Peace in Our Time

David Zucker takes a great swipe at James Baker and The Iraq Surrender Group.

Happy Holidays

I was hoping to get to more savings posts done before leaving for Hawaii tomorrow for a ten day family vacation where I'll have no access to the Internet (hopefully, I'll be able to withstand that), but no dice. I'll continue when I get back.

In the meantime, I wish y'all a Chappy Chanukah (what remains of it), a Carefree Christmas, a Kool Kwanzaa, or whatever winds your windmill.

Myth Busting

As I mentioned in this post, statistics must be analyzed with great care if they are to provide meaningful insight. Handled poorly they can provoke ill-advised political responses as Cox and Alm worn in the same post.

What we don't know about the economy could hurt us. Many of the suggested remedies to problems that don't exist may leave us worse off.

More careful analysis of data is provided in an Alan Reynolds article in the WSJ which Don Luskin posts and comments on here:

At last... Alan Reynolds' long-awaited blast against all the hype from the Left and the Right about so-called "income inquality," and the myth that the "top 1%" have suddenly started making all the money in this country. ... This is the best. I totally bow down before Alan Reynolds.

As many others have done, Virginia's Democratic Senator-elect Jim Webb recently complained on this page of an "ever-widening divide" in America, claiming "the top 1% now takes in an astounding 16% of national income, up from 8% in 1980." Those same figures have been repeatedly echoed in all major newspapers, including this one. Yet the statement is clearly false. The top 1% of households never received anything remotely approaching 16% of personal income (national income includes corporate profits). The top 1% of tax returns accounted for 10.6% of personal income in 2004. But that number too is problematic.

The incessantly repeated claim that income inequality has widened dramatically over the past 20 years is founded entirely on these seriously flawed and greatly misunderstood estimates of the top 1%'s alleged share of something-or-other.

The politically correct yet factually incorrect claim that the top 1% earns 16% of personal income appears to fill a psychological rather than logical need. Some economists seem ready and willing to supply whatever is demanded. And there is an endless political demand for those able to fabricate problems for which higher taxes are, of course, the preferred solution. In Washington higher taxes are always the solution; only the problems change.

Read the whole article - well worth it!

Patently Expensive

There's no doubt that Patents and other Intellectual Property (IP) laws have benefits. Benefits often have associated costs and the current IP regime is no exception. If associated costs exceed the benefit then the benefit isn't worth it. In other words, if you incur $1,000 of cost to derive $10 of benefits, you'd be better off not spending the $1,000 and foregoing the $10 of benefits. Let's consider some of the costs of patents in ascending order.

The Patent and Trademark Office (PTO) has a budget a bit under $2 billion. Chickenfeed.

There are almost 1/2 million patents filed every year now. I know my company's have averaged around $20,000 in legal fees and probably another $5,000 in internal engineering costs to file. I've also seen the $20,000 number batted about as a typical cost for filing and processing a patent in the United States. That'd work out to about $10 billion a year. Still chump change relative to the size of our economy.

People with patents are forever suing those they think are infringing their patents (that is, of course, the whole point of getting a patent). I've been unable to find any statistics on the annual aggregate cost of patent litigation, but I'm guessing it's somewhere in the tens of billions of dollars. Still less than 1% of GDP.

Monopoly rents is trickier. The actual increase in the cost of a product because of patent protection doesn't actually cost the economy anything as a whole. It only tends to shift wealth and income to businessmen, inventors and lawyers from others, but is otherwise cost neutral as far as direct effects are concerned.

Where the monopoly is devastating is in suppressing the innovation that comes from competition. Microsoft is a good example of this, even though they are admirably restrained when it comes to wielding patents as a weapon. There software is kinda crappy specifically because they have very limited competition in the desktop market. If Apple hadn't fallen apart and had gone head-to-head with Microsoft for longer, Microsoft's software would have been far better and we all would've benefited, in my opinion.

So what's the cost of this innovation suppression? Nobody knows. I think it's huge because one relatively small group effectively shuts down innovation in the entire rest of the population for each product area protected by patents. In the area of Open Source Software we see the benefit of thousands of pairs of eyes looking at problems, fixing them, and innovating further. Monopolies preclude that sort of interaction.

Lastly, the biggest cost, in my opinion, is the mine field created by patents. There's all kinds of areas in robotics that my company won't touch because there are patents that make it too difficult. Worse still, nobody else, including the patent holders, are bothering to pursue these areas. As a result, there are many technologies that lie dormant for decades while time slowly defuses the patent minefields.

Since humans are naturally creative, there's no doubt in my mind that patents stifle creativity overall. Whether or not patents enable capital aggregation to implement the creativity that's left will be the topic of another post.

Regulatory Burdens

Congress does two things well, nothing and overreacting.(not mine) Regulatory approaches with high costs and little benefit are not exactly pro-growth.

Steve Waite at his Creative Destruction blog gives us this:

Here's an exchange between Mike Holland and Herb Greenberg from economist Larry Kudlow's TV show that discusses the unintended consequences of government regulation - in this case, the Sarbanes-Oxley Act...

Mike Holland: I'd like to put a fact in here. Before Sarbanes-Oxley, 50 percent of all IPOs around the world listed in the United States. Would anyone, including Herb, like to guess how many since Sarbanes-Oxley have listed in the U.S.?

Herb Greenberg: Give me the number.

Mike Holland: It's 8 percent. And the last 25 largest IPOs, they all listed abroad. I was in Europe a couple weeks ago--they're talking about erecting statues to Sarbanes and Oxley in London's financial center.

Given some luck, the overreaction will be modified. Donny Baseball is hopeful.

I am agog. One of the the most unreconstructed liberal members of the Great Sausage Factory's Upper Chamber, my very own Senator, Chuck Schumer write this today in the WSJ:

With the benefit of hindsight, the Sarbanes-Oxley Act of 2002, which imposed a new regulatory framework on all public companies doing business in the U.S., also needs to be re-examined. Since its passage, auditing expenses for companies doing business in the U.S. have grown far beyond anything Congress had anticipated. Of course, we must not in any way diminish our ability to detect corporate fraud and protect investors. But there appears to be a worrisome trend of corporate leaders focusing inordinate time on compliance minutiae rather than innovative strategies for growth, for fear of facing personal financial penalties from overzealous regulators.

It gives you a sense of what a disastrous misfire Sarbanes-Oxley was that Chuck Schumer would even put his name to this let alone do so before his colleague Paul Sarbanes has even left the building.

You'd think they might have discussed these matters before writing and passing the legislation!

It's Magic!

One of the primary reasons that many people lament the supposedly low savings rate in the United States is that they erroneously believe that "savings" and "investment" are the same thing or that "savings" causes "investment". Saving does not automatically lead to investment. At best, saving can reduce the cost of investment. But, as I wrote in "Is Savings Always Good?", saving beyond a certain level can actually reduce investment.

Let's start with our hypothetical static economy (HSE) as described in "Selfish Savings":

This hypothetical economy is completely stable with no loans or debt, constant population, constant demographics, constant (and moderately low) unemployment rate, constant GDP output consisting of the same products, etc.

One specific aspect that needs to be clear is that the net savings in the HSE is zero. For each dollar that goes into savings there is a corresponding dollar that comes out of savings.

But, as I described in "Money's Inherent Value", since fiat currency issued by an authority that collects taxes has inherent value just like gold, let's use the currency instead of gold. In addition, since it's usually important for the control of the money supply for the government to have some debt, let's say the government has some small amount of debt, say 10% of GDP. The fiat currency in turn enables borrowing as described in "Paying off the National Debt". Also, assume that there is intergenerational borrowing as described in "Barn-Raising Borrowing". Let's denote the HSE with all these modifications as HSEb. We'll keep coming back to HSEb in future posts.

Now let's consider the story of Bob the bonbon maker in our hypothetical static economy. Bob has just thought of an ingenious way to double his production of bonbons. Unfortunately, to do so, Bob will have to build some bonbon making machines and it will take someone a year to do so.

There are many ways that this endeavor can be financed, all of which will slightly alter the hypothetical stable economy (innovations tend do that). But let's start with the simplest. Bob borrows bucks directly from the central bank and pays someone (call him Sam) who was unemployed to build the machines. In the real world, private entities don't usually borrow directly from the central bank, but a similar thing happens via the central bank's agents. Those agents are private banks within the banking system. But let's not get into those details right now.

Sam takes a year to build the bonbon making machines and after a year goes back to the trajectory he would've been on in HSEb. Assume for now that Sam didn't alter his consumption at all relative to his original trajectory in HSEb, either while employed building bonbon machines or afterward.

So let's take a look at the balance of savings at the end of that year. In the private sector, the net savings is still zero. Bob has borrowed, but Sam has saved an equal amount relative to what he would've since he hasn't changed his consumption. Nobody else has changed their consumption (or production) during that year either. Nobody had to save any more money. Yet the economy now has bonbon making machines. Investment and wealth has been created out of thin air. It's Magic!

Again, as shown by this example, savings is not necessary for investment. Admittedly, there are a few minor caveats. It is true that the central bank does now have a positive entry on the balance sheet (what Bob owes them). But the central bank has literally an infinite positive entry (since there is no limit to the amount of money that they can create) so this entry really changes nothing. When Bob pays back the loan, the payoff just goes back into the infinite pool.

It's also true that the unemployed can be thought of figuratively as "savings" as in we're saving them for later. So in this case, by employing Joe, we're using a previously "saved" resource. The concept here is that anytime we do something that increases employment, we pretty much get something for nothing, even if we have to "borrow" to do so. For example, when unemployment is high, the government should generally borrow more and tax less because that generally increases the demand for labor and ends up employing people who would otherwise been unproductive. In this case, the borrowing is very inexpensive per unit of created well being and productivity. Next time you're unemployed (if ever), you can consider yourself a saved resource. Rest up!

So what if there was nobody who was unemployed available to build the bonbon machines? We'll look at that in the next post in this series.

Science or not!

Science has its' own procedures and methods of inquiry which make it a powerful tool for exploring and discovering things about the universe. There are of course many other avenues for acquiring useful knowledge such as following learnt morals and traditions. Understood within its' limits science is quite useful. All to common in this day and age are politicized ideas or junk science sailing under the banner of the real thing. Michael Crichton warns us of such here:

I want to pause here and talk about this notion of consensus, and the rise of what has been called consensus science. I regard consensus science as an extremely pernicious development that ought to be stopped cold in its tracks. Historically, the claim of consensus has been the first refuge of scoundrels; it is a way to avoid debate by claiming that the matter is already settled. Whenever you hear the consensus of scientists agrees on something or other, reach for your wallet, because you're being had.

Let's be clear: the work of science has nothing whatever to do with consensus. Consensus is the business of politics. Science, on the contrary, requires only one investigator who happens to be right, which means that he or she has results that are verifiable by reference to the real world. In science consensus is irrelevant. What is relevant is reproducible results. The greatest scientists in history are great precisely because they broke with the consensus.

There is no such thing as consensus science. If it's consensus, it isn't science. If it's science, it isn't consensus. Period.

In addition, let me remind you that the track record of the consensus is nothing to be proud of.

We would all do well to remember this!

Drug Companies and Value

This morning Instapundit wrote:

"... drug companies have done a lot more to make my life better than their critics have. Maybe someone should point that out more often."

I find it interesting that a guy who wrote "An Army of Davids", a book that celebrates that ability of small entities to efficiently utilize and further technology and commerce, is so enamored with an intensely centralized Goliath like the drug industry.

Tiger Hawk then jumped on the bandwagon with:

The pharmaceutical companies deliver extraordinary value to their customers, yet there is apparently great political advantage in bashing them. It is not obvious why this is so.

One obvious answer comes from the "any profits are evil" crowd. Perhaps that even explains most of the big Pharma bashing. But let's ignore this explanation for now since I don't agree with them because I'm all for profits in open and competitive markets.

My perspective is different: I'm very suspicious of any industry whose profits are the result of monopoly rents. And I think that despising monopolies is very much part of the American psyche.

Firmly believing that "pharmaceutical companies deliver extraordinary value" requires an inability or refusal to think outside the box. The four sides of this "box" are the series of monopoly rents imposed by the Patent Office, the AMA, the FDA, and big Pharma. Within this box, I would agree that pharmaceutical companies deliver value. However, I think the box is extremely expensive, both in terms of money and health, and once that's taken into account, I'm not convinced that there's any positive value at all delivered outside the box. If there is value delivered outside the box, I doubt it's extraordinary - it's at best marginal.

There are, of course, gazillions of arguments about why each of those four sides of the box are necessary and I can't possibly begin to address them in a single blog post. Each one of those arguments, however, is only valid within the box. If the box didn't exist, if drugs were developed and deployed using another paradigm, the arguments wouldn't be valid. In fact, they'd be nonsensical.

With this instigation, I'm going to start an Intellectual Property thread of posts where I will propose alternate paradigms for drug development and pick apart the arguments that support the current paradigm. Stay tuned.

Subtleties seperating civilization from primitivism

The problem that defenders of freedom run up against is that both the emotional and seemingly rational appeal of alternatives seem more compelling.

As the late Milton Friedman explains:

FRIEDMAN: Because the story they tell is a very simple story, easy to sell. If there's something bad, it must be an evil person who's done it. If you want something done, you've got to do it. You've got to have government step in and do it. The story Hayek and I want to tell is a much more sophisticated and complicated story, that somehow or other there exists this subtle system in which, without any individual trying to control it, there is a system under which people in seeking to promote their own interests will also promote the well-being of the country -- Adam Smith's invisible hand.

Now, that's a very sophisticated story. It's hard to understand how you can get a complex interrelated system without anybody controlling it. Moreover, the benefits from government tend to be concentrated; the costs tend to be disbursed. To each farmer, the subsidy he gets from the government means a great deal. To each of a much larger number of consumers, it costs very little. Consequently, those who feed at the trough of government tend to be politically much more powerful than those who provide it with the wherewithal.

The desire to right every perceived wrong in the world is very strong in some people. The law of unintended consequences ends up being like a banana peel when real world tradeoffs are ignored in attempts to remake the social and economic order. Another point made by Milton Friedman is that good things that arise from a free society are simply taken for granted. This is human nature and it is especially easy to do while harboring an ill-conceived notion of how things work.

The most basic ideas of economics such as supply and demand may be simple enough, but even this construct is rejected by some people in practical application. The coordination and discovery aspect of prices and a market order are somehow too mysterious for many to grasp.


The collectivists arguements are based upon false claims and logical errors but for many people the emotional appeal of such ideas is overwhelming. Yet again Dr. Sanity nails it with this post. Be sure to see the other links within...

Not until Adam Smith was it recognized that wealth can grow without limits, but obviously even now people have a hard time wrapping their minds around this idea.

Progressives, he argues, operate under an economic model that is more genetic as opposed to cognitive. They are still functioning with the herd mentality and have yet to embrace modern civilization or individualism, preferring instead to function on an instinctual, rather than a rational level. This is why they find capitalism and market economics so repugnant.

The economic primitivism that is unceasingly promoted by the political left is a remnant of the cave-dwelling days of mankind; an idyllic era of history to which the left desperately yearns to return. The word "Progressive" is thus a simple rhetorical manipulation to diguise the essential backwardness of the left's economc thinking.

One of the difficult tasks for defenders of freedom, also described as the extended order of human cooperation, is to develop explanations of key ideas that are understandable to most people. Hopefully the explanations are good enough to overcome both misconceptions and misguided emotionalism.

Barn-Raising Borrowing

Communities in the United States in the 18th and 19th centuries would rally around a young married couple and get together over the course of a weekend and build them a barn. According to Wikipedia:

A barn raising is a one or two-day event during which a community comes together to assemble a barn for one of its households. [...]

Generally, participation is mandatory for community members. These participants are not paid. All able-bodied members of the community are expected to attend. Failure to attend a barn raising without the best of reasons leads to censure within the community.

Having the community raise your barn is essentially accepting debt. You pay your debt to the community back over the course of your lifetime by helping to build other people's barns.

In "Selfish Savings" I noted that the primary purpose of savings is to give us the "option of consuming in the future instead of today" enabling us to withstand bouts of unemployment and take care of ourselves in retirement. The barn-raising concept enriches this temporal nature of savings. Instead of the typical savings cycle over the lifetime of an individual being "save when you're young, then spend when you retire", it's "spend, then save, then spend". In other words, young adults borrow in order to have places to live, in order to set up households, and in order to have transportation to their jobs. Perhaps they also borrow to pay for an education so they can get a job. Then they occupy their productive years paying off debt and then saving for retirement. Finally, they spend down their savings during retirement. Instead of being the recipient of a barn and then being compelled to attend barn raisings forever, modern young adults simply borrow money and (usually) buy an existing house (or barn). Then they pay back the debt at a pace that works for them (and the lender).

This cycle of borrowing, spending and saving over the course of a person's lifetime would occur in the hypothetical economy outlined in "Selfish Savings" where everything is perfectly stable (GDP, population, production, etc.) and does occur in a real, dynamic economy such as the economy of the United States. So far, in the hypothetical examples I've described, the amount of money going into savings is exactly matched by the amount of money coming out of savings and individual entities (and families) receive virtually all of the benefits of savings (and borrowing).

In my next post on savings, we'll start with the hypothetical static economy and see what it takes to get a little growth to happen and how savings relates to that.

Money's Inherent Value

In my last post on savings ("Selfish Savings"), I stated that the currency of the United States has inherent value. In this post I'll explain why.

When we buy and sell things from each other here in the United States, we almost always use dollars. But we don't have to. We can trade goods directly for other goods (barter), we can use other currencies such as the Euro, and private entities can even make up their own currencies for trading with each other. There is no law in the United States that says that two private entities must use dollars when buying and selling.

But even if we all decided to barter or use other currencies, even if we all stopped using the dollar on a day-to-day basis, the dollar would still have inherent value. That's because we must pay our taxes with dollars. Thus, dollars are rather like a get out of jail free card (except for the "free" part), since if you don't pay your taxes (in dollars), those nice men associated with IRS will come and haul you off to jail. You must acquire enough dollars to pay the taxes you owe to the government. That makes dollars inherently valuable.

This is why every national government in the world, no matter how rinky dink, no matter how unstable, can have its own fiat currency. This is why its citizens, who must pay taxes to that government in that government's currency, use that currency. This is why currencies need not be gold backed and citizens of a country need not have a lot of confidence in the currency, yet the currency has value and finds widespread use within that country, whether or not there are laws requiring the use of that currency. People need the currency to pay their taxes.

Warren Mosler wrote in "Soft Currency Economics" (hat tip: Skeptical Optimist):

A government using fiat money has pricing power that it may not understand. Once the government levies a tax, the private sector needs the government's money so it can pay the tax. The conventional understanding that the government must tax so it can get money to spend does not apply to a fiat currency. Because the private sector needs the government's money to meet its tax obligations, the government can literally name its price for the money it spends. [...]

The concept of fiat money can be illuminated by a simple model: Assume a world of a parent and several children. One day the parent announces that the children may earn business cards by completing various household chores. At this point the children won't care a bit about accumulating their parent's business cards because the cards are virtually worthless. But when the parent also announces that any child who wants to eat and live in the house must pay the parent, say, 200 business cards each month, the cards are instantly given value and chores begin to get done. Value has been given to the business cards by requiring them to be used to fulfill a tax obligation. Taxes function to create the demand for federal expenditures of fiat money, not to raise revenue per se. In fact, a tax will create a demand for at LEAST that amount of federal spending. A balanced budget is, from inception, the MINIMUM that can be spent, without a continuous deflation.

Again, it's taxes that form the basis of the value of a currency. To be sure, there are many other factors such as the size of the money supply, total GDP, etc., but taxation is the fundamental driver of a currency's inherent value.

With this understanding, we can now turn our attention back to the meaning of savings and investment in the next posts in this series.

Selfish Savings

In my last post in this series about savings, debt, and money, I noted that in aggregate in a given year, we consume what we produce, and asked the question "What is Saving?" In the comments, Hey Skipper noted that savings is just financial and we had to answer what money is to really understand it. I'll come back to money later, but for now, consider the following hypothetical closed economic system. This hypothetical economy is completely stable with no loans or debt, constant population, constant demographics, constant (and moderately low) unemployment rate, constant GDP output consisting of the same products, etc. To make things a little more tangible to start, assume that gold coins are the only money and that there are no banks and all of the gold in the world has already been dug up. The people are perfectly peacefully and law-abiding so no formal (funded) government exists. There are also no corporations (all income flows directly to proprietors and partners). While the existence of this economic system is clearly impossible, I think it's important to start simple to begin understanding the issues.

Since we've specified that there is no debt, that means that each entity (personal, business, or government) saves and/or spends gold coins as they choose. Since there aren't any loans, that means that nobody makes a return on savings.

Yet people will still save quite a bit. Young people will save for retirement and/or bouts of unemployment. Retired people will draw down there savings. Business will save in order to replace capital equipment that wears out. In this perfectly stable system, each additional coin saved by someone who's young or a business saving against depreciation is exactly matched by someone who's old or temporarily unemployed who's drawing down their savings or a business purchasing capital equipment. In this hypothetical economy it has to be true. Where else would the gold coins come from?

This is the primary purpose of savings. It benefits us as individuals and businesses. It gives us the option of consuming in the future instead of today. In some sense, saving more than you need for the future is miserly, as it prevents others from saving what they need and takes away opportunity for employment from others.

One thing that's moderately interesting is that you can't necessarily substitute paper money for gold. Since it's a hypothetical system, I suppose we can do anything we want, but there might be an inherent difference. Humans seem to have an affinity for gold (giving gold inherent value) even though gold isn't all that important a material for production. Humans may or may not have an affinity to pieces of paper with numbers on them. In this closed system those pieces of paper wouldn't have any inherent value (assuming no affinity). However, in the economy of the United States, dollars do have an inherent value which I'll explain in the next post.