Sunday, November 30, 2008

Yeah, What He Said: Brandeis Edition

Yes, as in Louis D. Brandeis, Supreme Court Justice from 1916 to 1939. He had some very timeless ... and timely things to say:

Organization can never be a substitute for initiative and for judgment.

America has believed that in differentiation, not in uniformity, lies the path of progress. It acted on this belief; it has advanced human happiness, and it has prospered.

Like the course of the heavenly bodies, harmony in national life is a resultant of the struggle between contending forces. In the frank expression of conflicting opinions lies the greatest promise of wisdom in governmental action.

It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.

There is no such thing as an innocent purchaser of stocks.

Friday, November 28, 2008

What Will Tomorrow Bring: Federalizing Federalism

Huge shout out to Eileen Norcross and Frederic Sautet. Their article "Who's Next in Line for a Bailout?" sidesteps the auto industry side-show to draw focus to the true next chapter of our little financial challenge: Local Governments.

41 states face budget shortfalls ... But the governments in the worst shape didn't get here overnight. New York, California and New Jersey--who are all petitioning the Treasury for relief--are dealing with the fallout from bad budgeting.

The main cost drivers, such as pensions and school aid, are often budgetary third rails, wrapped up in court orders and government mandates and guarded by unions. That is what makes the plea for federal assistance so appealing--it's a politically cheap way to avoid the hardest reforms.

Clearly, data mining gurus, they found stats and figures which stand alone to tell a story which could hardly be crisper. To writ:
  • $900 million in local law enforcement grants in the new Reid/Pelosi stimulus plan
  • Between 1997 and 2007, total state and local spending grew by more than 81% in real terms, while GDP increased by 32%.
  • In 2001, the California legislature reduced the retirement age and increased benefits for public employees, producing a $26 billion unfunded liability
  • The City of Vallejo let unions fatten their contracts on cascading revenues until 80% of the city's budget was dedicated to police and fire benefits
  • Gov. Jon Corzine of New Jersey found $600 million in cuts this June, only to borrow $3.9 billion for school construction projects
  • Gov. Arnold Schwarzenegger made $5 billion in cuts to fill in the state's $15.2 billion gap but wants to make up the rest by levying a sales-tax hike.
  • Years of intergovernmental aid have created budgetary paralysis and policy dependency, calcifying spending patterns while limiting experimentation in the delivery of services
  • [NJ's] school aid formula imposed on the legislature in the 1990s ... has redistributed half of income tax collections to 31 of the state's 585 school districts
Viewed from this perspective, it's clear why states are where they are ... and what they need to fix. Right on, guys!

Thursday, November 20, 2008


Disjointed but topical quotes I've run across recently:

The distribution of a trillion dollars by a political institution -- the federal government -- will be nonpolitical? How could it be? Either markets allocate resources, or government -- meaning politics -- allocates them
- George Will, NY Times Column
(right on G!)

The cause of the "bust" is the same as the cause of the previous "boom" - the willy-nilly creation of credit out of thin air, for the purposes of creating political and economic advantage in the short term.
- David McGregor, Sovereign Life
(where have I read that before? Oh yeah, on my blog!)

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.
-Adam Smith

The real threat to the Republican Party is something we saw a lot of this past election cycle: libertarianism masked as conservatism. And it threatens to not only split the Republican Party, but render it as irrelevant as the Whig Party.
- Mike Huckabee, Do the Right Thing,
(uh, Mike you may have that backwards. As far as I'm concerned, the Republican party has abandoned its conservative, libertarian roots ... and in doing so, risks making itself irrelevant.)

The theorem of the economic impossibility of socialism: According to this theorem, it is impossible to organize society, in terms of economics, based on coercive commands issued by a planning agency, since such a body can never obtain the information it needs to infuse its commands with a coordinating nature. Indeed, nothing is more dangerous than to indulge in the fatal conceit of believing oneself omniscient or at least wise and powerful enough to be able to keep the most suitable monetary policy fine-tuned at all times
- Ludwig von Mises and Friedrich A. Hayek

[Competition] is a process of formation of opinion ... It creates views that people have about what is best and cheapest"
- Friedrich A. Hayek, the Meaning of Competition 1948

Rent extraction is the practice of using regulatory powers to pressure private interests into donating money to politicians or political parties.
- Economist Fred McChesney

Wednesday, November 19, 2008

In the Words of Willie: "It's Been Rough and Rocky Travlin'..."

... but I'm finally standin' upright on the ground.
And after takin' sev'ral readings,
I'm surprised to find my mind's still fairly sound..."
- Willie Nelson, Me and Paul

Willie doesn't need a U of Chicago economics diploma hanging on the wall in his tour bus. He just knows good sense and how to not take things too seriously. I'm going to borrow his words above to explain what is essentially a very simple economics concept. Stay tuned.

As I bemoaned in a recent blog, talking heads everywhere are proclaiming the death of the free market, but NOT the death of capitalism and NOT a turn toward socialism (that would be politically unwise to say). In saying this crap, they show their lack of understanding of economics. A free market is a necessary prerequisite of the capitalism model because this is how prices are determined ... and prices are the uniform measure which ensures capital is allocated most efficiently ... and efficient capital allocation ensures that the most "value" is wrung from every bit of capital. This is capitalism' single goal.

  • It's goal is NOT fairness (Thomas Friedman said it himself on Meet the Press this week: "Fairness is not on the table anymore ... we either have systemic risk or find a way out of this mess.")
  • It's goal is NOT equality (actually, perfect equality and perfect capitalism are completely incompatible, as forced equality kills the incentive mechanism)
  • It's goal is NOT stability (and that's where Willie's words come in. Free-market capitalism is great at achieving its goal, but it does not guarantee a smooth or direct path. This is not a failing of the model, it is a result of the imperfection of the human mind in making decisions)

Capitalism focuses on what it's good at (the economy) and leaves social topics to social constructs. Advocates of other models such as socialism and communism may be reluctant to admit as much, but the ultimate goal of these models, in pure form, is the same.

The only real difference between the models is simply who makes the decisions.

Socialism presumes that government officials are in the best position to make decisions for the common people, and that their goal must be equality. Our economy is so bogglingly complex that, for this model to work, government must be comprised of a cadre of elite, selflessly compassionate intelligentsia with perfect foresight and super-human decision-making abilities.

Until a doting, grandfatherly HAL 9000 emerges (and it's already 7 years late!), free-market capitalists believe that it takes the entire population of the economy to get decisions right. Leveraging 4 billion years of evolution (or 6 days of creation, which ever you prefer), capitalism makes use of each person's instinctive desire to maximize pleasure while minimizing pain. Each person is empowered to constantly make the decisions that are best for themselves based on the information at hand.

Each owner of capital (including the human capital of our own labor and intelligence) is empowered to constantly make decisions about the best use of that capital in order to maximize the NPV of future profits from it. This NPV is represented by the current price of the capital. If the owner "prices" his capital at $1,000, but a smart entrepreneur thinks of a better use and "prices" it at $1,200, then the owner should be ecstatic to sell it to the entrepreneur at any price above $1,000. Done a trillion times a day, such interaction maximizes the overall output and value of the entire economy. In short, decision-making is decentralized to the lowest possible level, not hoarded in Washington.

Progressive Lefties will immediately smell a rat here. This process does nothing to ensure that all the pie slices are equal. They're right. Capitalism simply grows the entire pie, and in doing so makes EVERY slice bigger. Bill Gates' decisions vastly grew his slice of the pie, both in absolute terms and in relation to everyone else's. He benefited unequally from his own success. That's the incentive mechanism of the economic model.

As a side-effect, the whole pie got bigger, and that has benefited even the poorest among us (see my recent blog on poverty for more on this) but social concepts like equality, fairness, stability, or poverty eradication should be handled via social constructs. Asking an economic model to address social goals creates an unnatural and unstable conflict of interest. To impose these goals on capitalism would require convincing every member of the economy to make decisions which do not maximize their own well-being. On the other hand, the concentration of power required by socialism, creates an much more practical way of imposing these goals on a populace without their consent.

Is that really what we want? If not, we need to put our politicians back in line.

Monday, November 17, 2008

Yeah, What He Said ... Friedman Edition

Thomas Friedman nailed our auto-industry bailout to the wall on Meet the Press yesterday:

"I see no plan, no reason to suggest that these people who drove this industry into complete ditch havea plan to get it out in the long term and not come back in 6 months for another $25 billion ... what was Detroit's plan two years ago? ... It was to subsidize gasoline at $1.99 a gallon ... that was their idea of innovation ... it was like a crack dealer offering subsidized crack rather than going to a clinic to get off the drug. And who was the enabler of that? It was the Carl Levins, all of the Michigan delgation ... where was their outrage two years ago about getting them to be more innovative, getting them on top of the energy-efficiency question. They have been enabling the destruction of this industry ... so show me a plan, show me a plan that says if we give you the $25 billion, you're actually going to change. Remember, we're going to charge that $25 billion on our kids' Visa cards ..."

BTW, Michigan, the auto industry, and crack seem to be frequent bedfellows. Check out this article from July. Silly people, get with it. Michigan is a meth state these days!

Sunday, November 16, 2008

Putting Our Economy in Context

Granted, we're in a recession. Granted, times are hard for a lot of people. However, before we undertake sea changes in our economic system, perhaps we should pause long enough to put our current pain into the context of the two centuries of incredible wealth our system has created.

And when I say wealth, I'm not just talking about the wealthy.

Most governments define poverty as the amount of yearly income necessary to pay for a "get-along" basket of goods and services (they call it "standard budget"). The US government's current number is about $10,500 for an individual (for households, the per-person number decreases with the size of the household due to shared expenses).

This buys a person a "basket" of goods and services something like the following (numbers averaged nationally):

  • a nutritionally-adequate diet ($300 a month buys you a more-than ample 3,000 calories a day, even without food stamps)
  • housing ($400 a month gets you a 20'x20' space even without public housing assistance)
  • transportation ($75 covers average monthly bus/subway fares)
  • everything else ($110 a month)

It's not a lot, to be sure, but people at this income level do not go to bed hungry or cold. They can count on the safety of an effective police and justice apparatus enforcing the rule of law. They are able to buy food not available locally, or in the current season. They are able to eat meat daily. In fact, poor children today grow up to be, on average, one inch taller and 10 pounds heavier than World War II GIs. If they get sick or injured, they can count on modern healthcare and a social safety net. They can reasonably expect to live past the age of 70.

On average, they work less than 40 hours a week, and do not need to fear negligent abuse or injury at work. Other activities necessary to support life consume less than 20 hours a week, leaving 52 waking hours for leisure. Per the US Census bureau, the average home owned by persons classified as poor is a three-bedroom house with one-and-a-half baths, a garage, and a porch or patio.

According to several studies (including this leftish one and this rightish one), well over half of people at that income level have air conditioning, at least 2 TVs, a microwave, a cell phone AND a home phone, and a car if they don't live in a major metropolitan area. They take a one-week vacation each year, and buy enough alcohol to get drunk every two weeks.

Moreover, there are a number of assistance avenues which help these individuals increase their standard of living from government direct assistance to religious/charitable programs to (most commonly) family assistance. It is quite common for working-age children, students, and retirees to live with family members or roommates during their (temporary) periods of low income.

Now visualize the entire history of civilization on the face of a clock, with today as 12:00. Roll that clock back a mere 15 minutes (=250 years in real time) and examine the standard of living, not of the poorest, but of the average citizen. He would, on average live 35 years, all of which within 100 miles of his birthplace. He would have had only vocational education, no voice in regional or national politics. He would have enjoyed no social safety net, instead seeking health care from an alchemist or priest who likely would have tried to bleed or exorcise demons out of him. Half of his children would not have seen adulthood, often due to diseases all but erradicated today.

His occupation would have most likely been manual labor. His home would have been heated by open fire or stove, using wood he chopped. Light would have been provided by candles he made. Food would have been whatever he had recently grown, hunted, preserved, or traded for. Most often it would have given him diarrhea. Electricity, phones, TVs, movies, antibiotics, antibiotics, refrigeration, food preservatives, and cars would have been unimaginable.

Move the civilization clock to 11:55pm (=1900AD) and over 80% of the world's population (primarily in Africa and Asia) still would have had a not dissimilar standard of living.

I could go on, but I'm sure I've already killed the horse. Poverty is a relative concept. Thanks to the amazing wealth creation of our most powerful economies over the last 100 years, the poorest among us is far wealthier and presumably lives a better life than 99% of the humans who have ever walked the face of the earth, as the following excellent chart from The Futurist Blog shows: Additional Reading:

Saturday, November 15, 2008

I TOLD you so

Holy effing ess ... and wtf and shiteballs ...

I TOLD everyone NOT to make Greenspan a scapegoat for the collective financial screw ups of the entire planet. But no sooner than I had called off my blog strike, the useless pieces of Washington garbage (who I pay for!) showed they have as little self-discipline as they have personal integrity and leadership skills. Thank God they're now in charge of EVERYthing. This is going to be awesome.


Also up on the Hill, a bunch of hedge fund demi-gods plead powerlessness over the mess. "The system" did it? I always knew Soros was a little off ... but that's as idiotic as letting a murderer walk because "it was the gun that killed the victim."

Another hedge fund fly-boy, Bill Ackman, was on Charlie Rose echoing the hew HF refrain pegging it all on the short selling
ban and the ratings agencies.

Everyone apparently fails to notice that capitalism actually worked in this case ... if a bit messy. These agencies are in the information analysis biz. As people have learned that these agencies performed flawed analysis and turned out crap information, people have stopped trusting them and are no longer willing to pay for their services. They will likely find themselves in an Arthur Anderson situation before too long.

In other news, Paulson is still motoring without a rudder, map, or compass. Good things will not come of his mess. Did anyone else catch him borrowing an odd quote from Keynes?

Paulson, this week: “I will never apologize for changing an approach or strategy when the facts change"

Keynes: "When the facts change, I change my mind. What do you do, sir?"
(nb: there is debate about whether Keynes even said this confidence-killing line)

Appropriately, HSBC is furious. Per CEO Michael Geoghegan:

"There is no question that guarantees have been given to failed managements ...
I hope these guarantees don’t last too long because they may create the wrong
type of behaviour by managements in those banks."
That's British for "get out of the market, you dumb clots, before you sink us all!" After weathering the storm relatively unscathed, HSBC now finds itself not at a competitive advantage (as it should be) but again at a disadvantage to the reckless, who have been lavished with bail-outs and governmental support based solely on perceived need ... as opposed to more logical criteria such as prudence, ability, and track record. The message: risk management is a fool's game. Damn the torpedoes, full steam ahead ... we'll just jump ship when we get sunk ... let the nanny government take care of the rest.

Perversely, it seems that there is a segment of the Left which salivates at the idea of the above, seeing it as a golden opportunity to sink their unproductive talons into deeper into industry...

... Evidence the panic to bail out the auto industry so it can continue to lose $1,000 on every car it sells; so it can spend multiples more on pensions than on R&D; so it can choose to continue to avoid issues with its products and business models which have existed for the last 30 years.

... Evidence Michael Beschloss (big chicken who donated to Obama only in his wife's name so people wouldn't realize how biased his new books are) on Charlie Rose on the 7th casually dropping lines like:
"Government being involved in the economy in a very draconian way, picking winners and losers... It's Obama's job to explain that ... we're not just doing this as a momentary effort to fix a problem. Maybe this shows us that government should be more involved in the economy than people have expected over the last couple of decades."
Yes, indeed, we'll have to dumb it down and spin it and wrap it in charismatic bullshit for the little people who aren't political hacks ... because saying these things outright obviates their fallacy. History will show them fools.