Thursday, February 26, 2009

Toddler Economics

For years the Parent/Child relationship has been used as a metaphor for the role of government both pro and con. There is a an implicit assumption that the family is a microcosm of socialism. Even the very free market F.A. Hayek believed that we act altruistically or socialistically at the family level. This inspired me to think about my children and how I maintain order at home. I am beginning to see the virtue of running my household more like a free market.

I joined Economist Bryan Caplan’s virtual book club a few weeks ago as he analyzes Murray Rothbard’s “For a New Liberty”. I have also been influenced by my friend Brian Phillips who is an Objectivist a la Ayn Rand.

Both Rothbard and Rand believe that the path to a moral society is to establish clear property rights. I’m not certain about it being moral, but if it helps me achieve my ends, then I’ll use it.

Here are my applications to toddler economics, of which I have two:

The living areas of the house are clearly a case of “Tragedy of the Commons”. That is, no one really “owns” the space so we all abuse the space, especially my boys. Therefore, the common areas must become the property of Mom and Dad. We allow the use of these areas by our boys if they follow our rules.

To encourage them not to abuse the “common areas” we have established a rule of use for the living areas and different rules for their rooms (being their property). Possession and proximity are the rules of temporary ownership for property brought into the living areas. That is, if child A leaves a toy on the couch and is now playing in the kitchen, said toy can become the temporary property of child O on possession. Permanent ownership is still conferred on the child of original ownership. In their rooms, all toys (property) are under their complete and permanent ownership. That is, if child A leaves a toy on his own bed, child O cannot take even temporary possession without explicit permission or compensation from child A. Thus, an incentive is used to maintain toys outside of the living areas.

Another minor rule for individual rooms is the right to exclusion. Child O may prevent child A from entering his room. Child O has the right to exclude child A from taking temporary possession of any property owned by child O within child O’s room.

On the subject of noise. We are all owners of our own bodies, and thus also our ears. If Child A shouts/screams this is a violation of property rights. He has caused me pain without compensation or permission. Therefore, shouting is only allowed outside and within their rooms with the door closed. At night, shouting violates the rights of the other child who is trying to go to sleep. This again is a violation of property rights.

And finally, to running and throwing objects in the house. The objects within the living areas of the house are the possessions of Mom and Dad (mostly Mom). To subject our property to risk of destruction without permission or compensation is a violation of our property rights. Because there is an objective probability that our property may be broken, throwing balls and running in the house are forbidden.

Any other thoughts? It’s actually pretty cool how this is working out.

Wednesday, February 25, 2009

Be Careful Not to Exaggerate

I am a believer in supply-side economics, but sometimes conservatives exaggerate its effects. There’s a little bit of this exaggeration in the criticisms I've read of the new Obama tax plan. Don’t get me wrong, it’s a bad idea and will only lead to less economic growth, but we are not going to plunge into a second recession from it alone.

From what I have read there are three major anti-growth tax changes that Obama wants to implement. First, is a hike in the marginal income tax rate for evil rich people. Not only do higher marginal provide a disincentive to work, but it also leads to less capital accumulation. The rate change, at least proposed, will move the highest marginal rate from 35% to 39.6%. If this were shooting up above 70% like under the Carter administration this would be a major concern. But, as is, it is only a slight negative effect.

Secondly, is the hike in the Capital Gains tax. This is the most moronic of all the tax hikes, as history has shown that cutting them down to 15% actually raised government revenue. This will have a more significant negative effect on capital flow into and out of the United States. However, changes in investment do not lead to immediate changes in the economy. This will be a long-term drag on the economy overall. However, the effects will be more immediate in the stock market.

Lastly, is forcing hedge funds to pay the corporate income tax rate instead of just the capital gains tax rate. Effectively what this says is that if you are an individual who invests one’s own money, you can pay the lower capital gains tax (15% soon to be 20%), but if you and your friends go into together you are now a corporation that needs to pay the higher corporate rate of 35%.

These changes are bad and they will lead to less economic growth, but the results will slowly build over time. If we were more sensitive to the tax competition they have in Europe the effects would be much bigger, but I don't think we are as sensitive to globalization as some would imagine.

Think of supply-side tax cuts this way: It’s like dieting. Cutting out the chips and sodas will lead to weight loss, but don’t expect to wake up the next morning looking like Brad Pitt.

Or the converse: It’s like me in college. I start off 5’11” and 130 lbs. As a carefree freshman, I laugh off suggestions about weight gain as I consume massive quantities of sodas, chips, and rolls of Pillsbury cookie dough. By the end of my sophomore year I’m pushing 175. Tax hikes always catch up to you, but only drastic changes show up quickly.

Tuesday, February 24, 2009

Good Quotes

Scott Grannis at his blog, Calafia Beach Pundit has some insightful quotes from economic thinkers of the past:

J.S. Mill: “Consumption never needs encouragement.”

J.B. Say: “It is the aim of good government to stimulate production, of bad government to stimulate consumption.”

J.S. Mill: “The usual effect of attempts of government to encourage consumption, is merely to prevent savings; that is, to promote unproductive consumption at the expense of reproductive, and to diminish the national wealth by the very means which were intended to increase it.”

F. A. Hayek: "Knowledge in our field is never established by experiment, but can be acquired only by following a rather difficult process of reasoning. No knowledge can be regarded as established once and for all … you have always to convince every generation anew. In fact, knowledge once gained and spread is simply lost and forgotten.”

Note - If you are looking for a blog with really good economic data (in the form of easy to read charts and graphs, of course!) from a free market perspective I recommend Scott's blog. He's pretty easy to read as well.

Monday, February 23, 2009

How To Cure a Leftist

Much to my chagrin, many Americans have become so besotted with pragmatism that the ability to decipher between freedom and socialism has been dulled by an ignorance of principles that would otherwise expose the ugly brutishness that is the logical end of even quaint collectivisms. Of course, there is no cure for an ardent leftist, or an ardent adherent to almost any ideology, much as a Red Sox fan who has tattooed “Yankees Suck” to his chest is beyond repair. The hope lies in inoculating those in the muddled middle whose personal philosophies are a grab bag of cliché’s and just-so’s.

In my attempts to persuade, I have come to realize is that if you present a principle or axiom with which someone cannot break down they will likely adopt it. Mind you, not everyone immediately cleaves from logical contradictions flowing from other assumptions they hold, but it allows a partial conversion. An added convenience is that my experience has been that people are usually open to a conversation about principles in the abstract. Instead of debating with them the most recent political headline, burrowing down to the underlying principles can avoid some hostility due to party allegiances and other sentiments attached to politics.

Another angle is to cast doubt on their assumptions. I have started to listen more intently during discussions to see if they state some imperative or “it is just so” comments. Questioning these comments can be more fruitful towards changing minds.

Don’t be confused that these are easy targets. First, you have to know what these assumptions are to hear them spoken in conversation. Secondly, you have to know how to deconstruct these arguments. And finally, be aware that people can be as passionate about certain principles as they are about politics.

Over the coming weeks I plan to detail some conversations that I have with people who will remain anonymous, but should help shed some light on what I perceive is going on in their heads when they say what they say.

Note – As you read my posts you will eventually notice that I almost never use the term “liberal” when referring to those on the Left. There is little that is liberal about the Left, and I will not confer such an exaggeration to them.

Friday, February 20, 2009

Is America Getting Angry At Obama? Exhibit A

If you haven't seen this rant by Rick Santelli of CNBC, I highly recommend it. In it, he rails against Obama's new housing plan and all the stupidity coming out of the White House. Near the end he recommends a "Chicago Tea Party" in revolt against what the government is doing. The traders in the background of the Chicago Board of Trade are cheering him on.

One man's rant does not make a trend. But, if you look at the poll...

Notice the mere 221,533 responses? Wow!

Three Cheers for Ideology

Seemingly for the American Left, destroying economic freedom is their raison d'etre. As pretext for their invasion of our pocketbooks, they have fabricated weak evidence that allowing "too much" freedom is to blame for our current economic problems. The alleged failures of capitalism are everywhere.

One problem: The minor exception of Texas.

Ah Texas, without a single Democrat holding a statewide office in over a decade. Texas, with a Republican majority in both houses of the legislature. Texas, with 9 of 9 Republican state Supreme Court justices. Texas, with no income tax. Texas, with light regulation and lightly planned cities. Where else in America could the economic failures of free market ideology be on greater display?

Only Texas doesn't seem to cooperate with the presuppositions of Obama's new statism. I have written about the massive budget surplus here. I have written about Texas' FALLING home foreclosure rate here and here. And how Texas has the 2nd most free economy in the U.S. here.

Today, Tory Gattis at his blog HoustonStrategies links to an article here, and a list here, that demonstrates the results of free market ideology in Texas.

The first, is an article at EcoHome Magazine that lists the 15 healthiest housing markets in the United States:

1. Houston, TX
2. Austin, TX
3. Fort Worth, TX
4. San Antonio, TX
5. Dallas, TX

Wow, Texas takes the Gold, Silver, Bronze, Honorable Mention and the Participant ribbons. Surely light land regulation had nothing to do with this at all!

The second link is a list of #1 rankings given by various publications for Houston and Texas.
Some selections are below.


Best City to Live, Work and Play Kiplinger's Personal Finance — July 2008
Best U.S. City to Earn a Living — August 18, 2008
Best City for Recent College Grads — June 26, 2008
Fastest Job Growth (11/07 to 11/08) U.S. Bureau of Labor Statistics, Metropolitan Area Employment and Unemployment – January 4, 2009
Lowest Cost of Living Among Major Metro Areas ACCRA Cost of Living Index — Second Quarter 2008
Largest IT Service Economy Onforce, Inc. (VoIP Monitor) – December 5, 2008
Top U.S. Manufacturing Cities Manufacturers' News Inc. (as reported in the Houston Business Journal) — May 30, 2008


America's Top State for Business — July 2008
Most Favorable Business Climate in the Nation Development Counsellors International (DCI) — "Winning Strategies in Economic Development Marketing" — July 2008
Best State To Do Business Chief Executive Magazine — January 2008
[Most] Fortune 500 Headquarters Fortune Magazine - April 2008
U.S.'s Top Exporting State WISERTrade — February 2008

I'm sure this is all coincidence and probably due to some evil conspiracy by George W. Bush, but I'm willing to wager (literally) that Texas' unemployment rate will be lower than in California and New York for at least the next two years.

Thursday, February 19, 2009

Who Didn't See Inflation Coming?

Clearly Martin should have been reading my blog.

From Yahoo News and the AP:

Wholesale inflation takes biggest jump in 6 months

Martin Crutsinger, AP Economics Writer
Thursday February 19, 2009, 8:53 am EST

WASHINGTON (AP) -- Inflation at the wholesale level surged unexpectedly in January, reflecting sharply higher prices for gasoline and other energy products.

Wednesday, February 18, 2009

Some States Are Getting Screwed - An Update

Marginal Revolution posted the graphic below in this post.

If you recall, I blogged on the noticable fact that states with low unemployment rates seemed to be getting more stimulus spending. I picked out the most egregious examples. Alex Tabarrok plotted all of the states. As you can see from the scatterplot below, there is a negative correlation between unemployment rates and per capita infrastructure spending in the stimulus. That is, states with low unemployment are, on average, getting more money than states with higher unemployment.

I guess those kinds of mistakes happen when our illustrious President screams that the sky is falling as his party passes the largest increase in spending in the history of the world be damned a proper review.

Tuesday, February 17, 2009

The Liquidity Trap, I’m a Believer

Paul Krugman, the influential Sith Lord columnist has finally convinced me that America is indeed in a Liquidity Trap. However, I have to add a few tweaks and variables to his thinking.

The traditional “Liquidity Trap” is as follows: Financial meltdown scares the public into saving money and not spending. Aggregate demand then falls, lowering prices. Companies begin to shed workers because of this fall in demand. More unemployed people spend less and discourage other consumers even more. Aggregate demand then falls, lowering prices. The cycle repeats.

Here is my “Liquidity Trap” as follows: Financial meltdown scares the public into saving money and not spending. The government does something reckless and foolish like a bank bailout, hurting future expectations of economic growth and recovery, which kills stock prices. Aggregate demand then falls, lowering prices. Aggregate demand begins to recover, and then the government does something reckless and foolish like a stimulus. Stocks fall, demand drops, inflation retreats. Recovery begins and then the government does something reckless and foolish like announcing a vague new bailout plan. Stocks fall, demand drops, inflation retreats.

Here’s the cycle more clearly in 6 easy steps:

1. Bank panic
2. Stocks crash
3. Government Panics and Screws Things Up
4. Stocks tank again, treasuries surge, inflation falls
5. Stocks begin to recover, treasuries decline, inflation starts to pick up
6. Return to step 3.

I had believed massive inflation was inevitable because the Federal Reserve is cranking out the dough like Pillsbury, but apparently, all the government has to do is slowly but surely destroy the economy to head this off. It's amazing how closely the data fits my new model. Hopefully Obama’s cabinet doesn’t run out of bad ideas anytime soon, or we’re all screwed.

Thursday, February 12, 2009

Book Review - The Fatal Conceit

The Fatal Conceit is one of Friedrich Hayek's most famous works, and after finally sitting down over the last few days and reading it with deliberation I see why it is so acclaimed. This book is phenomenal. I have read The Road to Serfdom and it was good, but it pales in comparison to The Fatal Conceit.

My impression had always been that in this book he laid out the case why the market, as an information gathering mechanism, is vastly superior to socialism and government planning of any stripe. This book, however, goes much further than that. It hacks away at the very philosophical roots of socialism and much of today's "Liberal" viewpoint. Revealing it to be a juvenile rebellion against human progress itself and a recidivist cycle of ignorance. After reading chapter 5, I literally put the book down and said, "Wow!" I was in awe of this man's brilliance.

A few pieces of advice on this book. First, this is not a beginner's guide to economics. I could not have appreciated the depth of this book without a basic understanding of philosophy, economics, and economic history. Not to say that it is out of the reach of a reasonably intelligent person, but you may have to reference Wikipedia about 100 times. Second, most books can usually give all you really need to know in the opening chapter, with the rest of the book being filled with back up material that reiterates the main point. This, for me, was not one of those kinds of books. Start reading on page one, and do not skip anything until at least chapter 6, as he purposefully builds his case. Overall, the book is pretty short, so it's a relatively quick read even though it often requires some thought.

This is also a book to be owned, and not just read. My copy is now filled with notes, underlines, and flagged corners. Go to Amazon. Buy this book.

Tuesday, February 10, 2009

Vincent Benard Writes the Complete Story on the Credit Crisis

For months now I have witnessed various economists lay out their version of the housing collapse and financial crisis. For whatever reason, none seemed to be able to wrap their heads around all of the pieces that I was seeing.

However, my friend Vincent Benard, a French economist and President of the "Institut Hayek", has now done that, and this time it is in English! Link here.

A general outline:

Ignition - Fannie Mae and Freddie Mac*, Fed Reserve's Low Interest Rates**
Amplification - Land Use Regulations
Propagation - Federal Reserve system encourages banks to be highly leveraged, Derivatives were poorly priced and risk misunderstood
Punchline - "Big Government is the culprit"

* - Vincent sent me some links after I poo-pooed Fannie and Freddie here. I have since softened my stance and believe that the two government subsidized organizations have more influence than my previous impressions.
** - I railed against this theory here, but again I have softened my stance (without writing about it) that it does have a significant impact, it is just not a primary cause.

Monday, February 9, 2009

Call for a Balanced Budget Amendment

Remember back in those halcyon days of 1995 when the Newt Gingrich and the Republicans were pushing for a Balanced Budget Amendment to the Constitution along with their Contract with America? Oh for those days.

A new cry for a balanced budget amendment needs to be on the lips of all who value economic freedom and loath its current erosion. This should be the central tenet to Republican efforts for 2010. By then, the deleterious effects of the $800+ Billion “stimulus”, and other extravagances, will be on full and naked display. The American people should never again be used as human experiments for economic theories of such grand scale that have so little empirical evidence.

This experimentation gathers its support through demagoguery alone, because the ideas of Keynes are far too arcane for the average voter to understand. This experimentation by our President abuses the trust of his own supporters by wagering such enormous sums on a dogmatic gamble. If it fails, the massive increase in debt will threaten the creditworthiness of the United States; a frightening scenario our economy has never had to face before. Few times, if ever, before has such reckless abandonment of deliberation and reason been eschewed for hand waving and threadbare excuses. Risking the entire economy on a moment of political expediency must never be repeated.

A Balanced Budget Amendment will force Congress and future Presidents to make tradeoffs in their priorities. Either they raise spending AND taxes, or they cut taxes AND spending. As demonstrated so clearly during the administration of George W. Bush, tax cuts with deficits do not lead to spending cuts. The old arguments against this amendment fail. With the sole exception of declared war, all future governments must be prevented from passing off financial responsibility to future generations.

Any candidate who espouses such an Amendment will have my vote and the support of this blog.

Saturday, February 7, 2009

Robert Barro Slams Paul Krugman and His Stimulus

I happened to see this interview of Robert Barro, linked by

[Atlantic blog:] Do you read Paul Krugman's blog?

[Barro:] Just when he writes nasty individual comments that people forward.

Oh, well he wrote a series of posts saying he thought the World War II spending evidence was not good, for a variety of reasons, but I guess...

He said elsewhere that it was good and that it was what got us out of the depression. He just says whatever is convenient for his political argument. He doesn't behave like an economist. And the guy has never done any work in Keynesian macroeconomics, which I actually did. He has never even done any work on that. His work is in trade stuff. He did excellent work, but it has nothing to do with what he's writing about.

I'm not in a position to...

No, of course not.

I'm not in a position to know things like the degree to which Paul Krugman counts as a relevant expert on new Keynesian economics.

He hasn't done any work on that.

Robert Barro, who's credentials I mentioned here, is revealing that the President of the United States, Barack Obama, is being led around by the nose by an economist who has no professional experience examining the proper role of economic stimulus.

Friday, February 6, 2009

Inflation is Coming

Contrary to what the Keynesians and their marionette in the White House believe, there is no liquidity trap and there is no threat of long-term deflation.

George Melloan has an op-ed in the Wall Street Journal (HT: EPJ) with the following excerpts:

Why 'Stimulus' Will Mean Inflation

In a global downturn the Fed will have to print money to meet our obligations.

So what is the outlook? The stimulus package is rolling through Congress like an express train packed with goodies, so an enormous deficit seems to be a given. Entitlements will go up instead of being brought under better control, auguring big future deficits. Where will the Treasury find all those trillions in a depressed world economy?

There is only one answer. The Obama administration and Congress will call on Ben Bernanke at the Fed to demand that he create more dollars -- lots and lots of them. The Fed already is talking of buying longer-term Treasurys to support the market, so it will be more of the same -- much more.

And what will be the result? Well, the product of this sort of thing is called inflation. The Fed's outpouring of dollar liquidity after the September crash replaced the liquidity lost by the financial sector and has so far caused no significant uptick in consumer prices. But the worry lies in what will happen next.

Even when the economy and the securities markets are sluggish, the Fed's financing of big federal deficits can be inflationary. We learned that in the late 1970s, when the Fed's deficit financing sent the CPI up to an annual rate of almost 15%. That confounded the Keynesian theorists who believed then, as now, that federal spending "stimulus" would restore economic health.

Adding to this analysis is recent data. Ten year Treasury rates are rebounding rapidly. From around 2% up to almost 3% in 6 weeks. The long term inflation outlook priced into the 5yr treasury/TIPS spread reveals that inflation expectations by the market have risen from almost -1% to +0.37% (at time of publish), again in about 6 weeks. Oil prices are slowly rising from low 30’s to low 40’s. Gold prices are rising as well.

Many have made a big deal about the astonishing growth in the money supply, but this has been offset by growing excess reserves held by banks. The banks were hoarding cash and not lending. However, the bi-weekly reports from the Fed show that excess reserves fell a little bit, meaning more of that massive money supply is getting into the market.

While rapid inflation isn't a sure thing from the data, I see nothing in the markets right now that predicts anything but growing doubts about deflation.

Thursday, February 5, 2009

Glenn Beck - Best Political Rant in Years

This video was linked by Drudgereport, so many of you might have seen it. It is easily the funniest political rant I have seen in a long time, if not ever. Nothing warms that heart more than seeing Barack Obama's agenda correctly called Socialist.

Wednesday, February 4, 2009

Mexico Converting to English

Surprisingly, the contents of this article from the Houston Chronicle did not make much news in the United States as far as I could tell.

Mexico launches effort to teach its students English

CIUDAD VICTORIA, Mexico — With its economy increasingly hitched to the United States, Mexico’s government has launched an ambitious plan to teach English to every schoolchild, even those in kindergarten.

Given that one of the common complaints iterated by anti-immigration adherents is that Mexican immigrants can't speak English and don't even try, this should be an interesting development. Does this pressure the U.S. to be bilingual as well, or does it take pressure off, now that our largest neighbor is determined to make English speaking skills more common?

Sunday, February 1, 2009

Silly Socialists, Capitalism Spreads the Wealth Around

It is often, and incorrectly, believed that capitalism inevitably leads to the accumulation of wealth in the grip of a handful at the great expense of the masses. Nothing could be further from the truth. It is capitalism that abuses the businessman by forcing him to share the fruits of his labor before he can enjoy them himself. The common man benefits from the talents, genius, and/or obsession of the rich capitalist. The rest of us should not envy, discourage, or hinder them, but cajole them to further abdicate leisure so that we can enjoy the benefits.

Let me explain how this is so…

Imagine an island with three inhabitants. Abram lives on the east coast and produces ice cream. He is industrious and driven to expand his wealth and production. Bob lives in the heart of the island, raises cattle, and produces steaks. Bob likes to play cowboy and has little interest in expanding production. Craig lives on the west coast as a vegetarian. He produces tofu burgers, and he too has little desire to expand output, and would rather do yoga.

In recent weeks, Abram produces 10 pints of ice cream every five days, but has grown to dislike the ice cream he produces. Bob produces 10 steaks and Craig produces 10 tofu burgers in the same 5 days. Abram trades with Bob 5 pints for 5 steaks. Abram trades Craig 5 pints for 5 tofu burgers. Bob likes to eat ice cream for lunch and a steak for dinner. Craig likes to eat a tofu burger for lunch and ice cream for dinner.

Now Abram wants to increase his wealth and has been focusing his thoughts on expanding production. Finally one day, the answer strikes him and he is able to increase his ice cream production to 14 pints of ice cream every five days.

Still not liking ice cream, Abram goes to Bob and asks to trade him 7 pints of ice cream for 7 steaks. Bob declines. He says, “I like having ice cream AND steak every day. So, I’ll just take my usual 5 thank you.” Abram goes to Craig and offers to trade him 7 pints of ice cream for 7 tofu burgers. Craig, too, declines. He says, “I like having ice cream AND burgers every day.”

Undaunted, Abram goes back to Bob and offers him a new deal. He says, “I will trade you 7 pints for just 6 steaks. Now you can have more food than you had before.” Bob now realizes that he can have ice cream for lunch, dinner, AND breakfast once every 5 days. Bob happily agrees to the trade. Abram makes the same offer to Craig and he accepts as well. Because Bob and Craig have a diminishing marginal utility of ice cream, Abram must lower the price of ice cream to match his new supply to the quantity demanded.

Abram now enjoys 6 steaks and 6 tofu burgers, so he is clearly better off, but it is a smaller increase in consumption than his increase in production. For Abram to increase his own consumption of the things he likes but does not produce, he must increase the consumption of his fellow islanders. Bob and Craig add nothing, but still enjoy the benefits. Capitalism, it seems, “spreads the wealth around”.

So, to all of those 70 hour week, no vacation, divorced three times, stress medication, corporate titans, I say “Keep up the good work”, my free lunch is depending on you.