Saturday, December 20, 2008

Cartoon of the Day


Lessons From the U.K. in the 1980s: And the Triumph of Thatcherism Over Keynesianism

When she came to power in May 1979, the British economy, by every measure, was in worse shape than the U.S. economy is today. Inflation was out of control. Unemployment was high and rising rapidly. Job creation had been at a total standstill for almost a decade and a half.

By sticking to her policies of lightened regulation, reduced trade barriers, privatization of a raft of publicly owned companies, reduced taxation, and the adoption of laws to prevent abuses of union power, Mrs. Thatcher achieved something few if any of today's economists have begun to consider. She achieved a genuine, productivity-led recovery that transformed Britain from perennial basket case into the Europe's most improved and vibrant economy.

U.S. policy makers and professional economists should study her example in order to turn this time of crisis into useful and enduring change. As she herself said, "Economics is too important just to be left to the economists." Thatcherite principles remain as valid as ever. The freedom of the marketplace is still the only effective mechanism for eliminating poor business practices, identifying productive investment, and providing long-term growth.

~Andrew B. Wilson in today's Wall Street Journal

Friday, December 19, 2008

Ford's State-of-the-Art Factory in Brazil: A Model for the Big 3's Survival. But The UAW Hates It.

DETROIT NEWS--This state-of-the-art manufacturing complex in northeast Brazil is one of the most advanced automobile plants in the world. It is more automated than many of Ford's U.S. factories, and leaner and more flexible than any other Ford facility. It can produce five different vehicle platforms at the same time and on the same line.

At Camaçari, more than two dozen suppliers operate right inside the Ford complex, in many cases producing components alongside Ford's main production line. Having those supplier operations on-site allows Ford to take the concept of just-in-time manufacturing to a whole new level. Inventories are kept to a bare minimum, or dispensed with entirely. Components such as dashboard assemblies flow directly into the main Ford assembly line at the precise point and time they are needed.

"South America is kind of the global sandbox for a lot of automakers to try out new methods," said Michael Robinet, vice president of global vehicle forecasts for CSM Worldwide. "Ford was able to think out of the box, and it's paying off for them."

Unlike many U.S. auto plants, where workers' responsibilities are strictly limited to specific job classifications, workers are encouraged to learn as many different skills as possible.

Watch a
fascinating video here of Ford's Camaçari plant.

So who could possibly object to having the most advanced, leanest, most flexible, state-of-the-art Ford facilities like the Camaçari plant built here in the U.S., especially if it could help Ford and GM survive and become more profitable?

Ford sources said it is the sort of plant the company wants in the United States, were it not for the United Auto Workers, which has historically opposed such extensive supplier integration on the factory floor.

MP: It's not just above-market UAW wages and benefits, along with overly generous lifetime pensions and health care coverage that have all contributed to pushing the Big Three to the brink of bankruptcy. It's also the outdated work rules, multiple job classifications, and union inflexibility and resistance to greater efficiency that have crippled the Big Three (see the 22 pound, 2,215 page UAW-Ford contract here).

Isn't it sad that U.S. automakers like Ford have to go 5,000 miles away to "the global sandbox" Brazil to try out new production methods, instead of introducing cutting-edge, state-of-the-art technology here in the U.S.? Even if GM and Chrysler reduce wages and benefits to competitive levels as part of the $17.4 billion bailout, they still might not survive in the long run if they are prevented by the UAW from introducing lean, flexible, state-of-the-art technology inside the U.S., like Ford has been able to introduce outside of the U.S.

(A version of this post appeared on 5/11/08.)

5 Reasons Why Today is Not Great Depression II

From Fidelity (11/25/2008), see chart above (click to enlarge) of the 5 reasons; here's the summary:

The challenges faced today by the global economy and financial system are staggering. For the United States, all economic indicators point to an economic downturn that will at least rival any in the post-war period. However, all historical analogies are imperfect. The world changes too much over periods of decades, particularly economies powered by constantly changing technologies, to find a precise fit for any historical parallel. While there are admittedly some similarities between today’s environment and the 1930s, those similarities do not mandate that the world is predestined to follow a path into a decade-long depression.

The dramatic response by central banks and governments around the world faces challenges and potential ill side-effects of its own. But this response underscores that we are living today in very different times than the world experienced 80 years ago, and it may serve investors well to take those differences into account.

Like Detroit, Washington Has Lost Its Way; Let's Restructure Washington While We're at It

Congress has been suitably tough in its advice to Detroit, calling for "a complete restructuring" of our failing auto makers. But how about restructuring Washington? Like Detroit, Washington has lost its way. Congress should take its own advice and retool Washington. Here's how:

1. Cut "legacy obligations." Congress lectures Detroit about a one-time loan of $15 billion, yet year after year Congress hands $10 billion to corporate farmers. And that's only one of hundreds of institutionalized pork-barrel projects.

2. Overhaul civil service. Civil-service rules make hiring an ordeal and firing practically impossible. Rigid job classifications are far more onerous than UAW work rules, guaranteeing massive inefficiency. The federal government employs about 2.5 million civilians, about 10 times the number directly employed in the U.S. by Detroit. The bloat is legendary.

3. Impose change from the outside. Entrenched cultures rarely fix themselves. That's more true with Washington than with Detroit -- Washington does not have Toyota or Honda pushing it to compete and innovate. President-elect Barack Obama is committed to change, but, like his predecessors, he will find himself nibbled to exhaustion by thousands of special interests.

Philip Howard in today's Wall Street Journal

With Economy in Shambles, Congress Gets a Raise

THE HILL - A crumbling economy, more than 2 million constituents who have lost their jobs this year, and congressional demands of CEOs to work for free did not convince lawmakers to freeze their own pay. Instead, they will get a $4,700 pay increase (from $169,300 to $174,000), amounting to an additional $2.5 million that taxpayers will spend on congressional salaries, and watchdog groups are not happy about it.

“As lawmakers make a big show of forcing auto executives to accept just $1 a year in salary, they are quietly raiding the vault for their own personal gain,” said Daniel O’Connell, chairman of The Senior Citizens League, a non-partisan group. “This money would be much better spent helping the millions of seniors who are living below the poverty line and struggling to keep their heat on this winter.”

HT: Ryan Stinson

HIV/AIDS Prevalence Rates: Top Ten Countries

Link.

Note that 7 out of these 10 countries are also in the bottom 10 countries for life expectancy, see CD post here.

Markets In Everything: Eyelid Advertising

Link.

HT: Ben Cunningham

Markets in Everything: Charity Porn

Link.

HT: Adam Smith Institute Blog

+259,000 Jobs Added in Six States Since Nov. '07

Here's one bright spot in today's State Employment Summary:

Wyoming recorded the largest over-the-year percentage increase in employment(+2.8%, +8,200 jobs), followed by Texas (+2.1%, +221,000 jobs), North Dakota (+1.4%, +4,900 jobs), and Oklahoma (+1.1%, +17,200 jobs), South Dakota (+1.1%, +4,300 jobs) and Alaska (+1.1%, +3,400 jobs), see chart above (click to enlarge).

Together, those six states have added 259,000 jobs in the last year (Nov. 2007 to Nov. 2008). One feature those states have in common is that they are all "Right to Work" states, except for Alaska which is a "Forced Unionism" state.

Life Expectancy: Bottom Ten, Top Ten

Bottom Ten:

Top Ten:

Link.

Thursday, December 18, 2008

30-Year Mortgage Rates Fall to Historic Low

The average 30-year fixed mortgage rate fell to an all-time historic low of 5.19% today, according to data available from the FHLMC (Freddie Mac), see news reports here and here. These historic low mortgage rates should be important "mustard seeds" that will help the real estate market recover and heal. Watch for the Housing Affordability Index to reach historical record highs in the coming months.

Update: Historical data to 1971 available here.

The Classic Story "I, Pencil" Turns 50

Eloquent. Extraordinary. Timeless. Paradigm-shifting. Classic. Half a century after it first appeared, Leonard Read’s 'I, Pencil' still evokes such adjectives of praise. Rightfully so, for this little essay opens eyes and minds among people of all ages. Many first-time readers never see the world quite the same again.

~Foundation for Economic Education president Lawrence Reed, on the 50th year anniversary of the free market classic "I, Pencil."


Leonard Read’s delightful story, “I, Pencil,” has become a classic, and deservedly so. I know of no other piece of literature that so succinctly, persuasively, and effectively illustrates the meaning of both Adam Smith’s invisible hand—the possibility of cooperation without coercion—and Friedrich Hayek’s emphasis on the importance of dispersed knowledge and the role of the price system in communicating information that “will make the individuals do the desirable things without anyone having to tell them what to do.”

~Nobel economist Milton Friedman

Wednesday, December 17, 2008

Markets In Everything: Naming Rights for Bats

INDIANAPOLIS - Searching for a truly original holiday gift, one that could bestow a bit of immortality on a loved one or a friend?

If so, Purdue University has the goods: The school is auctioning the naming rights to seven newly discovered bats and two turtles. Winning bidders will be able to link a relative, friend or themselves to an animal's scientific name for the ages.

Last year, Conservation International auctioned the naming rights to 10 new fish species during a gala "Blue Auction" in Monaco that raised more than $2 million for the Washington, D.C.-based conservation group. The highest winning bid was $500,000 for the honor of naming a new species of "walking" shark.

Thanks to Sanil Kori.

Ford Received $300m in 2007 To Lose MI Jobs

BBC (January 2007) -- Michigan agreed to give Ford Motor $300m to keep open six of its factories in the state. The move, which amounts to subsidies of about $23,000 per worker, could help safeguard 13,000 jobs in the state.

Ford cannot guarantee that it will create any new jobs, nor offer a guarantee that it will continue to employ all of its existing workforce. This is in contrast to similar deals where states offer car companies incentives to build car factories specifically to create new jobs.

MP: At least when the foreign transplants receive state subsidies, they usually create a net increase in jobs. It appears that Ford received $300 million in 2007 from the state of Michigan even though there's been a net loss of Ford jobs in Michigan over the last few years.

NY Times Flashback: Chrysler Got $232m in 1997

NY TIMES (August 12, 1997) -- The Chrysler Corporation has become the latest company to negotiate extensive tax breaks and other government incentives, winning concessions totaling $232 million (MP: $307 million in 2008 dollars), or about $47,000 for each job retained, for building a Jeep assembly plant in Toledo, Ohio.

Never mind that the new factory will have 600 fewer jobs than the one it replaces, that unemployment rates are at record lows and that Chrysler planned to stay within 15 miles of Toledo -- possibly somewhere in Michigan -- even if it had abandoned its downtown site. Cities, like workers themselves, remain eager to hold onto jobs in this era of downsizing. City and state tax revenues paid by Chrysler and its workers would have plummeted had Chrysler moved out.

This is not the first time Chrysler has gotten an incentive package to have a plant stay put. In 1992, Chrysler replaced an 85-year-old plant in Detroit with a $1 billion sophisticated factory where Jeep Grand Cherokees, the high end of the Jeep line, are built. Back then, the company received a package of financial incentives worth more than $250 million ($378 million in today's dollars).

The Minneapolis Federal Reserve Bank argued that while the competition for jobs among states might shuffle jobs from state to state, it created no new jobs nationally. The bank argues that Congress, which has the authority to regulate interstate commerce, should deter such competition by taxing as income the special deals offered to companies like Chrysler.

HT: Johnny

Michigan: $3 Billion in Business Subsidies

According to the Mackinac Center for Public Policy:

1. April 18, 2005 marked the 10th anniversary of The Michigan Economic Growth Authority (MEGA), a program established by Michigan government with the mission of spurring in-state job creation and business investment. The authority is the state of Michigan’s agent for selecting firms to receive Single Business Tax credits in return for creating new facilities and jobs in Michigan.

2. The incentives offered through MEGA packages total more than $3 billion since the beginning of the program (through 2005). These incentives include state tax credits, local abatements and other state and local inducements, such as job training and road improvements.

3. The largest local incentive was $165 million over 25 years to General Motors in June 2000. General Motors has been the direct beneficiary of six MEGA deals, by far the most of any corporation. Additional MEGA deals have been concluded with GM suppliers as part of an overall package benefiting GM.

Here's an example of one MEGA deal that provided GM with almost $100 million of incentives in 1999 ($127 million in today's dollars) to build a new Cadillac factory in Lansing, Michigan (thanks to Jim for the link).

Bottom Line: It's not just the foreign transplants that have received generous state subsidies for building new plants; Michigan has doled out $3 billion of taxpayer money to attract business investment, and GM and Ford have both been the recipients of Michigan taxpayers' largesse.


What Would D. Crockett Say About Bailout Nation?

From Davy Crockett's "It's Not Yours To Give" story:

It is not the amount that I complain of; it is the principle. The power of collecting and disbursing money at pleasure is the most dangerous power that can be intrusted to man, particularly under our system of collecting revenue by tariff (Note: There were no income taxes in the 1800s when this was written, most government revenue came from tariffs), which reaches every man in the country, no matter how poor he may be, and the poorer he is the more he pays in proportion to his means.

If you have the right to give to one, you have the right to give to all; and, as the Constitution neither defines charity nor stipulates the amount, you are at liberty to give to any thing and everything which you may believe, or profess to believe, is a charity, and to any amount you may think proper. You will very easily perceive what a wide door this would open for fraud and corruption and favoritism, on the one hand, and for robbing the people on the other.

No, Congress has no right to give charity. Individual members may give as much of their own money as they please, but they have no right to touch a dollar of the public money for that purpose.

(Originally posted in August 2008.)

Update: These were the words of Horatio Bunce, a constituent of Davy Crockett.

Postponing Reality and Rust Belt Policies

Economist Thomas Sowell weighs in on the Big Three bailout:

We are told that the collapse of the Big 3 automakers in Detroit would have repercussions across the country, causing mass layoffs among firms that supply the automobile makers with parts, and shutting down automobile dealerships from coast to coast.

A renowned economist of the past, J.A. Schumpeter, used to refer to progress under capitalism as "creative destruction"-- the replacement of businesses that have outlived their usefulness with businesses that carry technological and organizational creativity forward, raising standards of living in the process. Indeed, this is very much like what happened 100 years ago, when that new technological wonder, the automobile, wreaked havoc on all the forms of transportation built up around horses.

For thousands of years, horses had been the way to go, whether in buggies or royal coaches, whether pulling trolleys in the cities or plows on the farms. People had bet their futures on something with a track record of reliable success going back many centuries. Were all these people to be left high and dry? What about all the other people who supplied the things used with horses-- oats, saddles, horse shoes and buggies? Wouldn't they all go falling like dominoes when horses were replaced by cars?

Unfortunately for all the good people who had in good faith gone into all the various lines of work revolving around horses, there was no compassionate government to step in with a bailout or a stimulus package. They had to face reality, right then and right there, without even a postponement. Who would have thought that those who displaced them would find themselves in a similar situation a hundred years later?

Actually the automobile industry is not nearly in as bad a situation now as the horse-based industries were then. There is no replacement for the automobile anywhere on the horizon. Nor has the public decided to do without cars indefinitely. While Detroit's Big 3 are laying off thousands of workers, Toyota is hiring thousands of workers right here in America, where a substantial share of all our Toyotas are manufactured.

Will this save Detroit or Michigan? No.

Detroit and Michigan have followed classic liberal policies of treating businesses as prey, rather than as assets. They have helped kill the goose that lays the golden eggs. So have the unions. So have managements that have gone along to get along. Toyota, Honda and other foreign automakers are not heading for Detroit, even though there are lots of experienced automobile workers there. They are avoiding the rust belts and the policies that have made those places rust belts.

A bailout of Detroit's Big Three would be only the latest in the postponements of reality.

Tuesday, December 16, 2008

Let's Not Spend Our Money to Avoid Reality Check

While Washington tries to arrange a bailout, the Detroit 3 auto makers and the UAW keep insisting that bankruptcy would be the kiss of death. Not so: a Chapter 11 bankruptcy filing will likely result in a stronger domestic industry.

General Motors is in need of Chapter 11 bankruptcy reorganization. It needs to shed labor contracts, retirement contracts, and modernize its distribution systems by closing many dealerships. This will give rise to many current and future liabilities that may be worked out in bankruptcy. It may need new management as well. Bankruptcy provides an opportunity to do all that. Consumers have little to fear. Reorganization will pare the weakest dealers while strengthening those who remain.

So why do the Detroit Three managements and the UAW insist that "bankruptcy is not an option"? Perhaps because of the pain that would be inflicted upon both.


The bankruptcy code places severe limitations on the compensation that can be paid to a manager unless there is a "bona fide job offer from another business at the same or greater rate of compensation." Given the dismal performance of the Detroit Three in recent years, it seems unlikely that their senior management will be highly coveted on the open market. Incumbent management is also likely to find its prospects for continued employment less-secure.

Chapter 11 also provides a mechanism for forcing UAW workers to take further pay cuts, reduce their gold-plated health and retirement benefits, and overcome their cumbersome union work rules. The process for adjusting a collective bargaining agreement is somewhat complicated and begins with a sort of compulsory mediation process. But if this fails a company can (with court permission) nullify the agreement. This doomsday scenario is rarely triggered, however, as its threat casts a large shadow over negotiations, providing a stick to force concessions.

Detroit and the public has little to fear from a bankruptcy filing, but much to fear from the corrupt bargain that is emerging among incumbent management, the UAW and Capitol Hill to spend our money to avoid their reality check.

~George Mason Law Professor Todd Zywicki in today's WSJ, "Bankruptcy Is the Perfect Remedy for Detroit"

Quote of the Day: Let Economic Energy Bubble Up

In many ways Milton Friedman was a devil figure in my youth, in a Keynesian household of economists. I grew to see the issue as more nuanced as I was in school and ultimately have come to have enormous respect for Friedman's views on a range of questions. That's a respect that is born of the power of his arguments as one considers them more and more deeply. But it's a respect that's also born of the lessons of the experience of the success of decentralization in a place like Silicon Valley and of the failures of centralization in places like Central Europe and Russia.

In many ways some of the ideas of Hayek and Friedman about how markets best provide incentives, and best provide information, and best collect information may in a sense be even more true today, because of the changes that information technology is bringing, than they were at the time when they were propounded.

If you think about it, it cannot be an accident that it is the same 15-year period when communism fell, when command-and-control corporations like General Motors and IBM had to be drastically restructured, when planning ministries throughout the developing world were closed down, and when the Japanese model of industrial policy proved to be a complete failure.

There is something about this epoch in history that really puts a premium on incentives, on decentralization, on allowing small economic energy to bubble up rather than a more topdown, more directed approach, that may have been a more fruitful approach in earlier years.

~Lawrence J. Summers, 71st Secretary of the Treasury and Adviser to President-Elect Barack Obama

Minimum Wage, Maximum Folly

MIT PRESS -- Minimum wages exist in more than 100 countries, both industrialized and developing. The U.S. passed a federal minimum wage law in 1938 and has increased the minimum wage and its coverage at irregular intervals ever since; in addition, as of the beginning of 2008, 32 states and the District of Columbia had established a minimum wage higher than the federal level, and numerous other local jurisdictions had in place "living wage" laws. Over the years, the minimum wage has been popular with the public, controversial in the political arena, and the subject of vigorous debate among economists over its costs and benefits.

In a new book from MIT Press (pictured above), economists David Neumark (UC-Irvine) and William Wascher (Federal Reserve) offer a comprehensive overview of the evidence on the economic effects of minimum wages. Synthesizing nearly two decades of their own research and reviewing other research that touches on the same questions, Neumark and Wascher discuss the effects of minimum wages on employment and hours, the acquisition of skills, the wage and income distributions, longer-term labor market outcomes, prices, and the aggregate economy. Arguing that the usual focus on employment effects is too limiting, they present a broader, empirically based inquiry that will better inform policymakers about the costs and benefits of the minimum wage.

Based on their comprehensive reading of the evidence, Neumark and Wascher argue that minimum wages do not achieve the main goals set forth by their supporters. Specifically, minimum wage laws:

a) reduce employment opportunities for less-skilled workers and tend to reduce their earnings;

b) they are not an effective means of reducing poverty; and

c) they appear to have adverse longer-term effects on wages and earnings, in part by reducing the acquisition of human capital.

The authors argue that policymakers should instead look for other tools to raise the wages of low-skill workers and to provide poor families with an acceptable standard of living.

HT: Ben Cunningham

The ACTUAL Fed Funds Rate is Already ZERO


WASHINGTON POST -- The Federal Reserve is widely expected this afternoon to cut interest rates for the 10th time in just over a year, driving the rate it controls close to zero as it continues the most sweeping effort to stabilize the economy in the history of the central bank.

The federal funds rate, at which banks lend to each other, is already at 1%. The Fed is expected to drop it to half a percent, or even lower, at the end of its policymaking meeting today. That would be the lowest U.S. rate on record.

MP: The Post article above illustrates some widespread confusion about: a) the TARGET Fed Funds rate (currently at 1%), and b) the ACTUAL Fed Funds rate (currently close to 0), see chart above (click to enlarge) using Fed data. The actual Fed Funds rate is determined by banks borrowing and lending bank reserves, so it generally a market-determined rate that can deviate from the intended target rate. The Post article should have said "The TARGET federal funds rate is already at 1%," and it could have been clarified that the ACTUAL rate at which banks actually lend to each other is closer to .25%, not 1%.

Notice that in October when the target Fed Funds rate was 1.5% (blue line), the actual Fed Funds rate was about 1% (red line). For the last two months, the target Fed Funds rate was 1%, while the actual Fed Funds rate has ranged between about .50% and close to zero, probably averaging about .25%.

At its meeting today, the FOMC is expected to cut its target Fed Funds rate again. But if the actual Fed Funds rate is already close to zero, will it really have any effect? Can it really have any real effect?

Monday, December 15, 2008

Kindred Spirits

Charles Ponzi (1882 - 1949)
Occupation: Businessman


Bernard L. Madoff
(1938 - present)
Occupation: Businessman


Franklin D. Roosevelt (1882-1945)
President, Created
Social Security


Markets In Everything: Buying Interview Time

This guy will pay $200 for an interview with an HR manager (20 minute minimum), $400 for an interview with a Director or VP, and $800 for an interview with a President or CEO, here's his interview fee schedule, here's his resume (BA in Business and Economics), and here's his main website.

Posted on Chicago Boyz blog, hat tip to Nicholas Bretagna II.

Bailout Nation and the Dangers from the Political Allocation of Capital

Just released from the Joint Economic Committee, a new study "Dangers from the Political Allocation of Capital," excerpts below:

Since the financial crisis began in August 2007, the federal government has become increasingly involved with U.S. banks and other financial institutions and U.S. financial markets. The Federal Reserve has greatly expanded the size, duration, and scope of its credit facilities. The Department of the Treasury has agreed to 1) inject up to $100 billion of taxpayer funds into Fannie Mae and $100 billion into Freddie Mac, 2) purchase up to $250 billion of preferred shares in banks, and 3) purchase $40 billion of preferred shares in AIG. Now, Chrysler, Ford, and General Motors along with the UAW are seeking emergency financing to help these automakers avoid bankruptcy reorganizations.

This raised an important question – how would the political allocation of capital affect the performance of the U.S. economy? The political allocation of capital misdirects investment based on political criteria. Product innovation and process improvement in firms suffer. Over time, diminishing productivity gains slow real income growth and reduce real GDP well below its potential. Economists attribute the deterioration of economic performance under the political allocation of capital to several factors:

Information problems. The knowledge necessary to allocate capital efficiently is widely diffused throughout the global economy and costly to obtain. It is impossible for any one person or organization to acquire and to update constantly all of the information necessary to allocate capital efficiently in a complex economy.

Unresponsiveness. A constitutional republic such as the United States places many restraints both legal and practical upon policymakers and bureaucrats. These restraints necessarily slow the response of policymakers or bureaucrats to changing conditions or prospects.

Bias against entrepreneurship and innovation. With the political allocation of capital, there is a bias against funding entrepreneurship in emerging industries producing new goods and services using innovative technologies, and toward funding existing firms in established industries producing known goods and services using conventional technologies. The political allocation of capital discourages entrepreneurship, slows product and process innovation, and retards the development of new technologies.

Political Bias for constituents. Under the political allocation of capital, the natural tendency of legislative policymakers to serve the special interests of their constituents may cause such policymakers to direct or at least to influence the flow of credit and investment to their constituencies.

Resource diversion ("rent seeking"). The political allocation of capital encourages firms to devote management time and firm resources to lobbying activities to secure funding from policymakers or bureaucrats.


Corruption and crony capitalism. Finally, the political allocation of capital may foster corruption. When policymakers and bureaucrats make credit and investment decisions, entrepreneurs and firm managers may be tempted to bribe policymakers and bureaucrats to secure funding for their firms or to prevent their rivals from securing funding.

Conclusion. While the severity of the financial crisis may justify some of the recent federal interventions, these interventions, if not reversed once the crisis has dissipated, may retard the efficient allocation of capital in the United States and thus diminish its long-term growth prospects.

Just Say No To Keynesian Leaky Bucket Economics




In the video above, Cato Institute's Dan Mitchell explains why Keynesian economics sounds good but is fundamentally flawed, and why bigger government cannot stimulate the economy. Reason: Before government can inject money/spending into the economy, it first must take money out of the economy (borrow or tax), so the net result can never be anything more than an inefficient redistribution, shifting and transfer of income/spending from one group to another. Kind of like transferring water from Group A to Group B, but with a leaky bucket (see picture below).


As George Mason economist Russ Roberts said on NPR earlier this year:

When you just send out checks from the government (MP: implement a Keynesian stimulus), whoever gets stimulated is likely to be offset by someone who gets unstimulated. The money has to come from somewhere. If you raise taxes to fund the plan, the people who are taxed are poorer and they'll spend less. If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It's like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn't get any deeper.

That's why stimulus schemes based on giving people money have a poor track record of energizing the economy. Usually, the only thing that gets stimulated is a politician's approval rating.

Quotes of the Day: The Case for Free Trade

The general case for freedom in international exchange is like the case against putting sand in the gears of a machine.

~C. Lowell Harriss, professor of economics at Columbia University, writing in 1953


The economic case for Free Trade is quite the same as the case for technological progress. Both increase the output of useful goods and services that a country can get from its labor and resources. In particular, Free Trade, like improved transportation, promotes interregional specialization and increases through trade the results that a country gets from its productive powers.

~Auburn University economist Leland Yeager

Tale of 2 Dictionaries:Collectivism v. Invisible Hand

Here's an interesting article about the first English dictionary completed in 1755 by a single individual, Samuel Johnson, after 7 years of work, and the first French dictionary, completed in 1694 after 55 years of work by the 40-member French Academy:

For many centuries, the English and the French languages, lacking formally binding rules, evolved spontaneously, inconsistently, and idiosyncratically. With the advent of the Enlightenment, attempts were made to end this state of linguistic anarchy by standardizing grammar and spelling, most notably through the creation of grammar books and dictionaries. This article deals with two of the most notable of the early dictionaries; the French dictionary created by the French Academy and the English dictionary created by Samuel Johnson.

The two dictionaries were completed in different ways and at different speeds: the English dictionary was composed by a single man in seven years; whereas the French dictionary was composed by a body of 40 members in an agonizingly slow 55 years. This fact seems bizarre at first; many people, by dividing the work amongst themselves, surely should have been able to complete roughly the same task that one man was engaged in in less time than it took that one man.


Yes, Samuel Johnson was a genius, but the French Academy also had its share of geniuses; even if we were to make the wild assumption that Samuel Johnson had the mental powers of ten Academicians, Johnson would still have been outnumbered by four to one; so surely genius alone cannot explain the vast anomaly. I suggest that much of the contrast can be explained by the ineluctable differences inherent in a collective, government-sponsored effort and in one that is individual and profit-making.

MP: Never underestimate the power of self-interested profit-seeking activity. The invisible hand of self-interest is our most valuable resource. As Steven E. Landsburg remind us "It is something of a miracle that individual selfish decisions lead to collectively efficient outcomes."

Update: Originally posted in September 2006.

Nigeria: The Next Global Outsourcing Power?

BUSINESS DAY -- Global information and communication giant, Microsoft, has set an ambitious target of training 50,000 Nigerian youths on IT and outsourcing skills. Ken Spann, Developer Platform Evangelist Lead for Microsoft Anglophone West Africa, told Business Day in an interview in Lagos that the initiative is aimed at facilitating the development of a vibrant outsourcing sector that would ultimately make Nigeria the IT Enabled Outsourcing hub in West Africa .

A recent World Bank study says that Nigeria can be the premier outsourcing country in the world. One distinct advantage is that English is the official language in Nigeria, making it a favorable outsourcing destination because English is the language for business around the world. With this, it is easy for Microsoft to build IT capacity in Nigeria.

Sunday, December 14, 2008

Bankruptcy is Best Solution for US Auto Companies

Argues Nobel economist Gary Becker:

One should not confuse the politics of the situation with what is the better economic outcome for consumers, and what is the effect of bankruptcy of the big three automakers on overall American employment and unemployment.

Bankruptcy would strengthen rather than weaken the competitive position of the American automakers, especially when combined with government debtor-in-possessor financing. The bankruptcy proceedings would likely break the union contracts and reduce their pay to levels comparable to those received by American employees of foreign car manufacturers. They would also break the contracts for health payments and pension obligations, which have been significant factors in causing their financial distress. Bankruptcy would also help the companies restructure their debt so that interest payments are much lower. I do not know whether even after all this, the Big Three can compete effectively in the long-run market for cars--almost surely Chrysler cannot--but bankruptcy combined with management changes, especially at GM, would give them their best chance.

This is certainly true compared to the alternative proposed by the Democrats, which includes the preposterous idea to create an auto "czar" who would oversee the industry. Since when does the American approach to market structure include czars and congressional management of an industry? Such an approach is just an encouragement to the development of a chronically sick patient (American auto producers) who never gets better, and continues to rely on taxpayer support.

548 Defunct U.S. Motor Vehicle Manufacturers and the Schumpeterian Forces of Creative Destruction

There's an interesting Wikipedia listing of 548 "Defunct Motor Vehicle Manufacturers of the United States."

See a related Wikipedia listing here of "
creative destruction:"

"The economist Joseph Schumpeter popularized and used the term to describe the process of transformation that accompanies radical innovation. In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power."

Comment: More than 500 American automobile manufacturers failed over the last 100 years for one reason or another, or were acquired, primarily due to the Schumpeterian forces of "creative destruction." As far I know, not a single one of those auto manufacturers asked for, or was granted, government assistance, or received a government (aka taxpayer) bailout. Should there now be an exception for GM, Ford or Chrysler to get bailed out when none of the 548 defunct companies received assistance?


HT: Ben Cunningham

Wal-Mart Gives Consumers a $400 Million Holiday Gift This Year, Exceeding Its 2007 Charitable Gifts; Wal-Mart Deserves the 2009 Nobel Peace Prize

WAL-MART PRESS RELEASEWalmart announced Friday another delivery of weekly savings to help families across America cut the cost of Christmas. Operation Main Street initiatives have saved shoppers an estimated $300 million thus far this holiday season. In the remaining days for holiday shopping, Walmart projects it will save its customers another $100 million over and above its every day low prices.

Weekly savings beginning in stores on Sunday, Dec. 14 underscore Walmart’s promise to provide shoppers with savings that matter when they are needed most. With Christmas two weeks away, Rollbacks and more new savings are focused on gifts and preparing for the holiday, from gifts for him at $10 and $20 to entertainment products and brands, including a 2GB Toshiba laptop and 32-inch Sharp LCD HDTV both priced at $398 starting Sunday.

According to Forbes, Wal-Mart was the most generous corporation in America in 2007, giving away $301 million in cash gifts to the Children's Miracle Network, Feeding America, The Salvation Army, the American Red Cross, the United Way of America, National Fish and Wildlife Foundation. Wal-Mart was almost twice as generous as the most profitable company in the world, Exxon, which gave "only" $173 million in 2007, and was #3 in the Forbes ranking.

MP: Wal-Mart has done more to benefit local communities and consumers around the country with $400 million of savings just during this holiday season (over and above Wal-Mart's already every day low prices) than through its generous charitable giving during the entire last year of "only" $300 million.

By itself, Wal-Mart's $400 million "holiday gift" to American consumers around the country from extra-low prices will probably make it the most generous, charitable corporation in the U.S. this year, and that's not even counting the estimated $300 million it will give away to charities in 2008 (assuming it matches last year's gifts). Gotta love "Saint Wal-Mart."

Here's a case for Wal-Mart getting the 2008 Nobel Peace Prize (it's too late now, but maybe 2009?), for lifting so many people out of poverty, benefiting so many poor people with "everyday low prices," selling prescription drugs that are almost free ($4), lowering inflation, and creating more than a million jobs.

Big Three, Meet the Anti-Detroit "Little Eight"

SLATE.COM -- Time was, the Big Three were the U.S. auto industry. No longer. Over the past two decades, enticed by cheap labor and massive incentives, a second auto industry has emerged: nonunion, Southern-based, and foreign-owned. Large plants, with names of Asian and European carmakers emblazoned upon them, now dot the Southern landscape. By moving aggressively into Kentucky, Tennessee, Alabama, Mississippi, South Carolina, Georgia, and Texas, foreign manufacturers—call them the "Little Eight"—have transformed the economic geography of the nation's auto industry and the political debate surrounding its future.

Today's Southern solons have watched their local economies blossom thanks to a younger, more-vibrant auto industry unencumbered by the Big Three's legacy costs and union work rules—a sort of anti-Detroit that has the flexibility and ability to turn profits by making the types of cars that Americans actually want to buy.

Great Profile: #1 Master Econblogger Tyler Cowen


Faculty Sabbaticals vs. The Jobs Bank

On this post, CD regular Walt G. comments: "I see that tenured professors can get a sabbatical leave (jobs-bank type leave) for six months every six years of employment (Source: The University of Michigan SPG 201.30-2). Accordingly, every 12 years they can get one year off work with full pay and benefits (except paid vacation): that’s 8½ % of the time they get paid for not working."

1. According to the University of Michigan Standard Practice Guide (SPG), "Members of the regular instructional staff who have completed six years of service in regular professorial ranks at the University are eligible for a sabbatical leave." That means that eligible faculty who complete six years of service would be eligible to take a sabbatical leave in his or her seventh year, and over a 14-year period would receive one year total sabbatical leave.

2. From the SPG: "Application for sabbatical leave shall be made in writing (using Form J) and submitted to the Dean of the unit concerned not later than February 1 preceding the appointment year within which the leave is desired. The application must be accompanied by a statement of a well-considered plan for the sabbatical which includes its significance as a contribution to the professional effectiveness of the applicant and the best interest of the University."

3. Further, "Upon completion of the sabbatical leave, the recipient shall submit a report of the results of the leave within 90 days following return from leave. The report shall be submitted to the chairman who will acknowledge receipt of the report and forward a copy of the acknowledgment memo to the dean and the Staff Records Office. The report shall include:

a) An account of activities during the leave, including travel itineraries, institutions visited and persons consulted.

b) A statement of progress made on the sabbatical leave program as proposed in the application and an explanation of any significant changes made in the program.

c) An appraisal of the relationship between the results obtained and those anticipated in the sabbatical leave program statement.

Bottom Line: There seems to be some general misunderstanding about sabbatical leaves for faculty at research institutions. As the application guidelines above suggest, sabbaticals are not paid vacations, they are probably better described as "research leaves from teaching" for professional development. Therefore, any comparisons of: a) sabbatical leaves from teaching to focus on scholarly research for a semester, to b) "working" in a "jobs" bank (i.e. playing cards or reading newspapers) sometimes for ten years or more with almost full pay, are a real stretch.

Faculty time at research universities is allocated among teaching, research and service, but what often happens is that teaching and service become so time-consuming that it detracts from scholarly research. Having a semester every seven years without any obligations for teaching and service allows research-oriented faculty an opportunity to devote full-time attention to research projects that are often impossible to complete with teaching and service obligations, e.g. write a book, or travel internationally to collect scientific data or conduct scientific studies, etc.

Here's one way to think about faculty sabbaticals. If you're thinking about attending graduate school (especially a Ph.D. program), I would think you would want a degree from ONLY schools that had faculty sabbatical leaves, because it's those universities that recognize and reward scholarly research, and it's faculty actively engaged in research who are best qualified to teach graduate classes in graduate programs. If you don't think faculty sabbatical leaves for research are a good idea, then you'll probably be left with choices like the University of Phoenix, Capella Universities, and NOVA Southeastern, etc.

Higher Gas Prices = Historic Reduction in Driving = 3,392 Lives Saved So Far in 2008 vs. Last Year


WASHINGTONFederal safety officials say auto fatalities dropped almost 10% in 2008 through October, a trend overlapping with a historic cutback in driving (see chart above) as well as advancements in safety measures such as technology that prevents rollovers.

If the trend holds up for the year's last two months, highway deaths could reach their lowest level in the 42 years since the National Highway Traffic Safety Administration began keeping records.

NHTSA said Thursday there were 31,110 auto fatalities the first 10 months of 2008. That's a 9.8% decline over the same period in 2007, when there were 34,502 fatalities.

According to Acting NHTSA Administrator David Kelly, "When you talk about reductions in traffic fatalities in one year you are usually talking about hundreds in a good year. The fact that deaths are down 3,000 so far this year is staggering."

HT: Ben Cunningham