Category: Economics

The headline omits the bad news for the company.

Both candidates for the presidency, and most certainly the lone straggler in the race, will focus only on $10.9 billion in profit, ignoring the full story:

Exxon Mobil Corp., the world’s largest publicly traded oil company, said Thursday record crude prices helped its net income grow 17 percent in the first quarter, but the results came in below Wall Street forecasts.
…

As expected, margins at the company’s refining operations dragged heavily on the bottom line as the big jump in prices on refined products such as gasoline, while a menace to consumers, failed to keep pace with the rapid increase in crude prices.

Still, queue the countdown clock to when Exxon Mobil will be once again demonized by politicians. Forget that the price increases at the pump are based in market dynamics and not just arbitrarily set to claim more windfall profits so that the CEO can make more money for himself. The correct answer will be ignored because the ignorant fairy tale purchases votes.

I wish to make a pledge. I will write a nice entry praising a policy position of whichever presidential candidate waits the longest to cite Exxon Mobil as an example of rising gas prices and why government needs to step in.

Tax incentives are the problem, not the fruitless search for the correct incentive.

I still have no intention of voting for him, but Senator McCain makes the most sense offers the least bad suggestion on health insurance reform:

In a speech at a cancer research center here, McCain dismissed his rivals’ proposals for universal health care as riddled with “inefficiency, irrationality and uncontrolled costs.” He said the 47 million uninsured Americans will get coverage only when they are freed from the shackles of the current employer-dominated system.

McCain’s prescription would seek to lure workers away from their company health plans with a $5,000 family tax credit and a promise that, left to their own devices, they would be able to find cheaper insurance that is more tailored to their health-care needs and not tied to a particular job.

Under McCain’s plan, $3.6 trillion worth of tax breaks over a decade that would have gone to businesses for coverage of their employees would be redirected to individuals, regardless of whether they are covered by a company plan.

“Insurance companies could no longer take your business for granted, offering narrow plans with escalating costs,” McCain said. “It would help change the whole dynamic of the current system, putting individuals and families back in charge, and forcing companies to respond with better service at lower cost.”

Unfortunately the inaccurate 47 million uninsured number seems to now be accepted as fact. Moving on.

The details will be important. If he’s proposing that Congress remove the tax incentive from employers to provide health insurance, then he’s possibly on solid ground. I disagree with filling the tax code with incentives. The current employer-provided health insurance should be ample proof that this distorts markets. But we’re dealing with least bad, not optimal. Even though people can be expected to protect themselves when they must shoulder the risk by purchasing insurance on their own, without incentive, if there must be an incentive until some foggy date in the future when we figure out the foolishness of the political game, offer it to individuals.

If he’s proposing additional tax breaks without removing the employer incentive, I don’t see how his plan succeeds unless the individual incentive gives more free money than the employer incentive. Such a free money scheme would be stupid, but with equal competing incentives, employed individuals will be likely to let their employer’s HR department handle the task of securing an insurance plan. Nothing changes.

This calls for a little bit of research. And the answer is:

John McCain Will Reform The Tax Code To Offer More Choices Beyond Employer-Based Health Insurance Coverage. While still having the option of employer-based coverage, every family will also have the option of receiving a direct refundable tax credit – effectively cash – of $2,500 for individuals and $5,000 for families to offset the cost of insurance. Families will be able to choose the insurance provider that suits them best and the money would be sent directly to the insurance provider. Those obtaining innovative insurance that costs less than the credit can deposit the remainder in expanded Health Savings Accounts.

The devil really is in the details, no? The employer-based incentive stays in place, which I assume means the incentive. If we take away the incentive, maybe employers will still offer insurance instead of cash. I doubt it, but let them if they want and employees agree. But to subsidize it is stupid, because then it requires “effectively cash” (i.e. free money). Behold the power of the government.

I realize this has a lower chance of becoming law than the plan proposed by Senator Obama. And that doesn’t factor the likely difference in electoral chances between Senators McCain and Obama in November once Senator Clinton gets pushed over the Party cliff figures out she has no chance.

Partisan buffoonary is certain to lead to a solution. Somehow.

President Bush talks about the economy, a topic he has proven himself qualified to discuss on par with his podium’s ability to explain game theory. Not that it matters, of course, because the best a president can do is get in the way. Talk of helping is politics, not economics. As it was today:

President Bush today blamed Congress for many of the nation’s economic woes, charging that lawmakers have blocked his proposals for dealing with problems ranging from soaring gasoline prices to the increasing cost of food.

Wasn’t the Free Money economic stimulus package the solution? That hasn’t even gone out yet, so it’s advertised benefits are unproven. I did get the letter telling me I might be getting the Free Money. I won’t, but why let that save me the cost of the postage and paper?

And he charged that instead of dealing with rising food prices, lawmakers are “considering a massive, bloated farm bill that would do little to solve the problem” and would not “eliminate subsidy payments to multimillionaire farmers.” Describing the U.S. farm economy as “thriving,” Bush said now is the “right time to reform our nation’s farm policies by reducing unnecessary subsidies.”

When he vetoes one of these massive, bloated farm bills, maybe I’ll think he’s serious.

The U.S. owes the world. The world owes nothing to individuals.

Here’s an interview (part 2 of 3) with Stephen Lewis¹, a former diplomat now involved in HIV/AIDS issues. Here are a few curious excerpts (italics added):

What do you think should be done [to fix PEPFAR]?

People should demand more – much more. No one denies that when you pump several billion dollars into a response it will mean something. Of course it will; millions of people will be treated. That’s terribly important.

But that’s what we deserve to expect from the United States. You don’t kneel down before a country because it’s doing… something that the world has a right to receive. The American administration is so discredited, George Bush is such a lamentable president, that when anything of a positive kind happens people are prostrate at the unlikelihood of it and they shouldn’t be.

It gets worse from there, but it’s most important to focus on the key assumption. The world has a right to receive American funding for its problems. I’d like to know the socialist theory Lewis is using to arrive at the conclusion. Presumably we’re only allowed to call our giving “charity” if we need to feed our American egos. The world will acquiesce with that concession, but the dollars must continue to roll in to satisfy the world’s right to receive.

I don’t have anything else nice to say about that, so I’ll move on to the next interesting bit. (Again, italics added.)

How about the response of the United Nations to HIV/Aids in Africa?

There is just so much more to be done. Frankly, one of the things that is inadequate is the United Nations agencies. Some of it is bewildering.

For example, you get the Minister of Health in South Africa (Dr. Manto Tshababala-Msimang [sic]) attacking and dismissing circumcision as a preventive technology. Here you have three determinative studies, definitive studies, we have UNAIDS and WHO encouraging male circumcision as a way of reducing transmission and you get an attack on it by the minister of health in South Africa. Where is the United Nations’ voice? Why haven’t they taken on the minister? Why haven’t they said what should be said, which is that she’s effectively dooming people to death and it need not be done? You have to have a much stronger voice of advocacy from the United Nations in dealing with disease and related matters.

Dr. Manto Tshabalala-Msimang is nuts is HIV, yes, but Lewis’ rant against the United Nations is bizarre. Whether it’s pushing circumcision through UNAIDS with breathless calls-to-action, issuing press releases touting the latest hype on the original story from WHO, or endorsing gender-based human rights violations through its remaining organizational reach, I’m not sure it’s possible to do more for the organization to insert its reach any further into this debate on the wrong side of human rights. But that’s defensible. Instead, let’s complain that they never criticized Dr. Tshabalala-Msimang for being stupid and dangerous.

Except, they did.

The United Nations special envoy for Aids in Africa has closed a major conference on the disease with a sharp critique of South Africa’s government.

Speaking at the end of the week-long gathering in Toronto, Canada, Stephen Lewis said South Africa promoted a “lunatic fringe” attitude to HIV/Aids.

Mr Lewis described the government as “obtuse, dilatory and negligent about rolling out treatment”.

Hey, wait a minute. Stephen Lewis? Stephen Lewis, working as special envoy for AIDS in Africa, attacked Dr. Tshabalala-Msimang’s comments in August 2006. Denouncing idiotic statements is necessary, but move on. Leave the grudge match to the WWE. Instead, every microphone is dead horse meets Stephen Lewis’ stick.

I did thoroughly enjoy this, in an “I’m disgusted” way:

“It really is distressing when the coercive apparatus of the state is brought against the most principled members of society,” he said.

Clearly Lewis is exhibiting a textbook case of Kip’s Law. I would challenge Lewis’ assertion that he is principled, since the UN’s Declaration of the Rights of the Child clearly forbids medically unnecessary genital cutting, without exceptions for gender or potential disease prevention. Nor am I particularly moved by his claim of oppression. Are infants subjected a coercive apparatus when they are circumcised, in part based on the rantings of individuals like Stephen Lewis?

¹ The following biography accompanies the article:

Formerly the special envoy for HIV/Aids in Africa for United Nations Secretary-General Kofi Annan, [Stephen Lewis] is now chairman of the board of the Canada-based Stephen Lewis Foundation, which endeavors to ease the pain of HIV/Aids in Africa by funding grassroots projects. Lewis is also co-director of Aids-Free World, a new international Aids advocacy organization based in the United States.

This will be important later in the entry.

It’s like legislating that puppies are cute.

Congress, protecting you from the world they built:

Lawmakers have agreed to make it illegal for employers and insurance companies to deny applicants jobs and health care coverage because DNA tests show they are genetically disposed to a disease.
…

It also makes clear that, while individuals are protected from discrimination based on genetic predisposition, insurance companies still have the right to base coverage and pricing on the actual presence of a disease.

Here’s an idea: eliminate the favorable incentive that irrationally ties health insurance in America to employment. If employers are no longer in the insurance business, they’ll have no opportunity to discriminate on the basis of future health care expense. Instead, Congress leaves the underlying problem that permits possible discrimination and codifies “discrimination is bad, mmmkay.” Never mind that politicians discriminate against the unemployed, under-employed, and self-employed.

Naturally Congress misses the point that discrimination is not inherently evil. It is often used for reasons we don’t like, so we’ve attached an exclusively pejorative interpretation to it. But I discriminate against meat when I choose vegetables instead. I discriminate against Ford when I drive a MINI. The Phillies discriminated against a local player when they traded him for a player they value more. Politicians discriminate against one expenditure when they vote for another. Sometimes, discrimination is just about making choices in a world with limitations.

I’m playing semantics right now. Conceded. But semantics matter, as this shows:

[Senator Olympia] Snowe noted that nearly 32 percent of women offered a genetic test for breast cancer risk by the National Institutes of Health declined because of concerns about health insurance discrimination.

I’m not advocating mandatory screening against a person’s wishes. But I’m also against prohibiting insurance companies from pricing risk more precisely by requiring genetic information through the voluntary application process. (Is that the inevitable future from this legislation?) Yet, just as an insurance provider may require the test, no applicant is forced to accept that condition. Competition breeds options where it is permitted. To a significant extent, it is not permitted while insurance is tied to employment, so we get further legislation.

Although it’s not explicit, I think the sponsors of this legislation are more content with the collective outcome of this. Insurance providers are good at knowing their business. They understand risk and how to price it based on statistics. Congress seems to be saying that pricing it better – to the individual, based on the individual – is discriminatory. Perhaps. But the risk will be priced. The only question for discussion is who pays. Is it shared across the insurance pool or paid by each according to his risk?

Legislation like this, as opposed to the more logical solution that removes the faulty incentive, clarifies the political mandate: genetic luck, just like financial “luck”, increases one’s responsibility to the unlucky.

Let’s organize a One Million Cow March on the Capitol.

The New York Times editorial board has an interesting reaction to PETA’s announcement of a $1 million prize to anyone who can produce commercially-viable in vitro chicken-meat by June 30, 2012. (The requirements are strict; it’s unlikely anyone could possibly meet this deadline.) Consider:

We are disgusted by the conventional meat industry in this country, which raises animals — especially chicken and pigs — in inhumane confinement systems that cause significant environmental damage. There is every reason to change the way meat is produced, to make it more ethical, more humane. …

So far, so good. But there has to be a “but”.

… But the result of the technology that PETA hopes to reward could be the end of domesticated farm animals. This has often seemed as if it were the logical conclusion of some radical animal-rights activists: better for animals not to exist at all if there is a chance that they would suffer.

I doubt seriously we’d see the end of domesticated farm animals, even in a world where everyone went vegan. Existing endangered-species legislation suggests we’d take an unkind view to complete extinction. And given that such a world will never exist, this fear is particularly worthless.

Nor is it particularly radical to suggest that it’s better for an animal not to exist than for it to suffer. I’ll temporarily pretend that the inevitable slaughter of the animal does not qualify as suffering. The “happy meat” argument in favor of Humane-Certified is different from the majority of animal agriculture in the United States today. Assuming “happy meat” animals will suffer only at their end, most animals raised for food will suffer throughout their lives. That warrants a discussion, even if the eventual answer is to default to the status quo.

This is not an adequate defense:

We prefer a more measured approach. Ensure the least possible cruelty to animals, by all means, and raise them in ways that are both ethical and environmentally sound. …

Again, so far, so good. Even for those who disagree because they prefer an abolitionist approach, this is better than nothing. But there has to be a “but”.

… But also treasure the cultural and historical bond between humans and domesticated animals. Historically speaking, they exist only because of the uses we have found for them, and preserving their existence means, in most cases, preserving the uses we have made for them. …

This is a ridiculous defense, but I’ll defer to Erik Marcus, where I found the link:

You know: the cultural and historical bond that involves one party cutting the other party’s throat. Yeah, let’s treasure that. …

As I implied earlier, treasuring the bond does not require death. For other species, we requires letting the species live, to the detriment of nearly every other consideration. That may be right, or it may be wrong. In the debate the costs of protection must be considered. But existing evidence undermines the “slaughter or extinction” nonsense.

At least they didn’t say that animals want us to eat them.

Businesses are people, too.

From Robert Samuelson, here’s an odd column in today’s Washington Post. I’m not interested in tackling specifics because Mr. Samuelson seems to offer mostly his own guesses as to the future of spending in America. But he did amuse me with a contradiction.

To say that the shopping spree is over does not mean that every mall in America will close. It does mean that consumers will no longer serve as a reliable engine of growth. Consumption’s expansion required Americans to save less, borrow more and spend more; that cycle now seems finished. Without another source of growth (higher investment, exports?), the economy will slow.

This is an interesting thesis, perhaps. But much later, he offers this:

What can replace feverish consumer spending as a motor of economic growth? Health care, some say. Health spending will surely increase. But its expansion will simply crowd out other forms of consumer and government spending, because it will be paid for with steeper taxes or insurance premiums. Both erode purchasing power. Higher exports are a more plausible possibility; they, however, depend on how healthy the rest of the world economy remains without the crutch of exporting more to the United States.

How is health spending not consumer spending? Economically, is paying a doctor to fix my heart different than paying a mechanic to fix my car’s fuel pump? Both are payment for a service. The importance we apply to the two, as well as demographics in both population aging and car ownership, matters, but not in how we think about spending. In a free market, people will spend on what they value. But people will spend.

Mr. Samuelson’s point that health spending will crowd out consumer spending is strange, coming after he posited that consumer spending is declining. It’s also strange to claim as a blanket statement that higher insurance premiums erode purchasing power. Surely at least some of the risk protection purchased through premiums will be consumed through health spending. How – and how much – does it matter who pays the service provider?

Inevitably that leads to another point. Higher exports are a more plausible possibility. Fine. But to suggest that this is surprising or new requires an unwillingness to define “consumer” as one who consumes rather than an individual who consumes. Does the business creating new products not need equipment to build those products or computers to manage that production? Does the business shipping those products to foreign markets not need trucks and ships? What about packaging material to protect those products during shipment?

It’s possible, maybe even probable, that Mr. Samuelson’s prediction will prove true. It’s problematic because it views specific spenders as the objectively preferable path. It’s better to understand that the economy is large, global, and dynamic. It will change. When allowed to adapt, change will mean long-term progress, despite any short-term bumps. But when viewed as something to be wrapped around a preferred path, problems abound. It’s projecting tomorrow based on yesterday, when every first year finance student is exposed to learns the idea that past performance does not equal future performance.

Mr. Samuelson concludes that “the ebbing shopping spree may challenge the next president in ways that none of the candidates has yet contemplated.” The economy will always challenge the president in ways not yet contemplated. That’s why the president should avoid meddling.

The new looks like the old.

I have a lingering internal question over whether my mistrust of government is still a healthy skepticism or is now in mired in the depths of cynicism. I don’t think the difference matters significantly because I still reach the same conclusions. But the latter might make the rare exceptions harder to accept when they appear. And yet, as I wonder, a story like this on Senator McCain’s proposed “gas-tax holiday” comes along (link via John Cole):

Earlier Monday at a community college in the Philadelphia suburbs, Obama rejected a tax holiday as bad economic policy. “I’ve said I think John McCain’s proposal for a three-month tax holiday is a bad idea,” Obama said, warning consumers that any price cut would be short lived before costs spike back.

“We’re talking about 5 percent of your total cost of gas that you suspend for three months, which might save you a few hundred bucks that then will spike right up,” Obama said. “Now keep in mind that it will save you that if Exxon Mobil doesn’t decide, ‘We’ll just tack on another 5 percent on the current cost.’”

I’m calling my mental approach skepticism because Senator Obama demonstrates here what cynicism really is. Where he could talk exclusively about the stupidity of a tax holiday bribe, he had to jump into talking points. Let’s assume Exxon Mobil, since they’re the working man’s evil oppressor du jour right now, would “just tack on another 5 percent on the current cost”. Then what? I, as a price-conscious consumer in need of gasoline, drive to the Shell station where the 5 percent isn’t “just tacked on”. Although it could be, because in a competitive market, companies are able – and certainly willing, the evil bastards – to “just tack on” whatever little windfall profits they want.

I’ve heard Senator Obama is a new kind of politician. I’m not buying it. A new kind of politics would rely on something a little more honest than pandering to voters with a scapegoat and misrepresentation of economics. This is one more reason I will not be voting for Senator Obama in November.

Housing cents in Congress is not housing sense.

Any punditry on government tinkering on the path to a mortgagee bailout that includes this sentence in the opening paragraph probably shouldn’t be taken seriously:

First Congress produced a timely and well-crafted stimulus.

Sebastian Mallaby wrote that in today’s Washington Post. It’s wrong, even if it miraculously results in actual spending on the part of recipients who understand that it’s a loan against future tax increases. Welfare is hardly a stimulus. However, that’s not the most egregious statement. Instead, this:

Of course, some fall in house prices is necessary. But absent federal action, market failure will cause real estate to fall further than the basics of supply and demand would justify. …

Naturally the market failed, because if supply and demand don’t match, the market clearly failed. Buyers aren’t able to prefer a lower price than sellers will accept. Sellers aren’t able to prefer a higher price than buyers will pay. The value each places on her preferred price can’t possibly rule out a short-term willingness to agree. Can’t we all just get along?

It doesn’t get better.

… In a healthy market, foreclosure would be rare, because it pays for a lender to forgive, say, 20 percent of a loan rather than booting the homeowner out and seeing 30 percent of the property value evaporate in the process of eviction. But because mortgages have been sliced up and distributed among far-flung investors, it’s difficult to get their consent for partial forgiveness. Homeowners get dumped on the street, and more value than necessary is destroyed.

Perhaps this is true. I’d like to read a source for this. But how does Mallaby know what specific resolution would be appropriate? Is a 20 percent forgiveness wise for the lender? Do they get the chance to work out these details with the borrower? Would the borrower be able to pay the remaining 80% of the loan? And how much financial gain resulted from the slicing and distribution of mortgages? Does that gain offset the value destroyed by the current crisis? These questions matter. We should have answers before we jump to a federal bailout of anyone.

So, although Congress would be wrong to launch a broad attempt to prop up home prices, it would be right to address the market failure that produces excessive foreclosures. The Senate is working on a smart reform that would begin to do this: It would give service companies that collect mortgage payments on behalf of creditors a legal safe harbor, allowing them to forgive part of a loan without having to fear that a few opportunistic creditors will sue them for being soft. Lenders as a whole would benefit, because the measure would reduce wasteful foreclosures. The flow of capital to future home buyers would not be compromised.

Again with the “market failure”, but more useful is Mallaby’s endorsement of Congress rewriting contracts it no longer deems acceptable under its subjective, uninformed economic analysis. How might that affect the loan market – housing and beyond – in the future if borrowers and lenders know that the key to limiting their own risk is to fail big? The last sentence demands proof more compelling than Mallaby’s wishful thinking.