Friday, December 23, 2011

Why you should be short the Euro

Hans, a middle-aged German tourist on his first visit to Orlando, Florida, finds the red light district and enters a large brothel. The madam asks him to be seated and sends over a young lady to entertain him.

They sit and talk, frolic a little, giggle a bit, drink a bit, and she sits on his lap. He whispers in her ear and she gasps and runs away! Seeing this, the madam sends over a more experienced lady to entertain the gentleman.

They sit and talk, frolic a little, giggle a bit, drink a bit, and she sits on his lap. He whispers in her ear, and she too screams, "No!" and walks quickly away.

The madam is surprised that this ordinary looking man has asked for something so outrageous that her two girls will have nothing to do with him. She decides that only her most experienced lady, Lola, will do. Lola has never said no, and it's not likely anything would surprise her. So the madam sends her over to Hans. The sit and talk, frolic a little, giggle a bit, drink a bit, and she sits on his lap. He whispers in her ear and she screams, "NO WAY, BUDDY!" and smacks him as hard as she can and leaves.

Madam is by now absolutely intrigued, having seen nothing like this in all her years of operating a brothel. She hasn't done the bedroom work herself for a long time, but she's sure she has said yes to everything a man could possibly ask for. She just has to find out what this man wants that has made her girls so angry. Besides she sees a chance to teach her employees a lesson.

So she goes over to Hans and says that she's the best in the house and is available. She sits and talks with him. They frolic, giggle, drink and then she sits in his lap.

Hans leans forwards and whispers in her ear, "Can I pay in Euros?"

HT Victor Hughes

Brent

Thursday, December 22, 2011

KiwiSlaver – I wasn’t too cynical

A basic lesson in economics is the total not just partial costs are important. Coercion and nudge virtually never produces good outcomes. Freedom is always preferable. This independent and objective assessment of the experience with the scheme to date is more than apposite…. the underlying problem is, of course, that it is very likely no political party would sign the death warrant that is reform.

KiwiSaver: An Initial Evaluation of the Impact on Retirement Saving

Published 16 Dec 2011 – N.Z. Treasury

Authors: David Law, Lisa Meehan and Grant M Scobie

Abstract

KiwiSaver is a voluntary savings scheme aimed at increasing the retirement wealth of a target population. A critical element shaping the success of KiwiSaver is the extent to which individuals participate in the scheme, given its voluntary nature; and, having chosen to participate, the extent to which their attitudes and practices toward savings have been modified by their participation. This paper presents the results of an initial evaluation to assess individuals' saving behaviour following the introduction of the KiwiSaver scheme. It is based on the findings of a national survey conducted in 2010.

We find that members adjust their savings portfolio such that only about one third of the contributions they make to their KiwiSaver account represents additional savings. Further, only 22% of respondents report that their expected retirement income would not be sufficient to meet basic living costs. Critically, regression analysis finds no relationship between KiwiSaver membership and any shortfall or excess in respondents' expected retirement income relative to either the amount needed to meet basic needs in retirement or to be comfortable.

Consequently, examination of standard measures of programme efficacy such as target effectiveness and leakage suggests that KiwiSaver has been only modestly successful in reaching the target population and that leakage to the non-target population was high. This implies that the on going cost of the scheme per target member could exceed $13,000 per year. Finally, recognising that KiwiSaver may have had broader objectives not explicitly stated in the Act, the scheme's possible effect on national saving was examined. In the long run the effect on net national saving appears marginal at best.

The full paper can be downloaded here.

Brent

Monday, December 19, 2011

The horror of Govt “stacks on the mill”

A great reminder here from Richard Epstein………

One of the enduring faiths of modern progressive thought is that omniscient policy makers can cancel out the errors of one form of economic intervention by implementing a second.

That lesson was brought home to me when I was a third year student at Yale Law School, whenever discussion turned to the perennial debate over the minimum wage. The charge against the minimum wage was that it had to introduce some measure of unemployment into labour markets by raising wages above the market-clearing price. “Not to worry,” came the confident reply.

The way to handle that imperfection is to raise the level of welfare benefits in order to remove the dislocations created by the minimum wage. If one government program had its rough edges, a second government program could ride to the rescue. Implicit in this argument was the tantalizing, but fatal, assumption of economic abundance: The government has the power to tax, and with that power, has access to a cornucopia of public funds that never runs empty—at least until it does.

This abundance-based argument is not confined solely to the minimum wage, but has been extended to countless programs of state intervention in labour, or indeed, any market. Thus in 1935, American labour law created a system of collective bargaining whereby employees bargain with a single voice. That system allows unions to seek, and often obtain, monopoly profits for their members. That system in turn reduces the number of workers hired by the unionized firms. So what is to be done with the excess workers? They should be shepherded into job-training programs, funded by the public, which would allow them to re-enter the labour force with other jobs.

Brent

Saturday, December 10, 2011

The Incredible Liteness of Occupiers

This is a current ad on Craigslist:

$1 / 15ft² – need roommate for my occupy tent (financial district)

My step father gave me his old tent to use so I can occupy the financial district. I set up a few nights ago but the cops were able to kick me out by using a big german sheapard to scare me. I want a roommate to help set up a new camp and watch my back in case the NAzis with the GERMAN dog come back to kick me out. I also have a video camera we can share in case they harrass us.

I am clean and keep a neat tent. I shave and shower every other week, we can alternate so some one is always in the tent. My girlfriend will bring food so we don’t have to leave. $1.00 rent is due upon our agreement and is due on the first of every month. It is not refundable as your dollar symbolizes your dedication to the tent and our cause.

Cats are OK, but you are not free to contact this poster with services or other commercial interests. For the pointer I thank  David Gonzalez via Tyler Cowan – all spelling errors are the responsibility of the occupier, as is the pricing model adopted for this market.

Brent

Wednesday, November 23, 2011

Employment Versus Entitlement

Contrasting numbers:

  1. At a company I chair: One position – Office Junior.  71 applicants (including many with degrees in architecture, media studies etc.). 67 counted out, one employed.
  2. A stat I read today: 1 in 4 Gen Y job offers turned down by applicant due to inadequate cell phone offer.

Conclusion – Snowflake and mates are slowly but surely squeezing the life out of the western economy and their own lives with it…. Gen Y is, rightly, close to the end of the alphabet.

Brent

Thursday, November 17, 2011

Abusive language

One of the things not helping the shocking reputation we finance and economics types have is the use of idiotic language coupled with totally deceptive phraseology.

My latest discovery is the term “high equity content” to describe risky bonds – hitherto known as “high yield bonds” or “junk bonds”.

This curiousity arises from the fact that when a bond has a high probability of default the chances of getting ones money back depend upon what’s left, if anything, of the issuing firm’s assets and earnings – i.e. the stuff of equity (not bonds) and equity analysts – so to assess these instruments takes equity analysis skills rather than the standard fare of credit analysts looking at gilts or low risk bonds.

The most important thing is that risk here is high! Disguising that or being deceptive about it by calling it “high equity content” is silly, condescending and deceptive. High risk bond – is the term the salesmen are struggling for.

In this case it is a new issue by Contact Energy – the ridiculous thing being that they have no need to resort to this rubbish. Investors are perfectly capable of figuring whether this level of risk is for them.

High equity content? Presumably the EU currently has “high equity content?” South Canterbury Finance bonds had “high equity content”?

This rubbery nonsense indicates rubbery intellect – the very same which describes company results as having “no unexpected surprises”. Right? So all surprises were fully expected. Good. Just as the risky option for Kiwislaver sufferers is described as “growth” instead of “most risky of the options”.

After a certain pretty bad day on Wall Street in 1929 JP Morgan’s side kick when asked about the state of the market declared that the market was “susceptible to price increases”.

Cleaning up our language might go some way to cleaning up our industry’s reputation – and possible clear out a few souls who are “susceptible to a brain transplant.”

Friday, November 11, 2011

On asset sales

Why on earth can Mr Key the National Government not bring itself to say:

Mr Goff and the Labour Party are simply wrong about this. For the last 20 years, all over the world, in governments of left, centre and right wing disposition and from Poland to Africa to the United Kingdom and to Australia, have progressively sold the last of their state owned assets to their citizens’ benefit.

They have done this, as ironically Mr Goff’s own government did in the 1980s, because governments  end up being consistently poor stewards of those assets compared with others and because taxpayers do not “own” the assets in any meaningful sense.

Like everyone else, it behoves us to capture at least some of the value that partial sale will bring while that value remains intact. The sales process will also deliver us whatever value might arise in the future – through how this utterly basic piece of finance works eludes Mr Goff and his colleagues.

We no longer have the time to rehearse arguments which have no policy content and were settled long ago – there are more pressing matters to be addressed.

Telling it like it is would make more sense than conjuring up dreamboat slush funds or promising to gamble asset sale proceeds in state owned banks.

Brent

Sunday, November 6, 2011

It’s politicians passing election crazed laws that need to extend the cooling off period

The National Party propose to help “poor” borrowers by, inter alia, extending the “cooling off” period from three to five days. The logic here is astounding.

Is this how it works?

Erstwhile borrower enters credit contract to borrow some money then….

  • Day One:       “yip, good as gold, glad I have this loan.”
  • Day Two:       “Going fine, this loan is just what I need.”
  • Day Three:    “Excellent, three days in and looking  good.” (that’s the current law)
  • Day Four:      “Hold on, I’m starting to get smarter. Must be than omega 3 I’m scoffing. Takes a while to kick in”
  • Day Five:      “Whoa – this loan stinks. I’m outta here. Thank God for the government.”

This is utter nonsense which helps prevent people learn any of the things that might improve their financial health.

Brent

Tuesday, November 1, 2011

Brain wire comes loose

Why would one take the proceeds from selling down state owned energy assets so as to reduce taxpayer risk, and promptly invest them in a state sponsored bank which is far more risky than any energy company?

Selling state assets is important for numerous reasons but it uses up valuable political capital in N.Z. Squandering the opportunity by straight away locking up the proceeds in an even more risky endeavour (established at the behest of a one man party conspiracy theory), shows just how shockingly low on investment prowess governments and even the normally sensible Bill English are.

It is, of course, precisely because of this sort of sheer brilliance that we ought to sell the state out of the country’s valuable assets.

Brent

Thursday, October 27, 2011

Not Quite so Rich

Top earners have taken some hits which typically have not been widely reported. In the US between 2007 and 2009 for example:

  • 99.9th percentile (the obscenely rich) a fall of 34% in income
  • 99.0th percentile (merely filthy rich  ) a fall of 16% in income
  • Median                                              a fall of 1% in income.

As Greg Mankiw’s research has shown – drawing rich earnings is on average a good deal more risky than drawing median earnings – which is why we depend on the rich to take the risks that bring progress… one of the most difficult concepts to sell.

Brent

Tuesday, October 18, 2011

Get thinking here…. Sowell

“Just as freedom of the press does not exist for the sake of that tiny minority of the population who are journalists, so property rights do not exist for the sake of those people with substantial property holdings. Both rights exist to serve social purposes reaching far beyond those who actually exercise these rights.”

1999 – the Quest for Cosmic Justice.

Brent

Friday, October 14, 2011

Yet another reason for Kiwis to quit property

The effect of ageing on asset prices may make the rich world’s problems worse

Sep 24th 2011 | The Economist

SINCE the bursting of Japan’s asset bubbles in the early 1990s, the country has undergone a long and deflationary process of debt reduction. During this period, Japanese policymakers have attracted criticism from (among others) Ben Bernanke, the chairman of the Federal Reserve, for their gradualist approach to reflating the economy. The critics’ charge is this: that although the Bank of Japan (BoJ) pioneered many of the policies that the Fed and others have since followed—such as committing to zero interest rates and increasing bank reserves by the alchemy of quantitative easing—the Japanese central bank still did too little, too late.

Things look rather different in Japan itself, where some say the problem lies in a lack of demand for loans from the debt-strapped private sector, rather than a lack of supply. This is the hallmark of a “balance-sheet recession”, a term coined by Richard Koo of the Nomura Research Institute to describe the process whereby households and companies pay down debts rather than embark on new spending.

In two speeches* this year, Kiyohiko Nishimura, deputy governor of the BoJ, has developed this line of thinking to help explain why Japan’s balance-sheet adjustment has taken so long. Mr Nishimura blames the prolonged slump on ageing, which is furthest advanced in Japan, but is also occurring in many of the world’s biggest economies.

His central argument is that ageing depresses asset prices. That in turn makes deleveraging tougher because debt used to finance assets is harder to pay off without incurring losses. This, he says, may have grim repercussions for America and Europe.

The theory behind the link between ageing and asset prices is outlined in a recent working paper by Elod Takats of the Bank for International Settlements (BIS). In simple terms, the young and middle-aged save for old age by buying assets, often with borrowed money; the old sell them to pay for retirement. As the working-age population rises—as it did, for instance, after the baby boom—asset prices rocket because of increased demand. As baby-boomers reach retirement, the reverse may happen.

In his paper Mr Takats seeks to quantify this effect. He prefers to look at an international sample rather than data on single countries, because that enables more robust identification of the impact of ageing. He also focuses on house prices rather than financial assets, because they are less likely to be influenced by cross-border capital flows. Mr Takats applies two aspects of demography to BIS house-price data from 22 advanced economies: first, total population; second, the ratio of old people to the working-age population, or the old-age dependency ratio.

Between 1970 and 2009, he finds that a 1% rise in GDP per person and a 1% rise in the total population each corresponded to about a 1% rise in real house prices. But a 1% increase in the old-age dependency ratio was associated with a 0.66% drop in real house prices.

Using United Nations projections, his analysis suggests that house prices will face strong headwinds in the next 40 years as populations age. American house prices, for example, will rise by about 80 basis points a year less than they would do if you strip out demographic factors, he reckons. For faster-ageing countries such as Japan, Germany and Italy, prices would fall by more than 1% a year, though he notes that other factors may offset the demographic effects and he does not expect a meltdown in prices.

Prices of financial assets do not necessarily shadow those of property: people tend to buy and sell stocks and bonds later in life than they buy and sell homes. But they are also affected by ageing as the old sell them to realise cash. A model developed at the Federal Reserve Bank of San Francisco finds that since 1954 there has been a high correlation between the ratio of Americans aged 40-49 to those aged 60-69, and the price/earnings ratio of the stockmarket. The implication of this relationship for share prices in the future is bearish, it says.

Based on standard demographic and earnings assumptions, the San Francisco Fed’s model suggests share prices will fall by 13% between 2010-21. The good news for America is that the relative proportion of middle-aged people should rebound in 2025, implying a strong recovery.

Such estimates should be treated with caution. Ageing, at least in the short term, is fairly predictable, so markets may have already discounted its impact on asset prices. Mr Takats draws attention to the fact that elderly people may end up working longer, which would reduce the pressure to sell their assets.

But the uncertainties run both ways. As Mr Takats points out, overstretched pension systems may spur retired people to run down their assets more aggressively than expected. The BoJ’s Mr Nishimura ventures that the downward pressure on prices may be exacerbated by ageing in countries like Russia and China, whose entry into the global economy helped fuel the world’s recent asset-price boom.

Grey market

If ageing does exacerbate the costs of a balance-sheet recession, what can policymakers do about it? The BoJ, Mr Nishimura says, has sought to counter some of the effects, such as the loss of lending expertise in the banking sector and risk aversion, through “truly unconventional” monetary policy, such as buying low-grade corporate bonds and exchange-traded funds to spur investment in riskier assets; and providing funds for banks to lend and invest in promising new fields, such as innovations for the elderly. But his overall message is stark: repairing balance-sheets when the population is ageing is much harder than when it is young. Some people, he cautions, regard the turmoil since 2008 as a “fleeting nightmare”. But where ageing is endemic, there may be no going back to normal. As the title of one of his papers ominously puts it: “This time may truly be different.”

Brent

Useful sequence on strategy from Steve Hansen

Forwards coach Steve Hansen almost unwittingly in talking to a radio interviewer this morning provided some helpful insights into strategy and even tactics.

He stated that what is needed (in preparing and then executing in a winning sports effort – in this case the RWC semi final) is:

Clarity first. Knowing with clarity what you are supposed to be doing. Then you can move to…

Intensity. Upping the intensity of effort to actually do what you are wanting to do. And with that tends to come…

Precision – which is fairly useful.

So turned around you should end up with precise and intense effort directed at exactly what you are trying to do. Very simple and no doubt very difficult to achieve (especially consistently) but it helps to know the sequence and work to it.

Monday, October 10, 2011

Joanne Black hits the nail absolutely on the head….

The Black Page, NZ Listener October 15 2011

Opposition leader Phil Goff says that once state assets are sold, they are gone for good. If only that were true. Sadly, KiwiRail was sold but even though we tried to later pretend we didn’t recognise it, it came back to us. It truly is a dog, in so many ways.

Brent

Inevitably

image

Saturday, October 8, 2011

Brooks on technological innovation…..

OP-ED COLUMNIST DAVID BROOKS
NYT: Published: October 6, 2011
Let’s imagine that someone from the year 1970 miraculously traveled forward in time to today.traveled forward in time to today. You could show her one of the iPhones that Steve Jobs helped create, and she’d be thunderstruck. People back then imagined wireless communication (Dick Tracy, Star Trek), but they never imagined you could funnel an entire world’s worth of information through a pocket-sized device.

The time traveler would be vibrating with excitement. She’d want to know what other technological marvels had been invented in the past 41 years. She’d ask about space colonies on Mars, flying cars, superfast nuclear-powered airplanes, artificial organs. She’d want to know how doctors ended up curing cancer and senility.

You’d have to bring her down gently. We don’t have any of those things. Airplanes are pretty much the same now as they were then; so are cars, energy sources, appliances, houses and neighborhoods. A person born in 1900 began with horse-drawn buggies and died with men walking on the Moon, but the last few decades have seen nothing like that sort of technological advance.

Recently, a number of writers have grappled with this innovation slowdown. Michael Mandel wrote a BusinessWeek piece in 2009. Tyler Cowen wrote an influential book called “The Great Stagnation” in 2010. The science-Fiction writer Neal Stephenson has just published a piece called “Innovation Starvation” in World Policy Journal and Peter Thiel, who helped create PayPal and finance Facebook, had an essay called “The End of the Future” in National Review.

These writers concede that there has been incredible innovation in information technology. Robotics also seems to be humming along nicely, judging by how few workers are needed by manufacturing plants now. But the pace of change is slowing down in many other sectors.

As Thiel points out, we travel at the same speeds as we did a half-century ago, whether on the ground or in the air. We rely on the same basic energy sources. Warren Buffett made a $44 billion investment in 2009. It was in a railroad that carries coal.

The Green Revolution improved grain yields by 126 percent from 1950 to 1980, but yields have risen only by 47 percent in the decades since. The big pharmaceutical companies have very few blockbuster drugs in the pipeline. They are slashing their research departments.

If you buy the innovation stagnation thesis, three explanations seem most compelling. First, the double hump nature of the learning curve. When researchers are climbing the first hillside of any problem, they think they can see the top. But once they get there, they realize things are more complicated than they thought. They have to return to fundamentals and climb an even steeper hill ahead.

We have hit the trough phase in all sorts of problems — genetics, energy, research into cancer and Alzheimer’s. Breakthroughs will come, just not as soon as we thought.

Second, there has been a loss of utopian élan. If you go back and think about America’s big World’s Fairs or if you read about Bell Labs in its heyday or Silicon Valley in the 1980s or 1990s, you see people in the grip of utopian visions. They imagine absurdly perfect worlds. They feel as though they have the power to begin the world anew. These were delusions, but inspiring delusions.

This utopianism is almost nowhere to be found today. Stephenson and Thiel point out that science fiction is moribund; the new work is dystopian, not inspiring. Thiel argues that the environmentalist ethos has undermined the faith in gee-whiz technological wizardry. Legal institutions and the cable TV culture dampen enthusiasm by punishing failure so remorselessly. NASA’s early failures were seen as steps along the way to a glorious future. Deepwater Horizon’s failure demoralized the whole nation.

Third, there is no essential culture clash. Look at the Steve Jobs obituaries. Over the course of his life, he combined three asynchronous idea spaces — the counterculture of the 1960s, the culture of early computer geeks and the culture of corporate America. There was LSD, “The Whole Earth Catalogue” and spiritual exploration in India. There were also nerdy hours devoted to trying to build a box to make free phone calls.

The merger of these three idea networks set off a cascade of innovations, producing not only new products and management styles but also a new ideal personality — the corporate honcho in jeans and the long-sleeve black T-shirt. Formerly marginal people came together, competed fiercely and tried to resolve their own uncomfortable relationships with society.

The roots of great innovation are never just in the technology itself. They are always in the wider historical context. They require new ways of seeing. As Einstein put it, “The significant problems we face cannot be solved at the same level of thinking we were at when we created them.”

If you want to be the next Steve Jobs and end the innovation stagnation, maybe you should start in hip-hop.

Brent

Thursday, October 6, 2011

The nappy rash indicator

From Marginal Revolution a post by Tyler Cowen on October 5, 2011 sparked the following:

…recent data show diaper sales are slowing and sales of diaper-rash ointment are rising.

Here is more, and I thank Peter Metrinko for the pointer.

4 comments

Robbie314 October 5, 2011 at 3:58 pm

Speaking as a father of four (including a six-month-old), skimping on diaper changes is a doomed attempt at savings. You give it all back in cleaning costs in the event of what I’ll politely call “catastrophic diaper failure”.

And, diaper cream that actually works is surprisingly expensive.

REPLY

Andrew' October 5, 2011 at 4:30 pm

Too big to fail fo’ real.

REPLY

Gabe October 5, 2011 at 4:31 pm

Just substitute the cheaper rash cream into the CPI for the more expensive diapers and whoala…CPI just went down a bit.

I knew I felt my standard of living going up!

REPLY

Lisa October 5, 2011 at 6:12 pm

Check to see if sales of cloth diapers are up. They’re cheaper and longer lasting, but may increase incidence of diaper rash.

Brent

Tuesday, October 4, 2011

No prizes for this prediction

Who would we expect to be the most wary about the implications and soundness, let alone the long run veracity of statistics showing a significant reduction in crime when interviewed on Morning Report today?

Well blow me down if it wasn’t a Professor of Criminology.

Brent

Monday, October 3, 2011

Don’t give up hope on “random”

Japanese macaques, AP 

Discussions of random processes often include this thought experiment. Here is a “live” test… reported by the BBC.

A few million virtual monkeys are close to re-creating the complete works of Shakespeare by randomly mashing keys on virtual typewriters.

A running total of how well they are doing shows that the re-creation is 99.990% complete. The first single work to be completed was the poem A Lover's Complaint.

Set up by US programmer Jesse Anderson the project co-ordinates the virtual monkeys sitting on Amazon's EC2 cloud computing system via a home PC.

Mr Anderson said he started the project as a way to get to know the Hadoop programming tool better and to put Amazon's web services to the test.

It is also a practical test of the thought experiment that wonders whether an infinite number of monkeys pounding on an infinite number of typewriters would be able to produce Shakespeare's works by accident.

Mr Anderson's virtual monkeys are small computer programs uploaded to Amazon servers. These coded apes regularly pump out random sequences of text.

Each sequence is nine characters long and each is checked to see if that string of characters appears anywhere in the works of Shakespeare. If not, it is discarded. If it does match then progress has been made towards re-creating the works of the Bard.

To get a sense of the scale of the project, there are about 5.5 trillion different combinations of any nine characters from the English alphabet.

Mr Anderson's monkeys are generating random nine-character strings to try to produce all these strings and thereby find those that appear in Shakespeare's works.

Mr Anderson kicked off the project on 21 August using Amazon's cloud computers. Each day of virtual monkey keyboard mashing processing cost $19.20 (£12.40).

The project has been moved to a home PC to speed up text string generation and to cut the cost. To make the task even easier the text being sampled has had all the spaces and punctuation removed.

Mathematicians said the constraints Mr Anderson introduced to the project mean he will complete it in a reasonable amount of time.

Monkeys: More interested in throwing faeces than writing sonnets

"If he's running an evolutionary approach, holding on to successful guesses, then he'll get there," said Tim Harford, popular science writer and presenter of the BBC's radio show about numbers More or Less.

And without those constraints?

"Not a chance," said Dr Ian Stewart, emeritus professor of mathematics at the University of Warwick.

His calculations suggest it would take far, far longer than the age of the Universe for monkeys to completely randomly produce a flawless copy of the 3,695,990 or so characters in the works.

"Along the way there would be untold numbers of attempts with one character wrong; even more with two wrong, and so on." he said. "Almost all other books, being shorter, would appear (countless times) before Shakespeare did."

Earlier experiments have shown how difficult the task is. Wikipedia mentions a 2003 project that used computer programs to simulate a lot of monkeys randomly typing.

After the equivalent of billions and billions and billions of monkey years the simulated apes had only produced part of a line from Henry IV, Part 2.

Also in 2003, Paignton Zoo carried out a practical test by putting a keyboard connected to a PC into the cage of six crested macaques. After a month the monkeys had produced five pages of the letter "S" and had broken the keyboard.

Brent

Institutionalised Racism

From David Zetland’s Aguanomics blog (David is a primarily a water economist – with an interest in much else besides).

01 October 2010

(via WEH) Thomas Sowell doesn't suffer fools:

Few things have captured in microcosm what has gone so painfully wrong, where racial issues are concerned, like the recent election for mayor of Washington, D.C.
Mayor Adrian Fenty, under whom the murder rate has gone down and the school children's test scores have gone up, was resoundingly defeated for re-election.

One key fact tells much of the story: Mayor Fenty received more than 70 percent of the white vote in Washington. His opponent received more than 80 percent of the black vote.
Both men are black. But the head of the school system that he appointed is Asian and the chief of police is a white woman. More than that, most of the teachers who were fired were black. There were also bitter complaints that black contractors did not get as many of the contracts for doing business with the city as they expected.

In short, the mayor appointed the best people he could find, instead of running a racial patronage system, as a black mayor of a city with a black majority is apparently expected to. He also didn't spend as much time schmoozing with the folks as was expected.

How did we reach the point where black voters put racial patronage and racial symbolism above the education of their children and the safety of everyone?
There are many reasons but the trend is ominous. One key factor was the creation, back in the 1960s, of a whole government-supported industry of race hustling.

Racism will persist longer when governments make rules based on racism,* whether negative (allowing slavery) or "positive" (giving jobs or money to people with different skin colours).

Governments should not discriminate on the basis of colour. If anything, government should help people under criteria that are not permanent. Poverty is ok, sick is ok. Tall, short, black, white, man, woman, gay, or straight? Not ok.

And that's not even acknowledging that most government programs crowd out private programs (educating kids, caring for the local homeless) that can do the same thing, better.

Bottom Line: Governments are necessary some of the time for some things, but for all of the time for all things. Just ask yourself: Is there another way? And then go do it.


* On why racism is NOT about skin colour, read this esearch:
Cosmides, L., Tooby, J. & Kurzban, R. (2003). Perceptions of race [pdf]. Trends in Cognitive Sciences, 7(4), 173-179.
Kurzban, R., Tooby, J., & Cosmides, L. (2001). Can race be erased? Coalitional computation and social categorization [pdf]. Proceedings of the National Academy of Sciences, 98(26), 15387-15392.

Brent

Sunday, October 2, 2011

Worth remembering…

Dismal perhaps… but free

Oct. 2nd’s New York Times Book Review published this letter of mine:

Reviewing “American Dreamers,” Michael Kazin’s paean to the country’s radical left, Beverly Gage echoes Kazin by including the abolition of slavery among the great achievements of leftists — an example of their “utopian spirit” (Sept. 18). Such radicals did call for abolition, but radicals of a very different sort — thinkers who offered a new understanding of how societies hang together and prosper without the centralized commands that Kazin’s leftists so extol — also lent their influential voices to the cause of abolition. These radicals were classical economists.

It was economists’ prominence in the abolition movement that led Thomas Carlyle, in an 1849 essay, to defend slavery and ridicule economists as “rueful” thinkers, each of whom “finds the secret of this universe in ‘supply and demand,’ and reduces the duty of human governors to that of letting men alone.” Economists’ advocacy of freedom, even for slaves, so incensed Carlyle that he gave it, in the same essay, a nickname that — considering its provenance — economists should forever wear proudly: the “dismal science.”

DONALD J. BOUDREAUX
Fairfax, Va.
The writer is a professor of economics at George Mason University.

Thanks to Cafe Hayek

Brent

Friday, September 30, 2011

So what do you really hate here????

From www.junkscience.com

The Obama administration is prosecuting seven oil and gas companies for the deaths of 28 birds. But what about the wind industry?

The Wall Street Journal (29 Sept) points out in an editorial this morning:

The Obama Administration’s hostility to oil and gas exploration is well known, but last week it took an especially fowl turn. The U.S. Attorney for North Dakota hauled seven oil and natural gas companies into federal court for killing 28 migratory birds that were found dead near oil waste lagoons…

Continental Resources is accused of violating the 1918 Migratory Bird Treaty Act because “on or about May 6, 2011 in the District of North Dakota” the company “did take [kill] one Say’s Phoebe,” of the tyrant flycatcher bird family. Brigham Oil & Gas is accused of killing two Mallard ducks. The Class B misdemeanors carry fines of up to $15,000 for each dead bird and up to six months in prison…

Absurdity aside, this prosecution is all the more remarkable because the wind industry each year kills not 28 birds, or even a few hundred, but some 440,000, according to estimates by the American Bird Conservancy based on Fish and Wildlife Service data. Guess how many legal actions the Obama Administration has brought against wind turbine operators under the Migratory Bird Treaty Act? As far as we can tell, it’s zero.

And this isn’t the first time this has happened.

Brent

Wednesday, September 28, 2011

Why Dick Smith Should Stick to Electronics: Dickhead Economics

In a populist outburst bemoaning the Cole’s CE pay for the year – as if that particular salary could materially affect the course of the Australian economy - vastly successful entrepreneur Dick Smith provided further evidence of a commonly observed phenomena:

Often it seems, businessmen who have an intense and sometimes unique knowledge of the micro workings of a given market and how to profit from that, frequently have quaint ideas about the wider forces at work. 

Smith told Morning Report that “capitalism has to have growth” and this is not possible because the world is “finite”. Apparently, the Murdoch empire (the guys currently flattened through a misjudgement in the micro markets they know so well) is obsessed with growth and they control 70% of Australia’s newspapers. And? Anyway…..

All this is “of course” linked to the poverty of farmers and “all those people on the dole” (that’s the guys in the hoodies with the cheap MP3 players, batteries and electronic goodies helpfully provided by Mr Wonder who “knows” that this “extreme capitalism” is wrong). Apparently “all extremes are wrong”. A bit of minor ex cathedra from the electronics king.

These are strange meanderings of logic. They come from the now thankfully out of fashion fantasy that “capitalism” like “socialism” is some kind of human selected “way of life” to be lifted down from the shelf in some sort of philisophico-political supermarket specialising in such wares, placed in the trolley and trundled to the cashier.

Presumably “extreme capitalism” is the jumbo size while the people of the USSR all went for the XOS version of socialism.

Nice to know know Dick is sticking with the family size capitalist pack that comes with a modest CEO salary, suitably wealthy farmers (who apparently make the world’s best food – it’s just that globalisation “doesn’t work the way its supposed to”, and no unemployment.

Why am I paying taxes so RNZ can parade this utter drivel? And why does Simon Mercer – once the fearless champion of “Fair Go” let him away with it?

Brent

Monday, September 19, 2011

Obama–policy to date… the evaluation

By MICHAEL J. BOSKIN WSJ 19 Sept

When it comes to the economy, presidents, like quarterbacks, often get more credit or blame than they deserve. They inherit problems and policies that affect the economy well into their presidencies and beyond. Reagan inherited Carter's stagflation, George H.W. Bush twin financial crises (savings & loan and Third World debt), and their fixes certainly benefitted the Clinton economy.

President Obama inherited a deep recession and financial crisis resulting from problems that had been building for years. Those responsible include borrowers and lenders on Wall Street and Main Street, the Federal Reserve, regulatory agencies, ratings agencies, presidents and Congress.

Stanford economist Michael Boskin on the records that Obama has set as president and last night's jobs speech.

Mr. Obama's successor will inherit his deficits and debt (i.e., pressure for higher taxes), inflation and dollar decline. But fairly or not, historians document what occurred on your watch and how you dealt with your in-box. Nearly three years since his election and more than two years since the economic recovery began, Mr. Obama has enacted myriad policies at great expense to American taxpayers and amid political rancor. An interim evaluation is in order.

And there's plenty to evaluate: an $825 billion stimulus package; the Public-Private Investment Partnership to buy toxic assets from the banks; "cash for clunkers"; the home-buyers credit; record spending and budget deficits and exploding debt; the auto bailouts; five versions of foreclosure relief; numerous lifelines to Fannie Mae and Freddie Mac; financial regulation and health-care reform; energy subsidies, mandates and moratoria; and constant demands for higher tax rates on "the rich" and businesses.

Consider the direct results of the Obama programs. A few have performed better than expected—e.g., the auto bailouts, although a rapid private bankruptcy was preferable and GM and Chrysler are not yet denationalized successes. But the failed stimulus bill cost an astounding $280,000 per job—over five times median pay—by the administration's inflated estimates of jobs "created or saved," and much more using more realistic estimates.

Cash for clunkers cost $3 billion, just to shift car sales forward a few months. The Public-Private Investment Partnership, despite cheap federal loans, generated 3% of the $1 trillion claimed, and toxic assets still hobble some financial institutions. The Dodd-Frank financial reform law institutionalized "too big to fail" amid greater concentration of banking assets and mortgages in Fannie and Freddie. The foreclosure relief program permanently modified only a small percentage of the four million mortgages the president promised. And even Mr. Obama now admits that the shovels weren't ready in all those "shovel-ready" stimulus projects.

Perpetually overpromising and under delivering is not remotely good enough, not even for government work. No corporate CEO could survive such a clear history of failure. The economic records set on Mr. Obama's watch really are historic (see nearby table). These include the first downgrade of sovereign U.S. debt in American history, and, relative to GDP, the highest federal spending in U.S. history save the peak years of World War II, plus the highest federal debt since just after World War II.

The employment picture doesn't look any better. The fraction of the population working is the lowest since 1983. Long-term unemployment is by far the highest since the Great Depression. Job growth during the first two years of recovery after a severe recession is the slowest in postwar history.

Moreover, the home-ownership rate is the lowest since 1965 and foreclosures are at a post-Depression high. And perhaps most ominously, the share of Americans paying income taxes is the lowest in the modern era, while dependency on government is the highest in U.S. history.

That's quite a record, although not what Mr. Obama and his supporters had in mind when they pronounced this presidency historic.

President Obama constantly reminds us, with some justification, that he was dealt a difficult hand. But the evidence is overwhelming that he played it poorly. His big government spending, debt and regulation fix has clearly failed. Relative to previous recoveries from deep recessions, the results are disastrous. A considerable fraction of current joblessness, lower living standards, dependency on government and destroyed savings is the result. Worse, his debt explosion will be a drag on economic growth for years to come.

Mr. Obama was never going to enthusiastically embrace pro-market, pro-growth policies. But many of his business and Wall Street supporters (some now former supporters) believed he would govern more like President Clinton, post-1994. After a stunning midterm defeat, Mr. Clinton embarked on an "era of big government is over" collaboration with a Republican Congress to reform welfare, ratify the North American Free Trade Agreement and balance the budget. But Mr. Obama starts far further left than Mr. Clinton and hence has a much longer journey to the center.

The president still has time to rebound from his economic policy missteps by promoting permanent, predictable policies to strengthen forecasted anemic growth. But do Mr. Obama and his advisers realize their analysis of the economic crisis was flawed and their attempted solutions mostly misconceived? That vast spending, temporary tax rebates and social engineering did little of lasting value at immense cost? That the prospect of ever more regulation and taxation created widespread uncertainty and severely damaged incentives and confidence? That the repeated attempts to prevent markets (e.g., the housing market) from naturally bottoming and rebounding have created confusion and inhibited recovery?

Can Mr. Obama change course, given the evidence that the economy responded poorly to top-down direction from Washington rather than the bottom-up individual initiative that is the key to strong growth? Is he willing to rein in the entitlement state erected under radically different economic and demographic conditions? And will he reform the corporate and personal income taxes with much lower rates on a broader base? Or is he going to propose the same failed policies—more spending, social engineering, temporary tax cuts and permanent tax hikes?

On the answer to these questions, much of Mr. Obama's, and the nation's, future rests.

Mr. Boskin, a professor of economics at Stanford and a senior fellow at the Hoover Institution, chaired the Council of Economic Advisers under President George H.W. Bush.

Thursday, September 15, 2011

The Rise and Fall of the White Man’s Empire

For at least three years I have been claiming that it is largely “all over” for the rent seeking economies – that is the interest group and politics riddled closet collectivist economies which make up the “developed” world.

Here is a graph that makes the point better than I can:

image

This is one result of the N.Z. Prime Ministers “streak of socialism in us all”.

Such fun…..

Brent

Wednesday, September 7, 2011

Extraordinary statement–how does this work?

In describing the denial the appeal of Roger Moses the Herald reported this from the sentencing proceedings:

In sentencing the men Justice Heath said their offending did not involve any element of dishonesty, rather the performance of directors was inept.

While in my view there were various reasons for which the activities of the defendant which might very well warrant a jail term and the upholding of law and order is a praiseworthy objective, sending people to jail for ineptitude seems strange indeed.

On this basis half the population ought to be inside. The rule, down through the centuries has ever been that one is allowed to make mistakes, make errors of business judgment, even make a thorough going muddle of the relatively straightforward.

One is not permitted however to break the law or commit crimes.

To move outside or away from this time honoured principle and commence instead to make judgments about what is and “ineptitude” and jail people on the basis of that judgment requires supreme and dangerous arrogance.

It is to be hoped that the elements of the conviction which led to jail were not those of apparent ineptitude.

Brent

Tuesday, September 6, 2011

What happens when Governments “stimulate”

When the inevitable call comes for “more stimulus” and “more government spending” and “more public works” – as it will in the next week or so this extract from the New York Times (hardly an advocate of dumping Keynesian spending or a critic of government spending):

HAMADA, Japan — The Hamada Marine Bridge soars majestically over this small fishing harbor, so much larger than the squid boats anchored below that it seems out of place.

And it is not just the bridge. Two decades of generous public works spending have showered this city of 61,000 mostly graying residents with a highway, a two-lane bypass, a university, a prison, a children’s art museum, the Sun Village Hamada sports center, a bright red welcome center, a ski resort and an aquarium featuring three ring-blowing Beluga whales.

Nor is this remote port in western Japan unusual. Japan’s rural areas have been paved over and filled in with roads, dams and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s. During those nearly two decades, Japan accumulated the largest public debt in the developed world — totaling 180 percent of its $5.5 trillion economy — while failing to generate a convincing recovery.

These policies fail – one cannot manufacture economic growth by governments spending up taxpayer money or borrowing from future taxpayers.

HT Russ Roberts at Cafe Hayek.

Brent

Monday, August 22, 2011

Shortest Possible Course on Why Keynes was wrong and dangerous

In university classrooms—and especially the Obama White House—fancy theories of macroeconomics defy basic common sense.

By STEPHEN MOORE

Christina Romer, the University of California at Berkeley economics professor and President Obama's first chief economist, once relayed the old joke that "there are two kinds of students: those who hate economics and those who really hate economics." She doesn't believe that, but it's true. I'm surprised how many students tell me economics is their least favorite subject. Why? Because too often economic theories defy common sense. Alas, the policies of this administration haven't boosted the profession's reputation.

Consider what happened last week when Laura Meckler of this newspaper dared to ask White House Press Secretary Jay Carney how increasing unemployment insurance "creates jobs." She received this slap down: "I would expect a reporter from The Wall Street Journal would know this as part of the entrance exam just to get on the paper."

Mr. Carney explained that unemployment insurance "is one of the most direct ways to infuse money into the economy because people who are unemployed and obviously aren't earning a paycheck are going to spend the money that they get . . . and that creates growth and income for businesses that then lead them to making decisions about jobs—more hiring."

That's a perfect Keynesian answer, and also perfectly nonsensical. What the White House is telling us is that the more unemployed people we can pay for not working, the more people will work. Only someone with a Ph.D. in economics from an elite university would believe this.

I have two teenage sons. One worked all summer and the other sat on his duff. To stimulate the economy, the White House wants to take more money from the son who works and give it to the one who doesn't work. I can say with 100% certainty as a parent that in the Moore household this will lead to less work.

Economic bimboism is rampant in Washington. The Center for American Progress held a forum earlier this summer arguing that raising the minimum wage would create more jobs. For this to be true, you have to believe that the more it costs a business to hire a worker, the more workers companies will want to hire.

A few months ago Mr. Obama blamed high unemployment on businesses becoming "more efficient with a lot fewer workers," and he mentioned ATMs and airport kiosks. The Luddites are back raging against the machine. If Mr. Obama really wants to get to full employment, why not ban farm equipment?

Or consider the biggest whopper: Mr. Obama's thoroughly discredited $830 billion stimulus bill. We were promised $1.50 or even up to $3 of economic benefit—the mythical "multiplier"—from every dollar the government spent. There was never any acknowledgment that for the government to spend a dollar, it has to take it from the private economy that is then supposed to create jobs. The multiplier theory only works if you believe there's a fairy passing out free dollars.

How did modern economics fly off the rails? The answer is that the "invisible hand" of the free enterprise system, first explained in 1776 by Adam Smith, got tossed aside for the new "macroeconomics," a witchcraft that began to flourish in the 1930s during the rise of Keynes. Macroeconomics simply took basic laws of economics we know to be true for the firm or family—i.e., that demand curves are downward sloping; that when you tax something, you get less of it; that debts have to be repaid—and turned them on their head as national policy.

As Donald Boudreaux, professor of economics at George Mason University and author of the invaluable blog Cafe Hayek, puts it: "Macroeconomics was nothing more than a dismissal of the rules of economics." Over the years, this has led to some horrific blunders, such as the New Deal decision to pay farmers to burn crops and slaughter livestock to keep food prices high: To encourage food production, destroy it.

The grand pursuit of economics is to overcome scarcity and increase the production of goods and services. Keynesians believe that the economic problem is abundance: too much production and goods on the shelf and too few consumers. Consumers lined up for blocks to buy things in empty stores in communist Russia, but that never sparked production. In macroeconomics today, there is a fatal disregard for the heroes of the economy: the entrepreneur, the risk-taker, the one who innovates and creates the things we want to buy. "All economic problems are about removing impediments to supply, not demand," Arthur Laffer reminds us.

So here we are, three years of mostly impotent stimulus experiments and the economy still hobbled. Keynesians would be expected to be second-guessing the wisdom of their theories. Instead, Prof. Romer recently complained that the political system will not allow Mr. Obama to "go back and ask for more" stimulus.

And that is why Americans hate economics.

Mr. Moore is a member of the Journal's editorial board.

Brent

Monday, August 15, 2011

Hypothesis worthy of consideration

In 1887 Alexander Tyler, a Scottish history professor at the University of Edinburgh, had this to say about the fall of the Athenian Republic some 2,000 years prior:

"A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse over loose fiscal policy, (which is) always followed by a dictatorship."

"The average age of the world's greatest civilizations from the beginning of history, has been about 200 years. During those 200 years, these nations always progressed through the following sequence:

From bondage to spiritual faith;
From spiritual faith to great courage;
From courage to liberty;
From liberty to abundance;
From abundance to complacency;
From complacency to apathy;
From apathy to dependence;
From dependence back into bondage."

Professor Joseph Olson of Hamline University School of Law in  St. Paul , Minnesota , points out that in  the last Presidential election:

Number of States won by: Obama: 19 McCain: 29
Square miles of land won by: Obama: 580,000 McCain: 2,427,000
Population of counties won by: Obama: 127 million McCain: 143 million
Murder rate per 100,000 residents in counties won by:  Obama:13.2 McCain: 2.1

Olson adds: "In aggregate, the map of the territory McCain won was mostly the land owned by the taxpaying citizens of the country. Obama territory mostly encompassed those citizens living in low income tenements and living off various forms of government welfare..."

Olson believes the  United States  is now somewhere between the "complacency and apathy" phase of Professor Tyler's definition of democracy, with some forty percent of the nation's population already having reached the "governmental dependency" phase.

Brent

Friday, August 12, 2011

Lottery Winners Do Not Avoid Bankruptcy

This short post by Alex Tabarrok is well worth thinking about….

August 11, 2011 at 10:33 am in Data Source, Economics | Permalink

The rags to riches to rags story of a poor, unemployed fellow who wins the lottery, blows the cash, and ends up just as poor and unemployed as he began is a common trope. (Here is a classic in the genre). In a paper just published in the Review of Economics and Statistics (gated, free version here), Hankins, Hoekstra and Skiba argue that the rags to riches to rags story has a systematic component.

The authors link records of lottery winners to bankruptcy records. The use of the lottery is a great randomization device, although obviously it restricts the sample to people who play the lottery.

The central finding is this: people who win large amounts are just as likely to end up bankrupt as people who win small amounts. People who win a large amount, $50,000 to $150,000, have a lower bankruptcy rate immediately after winning but a higher bankruptcy rate a few years later so the 5-year bankruptcy rate for the big winners is no lower than for the small winners. Amazingly, by the time the big winners do go bankrupt their assets and debts are not significantly different from those of the small winners. The big winners who ended up bankrupt could have paid off all of their debts but chose not to.

N.B. the result is not that most lottery winners go bankrupt or that winning money doesn’t help people–the result, as Robin Hanson might say, is that bankruptcy isn’t about money.

Brent

Tuesday, August 9, 2011

Drop in queue at food banks….

Gisborne Herald. Saturday, August 06, 2011 • Andrew Fernando

A HUGE increase in the number of Gisborne people seeking budgeting advice has contributed to a drastic drop in demand for food bank services, even as living costs and unemployment levels rise.

Three Gisborne food banks spoken to by The Herald said there had been a significant drop in the number of people seeking donations, with the city’s largest food bank — The Salvation Army — reporting a decrease of around 50 percent.

The decline in demand for help has coincided with a dramatic increase in people seeking advice on their budget — a result of Gisborne food banks’ collective efforts to break the intergenerational cycle of food dependence.

Gisborne food banks tightened their eligibility criteria in March last year, requiring regular clients to sign up for budgeting advice.
The move had paid dividends 12 months later, said Salvation Army community ministries coordinator Beverley Hauiti.

“There has just been an incredible increase in the number of people who have wanted budget advice. We have three budget advisers on site here, but we still have a three-week waiting list of people who are just waiting to see one of us.”

Ms Hauiti said budget advisers were in high demand across Gisborne.
“We work very closely as a collective unit with other food banks, and some of them also have waiting lists on their budget advice services.”

The Salvation Army had reaped the benefits of an attitude change, she said.
“For a long time we have been the ambulance at the bottom of the cliff but we’re now trying to inform and inspire people to change the way they live and deal with the deeper issues.”

Gisborne Salvation Army Pastor Graham Medland agreed the budget advice service was likely to have influenced the dip in demand for food parcels.

“We have not sat down and analysed the figures, but I think the increase in people enrolled in our budget advice services has certainly had an effect there.”

The manager of another Gisborne food bank said it had also had fewer requests in recent months, and believed the popularity of budget advice services was making the difference.
“We refer people to budget advice as well and have had a lot of good feedback from it. I think it’s a really positive sign that people are taking more responsibility.”

The unemployment rate for the East Coast rose 2.4 percent in the quarter ended March 2011, and sits at 9.8 percent — 3.2 percent higher than the national average.

Brent

Saturday, August 6, 2011

Any chance they will learn? Not a big one….

All three articles on the exchange rate in the Herald at the moment show (again) that the financial economics texts which say “don’t bother even trying to predict exchange rates” are on the money.

Evidence and theory about market processes  are roundly hated by journos, pundits and news paper analysts. After all – if its true you can’t pick this stuff, what are they to do?

All the articles bemoan the “high exchange rate”, a couple dish out advice – to the Reserve Bank and anyone else silly enough to listen -  as to how to knock the guts out of the exchange rate. All were totally out of date with 24 hours of publication as the dollar danced down from touching $0.89 to embracing $0.83.

My test is always “so you say it’s too high? How many short contracts are you holding?” The answer is always, predictably (and rationally of course – since it is a mugs game only a “commentator” would think they can convince someone to believe) – “None”. No money where mouth is.

Brent

Sunday, July 31, 2011

Regulatory Costs: Good for Mr Soros, What About Us?

From WJS: (HT D. Haarmeyer)

Regarding your editorial "Soros's Regulatory Hedge" (July 27): I wish my partners and I could give back a mere 4% of capital under management as George Soros is doing and be free of the new SEC requirement to register as an investment adviser. Instead, our small firm will be forced to create a compliance department and incur substantial costs to track and report various aspects of our business because the Dodd-Frank Act defines us as a systemic risk to financial markets.

We must make 44-page quarterly filings, and even longer annual filings require vast disclosure on personnel, partnership agreements and underlying investments—companies that have nothing in common except that we are a shareholder. Like most private equity firms, we use no leverage at the fund level. Our contract with investors limits us to a tightly defined list of permitted investments. Each of the companies we invest in produces audited financial statements. These audits are the basis for our own audits, which are provided to investors and used in fundraising activities already highly regulated by the SEC.

Contrast this to Mr. Soros's "family office," which will be free to invest billions of dollars in anything, anywhere, anytime with or without leverage and with little or no disclosure to anyone. The family-office exemption exists because Congress determined that requiring these private capital pools to register would not reduce systemic risk, though they may manage many times the capital our firm does. There is absolutely no credible reason to treat private firms managing third-party capital for sophisticated investors differently than family offices—except to create sound bites and score political points.

Brian P. Simmons

Chicago

Brent

Monday, July 25, 2011

Dom Post claims to have found the “free lunch”

This comes in the form of the “Free Store” started in Wellington and now replicated in Waitakere – a grocery shop where offerings are given away while local artists exhibit their works.  Instant claims of a free lunch were made.

Far from being a “free lunch” the  huge popularity of the Free Shop and the joy it no doubt brings to both needy “shoppers” and generous volunteers, the idea, its execution and its popularity demonstrates numerous economic principles and underlines the value of market processes.

We see that:

  • people do derive benefit from from helping others, are more than willing to expend energy and ingenuity doing just that and the return to them can take many forms – satisfaction, a sense of communing with their fellows and, let’s hope, some artwork sold.
  • produce comes from local businesses donating leftover and other produce. So it seems not all the business world is full of the vicious, spiteful and mean capitalist classes. The business’s reputations and their own desire to feel they are doing something useful turns out to, in fact, be useful.

And on the other side – some economic problems never go away.

  • The shop is so popular the managers have to “ration” how many people are allowed in at once. Scarce resources – free groceries in this case, do, it seems have to be rationed even when the high minded are running the place.
  • There has also been some criticism of consumers of the Free Shop offering. What? These “shoppers” are likely to be needy and poor. But envy and fear of competition is also a classic feature of success.

So free lunch it is not. Worthy example of capitalism it is – and as in “conventional” capitalism those who bring nothing but envy to the party are welcome to leave.

Brent

Demonising the source of improved social welfare

By 1934, the Depression's banking crisis had been resolved, "yet full recovery was still seven years away," (Nobel winner Robert Lucas)  said in the Milliman lecture. GDP stayed more than 10% below trend.

"Why?" The answer, he says, was growth-suppressing policies, such as the Smoot-Hawley tariff, cartelization, unionization and, "most important but hardest to measure, FDR's demonization of business."

The last point (the inverse of Bourgeois Dignity – for those who have been listening) is critical in N.Z. We are awash with demonising business, fearing gnomes of Zurich, believing that co-op free lunches (AMI ownership structure for instance) abound, fear of Yellow Peril, the belief that trade leads to invasion, hatred of phone companies…. et al.

All good fun, low effort news stories and no doubt cute… also dumb and deadly.

Full article on the Brent Wheeler Group site.

Brent

Wednesday, July 20, 2011

For those believing NZ debt is not an issue…

“Yields on 2-year Greek govt debt shot up more than 3 pct -pts to 39.02% today (JPMorgan) That is not a typo.” (HT David Wessel)

Brent

Sunday, July 17, 2011

Regulating to produce immoral behaviour

"Mr Grant (Jim Grant – WSJ 16 July, Newsletter columnist) is also a critic—albeit with caveats—of today's great bankers, whom he says in one respect don't hold a candle to their gilded forebears. "When you take away the downside, you take away the virtue. You take away the moral foundation of markets. You always have envy but now the envy is a little better grounded in objective facts. Taxpayers get the downside. Modern-day Wall Street gets the upside."

What I like about this is that it provides a sound economic explanation for behaviour which is usually explained with a whole lot of “moral stuff” about bankers or whoever being “bad people” – as many a decent economist has pointed out – there are no good or bad people – just human beings responding to incentives.

The regulator, the politician, the media, and indeed those who support all of these have constructed a regulatory structure which transfers risk to the population at large – all in the fond belief that they can banish risk and penalise those of whom they are envious. In doing so what they have banished is the one mechanism which might deliver their dreams – the market.

Brent

Wednesday, June 29, 2011

Something people keep failing to understand….

There are two sides to the sale of an asset: a one-off payment to the seller and an expected stream of profits to the buyer. If the price is efficient, these two sides of the transaction should be equivalent: that is, the purchase price represents the net present value of the future stream of profits (i.e. the commercial value).

In general, in respect of sales of government assets the value of the business to the purchaser should exceed the commercial value of the asset if retained in Crown ownership because of the greater efficiencies likely to be achieved in private ownership. A competitive sale process should ensure that the value of those expected efficiency gains are captured by the Crown in the sale price. (see R. Kerr blog and www.treasury.govt.nz)

Brent

Saturday, June 18, 2011

Dealing with “Pike River” type compensation issues….

From a Latte to a Life: 'The Price of Everything'

Published: May 03, 2011 in Knowledge@Wharton

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In the months following September 11, 2001, Congress approved a fund to compensate the victims of the terrorist attacks on New York City and the Pentagon that claimed nearly 3,000 lives. Unlike most bills passed by Congress, this one had an unlimited budget. Money, in the grand scheme of things, was not an object when it came to the largest terrorist attack ever to occur on American soil.

But Congress wasn't about to open its checkbook indefinitely: It set tight criteria under which people could file a claim. With the stroke of a pen, Congress had put itself in the unenviable position of determining how much a human life is worth.

Kenneth Feinberg was appointed to manage the fund. Feinberg, a lawyer and former chief of staff to Senator Edward Kennedy, had been in this position before: In 1984, Feinberg negotiated a $180 million settlement paid by the manufacturers of Agent Orange to 250,000 Vietnam veterans who had been sickened by the chemical agent. He was part of the team that awarded $16 million to the Zapruder family for the 26.6-second film Abraham Zapruder took in Dallas on November 22, 1963, the day President John F. Kennedy was assassinated. In 2010, Feinberg was appointed to administer the $20 billion fund created by BP to compensate those affected by an oil spill in the Gulf of Mexico.

In the first case, Feinberg determined an average life was worth about $720 a head. Zapruder's family got about $600,000 per second of film. Along the Gulf of Mexico, the final payouts are yet to be determined. But why are the injuries to a Vietnam veteran worth only a fraction of a cent compared to a dollar's worth of a film? How much is a dead fish worth versus the life of an investment banker who would have made millions of dollars had her life not been cut short by a terrorist attack?

These are the questions at the heart of The Price of Everything: Solving the Mystery of Why We Pay What We Do. The author, Eduardo Porter, an editorial board member of The New York Times, leads readers on a leisurely, but thorough, trip through the corners of humanity in which price affects our decision-making process.

Much of Porter's book, despite its title, isn't dedicated to parsing the details of how commodity prices influence food or how comparison-shopping for plasma TVs keeps the market honest and prices low. Such matters are discussed in his very first chapter, "The Price of Things." The bulk of Porter's book is dedicated to more existential matters -- faith, "free," happiness, the future culture -- areas that, despite the ideals of purists, are no less subject to market forces than the device on which you read this review. Every examination isn't equally enlightening, but Porter is at his best when the subject is at its farthest from the traditional realm of economics.

The Price of Faith

Take, for example, Porter's discussion about the price of faith. The most starry-eyed of us would believe that faith is free, that the path between you and God is a toll-free highway with the only disruptions ones you place in your own path.

Think again: Even faith comes with a price tag, Porter argues. Religion demands sacrifices from its members, including dietary restrictions, sexual abstinence for the unmarried and tithing. You cannot just walk into St. Patrick's Cathedral and decide you are going to be a Catholic: You have to study, undergo several religious rites and demonstrate your allegiance to the faith. And that's just to get in the front door -- the pricing doesn't stop after your first Communion.

Porter takes the abstract subject of faith, breaks it down to its most elemental and applies price theory to its parts. Consider his analysis of why the normal laws of pricing seem to work in the inverse when it comes to the price of faith: "The most successful religions at building enthusiastic flocks are usually the most extreme in their beliefs, like evangelical Christians in the United States or radical Islamists in Central Asia and the Middle East. Even in the face of increasing opportunities in the secular world outside, these churches have developed a growing following of truly fervent believers by closing down their options. They select their members among people with the fewest opportunities outside and erect higher barriers to keep them in. It is a strange strategy: raising your prices to keep your customers. But it works."

The Price of a Life

Putting a price on life is no less abstract than faith, but it happens on a daily basis. How much, for example, would you pay for a car with the newest safety features versus a 10-year-old used car with a lesser generation of airbag? Although a host of other variables come into play -- the mileage of a used car, for example, or the cost of financing or even paint color -- all things being equal, Porter writes, the difference between the used car price and the new car could be construed as the price you are willing to pay for your safety, and ultimately, your life.

In determining how to mete out the bottomless pit of money allocated to the victims of September 11, Kenneth Feinberg was immediately faced with the challenge of putting a value on the tangible, and intangible, aspects of human existence. As Porter describes, Feinberg started with an arbitrarily flat figure of $250,000 a head plus $100,000 per dependent for the noneconomic loss of life. Figuring out how to compensate economic loss was more difficult.

The World Trade Center was home to a fleet of high-paid financial experts as well as a fleet of minimum-wage workers who kept the windows clean, the carpets vacuumed and the china at the Windows on the World restaurant clean. A busboy could never hope to earn as much in his life as a broker at Cantor Fitzgerald might earn in an above-average afternoon, but did that mean a broker's life was worth more than that of an illegal immigrant?

Although the fund paid $2 million, on average, to the next of kin to 2,880 victims who died in the attacks, "each of the families of the eight victims who earned more than $4 million a year got $6.4 million, while the cheapest victim was valued at more than $250,000," Porter wrote. Life, as it turns out, does indeed have its price tag.

The Price of Free

Porter's look at pricing also considers what he calls "the price of free," or the value of ideas and information -- an interesting discussion in light of The New York Times' recent implementation of a metered pay wall on its website. His book was published before the Times made its online pricing system public, but Porter, a media veteran, still has a lot to say about the concept of information floating around the Internet for free -- namely, that it's not.

Porter uses an apt analogy of a lighthouse to make his claim, writing, "Those who believe information online should be available at no cost like to see it as the light from a lighthouse. Any ship passing through the bay at night will benefit from its light, yet this use will not reduce the supply of light for other ships in the vicinity." It is a good analogy, because the theft of a copy of the latest blockbuster movie does not reduce the ability of others to view it, either online or at the local multiplex.

Of course, the light from the lighthouse isn't free. Nor is the news on CNN, nor clean air or national defense. The free rider problem, long ago identified with these public goods, has increased in the world of online information because the cost and availability of Internet access has dramatically fallen. If private companies can't make money providing information for free, they will abandon their efforts, as so many media organizations have done in the last decade.

For information, Porter writes, free is too expensive a cost: "(I)f information becomes truly free, we will stop producing any."

The Value of a Day's Work

Porter's meatiest work makes a thorough examination of the dynamics of how workers get paid and is the most relevant part of his book.

Take the history of determining the value of a single day's work. Nowadays, negotiating your own price is a common practice undertaken by millions of Americans. If you think you are worth more than your prospective employer wants to pay, you either negotiate for more money or turn the job down.

But in serfdom, and its first cousin, slavery, the price is totally set by the employer -- a situation that lends itself to some manageable labor costs, in theory. In practice, however, a company paying nothing for its labor does not mean a good deal. Porter writes, "Employers who could increase production by adding more inexpensive slaves had little incentive to invest in laborsaving technologies. Coerced workers had no incentive to become more productive -- because they would just be handing a higher surplus to the boss. Both these effects hindered economic progress."

Slaves were not free. The cost of buying, feeding and housing slaves, even in meager shanty towns, cut into the profits slave owners expected to reap. Slavery led to slower economic growth: The cost of free labor was too high.

When Prices Are Wrong

Published as the United States was only starting to crawl out of the deepest economic downturn in modern times, one that still held many European countries firmly in its grasp in 2011, Porter saves his biggest punches for his book's finale. After setting up situation after situation in which pricing is a way, if not the best way, to organize life, the first nine chapters of his book become target practice for the epilogue -- where pricing homes destroys the American economy and where economists have to derive a new theory to explain situations where the laws of pricing fail.

The theory of pricing, Porter writes, only works when relative prices are right. "When prices are wrong, these decisions are distorted, often to devastating effect. This, unfortunately, happens depressingly often," as it did between 2000 and 2006 when housing prices were boosted by 70% on average, on the belief that home prices would rise forever. During the so-called "dot-com" bubble of the late 1990s and early 2000s, any company with an "e" prefix was instantly assumed to be worth more -- an assumption that ultimately proved false after a wave of Internet companies filed for bankruptcy.

Economics must include human irrationality to be a more exact science, he argues, a paradox that lies at the heart of Porter's book. It must incorporate social norms, the pursuit of what people think they want, and individuals who will pay an exorbitant price for a seemingly meaningless object just because it's expensive. "Including all these dimensions of humanity is likely to turn economics into a messier, less mathematically elegant discipline" he writes -- an understatement for the ages -- "but, in exchange, the new economics will provide a more comprehensive understanding of the world. Also important, it will be able to grapple with the many ways in which the decisions we make based on the prices arrayed before us can take us in directions that, individually or as a society, we would rather avoid."

Porter skillfully blends economics and existentialism in his discussions of how prices are negotiated, which rescues the book's brisk 304 pages from being just another economic tome that tells readers why Starbucks charges four dollars for a venti latte or how Wal-Mart can undercut its competitors on nearly everything, from tires to lettuce. Although those topics are touched upon here, they have been so well covered elsewhere that Porter's decision not to ground his book in the everyday is far from fatal. In fact, as Porter himself could argue, they make the book worth its price.

Brent

Thursday, June 16, 2011

A little story from Oregon–another “liberal” state

Have you ever tried to hire an average teenager? A few years ago, when I needed some furniture moved, my mother reached out to some fundraising teenagers on my behalf, offering the wage that I had set. The three boys eagerly accepted the offer, showed up for work and proceeded to demonstrate why it can be so difficult for many teenagers to land and maintain employment. They not only lacked experience, but they required detailed tutoring in seemingly straightforward work. More time was spent teaching them how to lift, move and pack furniture than they actually spent working. 

In Oregon, you cannot legally employ anyone, teen or otherwise, for less than $8.50 per hour, even if his actual labor is worth much less. It should be little surprise then, that our population’s least experienced workers – teenagers – had an unemployment rate of 28.8 percent last year (much higher than the state’s rate of 10.2 percent). The national teen employment rate in 2010 was a meager 27 percent, which has dropped substantially since 2000, when it was healthier (but still too low) at 45%.     

Cascade Institute… HT NZBR

Brent

Tuesday, June 7, 2011

Why Economists Care So Much About the Minimum Wage…

Art Carden writing in Forbes (May 13 2011) magazine expresses the answer to this question – such a critical question in N.Z. right now – very well:

Someone once asked me why economists care so much about the minimum wage.  It reduces employment for the poor, to be sure, but the efficiency effects are probably pretty small compared to the effects of other policies.  So why do economists care so much about the minimum wage when there are other policies that inflict greater damage?           

It’s a good question, and an important one.  The welfare loss might be small–though this is itself debatable–but the relevance of economic thinking is what is important.  Beyond its consequences for the poor, I care about the minimum wage because it brings into high relief the fundamental differences between the anti-economic way of thinking and the economic way of thinking.

The anti-economic way of thinking sees the minimum wage as a policy whereby those endowed with Goodness and Mercy redistribute possibly ill-gotten wealth from the rich to the poor and protect the weak from exploitation.  According to this view, the only reasons to oppose the minimum wage are ideology and sheer meanness.  Just as the only reason someone could possibly oppose a war is because he or she hates America, the only reason someone could possibly oppose the minimum wage is that he or she hates poor people.  Or so some might think.  The economic way of thinking sees the minimum wage as exactly what it is: interference that destroys wealth, encourages wasteful rent seeking, and hurts exactly the people it is alleged to help.

The “anti-economic way of thinking sometimes seems to thrive in N.Z….. and we all suffer when it does (thanks to NZBR for the alert).

Brent

Sunday, June 5, 2011

The unsurprising push behind this light bulb nonsense–Greed meets Green

NYT June 3rd……

The whole story is here. Here is what kicked it off. Needless to say it fits the Adam Smith warning

I have never known much good done by those who affected to trade for the public good

Philips created its L.E.D. bulb to compete for the L Prize, a government-sponsored award meant to encourage the development of a replacement for the 60-watt incandescent before the new standards begin to go into effect in January. Traditional incandescents are extremely inefficient, giving off 90 percent of their energy as heat, not light, and over the years, the government and the lighting industry tried to move consumers on to products like halogens and compact fluorescents. But no amount of subsidy or “green” branding has managed to woo consumers away from Edison’s bulb. “Not only is it in alignment with the type of light that consumers like,” says David DiLaura, author of “A History of Light and Lighting.” “It’s commoditized and it’s cheap.”

So some years ago, Philips formed a coalition with environmental groups including the Natural Resources Defense Council to push for higher standards. “We felt that we needed to make a call, and show that the best-known lighting technology, the incandescent light bulb, is at the end of its lifetime,” says Harry Verhaar, the company’s head of strategic sustainability initiatives. Philips told its environmental allies it was well positioned to capitalize on the transition to new technologies and wanted to get ahead of an efficiency movement that was gaining momentum abroad and in states like California. Other manufacturers were more wary, but they also understood the downside to selling a ubiquitous commodity: the profit margin on a bulb that sells for a quarter is negligible. After much negotiation, the industry and environmental groups agreed to endorse tightening efficiency by 25 to 30 percent.

Brent