon, than why not recreate the effect all across the country? Why not simply blow up the biggest buildings in every city? Why should only New Yorkers share in such destructive wealth?

The fallacy of such thinking probably does not elude you. The Keynesians focus on increased economic activity to sustain their absurdities, but they ignore the preceding loss of wealth. It is simply the broken window fallacy as originally explain by Bastiat. Sure, a broken window will spur economic activity to replace it, but at the end of the day all that has happened is a shifting of resourcing out of other productive activities and into producing something that leaves you no better off than before the destruction. It is a net economic loss.

Look at this way. The Japanese will spend millions of labor hours, and hundreds of billions (or more) worth of resources rebuilding their nation. At the end of the process, they will have approximately what they had before. All of those hours that could have been spent doing something else, and all of those resources that could have been used for making something else, are pure waste. Destruction is destruction and loss is loss, no matter how much the Keynesians talk of aggregate demand and other fuzzy accounting gimmicks.

More on the topic:

Update: One more…

Thursday

17

February 2011

3

COMMENTS

Obamacare: Now Exempting Entire States

Written by , Posted in Economics & the Economy, Health Care, Welfare & Entitlements

Another day, more Obamacare waivers:

The Obama administration said Wednesday that it had granted broad waivers to four states allowing health insurance companies to continue offering less generous benefits than they would otherwise be required to provide this year under the new federal health care law.

The states are Florida, New Jersey, Ohio and Tennessee, the administration told Congress.

Lawmakers said that many other states, insurers and employers needed similar exemptions from some of the law’s requirements and would seek waivers if they knew of the option.

Why do we need to exempt people from a law that was supposed to make things better? The question answers itself: because it doesn’t.

These new waivers are being handed out because the fantasy of Obamacare has run into the reality of economics. Requiring “more benefits” means higher costs. Higher costs mean some people that previously had coverage will not be able to afford the new plans. There’s no reason why people should be denied the opportunity to buy plans that are appropriate to their situations and needs, instead of forcing them to buy plans some bureaucrat in Washington DC decides is appropriate.

This was all obvious at the time the law was passed, and plenty of us said so. Are we to believe that Obama honestly didn’t know, or was he simply lying when he said people would be able to keep their plans, even as he artificially made them more expensive?

Sunday

6

February 2011

0

COMMENTS

TARP Pays Off

Written by , Posted in Economics & the Economy

The special inspector general for the TARP program says that it makes future government bailouts more likely:

The financial rescue fund known as TARP has actually the increased the likelihood of more bank bailouts in the future, Neil Barofsky, the program’s special inspector general, told CNBC Wednesday.

“As long as the market perceives that the government is going to be a backstop…(it will) encourage more and more risk-taking and put us right back where we were in late 2008,” said Barofsky.

When government bails out businesses that took big risks that didn’t pan out, it is encouraging yet more risk taking than otherwise would occur.  This is known as moral hazard, and it played a part in causing the financial crisis in the first place.

It’s painful to watch people in power learn absolutely nothing from the disasters they create.

Tuesday

1

February 2011

0

COMMENTS

Sharing the Wealth, Mob Style

Written by , Posted in Economics & the Economy, Health Care, Welfare & Entitlements

I’ve had this article open for several days now, so it’s probably time I get around to a response. Reuters reports on the World Economic Forum with a headline that ominously warns “Rich corporations ‘must share wealth’ to avoid unrest:”

Poverty and unemployment reared their heads at the World Economic Forum on Thursday, with speakers urging the elite audience to bridge a growing gap between booming multinationals and the jobless poor.

Greek Prime Minister George Papandreou, who also chairs the Socialist International group of center-left parties, said the global crisis had led to an “unsustainable” race to the bottom in labor standards and social protection in developed nations.

…Maurice Levy, chairman and chief executive of French advertising giant Publicis, said there was “a huge suspicion about CEOs, bankers, corporations.”

“People do not understand that these large corporations are doing extremely well, while their lives have not improved and without the support of the people, there is no way we will be able to grow,” he told a panel discussion.

“We have been led by greed. We have been led by only the bottom line, the profit and we have sacrificed the workers in order to please the stockholders.”

The increasing division between fast-growing emerging market economies and stagnating, jobless nations in the developed world has been a theme at the talks in Davos this year, which some corporations pay tens of thousands of dollars to attend.

Their lives have not improved compared to what? Since these greedy corporations are doing so well but are failing to “give back,” clearly we would be better off without them. So let’s just abolish them. We’ll see how well off the people are without their convenience stores or cheap electronics. Ah, but of course that’s silly. People are clearly much better off than they would be if there were no “greedy corporations” servicing their demands by supplying them with necessities and luxuries.

If you want to look at why some people are not better off than they were some number of years ago, I’d suggest starting with politicians and the excessive burdens of debt that they have heaped onto the taxpaying citizens of those stagnating welfare states.

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About Me

profileI serve as Vice President of the Center for Freedom and Prosperity, a non-profit think tank dedicated to preserving tax competition and free markets. This site features my personal views, which are not reflective of CF&P.

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