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economics Archive

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?

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.

Sunday

19

December 2010

3

COMMENTS

Do Not Fear the Chinese Economy

Written by , Posted in Economics & the Economy, Free Markets

Hand-wringing over Chinese economic growth is both common and bipartisan. Commentators and politicians from the left and right alike find something fearsome in the rise of China as an economic force to be reckoned with. From Paul Krugman to Pat Buchanan, we are told to be concerned. Be very concerned. But these concerns are almost entirely based on faulty economics, and are therefore misplaced.

Before I get into some of the specific arguments, I want to make a simple point that few seem to truly accept: the economic success of another is not your failure. There is no set, fixed pie of wealth.  We are not “falling behind” just because the Chinese economy is growing faster (and why shouldn’t it be when they have so much farther to climb?). The left can be somewhat excused for not seeing how this applies to China since they don’t even see how it applies among Americans, but the right does get it domestically, by and large. This is why I get frustrated to see Chinese economic scaremonger from the right as well as the left.  The rhetoric surrounding the rise of China mirrors closely the fearmongering over Japanese growth that was so common throughout the 80’s. Needless to say, the fear proved ill-founded, as the Japanese economy collapsed in 1989, and subsequent dabbling in Keynesian stimulus policies condemned the nation to a “Lost Decade” of stagnation.

Now the next great Asian threat is China. And the primary cause of this threat is their so-called “currency manipulation.” China, we are told, is unfairly devaluing its currency and thus boosting exports. This costs America jobs and harms the US economy. Sounds plausible enough, right? In fact, it was this reasoning that led to  bipartisan support for recent legislation granting President Obama  “expanded authority to impose tariffs on virtually all Chinese imports to the United States.” I doubt any supporters of the legislation stopped to consider how well it turned out the last time tariffs were imposed in the midst of an economic slump.

The currency-manipulation argument sounds plausible enough, but it’s not actually valid.  It is a common protectionist misconception that exports are benefits and imports are the price we pay to export goods and create jobs. This view is entirely backwards. In fact, exports are the price we must pay in order to get the goods we desire. When you go into a store, your goal is invariably to minimize what you must export (pay) for what you wish to import (buy). The more you can get for less, the better. It is no different on a national scale. There is no more reason to complain about cheap goods offered from China than there is to complain about bargains from Best Buy or Barnes and Noble.

Consider the impact of a devalued Chinese yuan (assuming it actually is devalued, which is debatable). Chinese workers are payed with a currency worth less than it otherwise would be, giving them less purchasing power and thus making them poorer. US consumers, on the other hand, get more Chinese goods for a cheaper price than they otherwise would. This is essentially a subsidy of American consumption by the Chinese worker. We are the winners and they are the losers in this arrangement.

“But wait,” I can hear the mercantilists saying, “what about the lost American jobs? What good are cheaper trinkets if we have no jobs and no income!”

Why, dear mercantilist, do you assume that we would have no jobs? Sure, there will inevitably be some particular jobs lost by any influx of cheap Chinese goods, but that’s true of all trade regardless of who it is with or the valuation of their currency. Even in the strongest economy, tens of millions of jobs are lost every year. Uncompetitive sectors close down and new ones rise up. Most people don’t see this, however, because economic statistics only report net job changes. Hiding behind these figures are a dynamic system of destruction and creation. Jobs producing goods which we can get cheaper elsewhere are lost, while jobs making new goods and providing new services are added. When the Chinese subsidize a product, allowing US consumers to buy it cheaper than American manufacturers can make it, it frees up labor to be utilized elsewhere.  We then benefit both from that labor and the cheap Chinese goods, which grows our economy.

There is no set number of products throughout the entire world that can be manufactured, for which all countries must then compete. Economic activity is not a race to grab a fixed pie, it’s a cooperative endeavor to grow the pie. New products and services are invented everyday, and the less it costs us to get existing products, measured in either dollars or labor, the more that is available for expansion elsewhere. The  industrial revolution was only possible after most agriculture jobs were “lost” to greater productivity.

Outside of the strictly economic arguments, there are some legitimate concerns about China. The share of American debt held by China, and its possible usage to strong-arm the US on matters of defense, is at least arguably problematic. I’m not staking a position on this point either way, but even if we assume the concerns to be legitimate, the problem is not the value of the Chinese currency, nor even the dynamics of trade between the US and China, but the size of the debt itself. They can only buy so much of our debt because we have so much debt in the first place, after all. Assuming Chinese ownership of American debt is problematic, the correct solution is not to hamstring our economy with protectionism, but to reduce government spending!

Furthermore, if you believe China will use its greater wealth to challenge US interests military, then that’s fine. I’m not attempting to address their political or military motivations here. What I am doing is challenging the notion that they are some how cheating us economically, or that trade with China is being manipulated against us. That couldn’t be further from the truth.

China is going to grow economically whether we like it or not. Their population is several times larger than ours, providing them that much more labor to tap. The reason we remain a wealthier country despite this disparity is our free economic system. One important characteristic of this system has been free trade. Let’s not start hacking away at the principles that have made us so prosperous in a futile effort to stop anyone else from becoming so. But if you’re still fearing the growth of China, then let me help you get a head start on the next big economic threat: India will surpass China in population by 2025.

Sunday

12

December 2010

0

COMMENTS

Don’t Fall Into the Keynesian, Demand-Side Trap

Written by , Posted in Economics & the Economy, Liberty & Limited Government, Taxes

This post from Pejman Yousefzadeh on the tax deal is a few days old, but it’s worth talking about because it illustrates a trap into which conservatives too often fall. His point is that the temporary extension of the tax rates likely will not help the economy. I don’t dispute this, as whatever benefit the tax rate extension provides comes from the fact that it means taxes won’t be going up. It’s good only insofar as it prevents politicians from doing something really bad, at least for another 2 years.

What I take issue with is his reasoning. Here’s what he says:

The thing is, a temporary extension of the Bush tax cuts will not be enough to stimulate the economy. Per Milton Friedman’s permanent income hypothesis, consumption patters (sic) even in the aftermath of a temporary extension of the Bush tax cuts will be tempered by long term expectations that eventually, the tax cuts may be allowed to expire. As a consequence, consumers are more apt to save money that comes from a temporary tax cut, rather than spending it in order to offer the economy any kind of economic stimulus.

My problem is his implication that the primary benefits from cutting taxes comes from increases in consumption.  This is essentially the Keynesian view of economic growth. It is this consumption-based view of growth which has led both Bush and Obama to try “stimulating” the economy through gimmick rebates and handouts. Each attempt has failed more miserably than the last.

Just to be clear, I’m not disputing Friedman’s permanent income hypothesis (that personal decisions on spending are based not on current income, but long-term expectations),  just its relevance to this situation. It’s not germane here because even if it were not true and consumption would increase in response to a temporary extension, it wouldn’t have any significant pro-growth impact. Otherwise, the other stimulus attempts would have worked.

The benefit from lowering tax rates, particularly those on capital, comes when it reduces government disincentives to savings, investment and entrepreneurship. Increased consumption is just the consequences of growing the economy. To see it as something to try to increase in its own right is to implicitly admit the validity of the Keynesian, interventionist approach which has never worked.

Monday

6

December 2010

2

COMMENTS

The Keynesian Stimulus Fallacy Refuses to Go Away

Written by , Posted in Economics & the Economy

They say that doing the same thing over and over again while expecting different results is the definition of insanity. If that is the case, then Keynesian politicians are completely bonkers.

Given the disappointing nature of the recent employment numbers, as well the ongoing failure of government “stimulus” plans to spur economic growth, you’d expect sane leaders to consider changing course. Yet just recently we’ve seen comments from Nancy Pelosi and Sherrod Brown touting the great stimulative qualities of jobless benefits – essentially a government subsidy of unemployment. Nor is this the first time Pelosi has made such remarks.

Now the White House is reportedly demanding yet another round of unemployment subsidies, along with a conglomeration of gimmicky tax credits which do nothing to lower marginal tax rates, before it will agree not to raise taxes in the midst of a recession. They should be more focused in providing an environment where jobs are likely to be created, rather than turning what was originally intended to be a temporary cushion into a permanent entitlement.

These leaders are in desperate need of a lesson in the fallacies of Keynesian economics, and it just so happens that one is available in the form of this recent video by the Center for Freedom and Prosperity, narrated by Hiwa Alaghebandian of the American Enterprise Institute:

Originally posted at American Thinker.

Wednesday

24

November 2010

2

COMMENTS

Insider Trading Should Be Legal

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

Fox News reports on an aggressive insider trading crackdown:

…Monday’s raids targeted three hedge funds: Level Global Investors in New York, Diamondback Capital Management in Stamford, Conn., and an address that matched Loch Capital Management in Boston. Federal law enforcement agencies would not comment other than to confirm an investigation.

Investors can use the expert networks to glean details of what’s occurring within certain industries or particular companies. Someone interested in learning more about fast-food dining in China, for example, might connect with local store managers, suppliers or experts on dining in the region.

The expert networks connect the investor and the source, getting a fee from the investor and then paying the source, who could make $400 to $500 an hour, says Sanford Bragg, CEO of the consulting firm Integrity Research Associates, which connects investors with these research firms.

Hedge funds have been paying people to dig for hard-to-find numbers on companies for years.

Tammer Kamel, president of Iluka Consulting Group Ltd. in Toronto, recalls visiting a Hong Kong fund 10 years ago that wanted to better gauge future sales by a company with factories in China. Its solution: Pay Chinese farmers near a company warehouse to count trucks leaving the site.

For a possible investment in a casino, another fund paid people to stand outside the casino and count visitors walking in, Kamel says. Then the fund multiplied that number by average losses per visitor to get a better sense of the casino’s daily take.

“The managers were openly discussing technique,” Kamel said. “They clearly thought it was just smart data gathering.”

Of course it is smart data gathering! Moreover, it’s good for markets and the economy when someone does this research. How would it be better to allow businesses to prohibit people from determining if a business is cooking its books? It is madness to say that markets should have less information because some squish thinks it is “unfair.” Attempting to regulate the distribution of information is silliness in the extreme.

I’ll allow Don Bordreaux to explain better than I can the benefits of insider trading:

Time to stop telling horror stories. Federal agents are wasting their time slapping handcuffs on hedge fund traders like Raj Rajaratnam, the financier charged last week with trading on nonpublic information involving IBM, Google and other big companies. The reassuring truth: Insider trading is impossible to police and helpful to markets and investors. Parsing the difference between legal and illegal insider trading is futile—and a disservice to all investors. Far from being so injurious to the economy that its practice must be criminalized, insiders buying and selling stocks based on their knowledge play a critical role in keeping asset prices honest—in keeping prices from lying to the public about corporate realities.

Prohibitions on insider trading prevent the market from adjusting as quickly as possible to changes in the demand for, and supply of, corporate assets. The result is prices that lie.

And when prices lie, market participants are misled into behaving in ways that harm not only themselves but also the economy writ large.

…Suppose that unscrupulous management drives Acme Inc. to the verge of bankruptcy. Being unscrupulous, Acme’s managers succeed for a time in hiding its perilous financial condition from the public. During this lying time, Acme’s share price will be too high. Investors will buy Acme shares at prices that conceal the company’s imminent doom. Creditors will extend financing to Acme on terms that do not compensate those creditors for the true risks that they are unknowingly undertaking. Perhaps some of Acme’s employees will turn down good job offers at other firms in order to remain at what they are misled to believe is a financially solid Acme Inc.

Eventually, of course, those misled investors, creditors and workers will suffer financial losses. But the economy as a whole loses, too. Capital that would otherwise have been invested in firms more productive than Acme Inc. never gets to those firms. So compared with what would have happened had people not been misled by Acme’s deceitfully high share price, those better-run firms don’t enhance their efficiencies as much. They don’t expand their operations as much. They don’t create as many good jobs. Consumers don’t enjoy the increased outputs, improved product qualities and lower prices that would otherwise have resulted.

In short, overall economic efficiency is reduced.

It’s in the public interest, therefore, that prices adjust as quickly and as completely as possible to underlying economic realities—that prices adjust to convey to market participants as clearly as possible the true state of those realities.

Monday

4

October 2010

0

COMMENTS

Monday

20

September 2010

0

COMMENTS

Democratic Senator Compares Tax Cutters To Terrorists

Written by , Posted in Economics & the Economy, Taxes

But remember, it’s those dirty tea baggers who need to watch their mouths and stop using divisive rhetoric:

Republicans are fighting to extend tax cuts for high earners with the intensity of a “holy jihad,” a Democratic senator charged Monday.

Sen. Ted Kaufman (D-Del.) said he didn’t see any room for compromise with Republicans on the extension of income tax cuts that are set to expire at the end of the year, blaming the GOP for being unflinching on tax rates.

“We talk about bending — it’s incredible. There’s no bending! Pick up your morning Washington Post and find out what Republicans are willing to bend on,” Kaufman said during an appearance on CNBC. “This is like a holy jihad to keep the tax cuts going.”

While I’m sure Sen. Kaufman might wish Republicans were blowing themselves up in the name the great supply-side god, that is not the case. Pointing out the facts about tax cuts is not “holy jihad,” it’s just winning the argument.