02 Sep 2008

Liberals and Libertarians Agree: Don’t "Privatize" Social Security!

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I have been arguing with “Lee Arnold” about climate models over at Marginal Revolution. Anyway, I clicked on his profile and stumbled across his YouTube library of “Ecolanguage” videos. Below I’ve embedded his neat little discussion of President Bush’s ill-fated plan to “privatize” Social Security.

As a free market economist, I disagreed with much of Arnold’s analysis. However, he hit on the crucial flaw in Bush’s plan, which I was hammering away at in my own articles (one and two) at that time: Because he didn’t plan on cutting government spending, Bush’s plan was a giant shell game. Whatever workers took from the “trust fund” and invested in the stock market, would simply have to be made up for by increased government borrowing. So there would be no net increase in savings and investment,* which was the whole )##$@#^ point of the program.

* I realize now that there could be an increase due to Laffer curve effects, but this wasn’t the point being made by most of the proponents at the time. They were naively saying, “Money in the stock market grows exponentially, whereas the government spends your payroll taxes right now. So Bush’s plan is better.”

02 Sep 2008

Palin’s Gas Tax Moratorium In Effect

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Governor Palin’s one-year moratorium on (state) motor fuel taxes is now in effect; see this official announcement. As many of you will recall, when John McCain proposed this for the summer (at the federal level), he was lambasted by his critics.

The controversy was over how much of the elimination of the federal 18.4-cent-per-gallon tax on gasoline would show up as a reduction in prices motorists saw at the pump, versus how much of it would be pocketed as extra profit by the gas stations. (See this pdf for a conservation group opposed to Palin’s move on these very grounds.) Some of you may have horrible flashbacks of this section in Principles of Micro, where we sadist economics professors would draw different supply and demand curves (some steep, some shallow) to show that the “incidence” of an excise tax depends on the elasticities of the producers and consumers. Intuitively, the side of the market that is more able to move away, bears less of the brunt of a new tax. (This is why cigarette taxes are almost paid entirely by smokers, rather than lower earnings for producers.) Going the other way, when such a tax is lifted, the more inelastic side of the market benefits the most.

Based on some back-of-the-envelope estimates I had seen, I predicted at the time that McCain’s plan (also endorsed by Senator Clinton when she was still in the running) would have been split about 50-50 between motorists and gas stations. I.e., of the 18.4 cents per gallon that the feds were no longer skimming off the top, I figured motorists would see posted pump prices fall about 9 or 10 cents, while the owners of the gas stations would retain an extra 9 or 10 cents in earnings, per gallon sold.

Governor Palin’s recent move apparently provides an excellent experiment to test these ideas: Specifically, will Alaskan motorists see lower pump prices? Unfortunately, the Alaskan state motor fuel tax was only 8 cents per gallon, so we don’t have that much of an effect to be looking for. Also, we have to do it right: Just because prices fall the day the tax cut goes through, for example, doesn’t prove that Palin’s moratorium is responsible. Oil prices are falling because Gustav isn’t wreaking too much damage on oil platforms in the Gulf, for example, and so (if gas prices fall in Alaska over the next few days) maybe that would be the reason.

Ideally, you would want to look at something like, the spread between average Alaskan gas prices versus the US average. If the spread falls starting on September 1, then that would be evidence that Palin’s cut is translating into relief for motorists. Yet even here you need to be careful; what if historically, that spread always falls as we move away from the summer driving season?

This stuff gets really complicated, really quickly. I’ll post an update here once we let some time pass and more data roll in. In general, I favor any and all tax cuts, for the simple reason that it’s less money the government is taking from the people who earned it.

02 Sep 2008

Good News on Oil and the US Dollar?

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Driven in part by the lack of major damage due to Gustav, oil prices have fallen to a five-month low, with the near-term futures trading at $109.25. At the same time, the US dollar has risen to a 10.5-month high, with the euro slipping below $1.45.

Oil prices, quoted in dollars, are closely connected with the US dollar’s fortunes on the foreign exchanges. Oil producers can sell their product to any number of nations around the world, and so if the USD falls against the euro, for example, then the dollar-price of oil needs to rise. (If it didn’t, oil producers would stop selling to American buyers and focus on European buyers.)

So the fact that oil is a very fungible, highly traded commodity ensures a close connection between its price, and that of the US dollar.

On the other hand, the two really are different goods. After all, there are days when some commodities are up, and others are down. And everything I said about oil in the above, could just as well be said of gold producers selling to a world market.

I will elaborate on my reasons in the coming weeks, but for now I will say that I think the “real” price of oil may continue falling, especially if worldwide recession dampens demand, and most especially if there are relaxations of the federal moratorium on offshore drilling in the US. (On the other hand, carbon legislation–promised by both McCain and Obama–would tend to raise the price of oil and other energy sources.)

But I am still very pessimistic about the fate of the US dollar. I still expect high rates of domestic price inflation in the next 12 months, and depreciation on the foreign exchanges.

01 Sep 2008

Is Gustav Good for the Economy?

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In a previous post, I explained why the conventional GDP accounts–based on Keynesian macroeconomics–lead to all sorts of absurd analyses and policy recommendations, such as viewing a falling dollar and consumer spending as boosting growth. We see similar confusion whenever it comes to disasters such as earthquakes and hurricanes, when analysts say, “Although the loss of life and individual homes is a tragedy, nonetheless the event should provide a boost to GDP.”

Economists label this the “broken window fallacy,” after the great 19th century economist Frederic Bastiat who spelled out why it is, well, fallacious. Very briefly, the problem is that it just focuses on the workers rebuilding houses, replacing shattered panes of glass, etc. But in the absence of the disaster, those workers could have been deployed into creating additional wealth for the community; now, they are busting their behinds simply to get back to the starting point. There is nothing counterintuitive going from the micro to the macro; what is an individual tragedy for thousands of homeowners is a collective tragedy for the whole community.

Anyway, the latest example of this fallacy is on display in the press coverage over Gustav (h/t to Jeff Tucker):

Economists agree that in the long run, a major hurricane or other natural disaster can actually help lift economic activity because of insurance payments and federal assistance.

In the short-term, the destruction and the disruptions can be a hit to the economy.

If we could just forget for the moment that this is coming from a “senior writer” at CNNMoney, and imagined that it was penned by a 7th grader, its absurdities would be funny. Besides the broken window fallacy, the first paragraph is even worse because it says that it’s not the work of the construction crews etc. that is boosting economic activity, but rather the transfer payments from insurers and government. Does it really boost economic activity for one group of Americans to write checks to a different group of Americans?

Alas, since the financial press always talks about the benefits of holiday shopping, I don’t think this last question would strike them as goofy. If everyone would simply give $100 to the neighbor living to the right of his or her house, these writers would predict a massive boost in GDP, methinks.

One final point, which shows why GDP accounting is so pernicious: The broken window fallacy doesn’t actually disprove the point that a disaster might boost total “output,” but rather shows that “total output” is the wrong metric. During a war, for example, people might work double shifts for years at a time; GDP, even if measured correctly, might be much higher during the period. Yet this doesn’t mean individuals are better off than during peacetime when they lounged around more.

01 Sep 2008

A Seinfeldish Question for Today

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Why do they call it Labor Day, if nobody’s working? Shouldn’t they call it Leisure Day? What’s the deeeeeal, with that?

31 Aug 2008

Were the Early Christians Socialists?

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Explanatory note: On this blog, I will focus on economic and financial matters, ranging from the household to a global scale. As the blog’s subtitle suggests, my worldview is informed by my belief in Jesus and individual liberty, meaning I am a harsh critic of coercive government policies. I assume that most readers of this blog will identify with the latter mindset, though not necessarily the former. For that reason, I will restrict my explicitly “religious” posts to Sundays…

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There is an undeniable tension between economics and religion (hence the title of my speech [video, audio] at the Mises Institute a few years ago), and more specifically between laissez-faire capitalism and Christianity. In the lecture linked above, I go through the reconciliation more methodically; in the present post I just want to focus on a particularly troubling Biblical passage for the libertarian Christian.

In Acts 4:32 – 5:11 we read:

32 Now the multitude of those who believed were of one heart and one soul; neither did anyone say that any of the things he possessed was his own, but they had all things in common. 33 And with great power the apostles gave witness to the resurrection of the Lord Jesus. And great grace was upon them all. 34 Nor was there anyone among them who lacked; for all who were possessors of lands or houses sold them, and brought the proceeds of the things that were sold, 35 and laid them at the apostles’ feet; and they distributed to each as anyone had need.
36 And Joses, who was also named Barnabas by the apostles (which is translated Son of Encouragement), a Levite of the country of Cyprus, 37 having land, sold it, and brought the money and laid it at the apostles’ feet.

Acts 5
Lying to the Holy Spirit

1 But a certain man named Ananias, with Sapphira his wife, sold a possession. 2 And he kept back part of the proceeds, his wife also being aware of it, and brought a certain part and laid it at the apostles’ feet. 3 But Peter said, “Ananias, why has Satan filled your heart to lie to the Holy Spirit and keep back part of the price of the land for yourself? 4 While it remained, was it not your own? And after it was sold, was it not in your own control? Why have you conceived this thing in your heart? You have not lied to men but to God.”
5 Then Ananias, hearing these words, fell down and breathed his last. So great fear came upon all those who heard these things. 6 And the young men arose and wrapped him up, carried him out, and buried him.
7 Now it was about three hours later when his wife came in, not knowing what had happened. 8 And Peter answered her, “Tell me whether you sold the land for so much?”
She said, “Yes, for so much.”
9 Then Peter said to her, “How is it that you have agreed together to test the Spirit of the Lord? Look, the feet of those who have buried your husband are at the door, and they will carry you out.” 10 Then immediately she fell down at his feet and breathed her last. And the young men came in and found her dead, and carrying her out, buried her by her husband. 11 So great fear came upon all the church and upon all who heard these things.

Now in light of a story like that, it’s understandable how many Christians could think that their doctrine literally implies socialism, and in fact communism, by which I mean the violent imposition of collective ownership of all property. After all, upon a quick reading, it seems that the apostles (this is after Jesus left, btw) demanded that everyone throw their possessions into a common pot, and if anybody selfishly held back, he or she was executed. Not exactly Adam Smith material, eh?

However, I think that’s an oversimplification. There are two crucial facts about the above story, which demonstrate that a modern-day communist revolution cannot be justified by reference to the early Christian communities:

(1) The apostles did not compel membership. Now I’m not claiming that Ananias and Sapphira signed a document saying, “We agree to turn over all of our property to the apostles for distribution, and we agree to be put to death if we are caught violating this pledge.” But clearly the early Christians were not a roving band of thieves, seizing random people’s property under threat of execution. So that right there jettisons any modern attempt to violently overthrow private property in a misguided attempt to recreate the early Christian lifestyle.

(2) Strictly speaking, Peter did not kill Ananias and Sapphira. Rather, God did (perhaps acting through the guilt of Ananias and Sapphira). I grant you that the distinction is tricky, especially in the case of Sapphira; e.g. is it correct to say that Peter healed the lame? Yes and no.

However, my point is that clearly Peter did not use physical force against them. And so if a modern-day Christian socialist wants to be true to this story, he shouldn’t authorize men with guns to override bourgeois prerogatives. Rather, he should say, “Bill Gates, give all of your money to Henry Paulson, or else God will strike you dead.” And then we could wait and see if God agreed with this.

31 Aug 2008

Why Government Regulations Keep Us Less Safe

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I am a very “extreme” (I prefer the term “consistent”) advocate of free markets. Not only do I think the private sector should provide 100% of the schooling services in a country, but I also think the government shouldn’t be in the business of guaranteeing product safety. For a quick exposition of my views relating to air travel safety and the TSA, see this article. And for a deeper treatment, buy the Best Economics Book Ever.

Basically, my point is that there’s nothing magical about government inspectors; any experts whom the government could hire, so too could the private sector. The crucial difference is that a private rating agency would go out of business if (like the FDA) it erroneously told people to stop eating tomatoes, etc., time after time. In contrast, government agencies get more funding after they screw up. If a plane crashes and records reveal shoddy maintenance logs, this is chalked up to “the free market,” even though that plane was operating under the protective oversight of the FAA.

Now, one of the best objections to my way of thinking is that, on the surface, it seems nothing is preventing these private sector analogs of the FAA, FDA, etc. from arising. According to this line of thinking, the addition of a layer of government regulators can’t possibly hurt (except for false alarms and the waste of tax dollars if the government regulators are truly redundant). But their presence can’t make us less safe, my critics claim.

Well it turns out government agencies do make us more insecure. When the government decides to “guarantee” safety in a particular area, it doesn’t want some other competing group showing it up. In the weekend (Aug. 30-31) Wall Street Journal, page A2, there is a story, “Private Mad-Cow Tests Can Be Banned, Court Says.” It’s short so I’ll just type in the whole thing, bold is mine:

A federal appeals court said the government can prohibit meat packers from testing their animals for mad-cow disease.

Because the Agriculture Department tests only a small percentage of cows for the rare but deadly disease, Kansas meatpacker Creekstone Farms Premium Beef of Arkansas City, Kan., wants to test all of its cows. The government says it can’t.

Larger meat companies worry that if Creekstone is allowed to perform the test and advertise its meat as safe, they could be forced to do the expensive test, too.

The U.S. Court of Appeals for the District of Columbia Circuit on Friday overturned a lower-court ruling that would have cleared the way for the testing. The appeals court said restricting the test is within the scope of the government’s authority.

Ah, this is just a great illustration of how things really work in the world. Far from the government chafing huge corporations with its noble efforts to save the public, on the contrary the government is in league with big business. The free market doesn’t lead to rampant sickness and accidents, it takes the government to suppress the natural free market reactions to such inefficient outcomes.

I can understand a teenager who thinks politicians are really trying to help. But how can grown men and women actually believe that politicians will side with them, and not the huge corporations that fund their campaigns?

30 Aug 2008

Is Home Equity a Form of Saving?

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In a recent NYT article Tyler Cowen wrote:

The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings. The thinking went something like this: As long as your home’s value rose every year, you didn’t have to set aside so much from your paycheck.

This is true, insofar as it goes. And indeed in the sharp debate on Kudlow’s show between Arthur Laffer and Peter Schiff, the same point came up; Schiff criticized the “saving” of rising home values as illusory while Laffer thought the economy was in fine shape.

Incidentally, this insight helps explain the shockingly low (even negative) “savings rate” of American households in recent years. These Keynesian-type aggregate statistics don’t count rising asset values as part of income, and so make people appear as spendthrifts. For example, suppose your salary is $75,000, your house appreciates $25,000 in market value, and you consume $75,000 worth of goods and services (fancy dinners, vacations, etc.). According to the standard macro accounting, your savings rate is 0%, but according to a broader measure that includes assets, your savings rate is 25%, because your total income (broadly defined) was $100,000 and you only consumed $75,000 of it.

Now it’s true that because of the recent episode, it appears that treating home equity as “saving” is crazy. But I think that’s the wrong conclusion. Really the mistake was “investing” in an asset that would soon drop sharply in price. If you really try to come up with a principled way to criticize the person for treating home equity as savings, you’re going to tie yourself in knots.

Let’s return to our example above. The guy normally makes $75,000 a year. But this year is special, and he gets a bonus of $25,000. His wife wants him to spend it on diamonds and a two-week blowout trip to Paris, but he thinks that would be irresponsible. “No no honey,” he says, “let’s instead build that extra guest room like we’ve been talking about. I’ve talked with real estate agents, and they tell me it would pay for itself; the market value of our house would go up by the $25,000 it would cost us. Instead of blowing the money now, let’s invest it in our house so it will be there when we sell the place and move to Florida for our retirement.”

I’m saying if his wife agrees to this plan, then their saving rate for the year is 25%. His income was, hands down, $100,000, and they only consumed $75,000 (at most). Now is this economically different from the first scenario, where the guy’s paycheck was always $75,000, but the market value of his unaltered house went up by $25,000? I don’t see how.

There is no such thing as a truly safe investment. Even the US federal government might default on its bonds, especially with the clowns we have in there right now. So you certainly can’t say, “Putting your money into bonds is saving, but putting it into real estate isn’t.”

The people who “legitimately” saved, and put some of their paychecks into Fannie Mae and Bear Stearns stock, also got hammered.

I anticipate one possible objection that says, “C’mon, you can’t withdraw the equity on your house very easily, so that’s why it’s not really saving.” But by the same token, you can’t withdraw contributions to your 401(k) very easily, either. It’s still saving though, right?

On an individual level, there is nothing wrong about treating a capital gain as part of one’s income–indeed a standard definition for income is, “How much one can consume in a period without impairing the capital stock.”

Now it’s true, something seems illusory in an entire nation importing foreign goodies (like cars and computers) while they sell off ownership claims to their assets. That seems like cheating, versus the nation devoting some of its resources to producing tools and machinery. But I think this reflects an unsupportable prejudice, comparable to someone saying, “You can’t have a strong economy without a strong manufacturing sector. A nation of programmers and musicians isn’t really productive.” (For more on this last point, see my article here where I show that a libertarian community would probably run perpetual trade deficits.)