Should the US Follow Canada's Lead?

I've been meaning to blog about this for a couple of months now, so here goes. Mark Steyn gave lecture at Hillsdale college in September, and the January issue of Imprimis provides an abridged version: Is Canada's Economy a Model for America?

This is a great essay. While admitting that these are differences of degree, Steyn details five important differences between the US and Canadian economic systems, and argues that in each case we should not be eager to move in Canada's direction. To summarize, the Canadian economy is more unionized, protected, subsidized, centrally planned, and heavily taxed. In each of these area Steyn makes great points, and goes on to make some additional great points about the dependence, in many ways, of the Canadian economy on the US economy in many ways. Rather than quote many passages from him here, I'll just encourage you to read Steyn in his own words.

China as Savior of the Oppressed?

Kudos to Gregory Clark, chairman of the Economics department at University of California at Davis. He wrote an interesting book review in The Chronicle Review entitled "China as the Antidote to Oppression and Exploitation?" The book being criticized is Johns Hopkins University sociologist professor Giovanni Arrighi's Adam Smith in Beijing. I admit I've not read the book myself (and don't plan to). But I found many of the points Clark makes to be strong ones and contrary to so much rubbish still being spouted by academic leftists (that seem to dominate so many fields, including sociology). Such writings are often as Clark describes this book... "little more than an extended anti-market, anti-capitalism, anti-Western harangue."

Importing Cars in Mexico

The writers at the Onion couldn't invent a story this odd... well, maybe they could, since they are quite good at what they do. See the AP story "Mexico Abruptly Restricts Car Imports". Basically, Mexico is now only allowing car imports from a single year, 1998. All market interference by governments distort the market, but this is serious arbitrariness and micromanagement. If you live in a border state and have been sitting on a lot of 1998 model cars, you are in luck.

Scary New York Numbers

I regularly read or hear statistics about New York State that indicate it is below average or near the bottom among the 50 states in a wide range of categories. Most of the time, these stats are talking about high taxes or other economic figures.

Columnist Jay Gallagher has done us all a great favor by gathering together many such statistics into one column, New York's Numbers are Numbing. Not all of these numbers are bad for New York -- a few are actually pretty good (low crime), and many are middle-of-the-pack (so not that bad at least relative to other states). But ouch... so many of these numbers place New York at or near the bottom.

On Ethiopia

If you are like me then you have kept up with the news in recent years out of countries in East Africa such as Sudan and Somalia. Often involved in these stories has been Ethiopia, a country that it seems has been helping the US in various matters in the region. In the Nov. 3 issue of The Economist there was a good "briefing" article "A brittle Western ally in the Horn of Africa". It gives a good overview of recent history of that country, both improvements made in recent years and the many troubles still faced. The last half is mostly about the near-term strictly political issues, but what I found more interesting are the long-term and quite devastating economic (and political) issues. Here is that section:

The fact is that for all the aid money and Chinese loans coming in, Ethiopia's economy is neither growing fast enough nor producing enough jobs. The number of jobs created by flowers is insignificant beside an increase in population of about 2m a year, one of the fastest rates in Africa. Since every mother has about seven children, it is conceivable that Ethiopia, with 75m-plus people today, could overtake Nigeria (now 140m-strong) as Africa's most populous country by mid-century. Just to stand still, let alone make inroads into poverty, the country must produce hundreds of thousands of jobs a year.

It is hard to see where they will come from. The government claims that the economy has been growing at an impressive 10% a year since 2003-04, but the real figure is probably more like 5-6%, which is little more than the average for sub-Saharan Africa. And even that modestly improved rate, with a small building boom in Addis Ababa, for instance, has led to the overheating of the economy, with inflation moving up to 19% earlier this year before the government took remedial action.

The reasons for this economic crawl are not hard to find. Beyond the government-directed state, funded substantially by foreign aid, there is—almost uniquely in Africa—virtually no private-sector business at all. The IMF estimates that in 2005-06 the share of private investment in the country was just 11%, nearly unchanged since Mr Zenawi took over in the early 1990s. That is partly a reflection of the fact that, despite some privatisation since the centralised Marxist days of the Derg, large areas of the economy remain government monopolies, closed off to private business.

This is where Ethiopia misses out badly. Take telecoms. While the rest of Africa has been virtually transformed in just a few years by a revolution in mobile telephony, Ethiopia stumbles along with its inept and useless government-run services. Everywhere else, a plethora of South African, home-grown and European providers has leapt into the market to provide Africans with an extraordinary array of cheaper and more efficient services, now used even by the poorest of farmers, for instance, to check spot prices for agricultural goods in markets miles away. And the mobile-phone revolution has created thousands of new livelihoods; at times it seems as if every boy on a street corner is hawking a top-up card. Not in Ethiopia.

It is the same story in financial services, where, despite the growth of some smaller private banks, no foreign banks are allowed. Micro-finance schemes have expanded exponentially, but it remains almost impossible to find start-up loans for small or medium businesses.

There is no official unemployment rate, but youth unemployment, some experts reckon, may be as high as 70%. All those graduates coming out of state-run universities will find it very hard to get jobs. The mood of the young is often restless and despairing; many dream of moving abroad. It was this mood of resentment that the opposition tapped into in 2005, and the capital's maybe 300,000 unemployed young men proved a combustible force on the streets. The ruling party, the Ethiopian People's Revolutionary Democratic Front (EPRDF), underestimated the degree of disillusion with its policies, and thus overreacted when the opposition polled much better than expected.

Unless the private sector is allowed to create jobs, the country's problems will continue to mount and the gains of development may be squandered. Sooner rather than later, 2m more people a year will overwhelm a state that is trying to provide most of the jobs itself.

An Update on the Government Spending Numbers

Here is a nice column from Jacob Sullum, Entitlement Mentality, that covers all the earmarks in the recent spending bill, and also reminds us of the ridiculous economic crisis that the big three entitlement programs represent.

Government Should Not Promote Home Ownership

Government should not have policies that "promote home ownership". The very idea implies interference in the free market. Yaron Brook wrote a very good piece, Predatory Legislating, for Forbes in December, attacking the ridiculous "Mortgage Reform and Anti-Predatory Lending Act of 2007", legislation passed in the House in response to the "subprime mortgage crisis". The entire commentary is worth reading, but here are the two paragraphs on the fundamental point that is so often missed in the press when folks are talking about how the subprime mess arose:

The government does not need to crack down on lenders. It does need to take responsibility for its role in promoting irresponsible lending and borrowing practices through its myriad interventionist programs to "promote homeownership." The very concept of the government having such a goal means that it facilitates borrowing and lending that would not occur on the free market--i.e., a market in which people are held fully responsible for their decisions.

One example of this is the Community Reinvestment Act, which literally forces banks to lend to people with high credit risk. Another is the Federal Reserve's policy of creating artificially low interest rates, which encouraged financial institutions to lend out more money for mortgages than they otherwise would have--and which helped artificially bid up housing prices and fed the fervor that buying a home at any price is a can't-miss investment that all Americans should make. The government's promotion of home-buying was a recipe for irresponsibility--and that's exactly what it produced.

Daniel Boone and the Nanny State

The Orange County Register recently published an interesting satirical piece: Daniel Boone vs. the Nanny State. While I certainly want to live in Daniel Boone's time, this essay makes many great points.

Housing Bubble Explained

Economist George Reisman has written an excellent blog posting that explains in detail what led to the housing bubble, the subprime situation, the credit crunch, and so on. Long as far as blog postings go, but worth reading.

80% Unemployment and 100,000% Inflation

No surprise, but the news out of Zimbabwe just keeps getting worse. The August 11 issue of The Economist has an article about the increasing number of people fleeing Zimbabwe for South Africa. There the unemployment rate is "only" 25-40%, which sounds awfully high until you learn that the rate in Zimbabwe is 80%. It also notes that, according to the IMF, the inflation rate is "heading for 100,000%". No wonder there are "severe shortages of meat, sugar, and cooking oil". This situation almost sounds like someone is trying to set records in Guinness or something.

From Relative Bread Basket to Basket Case

Each time I read about the declining situation in Zimbabwe, I post a blog entry about it. And each time I think that it can't get much worse. And then I read how it has gotten worse a few weeks later. I need to stop being amazed at this.

The latest I've read is from the July 14th issue of The Economist, "How to stay alive when it all runs out" (which I only got around to reading tonight). There are some amazing items in this brief article. Oops, there I go again, being amazed by the economic numbers and dismal reports.

If anyone ever creates a Hall of Government Shame, Dictator Robert Mugabe could easily be a unanimous selection in the first round of inductees! The sad thing is, unless someone with near perfect economic policies becomes the next leader of Zimbabwe, it will take quite a long time to recover -- even after a radical shakeup in leadership occurs. And to think that at one time Zimbabwe was referred to as the "breadbasket of Africa". As I've said before, it is now the "basket case of Africa."

Sowell on Neglected Infrastructure

Thomas Sowell has written a good column, A Bridge Too Far Gone, on some of the neglected infrastructure in the US. This is of course written in the wake of the bridge collapse in Minnesota, and the inevitable questions about similar bridges and other infrastructure issues around the country.

Some people claim that the problem is how much money it would take to properly maintain bridges, highways, dams and other infrastructure. But money is found for other things, including things far less urgent and some things that are even counterproductive.

The real problem is that the political incentives are to spend the taxpayers' money on things that will enhance politicians' chances of getting re-elected.

There may be enough money available to maintain bridges and other infrastructure but that same money can have a bigger political pay-off if spent building something new instead of maintaining and repairing existing structures.

When money is spent building a new community center, a golf course, or anything that will be newsworthy, there will be ribbon-cutting ceremonies and the politicians who cut the ribbons can expect to see their pictures in the newspapers and on TV.

All that keeps their name before the public in a positive role and therefore enhances their prospects of being re-elected.

But there are no ribbon-cutting ceremonies when bridges are being repaired or pot-holes are being filled in. These latter activities may be more valuable than a community center or a golf course, but they are not nearly a photogenic.

He then goes on to note that this incentive problem has existed for centuries, and that the situation will not improve until incentives are changed. He then makes a brief case for doing exactly that -- by privatizing bridges and other aspects of our infrastructure.

A company that has to get the money to build and maintain bridges or other infrastructure through the voluntary actions of people in the financial markets, instead of being able to extract money from the taxpayers, is going to find financiers a lot more finicky about what is being done with their money.

People who are putting their own money on the line are going to want to have their own experts taking a look under the bridges they finance, to see where there are rust, cracks or crumbling supports.

When people know that the lawsuits that are sure to follow after a bridge collapses are going to drain millions of dollars of their own money — not the taxpayers' money — that keeps the mind focussed.

Government as a Cause of Subprime Follies

Thomas Sowell has written a column, Sub-Prime Politicians, that describes the mutliple ways that bad government policies are causes of the subprime mortgage mess. Government restrictions on building in certain times and places have been shown to be a major factor, as has the more obvious and direct government interference of pressuring lenders to give loans to people with risky credit to encourage more home ownership. He concludes his column as follows:

Yet with all the finger-pointing in the media and in government, seldom is a finger pointed at the politicians at local, state and national levels who have played a key role in setting up the conditions that led to financial disasters for individual home buyers and for those who lent to them.

While financial markets are painfully adjusting and both lenders and borrowers are becoming less likely to take on so much risky "creative" financing in the future, politicians show no sign of changing.

Why should they, when they have largely escaped blame for the disasters that their policies fostered?

Repugnance Shouldn't Be a Standard

Over the past several years I've read more and more from bioethicists and others who argue against some regulation, policy, or law based primarily on the grounds of "repugnance". I've read this on the issues of stem cell research, cloning, euthanasia, and others.

This is absurd. One's subjective emotional responses -- whether discomfort, repugnance, apprehension, joy, elation -- are not a proper grounding for moral evaluation of an action, or a prospective regulation, policy, or law.

And yet this charge of "repugnance" surfaces time and again, perhaps most commonly in connection with the dire situation with the lack of kidneys available for transplant. There are no where near enough donors relative to the number of those who need a kidney -- people are suffering for years for lack of a kidney, and many die waiting for one.

And yet this problem could be solved in a relatively short time if a market for kidneys were allowed to develop and flourish. In such a market, individuals could be given cash payments for one of their healthy kidneys, or their beneficiaries could be given cash payment in exchange for kidney donation after death. The former is what would really fix the shortage, but even the latter (which seems like a no-brainer) would help. But neither of these are allowed today in the US. Although regulation of a market, generally speaking, interferes with that market and creates a suboptimal result, even a regulated market is better than no legal market at all. So in this case, as with many other non-violent acts that are currently prohibited, I definitely support a move from prohibition to a regulated market for kidneys.

The BBC recently did a special on this subject. This summary, after mentioning the "repugnance" or "disgust" viewpoint (I won't even call it an argument), quotes a Bishop whose position is that cash payment for a kidney negates the act's moral worth. His position apparently is that simply donating a kidney to a stranger or loved one is a good thing, but not if you are paid for doing so. This is, in part, the common ethical bias against money, commercial exchange, and best put -- the trading of a value for a value. This is a basic -- and common -- ethical error the Bishop is making here.

Here is a great clip from this article:

Yet others argue that what really counts here is not the motive, but the results.

American writer Virginia Postrel has been campaigning for it to be legal in the US to pay cash for a kidney from a live donor.

She said: "People want to keep it as a heroic, uncompensated act because it makes them feel good.

"Never mind that tens of thousands of people are dying for your right to feel good about other people's heroic acts."

Postrel's criticism sounds cynical, but she isn't the cynic she appears to be. She donated a kidney to a sick friend, became interested in the idea of a market for kidneys because of her experience with donation.

"The reaction is completely disproportionate to the actual risks involved. People do act like you're completely nuts."

Italics mine... what a great line!

Generic Drugs More Expensive in Canada

The Frasier Institute in Canada has done study which shows that the prices for generic drugs in Canada have been skyrocketing, and that Canadians now pay significantly more for generic drugs than we do here in the States. It is of course well known that we pay more for brand name drugs than Canadians do. Both of these results are because of government interference in the market. Here is a brief news item on this study.

Gas Taxes vs. Gas Profits

On June 6 John Stossel provided another great item, "Why is Profit a Dirty Word?" (thanks to Shawn Klein for this link). He begins as follows:

At a recent press conference Sen. John Kerry was upset as he snarled, "Oil companies in America are reporting record profits. Record profits."

When did profit become a dirty word?

I wish the oil executives would face the media.

They could say something like:
"What are you complaining about? What do you think we do with our profits? Buy fancy cars and homes? Well, we do, actually, but nearly all the money goes to looking for more oil and following environmental rules that you want us to follow. You should want us to make more profit. Anyway, we make less profit per gallon than your beloved government takes in taxes."

This is something I have thought about often: the lack of proper argumentation from those in business when they are attacked by the press or by politicians. And the point Stossel makes here is so ripe for use in response to the likes of John Kerry! "Can you explain your record profits?"... countered by "Sure I can. But if I do will you explain why you feel it necessary to take more in oil and gas taxes than we do in profits?" LOL... the look on the politician's face at that moment would be priceless.

A Brief History of Economic Time

University of Rochester Economics professor Steven Landsburg wrote a nice opinion piece in the 6/9-10 Wall Street Journal, titled "A Brief History of Economic Time". He begins with the following rapid history review:

Modern humans first emerged about 100,000 years ago. For the next 99,800 years or so, nothing happened. Well, not quite nothing. There were wars, political intrigue, the invention of agriculture -- but none of that stuff had much effect on the quality of people's lives. Almost everyone lived on the modern equivalent of $400 to $600 a year, just above the subsistence level. True, there were always tiny aristocracies who lived far better, but numerically they were quite insignificant.

Then -- just a couple of hundred years ago, maybe 10 generations -- people started getting richer. And richer and richer still. Per capita income, at least in the West, began to grow at the unprecedented rate of about three quarters of a percent per year. A couple of decades later, the same thing was happening around the world.

Then it got even better. By the 20th century, per capita real incomes, that is, incomes adjusted for inflation, were growing at 1.5% per year, on average, and for the past half century they've been growing at about 2.3%. If you're earning a modest middle-class income of $50,000 a year, and if you expect your children, 25 years from now, to occupy that same modest rung on the economic ladder, then with a 2.3% growth rate, they'll be earning the inflation-adjusted equivalent of $89,000 a year. Their children, another 25 years down the line, will earn $158,000 a year.

Against a backdrop like that, the temporary ups and downs of the business cycle seem fantastically minor. In the 1930s, we had a Great Depression, when income levels fell back to where they had been 20 years earlier. For a few years, people had to live the way their parents had always lived, and they found it almost intolerable. The underlying expectation -- that the present is supposed to be better than the past -- is a new phenomenon in history. No 18th-century politician would have asked "Are you better off than you were four years ago?" because it never would have occurred to anyone that they ought to be better off than they were four years ago.

That is a good point, and one I hadn't thought of! Landsburg's history review then goes beyond income alone:

One hundred years ago the average American workweek was over 60 hours; today it's under 35. One hundred years ago 6% of manufacturing workers took vacations; today it's over 90%. One hundred years ago the average housekeeper spent 12 hours a day on laundry, cooking, cleaning and sewing; today it's about three hours.

As far as the quality of the goods we buy, try picking up an electronics catalogue from, oh, say, 2001 and ask yourself whether there's anything there you'd want to buy. That was the year my friend Ben spent $600 for a 1.3-megapixel digital camera that weighed a pound and a half. What about services, such as health care? Would you rather purchase today's health care at today's prices or the health care of, say, 1970 at 1970 prices? I don't know any informed person who would choose 1970, which means that despite all the hype about costs, health care now is a better bargain than it's ever been before.

The moral is that increases in measured income -- even the phenomenal increases of the past two centuries -- grossly understate the real improvements in our economic condition. The average middle-class American might have a smaller measured income than the European monarchs of the Middle Ages, but I suspect that Tudor King Henry VIII would have traded half his kingdom for modern plumbing, a lifetime supply of antibiotics and access to the Internet.

Some interesting numbers and thought experiments here. I've read the health care comparison he poses somewhere before, and it is an important point to make when considering the rising cost of health care in this country. He then goes on to praise what he sees as the source of this wealth: technological progress and ideas, not just technological ideas, but ideas of all kinds including new ideas in economics. He makes good points here, but I don't think that he has really hit the fundamental source. The examples of economic ideas that he cites are very particular, concrete ideas, like Julian Simon coming up with the idea of bribing airline passengers to give up their seats on overbooked flights and so on. But the fundamental source of the incredible progress of the past 100 years is a particular economic-political system that fosters and allows for such progress in technology and ideas, and that system is of course capitalism, the system that promotes liberty and protects individual rights.

It'll Function Fine Until the Next Storm

In the May 14 issue of BusinessWeek there was an article titled "Hurricane Ahead, But Lower Insurance", subtitled "Why the price of property coverage is going down in the face of dire predictions". The article notes that even after Katrina and other recent, costly storms:

In most of the country, property insurance rates for homeowners and businesses are actually lower than they were before Katrina. And amazingly, insurance rates have been falling recently in many parts of Florida and the Gulf Coast that stand to suffer severe losses from hurricanes, encouraging continued construction in low-lying areas.

There are some financial reasons given for this, but the other big one is government interference in the market:

Regulators and the insurance industry are only beginning to grapple with the problems of pricing coverage in an era of potentially big storms. By some calculations, actuarially correct premiums would be so high as to freeze economic development in places such as Miami and New Orleans.

But of course that isn't happening, because actual risk calculations are not determining the market. Government regulators are capping rate increases and in some cases "broadening the availability of state-subsidized insurance for highly exposed property owners who can't get coverage from the private market". Consider this:

Under Governor Charlie Crist, Florida has gone the furthest in challenging market forces. In January, the state legislature massively increased government involvement in the insurance business in hopes of rolling back homeowners' rates. It blocked rate hikes by the state-controlled Citizens Property Insurance Corp., which insures people who can't get coverage in the private market. That allowed Citizens to undercut private insurers. To keep private companies from bailing out of Florida, it intends to make available an additional $16 billion in highly subsidized reinsurance from a state fund.

Trouble is, if a series of big hurricanes empties out the Citizens reserve fund and the reinsurance fund, the state will have to raise the money to pay claims via a special assessment of thousands of dollars apiece on all policyholders in the state. "It'll function just fine until the next storm. Then we'll see," says Joshua D. Shanker, an equity analyst at Citigroup Investment Research.

Well, duh. That is a classic line: "It'll function just fine until the next storm. Then we'll see."

How many times have you seen people's homes or businesses destroyed, not by freak occurrences that are hard to predict like a tornado, but by regular occurrences that one should expect in certain areas, like damage from being too close to a river or an ocean? And how often do those people then say, on camera, "Well, it is a tough loss. But we'll rebuild." The many times I've seen and heard this I've always thought two things. First, I'm glad you are picking yourselves up and are eager to rebuild your lives and rebound from disaster. But second, why are you going to rebuild in the same location?!?! How could you afford to do that given the massive increase in insurance that will no doubt hit you... oh wait, it won't, because the government will subsidize you and encourage you to rebuild in that high-risk location. And this will be a cycle that will continue and continue, with billions of dollars wasted time and again.

The article continues:

The political fix temporarily alleviates the financial pain, but it worsens the underlying problem. Developers continue to erect condos in vulnerable parts of Florida in part because of the availability of state-subsidized insurance. Florida already has $2 trillion in coastal exposure and remains one of the fastest-growing states. That will raise the cost of the next Big One. "People have the expectation that insurance is a commodity and should be flatly priced," says Robert Muir-Wood, chief research officer of Risk Management Solutions Inc. But in an actuarially ideal world, he says, the rate for the South Florida beachfront should be perhaps 50 times higher than the rate for an elevated property in northern Florida. "The wealthiest people tend to benefit the most from this aberration," Muir-Wood says.

Meanwhile, the Florida state government's decision to fight the market and absorb more hurricane risk is benefiting other parts of the country. As private insurers and reinsurers are being driven out of Florida, they are writing more policies elsewhere, which is helping to lower rates in other places, like Mississippi.

The dip in rates is not likely to survive another year like 2005. Insurers are being more rigorous in setting rates and paying closer attention to their risk models than in the past, says Timothy R. Gardner, global head of the property specialty practice of Guy Carpenter and Co. The influx of capital could ebb. And if another Katrina-type hurricane hits, regulators and politicians will find it harder to defy nature and enforce unrealistically low rates for coastal property.

Harder, perhaps. But I don't think one more Katrina-level disaster will lead to change in this system. A change in thinking is what is needed, not just more financial disaster and hardship -- and I don't think just one more massive-damage event will get the relevant parties' thinking to change. Government needs to get out of the insurance-subsidizing business, and individuals and businesses need to stop building and re-building in such high-risk areas. If you are wealthy and can and want to take the risk -- either by not having insurance or by buying expensive insurance that is priced according to the actual risks involved -- then fine. But anything other than that is an evasion of reality. I mean, do people expect the government to subsidize the insurance for their new home or business that they want to build on the side of an active volcano? I'd like to think that the obvious answer there is "of course not", and the essence of the situation in Florida and other high-risk areas is relevantly similar. Live there without an insurance safety net, pay the price for your insurance safety net, or don't live there at all.

John Stossel on Double Thank-You Moments

John Stossel recently wrote a great column, The Double "Thank-You" Moment. In it he writes:

I suspect ignorance about economics leads many to believe that when two people exchange goods and money, one wins and the other loses. If rich capitalists profit, the poor and the weak suffer.

That's a myth.

How many times have you paid $1 for a cup of coffee and after the clerk said, "thank you," you responded, "thank you "? There's a wealth of economics wisdom in the weird double thank-you moment. Why does it happen? Because you want the coffee more than the buck, and the store wants the buck more than the coffee. Both of you win.

Economists have long understood that two people trade because each wants what the other has more than what he already has. In their respective eyes, the things traded are unequal in value. But this means each comes out ahead, having given up something he wants less for something he wants more. It's just not true that one gains and the other loses. If that were the case, the loser wouldn't have traded. It's win-win, or as economists would say, positive-sum.

We experience this every time we have that double thank-you moment in a store or restaurant.

It doesn't matter that you wish the price of coffee were lower. We want the price of everything to be lower (except the price of what we're selling, whether it's our products or labor). What matters is that you bought the coffee for a buck.

This is a great phrase that is new to me: "The Double Thank-You Moment". He then goes on to apply this same reasoning to the notion of "fair trade" vs. "free trade".

"Fair trade" is code for protectionism disguised as retaliation against other countries that may or may not practice protectionism, and it's a bad sign when even Republicans talk about "fair" rather than "free" trade.

We should practice free trade no matter what others do. Why? Because freedom is good in itself. If foreign governments want to hurt their citizens, it's no reason for ours to hurt us.

People who live in different countries are divided by a political boundary, but boundaries are accidents of history or the results of politicians' arbitrary decisions. Political boundaries are economically irrelevant. When left free, people trade across them as naturally as they do across state lines. Trade is trade. Buyer and seller both benefit. "Thank you." "Thank you ."

If you're worried about a trade deficit with, say, China, imagine that China became the 51st state. We'd immediately forget all about that so-called deficit. Who cares if New York runs a trade deficit with Pennsylvania? As Adam Smith wrote, "Nothing ... can be more absurd than this whole doctrine of the balance of trade."

That is a great point and something to keep in mind the next time you hear someone, of either political party, bemoaning the "trade deficit" with China or whoever. He concludes with:

Once we choose trade over self-sufficiency, we're just arguing about how big the free-trade zone should be. Since trade is always mutually beneficial, the answer is: The bigger the free-trade zone the better.

Worldwide is best of all.

Indeed.

Gas Prices "Too High"?

The Ayn Rand Institute's Alex Epstein recently wrote a good op-ed piece titled "What to Do About Rising Gas Prices". Here is an excerpt:

There is no moral or economic justification for any politician or consumer to declare market prices "too high," and to use the government to coerce lower prices. To do so violates both the rights of gasoline producers and their productive customers to set voluntary prices -- and, in doing so, causes destructive shortages. When shortages exist, how much gasoline one is able to get depends not on one's willingness to pay a mutually agreeable price, but on one's political pull to secure rations, or on whether one has time on one's hands to wait in endless lines (as in the 1970s).

There is only one sense in which we are entitled to tell the government to "do something" about gasoline prices: insofar as these prices are made artificially high by the government's many regulations on oil and gasoline production.

He then goes on to cite a few such regulations that cause the price of gasoline to be as high as it is, and the concludes: "What should the government do about gasoline prices? Get its hands out of the market--and keep them off."

Say on Pay?

Yaron Brook has written an Op-Ed attacking the Say On Pay bill that has passed in the US House of Representatives. The Op-Ed ran in modified form here at Investment News. The bill would force all corporations to allow shareholders a non-binding vote on CEO compensation, the idea being to shame directors in lowering CEO pay. While this bill itself might not do much -- since it forces only non-binding votes -- this bill would appear to be only a first step. As Brook notes, the Rep who proposed it, Barney Frank, has supported outright caps on CEO pay and "has threatened that if 'say on pay' does not sufficiently reduce CEO compensation relative to that of other employees, 'then we will do something more.'"

Brook's piece is a good read, and he notes several things that shareholders can do already if they are unhappy about the pay of a CEO, none of which require further regulation of business by government:

1. "Vote with his dollars" by selling his shares
2. Accumulate a controlling interest in the company (typically 51%) and impose a new board of directors
3. Persuade a majority of shareholders to replace the board with people sympathetic to their concerns.

When Trade is Outlawed, Only Outlaws Trade

The following letter to The Economist ended with a great line, that I've used as the title for this posting:

SIR -- Your article on tigers outlined the cost to their conservation of refusing to countenance markets ("Market failure", April 21st). I have argued that the only way to save the tiger is to sell it, but conservationists have maintained that commerce and conservation are antithetical. Their principal strategy has been to prohibit tiger hunting and the trading of tiger parts. Policing has thereby become the cornerstone of conservation polices and, predictably, it has failed to stave the decline of tigers in the wild.

Some of the poorest people in the world live in close proximity to valuable resources like tigers, yet they have no incentive to conserve and manage the resources sustainably, allowing criminals and smugglers to profit from poaching. This is bad for the people and very bad for tigers. In contrast, 2m crocodiles are harvested each year from facilities as far apart as Australia, South Africa and the United States. The international availability of farmed crocodiles has virtually eliminated crocodile poaching. Clearly, when trade is outlawed, only outlaws trade and the only market failure here is the failure to let markets operate.

Barun Mitra
Liberty Institute
Delhi

That great line -- "When trade is outlawed, only outlaws trade" -- surely that is not new? Well, I looked it up on Google, and found only two other references. And guess who those are from? The same person, Barun Mitra: see "Commerce for Conservation" from April 17, 2007 in the Hindustan Times, and also "Environmentalists Can't Save the Tiger" from 2005. Both are on the same topic as the letter above, but go into more detail, and give examples beyond crocodiles.

So thanks for this great line Barun!

Internet Radio on Life Support?

Is so-called "Internet Radio" on life-support? It seems that unless a new bi-partisan bill introduced in congress, the Internet Radio Equality Act from Jay Inslee (D) and Donald Manzullo (R), is passed by July 15th... well, a great many outstanding Internet music sites will quickly go bankrupt and be out of business. Most notably for me would be the harm this could cause Pandora, a service I have quickly grown to love, as my recent blog posting described.

See this article, and this one, and this one for info on the situation. More recently than any of these it was announced that the feared May 15th deadline was actually a July 15th deadline, so that gives the SaveNetRadio.org group and others time to fight to get the new bill passed. Doing so would essentially cancel the decision of the federal Copyright Royalty Board, which had determined to hike up fees for web streaming radio stations like Pandora and many others. The new fees are bizarre -- they are per song rather than based on profits (thereby treating streaming like downloading), and they are totally out of whack with (higher than) the fees charged statellite radio and traditional AM/FM radio.

A few comments... first, I wish that we didn't refer to sites like Pandora as "Internet Radio". I mean, "radio" is a particular technology. It isn't used by the Internet to stream music. Calling sites like Pandora "radio" is confusing and based on inessential similarities. Yes, it is similar in that the music (or other content) is streamed rather than downloaded permanently. So lets call such services Internet Streaming services or Music Streaming services or whatever. That is accurate -- calling them "radio" is confusing.

Second, how many people know much about the federal Copyright Royalty Board? That sounds like something out of a socialist or communist country! What are a bunch of government bureaucrats doing dictating to anyone what they must pay to other people for streaming copyrighted content? Can't the two parties involved contract with each other? I'm not in favor of theft of intellectual property -- but equally wrong is government intervention in the economy... and for the same reasons: both are violations of individual rights.

The third news item linked above has the following bit worth quoting here:

Anyone who spends more than an hour a day in a car -- and there a lot of you in Miami -- knows that commercial radio stations are horrid purveyors of mainstream schlock. Internet radio has made new artists, genres, and songs available to listeners all over the world. Artists have a new way to get their music out there, and small distributors have a way to wrangle in new customers.

Sites like Pandora, which uses the innovative Music Genome Project to create specialized radio stations for its six million users based on what they tell it about their musical tastes, are a blessing to music junkies everywhere.

"We can't continue, at the new rate we can’t sustain the service," said Pandora founder Tim Westergren from Washington D.C., where he is attending congressional hearings on the fee hike. "We are losing money now, even at the old rate, we were looking at another two years before we expected to be in the black."

If the new rates go into effect, and sites like Pandora and W305 shut down, it would be a huge loss for music lovers, and perhaps an even bigger blow to musicians struggling to get their music to the public. A lot of smaller, independent Internet stations may go underground and avoid paying licensing fees all together, Kalimi said.

Scarcity Amid Abundance

The April 14-20 issue of The Economist again has a good article about the situation in Venezuela, and the economic problems being caused by Chavez and his policies. I couldn't think of a better title for this than what they used: Scarcity Amid Abundance. As I've noted in earlier blog postings, such as in Let Them Eat Chicken Feet, the price controls imposed by the Chavez regime are leading to ridiculous shortages. This latest article also points out the very high inflation rates in Venezuela, which only makes the price-control-causing-shortages issue that much more pronounced and guaranteed to occur (since people will be much more careful with their goods and their money, knowing it will be worth far less in the coming months).

Maximize Absolute Rate of Growth, Not Relative Rate

The April 14-20 issue of The Economist had a good, brief editorial "Come in Number One, Your Time is Up" (subscription required, but also available here). It discusses the various ways that America is being pushed off its economic pedastal, whether by some European countries, China, or whoever. The last two paragraphs, subtitled "A Winnner in Second Place", are worth quoting:

There will be plenty of hand-wringing in the years ahead. But does being the biggest economy matter? It helps to ensure military superiority; it gives a country more say in fixing international rules; and as the issuer of the main reserve currency, America can borrow more cheaply. But being number one cannot be an end in itself. The goal of policy should be to maximise a country's absolute rate of growth, not its relative rate.

Losing top place in the economic league is different from being beaten in sport, where for every winner there is a loser. Economic competition is not a zero-sum game. China's economy will overtake America's not because the United States is in terminal decline, but because China is catching up. And faster growth in China and other emerging economies will benefit America's economy, not harm it. If an obsession with remaining number one foolishly caused America to adopt protectionist policies, that would reduce America's growth as much as China's. It is better to be number two in a fast-growing world than number one in a stagnant one.

Some Consumers Unable to Buy Caviar

Lately I've been reading numerous articles about the collapse of the "sub-prime" mortgage/loans/housing market, and the impact of this on the "alternative" loans market and even the broader market. Some articles or news items on TV covering this have been better than others, naturally. The ones that annoy me are the ones that lament the situation without asking the important questions of how we got into this situation in the first place. This seems to be yet another example of journalists becoming more and more lazy -- because I refuse to believe that news consumers (you and me) are not asking for this kind of information in news reports on issues like this.

The subprime loan situation seems to be at least in part another instance of government intervention in the economy producing unintended, negative side-effects. This is another Hardy-moment, "This is another fine mess you've gotten me into!" -- a quote that I have thought of more and more in recent years when considering well-intended government programs that end up doing far more harm than good (above and beyond the inherent violation of individual rights that they involve in the first place).

The banking/loan/housing industry is of course far from a laissez-faire capitalist system. On top of that, the government in the US has been promoting more and more home ownership for many, many years now. Well guess what? Not everyone has the financial ability to own a home. To do so, unless you can pay in cash upfront, you need a loan. To get a loan you pay interest and rate of interest must rationally be based on what kind of risk you represent to the bank giving you the loan. This is all very simple economics folks! The more the government promotes, subsidizes, encourages, etc., more and more people to own their own homes, the more risky loans are going to be made. As base interest rates rise, and if people do not have fixed rates, then the inevitable will occur -- people won't be able to pay for their loans, banks will foreclose on homes, and dreams will be shattered. This is a simplification of the current situation, but it captures the essence I think.

And this is entirely predictable of course -- again, it is basic economics.

As an example of the kind of news article I'm talking about, consider the one in last Sunday's Rochester Democract and Chronicle, titled "Not 'Sub', Not Prime" which ran on the front page of the business section. It is a story about those with "Alternative Loans", which are kind-of between "sub-prime" loans and regular mortgage loans. In particular, Matt Drouin is profiled -- a 23-year old who lived with his parents for a while (a brief while it seems) after college to save up some money to buy a home. Because has virtually no credit history -- since he is only 23 years old! -- he doesn't qualify for a regular loan, and can only buy a home with an "alternative loan" that has higher interest rates of course. (How many single 23-year olds own their own homes vs. rent apartments I wonder?)

So what annoys me here is... why is this news? Why does this warrant an article in the paper? I mean, some people are not in a financial position to buy XYZ -- so we report on it? Since when? I don't recall seeing articles with titles like "Some Consumers Unable to Buy Caviar", or "Some Local Residents Priced Out of the BMW Market", or "The Poor Find they are not able to Attend Football Games Every Weekend". Isn't this all obvious? If you are poor, you can't buy things that cost a lot. If you are young, you have no credit history -- and unless you have a really high-paying, secure job, you are therefore a major credit risk for banks. Ergo, you will not get a good interest rate on a major loan (like a mortgage loan).

The sub-title for this article was "Some home buyers must settle for 'alternative' loans". You can almost here the "sigh" being voiced in that subtitle -- as if, the world is unfair, and maybe, just maybe, something should be done about it.

Only buried on page four do we have the all-important point being made:

But the availability of subprime and alternative loans has boosted the nation's number of home owners, with 69 percent of households owning their own homes. "For the past two decades, the emphasis by our government has been home ownership," Nothnagle [local Realty giant] said.

Wow... 69% own homes? I knew the number was artificially high these days -- that is, not what the market would bear without government interference in various ways -- but I had no idea it had reached nearly 70%. We can all agree that owning a home is a good thing, generally speaking -- rather than throwing money away in rent, you are investing in property that you will one day own outright. But just because something is good in this general way doesn't mean that everyone, or even 70% of people, can just magically obtain it. Because the markets represent reality, government interference with them amounts to attempts to interfere with reality -- and that can only have consequences at some point down the road. The chickens come home to roost.

Making this same point recently was a brief Letter to Editor by David Holcberg from the Ayn Rand Institute from 3/30, titled Lenders are Damned if they Lend, and Damned if they Don't:

With 2 million homeowners defaulting on their mortgage payments, we are increasingly hearing denunciations of lenders for having loaned money to people who had no means of paying it back. But these denunciations reveal a disturbing double standard. For years, politicians pressured lenders to not discriminate against those with poor credit history and shaky finances. Now we have the despicable spectacle of politicians accusing lenders of not having discriminated enough and of having made too many risky loans.

Lenders are damned if they lend--and damned if they don't. Whatever lenders do, politicians seem to always find their practices objectionable, and will take advantage of any excuse to call for more regulations and increased political power over lending. Politicians should leave lenders alone, and instead of damning them, they should acknowledge their crucial role in making home ownership possible for so many people.

India's Growth and Low-Hanging Fruit

Stories of the fast growth of both China and India abound. There are of course many important differences in their growth stories, and one that is often mentioned is the generally abysmal state of India's infrastructure (roads, utilities, rural services, and so on). A recent BusinessWeek cover story, The Trouble with India, does a good job of describing this. There are many "online extras" linked from this page, that weren't in the print magazine too. But for me the most interesting bits of data were those in the chart "How the Global Giants Stack Up". Here we see Population, National Expressways, Major Airports, Electricity Production, Internet Penetration, and Port Shipments compared between India, China, and the US. I would have liked to have seen Europe and Russia included as two other "giants", but even just this three-way snapshot is interesting. India and China each have around 4 times the population of the US. The US has twice as many expressways as China, and more than 12 times as many as India. The US has more than three times as many airports as China, and 11 times as many as India. The US has 1.5 times as much electricity production as China, and 6 times as much as India. Internet penetration is nearly 7 times greater in the US than in China (and far less regulated!), and nearly 20 times greater than in India. China of course has far more port shipments -- two times as many as the US, who in turn as over three times as many as India. See the chart for the numbers.

These numbers are striking. I don't think India's growth can be accurately called a "bubble", in the way the Internet bubble was clearly a "bubble" several years ago -- and this article doesn't argue for such a label either. But the article, and these numbers, do lead me to think that India's growth is not sustainable at the 8-10% clip we have seen recently. I'm far from an expert on such matters, but it wouldn't surprise me at all if we see less growth in India at some point. Stating the obvious? Perhaps. But my point is that the reason for such slower growth will be because the "low-hanging fruit" will have all been picked. That is, generally speaking, I would assume that the easiest and most profitable ventures occur first. This is a univeral rule, but generally speaking if two ventures are similar but one has far fewer government hurdles, requires few if any bribes, doesn't involve building facilities and infrastructure in the surrounding area (hospitals, schools, roads, etc.), well, that venture will be the one undertaken. This leaves other areas of the country, and other more difficult projects, for a later day -- if ever. Hopefully the bureaucracy in India will continue to change, and many of the bigger and harder problems the country faces will be increasingly addressed over time, but doing so is the steeper hill to climb, and so I assume progress will become slow.

This is not necessity of course, but it is what I'd predict right now. The country -- like any country -- could of course get its act together, and make wise decisions across the board: economically, politically, socially, culturally, and so on. They could promote rational individualism, free markets, entreprenuerialism, and so on (in a word, capitalism) in a consistent way -- and thereby really turn around their country fast, including helping the hundreds of millions of poor. But alas, that doesn't seem likely any time soon.

Equal Rights vs. Egalitarianism

Peter Schwartz of the Ayn Rand Institute has written a powerful Op-Ed on the issue of egalitarianism. In it he argues that income inequality is something good -- a position almost never argued for elsewhere. As Schwartz notes, the issue of egalitarianism is not the issue of poverty. Wanting to alleviate poverty is one thing, but wanting to equalize everyone's wealth is quite another. And assuming that in order to do the former one must do the latter indicates a misunderstanding of economic reality, as such people are usually operating with an at least implicit premise that the world is a zero-sum game: for poor people to be better off, then rich people must be made worse off. Only by reducing income or wealth inequality -- by redistributing from the haves to the have-nots -- can the poor be made better off. But this is incorrect, as all boats can rise at the same time -- with some rising faster than others, either in percentage-increase terms or real-terms, or both. I'll now quote at some length from Schwartz, as he makes several points very well:

... the alleged problem is not that some are becoming poor--but that others are too rich. The complaint is that while the bottom tier enjoyed a 4% rise in income, the top tier enjoyed a 34% increase. The complaint is that over the past 25 years, the share of income of the top fifth of households climbed from 42% to 50%, while that of the bottom fifth fell from 7% to 5%.

But this development represents an injustice only if we use a perverse standard of evaluation. It is unjust only if we measure someone's economic status not by what he has, but by what others have--i.e., only if he benefits not by making more money, but by making his neighbor have less.

...

Egalitarianism is the antithesis of the valid tenet of political equality, under which we have equal rights. That is, we have the right to achieve whatever our ambition and talents allow, with no one permitted to forcibly stop us. Egalitarianism, however, is a denial of the individual's right to be left free. It is an abhorrent demand that some people be punished for achieving what others haven't. It is a brazen declaration that an equality of condition must be attained.

And how is it to be attained? By--as the Australians aptly phrase it--cutting down the tall poppies. No one is to be allowed to surpass his fellow-citizen. No one is to be allowed to rise. Which means that the most able must be brought down to the level of the least able. The equal spread of misery and privation is the only "equality" that egalitarians ultimately seek. This is why they extol socialist societies, where all suffer equal destitution, while vilifying capitalist societies, where all are free to advance according to their abilities and where the poorest enjoy greater luxuries than any citizen in a "worker's paradise."

Making others fall does not make you rise. While prohibiting a Thomas Edison or a Bill Gates from becoming fabulously wealthy does indeed reduce income inequality, it does not make the poor richer. Nonetheless, it is what egalitarians desire. Nonetheless, it is what egalitarians desire. They are motivated by what Ayn Rand called "hatred of the good": if they lack something of value, they want to make sure nobody else has it either.

Income inequality is an effect. The cause is the difference in people's economic production. Criticizing income inequality is like complaining that a computer carries a higher price than a paper clip. Price reflects an object's market value--and the money someone earns reflects the market value of his work. There is no fixed, pre-existing glob of income that somehow oozes disproportionately into the pockets of the rich. Wealth is created. The top fifth of the population have ten times more income than the bottom fifth because they have produced ten times more.

In a statist system, people advance through government favors and at the expense of the genuinely deserving. But in a free, capitalist system, income inequality represents something good. It means that exceptional individuals are free to do their productive best, and to reap their rewards. Whenever a Bill Gates ar