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Sunday, November 27, 2005

Off to Netherlands

No posts by me this week as I'll be in Europe, and more importantly, without convenient access to the Internet. :-(

Saturday, November 26, 2005

Unprecedented Corporate Profits

According to the LA Times, S&P 500 companies posted a 14th straight quarter of double-digit gains in earnings:
With nearly all of the companies in the blue-chip Standard & Poor's 500 index now having reported their earnings for the quarter ended Sept. 30, the overall growth rate was 11.5% from a year earlier, S&P said this week.

That marked the 14th straight quarter of double-digit gains, an unprecedented streak, said Howard Silverblatt, who compiles S&P's earnings data. [...]

Companies have reaped record earnings in the economic expansion since 2002 as sales have risen while managements have focused intently on keeping costs down, including by limiting hiring.

"What companies have done is they've been able to squeeze costs [and] they have great productivity," Silverblatt said.

Although the year-over-year growth rate in earnings has declined from 31% in the second quarter of 2004, the surprise is that results still are rising at a double-digit pace, many experts say. The growth rate was 13.4% in the first quarter of this year and 14.4% in the second quarter, even as rising interest rates and soaring energy prices added to many companies' costs.
How unprecedented is this streak of 14 quarters of double digit earnings growth? According to this article, it's the "longest run of double-digit quarterly profit rises since at least 1936" and that this streak "eclipses the previous 13-quarter run of double-digit earnings growth, when US companies emerged from the early 1990s downturn to mark the best such showing for seven decades." Furthermore, "Wall Street institutions are also betting on the double-digit increases in earnings per share continuing for at least a further two quarters, into next year." So not only is this already the best earnings streak for decades, the streak is set to continue for at least a couple more quarters.

This is good news not only for the rich, but also for the less well off. Wages and profits are always linked over the long run. When doing business becomes more profitable, companies seek to expand their business. This increases the demand for labor which reduces the labor pool causing wages to increase. Because of these earnings increases, I expect to see the median family income increase nicely during 2006 and 2007, especially if unemployment drops a notch or two further.

I think the U.S. economy has responded wonderfully to the Bush tax cuts and everybody will start to feel the positive impact soon.

Tuesday, November 22, 2005

More on Taxes and Regulations

I wrote here about how taxes on the more well off negatively impact the economic opportunities of the less well off. Howard wrote here (with an assist by Thomas Sowell) about how regulations such as minimum wages negatively impact the economic opportunities of the less well off. In the New Yorker, James Surowiecki (of "The Wisdom of Crowds" fame) writes about both taxes and regulation:
The Nobel Prize-winning economist Edward C. Prescott has pointed to sharp increases in Europe’s tax rates since 1970—higher taxes give workers less of an incentive to work extra hours. But taxes aren’t high enough to explain Europeans’ new taste for free time. A more plausible explanation was put forward recently by the economists Alberto Alesina, Edward Glaeser, and Bruce Sacerdote: European labor unions are far more powerful and European labor markets are far more tightly regulated than their American counterparts.
Interestingly, in the paper by Glaeser, Alesina, and Sacerdote, the authors point out that the Europeans are very happy (based on life satisfaction indices taken from Eurobarometers data) to work less even though they have less income. Indeed, the authors seem to believe that labor regulation may actually be a good thing, but won't quite come out and say it explicitly:
A very hard question to answer is whether labor unions and labor regulation introduce distortions that reduce welfare or whether they are a way of coordinating on a more desirable equilibrium with fewer hours worked. Since answering this question is difficult and the question is heavily politically charged, we won't be surprised if the debate will continue for a long time with heated tones.
They wrote the paper last March. I wonder if they would get the same results now after the riots in France and Denmark?

Monday, November 21, 2005

Job creation or not

As Bret explained in this post, high enough levels of taxation can limit paying work that would otherwise be available to people. Another way of depriving people of jobs is through regulations. Thomas Sowell offers up this article which presents information which I'm pretty sure most people are unaware of...

Let us go back a few generations in the United States. We need not speculate about racial discrimination because it was openly spelled out in laws in the Southern states, where most blacks lived, and was not unknown in the North.

Yet in the late 1940s, the unemployment rate among young black men was not only far lower than it is today but was not very different from unemployment rates among young whites the same ages. Every census from 1890 through 1930 showed labor force participation rates for blacks to be as high as, or higher than, labor force participation rates among whites.

People who are less in demand -- whether because of inexperience, lower skills, or race -- are just as employable at lower pay rates as people who are in high demand are at higher pay rates. That is why blacks were just as able to find jobs as whites were, prior to the decade of the 1930s and why a serious gap in unemployment between black teenagers and white teenagers opened up only after 1950.

Prior to the decade of the 1930s, the wages of inexperienced and unskilled labor were determined by supply and demand. There was no federal minimum wage law and labor unions did not usually organize inexperienced and unskilled workers. That is why such workers were able to find jobs, just like everyone else, even when these were black workers in an era of open discrimination.

The first federal minimum wage law, the Davis-Bacon Act of 1931, was passed in part explicitly to prevent black construction workers from "taking jobs" from white construction workers by working for lower wages. It was not meant to protect black workers from "exploitation" but to protect white workers from competition.

Even aside from a racial context, minimum wage laws in countries around the world protect higher-paid workers from the competition of lower paid workers.

Often the higher-paid workers are older, more experienced, more skilled or more unionized. But many goods and services can be produced with either many lower skilled workers or fewer higher skilled workers, as well as with more capital and less labor or vice-versa. Employers' choices depend on the relative costs.

The net economic effect of minimum wage laws is to make less skilled, less experienced, or otherwise less desired workers more expensive -- thereby pricing many of them out of jobs. Large disparities in unemployment rates between the young and the mature, the skilled and the unskilled, and between different racial groups have been common consequences of minimum wage laws.

That is their effect whether the particular minimum wage law applies to one sector of the economy like the Davis-Bacon Act, to the whole economy like the Fair Labor Standards Act of 1938 or to particular local communities like so-called "living wage" laws and policies today.

The full effect of the Fair Labor Standards Act of 1938 was postponed by the wartime inflation of the 1940s, which raised wages above the level specified in the Act. Amendments to raise the minimum wage began in 1950 -- and so did the widening racial differential in unemployment, especially for young black men.

There have been some studies implying that minimum wage laws are not that bad... but upon careful examination they have been found to be, shall we say, garbage. Wage, benefit mandates and other labor market regulations might sometimes achieve the stated good effects. Often they do not and they always come at a price.

Sunday, November 20, 2005

Home Depot and the Negative Impact of Taxes

Howard recently posted "A Perspective On Where We Are" that describes the importance of "extended order of cooperation" from a very high level, big picture perspective. He excerpted the following statement from an article from The American Enterprise:
What generates economic growth, more business creation and more jobs are lower taxes, less central planning and less government, as unambiguously demonstrated by country-by-country analyses and by the widely divergent growth rates within the United States between the different states.
Whereas I couldn't agree more with this statement, it's clear to me that if someone hasn't extensively studied markets and economic frameworks, it would require a huge leap of faith to buy into such a statement. So I'm going to try and come down a little closer to earth from the stratosphere of economic thought and give one small concrete example of why lower taxes do actually create more jobs, and as a side benefit, create wealth for the less skilled in our society.

Our story starts at the Home Depot. Most free-market champions laud places like home depot as an example of how the spontaneous economic order creates tens of thousands of different types of products, automatically adapting to the needs and desires of do-it-yourselfers. And yes, I also am amazed at the diversity of products at the Depot. It's the story I Pencil repeated hundreds of thousands of times.

But there's another interesting story about the Depot that's generally unnoticed and that's the fact that the existence of all these do-it-yourselfers is evidence of too much taxation. I was there just the other day which is why I'm thinking about it. Many of the customers' cars in Home Depot's parking lots are quite nice: BMWs, Mercedes, Infinitis, and so forth. On my way out, I noticed a guy loading about 100 feet of copper pipe into his Lexus SUV. A Lexus SUV costs more than $40,000, so chances are he gets paid a lot for his work.

So why was this guy doing his own plumbing? Why didn't he just hire a plumber to do the work? For sure, some people might actually like to do plumbing, though I have a hunch that plumbing isn't a favorite hobby for the do-it-yourselfer. I do my own plumbing (at least on the intake end) and it's dirty, greasy, and hot and you often have to crawl into or at least work in tight spaces. So while it may not be true in this instance, let's assume that this do-it-yourselfer had an economic incentive to do so.

I didn't actually talk to the guy, so I'll have to make some other assumptions as well. Let's assume this guy was an independent software contractor who makes $100 per hour. That's probably a high enough rate to support owning a Lexus SUV. Let's also assume that this guy can get as much work as he likes at $100 per hour and that he likes his work at least as much as he like plumbing. In addition, assume that he could have hired a plumber at $80 per hour and that the plumber could do the work 25% faster.

Given that there was 100 feet of pipe involved, I'd imagine that it would take about a day (8 hours) to layout and solder all that pipe. The plumber being 25% faster would therefore take 6 hours and would charge $480 (6 hours times $80 per hour) for the work.

So it might seem that the software guy would be economically better off if he simply worked at software for an additional 8 hours to make an additional $800 and then pay the plumber $480 to do the plumbing as opposed to working those 8 hours soldering the copper pipes himself. It seems like he would be $320 dollars ahead ($800 - $480) for working the exact same number of hours.

However, we haven't yet taken into account transaction costs. First the software guy has to find the plumber. Then he has to meet him and get a bid or estimate. Perhaps he has to let the plumber inside the house one or more times. When the plumber is done he has to write him a check. Let's estimate that these activities take the software guy two hours. Taking this new information into account, of the eight hours that it would take the software guy to do his own plumbing, two hours are allocated to dealing with the plumber, which leaves only six hours to writing software. So now it's only $600 dollars extra that the software guy makes writing software minus the $480 that's paid to the plumber. But he's still $120 ahead.

But wait a minute. The software guy also has to pay taxes on that $600. Since he lives in California (that's where this Home Depot is that I'm talking about), he pays 9.3% of state income tax on those marginal dollars earned and 35% federal income tax. Because of the Alternate Minimum Tax, only some of his state taxes can be deducted from his federal taxes, so assume that he loses about $40 dollars of each $100 dollars he's paid per hour.

Now, of that extra $600 he was paid for those six extra hours writing software instead of plumbing, he pays $240 in taxes, leaving him only $360. But he still owes the plumber $480, so it turns out, that because of taxes, he's better off doing his own plumbing.

Let's quickly consider the economics of the situation. With lower taxes, the software guy would work writing software for an extra six hours and pay a plumber for six hours of work. With taxes as they are, the software guy spends the time plumbing, and the plumber spends the time doing nothing. So our economy loses about six plumber hours of wealth because of this one transaction (or lack thereof). Note that the software guy's time spent writing software is what's called "market time" (he's selling his services to the market) and is counted as part of GDP. His time spent plumbing is called "non-market time" (he's doing something for himself) and is not counted as part of GDP.

But the economic loss itself is secondary to a more important problem in my opinion. In such a situation, it's always the less well paid person who loses out more. The software guy ends up with $480 worth of plumbing for an effective rate of $60 per hour after taxes, which is about the same as his marginal hourly rate after taxes. He worked at plumbing for eight hours and has created an additional $480 more wealth for himself. But the plumber lost a $480 opportunity. Because of situations like this there are less opportunities for plumbers and therefore less plumbers. Those individuals who might have been $80 per hour plumbers need to find some other, lower paying line of work.

This sort of situation can be part of long chain. A doctor writes his own will instead of hiring a lawyer who does her own books instead of hiring the accountant who writes her own customer database program instead of hiring our software consultant who does his own plumbing instead of hiring the aforementioned plumber who fixes his own washing machine instead of hiring a washing machine repairman who builds his own kitchen cabinets instead of hiring a cabinet maker who does his own landscape maintenance instead of hiring a gardener who doesn't do anything because he can't get work.

At each stage in the process, the reduced opportunity due to tax burden ends up affecting the less well off individual more than the better paid person. There would be more and better paying jobs at the lower end of the scale if taxes at the higher end were lower. This is one of the many reasons why lower taxes create more jobs and create wealth for the less skilled in our society.

Category: cat_taxes

Wednesday, November 16, 2005

A Perspective On Where We Are

I thought it might be useful to take a stab at presenting a perspective on where we are historically as seen through the lens of some really big ideas discussed on this blog. As referenced in this post, a competition between traditional religious belief and aetheism (which has been a wellspring for forms of non-traditional worship) has shaped the world at many levels. Ideas from this arena are intertwined with threads of thought in the political and economic realm. Attempts at a more rational and neatly designed realm morphed into brutal authoritarian regimes and somewhat more benign social democracies. Even societies like America developed in the direction of greater government interference and control over more aspects of life. Statism was on the march. The story of this counter-revolution against an emerging trend of political freedom and the growing extended order of cooperation of the industrial revolution, is captured in a terrific book - Against The Dead Hand by Brink Lindsey. Here are some excerpts from a book review by Richard Eberling.

By all outward signs and impressions, the current age represents a dramatic rebirth of free-market capitalism and its institutional foundations. Socialism and the interventionist-welfare state have been defeated. A grand vista of a new century of personal, civil, and economic freedom may be right in front of us.

Perhaps it will be, but there are those who have concerns and doubts about the continuing direction of the global economy. One of these is Brink Lindsey of the Cato Institute, who explains the reasons for his concerns in his new book, Against the Dead Head: The Uncertain Struggle for Global Capitalism. The trend towards a greater degree of economic freedom in various parts of the world over the last 20 years, Lindsey argues, has not been based on any thorough and positive belief in the virtues of the market society or the productivity of it. It has happened by default and with great reluctance in many countries simply because of the abject failure of government planning, regulation, and control.

Lindsey explains this thesis on a broad canvas on which he takes the reader on a journey that covers the political, social, and economic trend of ideas during the last two and a half centuries. He explains how the ideas of the classical liberals and classical economists liberated the world from its centuries-old system of government domination of society. The thinkers of the 18th and first half of the 19th centuries articulated the case for free men, free markets, and international free trade. The success of these ideas revolutionized the world, bringing about more freedom and prosperity than the human race had ever known.

But beginning in the second half of the 19th century, a variety of counterrevolutionary ideas emerged and began to have increasing influence and power over the minds of men and the direction of government policy. These ideas were socialism, protectionism, and the welfare state. Why they had arisen and successfully challenged the free-market philosophy, Lindsey says, was partly owing to the triumphs of the new market society.

Individual freedom, developing industrialism, and the new contract-based society weakened and undermined the traditional cultural and institutional anchors of society. Men were thrown into a new type of social order that created a sense of disorientation in many people and a disconnection from the customary arrangements that seemed to represent stability for many people. Socialism and the new mercantilist system of protection, regulation, and welfare seemed to offer a tamed and more humane industrial society.

But Lindsey tempers the notion that good, free-market policies will slowly but surely supersede the bad, interventionist, and regulatory policies of the past. “Free-market partisans sometimes talk as if they have already won the war of ideas, but the self-congratulations are dangerously premature. They have confused passing a turning point with bringing the campaign to completion.” The opponents of the free-market society still criticize self-interested, decentralized, market decision making and advocate “public interested” political management. And they still argue that the opposite of government planning and regulation is “chaos” and “social injustice.”

Thus, the task of the proponent of economic liberty, Lindsey concludes, is to hope that a change in ideologies and ideas has really begun to take hold but also to remain ever vigilant and determined to fight the large number of battles that still remain ahead if individual freedom and the free market are really to triumph around the world.

This battle of ideas is ongoing. Even though many thinking people acknowledge the failure of socialism, they still have hope for social democracy. If they would only study the lessons of The Fatal Conceit!! Mark Steyn explains in this article, why they should be prepared to see social democracy fail. Excerpts to follow:

As Gerald Ford likes to say, “A government big enough to give you everything you want is big enough to take away everything you have.”

And that’s true. But there’s an intermediate stage: A government big enough to give you everything you want isn’t big enough to get you to give any of it back.

That’s the position European governments find themselves in. Their citizens have become hooked on unaffordable levels of social programs which in the end will put those countries out of business. Just to get the Social Security debate in perspective, projected public pensions liabilities are expected to rise by 2040 to about 6.8% of GDP in the US. In Greece, the figure is 25% - ie, total societal collapse. So what? shrug the voters. Not my problem. I paid my taxes, I want my benefits.

This is the paradox of “social democracy”. When you demand lower taxes and less government, you’re damned by the left as “selfish”. And, to be honest, in my case that’s true. I’m glad to find a town road at the bottom of my drive, and I’m happy to pay for the army and a new fire truck for a volunteer fire department every now and then, but, other than that, I’d like to keep everything I earn and spend it on my priorities.

The left, on the other hand, offers an appeal to moral virtue: it’s better to pay more in taxes and to share the burdens as a community. It’s kinder, gentler, more compassionate, more equitable. Unfortunately, as recent European election results demonstrate, nothing makes a citizen more selfish than socially equitable communitarianism: once a fellow’s enjoying the fruits of government health care and all the rest, he couldn’t give a hoot about the broader societal interest; he’s got his, and if it’s going to bankrupt the state a generation hence, well, as long as they can keep the checks coming till he’s dead, it’s fine by him. “Social democracy” is, in that sense, explicitly anti-social.

Somewhere along the way these countries redefined the relationship between government and citizen into something closer to pusher and junkie. And once you’ve done that, it’s very hard to persuade the junkie to cut back his habit. Thus, the general acceptance everywhere but America that the state should run your health care: A citizen of an advanced democracy expects to be able to choose from dozens of breakfast cereals at the supermarket, hundreds of movies at the DVD stores and millions of porno sites on the Internet, but when it comes to life-or-death decisions about his own body he’s happy to have the choice taken out of his hands and given to the government.

The modern social democratic state is so corrosive of its citizens’ will and so enervating in its elevation of secondary priorities (welfare, paid vacation) over primary ones (family, national defense) that most of them will not survive this great existential struggle. In America, a wartime president should understand that this is no time to increase his own citizenry’s addiction to entitlement. A government big enough to give you everything you want is big enough to take away everything you have, starting with your sense of self-reliance.

National Review, October 28th 2005

The Fatal Conceit Always Fails!

...the nations with the most economic freedom are also the most prosperous.

"The road to growth is paved with liberty."

What generates economic growth, more business creation and more jobs are lower taxes, less central planning and less government, as unambiguously demonstrated by country-by-country analyses and by the widely divergent growth rates within the United States between the different states.

In The Fatal Conceit, the Nobel laureate economist F.A. Hayek writes of the key ideological conflict in economics. On the one hand are "the advocates of the spontaneous extended human order created by a competitive market," and on the other hand, "those who demand a deliberate arrangement of human interaction by central authority based on collective command over available resources."

What has failed is the latter, collectivism--the "fatal conceit" that says that a single mind, a single committee, can somehow do things better than the spontaneous, unstructured, complex, and creative forces of the market.

Even as society grows more complex, the arguement is even more appropriate.

It is not a matter of having better data collection and bigger computers. The basic fact is that greater complexity makes the processes increasingly unknowable. "Data" presuppose a scheme of classification, a formulation of categories, a practice of deciding what will be counted as what. Greater complexity makes any interpretation of the whole less complete and less definitive. The economic cosmos is unknowable because the categories of goods and services become so multitudinous and the relations among them impossible to interpret in any useful way by central authority.

Because the hardest part of knowing is, not merely getting the facts, but getting the interpretation right, the complexity that technology brings tends to outstrip the informational capabilities of the regulator. The economy is less "masterable", not more.

Except in the most clear-cut cases of systemic harm, such as pollution, the idea that government officials can figure out how to improve upon the results of decentralized, voluntary decision-making becomes more and more questionable. In his Nobel lecture, Hayek called that supposition the "pretense of knowledge."

Dumber than Bush?

The problem with Bush Derangement Syndrome is that like all types of insanity, it leads the sufferer to do things that are extremely counterproductive. Unfortunately, the vast majority of elected Democrats seem to suffer from it and, as a result, are once again striving to snatch defeat from the jaws of potential victory.

What was the potential victory? Many Americans, even ones who once strongly supported the Iraq war, are beginning to tire of it, and are open to (constructive) criticisms about how the war effort is being conducted. The Democrats were beginning to provide credible criticism (at least some of it constructive) and could have had a good chance at winning the debate in at least some peoples' minds. That might have helped make them electable.

Instead, with the resurgence of the Plame affair and the indictment of Libby (Vice-President Cheney's chief of staff), the Democrats are switching from focusing on constructive issues back to the old and very tired meme of "Bush lied, people died". In other words, the Dems are back to claiming that Bush led us to war by tricking everyone.

There are two problems with this: it's not true (or at least not true enough) so that those that claim it look like liars themselves, or at least they look like partisan hacks, and more importantly, moderate voters don't care - politicians are inherently liars, that's part of their job description, we're in Iraq, we need to do the best we can.

First a little bit about the lack of truth. According to the Washington Post:
The administration's overarching point is true: Intelligence agencies overwhelmingly believed that Saddam Hussein had weapons of mass destruction, and very few members of Congress from either party were skeptical about this belief before the war began in 2003. Indeed, top lawmakers in both parties were emphatic and certain in their public statements.
None of the possible explanations makes the Democrats who made such statements look good given that they are now saying the opposite. Since they have security clearances and have access to classified (and unclassified) intelligence information, they either didn't do their job, they got fooled by Bush, or they were taking and are continuing to take the politically expedient path even if that path is damaging the country. The three corresponding slogans would be "Vote for Us! We're Incompetent", "Democrats: Dumber than Bush!", or "The Party of Prevailing Winds: Vote Democrat!". None of those sound particularly appealing to me, but hey, what do I know?

One of the Democratic law makers who voted to give Bush authority to go to war was Jay Rockefeller. Here's a brief excerpt from an interview of him by Chris Wallace regarding his vote:
WALLACE: But you voted, sir, and aren't you responsible for your vote?


Well, okay then. And we should vote for a leader who refuses to take responsibility for his votes because why?

Scott Ott writes a (more or less) daily parody (called Scrappleface) of current events, but sometimes, it's difficult for me to tell the difference between his parodies and reality. The following excerpt of a recent piece by him regarding the topic at hand is an example of such a parody:

Democrats Deny Having Pre-War Intelligence

(2005-11-11) -- Democrats in Congress today rejected President George Bush's accusation that they're trying to rewrite history, which shows they supported the Iraq war based on the same intelligence that drove his decision to send in the troops.

"We had no pre-war intelligence,"” said Sen. John Kerry, "History will show that none of the leading Democrats had substantial intelligence. Anyone who remembers what we did then knows that the president is making a baseless allegation. I think history will bear out my contention that we Democrats lacked the intelligence to make such an important decision." [...]

"Our troops deserve to know that their elected leaders who voted to send them to war will remain firm in our conviction that we didn't know what we were doing at the time,"” Sen. Kerry said.

The tragedy is that Dems are muffing yet another opportunity. As Mickey Kaus points out, the sure-fire strategy for the Democrats to regain power is to "[w]in the war in Iraq":
After all, what would happen if we won? Or to put it more precisely, what would happen if we stabilized the situation enough to stop the steady combat losses of Americans and enable the Iraqi polity and economy to move forward? (If you think that's unlikely, then consider this a useful thought experiment.)

The answer is pretty obvious: Attention would quickly shift back to domestic issues. Since Bush has no remaining saleable domestic agenda to speak of--and hasn't, really, since the passage of his Medicare drug plan--Democrats would clearly have the advantage.

Instead, the Democrats are going out of their way to look stupid, naive, gullible, partisan, and incompetent. Bummer!

Category: cat_BDS

Tuesday, November 15, 2005

Insights of Peter Drucker

I already commented on the passing of Peter Drucker last week. Steve Forbes had a terrific tribute to PD in the WSJ. Here are some salient excerpts:

What helped make Mr. Drucker so insightful was a profound understanding of economics, an understanding that still eludes most economists today. Not for him was the notion of "macroeconomics," of seeing the economy as something of a machine that can achieve steady, stable growth. To him, traditional economic notions of "equilibrium" or Keynesian ideas of "aggregate demand" were nonsense. Innovation, constant change, and turmoil were the true constants of a progressing economy.

As Mr. Drucker wrote over two decades ago, "The economy is forever going to change and is biological rather than mechanistic in nature. The innovator is the true subject of economics. Entrepreneurs that move resources from old and obsolescent to new and more productive employments are the very essence of economics and certainly of a modern economy. Innovation makes obsolete yesterday's capital earnings and capital investment. The more an economy progresses the more capital formation -- profits -- will it therefore need." These two men saw profits as a moral imperative, a genuine "cost" in the cost of staying in business because "Nothing is predictable except that today's profitable business will become tomorrow's white elephant."

He brooked no nonsense about some of the topics that obsess Chicken Little today. Outsourcing? He told Fortune in 2002 that "We import two to three times as many jobs as we export. Wage costs are of primary importance for very few industries. The industries that are losing jobs out of the U.S. are the more backward industries." He never tired of pointing out the huge advantage the U.S. has over Europe and Japan and other countries with American workers' flexibility, not only for changing jobs but physically moving from one area to another to pursue opportunities.

Monday, November 14, 2005

And the fish said, “water, what water is that?”

Some ideas are so deeply ingrained in our thinking that we simply take them for granted. We have no idea to what extent they influence and pervade our thoughts about and view of the world. Often unable to step outside of our usual modes of thought we simply deny that we are wearing blinders because we can not grasp how some ideas have been accepted without question. Talking about the European Tiger Ireland, before they cut taxes and regulations to free up their economy, Jimmy Rogers states:
Ireland is a victim of statism, which my dictionary defines as the concentration of economic controls and planning in the hands of a highly centralized government, and which I further define as the belief that the state is the mechanism best suited for solving most if not all of society’s ills, be they health related, natural disasters, poverty, job training, or injured feelings. Statism is the great political disease of the twentieth century, with the Communist, socialist, and many democratic nations infected to a greater or lesser degree. When the political history of our century is written, its greatest story will be how a hundred variants of statism failed.

Many discussions about economic policy fixate upon federal budgets and surpluses or deficits while ignoring the impact of tax and regulatory regimes on incentives in the private sector. The powerful wealth creating dynamics of the private sector are ignored. This is an incredibly government-centric view of the economy - a mindset of Statism!

Historian Robert Conquest has his own hard-nosed take on the lessons to be learned that shaped his own views. As presented by Jay Nordlinger here:

Well, then, how would he describe himself, politically? One writer, in Reason, described him as a "Burkean conservative." Conquest would allow that. He says, "I'm an anti-extremist. And I'm for a law-and-liberty culture. Those are Orwell's words: law and liberty. I don't regard the EU as being any good for that. I am strongly against the EU. I'm against regulationism and managerialism. I'm against activism of any sort." Remember, he says, "the Nazis were keen statists, and keen on socialism: 'national socialism,' they called it." And when it comes to "conservatism" — that murky term — "I feel that, when other people and nations are veering from civilization, I would prefer to conserve. I certainly prefer Burke to Locke — but, of course, there's overlap of various sorts."

He has always insisted that the facts about the Soviet Union were always available, for anyone interested in them. Trouble was, too few were interested. Everyone was in the thrall of "socialism" (though not of the "national" variety). If Idi Amin had only called himself a socialist, Conquest once said, he'd have been all right — no matter how many people he ate. Even today, they're still swooning over most any tyrant and torturer who calls himself "socialist" or "progressive."

In the May 1997 edition of the Hillsdale College Imprimis magazine venture capitalist/buy-out specialist Teddy Forstmann gave his take on the matter of statism:

But in our day, many of our leaders believe that the state–not the individual–is now the spiritual center of society. According to this view, known as “statism,” government assumes a moral importance that outweighs individual claims. Statists do not speak of government as a collection of bureaucrats, agencies, and limited constitutional powers but as the embodiment of the collective good–as community itself. They believe that government should make decisions for individuals. Since individuals usually prefer to make their own decisions, coercion and compulsion become necessary correctives. This is why the statist has no use for the Golden Rule. The statist does not do unto others as he would have others do unto him. The others aren’t to do at all; they are to be done to and done for.
If it is true, as philosopher Michael Novak once observed, that “each immoral action sows its own irrationality into the pattern of events,” a government that breaks the moral laws encoded in the Golden Rule will have a profound effect on all those living under it. The genesis and genius of the Golden Rule is that it is a twoway street. Statism, on the other hand, is a one-way street. The Golden Rule teaches us that we are all brothers. Statism teaches us that we are the children, and government is the parent. In fact, statists are looking for far more than a maternal embrace in the arms of big government. They are looking for nothing less than a New Jerusalem, literally for redemption through the state.

Every human being has a need to believe and belong. Traditionally this impulse found expression through religion. But with the decline of clerical power in the 18th century, the search for salvation did not come to an end. Instead the intellectuals of the day began to look elsewhere for idols and answers, for kinship and community. As Paul Johnson observes in Intellectuals:

For the first time in human arose to assert that they could diagnose the ills of society and cure them with their own unaided intellects: more, that they could devise formulae whereby not merely the structure of society but the fundamental habits of human beings could be transformed....[ These] were not servants and interpreters of the gods but substitutes. Their hero was Prometheus, who stole the celestial fire and brought it to earth.

Half a century later, Marx picked up where Hegel left off, promising that socialism could become the “functional equivalent of religion.” Religion, said Marx, was nothing more than “the sigh of a distressed creature...the spirit of spiritless conditions...the opiate of the masses.”
In a sense, Marx was the John the Baptist of the statist faith in the 20th century. The fact that so many were baptized in this faith confirms British writer G. K. Chesterton’s observation that “when men cease to believe in God, they will not believe in nothing, they will believe in anything.” From this perspective, it becomes clear that statism is more than a mere ideology. It is statism that has become “the spirit of spiritless conditions” and the opiate, not of the masses, but of the elites.

Oh no, a balanced budget by 2008

According to Steve Conover

...just in time for the presidential campaign?

Smiley19aThat's the current trend, I kid you not. Neither party's "help" appears to be needed, either: no spending cuts, no tax rate hikes, thank you very much.

The two trend lines, receipts and outlays, confirm what I thought I had seen two months ago. Federal tax receipts are growing much faster than federal spending outlays: 15.2% versus 8.5%, respectively.

The trend in tax receipts on this chart illustrates the power of a growing economy: tax receipts grow because more people are creating jobs, more people are working, and taxable incomes are rising. That's what is happening today, and that's what we should want to sustain.

Sunday, November 13, 2005

Bush Derangement Syndrome Explained

Dr. Sanity (a blogger who is also a psychiatrist) explains Bush Derangement Syndrome (BDS) from a psychological perspective:
What makes Bush Hatred completely insane however, is the almost delusional degree of unremitting certitude of Bush's evil; while simultaneously believing that the TRUE perpetrators of evil in the world are somehow good and decent human beings with the world's intersts at heart.

This psychological defense mechanism is referred to as "displacement".

One way you can usually tell that an individual is using displacement is that the emotion being displaced (e.g., anger) is all out of proportion to the reality of the situation. The purpose of displacement is to avoid having to cope with the actual reality. Instead, by using displacement, an individual is able to still experience his or her anger, but it is directed at a less threatening target than the real cause. In this way, the individual does not have to be responsible for the consequences of his/her anger and feels more safe--even thought that is not the case.

This explains the remarkable and sometimes lunatic appeasement of Islamofascists by so many governments and around the world, while they trash the US and particularly Bush. It explains why there is more emphasis on protecting the "rights" of terrorists, rather than holding them accountable for their actions (thier actions, by the way are also Bush's fault, according to those in the throes of BDS). Our soldiers in Iraq are being killed because of Bush--not because of terrorist intent and behavior. Terrorist activity itself is blamed on Bush no matter where it occurs.

It isn't even a stretch of the imagination for some to blame 9/11 on Bush. This is the insane "logic" of most psychological defense mechanisms. They temporarily spare you from the painful reality around you and give you the illusion that you are still in control.

This is exactly the illusion/delusion circulating in the minds of many of the Bush Haters. They want desperately to forget that there is a tidal wave of terror reverberating around the world and to pretend that everything is America's and Bush's fault. If that is true, then they will still be in control of events.
Read the whole thing. I finally understand BDS. Thanks Dr. Sanity, I feel so much better now...

Category: cat_BDS

Saturday, November 12, 2005

Another giant sheds the mortal coil - Peter Drucker R.I.P.

As noted here and here:

Peter F Drucker, known as the 'father of modern management', died at his home in Claremont, California on Friday.

Drucker was considered a visionary for making management a field of study and his recognition that dedicated employees are key to the success of any organisation, a concept that he began proposing during the 1950's.

His work spanning over seven decades has helped many corporations and educational institutions across the world.

A journalist, teacher and business consultant, Drucker has authored more than 35 books. According to him, "Management deals with people, their values, their growth and development, social structure, the community and even with spiritual concerns."

Although a few years younger than F.A. Hayek, Peter Drucker emerged from the same intellectual hot-house, early 1900's Vienna. A truly great thinker who will be missed!

Wednesday, November 09, 2005

China, That Egalitarian Paradise

Well, maybe not. As a recent article in the Asia Times points out, China has more economic inequality than that champion of free markets - the United States:
The startling figure of 74,000 protests across China in 2004, up from 58,000 the previous year, has popped up in many newspapers, as has China's most recent Gini coefficient of 0.45, suggesting that economic inequality in China has in fact surpassed that of the US and UK with their allegedly cold-blooded "Anglo-Saxon" model of capitalism. (The Gini coefficient, a measure of inequality developed by the Italian statistician Corrado Gini, is a measure of income inequality ranging between 0 and 1, where 0 corresponds to a society where everyone has exactly the same income, and 1 corresponds to a society where one person has all the income and everyone else has none.) [...]

The aforementioned figures seem to find confirmation in other numbers more readily available: 66% of all total bank deposits belong to 10% of the population, with 20% of the population holding 80% of total deposits. Peasants, the majority of China's population, make under US$300 a year, while people in Shanghai, the richest city in China, earn over $4,000 a year. China's coastal region, home to some 300 million people, produces about 70% of China's GDP. If we compare these numbers, it becomes clear that we are talking about the same group: 20% of the population amounts to about 260 million people, roughly the population of the coastal region, and the ten percent holding 66% of total deposits are the 130 million affluent people living in eastern coastal cities. The rest of the country has been left behind.
So that's why China has been growing so fast. Not only are they not into communism anymore, they're not even trying to keep up a pretense of being egalitarian. Welcome to the global market economy China!

Monday, November 07, 2005

Oh Anointed Ones, Tell Us What To Do and Think

Being so much smarter and wiser than everyone else on planet earth, or atleast in America, this received wisdom from Walter Cronkite and Studs Terkel shows the self-anointed elite starting to lose it. Appearing on Larry King live on September 30, 2005 Walter said:

If we expect this country to work, it depends on an informed, an intelligent electorate. You know, Thomas Jefferson said very early on in our republic that the nation that expects to be ignorant and free expects it never can and never will be.

We're an ignorant nation right now. We're not really capable I do not think the majority of our people of making the decisions that have to be made at election time and particularly in the selection of their legislatures and their Congress and the presidency of course. I don't think we're bright enough to do the job that would preserve our democracy, our republic. I think we're in serious danger.

In this past Sunday's NYTimes in this article about aging and wisdom Studs Terkel said:

"As long as you're not senile or retarded and have some faculties left there's going to be memories you have that set a pattern for what to avoid and eliminate" in your life, he said in a phone interview.

But this will never guarantee wise behavior, he. said, showing that age doesn't mellow a lifetime of political advocacy. "We certainly know there are a whole lot of old boys and old girls out there who have been voting against their best interests, the way this country is going."
I guess that it's just not possible that the Wisdom of The Crowd could exceed that of these towering individuals!

Friday, November 04, 2005

Tolerance, faith and reason

As Bret has pointed out in this post, there are many people of faith who have some understanding of people with a different world view. Meanwhile many people who are areligious or even anti-religious seem clueless about people on the other side of the divide. They pride themselves on being people of reason, as if to be otherwise is ridiculous. They usually assume that faith and reason are inherently in conflict. Thought is rarely given to the misuse or abuse of reason that has often occurred. Significant aspects and episodes of this are chronicled in The Counter-Revolution of Science: Studies on the Abuse of Reason by F.A. Hayek.

In relation to many aspects of this subject, please see this terrific book review which the author has titled
Imagine There's No Heaven

I'll say no more - you should already be enticed!

This is really a review of two books with juxtaposed views.

The Twilight of Atheism: The Rise and Fall of Disbelief in the Modern World by Alister McGrath

The End of Faith: Religion, Terror, and the Future of Reason by Sam Harris

Productivity Up

In my mind the most important economic numbers are the productivity numbers which measure the output per hour of the average worker. The (preliminary) third quarter (2005) productivity numbers are excellent:
U.S. business productivity — measuring worker output per hour — surged at an annual rate of 4.1% in the July-to-September period, the Labor Department reported. It was the strongest increase in more than a year and far surpassed expectations.

Meanwhile, unit labor costs — what it costs businesses to produce a given output for a set amount of labor — declined at an annual rate of 0.5% in the quarter, the department said. It was the first drop in this key indicator of corporate profitability since the second quarter of 2004.
Productivity, especially coupled with the declining labor costs we're experiencing, enables products and services to be produced for less, which usually leads to enhanced profitability (selling the same products at the same price for less cost). Increased profitability stimulates additional business activity which then drives demand for additional labor. The demand for the additional labor eventually drives up wages and compenstation giving everybody more money to spend and invest. The resulting higher demand coupled with additional capital drives the creation of new technology which helps drive productivity. That's the virtuous circle of market economies and the productivity portion of that circle is very virtuous at the moment!

Wednesday, November 02, 2005

The Boom that Wasn't?

The Economic Policy Institute published a piece by Lee Price titled The Boom that Wasn't. The conclusion is that "[t]he economy has little to show for $860 billion in tax cuts" and that "[a]lmost every broad measure of economic activity" such as GDP "has fared worse over the last four years than in past cycles." What's interesting about the piece is that it is extraordinarily clever about how the data is picked and massaged in order to mislead the reader to the desired conclusion. I think that anyone without a critical eye and some experience would be prone to accept what's presented and believe, perhaps even strongly, that the economy is very weak and that it's been damaged, or at least not helped, by tax rate cuts.

In order to illustrate the clever data manipulation, I'm going to focus on the first set graphs that appear in the paper which I've reproduced here (click on the images to enlarge).

The graphs compare "the current business cycle (since March 2001) to comparable 17-quarter (and, in places, 54-month) periods for all previous business cycles dating back to the late 1940s (when these data first began to be collected)." The author was not kind enough to identify the starting year and quarter for each the previous business cycles, but I was eventually able to figure it out, and using GDP growth data from the Bureau of Economic Analysis, as shown below, I am able to exactly duplicate the data in the article's "FIGURE A" as shown below:

The author happens to find 6 "comparable" previous business cycles since "the late 1940s." But there were more than 6 business cycles in the last 60 years. It took me awhile to match the data, and it turns out that the "comparable" business cycles that the author chose were the ones that went for at least 17 quarters without going into another recession. It turns out that those recoveries were the six strongest recoveries since data began being collected.

So Bushonomics has to complete with the best, as opposed to any run of the mill, recovery. Fair enough. Let's strip away the gray range and look at the underlying data for the individual recoveries (the heavy black line represents the current recovery in all of the following graphs):

The first recovery started in the late 40s and is depicted by the bluish line at the top of the graph. As you can see, this recovery was an outlier with the rest much more tightly clustered near the current recovery. Fundamentally, it's also an outlier in that we had just gotten over a depression and a huge war, we were rebuilding Europe, etc. It also is the oldest recovery with the oldest data and the most subject to variations due to time when comparing it to the current recovery. So I think it's pretty fair to eliminate that recovery. So, instead of the 6 best recoveries starting in the late 1940s, we'll compare the 5 best recoveries since 1950 to the most recent recovery:

The only recoveries in this set that were doing better after 17 quarters than the current recovery were the ones which started in 1960 and 1981. What's interesting about that is that those two recoveries had substantial tax rate cuts associated with them: the Kennedy and Reagan tax rate cuts. The irony is that once we strip away the masks that the author used to hide the basic information, not only does the data not support his hypothesis, but it actually provides evidence that the best and longest lasting recoveries are associated with tax rate cuts - in other words it shows the exact opposite of what he's trying to prove.

But we're not done yet. Another misleading technique the author used was his choice of statistics. Real GDP if a fine statistic if you're comparing one year to the next. But GDP is strongly affected by population growth (larger populations generally have larger GDP) and, because population growth varies over decades, it is a poor measure to use when comparing GDP numbers over long time spans.
Indeed, the population growth rate was significantly higher in the past and has been slowing steadily which would tend to make past GDP growth higher relative to more recent GDP growth numbers. A much better number to use is real GDP per capita. The following graph is the same as the previous one except it uses changes in GDP per capita instead of changes in GDP.

As you can see, the recent recovery looks even better relative to those recoveries not associated with a tax cut.

The bottom line is that the author used data that actually supports tax cuts and contradicts his conclusion, but by clever picking of time frames and statistics, and masking the underlying trends, is able to give the strong impression of the exact opposite position. The rest of the data in the article has similar and related flaws which I may address in a future post.