Commentary From the Mile High City

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Joshua Sharf

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March 12, 2009

Jobless Rise Mirrors 2001

The Denver Post, in its report on the rise in Colorado's jobless rate, posted the following chart of the state's unemployment rate for the last 21 years:

Now look at the rise during the 2000-2001 recession. The curve just about mirrors this one. And yet, it topped out fairly shortly thereafter. I know these situations aren't identical, and that we now face some threats that we didn't before. But I remember the moment, I remember looking for work for several months in the summer of 2001, and I remember the sense that things were going south in a hurry.

Just remember, things can turn around just as quickly. No wonder they're in a hurry to "fundamentally transform" the country. In another few months, the crisis might not be there for them to waste.

March 6, 2009

Kudlow for Congress? - II

Civil Sense, he of the Colorado Index, doesn't like my dissing of CNBC business anchor Larry Kudlow, who's reportedly thinking of challenging Sen. Chris Dodd (D-Countrywide) in 2010.

First, while Kudlow may have used cocaine in the past, that is not an automatic disqualification for public office. Even President Obama admitted to using "a little blow" before.

Second, while Kudlow did not see the sky falling one year prior to the financial crisis, very few did. That said, he is not corrupt, unlike Sen. Dodd, so that would be an immediate improvement.

Third, because he is a broadcaster, he can communicate. After all, President Reagan was a baseball broadcaster early in his career. The Republicans have too many politicians who are philosophically correct yet cannot connect with the public e.g. Bobby Jindal. A trained broadcaster with a firm grasp of market economics may work wonders in educating the public and the fiscally illiterate members of the Senate.

I never said that prior cocaine use was a disqualifier. In fact, I pretty much went out of my way to avoid saying that. But these things are always held more against Republicans than Democrats, and you can be sure that it'll be used to color Kudlow out of the box.

Civ Sense nails Kudlow's biggest advantages: 1) he's not corrupt like Dodd, and 2) he can communicate business and economics on TV. How well that style translates to campaign speeches is as yet unknown. Giving interviews is very different from conducting them. And please, can we declare a moratorium on Reagan comparisons? Calling Reagan a sportscaster is like calling Eisenhower a football player. By the time he ran for governor of California, he was a little more than that.

(Sense's cutting Jindal is a little bizarre; given that he's actually been elected Governor of Louisiana, he clearly connected with over half the voters there; it's not as though the irresistible Louisiana Republican Machine put him in office.)

As for the tsunami, in fact, the Street was worried about this as far back as '06. I clearly remember sitting in meetings at the brokerage with our senior analyst and head trader remarking on the fragility of the mortgage credit market, and that these derivative had spread the risk around to the point where nobody knew who held what. Search Kudlow's columns for any unease in 2006 on that score.

Kudlow's in the position of a bridge player who's got almost all the high cards in one suit, and nothing in anything else. If the debate moves to something other than finance, he's screwed. If he can be shown not to be 200 times brighter than Dodd in that one suit, he's equally screwed. As late as December 2007, Kudlow was claiming that a few interest rate tweaks here and there, along with moving poor mortgage-holders into FHA loans, would be enough to right the ship with little pain. Not a great move for someone who's selling his deep understanding of money and markets.

Dodd may well be damaged enough goods that he can be taken in a Democrat state. I'm just not enthusiastic about Larry Kudlow as the man to do it.

March 5, 2009

Kudlow for Congress?

Even for Senate. Hot Air is reporting that Larry Kudlow is taking a long, hard look at running for the seat of hopelessly corrupt Connecticut Senator Chris Dodd.

I wish I were as thrilled about this idea as they are. I've never been a huge Kudlow-as-TV-talking-head fan, and I'm even less of a Kudlow-as-Senate-candidate fan.

First, while the Republicans may want the 2010 election to be about economics and finances, there's no guarantee that will happen. I'm not certain he's going to be interested in or capable of discussing those issues.

Second, the man's had a serious coke problem in the past. Not the diet sodas in aluminum cans that are starting to catch up with me. No, the little white powdery stuff. This isn't a secret and it's not all that recent. But to someone who's never heard it before it's as recent as today's left-wing echo-chamber headline. Does it really matter? Probably not, and my bringing it up may not be fair. But who would you rather have vetting our candidates? Ourselves or the Democrats?

Finally, Kudlow's prowess as an economics-and-business analyst leaves a lot to be desired. I've always thought he was more cheerleader than quarterback. As late as Summer 2007 he was on Hugh Hewitt's show, plugging the economy as the "Greatest Story Never Told," and predicting that the good times would keep on toinin'. He didn't see the iceberg coming any better than Dodd did.

Nah, we ought to be able to do better than this, and we ought to know not to fall in love with media stars.

February 22, 2009

Nice Little Bank You Got There

Initially, I was in favor of the TARP. I believed it was necessary and useful to buy up distressed assets quickly, and provide reassurance to bank shareholders and managers. I still believe that had that been done, we could have avoided what we seem to be headed for - a replay at some level of 1930-31, with all its economic and financial uncertainty, with the Fed doing the right things, and the rest of the government making the same mistakes, that dwarf the Fed's ability to respond.

Let's just say that isn't how things have turned out. Instead, we've gotten an object lesson in what happens when you go into business with the government.

What happens is that the government may hold some of the shares, but it holds all of the cards. The government receives shares and/or preferred stock for its investment - often non entirely voluntary on the part of the banks. And then it proceeds to behave as though it were the only shareholder.

Executive pay is only the most obvious example. The Mugging of Bank of America, forcing it to swallow Merrill at its original price, is another:

In other words, the feds believe that the way to calm financial markets is to force the nation's largest, and a heretofore healthy, bank to swallow toxic assets it didn't want. In return, yesterday the Treasury agreed to invest $20 billion in BofA, for which the government will receive preferred shares paying 8%. Treasury, the FDIC and the Fed will also partially insure $118 billion in troubled assets -- mostly Merrill's. In return for this downside protection, BofA will have to render unto Caesar another $4 billion of preferred stock plus warrants.

These preferreds will also pay 8%, but private shareholders are not so fortunate. The agreement limits quarterly common stock dividends to a penny a share.

Other healthy banks, state and regional banks who weren't in trouble to begin with, were, ah, encouraged to take money they probably didn't need, money that's turning out to be expensive in more ways than one:

Bankers' Bank of the West

At year-end 2008, Bankers' Bank of the West had a risk-based capital ratio of 12.4 percent, high enough to be considered very well capitalized.


The bank issued the government preferred stock that pays 5 percent interest, plus another batch of preferred stock, equal to 5 percent of the amount requested, that pays 9 percent.


"It's extremely expensive capital, but we did this as a good-faith investment for our banks," Mitchell said. "The government will do very well on this program."

So the bank is over-paying for capital it doesn't need and can't invest, setting up trouble down the line. Thanks, Uncle Sam.

First Western

"For a growth company like us to raise new equity, people are looking for 15 percent to 20 percent returns over time," Wylie said. "To get preferred stock from this program is an inexpensive form of capital."

First Western's assets nearly doubled in 2008 to about $450 million. At the same time, its capital ratio was above 10 percent, Wylie said.

"We were encouraged by the regulators to do it, so we asked our investment bankers and lawyers whether we should take it because of the possible stigma," Wylie said. "They said, 'You're already a kind of partner with government because you're highly regulated.' (emphasis added -ed.)

All banks are highly regulated. That doesn't mean they're in business with the government. This is also an admission that there aren't enough high-growth areas to invest in right now, and not for the foreseeable future, either. If you could get 15-20% in this environment, wouldn't you invest in these guys? Of course you would.

CoBiz Financial

CoBiz Financial, the parent company of Colorado Business Bank, struck a deal with the Treasury in November. For its $64.5 million, it issued preferred stock to the government that pays 5 percent for the first five years and 9 percent after. Because the bank has publicly traded stock, it also had to give the Treasury warrants to purchase 895,968 shares of CoBiz common stock at an exercise price of $10.79 per share.


By the end of the third quarter, before the provision, Colorado Business Bank still had a risk- based capital ratio above 12 percent. It was 14.5 percent at Dec. 31.

"The thought was we would take advantage of (TARP) and shore up our capital base," said CoBiz CEO Lyne Andrich.

"In this environment, more capital is always better than less. We're going to use it for growth. We believe this environment creates a lot of opportunities for acquisitions, but we didn't take the capital primarily for that purpose."

Again, if growth opportunities were out there, the bank was well-enough capitalized to lend as it was. If they aren't, they're shoving government money at questionable investments. And if acquisitions are the best way to grow, that in and of itself will provide a better home for those banks' assets.

There are a lot of reasons why bank nationalization is scary. And right now, we seem to be getting them all, even without the nationalization.

February 18, 2009

Economic Sanity On The Hill, To A Point

The House Business Affairs and Labor Committee just voted to kill HB 1208, which would have proposed a state-wide Davis-Bacon prevailing wage rule on all state construction projects. While the bill was killed, 7-4, some of the reasons given for voting against it weren't encouraging. Rep Rice voted against, but prefers carrot to sticks. One would think that winning a contract would be enough of a carrot. He also equated this bill several times with TABOR and the 6% rule as "government by formula." So this doesn't necessarily mean enlightenment on the part of the committee Chairman.

It was also noted by the representative of small business that the bill would disproportionately affect minority workers. That was, of course, the implicit reason for the initial Davis-Bacon Act, pushed by white unions to exclude black workers from the work force. For some reason, Rep. Soper was unable or unwilling to distinguish between minority ownership and minority workers. There is, in fact, no reason the party and its candidates shouldn't make minority workers in Denver well aware of the affects of this legislation, and of which party tends to support it.

February 17, 2009

Live From The Pork Roast

The RMA will be hosting a special edition of Blog Talk Radio today at noon, Mountain Time, with me in the studio, and Randy Ketner, of both Night Twister and Red County, calling in on remote from the State Capitol.  The Independence Institute and the Colorado Republican Party are sponsoring a Pork Roast there, in honor of President Obama's signing the Stimulus Pork Bill here in Denver this afternoon.

Listen Live as we make our feelings about this Federal power grab known!

UPDATE: Well, that was an experience.  Nothing like doing a remote on a windy day without a microphone muffler.  Try again this evening as we rehash the day's events, and talk politics and economics with Chris Maj of the Colorado Constitutional Republicans, a group spawned by the candidacy of Ron Paul

February 12, 2009

He's Here to Stimulate You

It's like that old Saturday Night Live sketch making fun of Collyfornia's current governor, "Hans and Franz." He's Barack Obama, and he's here to!

Never mind that the CEO of Caterpillar doesn't think he'll be stimulated for some time to come.

According to the Wall Street Journal, the compromise bill is, as is often the case with Washington compromises, worse than either bill that went in:

The latest version of the economic-stimulus package is expected to provide less near-term support for the economy and make it less likely that the economy will pull itself out of recession before late this year.

The $789.5 billion deal, reached by House and Senate negotiators Wednesday, indicates the Obama administration was willing to reduce its goal of creating or saving four million jobs. The new plan pares some aid to state and local governments that was aimed at preventing job cuts and reduces tax breaks for workers that were intended to spur quick spending.

Reducing the payroll-tax cut for workers by about 20% -- to $400 per individual or $800 per family -- also diminishes another element that was expected to help the economy in the first half of this year.

Of course, we'll have to take Mr. Reddy's word for it, since the Democrats have already gone back on their promise to make the bill public and available online before they vote on it.

With each iteration, it becomes clearer that this isn't a "stimulus" bill in any meaningful sense, even if such a bill were possible in any meaningful sense. Larger and larger portions of the spending take place in the out years, where they have no stimulative effect. They do, however, manage to achieve through spending many of the Democrats' fondest wishes without serious debate or scrutiny.

Remember that this Big Blue Boulder of a Bill is only possible because our filibuster depends on Arlen Specter, Susan Collins, and Olympia Snowe. And that's only because of the sterling representation of Liddy Dole, Ted Stevens, and John Sununu.

February 1, 2009

AP Warns GOP Against "Risky" Opposition to Debt

Opposition to excessive debt as "analyzed" by the AP:

Analysis: GOP gambles in opposing Obama stimulus


AP White House Correspondent Jennifer Loven contributed to this report.

At least two of these folks come with a history. Charles Babington, when at the Washington Post, and Jennifer Loven, in her current position as Democratic flack for the AP, each have a history of writing briefs for the current Democratic position disguised as news reporting or analysis, with Loven having trouble interpreting polls correctly.

WASHINGTON (AP) Eight days after Barack Obama took office as a "change" president, House Republicans have made a huge political gamble that could set the tone for the next election cycle.

In unanimously opposing the massive spending bill that Obama says is crucial to reviving the economy, they signaled they are not cowed by his November win or his calls for a new era of bipartisanship. Obama's popularity will slacken, they say, and even if it doesn't voters will reward a party that makes principled stands for restrained spending and bigger tax cuts.

As usual, "bipartisanship" for Democrats means, "do it our way." The cuts to the package were trivial, the remainder a wish-list of payoffs, new permanent spending, and disguised protectionism.

Democratic officials think Republicans are misreading Americans' hunger for action. And if they are right, the GOP could face a third round of election setbacks next year.

Ah, "Democratic officials" believe there's a Republican gamble, therefore there is one. No possibility that the gamble is on the Democrats' side instead.

The rest of the article is essentially a Democratic press release, repeating claims that the Republicans are rooting for a weaker economy, and that tax cuts for people who don't pay income taxes are actually offset against payroll taxes. Remarkable that when the Democratic party spent 2006-2007 talking about, "the worst economy since the Great Depression," and actively undercutting the war effort in Iraq, the AP never found time to accuse them of rooting against their country's economy or military.

The House vote makes it easier for Democrats to portray the entire Republican Party as a do-nothing, head-in-the-sand group, though GOP officials call that unfair.
It certainly will make it easier for the AP to portray the GOP that way, as only GOP officials will call it unfair.
Both parties point to polls that they say show support for their respective viewpoints. White House chief of Staff Rahm Emanuel told House Republican moderates this week that surveys find about 80 percent support for the stimulus legislation.

House GOP leaders, meanwhile, cited a poll Thursday in which most respondents said the stimulus bill is too expensive. It also found, they said, that 71 percent think it's unfair to give refund checks to people who do not pay federal income taxes.

I don't believe published polls supporting Emanuel's position exist, and the AP doesn't cite any; Gallup has a slim 53% majority supporting the bill, while Rasmussen has the bill supported by 42-39. And while the Gallup poll has independents supporting it 46-40, Rasmussen has them opposing it 50-27. The AP reports no numbers for the Republican claims, and instead focuses on the unfairness of tax cuts.

In reality, the political decision here is easy to make. As Powerline pointed out, if the package is seen to be successful, the Democrats will get credit regardless of how the Republicans vote. If the package is seen not to have helped, then Republicans who vote for it will once again have forfeited a chance to distinguish themselves from Democrats.

In the world of the AP, only Republicans always take political risks by acting on principle.

January 29, 2009

"Worker Retention"

That's the term for a recession-induced, recession-prolonging piece of extended patronage being considered by the power-conscious but economically illiterate Denver City Council.

According to the Denver Post, the City Council is considering enacting so-called "worker retention" laws for city contracts:

Now Nevitt and eight other members of the 13-member City Council say they want to extend "worker retention" for all service contracts for the city and airport.

Firing workers just because a new contractor comes on the scene is "both inefficient from an operational perspective, expensive from a budget perspective and cruel from a personnel perspective," Nevitt said.

Oh-for-three. There's no particular reason to think it's inefficient operationally: if the duties performed are routine, the new, winning bid may in fact derive from operational efficiencies. It's less expensive by definition, as the winning bid by a new company must be, by definition, lower than the incumbent's bid. As while nobody wants to see anyone else lose his job, where's the kindness in leaving the winner's employees on unemployment?

It's perfect reasonable for people to seek security in this economy. You think I'm not worried about my job, too? But pressure to keep wages high was one of the chief factors in the New Deal's prolonging of the Depression, and this bill would do nothing if not keep wages artificially high.

Finally, this basically extends permanent job security from direct city employees to city contractors, in effect creating an entirely new patronage class dependent on the largess of city budgets.

January 5, 2009

Free Us To Spend More

Tucked away in Friday's Denver Post was this little plea for flexibility from the state college presidents:

Several prominent college leaders want lawmakers to step aside and allow them to raise the price of tuition as they see fit -- especially with severe state budget cuts looming.

University of Colorado president Bruce Benson -- with presidents at other schools lining up behind him -- is urging the legislature to loosen regulations that public colleges and universities have to abide by in doing business every day.

Benson believes the schools could save money and time if they could make decisions for themselves and not have to run everything through the loop of the legislature and the state Department of Higher Education.

I'm sure they could save time, but saving money doesn't seem to be much on their minds. In fact, the one thing you almost never see is any questioning or examination of how colleges are spending their money.

Note that this is the same set of college presidents who ran as from the plague from a suggestion that they get exactly that flexibility in return for forgoing state support altogether. Translation: keep funding us, but relinquish any control or right to question how we spend or what we charge.

Yeah, that's going to go over well in a recession.

The single best description of the big business that colleges have become is still, "Higher Ed, Inc.," by James B. Twitchell, published almost four years ago.

We'll be interviewing CU Regent Tom Lucero, who's already announced he's running for CD-4 in two years, tomorrow evening on our Blog Talk Radio show, and you can bet that funding and spending at our state's universities will feature prominently.

December 26, 2008

The Other Car Industry

The Japanese one, that is, both here and in Japan. As Japanese auto purchases plummet, Japanese car companies are ratcheting down domestic production.

Production of passenger cars in Japan decreased 20.3 percent in November from the previous year to 737,797 vehicles, while production of trucks here declined 20.9 percent for the month to 106,170.


Auto executives have expressed dismay at the fall in Japanese sales, which have worsened in the last two months.

Japanese plants are being idled to reduce production, and thousands of assembly line workers have lost their jobs in recent weeks.

In the meantime, Japanese companies are also cutting production at their array of plants here in the US, but so far have only cut contract and part-time workers. Despite cuts in Ohio, Indiana and Alabama production, Honda is avoiding layoff. Toyota has avoided them so far, but may be forced into cutting North American workers.

What does this mean? Mostly that American auto workers aren't competing with Japanese workers any more, but with each other. The Japanese labor market is driven by Japanese demand, and the American labor market is being driven by American auto demand. These plants were originally put here to meet domestic US demand, and that's what they're doing.

Secondly, Japanese multinationals are no more loyal to Tokyo than US-based multinationals are loyal to the US. Otherwise, these Japanese companies would be cutting US employment in order to keep their Japanese workers employed, exporting cars to the US.

Finally, beware a currency collapse. Should the dollar decline precipitously against the Yen, and 14% is not precipitous, even operations that are making money here in the US could be endangered. All those dollars that Honda is making only help the parent company if they can be profitably shifted to other markets or other facilities. Otherwise, they're only good here in the US. If those dollars won't buy enough Yen, or Bhat, or whatever, to finance improvements elsewhere, their value to Honda HQ is greatly diminished.

December 21, 2008

Colorado Tuition Rises - No Focus on Spending

So, once again, students in the Colorado university system and their parents will be asked to pay more for tuition.  The Rocky slips this university talking point into its report:

Low state funding has driven heavy tuition increases every year since the beginning of the decade.

Of course, how the money's being spent escapes all attention. Good luck figuring out how much it takes to educate a 4-year student at CU; the university's allegedly been trying for years to figure that out, and still can't provide a number.

The fact is that universities themselves are increasingly perceived as irrelevant, even as their degrees become an ever-more important entry ticket to the professions. It's the price they're now paying for having assumed their importance for so many years, rather than having earned it.

November 21, 2008

Culture Clash

Politicians don't understand businessmen. And businessmen don't understand politicians. Each certainly fails to understand the game that the other is playing, and why they're playing it. It results in consistently unequal negotiations, where one side ends up getting scalped by the other.

Businessmen are in it to make money, but the entrepreneurs are also in it to build, to create, to do cool things. Politicians are in it to help people, but they're also in it to control, to exercise power, to dispense favors. For most of history, politicians had the upper hand, because wealth was tied up with the crown and with aristocracy, which was tied up with the government. Only in very rare instances - fleetinglly in industrializing England and France, and more durably in 19th and early 20th century America - was business able to run its own show.

It depends on whose turf they're playing on. Earlier this year, the academics and bureaucrats over at the Fed got snookered into heavily subsidizing JP Morgan's buyout of Bear Stearns. Morgan had to put up $1 billion, in return for which the Fed bought $26 billion or so of bad debt. The pressure was on, a deal had to be reached, we were told, and the government gave in.

Similarly here in Denver, aviation moguls have repeatedly played the Denver and Colorado governments over DIA. United Airlines got preferential treatment concerning gates, which prevented the expansion of Frontier and kept UA on life support, all the while shutting out new competition like Southwest and keeping fares high and choice low for Denver flyers. Later, Boeing led the governor and the mayor on a merry chase, playing them off against Chicago and Dallas for the right to host their new headquarters. And let's not even get started about Coors Field and Mile High II.

But it works the other way, too, and historically, it's been far more common. We got to build DIA, but the concession stands had minority and women set-asides. For some reason - can't for the life of me figure out how - Wilma Webb ended up with one of those set-asides.

And now, the Big 2.5 were on Capitol Hill rattling their tin cups, asking for our money to stay afloat. The price of this was to be a government oversight board of some kind. They they can't run a railroad, they seem to have problems running a bank, they sure as hell can't run a school system, they gave up trying to run the airlines, but they want an oversight board for auto manufacturers.

Then there are the health insurers who seem willing to sign the death warrant for their own industry:

Wall Street Journal: On Wednesday, the insurance industry's Washington trade group issued a statement saying it could accept new rules requiring companies to cover sick people, as well as healthy ones, as long as all Americans were required to have insurance, with subsidies for those who need them. The declaration by America's Health Insurance Plans is a switch from the industry's long-time opposition to rules that bar the common practice of weeding out customers who are likely to rack up too many bills.


National Review: Still, [Daschle] is unlikely to abandon the contention that decisions regarding what should or should not be available as a universal benefit to all Americans should be decided by an independent body of experts and wise men, not the marketplace or the political process. A powerful, unaccountable über-regulator of health care would be exactly what proponents of market-based health care dread.

Having demonized insurers for making money on their product, the government would simply rig the rules so that its "non-profit" share of the health insurance market steadily grew.

There's a chilling line from Atlas Shrugged, where the increasingly meddlesome bureaucrats tell the Midshipmen of Industry, "You wouldn't want us to tell you how to run your businesses now, would you?"


Progressively more intrusive. Progressively more expensive. Progressively more restrictive.

November 13, 2008

Grass Growing Through the Cracks

This is another reason why we should just go ahead and let GM, Ford, and Chrysler take their natural course towards bankruptcy.

The car industry is certainly in trouble, but these ambitious little companies intend to buck the trend. Some have arisen to take advantage of low labor costs in China or Eastern Europe. Some are determined to be the company that revolutionizes transportation by reinventing the automobile with some new technology or alternative fuel. History makes it plain that most of these companies are bound to fail without leaving behind much evidence that they ever existed—Bricklin and DeLorean come to mind. But radical change often comes from people who dream audaciously and act boldly. Here are ten new car companies that may (or may not) change the world.

Putting the big 2.5 into receivership isn't the physical equivalent of dynamiting their physical plant. These companies will eventually want some of that capacity, or can use some of it to build their own plants. Parts suppliers will retool to for these fellows. (In the shorter term, they'll retool for locally-built Toyota, Honda, and BMW plants, too.)

Bailing out Detroit will do little more than make you and me make good on un-fulfillable promises made by GM and Ford and Chrysler. If I wanted to do that, I could have bought GM or Ford stock any time I wanted.

I remember when the steel industry was collapsing, giving us the term, "the rust belt." It was the end of US steel. It turned out not even to be the end of US Steel. First came Nucor, and now Nucor is facing competition from even-more-mini mills at the margin.

For a while in the mid-90s, I was commuting each week from Fairfax to Johnston, Pa. (It was sort of the Monkey's Paw version of, "I'd like a job with travel.") The mill there had closed down years ago, and was clearly not going to re-open, but people kept on talking about "when the mill re-opens." I'm sure, though, that some went south to go work for Nucor.

November 12, 2008

PERA-lous Territory

Moral Hazards, everywhere you look. Arnold Kling has been all over that terrible idea, the proposed auto bailout.

A big reason that the auto industry is in trouble financially is that many of its current and past workers have retirement benefits (including medical care) that are defined benefits. That is, the benefits are promised regardless of whether enough money was contributed to provide for them.

And why is this a problem?

This refers to companies with defined-benefit pension plans, which are plans that promise to pay specific benefits, even if the funds in the plans lose money. The companies think that it is onerous that they should be expected to actually have to take steps to keep their promises. Instead, they want to go on as if everything is fine, and leave somebody else to pick up the tab if it isn't.

And who are the tab-picker-uppers? Naturally, the taxpayers, under the Pension Benefit Guarantee system.

Everyone who promises defined benefits thinks that somebody else needs to help them keep their promises. That somebody else is you and me.

First GM, and then PERA, which is less arguable, because those pushing this little piece of socialism will then claim that you and I made the promises to the government employees.

In fact, it's almost as though they're pushing to help GM in order to clear the way for a PERA bailout.

October 25, 2008

Right to Work

Readers of the blog, and those following the campaign, know that I'm a fan of Right to Work, and therefore a proponent of Amendment 47.

I just saw an anti-Amendment 47 ad, claiming that Right to Work would both lower wages and cost jobs. I suppose these are truly bipartisan ads, in that neither Hoover nor Roosevelt seemed to think that employment had anything to do with the cost of labor.

October 10, 2008

Special BTR Today

I'll be doing a special noon-time BTR show today about the financial crisis with King Banaian of SCSU Scholars, and William Polley of, ah, William Polley.

Hopefully, we'll all learn something.


One of the villains of Amity Shlaes's The Forgotten Man is uncertainty. Markets hate nothing more than uncertainty, which paralyzes decision-making and freezes capital. Typically, market uncertainty is nasty, brutish, and short. Typically, government uncertainly is agonizing and long.

At the end Roberts's and Kling's podcast, Kling points out that there are vulture funds waiting to buy distrssed securities and properties in order to re-sell them at a profit, but that the holders are waiting for a better deal on a bailout. (Something like this may have happened with Citigroup and Wells Fargo fighting over Wachovia.)

This is bad for about 100 different reasons, but I'll pick 5 ways this royally screws up market operations:

1) It prevents mark-to-market rules from working, hiding losses when there effectively is no market
2) It keeps distressed securities off the market, keeping markets illiquid
3) The lack of a market in certain securities makes it impossible to issue new securities of that type
4) It keeps the market from finding its level; something priced at 80 might sell for 50 after being dumped at 30; you'll never know the true value
5) It keeps the vultures from earning money while not capitalizing the guys holding onto the assets

I could go on, but you get the idea. It all adds up to nobody knowing what anything's worth, and nobody being willing to take risks because they can't price that risk adequately. As a result it freezes capital and damages the real economy.

FDR didn't help this problem, he made it worse. He got the politics of it - he didn't need to suggest a solution to get elected, and he steadfastly refused to work with Hoover after he was elected. I don't see anything from the forthcoming Obama administration to suggest anything different.

June 25, 2008

We're #3!

The Milken Institute has released its 2008 State Science and Technology rankings, and Colorado ranked #3, behind Massachussetts and (gasp!) Maryland. And it's not as though this is a sudden leap, the result of the magnanimous and enlightened policies of Gov. Ritter. No, Colorado ranked 3rd in 2004, and 2nd in 2002.

The study is designed to measure the intangibles such as education, R&D spending, and capital formation, that contribute to a successful high-tech economy.

Keep this in mind the next time you hear someone asking for more of your money for the teachers' unions, for instance. The notion that, without additional massive government investments in schools or in economically marginal technologies, we're all going to be reduced to carbon-neutral sheep-herding in a few years, seems a little far-fetched, eh?

For the record, this event didn't go entirely un-noticed by the local media. The Rocky actually assigned a local reporter to write up the report:

"The state is creating high-quality jobs. And it's well-positioned to create high-quality, high-paying jobs in the future," said Ross DeVol, director of regional economics at the Milken Institute, the economic think tank that issued the report.

The state benefited, in particular, from its high concentration of scientists and engineers as well as its educated work force.


DeVol said Colorado stands in a relatively unique position because it placed among the top five states in all five categories.

"Across a very broad spectrum, Colorado does very well," DeVol said.

The Post, by contrast, buried the news in an AP wire story that doesn't mention Colorado until the 5th paragraph.

Milken breaks the five major categories down into 77 subcategories, and with three studies' worth of data available, it would be interesting to see what categories and subcategories appear to be leading or trailing indicators.

Also telling - and disheartening - is the extent to which even entrepreneurs have internalized the notion that the state government is the place to go for direct funding:

"It's amazing. Colorado has such an amazingly entrepreneurial spirit, but there's a lack of direct funding from within the state," said CEO Jon Nordmark, referring both to direct state funding and private funding sources.

He noted the governor's strategic focus on four industry clusters, in particular: bioscience, energy, tourism and aerospace.

Nordmark contended Ritter's administration had "selectively chosen" a few industries to zero in on, adding that "they completely ignored" software and Internet companies.

Ritter spokesman Evan Dreyer didn't dispute the governor's focus on those areas. He said high-tech "is an undergirder - or overarching umbrella - for all four of those sectors."

Leaving aside Evan Dreyer's metaphorical confusion - high-tech is either an undergirder or an overarcher - the point here is that when the government takes on the role of picking winners, the losers will spend time and money lobbying it rather than producing more...stuff.

May 28, 2008

Comparative Advantage

So two old Jewish guys are sitting on a bench, watching the waves roll in.
"You know something, Hymie?"
"What, Abe?"
"If I were as rich as Rothschild, I'd be richer than Rothschild."
"How's that?"
"Well, I'd do a little tailoring on the side."

This is funny, because we all understand comparative advantage, whether we want to admit it or not.

April 15, 2008

Frederic Bastiat, NFL GM

What does the NFL draft have to do with Frederic Bastiat?

Bastiat might have liked George Allen, senator and governor very much. His father, George Allen, Mr. "The Future Is Now," not so much. George Allen pere decided to trade away the team's draft for the next century in order to turn the Redskins into the Ramskins, and bring his Over-the-Hill Gang to Washington. Almost immediatley they got to a Super Bowl. They were much-beloved, these Redskins of my youth. But the team didn't win another playoff game until the Super Bowl year of 1982.

Years later, the Minnesota Vikings were to make the same mistake, trading away their first and second round draft picks for three years, for the rights to one running back, Herschel Walker.

Why do teams do this?

Bastiat would have understood. He spent a career arguing that economic policies that are popular in the short term are almost ruinous in the long term. And that what makes such catastrophe possible is the difference between the seen and the unseen.
You can always point to the guy who gets laid off when someone moves a manufacturing operation to Asia because of NAFTA. (Yes, oh humorless ones, that's a joke.) But with rare exceptions, you can't point to the guy who has a job because his boss is spending half as much on office supplies as he used to.

George Allen was the perfect football administration for DC. He could immediately point to the Super Bowl appearance, and to the terrific players he had brought with him. And nobody could point with certainty to the talent the Redskins didn't draft, because B.K. (before Kiper) nobody could say with certainty where they would have picked, and who would have been available.

The Over-the-Hill Gang was seen; the players who went to Pittsburgh, Dallas, and Oakland were unseen. Except on some very big Sundays in January.

David Sirota, Barack Obama in his current incarnation, Hillary Clinton trying to catch up with them, are George Allen. They'll trade the unseen for the seen, and make people happy for the moment. The free-traders are the dynasty-builders. They'll trade the seen, with the assurance that the unseen will materialize.

April 13, 2008

Another Run at '31

The Democrats are now in the process of repeating all of the mistakes of the Great Depression.

Pushing for a war on inflation, seeking to increase uncertainty in the housing market, allowing a $2 Trillion tax increase in three years, threatening to go full Smoot-Hawley, and now pushing for artificially inflated wages and artificial - and extremely temporary - job security.

The UFCW Local 7 has introduced a whole raft of ballot initiatives for this fall. While they're the political equivalent of an F- economic grounds, their underlying political agenda is unmistakable.

First, the economics. Ben Bernanke's been taking a beating recently, and on some counts, he deserves it. But this is a scholar of the Great Depression. I'm probably one of the bloggers you'll see who's actually read any of his scholarly papers on the Depression. Bernanke notices two great contributing factors to the Depression: the US's late abandonment of the gold standard, and the stickiness of wages.

One of the dirty little secrets of the Great Depression is that if you had a job, it wasn't so bad. That's because wages often staid at pre-crash levels, even as more of them were being paid by soup kitchens. Why were wages sticky? That is, why, instead of lowering wages, did companies keep them high, even to the point of failure? Because Herbert Hoover wanted it that way, believing that high prices meant prosperity.

These labor initiatives: no firings without specific cause, forcing small business to pay for health insurance, and forcing businesses to match the inflation rate, are the economic equivalent of begging for unemployment. Sure, if you've got a job it's not too bad. But try getting one when the cost of hiring keeps going up relative to everything else.

The cynic will say that this is all part of the plan. Well, it is. First, the unions have seen their membership drop off the edge of a cliff. The majority of their membership is now comprised of public employees, and people are beginning to question the propriety of paying taxes to support a naked political agenda. The unions need to prove that they still have some political muscle.

Another, little-mentioned aspect of their initiatives is that it would let anyone bring suit for alleged corporate wrongdoing. Historically, you actually have to have been hurt in order to have standing in a civil suit. This obvious sop to the other Great Democrat Constituency, the trial lawyers, would be another avenue for corporate shake-down artists to raise the cost of doing business, and to fund their own personal and political cash flow needs from the hard work of others.

Inflation-indexed wages will have yet another perverse effect. Such a rule would act as a subsidy to inflation, both promoting and limiting the incentive to fight it. Which means that pensioners, retirees, and those on fixed incomes will find their own savings stolen from them. Which will become an excuse for another big tax increase to fund those generous retirement programs we've rashly promised our teachers and other public servants.

Today's economy is more inter-connected, more diversified, more entrepreneurial, and more resilient than in was in 1930, which probably means that we'll end up looking more like Japan in 1990 than the US in 1930. But that doesn't mean that the damage to hopes, dreams, and security won't be real.

April 1, 2008

Economics As Latecomer

Over at EconLog, Arnold Kling replies to a post by Tyler Cowen asking why the development of economics came so late in western intellectual history:

My view is that historically there was a universal propensity for plunder and coercion. It could be that only in the late stages of the British empire, around the time that Adam Smith was writing, that people really began to be accustomed to market economic activity.

In that case, it would not be surprising that economics itself developed late. Conversely, the fact that there was no Greek or Roman Adam Smith is consistent with my view that the Greeks and the Romans did not really have modern market economies.

I'd go in a slightly different direction here; rather than only understanding plunder, production wasn't understood at all.

There wasn't, as near as I can tell, a concept of money beyond currency. Kings would routinely re-issue debased coinage, inflating their way out of debt. When Spain decided to plunder the Americans for gold and silver, mostly what they did was create a global inflation of historic proportions. The problem, of course, is that all they did was create more money chasing the same goods.

I've been listening to the High Middle Ages CDs from the Teaching Company as well, and Prof. Daileader makes a point that towns really did constitute a market. So much so that guils felt it necessary to regulate trade in order to prevent "unfair" competition. Like advertising of any kind. Artisans worked on demand, rather than keeping regular hours. So while the Town was criticized by the Church and the Country for being mean and materialistic, it was such a heavily regulated market so as to be quite unfree. It even benefited from the urban advantage of specialization. Yet it certainly wasn't based on plunder.

But production was severely limited, often by factors outside the control of the producer. Farmers were stuck with the local weather, and villages would starve while villages only a few miles away would have crops rotting. Artisans couldn't scale up before industrialiization, so their production was essentially limited by time, and only variable in a very limited sense. The European population might have doubled between 1000 and 1300, but that amounts to about a 0.3% change each year - so of course business would look like a zero-sum game. Especially since innovation wasn't seen as changing and improving markets so much as undercutting your competition.

Some of these misconceptions persist, especially in the minds of Democrats and rent-seeking businessmen. But for the most part, the conditions had changed by 1776. Progress was obvious within one's lifetime. Production was scalable. Guilds were losing their power, and money was much better-understood.

March 17, 2008

Recreate '38

Netflix is addictive. While working on the computer, I spent yesterday watching Seabiscuit twice - once with commentary and once without - and watching the special features, including a mini-documentary about the Seabiscuit's times, the Depression. Unenlightened self-interest has pretty much wrecked horse-racing, but if the current crop of self-styled "Progressives" has its way, we may soon get to relive the 30s economy.

(WARNING; The following links contain shameless self-promotion and extreme economic geekery. Follow at your own risk. The management assumes no liability.)

Even almost 80 years after the fact, we still don't fully understand the Great Depression. Still, economists now seem to be groping towards a multi-pronged consensus: 1) the Fed tightened money when banks were failing, 2) stubbornly high wages and 3) artificially high tariffs kept the costs of doing business up when they should have been falling. Amity Shlaes adds 4) uncertainty caused by incessant government "experimentation" with the economy as another leg.

When unions and union contracts keep wages artificially high, they discourage new hiring. The profit from increased sales doesn't match the cost of the new workers needed to get there. Further. businesses can't lower prices through economies of scale; and consumers don't have money coming into buy the stuff, anyway. This isn't just bad for workers, it's pretty much bad for everyone except union bosses, who can keep on collecting fat-cat salaries and perks, and spending their union dues on politicians devoted to, er, keeping wages high.

Now, you can offset some of this through incresed productivity. Unions don't much care for this, either, because they think that it costs jobs. It's only the very definition of economic progress, so you'd think "progressives" would be in favor of it, but next time you see one, ask how it is we've managed to keep everyone employed as the population has gone up 100 times in 200 years.

But if you've got tariffs in place, the incentive to invest in more efficient equipment and processes declines. Fifty-cent tariffs on Brazilian sugar ethanol mean that we can continue to produce expensive, inefficient corn-based ethanol to the point where we cause food riots in Mexico. Inefficiency makes it harder to ramp up production when you want to, and also artificually suppresses economic activity.

Combined, the two are deadly.

Fortunately, the Dems will only be in a position to repeat mistakes 2) and 3), while exacerbating 4) again as well. Unfortunately, that may well be enough to spread what should be a short recession over most of the next 10 years.

Last word to the brilliant Lileks:

Speaking as an utter amateur, I’m worried less about a recession than inflation. I’m worried most about a recession, inflation AND a jolly round of trade wars, coupled with fragile banks, overcapacity, diminished consumer confidence and aggressive messianic collectivism. Something about that smells familiar. I love studying the thirties and forties, but not first hand.


Progressively more restrictive. Progressively more expensive. Progressively more intrusive.

Progressively more...reactionary.

March 12, 2008

Mark Udall, Natural Gas, Iran, and You

Mark Udall - a good, patriotic American - is a threat to national security.

OK, not all by himself, and not any one of his positions, but as part of a Democratic Senate majority, and as a combination of his policy views.


  1. He has repeatedly opposed expanded gas production on the western slope
  2. He has voted against an additional 700 miles of fencing along our border with Mexico

Why is this a threat to national security? Because Iran is almost certainly plotting to disrupt our supply of natural gas from Mexico, And because they may well be trying to insert operatives directly into the United States.

Todd Bensman of the San Antonio Express-News, wrote the series, "Breaching America," and appeared as a guest on Backbone Radio with John Andrews and me. Well, he's back, with a story about Iran establishing a presence in Nicaragua, now run by Venezuela-friendly and decidedly US-unfriendly Danny Ortega.

Make no mistake, this is no humanitarian mission. This is exactly from the Soviet playbook - promise aid to establish a reason for being there. In this case, the aid amounts to a ridiculously ambitious project with little-to-no economic reason for being. Send a high-level delegation, with ministers of electricity, or whatever, providing cover for intelligence operatives. (Note that one of the delegation members is the Iranian Ambassador to Venezuela, also a likely intelligence agent.)

With completely ineffective border security, the Iranians will soon be in terrific position to start slipping agents across borders. And there aren't a whole lot of borders between Managua and El Paso.

More immediately, they may already have tried to blow up the main Mexican pipeline. Or, they may have gotten the idea from that attempt, and want to do it right this time.

If it were an oil pipeline, it might matter less. Oil is easily shipped all over the world, so there's a world market for it. Natural gas is difficult and expensive to ship across oceans, and the US has also resisted building LNG terminals. This means that there is, at best, a continental market for natural gas. And it also means that the best defense against any disruption in supply is...a good, reliable, local supply.

Mark Udall's policies leave us both more vulnerable to an attack, and more vulnerable to the effects of that attack.

March 11, 2008

Old New Deal

Home sick yesterday with something that even weapons-grade Mucinex wasn't helping, I saw a part of a speech where Barack Obama proposed his "solution" to the higher education "crisis." This is a paraphrase, but not much of one:

I'll make college education affordable for every American with a $4000 tax rebate payable towards tuition. We're going to invest in you. But in return (There's always an, "in return." -ed.), we're going to require you to invest in us by volunteering in the Peace Corps, the VA...

I'd give it about half an hour before every college in the country raised tuition by about, oh $4000. Repeat after me: subsidies either raise prices or create surpluses.

But the really insidious part is that public service requirement, couched as, "investing in us." "Us" being the government and government programs. Obama is proposing to take more of your money, transfer it directly to liberal universities, many of whom already get your tax money or have endowments the size of small countries' treasuries, and then claim the first two years of your kids' working lives doing make-work projects for the government.

Now, if "us" meant the country, then going out, getting a job, and doing research in alternative fuels or new drug therapies, possibly nanotech. Notice what else is missing from this list: the CIA, FBI, the military.

But then, making money or defending the country aren't nearly as appealing as ticking off allies.

Progressively more expensive. Progressively more intrusive. Progressively more restrictive.

February 6, 2008

Meanwhile, Back at the Ranch

You know, if the Democrats actually cared about the homeless as something other than a political bludgeon, they'd stop trying to create more of them.

Just as New York is phasing out a 60-year experiment in rent control, Democrats on the House Committee for Local Government are proposing to let local governments here try it. I know it's a basic principle of history that nobody ever learns anything, but really, people, nobody's memory is that short.

As with most populist measures, predicated on the notion that I can get the government to get someone else to pay my bills for me, this scheme would only prolong the pain. By keeping rents down, mortgages would have to decline more to reach the historic averages. And with more people selling, and fewer places for them to move into, well, they'd either have to move farther out, or find a bridge with indoor plumbing.

All together now: subsidies create surpluses, price controls create shortages. There's no shortage of gasoline, because the price floats. There is a shortage of gasoline at $1 a gallon. There's also a shortage of bread at 10 cents a loaf, and Maseratis at $5000. Rent controls create housing shortages, because developers aren't willing to build as many apartment complexes when they'll make less money on them. Rent controls reduce the return on such a project, and make other projects more attractive by comparison.

There's never a good time for this sort of intervention, but right now, what's driving it is the number of foreclosures, and thus the number of people involuntarily entering the rental market, driving up rents at the same time that housing prices fall. Now one way to measure how out of whack the housing market had gotten is to compare rents to mortgages. Nationally, mortgages were 43% higher than they should have been, given historical averages. So some combination of house price declines and rent increases is necessary to get the market back into whack.

The irony is that, as bad as things are here compared to 2006, they're not that bad compared to the rest of the country, contrary to what you might have read. The Wall Street Journal shows that Denver's housing inventory actually decreased 3.8% compared to last year, one of only two markets to show a decline. We have 5.7 months supply on hand, tied for fourth-best in the nation, and prices declined a modest 1.8% year-over-year (6th-best nationally, with the 3rd-lowest decline). Denver's 3.71% delinquency rate is below the national average of 3.98%.

All of which means that, while there might seem to be enough of a glut now to absorb any price controls, in fact, we're likely to start feeling that pain a lot sooner than we think.

Even the bill's prime sponsor, Rep. Weissmann, admits that rent control is a "failed economic policy," but puts forth his measure as a nod to local zoning control. But every Democrat on the committee voted for it, save one (who's married to a landlord and developer, so she rightfully recused herself). Makes you wonder exactly what political forces pushed the House leadership to bring this thing to committee.

Progressively more intrusive. Progressively more expensive. Progressively more restrictive.

November 8, 2007

Free Trade Advances

With the support of all seven of Colorado's representatives (must be those multinationals based in Bailey and the money-center banks headquartered in Grand Junction), the House voted last night to extend NAFTA rules to Peru.

This is a good thing for both the US and for Peru, for a variety of reasons. Peruvian goods basically flow freely into the US, the deal does more to lower Peruvian barriers to US goods than the other way around. It helps serve as a counter-weight to Chavezism-Castroism in Latin America, although some people have never forgiven them for defeating Shining Path. It draws Peru more tightly into US economic orbit. Their #2 trading partner is China, so unless you're expecting to see some of that wealth circle around in the form of campaign contributions, strategically it's probably better to have them trading with us.

From Peru's point of view, their economy is miniscule compared to the US, about 1.5% of our GDP. So anything that helps boost their economy will disproportionately help lift their people out of poverty. Our total trade deficit with Peru is $3 billion annually (or about $1.2 billion at the official exchange rate). Hardly something to be scared of.

September 20, 2007

Jumping the Gun

Our New Governor (heh) was in Washington today, promoting the idea of a federal diktat on generating electricity with renewable sources: Ritter notes that 20 states have mandates. Of course, if they're anything like Europe's Kyoto targets, we won't be meeting them this century. If you actually look at what the states are requiring, the real mandates haven't started yet, and we have no idea of the eccnomic effects of actually producing 20% of our power this way.

"This has to be a national effort," said Ritter, a Democrat. "This is too important a conversation we face not to undertake it now."

If it's an important conversation, we should be having the conversation, not jumping to dictate policy. Of course, like most big-government enthusiasts, especially when it comes to the environment, honest "conversation" is the very last thing they want: "We need to move beyond debates about whether global change is occurring." I'm sure James Hansen over at NASA will be happy to hear he won't be facing that debate. After all, it's not as though it's the 30s, or anything like that.

And don't kid yourself about the ease of making an about-face if it turns out to be a bad bet. We hear lots of talk about improving Mexico's economy as the antidote to illegal immigration, yet in the face of tortilla riots in Mexico City, plow right on ahead turning food into fuel.

Jumping the Gun

Our New Governor (heh) was in Washington today, promoting the idea of a federal diktat on generating electricity with renewable sources: Ritter notes that 20 states have mandates. Of course, if they're anything like Europe's Kyoto targets, we won't be meeting them this century. If you actually look at what the states are requiring, the real mandates haven't started yet, and we have no idea of the eccnomic effects of actually producing 20% of our power this way.

"This has to be a national effort," said Ritter, a Democrat. "This is too important a conversation we face not to undertake it now."

If it's an important conversation, we should be having the conversation, not jumping to dictate policy. Of course, like most big-government enthusiasts, especially when it comes to the environment, honest "conversation" is the very last thing they want: "We need to move beyond debates about whether global change is occurring." I'm sure James Hansen over at NASA will be happy to hear he won't be facing that debate. After all, it's not as though it's the 30s, or anything like that.

And don't kid yourself about the ease of making an about-face if it turns out to be a bad bet. We hear lots of talk about improving Mexico's economy as the antidote to illegal immigration, yet in the face of tortilla riots in Mexico City, plow right on ahead turning food into fuel.

September 6, 2007

Right-Not-To-Work Facts

Well, some of the facts, anyway. As with any good propagandist, the secret is in what they leaves out. So maybe workers in states without Right-to-Work laws earn more than workers elsewhere. Let's see how much they have to give up in order to get it.

We'll use the list of states from National Right to Work. For purposes of the comparison we'll ignore DC, because it wouldn't be fair to include a forced-union district where the whole city is a company town. (It also skews the numbers, since we're primarily concerned with private-sector competitions here.)

According to the Missouri Department of Economic Development, the cost of living index averages 16% higher in non-right-to-work states (111-95). According to the Tax Foundation, for the year 2007, the state and local tax burden is over 8% higher (almost a full percentage point), 11.1% vs. 10.2%. So not only do you have to pay more for dinner, you've got less to cover it with.

I've also used BLS statistics to calculate the average unemployment rates for July 2007, but that's mostly a time limitation. It's basically a snapshot of what should be viewed as a movie, but I don't have the time at the moment to do much more. Yes, it's higher in the non-right-to-work states: 4.7% to 4.1%.

The one thing I haven't done is adjust for population. California, New York, the high-population Northeast and the old industrial midwest are all non-right-to-work. (There's a reason it's call the Rust Belt.) For the moment, that would just highlight how much more of the population lives under the threat of a closed shop.

At least until the rest of the jobs move to the South.

Cross-posted at Politics West.

August 10, 2007

Another CFA Post

Wherein the CFA Econ book abandons empirical observation, choosing instead to count 5 chambers in the heart...

August 1, 2007

Macro v. Micro

In studying for the CFA, the Economics section has eight readings (about a week's worth) on Microeconomics, and eight readings on Macroeonomics. It seems to me that while economic illiteracy abounds, especially among the political and journalistic classes, it manifests itself somewhat differently between the two subjects. Most of the juice is around macro stuff, because that's where policy decisions lay. But most of the action is in micro, because that's where businesses actually have to operate.

Illiteracy about macroeconomics leads people to assume that price rises mean inflation. Inflation is a monetary phenomenon. Illiteracy about microeconomics leads people to ignore how poorly gate space is allocated at DIA. Gates are not offered by competitive bid, leading to all sorts of market distortions. Historically, I would guess that micro-illiteracy is dangerous all the time, while macro-illiteracy is mostly dangerous on four- and two-year cycles.

But when politicians talk about 'windfall' taxes on oil companies, then complain about lack of slack in refinery capacity, or when they shut down drilling on the Roan Plateau, then complain about natural gas prices, it's dangerous micro-illiteracy. Or demagoguery taking advantage of it, which amounts to the same thing.

Cross-Posted over at CFA Blog.

July 12, 2007

A Test On Immigration

Proponents of stricter enforcement of laws against hiring illegals often argue that this will result in "self-deportation." In other words, large numbers of illegals will pick themselves up and leave a place where things always get better to go back to a place where things never seem to.

Now, we may have a chance to put this to the test. The Wall Street Journal's Economics Blog reports that four researchers from Deutsche Bank believe that, a year and a half into the housing slump, builders have laid off as many as 500,000 illegal aliens.

The title of the post, "Report Illegal Hispanics Bear Housing Slump Brunt," recalls "World Ends, Women, Minorities Hardest Hit," but the point is clear. 500,000 jobs lost translates to just over a 4 percentage point increase in the unemployment rate for illegals, assuming 12 million illegals in the country. It's not 1930, but it's also not

Since we all believe that neither illegals nor their informal network are stupid, word should be getting around that it's not so easy to find work pounding shingles and hanging sheet rock right now. Despite the fact that we've seen about 40 feet of actual fencing built, we should still be seeing fewer people trying to sneak in. If we do, there may be some merit to the demand-side enforcement argument. If we don't, then the draw of the American idea remains stronger than any transient economics.

March 6, 2007

Economics By Doctors

Last week, the local propagator of economic illiteracy, the Denver Post, ran an op-ed by a professor over at the University of Colorado Health Sciences center, who specializes in bioethics and the humanitites. It included the usual bromides about obscene profit margins and too much marketing vs. too little R&D. It concluded with a call for the citizenry to demand more R&D spending by drug companies. Or presumably, we'll be taking away those profits to make sure there's no more R&D. (Ironically, a week earlier I had had this debate with a friend of mine who's a doctor there, so maybe it's something in the water. Or a virus.)

In the meantime, Russ Roberts has an extensive podcast with Mr. Law-and-Economics himself, RIchard Epstein, an actual economist, of the Hoover Institution and the University of Chicago. Epstein makes the following points.

  • That studies show that drug companies keep somewhere between 15% and 25% of the economic profit from their discoveries. Which means that you and I get to keep about 80% of the benefit from someone else's work.
  • That the excessively long FDA approval time robs the compnies from many of the benefits of the patent system
  • That taxing away the profits is only going to force the drug companies to focus on the higher-margin projects, which will then lead the same whiners to complain about the even more obscene profit margins
  • That there will always be competition, since it's the molecule not the health benefit that gets patented; this means that your slightly different drug with a slightly different mechanism can compete even while the original is under patent protection

I'd add one other point. Mark Yarborough complains about the ratio of marketing budgets to R&D budgets. But this is always true. I just finished visiting a company, Brush Engineered Materials, which refuses to get pantents on much of its research out of the belief that they'd rather not have their competition reverse engineer their processes. Their competitive advantage and their real asset is their institutional know-how and craftsmanship in the art of making metal alloys. This is a company that knows it needs to be ahead of the curve, always developing new alloys and new uses for those alloys.

They spend less than 1% of gross revenues on R&D.

I never would have know about Epstein's book if not for a series of blog links.

Thus do institutional biases restrict the debate. At least on their pages.

January 28, 2007

Legacy of Milton Friedman

On the show this evening, we hosted Bob Chitester, who's produced an intellectual biography of Milton Friedman, "The Power of Choice," airing tomorrow night on PBS. Bob's site, The Idea Channel, is also streaming both the original Free to Choose series and its updated version for free. Several years earlier, the Dallas Fed hosted a conference dedicated to the legacy of that series and book.

When Milton Friedman died late last year, much was made of the legacy of his economic thought, and its spirited promotion of liberty. Sadly, the election to majority status of a party dedicated to the slow destruction of that liberty has also emboldened those Republicans who don't quite trust their fellow citizens. Reminders of the power of economic freedom are desperately needed.

October 30, 2006

Property Rights

The Taylor Ranch controversy is one of those nasty points of intersection between economics, politics, and the judiciary. In 2002, the Colorado Supreme Court ruled that a series of landowners who border the Taylor Ranch had the right to continue doing what they had been doing for about 150 years, namely, freeloading off the Taylor Ranch resources. We had the chance to interview Dick Johnston, author of The Taylor Ranch War, which follows the 40-year (!) series of lawsuits required to resolve this issue.

In essence, the court ruled that the communal rules of the original Mexican land grant from the 1830s and 1840s overrode the American notion of exclusive use.

It hadn't occurred to me before, but is it possible that communal property right could be an answer to the question, "Why is Mexico so poor?"

June 27, 2006

The Denver Post and the Death Tax

Warren Buffett, in addition to his admirable philanthropic endeavors, has also been trying to make sure that the Federal Government continues to be the recipient of your largess from beyond the grave:

The world's second-richest man, Warren Buffett, has asked Sen. Ken Salazar to vote against repealing the estate tax.

Buffett sent a letter to Salazar, D-Colo., the senator's spokesman, Drew Nannis, said. The multibillionaire Monday called on Congress not to repeal the tax.


Repealing the entire estate tax now would cost the government an estimated $550 billion to $700 billion through 2010. (emphasis added - ed.)

The Post gives no citation for this number, nor does it consider the additional wealth that will be created by businesses that can, well, stay in business after their owners die. If the estate tax comes back, it will be on estates over $1 million. Most estates over that number aren't just cash sitting around under mattresses. They're in businesses that employ people.

Larger businesses tend to be separate corporations, but the smaller businesses hit here are often partnerships or sole proprietorships that tend to struggle for cash. They would have to sell all or some of their assets just to pay the IRS. In all likelihood, they'll sell to larger companies. Even assuming that everyone stays employed - a bold assumption at best - these transfers concentrate wealth, they don't diffuse it.

The Post also fails to notice that Mr. Buffett hasn't been such a big fan of paying unnecessary taxes himself:

Mr. Buffett’s decision to give away to charity Berkshire Hathaway stock valued at about $37 billion, much of it to the Bill and Melinda Gates Foundation, is the sort of bold move that has made so many Americans admirers of Mr.Buffett. As an avowed supporter of the estate tax, Mr. Buffett could have let the government take its share of his estate after he dies. But just as Mr. Buffett has accumulated his vast wealth without paying much personal income tax, he has found a way to avoid the tax man in this maneuver as well, even writing in his letter to Bill and Melinda Gates that a condition of the gift is that the foundation “must continue to satisfy legal requirements qualifying my gifts as charitable and not subject to gift or other taxes.”

(Hat tip: Best of the Web)

June 26, 2006

Free Market Reading List

For those of you intrigued by the Free Markets, Free People class being offered by last night's radio guest, Paul Prentice, but who either don't have the time to attend class, or don't have the time to commute from California to attend class, here's the reading list:

Economics in One Lesson, Henry Hazlitt
Between Power and Liberty: Economics and the Law
Free to Choose, Milton Friedman
Economic Fallacies, Frederic Bastiat
Human Action, Ludwig von Mises
Capitalism: The Unknown Ideal, Ayn Rand
The Road to Serfdom, Friedrich von Hayek
The Mystery of Capital, Hernando de Soto

A little light reading for the beach, maybe?


Power, Faith, and Fantasy

Six Days of War

An Army of Davids

Learning to Read Midrash

Size Matters

Deals From Hell

A War Like No Other


A Civil War

Supreme Command

The (Mis)Behavior of Markets

The Wisdom of Crowds

Inventing Money

When Genius Failed

Blink: The Power of Thinking Without Thinking

Back in Action : An American Soldier's Story of Courage, Faith and Fortitude

How Would You Move Mt. Fuji?

Good to Great

Built to Last

Financial Fine Print

The Day the Universe Changed


The Multiple Identities of the Middle-East

The Case for Democracy

A Better War: The Unexamined Victories and Final Tragedy of America's Last Years in Vietnam

The Italians

Zakhor: Jewish History and Jewish Memory

Beyond the Verse: Talmudic Readings and Lectures

Reading Levinas/Reading Talmud