Category: Economics

Do you want to hedge the risk that government will overstep?

For once I agree 100% with Sebastian Mallaby when he’s discussing economics and finance. Consider:

Modern societies worship innovation. When tech wizards get rich by founding Facebook or YouTube, people tend to celebrate. But this healthy admiration for success is subject to exceptions. When a different species of tech wizard gets rich by founding a hedge fund, the reaction is ambivalent — even though hedge funds contribute to the success of the economy as surely as tech firms.

Last week was fairly typical. The European Central Bank called for new regulation of hedge funds, including American ones. Germany’s government declared that hedge fund oversight would be on the agenda when it hosts next year’s Group of Eight meetings. Not to be outdone, the U.S. Securities and Exchange Commission proposed a rule that would bar all but the wealthiest 1.3 percent of households from investing in these demon vehicles.

How to explain all this suspicion? Hedge funds are simply pools of money whose managers are paid according to performance. This system of rewards is no more sinister than the patent system, which spurs inventors with the prospect of fabulous profits. Like intellectual property laws, hedge fund performance fees have created some impressive fortunes. Like intellectual property laws, they have inspired innovation, too.

His analysis is presented well. With over-intrusive government meddling in personal investing decisions, the government might as well mandate a “mutual funds only” policy for individuals. It would be just as rational, which is to say not at all. Oversight is important, as the history of finance and business in America shows, but I can just as easily lose all of my money in my business or in Las Vegas as I can by making investment decisions. Full disclosure, yes. Paternalistic protection, no.

Free market economics, not surgery

I’ve held off posting this because I try to pace myself on the circumcision posts. But today is the perfect day to comment. For a rational take on the problem of HIV/AIDS in Africa, consider Emily Oster’s recent article from Esquire:

When I began studying the HIV epidemic in Africa a few years ago, there were few other economists working on the topic and almost none on the specific issues that interested me. It’s not that the questions I wanted to answer weren’t being asked. They were. But they were being asked by anthropologists, sociologists, and public-health officials.

That’s an important distinction. These disciplines believe that cultural differences—differences in how entire groups of people think and act—account for broader social and regional trends. AIDS became a disaster in Africa, the thinking goes, because Africans didn’t know how to deal with it.

Economists like me don’t trust that argument. We assume everyone is fundamentally alike; we believe circumstances, not culture, drive people’s decisions, including decisions about sex and disease.

I’ve studied the epidemic from that perspective. I’m one of the few people who have done so. And I’ve learned that a lot of what we’ve been told about it is wrong. Below are three things the world needs to know about AIDS in Africa.

I can’t recommend the article enough, as Ms. Oster explains the HIV crisis in Africa in terms at least as plausible as any prevailing theory. It just might be possible that believing the future will be worth living encourages people to make better choices. If that’s correct, circumcision won’t make the difference in Africa that its proponents hope. Again, we must ask ourselves whether solving the problem is more important than addressing it with a preferred solution. Accurate assumptions are vital.

Central planning is not an economic policy.

Here’s an interesting but misguided study:

A new poll shows that the overwhelming majority of Americans favor allowing the government to negotiate prescription drug prices for the Medicare program, suggesting there will be considerable political pressure on the next Congress to do so.

Eight-five percent of the 1,867 adults polled in the Kaiser Family Foundation survey released yesterday said they favored such negotiations, including majorities of Republicans, Democrats and independents.

So people presumably understand that negotiating in the marketplace makes sense. Why include government? Do people not pay attention to results?

Julie L. Goon, special assistant to Bush for economic policy, said that Medicare beneficiaries are saving an average of $1,200 a year on drugs and that the existing program is popular and efficient.

“The government doesn’t do a particularly good job of negotiation,” Goon said. “I think it would be a mistake to open up the political process to what particular prices are available for drugs.”

Success is measured by beneficiaries saving money without noting that the cost is that someone else pays that $1,200. Of course, we could look no further than the stunningly frank admission that government doesn’t do a particularly good job of negotiation. The trade-off for those savings-that-aren’t-really-savings is fewer choices. Well done.

Welcome to government meddling with healthcare. Anyone who wants more is crazy.

Sports is a business.

First, with the Phillies’ recent acquisition of starting pitcher Freddy Garcia, we the team now has one too many starters. With many teams in need of a proven starter, a trade will occur before spring training. The odd man out is Jon Lieber, but that’s not what’s important. This quote from Phillies assistant GM Mike Arbuckle explains how to operate in a market.

“If we’re sending Christmas gifts to starting pitchers, we’ll probably only have to send out five,” he said with a laugh. “But we’ll let numerous teams come to us and see what the best offer is. Supply and demand may work in our favor.”

Bud Selig and the other owners in Major League Baseball talk a lot about parity, which can be seen as little more than talent redistribution when carried to the extreme. Yet, it doesn’t work out that way. Some teams seem to build talent in excess of what they need.

In this case, the Phillies and starting pitchers. Would it make sense for Major League Baseball to take one of the Phillies’ pitchers and give him to the Devil Rays, for example, because they need starters? Of course not. The Devil Rays, and every other team, are left to extract that player from the Phillies in exchange for another player. As any reasonable person could predict, the Philadelphia will try to improve its roster (demand) by offering a starter (excess supply). This is logical, so why do so many in our government feel that this does not apply to every other situation in economics?

Next, Senator Arlen Spector has interesting opinions about the NFL and its collectivist bargaining of television rights. Consider:

Whatever his motivation, Sen. Arlen Specter, R-Pa., claimed at the end of a Thursday hearing that he will sponsor legislation to strip the NFL of the antitrust exemption that permits the league to negotiate its television contracts for all 32 franchises, rather than have the teams do so individually.

“Wouldn’t consumers be better off if teams could negotiate [individually]?” Specter said. “This is the NFL exerting its power right down to the last nickel.”

..

Specter said the NFL should not use the exemption to negotiate exclusive programming packages such as DirectTV Inc.’s “Sunday Ticket,” which allows viewers to watch teams outside their regional market.

“As I look at what the NFL is doing today with the NFL channel with the DirectTV … a lot of people, including myself, would like to be able to have that ticket,” Specter said.

Among the grievances cited by Specter in what he termed a “fans be damned” mentality demonstrated by the NFL was the relocation of franchises, and decisions like the one that moved Monday Night Football from ABC, an over-the-air network broadcaster, to ESPN, a cable entity.

Using Sen. Spector’s logic, couldn’t individuals better negotiate wage contracts with employers tailored to meet their own needs? Perhaps collective bargaining is a great benefit for those involved. Perhaps not. But those involved should decide how they best wish to negotiate, free of government intervention or protection. The NFL’s structure is a voluntary club in which individuals and corporations transact with known rules. This is not the problem.

I could get behind Sen. Spector’s sabre-rattling about antitrust exemptions, but he’s attacking the wrong beast. He apparently can’t fathom the idea that the government should have little role in the operation of business. Remove/reduce the concept of antitrust and this matter goes away. Sen. Spector doesn’t want that; he is a politician, after all. But he seems to believe that being a football fan also entitles him to manipulate a market because he’d rather get the NFL and DirectTV’s combined product without having to include DirectTV. No. Subscribe to DirectTV or don’t, but leave the government out of it.

On Sen. Spector’s last point, what would he propose regarding Monday Night Football? That ABC receive a monopoly on broadcasting that, even if someone else (ESPN, like ABC, owned by Disney) is willing to pay more? I don’t recall reading anything about a fundamental right to free broadcasts of the NFL in the Constitution.

Finally, the Orioles are getting a new JumboTron, except they don’t want it. They’re not paying for it, so they want a bigger JumboTron.

The Maryland Stadium Authority agreed yesterday to move forward with the purchase of a new Mitsubishi video screen for Camden Yards despite objections from the Orioles.

Orioles officials say the DiamondVision screen is too small and technologically inadequate and plan to file a temporary restraining order in Baltimore Circuit Court today to block the $1.5 million purchase. The restraining order would give the Orioles time to move the dispute to arbitration as is called for in the team’s lease for the stadium.

On the surface, this is little more than a contract dispute. It should be decided as such given the constraints of reality. It’s possible to accept the facts while rejecting the assumptions. The taxpayers of Maryland should not be forced to subsidize the purchase of a bigger video screen for a private business.

Major League Baseball and the NFL are businesses and should be treated as such. Politicians who interfere *cough*Tom Davis*cough*, for whatever reason, are anti-capitalists trying to break fundamental laws of economics. They should not be tolerated.

Hat tip to Baseball Musings for the last item.

“We are already above that.”

Nothing in this article about raising the minimum wage is in any way support for the move. It doesn’t counter it either, unless you want to make logical inferences into the facts. It’s mostly a “this won’t do much” fluff piece, with a little bit of touchy-feely goodness masquerading as business sense. As such, it’s important to ask, if raising the minimum wage is so irrelevant, why bother? To feel good about ourselves? That’s not wise business.

A couple of morsels:

“When you let the minimum wage fall as low as it’s fallen, it becomes almost irrelevant,” said Harry J. Holzer, professor of public policy at Georgetown University and a former chief economist for the Labor Department. “This is an attempt to make it somewhat more meaningful, but not so meaningful that it destroys a lot of jobs.”

Wait, it becomes almost irrelevant? So the greedy capitalists don’t sit around trying to screw their employees out of wages, instead paying market wages above the minimum required by law? Who would this benefit? The answer, of course, is new, unskilled entrants into the job force (teens) and older workers, presumably staying active with employment. They need more why?

Also note that this attempt would not be so meaningful that it destroys a lot of jobs. A few jobs is acceptable, as long as we’re doing something that feels good. I bet the unemployment line won’t feel good to those (few?) who lose their jobs or don’t get jobs because they’re not created.

Carlos Castro is another area employer who said he won’t cut workers if the minimum wage goes up. As the owner of Todos Supermarkets in Alexandria and Woodbridge, he pays a starting wage of $7 an hour for cashiers, stockers, meat cutters and cooks — well above the $5.15 minimum in Virginia.

“You just can’t get by on minimum wage these days, and I don’t want to force my employees to have to get a second job to support themselves,” Castro said.

Castro said that if Congress increases the federal minimum wage, he will probably raise his pay to keep it above that — precisely what the EPI anticipates happening around the country.

This is the perfect way to see that increasing the minimum wage cause arbitrary, artificial gains for employees. It’s central planning at its ugliest. Who is going to pay for that increase in wages to stay a specific dollar amount above minimum wage? Rather than understand that the market already takes care of the problem in setting wages, the busybodies want to make sure that those few who are near the current, allegedly outdated minimum will no longer be harmed. Except they will be harmed, as prices increase to offset the new expenses. This is not a hard concept.

Rather than tie up business in endless regulation, government needs to get out of the way and let the market, powered by human creativity, solve whatever problems exist that harm the working poor the government so dangerously cares about.

Free trade is the only fair trade.

For once I agree with Robert Samuelson in conclusion. Today, he discusses free trade and looming efforts to fight against it. It’s not a clear article, but I think I get the gist. Free trade is good. Efforts to inhibit free trade are bad. Yep. I’m not sure he’s as close to absolutism on that as he (and everyone) should be, but some is better than none.

This passage is off, though.

We are dealing with something new here. It transcends traditional protectionism, which tries to shield specific industries and workers from imports. It’s trade obstructionism: a reflexive reaction against almost any trade agreement.

All protectionism is trade obstructionism. Always has been, always will be. We can argue whether or not there are scenarios where retaliatory of defensive protectionism is warranted, but that’s not what he’s saying. There’s protectionism, which can be justified, although he doesn’t offer scenarios. And then there’s obstructionism. I guess the difference is intent, but results speak a lot louder than intent. Sober drivers don’t mean to kill other, innocent motorists, but they can do so just as easily as drunks.

“Good” intentions within government don’t guarantee good results. As such, government shouldn’t interfere.

This has to be satirical.

I didn’t get to blog this yesterday, but it’s still worth a mention. It’s always wise to check your assumptions when promoting an idea, especially when that idea is that deficits are wonderful:

A reporter once asked President Reagan if he had anything to say in defense of his deficits. “No” answered Reagan, “they’re big enough to defend themselves.” Liberals howled, and conservatives chuckled, but no one questioned the premise of the question: that deficits are inherently a bad thing. The argument has always about whether the bad thing called deficits are too large and whether they will ever be paid off, not whether they can actually be good for our country. For the record the answers are: no, they’re not too big (see attached chart); no, they will never be paid off, and yes, they can be a good thing.

I actually like the premise of the question, because deficits involve politicians playing with other people’s money. Considering some of those other people haven’t been born yet, caution and responsibility seem to be key. But that’s not the flawed assumption I’m concerned with in this essay.

When strong nations go to war, they borrow money. Weak nations, not so much. That’s because strong nations usually win, and winning nations usually repay their creditors. Rich and successful people don’t have any problem getting someone to loan them money. The same holds for wealthy and successful nations. That’s why, historically, the interest rate of a nation’s bonds is a pretty good inverse indicator of investor confidence in the war effort. The more trouble investors see on the horizon, the more compensation they demand for the added risk.
…

This is the way the world works, some might say, but is it right? What about the children? Is it really fair for them to shoulder the burden of our wars? Heck yeah, it’s fair. Number one, they won’t be children when they start to share the burden of the national debt. Number two, they benefit.

Here’s the flawed assumption. The author expresses a selfish belief that we can have anything we want, and as long as the country survives, the children should just shut up. We’re wise, or at least rich. That’s enough, right?

The author concludes:

Defense is a sort of infrastructure, too. It provides benefits for future generations, just like roads and bridges do. Is it some kind of rip-off that my kid’s future tax bills will include interest payments from the war against Jihadists? Not if we win.

Good grief. Of course defense is vital, and the benefits of maintaining a strong nation carry over beyond just the immediate expenditure. (An assumption with some danger, but I can accept it.) No sane person believes that government shouldn’t protect its people. Defense is a legitimate expense for any government and should be made to the point that the nation remains safe. But that does not give a free pass for rampant spending elsewhere at the expense of future generations.

Look at the federal budget. The bulk of expenditures are in entitlements (Social Security, Medicare, etc.), not defense. To ignore these and believe that the war on Jihadists somehow excuses annual deficits of hundreds of billions of dollars is absurd. Eventually, the interest will absorb the entire budget, so the government will need further resources. At what point does this stop? (Hint: It begins with bank and ends with ruptcy.)

If the author wanted to make a case that the national debt is good, and shouldn’t be paid off, we can talk. He’d still be wrong, I believe, but there might be a case. But the deficit? Ridiculous. There is more than just interest rate signaling involved. Namely, interest payments.

If we want to do something for the children, we need to teach them economics. And the author of this essay should be last in line for the job.

In the Interest of Full Disclosure

In yesterday’s post about Robert Rubin’s suggested tax increase, I forgot to mention that I voted for Clinton in ’92 (and ’96, for what it’s worth) and supported the tax increases. My acceptance of tax increases as the viable solution was naive, based in economic ignorance, but my basic fiscal philosophy was still there. The budget should be balanced. In surplus, actually, since we need to pay the debt, as well. But my understanding of what the government should be spending has changed, based on knowledge and reading the Constitution.

All of this is a prime reason why economics education should be mandatory in school. Before I’d taken any economics classes, political marketing influenced my economics understanding. Today, economics influences my political understanding. I’ve always been a libertarian, for my commitment to liberty has always been my fundamental philosophy. In the past I naively ignored how crucial economic liberty is to individual liberty.

If I’d been aware in ’92, I doubt I would’ve voted for Clinton in that election. I doubt I would’ve voted for Bush, although history has been kind to my recollection of his presidency. But I wouldn’t vote Democrat. Yes, I’ve voted Democrat in the last two elections, but I’ve been trying to find the best way to defeat the nonsense of the last five years or so. I desperately want to vote for a libertarian candidate, but Virginia politics isn’t keen on nominating libertarians. As such, it’s highly unlikely that a Democrat will get my vote in the near future because I don’t think they’ll change. If I have to vote for myself, I will. I’ll even be eligible for president in ’08.

In other words, cut spending to fix our fiscal crisis. Increased redistribution through taxes on “the rich” reduces liberty for all, which will not work in the long-term for a nation that strives for prosperity.

“This is like déjà vu all over again.”

How to learn nothing:

That was fast. A mere two days after Democrats capture Congress claiming they wouldn’t raise taxes, former Treasury Secretary Robert Rubin tells them they should do so anyway.

“You cannot solve the nation’s fiscal problems without increased revenues,” declared Mr. Rubin, the Democratic Party’s leading economic spokesman, in a speech last Thursday. He also took a crack at economic forecasting by noting that “I think if you were to increase taxes right now, you would have probably about zero negative effect on the economy.” The economics and politics here are worth parsing.

It’s premature to assume that this is The Path&#153 for the next two years because much political wrangling has to happen before we see this implemented. My reaction is more exasperation than anything, which is to say that this is not “buyer’s remorse.” I’ve said many times that a (massive) spending cut is the way to fix our fiscal crisis. But politicians aren’t to be trusted, so I reasonably expected this. Democrats can’t comprehend that spending is too high rather than revenues tax receipts are too low. They’re stupid.¹

Aside from the ridiculous notion that Mr. Rubin believes tax increases would have zero negative effect on the economy, Mr. Rubin seems to be misreading the results of the Democratic victory last week. This is not 1992, when then-candidate Clinton ran on the promise to raise taxes. Everyone knew it was coming with a Clinton victory and still he won. However right or wrong the decision was, its inevitability was obvious. Clinton had the political capital to “encourage” Congress to increase taxes.

The 2006 election signaled no such preference from voters. Democrats could be expected to misinterpret their victory, as its lack of political leadership and foresight has been evident for many years. So, again, I think no one will be surprised if the 110th Congress attempts a tax increase. But they should not be surprised when they find themselves on the outside looking in at control of the 111th Congress.

The rest of the Opinion Journal editorial is reasonable, although it glosses over the deficit considerably more than it should.

¹ As further evidence:

“The middle class is being squeezed,” Mr. Reid said. “Squeezed. The rich are getting richer; the poor are getting poorer. We must do something about education. We must do something to relieve the tax burden on the middle class.”

It doesn’t take a genius to decipher that.

Meeting Customer Needs Mislabeled As Excessive Choice

This article, titled “When Fewer Choices Mean Bigger Returns,” is not geared to me, for I like choices and the research involved¹ in some of them. However, it’s refreshing that at least there is no request for someone outside the private marketplace to limit choices. Consider:

This point came rushing back to me the other day when I heard a radio commercial for Wal-Mart in which the company boasted about how small its selection of HDTVs was. The spot wasn’t apologizing for Wal-Mart’s lack of selection, nor was it saying the fact that Wal-Mart carried fewer options than the competition didn’t matter. The commercial actually touted the fact that Wal-Mart had improved the HDTV buying process by limiting its selection to only the most popular models.

The author appreciates this because he is overwhelmed with the number of available HDTV choices. Fair enough. If you’re content with the small selection Wal-Mart offers, you’re being catered to perfectly. I don’t prefer that method, because I know that the right possibility for me might be something I’m not aware exists. So this is not a chore:

If they can go to Wal-Mart and choose from a handful models that will do the job just fine for the average person, they will be happier than if they are required to sort through 40 or 50 models at Best Buy or Circuit City.

Again, I find this article useful in that it only makes the case that a business may meet its customers’ needs by doing some of the work for them. Free enterprise doesn’t have to mean every person has to try 500 brands of toothpaste. Where the author’s thinking is dangerous, though, is that “required to sort through 40 or 50 models” is an excuse for central planners to argue that too much choice is bad.

No one is required to do any research, of course. But if I like research and want to buy a TV that few people buy, there’s still a market. I may pay more for Best Buy to stock that model, but if it’s worth it to me, I’ll pay and Best Buy will make a profit. Whether or not that’s likely is subjective, but I am the person best-suited to being the decider.

¹ Ask Danielle how true this statement is.