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    Summer Rerun — Book Review: Life in a Soviet Factory

    Posted by David Foster on 3rd August 2019 (All posts by )

    Bitter Waters: Life And Work In Stalin’s Russia by Gennady Andreev-Khomiakov

    A fascinating look at the Soviet economic system in the 1930s, as viewed from the front lines of that system.

    Gennady Andreev-Khomiakov was released from a labor camp in 1935, and was fortunate to find a job as a book-keeper in a sawmill. When the factory manager, Grigory Neposedov (a pseudonym) was assigned to run a larger and more modern factory (also a sawmill), he took Gennady with him.

    Although he had almost no formal education, Neposedov was an excellent plant manager. As Gennady describes him:

    He was unable to move quietly. Skinny and short, he moved around the plant so quickly that he seemed to be running, not walking. Keeping pace with the director, the fat chief mechanic would be steeped in perspiration…He rarely sat in his office, and if he needed to sign some paper or other, you had to look for him in the mechanic’s office, in the shops, or in the basement under the shops, where the transmission belts and motors that powered the work stations were located…This enthusiasm of his, this ability to lose himself completely in a genuine creative exertion, to give his all selflessly, was contagious. It was impossible to be around Neposedov without being infected by his energy; he roused everyone, set them on fire. And if he did not succeed in shaking someone up, it could unmistakely be said that such a person was dead or a complete blob.

    With his enthusiasm and dedication to his factory, Neposedov comes across almost as a Soviet version of Hank Reardon (the steel mill owner in Ayn Rand’s Atlas Shrugged), with this difference–Nepodesov could throw himself as enthusiastically into bureaucratic manipulation as into his technical and leadership work. All of his skills would be needed to make this factory a success.

    Although the sawmill had modern equipment, it was producing at only a fraction of its design capacity. One of the problems was energy: the plant was powered by a 200HP steam engine, and whoever had built the place had spent almost all of the budget on other equipment, leaving very little for the boiler. The original boiler that came with the plant turned out to be useless, and was replaced with a salvaged boiler..this worked, but was not in good shape and produced only about half the steam needed to run the engine–and the plant–at full power.

    At this point in history, and in this particular corner of the Soviet economy, the amount that was available to be paid to workers was strongly related to the output of a plant. And workers at this sawmill were becoming increasingly desperate, on the point of actual starvation. Neposedov, aided by Gennady, pusued a three-part program of improvement: (1)fix the boiler, (2)improve the workflow (as we would now call it) within the plant, and (3)put in place an incentive system for the workers.

    New “pipes” for the boiler were somehow obtained (I think “pipes” in this context refers to boiler flues) and the workflow was continuously analyzed and improved. The most interesting part of the story, though, deals with the incentive program. The plant manager apparently had discretion to put such programs in place as long as he could pay for them out of increased output. (As the book describes it, there were extensive accounting systems in place throughout the Soviet economy–indeed, Lenin had once gone so far as to say “Socialism is accounting.” The accounting seems a bit similar to what you would find in a multidivisional American company with extensive intracompany transactions.) The incentive system that Gennady designed for this sawmill was based on very sharp pay increases for the workers when production exceeded target–so that, for example, you could double your pay by producing only 25% over target. (Actually, the plan paid collectively by group and by shift, rather than on an individual basis.)

    The incentive plan, together with the repaired steam boiler, resulted in very high production–140%, then 160% of target–and correspondingly high pay for the workers. Gennady had some nervous moments when he feared he had made a mistake in the calculations and the cost of the additional wages would exceed the amount generated by the new production….a mistake like this could easily have landed him back in Siberia, or worse. But it turned out that the new system was indeed sustainable.

    The local Communist Party leadership, while pleased with the increased production, was disturbed that the propaganda buzzwords of the day were not being implemented. “Socialist competition” was hot at the time, and the Party organizer insisted on competition at the individual worker levels, not just the group and shift level.

    Read the rest of this entry »

    Posted in Big Government, Book Notes, Business, Economics & Finance, Leftism, Management, Russia | 4 Comments »

    Re-Privatizing Fannie and Freddie: It’s Déjà Vu All Over Again

    Posted by Kevin Villani on 19th July 2019 (All posts by )

    Privatization reform of Fannie Mae and Freddie Mac, a hot topic on and off since their founding eight and five decades ago respectively, is heating up once again after more than a decade of temporary conservatorship. All past reform efforts have failed. What should we have learned?

    • Private markets operate on one set of incentives and accountability, government on an entirely different set. Each has its problems and imperfect solutions.
    • Private markets may inappropriately discriminate against qualified borrowers, for example, whereas public programs may fail to adequately discriminate.
    • Public enterprises created to jump-start or complement private markets often miss the mark, with unintended consequences.
    • Politicians much prefer to deliver subsidies through taxes (in this case tax exempt debt substituting for taxable equity) rather than expenditures – especially since the Budget Control Act of 1974 – and implicit off-budget credit guarantees that delay the reckoning.
    • In spite of good intentions and design to get the best of both, privatized hybrid public-private systems inevitably embody the worst: public risk for private profit. Lacking both market and public discipline, they cause systemic failure that “nobody could have seen coming.”
    • Political reform reflexively blames private market failure, doubling down on unaccountable and ineffective bureaucratic methods while providing opaque bailouts through greater tax and credit subsidies.
    • Political reform starts with what is, not what should be, repeating the cycle.

    U.S. secondary markets evolved entirely in response to anachronistic political forces. FHA was created in 1936 to stimulate new construction jobs subsequent to a huge housing construction boom. Fannie Mae was created two years later to prop up flagging demand for FHA mortgages. Ginnie Mae was created in 1968 to liquidate Fannie Mae after prior privatization attempts failed to reduce official government debt, but the residual $1 billion secondary market facility with minimal shares outstanding as a result of a mandatory user purchase program was instead privatized. When that entity turned down tax exempt pass-through securitization to circumvent the myriad laws and regulations preventing the development of a national securities market, Ginnie Mae stepped in. Rather than liquidate, the privatized Fannie turned to funding conventional mortgages for their mortgage banker clients. To protect their turf, portfolio lending savings and loans then demanded their own secondary market facility, Freddie Mac. It later privatized mainly to provide management incentives comparable to Fannie, particularly stock options.

    They then morphed into massive public directed credit institutions, with profits from government subsidies privatized but otherwise lacking the benefits of market efficiency and discipline. About half of F&F subsidies were captured by shareholders, managers and politicians (my estimates), an invitation to affordable housing proponents to share in this booty. Several 2018 Democratic presidential candidates have proposed upping these goals.

    U.S. mortgage markets were characterized by cut-throat competition decades before the advent of government sponsored enterprises (GSEs): the indiscriminant lending and private market securitization during the sub-prime lending bubble of 2004 to 2007 suggests that is still the case.

    What the private market can’t deliver are the tax and credit subsidies – worth tens of billions annually – that result from federal backing to support fixed rate mortgage interest rate and affordable housing credit risks. Any re-privatized hybrid system that promises to mimic the market, e.g., by requiring that it actuarially price a government credit guarantee as the market oriented Milken Institute and others recommend and to impose market capital requirements and risk regulations directly conflicts with these goals and is doomed to failure. Regulatory restrictions will remain malleable because politics has and will continue to trump bureaucracy. Nor will the market discipline this regulated too-big-to-fail public mission duopoly, having correctly inferred an implicit guarantee in the past for the GSEs, disclosures, regulations and legislation notwithstanding.

    There is a better “public/private” policy option to deliver these subsidies. Long term fixed rate FHA insured mortgage loans have since 1970 been funded almost exclusively with Ginnie Mae securities. Investors take the interest rate risk, HUD takes the credit risks and all ancillary functions are delegated to a competitive private marketplace. FHA, a government sponsored mutual insurance fund with de facto public backing since incorporated into and regulated by HUD insures each mortgage. The un-capitalized Ginnie Mae de jure security guarantee covers only timeliness of FHA payments, but de facto acts as a guarantor of FHA mortgage securities.

    While FHA has failed actuarially – in part due to overly ambitious political goals and its focus on borrowers who may not have qualified for a conventional loan – bailouts have been opaque with minimal or no budget transfers, investor losses or market disruption. It survived the sub-prime lending debacle relatively unscathed. This system hasn’t failed systemically because it separates the private and public functions into different entities, minimizing public risk for private profit incentive conflicts.

    A federal guarantor for conventional mortgage securities modeled after Ginnie Mae (something Ginnie Mae proposed in the late 1970s but I opposed on grounds that it would displace the private savings and loan system of the time) should replace F&F, with the existing infrastructure auctioned to the highest bidder .

    Properly designed, a federal guarantor wouldn’t experience any loss except in catastrophic circumstances. The original Fannie Mae and particularly Freddie Mac secondary market system that left credit risk primarily with multiple state regulated private mortgage insurer’s (pmi’s), experienced negligible credit losses until the market collapse of 2008, after which F&F credit losses of about $300 billion were ten times total pmi industry losses, due to loss severity far exceeding insurance limits. A federal guarantor should be limited to pools of fixed rate mortgages with deeper pmi coverage to reduce exposure, and ideally partially re-insured with private mortgage pool insurers to further capitalize and diversify risk.

    The tax and credit subsidies all go to uniformly lower rates. Deeper affordability subsidies in pursuit of federal home ownership affordability goals were previously provided by HUD’s Section 235 homeowner program targeted to individual FHA mortgage borrower needs, the right approach for achieving this goal. But after years of default losses, Congress shut it down in 1989 rather than increase the budget to reflect the true cost. Following the law of unintended consequences, the affordable housing goals were then dramatically expanded in the Federal Housing Enterprises Regulatory Reform Act of 1992, a precursor to their subsequent failure.

    The debate over the desirability and magnitude of homeownership subsidies remains unresolved. This proposal shifts it to the political arena.

    Kevin Villani

    —-

    Kevin Villani, chief economist of HUD during the Carter and Reagan Administrations and Freddie Mac from 1982 to 1985, is the author of Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath.

    Posted in Big Government, Business, Economics & Finance, Politics, Public Finance | 3 Comments »

    Iran’s RQ-4N Shoot Down, Pres. Trump and the Expiration of the Carter Doctrine

    Posted by Trent Telenko on 24th June 2019 (All posts by )

    It’s become something of a regular occurrence for the American mainstream media to blow a foreign policy story because of their Trump Derangement Syndrome. Yet they seem to have greatly sunk to new lows in missing the real importance of events leading to the 19 June 2019 Iranian shoot down of an American drone.

    RQ-4N BAMS-D (Broad Area Maritime Surveillance-Demonstrator)

    President Trump has ended the 1980 Carter Doctrine!

    The free flow of oil from the Persian Gulf is no longer a “Vital Interest,” thanks to frac’ing, for a near energy independent USA.

    BACKGROUND

    CENTCOM confirmed Last Wednesday night of 19 June 2019, in international air space over the Strait of Hormuz, an Iranian surface to air missile (SAM) battery shot down a US Navy RQ-4N BAMS-D (Broad Area Maritime Surveillance-Demonstrator) Global Hawk. The ~$120 million drone in question was a navalised version of the USAF Global Hawk, used as proof of concept for the production MQ-4C Triton. It was essentially an unarmed, jet powered, sail plane with the wing span of a 737 jet liner and several tons of sensors. The drone fills the mission of the U-2, at similar altitudes, without the risks of a human pilot in the event of a shoot down.

    RQ-4N Shoot Down Map

    Pentagon RQ-4N Shoot Down Map with Drone and SAM launch battery location.

    Iran has claimed it used it’s ‘Third of Khordad’ domestically built SAM system, operated by the IRGC, to shoot down the drone. This SAM system is described as a copy or derivative of the Russian Buk M3 / SA-17 GRIZZLY that incorporates the Bavar 373 missile that, in turn, appears to be a derivative/copy of the Soviet 5V55/SA-10B with additional controls. If you think of it as a late model Raytheon MIM-23 Hawk medium-range surface-to-air missile battery firing an early version of the MIM-104 Patriot PAC 1 missile, you would not be far wrong.

    Press TV Tweet of Iranian SAM

    Press TV Tweet of Iranian SAM

    It was this lack of a human pilot, either as a death or a prisoner of war, that saw President Trump jump off Iran’s scripted “escalation ladder.” Instead of destroying a SAM battery and converting 150 odd IRGC missile operators into another “Martyr blood sacrifice” for the Mullah regime to celebrate. Pres. Trump responded with cyber-attacks on Iranian missile control systems to remind the Mullah’s of the West’s technological “Black Magic” and additional economic sanctions that will cause further payroll cuts to both the IRGC and it’s over seas terror networks. (Truth be told, the new economic sanctions threaten the Mullah’s power far more than any set of tit for tat military strikes.)

    And in a move treated as an afterthought, if the MSM mentioned it at all, President Trump ended an era in American Middle Eastern Foreign Policy.

    END OF AN ERA
    It has been almost 39 & 1/2 years — 10 years before the Cold War ended — that President Carter pronounced access to Mid-East oil a “Vital Interest” that the United States would go to war to protect.

    Our two wars in Iraq both have that date, and that policy, as their starting point.

    Now that era is over.

    Last week Pres. Trump forged a completely new Middle East Foreign policy for America. Specifically, Pres. Trump took the opportunity Iran’s military escalations leading to the shooting down of the RQ-4N to end the January 23, 1980 “Carter Doctrine” expressed as follows —

    “…An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.”

    This is how Vandana Hari at the Nikkei Asian Review put it:

    Asia has most to lose if Middle East turmoil hits oil supplies
    As US-Iran tensions, can crude importers defend their interests?
    JUNE 21, 2019 14:21 JST
    https://asia.nikkei.com/Opinion/Asia-has-most-to-lose-if-Middle-East-turmoil-hits-oil-supplies

    “U.S. President Donald Trump says he might take military action against Iran to prevent it from acquiring a nuclear weapon. But he has indicated he won’t necessarily jump in to protect international oil supplies from the Middle East if they are under threat from the Islamic Republic.

    .

    The position, articulated by Trump in an interview with Time magazine on June 17, should not come as a surprise, even if it appears to be at odds with the Pentagon beefing up aircraft carriers and troops in the Middle East in recent weeks, citing a threat from Iran.

    .

    As Trump spelt out in the interview, the U.S. is no longer as dependent on oil from the Middle East as it was, thanks to burgeoning domestic production.

    .

    Air Force General Paul Selva, vice chairman of the U.S. Joint Chiefs of Staff, emphasized the message a day later, pointing out that China, Indonesia, Japan and South Korea were heavily dependent on supplies moving through the Strait of Hormuz, and needed to protect their interests. U.S. Secretary of State Mike Pompeo has made similar comments.”

    The pronouncement above was the full “Bell, Book and Candle” exorcism of American foreign policy — President, Joint Chiefs of Staff and Secretary of State.  And please carefully note that it happened two days before the RQ-4N was destroyed.

    .

    While “freedom of navigation” on the high seas over all and the Persian Gulf in particular remains a “major interest” of the United State of America.  It is no longer one which America will automatically go to war over.

    .

    In ending the Carter Doctrine, President Trump has fulfilled his 2016 campaign promise of “No More Iraq’s.”

    .

    By changing the cost benefit calculations of Middle-Eastern oil — no more free riding on American protection of Persian Gulf Sea lanes — the only way a nation can “win” internationally now is by “getting close” to the American hyperpower.

    .

    If you are functionally anti-American.  You get nothing but higher insurance rates included in your price of oil to cover the political risk premium of lacking American protection.  China is now paying  -defacto- and additional American oil tariff via much higher insurance rate on the VLCC tankers moving Mid-East crude oil to the Far East.
    .
    Japan and South Korea could get lower insurance rates if they send naval forces to the Gulf to work with the US Navy.  Or they can replace Mid-Eastern oil with exported US oil.
    .
    China, not so much.
    .
    As a correspondent put it in an e-mail to me when I mentioned the above to the list he and I are in —

    HA-HA-HA-HA-HA-HA-HA-HA-HA-HA-HA-HA-HA-HA-HA-HA-HA-HA-HA!

    .

    That’s a good one!

    .

    “You all need to defend YOUR oil shipments through those NASTY Straits of Hormuz.  The U.S. don’t need that filthy Middle East blood-oil no more.  In fact, if you don’t want to spend the money and lives pounding sand in Iraq, Kuwait and Iran, we have some FINE Texas frackin’ goodness to sell at a SPECIAL price, just for YOU, our friends and allies for SO many years!”

    .

    Snicker, choke, GASP….”

    The American Left has finally gotten what it always wanted…no more “Blood for Oil in the Middle East.

    Somehow, I don’t think President Trump delivering that reality to them will make them very happy.

    -End-

    Posted in Culture, Current Events, Economics & Finance, Energy & Power Generation, Environment, Europe, History, Iran, Iraq, Japan, Korea, Leftism, Middle East, Military Affairs, Miscellaneous, National Security, Politics, Texas, USA, War and Peace | 26 Comments »

    The Trade War and Agriculture.

    Posted by Michael Kennedy on 11th May 2019 (All posts by )

    We are entering a period when the tariff controversy with China is getting serious.

    The Wall Street Journal is worried.

    A failure to break an impasse in talks in Washington on Friday opened a new phase in the trade fight after more than five months of back-and-forth negotiations. This time, some economists and analysts said, Beijing is taking stock of potential economic damage from higher tariffs.

    The U.S. raised punitive tariffs to 25%, from 10%, for $200 billion in goods leaving China on Friday and thereafter. President Trump also ordered staff to begin the paperwork to impose levies on the more than $300 billion worth of everything else China sells to the U.S.

    While Beijing has met previous volleys of tariffs from the U.S. by raising duties on American goods—and the government has promised to retaliate—it held its fire. Though China has more limited tariff options, since it imports fewer products from the U.S. than the other way around, the Chinese leadership is also constrained by an economy that is in a shaky recovery from a sharp slowdown.

    There is talk of China boycotting US farm products. They tried it a year ago.

    The world’s biggest oilseed processor just confirmed one of the soybean market’s biggest fears: China has essentially stopped buying U.S. supplies amid the brewing trade war.

    “Whatever they’re buying is non-U.S.,” Bunge Ltd. Chief Executive Officer Soren Schroder said in a telephone interview Wednesday. “They’re buying beans in Canada, in Brazil, mostly Brazil, but very deliberately not buying anything from the U.S.”

    In a move that caught many in U.S. agriculture by surprise, China last month announced planned tariffs on American shipments of soybeans.

    The boycott failed.

    “China has to resume purchases of U.S. soybeans,” Oil World said in its latest newsletter. “The South American supply shortage will make it necessary for China, in our opinion, to import 15 million tonnes of U.S. soybeans in October 2018/March 2019, even if the current trade war is not resolved.”

    China may not be in good shape to handle a trade war.

    Read the rest of this entry »

    Posted in China, Current Events, Economics & Finance, Politics, Trump | 58 Comments »

    Our ‘Xanatos Gambit’ President’s Energy Export Strategy Tree

    Posted by Trent Telenko on 5th May 2019 (All posts by )

    In my last post — President Trump’s ‘Xanatos Gambit’ Trade Policy — I spoke to how President Trump has set up his political strategy on trade policy to make any outcome on the USMCA Trade agreement that he negotiated to replace the NAFTA agreement would be to his advantage over House Democrats and the “purchased by the multi-national corporation China Lobby” GOP Senators.  In this post I am going to lay out President Trump’s “Global  Energy Dominance” export policy’s “Xanatos Gambit” strategy tree vis-à-vis the 2020 presidential elections.

    To start with, I’m going to refer you back to this passage from my last post on how the Trump Administration is “gaming” economic growth measurements:

    This is where Pres. Trump’s ‘Xanatos Gambit’ strategy tree kicks in via a macroeconomic and trade policy manipulation of the very simple economic equation of gross domestic product:

    GDP = US ECONOMIC ACTIVITY + EXPORTS + FOREIGN INVESTMENT – IMPORTS – EXTERNAL INVESTMENT

    The American economy just grew 3.2% in the 1st quarter of 2019.  It would have grown another 0.3% but for the 30-odd day federal government shut down.  The “markets” were expecting 2.5% GDP growth.  The huge half-percent GDP “miss” boiled down to:

    1. The USA exported more.

    2. The USA imported less and

    3. There was more external foreign investment than expected.

    All three were the result of a combination of Trump administration policies on oil/LNG fracking, tax & regulatory cuts and trade/tariffs.

    The Trump Administration upon coming into office in January 2017 had a huge windfall of energy projects that the Obama Administration had held up approval of in the Federal Energy Regulatory Commission.   This windfall neither began nor ended with the  Keystone XL oil pipeline There was a whole cornucopia of oil and natural gas energy infrastructure projects that Democratic Party interests, only some of them environmental, that the Obama Administration was using the FERC to sit on for a whole lot of reasons that I refer to as “The Economic Cold Civil War.

    While the media was spending a great deal of time talking about things like the Congressional votes to open the Arctic Wildlife Refuge in the early days of the Trump Administration’s energy policy implementation.  President Trump spent a great deal of his early political capital on getting his earliest political appointments through the Senate to the FERC to get those projects turned loose as a part of President Trump’s “Global  Energy Dominance” export policy.  The first fruit of this export infrastructure energy policy focus started paying off with the  Louisiana Offshore Oil Port (LOOP) coming on-line in 2018.  See this Apr 16, 2019 article by Julianne Geiger at Oilprice.com:

    U.S. Doubles Oil Exports In 2018

    The United States nearly doubled its oil exports in 2018, the Energy Information Administration reporting on Monday, from 1.2 million barrels per day in 2017.

    The 2.0 million barrels of oil per day exported in 2018 was in line with increased oil production, which averaged 10.9 million barrels per day last year, and was made possible by changes to the Louisiana Offshore Oil Port (LOOP) which allowed it to load VLCCs (Trent Note: Very Large Crude Carriers) .

    The changes to LOOP and to the sheer volume of exports were not the only changes for the US crude oil industry. The destination of this oil shifted in 2018 as well, and even shifted within the year as the trade row between China and the United States took hold.

    Overall, Canada remained the largest buyer of US oil in 2018, at 19% of all oil exports, according to EIA data. During the first half of 2018, the largest buyer of US crude oil was China, averaging 376,000 barrels per day. Due to the trade row, however, US oil exports to China fell to an average of just 83,000 barrels per day in the second half, after seeing zero exports to China in the months of August, September, and October.**

    [**Please note above the nice thing about energy exports is how futile a energy user embargo is against it.  China’s economic embargo of US crude products only hurt itself.]

    The impact of the Trump Administration’s energy export policies from those early days of his administration in terms of liquefied natural gas (LNG) export facilities are now impacting the American economy. A large part of the extra 0.7% GDP growth achieved over the 2.5% Wall Street forecasts in the first quarter of 2019 came from the Corpus Christ 1 and Sabine 5 LNG export facilities coming on-line in late 2018 and making their first full export capacity quarter in Jan – Mar 2019.  The Cameroon 1 and Elba Island 1-6 LNG export facilities were also scheduled to come on-line in Late Feb-Early March 2019, and were very likely large contributors to LNG export surge.

    This is how CNBC described 2019’s 1st quarter:

    Robust demand for Texas oil and gas in the first two months of 2019 pushed the state’s export activity into high gear, strongly outpacing the national rate and contrasting with a slight decline by California.

    Texas represented nearly 20% of all U.S. exports in the January-February period while California accounted for roughly an 11% share.

    California has seen its share of total U.S. exports fall in recent years while Texas has been growing its share due mainly to the new oil boom.

    And this is only the beginning for the US economy in 2019. See the following text and LNG export facility graphic from a Dec 10, 2018 report by the US Federal government’s Energy Information Administration:

    U.S. liquefied natural gas export capacity to more than double by the end of 2019

    U.S. LNG exports continue to increase with the growing export capacity. EIA’s latest Short-Term Energy Outlook forecasts U.S. LNG exports to average 2.9 Bcf/d in 2018 and 5.2 Bcf/d in 2019 as the new liquefaction trains are gradually commissioned and ramp up LNG production to operate at full capacity. The latest information on the status of U.S. liquefaction facilities, including expected online dates and capacities, is available in EIA’s database of U.S. LNG export facilities.

    EIA projection of Liquefied Natural Gas Export Capacity from 2016 - 2021. Date of projection Dec 2018

    EIA projection of U.S. Liquefied Natural Gas Export Capacity from 2016 – 2021. Date of projection, Dec 2018.

    Given the above information, barring a war or serious election year intervention to kill the economy by the Federal Reserve, the cascade of LNG export infrastructure coming on-line in the 2nd and 4th quarters of 2019  will mean something on the order of a full percentage increase in GDP growth (in a range of 4.0% to 4.5%) in Jan – Mar 2020 over Jan – Mar 2019.  That is what going from 3.6 billion cubic feet per day (Bcf/d) of natural gas export capacity to to 8.9  Bcf/d in Dec 2019 does for you.

    This extra 1% GDP will be happening just in time for the Iowa caucuses and New Hampshire primary.

    Read the rest of this entry »

    Posted in America 3.0, Big Government, Business, Capitalism, Culture, Current Events, Economics & Finance, Energy & Power Generation, Immigration, Markets and Trading, Miscellaneous, Politics, Predictions, Taxes | 34 Comments »

    America, the Land of the Free Lunch and the Home of the Brave Easily Traumatized

    Posted by Kevin Villani on 3rd May 2019 (All posts by )

    As a Boston area baby boomer, I belted out the National Anthem in my youth with conviction at sporting events. Massachusetts educators emphasized its role as the birthplace of the American Revolution from distant unaccountable politicians (leaving out the crucial role of fake news written and published by the infamous brewer’s son Sam Adams) and the motivating principles, summed up by Virginian Patrick Henry’s immortal phrase: “give me liberty or give me death.”

    In the 1970s Boston’s U.S. Congressman Speaker of the House Tip O’Neill quipped “all politics is local.” Now the progressive daily prayer on Twitter begins “Our father, who art in Washington D.C. give us money – a guaranteed minimum income, reparations, welfare, entitlements, etc. and other free stuff – food, housing, medical care, a college education.”

    Bostonian President Kennedy’s appeal to voters’ patriotism in the 1960’s to “Ask not what your country can do for you. Ask what you can do for your country” is reversed today. Patriotism is as out of favor with many millenials (who proudly display their participatory soccer trophies) as are the Boston (now New England) Patriots for hogging the Super Bowl Trophy this century, stigmatizing other teams as “losers.”

    Competing Foreign Ideologies

    Traumatized by competing ideas, many millenials would trade U.S. competitive capitalism and individual freedom for a free lunch. “History doesn’t repeat itself but it rhymes” according to Mark Twain. The core contemporary national political issue is whether America’s popular progressive ”social democracy” ideology rhymes with its founding principles and historical values or foreign ideologies that threaten the body politic?

    The Communism Threat

    The Bolshevik Revolution ended an anachronistic Imperial dynasty in a country with no prior democratic traditions. Communist intellectual Leon Trotsky promised a utopian Marxist socialism, international brotherhood and the end of nation-state competition for resources as the state would wither away. Communist atrocities under Stalin, murders and deaths measured in the tens and hundreds of millions, predated the WW II Western Alliance in a desperate attempt to industrialize a backward agrarian society.

    Stalin promoted opaque Russian Imperialism under the banner of brotherhood. Soviet skullduggery in post War elections in Europe and around the globe – and CIA involvement to counter it (or visa-versa) – was widespread. The post WW I & II “Red Scare” of communist infiltration of state institutions in the U.S. was somewhat over-blown, but the belief that communists could be elected in a democracy based on false promises then turn dictatorial and refuse to relinquish power as has occurred most recently in Venezuela, was well founded. Fearing such a cancer on the body politic, the Communist Control Act of 1954 outlawing the Communist Party in the United States suppressing free speech passed with the full support of progressive Democrats who wanted to distance themselves from ”Uncle Joe” Stalin (and later, many others, including Mao).

    Fascism, Communism’s Cousin and Bitter Political Rival

    Hitler came to power in democratic Germany promising economic prosperity, understandably as wartime consumer deprivation far exceeded that of France and Britain (where communist sympathies were widespread), and post war reparations inhibited a consumer recovery. Although Mussolini, the founder of European fascism, once headed the Communist Party in Italy, and Hitler founded the National Socialist Party, neither implemented socialism domestically. By national, they meant a return to Germany’s pre-War greatness: consumers initially benefitted from a massive boom in defense spending before once again suffering wartime deprivations.

    The nationalist agenda was less imperial than traditional. European history since 1453 is largely related to border wars as Germany is caught in the middle between the British and French empires to the west and Russian empire to the east: only the scale of Nazi eastward border expansion represented a radical departure. In Hitler’s view this rhymed with American westward expansion and genocide of the indigenous populations. He persecuted the Jews, even ethnic Germans, based on Nazi perception of Jewish financing of German enemies on the WW I battlefield and in the labor movement fomenting unrest on the home front and their perceived outsized influence in the Bolshevik communist movement (Trotsky was Jewish).

    Hitler inherited a failing German economy. He was aware that the economic potential of the western capitalist powers were orders of magnitude greater and growing faster, causing him to knowingly take enormous risks to address what he believed was an existential threat. Even as he acquired new territories he was playing catch up. Unlike Stalin, he was not driven by an anti-capitalist economic ideology, but intervention in the German economy increased as the Wehrmacht consumed an ever increasing share of GDP – over half at the peak – relying on private enterprise and the profit and price mechanism to the extent feasible (and arguably more than FDR) relative to the size of the war effort. Dictatorial power and crony capitalist corruption – favoritism of the political elite – was an inevitable result of a rising government share of the economy.

    Racist ideology contributed to his miscalculation of the military industrial ability of the Soviet Union, where his early luck inevitably ran out, after which a war of attrition would exploit Germany’s relative economic weakness. Economic desperation determined the magnitude of Nazi atrocities, less in scope and subsequent to those of the communists in the Soviet Union, but driven by racism.

    In 1977 the U.S. Supreme Court extended freedom of speech protection to the National Socialist Party of America, a racist fringe rather than socialist party.

    European Social Democracy

    In the wake of WW II deprivation and devastation in Europe, “social democracy” – a greater role of the state in providing household necessities – was viewed as a more benign alternative to communism. Britain, particularly Scotland, experimented primarily with socialized housing and medical care until the late 1970s when, as British Prime Minister Margret Thatcher put it, they were running out of “other peoples’ money.”It was also tried in the small relatively homogeneous Nordic countries, running out of money in Sweden in the 1990s and Finland more recently. These experiments were not democratic socialism or the fascist prone democratic capitalism, as all were financed by taxing capitalist-created income and resulted in retrenchment rather than socio-political collapse when they went to far.

    American Progressivism Rhymes with Fascism and Communism, not European Social Democracy

    But for democrat skullduggery, Socialist Bernie Sanders might well have been the 2016 Democratic candidate and also won the election. Most of his younger Democrat competitors for 2020 support the Green New Deal, the latest utopian vision. Their success hinges on rhyming this vision with small-state European social democracy, but the American progressive movement has always focused on the entire nation. When a failed ideology is adopted by a large too-big-to-fail nation-state like Germany or the Soviet Union in the past or the U.S. at present, unaccountable politicians cover-up and double down on failure until it is systemic and seismic like the 2008 financial crisis.

    Progressivism’s historical nationalism and racism and current methods of intervention in a capitalist market economy rhyme with fascism: its premise that economic progress is attributable to politics and its utopian goal of social justice without regard to national borders both rhyme with communism: the inherent dictatorial lack of political or fiscal accountability rhymes with both.

    American Nationalism

    Federal power ballooned during the wars of progressive presidents TR, Wilson, FDR and LBJ. That American patriotism is excessively nationalistic has been an issue since the Monroe Doctrine and subsequent Manifest Destiny. America’s support of free trade post WW II supported by American hegemony over trade routes worked well, as it did under British hegemony leading up to WW I. But the post WW II order is once again breaking down as a consequence of increasing nation-state rivalry over resources and trade routes. President Trump’s “Make America Great Again” is daily attacked not as patriotism but Nazi racist nationalism. The future of American Hegemony should be the central issue in the next presidential election.

    Racism and Sexism

    In a competitive free market economy those who would inappropriately discriminate by race or sex always lose out, always: racism requires political protection from competition. Socialism is inherently discriminatory; the state determines who gets what and who pays. The Democratic Party was the party of slavery, Jim Crow and voter discrimination; it remains the party of restrictive working laws and regulations (with a “disparate impact” on black youth employment) e.g., with well above market “living” minimum wages, credentialing and anti-immigrant worker prohibitions, and admission quotas. Winners beget losers: progressives once again discriminate against Asians.

    The progressive party founded the eugenics movement targeted to limit the black population from which Hitler borrowed ideology. Roe versus Wade represents a eugenic success story, as abortion for the white population at the time required no more than a bus ticket to the next state. Now about half of black pregnancies are terminated.

    The Road to Serfdom

    The promise of “free stuff” to those mostly not yet paying taxes and of cancelling their debt likely explains college students’ preference for socialism over capitalism, and the myth of socialist environmentalism the Green New Deal environmental goals.

    Income inequality and Social Justice in a Democracy

    America’s social welfare system while not as generous as the Nordic countries generally provides a standard of living sufficient by international comparison and luxurious compared to the deprivations suffered when fascism and communism incubated. Competitive market capitalism produces unequal incomes, the source of its ability to raise the living standards of all through increased productivity. Progressive policies that cross the constitutional threshold of equality of opportunity to demand equality of economic outcomes by broadening the base of the politically favored are a subset of crony capitalism that favors the political elite at the expense of society generally, a failed ideology. Socialism fails every time because incentives matter.

    The Green New Deal: a Fentanyl induced Utopian High

    Concern for the environment and the human impact on it is warranted, but what to do about it is a difficult question primarily for foreign diplomats. The Green New Deal adopted by only the U.S. would provide negligible environmental benefit. But as virtually all past environmental initiatives, it would be a bonanza for the crony capitalists and their political patrons. Whether or not the Green New Deal cost $100 trillion or only $10 trillion, it is a road to serfdom for millenials, with no exit provided by the archaic modern monetary theory.

    Democrats Cross the Rubicon

    “The founders of the Roman Republic, like the American founding fathers, placed checks and balances on the power of their leaders. The Romans, however, came up with a way to sidestep these checks and balances when strong leadership was needed, such as a time of crisis.” 

    Communism, fascism, the New Deal and social democracy were all implemented in response to an existential crisis. It is no accident that progressives exploited the “environmental crisis” to push their social justice agenda: these faux crises don’t justify national socialism, an existential threat to the body politic.

    The majority of American voters – positively correlated to age – still properly associate socialism with the totalitarian communist and Nazi regimes rather than European democratic socialism as socialist Sanders’ argues, undercut by his Moscow honeymoon. The two big progressive myths are that European social democracies never run out of money and that “other peoples’ money” i.e., the other party’s voters, will somehow finance the socialist agenda. Green New Deal proponents refused to vote for it to avoid voter accountability for the costs. National socialism and the virtual one party rule necessary to achieve it provides the best explanation for the rest of the 2020 “democratic” agenda.

    Progressive Social Democracy isn’t Nordic

    The population of California is four times that of the largest Nordic country Sweden. It, like all the progressive states is over taxed and over indebted. Obamacare impregnated promiscuous states with these twin fiscal burdens with a whispered promise of a subsequent opaque federal bailout when they matured, making states subservient to D.C. like Soviet Oblasts to Moscow.

    Suppression of Free Speech

    The free speech amendment is listed first as the foremost safeguard against infringement of individual freedom and equality under the law. The Communist Party remains illegal in U.S. due to its meretricious promises, now virtually indistinguishable from those of progressives. Conservative speech to expose the fallacies of progressive ideology and the threat to the Republic is suppressed by the democratic state apparatus. Free speech invites propaganda, including Russian translations, think tank and academic “research” but should be protected, even for communists and neo-Nazis.

    From Republicanism to Democratic Totalitarianism and One Party Rule

    The American experiment with a limited government republic has been undergoing constant change since the “peoples” candidate Andrew Jackson, founder of the Democratic Party and seventh President, while winning the popular vote in the post-universal male suffrage election of 1824 lost in the Electoral College, which he then proposed to abolish. Subsequent progressive constitutional amendments extended voting rights to former slaves and their decedents (15th), women (19th) and the direct election of Senators (17th).

    Even with control of the House, Senate and Presidency, this wasn’t enough to pass Obamacare, arguably the stealth stepping stone to single payer Medicare for all. Unprecedented political maneuvering and prosecutorial and administrative abuse by then FBI Director Robert Mueller was employed. Then a lone opinion of Chief Justice Roberts relied on another progressive amendment, the 16th enabling unlimited power to tax, to save it.

    Socialism in a large diverse nation like the U.S. requires permanent dictatorial powers of enforcement, as highlighted by the requirements of Obamacare and the controversy over the individual mandate. This explains the progressive platform on: voting rights; opposing voter registration, supporting immigration of dependents with voting rights rather than working rights, eliminating the Electoral College, reducing the voting age to 16 years old, registering prisoners, and drive-by voter registration: the Supreme Court; nominating liberal (i.e., anti-Constitutional) Supreme Court Justices, packing the Supreme Court (again), and: the apparent attempt by the Obama Administration to implement PRI style hereditary presidential selection. This rhymes with Mao’s “people’s democratic dictatorship” not the individual liberty of the American Lion.

    To quote America’s greatest economist Milton Friedman:  “A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”

    Kevin Villani

     
     
    —-

    Kevin Villani, chief economist at Freddie Mac from 1982 to 1985, is a principal of University Financial Associates. He has held senior government positions, has been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath.

    Posted in Big Government, Book Notes, Conservatism, Crony Capitalism, Culture, Economics & Finance, Elections, History, Leftism, Libertarianism, Obama, Political Philosophy, Politics, Public Finance, Taxes, Tea Party, Tradeoffs, Trump, USA | 6 Comments »

    President Trump’s ‘Xanatos Gambit’ Trade Policy

    Posted by Trent Telenko on 27th April 2019 (All posts by )

    I’ve written previously in my column “President Trump’s ‘Xanatos Gambit’ Government Shutdown” of President Trump’s tendency for building political strategy trees were every possible outcome is to his advantage. (See the “Xanatos Gambit” strategy tree example in the figure below)

     

    https://static.tvtropes.org/pmwiki/pub/images/XanatosGambitDiagram_7509.jpg

    This is a decision diagram example of a “Xanatos Gambit. Source: https://tvtropes.org/pmwiki/pmwiki.php/Main/XanatosGambit

    It very much looks like President Trump has done the same thing with the Democrats and “China lobby” GOP Senators with the post-NAFTA US-Canada-Mexico (USMCA AKA “You Smack-A”) trade agreement and the US economy.

    THE US ECONOMY, NAFTA & USMACA

    The key thing you need to understand regards NAFTA and American manufacturing is that NAFTA was geared to allow the “China lobby” of multinational corporations to use Canada and Mexico as an “international arbitrage opportunity” for Chinese slave labor wage manufactured goods to be assembled at Canadian and Mexican production facilities and avoid American tariffs.

    Multinational corporations exploiting this “international arbitrage opportunity” was “The Great Sucking Sound” that Ross Perot talked about which killed the US domestic refined metals industry and hollowed out middle class manufacturing jobs in the American economy.

    President Trump’s USMCA removes that “international arbitrage opportunity” via original 75% North American manufacturing content requirements for metals and intermediate manufacturing goods as well as a Mexican minimum wage rules on the order of $15 an hour for automotive parts assembly.

    In response the “China lobby” has been paying large campaign contributions to both House Democrats and “free trade” GOP Senators to try and keep NAFTA, as well running info-war spots everywhere in the corporate media and “movement conservative” publications/media outlets about the benefits of “free trade.”  This has resulted in public statements by Speaker Pelosi that the House does not intend to vote for USMCA.

    This is where Pres. Trump’s ‘Xanatos Gambit’ strategy tree kicks in via a macroeconomic and trade policy manipulation of the very simple economic equation of gross domestic product:

    GDP = US ECONOMIC ACTIVITY + EXPORTS + FOREIGN INVESTMENT – IMPORTS – EXTERNAL INVESTMENT

    The American economy just grew 3.2% in the 1st quarter of 2019.  It would have grown another 0.3% but for the 30-odd day federal government shut down.  The “markets” were expecting 2.5% GDP growth.  The huge half-percent GDP “miss” boiled down to:

    1. The USA exported more.

    2. The USA imported less and

    3. There was more external foreign investment than expected.

    All three were the result of a combination of Trump administration policies on oil/LNG fracking, tax & regulatory cuts and trade/tariffs.

    First point, the USA will be a net energy exporter — of oil, natural gas & coal combined — in 2020 if it isn’t one already.

    Some rough numbers:  In 2012 US oil production was ~8 million barrels a day, all for domestic consumption, and in 2019 it is 12.6 million with some exports.  Today’s US oil consumption is 20 million barrels a day.  That increase in oil production that has reduced imports of oil by a net of 4.6 million barrels a day has also been accompanied by the displacement of coal and oil in both electrical production and manufacturing by cheaper natural gas, thus freeing both the coal and oil not used to be exported. This combined economic change since 2012 alone is worth a 1% increase in GDP growth a year compared to 2012.

    Second, the Trump administration’s systematic and sustained attack on Obama era federal regulatory growth is reducing business compliance costs particularly in the energy sector for new infrastructure projects.  These are the “anti-green” actions the Democrats accuse the Trump administration of.

    Third, the Trump administration/GOP tax bill, in addition to increasing spending power for the middle class, has had a huge -YUGE- reduction in capital gains taxes and a one-time break in repatriating overseas capital holdings. This has made America a much more attractive place to hold and invest money.  Particularly for energy companies like Exxon, which are dropping this foreign capital inflow into the Permian basin for oil and natural gas fracking and energy export infrastructure from the Permian to the Gulf Coast.

    Finally, in terms of trade and tariffs, President Trump’s tariffs on Chinese steel and aluminum combined with the business implications of USMCA rules have made further investment in Canadian automotive plants a net loss position.  American metal content is now economically competitive for energy sector infrastructure and automobile parts such that US Steel among others are reopening US metal plants.

    Taken together every part of the GDP equation has been directly affected by the Trump administration macroeconomic policies to get that 3.2% GDP number.

    This is where the Xanatos Gambit for USMCA arrives.

    Things will be worse for the China lobby without a vote on USMCA than with one.

    Short form:

    NAFTA is dead regardless of any action or inaction by the House.  All the House and Senate can do is not vote on USMCA.  The legislative branch cannot revive a NAFTA trade agreement the federal executive has withdrawn from.

    This means without a signed USMCA trade deal Pres.Trump can — and will — lay on even more tariffs on the multinational corporations playing price arbitrage in Mexico and Canada between Chinese and American manufacturing.

    While such trade sanctions can reduce the American economy like a tax increase, when we are likely at close to 4% economic growth in late 2019 to early 2020 from the accumulated investment in energy projects bringing defacto energy independence, a 3.5% economic growth rate with tariffs is still pretty good.

    And when the House refuses to vote in USMCA, NAFTA still dies.

    Pres. Trump can and will lay on new massive new anti-Chinese tariffs on Canadian and Mexican front companies for China without USMCA rules.  This will be massively popular in the Midwest in an election year and will hurt the income streams of the multi-nationals supporting the Pelosi Dems and McConnell RINOs.

    From Trump’s point of view, What’s not to like about America’s manufacturing base employing the Midwestern white working class growing while the “international arbitrage opportunity” of China’s slave labor economy contracts?

     

    Posted in America 3.0, Big Government, Business, Capitalism, Civil Society, Economics & Finance, Elections, Energy & Power Generation, Entrepreneurship, Environment | 28 Comments »

    Conspiracy Theories.

    Posted by Michael Kennedy on 20th March 2019 (All posts by )

    I’ve been having some fun poking around old posts on my own blog to see how some have held up ten years later.

    Conspiracy theories seem to have held up well, and new ones keep popping up. Like Jeff Bezos trying to spin a conspiracy theory about how his penis pictures got to National Enquirer. No, it wasn’t Trump.

    Now, the Wall Street Journal reports that Michael Sanchez, “a talent agent who has managed television pundits and reality-show judges” has also “long been a source for the Enquirer.” And, according to the paper, Michael Sanchez sold the Bezos texts to the Enquirer for $200,000.
    Imagine that. Mogul sends deeply private texts to gossipy L.A. girlfriend who has gossipy, fame-hungry brother, and somehow it gets out! No Saudis required.

    Hilarious.

    This one of mine from 2010 has stood up pretty well.

    The Democrats are committed to static analysis of tax effects. A tax cut loses revenue while a tax increase adds revenue. Now why are the Democrats, who have large majorities in both houses of Congress, unable to block this Republican effort to keep tax rates the same? It can’t be good economic policy because Steve Benen said so. What could they do to convince Republicans the Democrat position is the better choice ? Here are some theories.

    You’re sending the message the richest of the rich actually control this country, and in order to get a few crumbs for the common man, the rich need to be paid off with borrowed money – money that the common man (and woman), and their children, will be obligated to pay back, with interest. That does not bode well for the future of America.

    Posted by: delNorte

    So the rich and the corporations control the country. That is probably the most widely accepted conspiracy theory in the country. It is accepted by the left and many independents.

    I think it’s a confluence of reasons: 1) It’s a simple issue with little to no nuance. There is no good reason to extend the cuts to the rich (outside of politics). 2) OTOH, the bank bailout and the fin reg are/were very complex issues which did not satisfy anyone’s sense of justice for holding responsible those to blame for the mess we’re in.

    Posted by: You Don’t Say

    Now, there is another theory. There is no reason to keep the tax rates the same for those with incomes over $250,000 except politics. Here is a person who does not believe that small business creates jobs. I doubt he would be impressed by this video. That business owner makes $300,000 and employs about ten people. Raise his taxes and what happens ? Who cares ?

    There is absolutely NO convincing case that extending tax breaks for the super-wealthy is good for the nation; quite the reverse — it signals that the unabated looting of America is now in full swing;

    Not much has changed in 9 years. Emphasis, maybe.

    This morning, the This Week program on ABC, in its new incarnation with Christiane Amanpour, spent the entire show on DADT. They said not a word about the economy. DADT will not be repealed so why spend an hour on it two days after the unemployment rate went up again to 9/8% ? The political left is bored by economics and the national economy. They are far more interested in social issues like DADT or gay marriage. I can understand this because so many of them are government employees, or academic institution employees or low level employees of private organizations who have nothing to do with managing the business. They don’t know how private business is managed, they have never signed the front of a paycheck, and have no idea how people make decisions about investing because, aside from 401ks, they have no contact with it.

    Gay marriage has given way to transgender and global warming is still going strong,

    Posted in Economics & Finance, Education, Politics | 5 Comments »

    Even Smart People Get It Wrong Sometimes

    Posted by David Foster on 7th February 2019 (All posts by )

    Economist Art Laffer:

    “China is a huge plus to the U.S. because without China there is no Walmart, and without Walmart there is no middle class or lower class prosperity in America.”

    Actually, the US was known for broad-based prosperity long before either Walmart or China was a significant factor.  It was really only in the 1980s that Walmart’s expansion really took off…and it was then by no means as China-dependent as it has more recently become.  Indeed, starting in 1984 and extending at least through the early 1990s, Walmart was a strong supporter of the Crafted with Pride in the USA campaign, which was launched by textile entrepreneur Roger Milliken, among others.

    China’s presence in the global marketplace was greatly expanded by the Permanent Normal Trade Relations bill, which was signed by President Clinton in October 2000, as well as by China’s own economic-liberalization policies.  (Some data on the growth of Chinese exports over time, here)

    Real mean US household income, which is effectively a measure of price levels as well as wages/salaries, grew from $71773 in 1985 to $93887 in 2000.  Fifteen years later, in 2015, it had risen to only $95887.  (2017 dollars)

    Real median household income  grew from $51455 in 1985 to $59938 in fifteen years later, in 2000. In 2015, this indicator had actually declined to $58476.  (It grew to $61372 by 2017)

    There are a lot of factors that affect an economy, of course, and it would be unfair to conclude that the slowdown in American household income growth was caused by the vast expansion of trade with China.  Maybe it would have been even worse without Chinese imports and exports?

    National Review writer Robet VerBruggen cites “research” suggesting that “consumers save hundreds of billions of dollars per year thanks to expanded trade with China, and six-figure sums for every manufacturing job lost.  (Tucker) Carlson may be right that cheap junk from China doesn’t make us happy in any fundamental way, but it would put serious strains on family budgets if all that junk got expensive again.”

    Maybe. But I doubt if the strains would really be all that serious over time. If manufacturers did not have vast reservoirs of low-wage labor available for production of a particular product, then the incentives to improve productivity when making that product with high-wage labor would be greatly increased. Capital investment that makes no sense when you are paying workers $1.50/hour may make great sense when you have to pay $15/hour.  Furthermore, product designs themselves can often be changed in minor ways to make them more manufacturable; again, this would help reduce the cost impact of domestic or other high-wage-country manufacturing.

    I doubt if the strains on family budgets resulting from such changes in production-labor costs would have anywhere near the impact that has resulted from dysfunctional public schools (resulting in a need to pay for private schooling or move to a pricier neighborhood), unreasonable constraints on home-building, and out-of-control administrative and facilities spending by universities, coupled with irresponsible marketing of degree programs and student loans by same.

    One thing that has definitely been beneficial about China’s export trade is the drastic reduction in poverty in that country; this reduction is indeed something that we should all celebrate.  I suspect, however, that given economic liberalization, China could probably be doing just as well or almost as well with an economic approach that is not so extreme in its trade orientation but more focused on satisfying domestic demand…and this would probably be much more sustainable for them in the long run.

    Also, here are some additional links on US wage trends for anyone who’s interested:

    Read the rest of this entry »

    Posted in Business, China, Economics & Finance, Tech, USA | 29 Comments »

    Financial Markets Commentary

    Posted by David Foster on 30th January 2019 (All posts by )

    John Hussman on valuations

    The saga of Broker Joe, from 2007

    Posted in Business, Economics & Finance, Markets and Trading | 7 Comments »

    Worthwhile Reading

    Posted by David Foster on 27th January 2019 (All posts by )

    Why do journalists love twitter and hate blogging?

    The legacy of China’s Confucian bureaucracy.  Related:  my previous post on the costs of formalism and credentialism.

    Stroking egos does nothing for students — raising expectation does.

    Magic and Politics.

    Related to the above:  Witches: the new woke heroines.

    Legos, marketing, and gender.  “In 1981,” says a woman who as a child was pictured in a Legos ad back then, “LEGOs were ‘Universal Building Sets’ and that’s exactly what they were…for boys and girls. Toys are supposed to foster creativity. But nowadays, it seems that a lot more toys already have messages built into them before a child even opens the pink or blue package.”

    What will be the economic impact of China’s increasing emphasis on economic control and preferential treatment for state-run enterprises?

    What is the fastest the US economy can grow?

    Midnight at the Gemba. Kevin Meyer visits the night shift at the medical-device molding plant he was running.

    Posted in Blogging, Business, Capitalism, China, Culture, Economics & Finance, Management, Media, Religion | 12 Comments »

    Coupling

    Posted by David Foster on 15th November 2018 (All posts by )

    (No, this post is not about sex…sorry. Nor is it about electrical engineering, though it might at first give that impression.)

    The often-interesting General Electric blog has an article about drones, linked to a cloud-based AI platform, which are used to inspect power lines and detect incipient problems–for example, vegetation which is threatening to encroach on the lines and short them out, or a transformer with a tendency to overheat.  The article mentions a 2003 event in which an encounter between an overgrown tree branch and a sagging power line resulted in a wide-area blackout that affected 50 million people.

    The inspection drone sounds like a very useful and productivity-improving tool: obviously, inspecting thousands of miles of power lines is nontrivial job. But the deeper issue, IMO, is the fact that one problem in one place can propagate over such a wide area and affect such a vast number of people.  Power system designers and the people who operate these systems are certainly aware of the need to minimize fault propagation:  circuit breakers and fuses, network analysis tools,  and the technologies of protective relaying were developed, by GE among others, precisely for reasons of fault localization.  But experience shows that large-scale fault propagation still sometimes does take place.

    This problem is not limited to electrical systems.  The mention of the tree-branch-caused 2003 blackout reminded me of a passage from the historian Hendrik Willem Van Loon:

    Unfortunately in the year 1914 the whole world was one large international workshop. A strike in the Argentine was apt to cause suffering in Berlin. A raise in the price of certain raw materials in London might spell disaster to tens of thousands of long-suffering Chinese coolies who had never even heard of the existence of the big city on the Thames. The invention of some obscure Privat-Dozent in a third-rate German university would often force dozens of Chilean banks to close their doors, while bad management on the part of an old commercial house in Gothenburg might deprive hundreds of little boys and girls in Australia of a chance to go to college.

    This probably overstates the interconnectedness of the global economy as it existed in 1914, but would fit our present-day global economy very well.  (The author was talking about the origins of WWI, which he blamed largely on economic interconnectedness…not correct, IMO, but the war was largely caused, or at least reached the scale that it did, because of another type of interconnectedness…in the shape of alliances.)

    Read the rest of this entry »

    Posted in Big Government, Business, Capitalism, Deep Thoughts, Economics & Finance, Energy & Power Generation, Human Behavior, International Affairs, Trump, War and Peace | 18 Comments »

    Tariffs, Trade, and the British Corn Laws

    Posted by David Foster on 8th October 2018 (All posts by )

    Stuart Schneiderman linked an article by Robert Samuelson on the 1846 British repeal of the tariffs on food imports, which further linked an Economist article arguing that:

    With the repeal of the tariffs, instituted to protect British corn farmers, liberal economic policies ascended. Free trade, free enterprise, free markets and limited government became the rule. And the world has not been the same since.  (Schneiderman’s summary)

    To me, it is highly questionable how much the elimination of tariffs had to do with limited government and internal free enterprise. The view that the British 1846 action was economically a very good thing for almost everybody is, however, generally accepted.  From the Economist article:

    The case for getting rid of British tariffs on imported grain was not a dry argument about economic efficiency. It was a mass movement, one in which well-to-do liberal thinkers and progressive businessmen fought alongside the poor against the landowners who, by supporting tariffs on imports, kept up the price of grain…When liberals set up the Anti-Corn Law League to organise protests, petitions and public lectures they did so in the spirit of the Anti-Slavery League, and in the same noble name: freedom. The barriers the league sought to remove did not merely keep people from their cake—bad though such barriers were, and strongly though they were resented. They were barriers that held them back, and which set people against each other. Tearing them down would not just increase the wealth of all. It would bring to an end, James Wilson believed, the “jealousies, animosities and heartburnings between individuals and classes…and…between this country and all others.”

    Again, this is all mostly generally-accepted thinking.  But Stuart’s post and the links reminded me of something I read–oddly enough, in a 1910 book on railroad history.  The author (Angus Sinclair) describes the transition to steel rails (from cast iron) and the heavier trains they enabled, and then discusses the political-economic impact of this transition:

    The invention of cheap methods of making steel rails has exerted a tremendous effect upon railroad transportation, and has created social revolutions in certain part of the world…It threw many farms in New England and along the Atlantic seaboard out of cultivation; it caused a semi-revolution in farming business in the British Isles, and strongly affected the condition and fortunes of millions of people in other countries.  Irish peasants used to go in thousands to England and Scotland to work in the harvesting of grain crops and thereby earned enough money to pay the rent of their small holdings.  Steel rails and Consolidation locomotives stopped the cultivation of so many wheat fields in the British Isles that the help of the Irish worker was no longer needed…

    The woes of Ireland were merely the preliminary manifestations of hardships inflicted through the grim ordeal of competition worked out by our cheapened  methods of land transportation.  (The heavier locomotive enabled by steel rails) is steadily forcing more grain raising farms of Europe out of cultivation and is raising a demand for protection against cheap land, just as our politicians have so long urged the necessity for protection against the cheap labor of Europe.

    About 60 years ago Great Britain abolished all duties on grain…By curious reasoning the statesmen believed that this policy would not only make the British Isles the manufacturers of the world, but that it would increase the prosperity of the agricultural communities as well.  The first thirty years’ experience of free corn did not seriously  challenge the correctness of the free trade theory, for more of the American wheat lands were yet unbroken prairie or virgin forests, and our steel rail makers and locomotive builders were merely getting ready…In 1858 the rate per bushel of wheat from Chicago to New York was 38.61 cents.  The rate today is 11.4 cents…

    The effect of that cheapening of transportation in the United States has been very disastrous to Great Britain, for during the last thirty years there had been a shrinkage of 3,000,000 acres in wheat and another of 750,000 acres in green crops; an enormous amount of land had reverted to pasturage…and the number of cultivators of the soil  had declined 600,000 in thirty years–1,000,000 in fifty years.

    That is a high price to pay for the devotion to a theory which fails to work out as expected.

    Read the rest of this entry »

    Posted in Britain, Business, Capitalism, Economics & Finance, History, Ireland, Libertarianism, Taxes, Transportation, USA | 36 Comments »

    Amazon at $15

    Posted by David Foster on 2nd October 2018 (All posts by )

    Amazon is raising the minimum hourly wage for its workers to $15…this includes Whole Foods, it’s not totally clear whether or not it includes contract employees, though I’d assume it does.  Jeff Bezos has also encouraged his competitors to do the same, and indicated that Amazon will lobby for an increase in the Federal minimum wage.

    For discussion:  What will be the impact of this Amazon decision on the retail industry, on American business generally, and on American consumers?

    Posted in Business, Economics & Finance | 35 Comments »

    An interesting analysis of the 2008 housing collapse.

    Posted by Michael Kennedy on 12th September 2018 (All posts by )

    The 2008 economic collapse gave us ten years of economic malaise and the presidency of Barack Obama.

    Why did it happen ? I have been a fan of Nicole Gelinas’ book, “After the Fall”

    I wrote a long review of it at Amazon, which is still a favorite of readers.

    Now, we have a very interesting new analysis, which blames housing almost exclusively.

    Looked at in terms of the popular narrative that there was a “financial crisis,” readers shouldn’t be fooled. There was nothing financial about what happened ten years ago. The “crisis” was made in Washington. Left alone, economies and markets never go haywire when natural market forces are putting out to pasture the weak, only to redirect the previously underutilized resources of the weak to higher uses.

    He makes an interesting point, which tracks with my own observations.

    a booming housing market of the kind experienced in the ‘70s and ‘00s is not a sign of economic vitality. Getting into specifics, a home purchase is not an investment. It won’t render the buyer more productive, open foreign markets for same, or morph into capital meant to develop something productivity-enhancing like software. Housing is consumption, that’s it. On the other hand, investment is what powers economic growth, so the very notion that a reorientation of precious capital away from consumptive goods and into production would foster economic crisis is for those who presume to comment on the economy to reveal how little they understand what they’re writing about. The feverish consumption of housing was what was holding the economy down, which means a reversal of what weighed on the economy would logically be good for growth. If so, markets would have discounted housing’s correction positively.

    I moved to Orange County in 1972 to begin my medical practice. I already owned two homes in South Pasadena which I had difficulty selling after the move. There was no appreciation of housing. By 1975, when a bear market caused a malpractice insurance crisis for doctors, my 1972 house had tripled in value. The South Pasadena house I finally sold in 1972 for the same ($35,000) price I had paid for it in 1969, was by 1979 for sale for $595,000.

    What did happen in both the 1970s and 2000s is that the dollar substantially declined vis-à-vis foreign currencies, commodities, and seemingly everything else. This matters because in both the ‘70s and ‘00s, gold, oil, wheat, land, rare stamps, art, housing, and just about every other kind of hard asset performed well. Well, of course. When money is losing value, the hard assets least vulnerable to currency devaluation perform best. In a repeat of the ‘70s, housing and other commodities proved a safe haven in the ‘00s from the U.S. Treasury’s policies in favor of a devalued dollar.

    I remember well the rush to buy gold and antiques as hedges against the post 1974 inflation. An elderly woman in Oceanside California got wide publicity for her “crazy” decision to invest her money in buying four Rolls Royces and putting them in storage. She paid about $50,000 each. Five years later they were worth about $200,000 each.

    Then came 2008.

    Read the rest of this entry »

    Posted in Big Government, Book Notes, Conservatism, Economics & Finance | 11 Comments »

    China, Taiwan, and the Third World

    Posted by David Foster on 28th August 2018 (All posts by )

    China has been making many investments in third-world countries, often in exchange for resource concessions.  There is growing concern that some of these projects leave the host country with too much debt–indeed, last December, Sri Lanka sold control of its port of Hambantota to a Chinese state-owned company after falling behind in repaying $1.5 billion in loans from Beijing.  Further such situations seem likely.  (See interesting article about Chinese investment in Malaysia here.)

    China has also been accused of using aid and investment funds to influence other countries’ policies toward Taiwan, an accusation that they unsurprisingly deny…and Taiwan is now down to only one diplomatic ally in Africa, the kingdom of eSwatini  (prevously known as Swaziland.)  El Salvador, too, has recently dropped diplomatic ties with Taiwan.

    See also my recent post about Chinese influence efforts targeted at other nations, including the limiting of US film content and the firing of an American employee of Marriott for liking a tweet which offended the regime.

     

     

    Posted in Business, China, Economics & Finance, Transportation | 10 Comments »

    The problem of modern socialism

    Posted by TM Lutas on 18th August 2018 (All posts by )

    This is lifted from one of many retyped responses to people who just want to engage in history-free, context-free thought experiments on whether socialism is any good. This particular one came in response to a person who was defending the USSR as a viable method of organizing society.

    “The problem is, and likely will remain for the foreseeable future, that there are wannabee genocidaires who would like to be signing the death warrants for those who resist the advance of socialism. There is no reliable test to separate those evil people from those who haven’t figured out why socialism landed on the ash heap of history and genuinely want to run through what happened, what went wrong, and why so many people died in the pursuit of this idea of implementing the labor theory of value as government policy.”

    If there is a reliable test, I certainly would love to know it. The ignorant are coming out of the US education system by the boatload. The malicious are far fewer than that, but so dangerous that they can’t be ignored.

    Posted in Academia, Economics & Finance, Education, Philosophy | 15 Comments »

    Summer Rerun: Wolf Among Wolves, by Hans Fallada

    Posted by David Foster on 3rd August 2018 (All posts by )

    Hans Fallada’s novel Little Man, What Now?, which I reviewed here, impressed me enough to look up some of  Fallada’s other works.  Wolf Among Wolves, was published later than LMWN, but set in an earlier period: 1923, the time of the great Weimar inflation. It tells the story of a collapsing society through the intertwined lives of many characters, who include:

    Petra Ledig, a sweet-natured girl from a rough background in Berlin, driven into prostitution by financial desperation. On impulse, she asks one of her clients to take her home with him, and he does. That man is…

    Wolfgang Pagel, son of a fairly-well-off but overprotective and controlling mother–the mother being less than thrilled about his relationship with Petra. Wolf supports himself and Petra, in a very marginal way, by working as a professional gambler. One day in Berlin, Wolf meets up again with an old Army acquaintance…

    Joachim von Prackwitz, who everyone calls the Rittmeister (cavalry captain). The Rittmeister married the daughter of a major landowner in East Prussia and is now managing a large farm at Neulohe under lease from his father-in-law, who cannot stand him…indeed, the father-in-law does everything he can to make the Rittmeister’s life miserable, including for example scheming to increase his portion of the electric bill from the estate’s shared diesel generator. (This is surely the only novel I’ve read in which depreciation and cost-allocation calculations come into play.) The Rittmeister was known in the Army as a brave if not terribly bright officer and a good comrade, but he is having great difficulty in dealing with the pressures of his civilian life.

    Eva, the Rittmeister’s well-balanced and long-suffering wife, is losing confidence in her husband and is very worried about the erratic and mysterious behavior of her daughter Violet, an attractive 15-year-old who has developed a passionate and secret crush on…

    The Lieutenant, agent for a group of former military men who are plotting a putsch against the Weimar government

    Mr Studmann, another Army friend of Wolf’s, who has been working as front-desk manager for a hotel. He and Wolf are both invited by the Rittmeister to leave Berlin and come help with the running of the farm. Despite his total lack of agricultural experience, Studmann turns out to be a very effective manager, using the skills he developed at the hotel. Eva is drawn to Studmann, seeing in him the stability and rationality that are absent in her husband–and he is VERY attracted to her.

    Raeder, a young and deeply weird servant who has an unwholesome sexual attraction toward Violet

    One “character” never absent from the story is the mark, the German unit of currency. In fact, the valuation of the mark is mentioned in the very first page of the book:

    This is Berlin, Georgenkirchstrasse, third courtyard, fourth floor, July 1923, at six o’clock in the morning. The dollar stands for the moment at 414,000 marks.

    (By the end of the period covered in the story, the dollar-to-market conversion rate was a trillion to one.)

    A few samples of the writing. Here, a description of Violet’s attraction toward the Lieutenant:

    He was quite different from all the men she had yet known. Even if he were an officer, he in no way resembled the officers of the Reichswehr who had asked her to dance at the balls in Ostade and Frankfurt. The latter had always treated her with extreme courtesy; she was always the “young lady” with whom they chatted airily and politely of hunting, horses, and perhaps of the harvest. In Lieutenant Fritz she had as yet discovered no politeness. He had dawdled through the woods with her, chatting away as if she were some ordinary girl; he had taken her arm and held it, and had let it go again, as if this had been no favor…Just because he thought so little of her, because his visits were so short and irregular, just because all his promises were so unreliable…just because he was never polite to her, she had succumbed to him almost without resistance. He was so different. Mystery and adventure hovered around him…Infinite fire, mysterious adventure, a wonderful darkness, in which one may be naked without shame! Poor Mamma, who has never known this! Poor Papa–so old with your white temples! For me ever new paths, ever different adventures!

    Read the rest of this entry »

    Posted in Book Notes, Civil Society, Economics & Finance, Germany, History | 3 Comments »

    Disruption – Scaling an Application

    Posted by Carl from Chicago on 1st July 2018 (All posts by )

    Today in the NYT they had an article about an online dating app called “Raya”. This tool is designed to let exclusive rich / celebrity folks match rather than being mixed in with everyone else on Tinder.

    From my perspective, the interesting fact isn’t what the application is “about”, but how easy it is to build a scale a worldwide tool with all necessary functionality. From what I can gather in the article:

    • The entire company is run with only 13 people, including technical staff
    • The platform is exclusive to Apple iOS, and costs $7.99 / month (if you are accepted, which is rare), with additional up-charges
    • This world-wide, fully functional app was built with limited investment and seed funding
    • The app was built and launched quickly, in likely a year or so (based on the dates provided in the article)
    Let’s look at how modern platforms and capabilities have enabled this sort of rapid delivery, scaling and enabling of a business model.  In the past, building a business such as this would have been a large-scale project.  By building it on the Apple iOS platform, however, the developer is able to tap into a huge amount of existing infrastructure, including:
    • Apple basically provides distribution through the iPhone, operating system, and entire infrastructure of the App store which includes billing 
    • Increasing power of the phone itself (likely all these rich and famous folks are on the latest models) enables advanced features and fast responses, as well as a consistent experience for users
    • The platform and embedded capabilities allow for rapid builds and prototyping, upgrades and security
    It is astonishing that such a ubiquitous and enabling platform exists, with the ability to scale to an essentially infinite degree, with little (to no) up front investment.  This platform and environment facilitates rapid prototyping, the ability to grow quickly (if there is demand for your app), and provides an entire environment for notifications, customization, etc… that you can leverage.
    If someone would have told you ten years ago that you could
    • Build a piece of software that can reach customers around the world
    • Scale up at a rapid rate with little or no upfront investment
    • Have billing, notifications, user experience, etc…. mostly done for you “out of the box”
    You’d think that they were dreaming.  And yet it is here, today.
    What are the implications of this?  I think that a lot of the assumptions that we make about how strong incumbent positions are, how fast challengers can emerge, and how low the barriers to entry are for many markets are incorrect.  Since the key demographics are already all mobile (and the majority of the highest income US consumers are on iOS), you can jump quickly into Apple and evolve rapidly.
    Since many companies today make little or no profits and “value” is the stream of future cash flows (when presumably the company will be profitable and able to capture and hold market share and customer revenues), the fact that competitors can rapidly come into your space with little incremental investment should make long-term investors shudder.  
    Cross posted at LITGM

    Posted in Economics & Finance, Tech | 9 Comments »

    Worthwhile Reading

    Posted by David Foster on 1st July 2018 (All posts by )

    A thoughtful post about walls and freedom:

    A city without walls was not a city. Anyone could march in and take over, give commands, and force the residents to obey. Without being able to defend yourself, you could not be counted among the free peoples. You were dependent on the good graces of someone else, be it a noble, a bishop, or hired soldiers. Walls meant the ability to defend your rights and liberties, to keep out unwanted people and protect what was good and valuable.

    Sultan Knish writes about Cybersecurity and Russia:

    “Why the hell are we standing down?”  That was the question that the White House’s cybersecurity coordinator was asked after Susan Rice, Obama’s national security adviser, issued a stand down order on Russia.

    Tolerance for ambiguity as a key factor in career success:

    Too many recent graduates, however, approach their job descriptions the way they did a syllabus in college—as a recipe for winning in a career. They want concrete, well-defined tasks, as if they were preparing for an exam in college. “Excelling at any job is about doing the things you weren’t asked to do,” said Mary Egan, founder of Gathered Table, a Seattle-based start-up and former senior vice president for strategy and corporate development at Starbucks. “This generation is not as comfortable with figuring out what to do.”

    Information and Gossip:

    Now, it so happens that at no point in history, except during the postwar period, did people receive news without being conveyors of news. That nuclear family, where people — pop, mom, 2.2 kids, one dog — are watching TV, receiving information and not transmitting.

    Is loneliness fueling the rise of political polarization?

    Many individuals no longer have the communal and social connections they once had, such as religion, ethnic culture, and family. The only connection many have left is their political party, and that forms their identity. And because of the closeness this has to their identity, they become more tribal and defensive when that party is attacked.

    The lifecycles of large corporations

    Posted in Business, Economics & Finance, History, Human Behavior, Management, Politics | 15 Comments »

    Disruption – Online Ordering

    Posted by Carl from Chicago on 24th June 2018 (All posts by )

    The retail restaurant industry already is an area of fierce competition. Just think of all the restaurants in your community vying for your attention and business. And this is also an industry with slim margins and a high mortality rate – even after a couple years’ away from Chicago, many of the local restaurants we used to patronize have turned over in one form or another.

    Since I’ve lived in a “big city” environment for decades, I am used to just walking over to a nearby restaurant to eat or potentially pick up a delivery. However, that isn’t an option for everyone, and digital delivery through various methods is now an important differentiator between chains and individual firms.

    The NYT had an article titled “App Takes Orders for Mom-and-Pop Pizzerias” about a company called Slice that offers a tool for small, individually owned pizza restaurants to offer sophisticated ordering capabilities in multiple methods in order for them to compete with chains like Dominos which run a significant portion of their business through online ordering. Small chains typically cannot build their own specific tools and will need to purchase these capabilities as a service.

    Slice sends customers’ online orders to the restaurants through their preferred method — email, fax or phone. Restaurants deliver the meals with their own couriers. For each order processed, Slice receives a $1.95 commission, or around 6 to 7 percent of order totals on average, Mr. Sela said. In contrast, GrubHub charges up to 18 percent of the order to process online sales for its clients.

    In a business with small margins, giving up 18% or even 6-7% of revenues off the top line seems to be a very significant cost, but at least it allows these restaurants to “even the playing field” with larger chains.

    Read the rest of this entry »

    Posted in Economics & Finance, Tech | 2 Comments »

    Draining the Swamp: Progressive Politics – the Road to Crony Capitalist Perdition

    Posted by Kevin Villani on 17th June 2018 (All posts by )

    From A Libertarian Republic to Majoritarian-Totalitarian Democracy: a Summary

    The 2016 American Presidential Election

    Trust in government fell by almost 80% from the end of the Eisenhower Administration to the end of the Obama Administration. Then Americans endured one of the most divisive and longest two year election campaigns leading up to the 2016 election. Former Democrat turned Republican Donald Trump defeated a field of 17 traditional center-right Republicans to run against traditionally center–left Democratic candidate Hillary Clinton who turned left to defeat her socialist competitor Bernie Sanders in the primary. Sanders correctly argued that the U.S. political system is rigged – more than he knew at the time – but responded by promising his generally young supporters socialism without totalitarianism. The public has endured another two years of divisiveness as the losing party tries to undermine and some would impeach the winner.

    Republican nominee and arguably crony capitalist businessman Donald Trump, the son of a crony capitalist housing developer, ran on the paradoxical promise to “drain the swamp.” The faux democratic election of crony capitalist supremo Vladimir Putin in 2011 drew the public reprobation of then U.S. Secretary of State Hillary Clinton, the subsequent Democratic Party nominee. Putin responded with a campaign of not so fake news not to elect Trump – they had the same polls as everybody else – but to expose Clinton as a crony capitalist who also engaged in election-rigging. He hit pay dirt. The faux Russian collusion scandal has since been used to undermine the legitimacy of the Trump Administration.

    On the issue of trade there was no difference between the three main candidates – all opposed the new TTP trade agreement. The U.S. trade deficit has been about $500 billion a year during this century, consumption financed mostly with additional debt. Candidate Clinton, who supported China’s entry into the WTO during the Clinton Administration agreed she would if elected renegotiate NAFTA, the trade bill passed at her husband’s initiative. On the related issue of immigration, candidate Clinton voted for the bipartisan Secure Fence Act of 2006, as did then Senators Obama and Schumer.

    The Obama Administration had doubled the federal debt outstanding to over $20 trillion – and the unfunded liability is approximately ten times that. President Obama’s Chairman of the Joint Chiefs of Staff publically warned as early as 2010 that the debt was a threat to national security. Candidate Clinton promised she wouldn’t add a penny to the national debt, but her platform had an imbedded $10 trillion increase, less than Sanders to be sure. Candidate Trump promised to eliminate the debt in eight years by increasing economic growth. Clinton’s was a political lie, Trump’s an outlandish campaign promise since going unfulfilled: his appropriations bill contained a $200 billion increase in spending, a Democratic victory for domestic spending in return for Republican defense spending.

    Candidate Trump ran against the “deep state” wars and military interventions that candidate Clinton had voted for. But as President, Trump embraced it with overwhelming Democratic support to punish Russia.

    Progressivism’s Administrative State

    The Democrats’ agenda has arguably fared much better under Trump than Republicans did under Obama. Given these similarities in proposed and actual policies, the subsequent animosity might appear puzzling. But the biggest difference among the candidates relates to the relative roles of the public and private sectors. The U.S. is now governed by an unaccountable patria administrative state: judicial and legislative subsumed in the executive branch and sometimes independent even of that – judge, jury and executioner. The new religion is “science” requiring a faux consensus and leadership by the “experts” as proposed by John Kenneth Galbraith in the New Industrial State (1967) over a half century ago.

    Washington, D.C. is a place where self interested deals are made in hotel lobbies and K street offices, but the entire federal bureaucracy sits on a former swamp. Most federal politicians are political swamp people having worked their way up in local and state politics by making political deals for budget and/or tax subsidies and/or regulatory discretion – legal extortion. Candidate Clinton is a self described progressive and candidate Sanders a socialist, the former supports state control of business, the later favors more direct state ownership.

    The Berlin Wall fell in 1989, followed by the Soviet Union two years later. In 1995 U.S. President Bill Clinton declared “The era of big government is over.” Britain’s Prime Minister Tony Blair, publishing in a Fabian pamphlet in 1998 argued: “Liberals (classical, i.e., American conservatives) asserted the primacy of individual liberty in the market economy; social democrats promoted social justice with the state as its main agent. There is no necessary conflict between the two, accepting as we now do that state power is one means to achieve our goals, but not the only one and emphatically not an end in itself.” But “the values which have guided progressive politics for more than a century – democracy, liberty, justice, mutual obligation and internationalism” have lead in practice to “state control, high taxation and producer interests (crony capitalism).” By the end of the century a few years after Blair spoke, the market had reached The Commanding Heights of the economy. But a decade later the Obama Administration had put the state back on top, seeking to control not just health care but finance and energy.

    Progressivism – like fascism and communism – started with the best of intentions, in opposition to crony capitalism. Social welfare programs were implemented to spread the wealth and provide a safety net, but during the progressive Obama Administration economic growth per capita stagnated. Candidate Trump believed that rolling back the administrative state regulations and the tax on savings and investment as suggested by Blair would restore real private economic growth, the key to managing the public deficit. His Democratic opponents both favored a vast expansion of the administrative state and increases in the tax on capital.

    Progressive Internationalism and the New World Order

    Progressives supported freer trade even if not reciprocal in the post WW II era because America could still enjoy a balance of trade surplus that could be used to fund investments abroad and a “new world order” of American dominance in a bi-polar world with the Soviet Union and its satellites. The European Union evolved as a mechanism to end European – especially German – “nationalism” in favor of this plan. Two events undercut this agenda of international control through capital flows: the 1960s wars on poverty and Vietnam turned American surpluses into deficits, and the common European currency created a German economic hegemony over Europe. The U.S. today is to China what Greece, Italy, Spain, Portugal and Ireland are to Germany, and that’s not a compliment. Both China and Germany – whose exports equal China’s with only 6% of the population – are mercantilist countries pursuing low wages and consumption domestically so that future generations can live off the debt that finances their over-consuming customers.

    Germany understands perhaps better than any country the problem of using foreign debt to finance current consumption as it did to feed a starving population during the interwar years. The excessive debt undermined the fledgling Weimar Republic, giving rise to Hitler. Trumps trade policy appears incoherent, as is much of the criticism. Progressives still argue for globalism and internationalism while conservatives and libertarians are hung up on Ricardian theory of comparative advantage in international trade and the accounting identity of the trade and capital balance.

    The problem isn’t global trade per se, but progressive policies that repress national saving and domestic labor and capital productivity while growing the administrative state. National boundaries still matter. In the EU the single currency zone has destabilized previously relatively stable prosperous countries, threatening political and economic collapse. The relationship between the U.S. and China reflects a similar dynamic: the willingness to accept American debt has kept the dollar from falling and trade adjusting. China holds over trillion dollars of debt backed by taxpayers, and was the biggest foreign funder of Fannie Mae and Freddie Mac during the sub-prime lending bubble. Progressives argued that we would grow out of this debt, but simultaneously and inconsistently deny that the failure to grow during the Obama Administration reflected economic repression but “secular stagnation” – that capitalist innovation has run its course. If so, we are doomed when countries attempt to collect.

    Thus far the main part of the Trump agenda, the tax reform and regulatory roll back – against universal Democratic opposition and condemnation – appears to be working. Economic growth per capita has picked up, unemployment is the lowest since the turn of the century, and business investment net of depreciation is rising from historic lows. But it is way too early to declare success. China entered the WTO without meeting the minimum requirements for intellectual property protection or reciprocity, a Clinton Administration oversight. Fixing the former should be uncontroversial. Reciprocity insures that the most competitive – not the most subsidized – win. Subsidies may benefit American consumers temporarily, but the dislocations are costly and overconsumption dangerous, the debt leading to contemporary “gunboat diplomacy” to settle debts. A reciprocal tariff is a consumption tax, not irrational to consider under those circumstances.

    Progressive efforts to Impeach President Trump: the Totalitarian Administrative State Strikes Back

    Yet since the election, some progressive Democrats have been pushing for impeachment on grounds of Russian collusion and obstruction of justice, although no evidence has yet been produced of that after two years of investigation.

    One thoughtful progressive commentator dismisses these grounds, arguing that the real grounds for impeachment are the “threats Trumpism poses to democracy and rule of law.” If true, those would indeed be grounds for impeachment but he doesn’t define Trumpism or provide evidence. The many articles in the progressive media can be summarized thus: Trump is tweeting against the administrative state agents that are out to get him.

    Libertarians and Republican conservatives have argued that progressives have been undermining liberty and the rule of law for over a century to create the administrative state, obfuscating their agenda by manipulating words to mean the opposite of their historical meaning. Trump’s Court appointments are intended to reverse that trend. Statism is usually associated with one-party faux democracy to prevent state power from turning against the entrenched interests with a change of government. Trump ran against the progressive new world order, arguing to “put America first.” The Democrats didn’t think Trump had any chance to win. This seems the more compelling reason for their impeachment efforts. The anti-Trump organized hysteria bears a marked resemblance to the largely Soros funded Republican and Democratic efforts to ignite the democratic color revolutions in the former Soviet states described by F.William Engdahl in Full Spectrum Dominance: Totalitarian Democracy in the New World Order (2009).

    This isn’t about Trump tweets. It’s a battle for the commanding heights.
    Read the rest of this entry »

    Posted in Big Government, Capitalism, Civil Liberties, Civil Society, Conservatism, Crony Capitalism, Economics & Finance, History, Leftism, Libertarianism, Political Philosophy, Politics, Public Finance, Taxes, Tradeoffs, USA | 11 Comments »

    A Disturbingly-Declining Rate of Return in Pharma R&D?

    Posted by David Foster on 5th May 2018 (All posts by )

    Here’s an interesting analysis

    Posted in Business, Economics & Finance, Science | 8 Comments »

    Worthwhile Reading and Viewing

    Posted by David Foster on 27th April 2018 (All posts by )

    An MBA student who was raised in Communist China reads Hayek.

    Has Silicon Valley hit peak arrogance?

    Is high testosterone inversely correlated with hedge-fund performance?

    Anti-Semitism and the Democratic Party.

    A manufacturing engineer looks at Tesla manufacturing.  Related:  Elon Musk now thinks his use of robots to build the Model 3 was excessive.

    (I wonder if Musk was aware of the history of Roger Smith and the robots at GM when he established his manufacturing strategy.)

    15 facts about Renoir’s Luncheon of the Boating Party.

     

     

    Posted in Business, Economics & Finance, Human Behavior, Judaism, Leftism, Tech | 20 Comments »

    Disruption – The Weed Market in Oregon

    Posted by Carl from Chicago on 20th April 2018 (All posts by )

    Oregon allows recreational marijuana. Originally, there were laws limiting growers to local Oregon companies (when it was a medical marijuana industry) which were effectively eliminated when the transition was made to recreational usage (allowing out of state funding). There was also a relatively small local market for growing cannabis.

    Dispensaries cropped up everywhere, even in seemingly small, out of the way tourist towns with only a few hundred souls. It seems that you can’t go far without seeing the “green cross” that symbolizes a marijuana dispensary. Unlike other states, Oregon apparently allowed anyone who met basic criteria to open a “weed store”.

    While it surprised many of the locals who curated their wares and made custom strains of local cannabis, the free market reared its head and drove down prices on effectively undifferentiated product and storefronts. From the local WWeek newspaper:

    A gram of weed was selling for less than the price of a glass of wine… we have standard grams on the shelf at $4… before we didn’t see a gram below $8… Wholesale sun-grown weed fell from $1500 a pound last summer to as low as $700 by mid-October.

    As a result of this, there is significant consolidation in the market as smaller growers either bow out or are bought up and dispensaries are being purchased by large groups (often vertically integrated with growers) at fire-sale prices.

    (the) Oregon cannabis industry is a bleak scene: small businesses laying off employees and shrinking operations. Farms shuttering.

    One farm profiled in the article went into growing weed with the expectation of selling at $1500 a pound; when they finally had to liquidate most of their crop at a weed auction, they only received $100 a pound.

    The entire Oregon recreational cannabis industry has played out exactly as you would expect in a market with few barriers to entry and a relatively undifferentiated commodity:

    1. Suppliers rush in to take advantage of high prices for crops, turning what was originally a weed shortage (and resulting scarce supply) into a huge spike in supply which in turn drove down wholesale prices to almost nothing on the margin

    2. Retailers who have little or no differentiation are being driven out of business by low profits or being forced to run at a loss

    For me the interesting part of this is not the plain execution of basic market economics (in an industry with low barriers to entry, prices will drive down to near marginal cost of the most efficient operator), but in what that means to “adjacent” industries. For example, if a gram of (high quality) weed is the price of a single glass of wine (actually a lot less at $4… that is probably 1/3 of the price of a glass of decent wine at a standard restaurant), will customers switch from beer or wine to cannabis? From an economic perspective (cost / buzz) this would be a relatively clear-cut choice. Over time economists should chart the impact of low cannabis prices on both prices and consumption in adjacent alcohol industries.

    Cross posted at LITGM

    Posted in Business, Economics & Finance, Oregonia | 30 Comments »