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    From the Cosmos to Strings: Parallels of Economics to Physics

    Posted by Kevin Villani on 24th March 2020 (All posts by )

    The first macroeconomic model of the U.S. economy consisted of 20 boxes of punched cards at 2000 cards per box that I would wheel on a dolly stacked five feet high to the main frame computer center where it took about three days to get results back.

    Mathematics is the language of physics. Graduating with a BS in mathematics in the 1960’s, I faced a choice between my two minors, physics or economics. Some famous physicists had already declared that the quest for a unified mathematical explanation of the cosmos and its smallest building blocks was at hand. In economics, the attempt to build a mathematical macro model of the U.S. economy and fully integrate it with the micro economic mathematical models of human behavior represented a new frontier. I chose economics.

    In retrospect, physicists are still searching for a Grand Unified Theory (GUT) of the universe. In economics, mathematics and statistics have widened the disagreement about how the economy works and the proper role of government in economic management.

    God and Physics: from Aristotle to Hawking

    Aristotle (382-324 BC) described the cosmos of round bodies in motion circling around the earth. It took almost two millennia until the sun-centric Copernican model was popularized by Galileo, who was imprisoned by the Pope, the political enforcer of orthodoxy at the time, in 1633 for heresy, forcing him to recant. But only a half century later, Newton described the mechanics of the universe and sun-centric solar system in Principia Mathematica (1687), which remains the cornerstone of basic physics.

    In Newtonian physics, motion and speed are calculated relative to what you are moving away from. Maxwell’s discovery in the mid-1800’s that the speed of light was “absolute” required an explanation that stumped many physicists until the young patent office clerk Albert Einstein, unaware of these efforts, provided the novel Special Theory of Relativity (1905) that if light speed was constant space and time must be relative.

    His mathematical model proved over time to provide a more precise description of the movement of heavenly bodies, but the implication of his equations that the universe was expanding violated his belief in a master plan of a “creator,” so he inserted a mathematical cosmological constant (what economic model builders would subsequently call a “dummy variable”) to stagnate it. But other physicists confirmed his original model, which in reverse required a mathematical ”singularity” – a beginning of time with a “big bang” from an infinitely small spec. The Catholic Church approved this model in 1952 as consistent with its orthodox views of a creator.

    In 1970 Stephen Hawking proved that the big bang theory was the only one consistent with the existing models of the universe, but he later challenged those models. First, the violent path of destruction and creation over billions of years subsequent to the big bang that ultimately produced the building blocks of life was a “million to one shot”- is ours just one of millions of universes? Second, macro models of the universe broke down at the mathematical singularity, which remains inconsistent with micro models of the very small – in my youth molecules then atoms made up of protons, neutrons and electrons, now subatomic “quarks” and more recently sub-quark vibrating strings.

    The scientific method is a slog: to understand the universe, the models must not only be tested empirically but compared to all the potential alternative explanations. Pre-conceived orthodox ideology has at times set the investigation back centuries.

    The Progressive Orthodoxy of Mathematical Models in Economics

    Macro economics, the desire to understand and control the workings of the economy at large, developed in response to the Great Depression. The roots of the mathematical approach to economic management trace to the founding of the Econometrics Society in 1930. John Maynard Keynes published his General Theory of Employment, Interest and Money in 1935, the title invoking the universality and finality of Einstein’s General Theory of Relativity published two decades prior.

    Paul Samuelson’s Foundations of Economic Analysis (1947) provided a mathematical model of micro economic consumer and business behavior. I was a regular reader of Samuelson’s Newsweek columns in high school and used his undergraduate economics text at UMass, where I worked on the first macro economic model of the U.S. economy developed at the University of Pennsylvania by Samuelson’s first PhD student Lawrence Klein.

    As a student of former Federal Reserve Board economist Pat Hendershott, I worked on the first Flow of Funds model of the U.S. financial sector. The main frame computer at Purdue University would run the punch cards of a professor’s research overnight, a big improvement. Such macro economic models are “Keynesian” central government centric by design: fiscal and monetary policies are modeled to control the economy, mitigating recessions and unemployment.

    But other models haven’t been ruled out. In The Forgotten Depression (2014) James Grant argues that the Depression of 1921 – there was no official designating body at the time – following the end of the Great War cured itself in 18 months due to official benign neglect. In Grant’s view (and many others, including economists living through it) what made the subsequent Depression “Great” was massive political intervention that prevented the required adjustments.

    While the merits and long term effectiveness of “small scale” and “counter-cyclical” measures remain debatable, the merits of the socialist centrally planned economies are not: hundreds of millions died and the remainder suffered economic stagnation while the capitalist world prospered. Only self described democratic socialist Bernie Sanders openly touts the performance of the centrally planned economies, but there isn’t much difference in the government centric policy approach of progressive politicians.

    This macro narrative is generally consistent with anti-capitalist progressive ideology of business, workers and consumers dating back to Marx that is accepted by the majority of more recent college graduates. Economic statistical research across a wide spectrum from discrimination and labor exploitation to income inequality and market failure is offered in support, albeit inconsistent with a competitive market system. The competitiveness of the U.S. economy implies that correlation is too often assumed to imply causation without rigorously considering alternative explanations.

    Creative Destruction Produces Economic Expansion

    Humans owe their very existence to the massive creative destruction of the Cosmos (whether or not by the grace of God) for we are all made from the dust of exploding stars. In the economic sphere, virtually all human economic progress is attributable to capitalist competition and creative destruction, favoring the adaptive over the sluggish. Mathematical models haven’t adequately described entrepreneurial innovation. Progressive intervention to mitigate downside risk of creative destruction, broadly or to specific political constituencies, is highly correlated with stagnation.

    Historically, even natural disasters including pandemics such as the corona virus (I assume it was “natural”) have provided opportunities for creative destruction. Consider, for example, the requirement that university students study online during the pandemic. While traditional colleges aren’t yet offering rebates, we know from experience that without the room, board and administrative costs and with increased productivity of fewer professors, online degrees can be provided for as little as one tenth the cost of the traditional approach.

    Progressive proposals for taxpayers to foot the entire bill for the high cost model may be called democratic socialism but are indistinguishable from democratic crony capitalism for the political elite.

    Kevin Villani

    —-
    Kevin Villani was chief economist at Freddie Mac from 1982 to 1985. 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 how politicians and bureaucrats with no skin in the game caused the sub-prime lending bubble and systemic financial system failure.

    Posted in Book Notes, Economics & Finance, Public Finance | 4 Comments »

    Ruin and Recovery

    Posted by David Foster on 21st March 2020 (All posts by )

    A brokerage note I received recently included the following quote:

    What has so often excited wonder, is the great rapidity with which countries recover from a state of devastation, the disappearance in a short time, of all traces of mischief done by earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire and sword, and destroys or carries away nearly all the moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.

    John Stuart Mill, Principles of Political Economy, 1848

    Questions for discussion:

    –How well has Mill’s assertion held up over the 170 years since he wrote the above?

    –Will American recovery from the Coronavirus follow Mill’s pattern, or is there reason to think that it will be different this time, and not in a good way?

    Posted in COVID-19, Current Events, Economics & Finance, History, Human Behavior | 7 Comments »

    How to fix US empty store shelves in 48 hours

    Posted by TM Lutas on 18th March 2020 (All posts by )

    It’s never a pleasant thing to stand up, alone, in the face of a national mania and provide an unpleasant solution. I’ve been putting it off for some time.

    Finally, I’ve had it. Nobody who does this for a living seems to be willing to step up to the plate so I guess I’m stuck doing the job. The free-market solution to excess demand over supply is to raise prices. We are not raising prices to end the empty shelves because the government in various jurisdictions has made it illegal to raise prices in the face of an emergency.

    Nobody has had the courage to say this. Everyone who has taken a basic economics course in the US knows this. This lack of even discussion on how to fix the empty shelf problem is deeply weird and nobody is talking about the odd silence either.

    Update: Kudos to John Stossel who did address this issue (from a different perspective) a few hours prior to my publishing this. His article is here.

    Posted in COVID-19, Economics & Finance, Politics | 30 Comments »

    SARS-CoV2/COVID-10 Update 3-5-2020 — “As long as you remember to keep breathing and don’t fall asleep, it’s basically just like the flu.”

    Posted by Trent Telenko on 5th March 2020 (All posts by )

    Issues covered will be on COVID-19 spread, World Headlines, the 3-4-2020 Seattle Public Health Press conference, World Headlind Summary, Corruption at the WHO, Bad and good news COVID-19 medical developments. the Political/Demographic Implications of COVID-19 for the Gov’t Elites, and the social media and videos COVID-19 tracking source section.

    Top line, There are currently 97,138 confirmed COVID-19 cases worldwide, including 3,351 fatalities as of the March 5, 2020, at he 4:48pm ET time hack on the BNO News corona virus tracking site (https://bnonews.com/index.php/2020/02/the-latest-coronavirus-cases/) There are 80(+) and growing umber of nations including China plus three “Chinese special administrative regions” (Macao, Hong Kong and Taiwan) that have reported COVID-19 infections. China, Taiwan, Hong Kong, Japan, Thailand, Singapore, Italy, Iran, Germany, R.O.K. and the USA all appear to have local, or endemic, spread of the disease. Russia, Egypt, and Columbia appear to have joined the endemic spread list as well due to airports in the UAE and elsewhere picking up air travelers originating from those nations as sick with COVID-19.

    WORLD HEADLINE SUMMARY (3/5/2020)

    o New Jersey confirms first presumptive case
    o NY state cases double to 22
    o Seattle closes 26 schools
    o Pentagon tracking 12 possible COVID-19 cases
    o Illinois reports 5 more cases
    o NYC reports 2 more cases, raising total to 4
    o Italy postpones referendum vote; death toll hits 148
    o WHO’s Tedros: “Now’s the time to pull out the stops”
    o Tennessee confirms case
    o Nevada confirms first case
    o New Delhi closes primary schools
    o EU officials weigh pushing retired health-care workers back into service to combat virus
    o Italy to ask EU for permission to raise budget deficit as lawmakers approve €7.5 billion euros
    o Beijing tells residents not to share food
    o 30-year-old Chinese man dies in Wuhan 5 days after hospital discharge
    o Cali authorities tell ‘Grand Princess’ cruise ship not to return to port until everyone is tested
    o Global case total passes 95k
    o Lebanon sees cases double to 31
    o France deaths climb to 7, cases up 138 to 423
    o EY sends 1,500 Madrid employees home after staffer catches virus
    o Trump says he has a “hunch” true virus mortality rate is closer to 1%
    o Switzerland reports 1st death
    o South Africa confirms 1st case
    o UK chief medical officer confirms ‘human-to-human’ infections are happening in UK
    o UK case total hits 115
    o Google, Apple, Netflix cancel events
    o HSBC sends research department and part of London trading floor home
    o Facebook contract infected in Seattle
    o Microsoft, Google, Amazon, Netflix cancel events and/or ask employees to work from home
    o Netherlands cases double to 82
    o Spain cases climb 40, 1 new death
    o Belgium reports 27 new cases bringing total to 50
    o Germany adds 87 cases bringing total to 349

    Read the rest of this entry »

    Posted in Big Government, China, Civil Liberties, Civil Society, COVID-19, Culture, Current Events, Dogs, Ebola, Economics & Finance, Iran, Medicine, Middle East, Miscellaneous, USA | 125 Comments »

    SARS-CoV2/COVID-19 Evening Update 2-25-2020: The Pandemic Hide the Name & Blame Games

    Posted by Trent Telenko on 25th February 2020 (All posts by )

    The themes of this update will be on issues of COVID-19 spread, World Headlines, border closings, the CDC news conference, developments with fomite spread, how American Public Health institutions build a liablity law suit proof diagnostic test and how that limits tests for community spread and a new recommended COVID-19 sites, social media and videos section.
     
    Top line, There are currently 80,420 confirmed COVID-19 cases worldwide, including 2,710 fatalities as of the 24 February 2020 at 5:24 p.m. ET time hack on the BNO News corona virus tracking site (https://bnonews.com/index.php/2020/02/the-latest-coronavirus-cases/) There are 39 nations including China plus three “Chinese special administrative regions” (Macao, Hong Kong and Taiwan) that have reported COVID-19 infections. China, Taiwan, Hong Kong, Japan, Thailand, Singapore, Italy, Iran and R.O.K. all appear to have local, or endemic, spread of the disease. Italy has spawned further spread in Spain proper, it’s Canary Islands possession, Austria, Germany, and possibly Croatia. And now Brazil in South America and Algeria reporting a case signals North West Africa have added two new regions to the Pandemic spread list. The virus has spread from Asia to Europe, North America, Australia and Africa.
     
    All of the above meets the pre-COVID-19 WHO standard for a “Pandemic” that requiring endemic spread in multiple nations in multiple WHO regions. However, the WHO just decided that it was time to retire the term “Pandemic” because…something…[insert reasons here]. The WHO statement for doing so was a master piece of unintelligible double talk that boils down to “Lets not scare the “Normies” and set off more “Run, Hide & Hoard” panics like seized Italy, ROK and Singapore in the last few days. Meanwhile the WHO is cheering-on China’s “Hospice-Prison system for the infected” Quarantine as a “Model” in aiding China’s restarting the World economy.
    ITALY COVID-19 Confirmed Cases and Deaths 25 Feb 2020

    ITALY COVID-19 Confirmed Cases and Deaths 25 Feb 2020

     
    World Headline Summary
    o WHO warns the rest of the world “is not ready for the virus to spread…”
    o CDC warns Americans “should prepare for possible community spread” of virus.
    o San Francisco Mayor declares state of emergency
    o Later, CDC says pandemic not a question of it, but when
    o Brazil may have South America’s first coronavirus case
    o Germany confirms 2nd case on Tuesday, brings total to 17
    o Italy cases spike to 322; deaths hit 10
    o Japan’s Shiseido tells 8k employees to work from home
    o Trump Economic Advisor Kudlow tries to jawbone stock markets higher
    o HHS Sec. Azar warns US lacks stockpiles of masks
    o Italy Hotel in Lockdown After First Coronavirus Case in Liguria
    o Algeria confirms 1st case
    o First case in Switzerland
    o Kuwait halts all flights to Singapore and Japan
    o Iran confirms 95 cases, 15 deaths
    o First case in Austria
    o Spain reports 7 cases in under 24 hours, including in Madrid, Canary Islands, Barcelona
    o Iran Deputy Health Minister infected with Covid-19
    Pandemic Border Closures
    Turkey, Iraq, Kuwait, Afghanistan, Pakistan, Turkmenistan, Georgia, Armenia, and UAE blocked border crossings by Iranians.
    Russia, North Korea and Vietnam are blocking border crossings from China
    Austria and Switzerlan are blocking border crossings from Italy.
    El Salvador on Tuesday announced it would prevent entry of people from Italy and South Korea.
     

    Read the rest of this entry »

    Posted in Big Government, Bioethics, China, Civil Liberties, Civil Society, COVID-19, Current Events, Economics & Finance, Health Care, Iran, Medicine, Middle East, Miscellaneous, National Security, North America, Politics, USA | 28 Comments »

    Wages, Employment, and Productivity

    Posted by David Foster on 21st February 2020 (All posts by )

    I think President Trump is quite sincere about his oft-stated desire to drive up the wages of low-income workers…especially young and non-college workers…and he does seem to be having some success at this quest.  It has struck me for a while that while this is a very good thing from the standpoint of the overall society, it is also likely to pressure business profit margins, with possible consequences for the stock market as well as for Fed policy.

    Yesterday the WSJ noted that “wages for 20- to 24-year olds are increasing twice as fast as for other workers…Overall job satisfaction in 2018 was the highest since 1994.”  At the same time, “90% of blue-collar businesses report operating with unfilled positions, and 29% say this has made them reduce output or turn down business.  Rising wages together with sluggish productivity growth are crimping corporate profits.  Between the fourth quarter of 2014 and the second quarter of 2019, profits for nonfinancial corporations  declined 17% and 46% for manufacturers.   The article quotes the Conference Board:  “The US will not be able to maintain its current standard of living unless the US government acts to significantly increase immigration, improve labor force participation, and, together with employees, raise labor productivity growth.”  To which the WSJ writer adds:  “Maybe the only short-term fix is to increase legal immigration–unless Americans want to see their living standards decline and more jobs exported.”

    Higher wages do of course drive productivity improvement…the US has been a pioneer in the mechanization of work in large part because it has been a high-wage country, and that mechanization has helped to enable further wage increases.  This doesn’t always require any new inventions:  there are always productivity tools available that will make sense to a business that is paying $25/hour for labor but would not make sense to one paying $15/hour.  The process isn’t instantaneous, though.

    Concerning immigration as a solution to labor shortages: commentators sometimes lose sight of the fact that GDP per capita matters for broad-based prosperity, not just absolute GDP.  And the only way to increase GDP per capita is through productivity improvements and higher labor force participation rates.  Increasing the raw number of workers doesn’t do this.

    The Conference Board statement appears to put a lot of emphasis on things that the government should do, and the WSJ emphasizes more (legal) immigration.  Some increases in legal immigration may well be a good idea…as would increases in American fertility rates…but the main issues, I think, are productivity and the labor force participation rate.  The actual productivity numbers don’t reflect all the talk about (and even the realities of) robotics and AI.  Maybe this is largely just a matter of implementation lags, maybe it reflects increasing bureaucratization and ‘compliance’ costs throughout our economy.

    My concern is that margin pressure may lead (in conjunction with other factors, like already-high valuations) to a sharp stock-market decline, which could have electoral implications.  Such decline might also lead to many deferrals of productivity-improving investments.  Alternatively, Fed concerns about rising wage rates as a possible signal of incipient inflation could lead the central bank to increase interest rates excessively as a preventative.

    And any electoral result which substantially increases Democratic party power could lead to massive upsurges in legal and illegal immigration, with consequent wage pressures, demoralizing many workers who are now on an positive track and deferring the need for productivity investments.  Any attempt to deal with such wage pressures by establishing high Federal-level minimum wages would add much rigidity to the systems, creating problems of many kinds.

    Discuss, if you feel so inclined.

    Posted in Business, Economics & Finance, Elections, Tech, Trump, USA | 21 Comments »

    Democratic Presidential Candidates Debate the Origins of the 2008 Financial Crisis and Systemic Failure

    Posted by Kevin Villani on 18th February 2020 (All posts by )

    Are greedy racist “Wall Street” bank lenders responsible, or progressive politicians?

    The housing finance systems of some developed countries have failed, but only the U.S. federally dominated system failed systemically twice in two decades, the second time in 2008 with global repercussions. Then Republican Mayor of New York now 2020 Democratic presidential candidate Michael Bloomberg blamed politicians for pushing lenders to make loans to “poor people” in low income neighborhoods that they couldn’t afford. 2020 progressive Democratic presidential candidate Warren, apparently reflecting the views of the Party, responded to Bloomberg: “That crisis would not have been averted if the banks had been able to be bigger racists.” 

    The Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 creating Warren’s proposed Consumer Financial Protection Bureau and the Financial Stability Oversight Council (FSOC) to Monitor and Mitigate Systemic Risk made up of the various financial regulators reflects the Warren/Democratic narrative. This narrative is the foundation of not just housing and financial sector policy proposals, but the entire progressive agenda.

    I’m from the federal government and I’m here to help you.

    That’s the punch line to the joke about the three biggest lies Pres Martin used to tell about a half century ago as past Chairman of the Federal Home Loan Bank Board (FHLBB) (hence Freddie Mac’s first Chairman) and Vice Chairman of the Federal Reserve System.

    The first wave of “help” came after the repeated waves of bank failures with the creation of the Federal Reserve System in 1913. The second wave came during the Great Depression with deposit insurance and associated regulation of the banking and savings and loan industries. This was followed by the creation of FHA mortgage insurance: to stimulate FHA demand, Fannie Mae was created make a market for which there were few buyers or sellers. By the late 60’s, rather than end a failed experiment Fannie Mae was “privatized” and the public monopoly was subsequently expanded to a tri-poly with the addition of Freddie Mac and Ginnie Mae, all funding fixed rate mortgages (FRMs) first introduced by FHA. As Milton Friedman famously said, “there is nothing so permanent as a temporary government program.”

    It didn’t help potential borrowers much. The resulting federally dominated U.S. Housing Finance System had been touted as the best in the world, a model to emulate for developed, developing and transitioning economies alike during the three decades prior to the 2004-2007 sub-prime mortgage lending debacle and globally systemic financial crisis of 2008. But the benefits are hard to identify: the U.S. homeownership rate is about the same as in the mid 1960’s under the prior savings and loan system in spite of a 50% increase in female labor force participation, a historically low real interest rate and a dramatic shift from detached single family to condo apartments.

    Civil rights legislation culminating in the Fair Housing Act of 1968 made racial discrimination in home sales a federal crime. The black homeownership rate which rose more than that for whites during the 2004-2007 sub-prime lending spree has returned to about where it was during the 1960’s.

    Market Discipline versus Public Regulation

    It didn’t help existing lenders much either. In the 1970’s federally sponsored agencies competed directly with federally chartered savings and loans whose investments were limited by regulators hamstrung by politicians to FRMs, forcing them to borrow short and lend long with callable insured deposits. Systemic failure was assured when interest rates rose as they did in the late 1970’s, with failures strung out over the 1980’s as regulators seized but often didn’t close zombie institutions, often run by academics.

    Systemic risk, the simultaneous failure of many or all firms (and households) in an industry or across industries, primarily afflicts mixed progressive financial systems, i.e., those with privately owned but publicly regulated financial institutions. Firms in an un-or-less regulated market economy may be fragile but “Wall Street” traders mitigate systemic risk by betting against weak firms and industries, either forcing corrective action or failure– hence the derogatory political reference to “speculators.” At the other extreme, state owned financial firms generally fail financially but face only a political bankruptcy constraint.

    Two types of progressive policies created systemic risk. First those intended to mitigate the failure of individual firms with public insurance and prudential regulation, making failure less frequent but more systemic. Regulators prevent commercial bank failures purportedly to protect public confidence in the payments mechanism. Second are those policies intended to universally favor borrowers and/or creditors – like requiring mortgages to have a fixed rate – making systemic failure more likely and more costly.

    Underwriting Mortgage Credit Risk: Discrimination and “Disparate Impact”

    With the exception of the Great Depression and 2008 financial crisis, home mortgage credit losses had been “Gaussian (normally distributed),” that is, they followed a predictable pattern that allowed them to be insured according to the law of large numbers, for all practical purposes eliminating uncertainty, hence risk.

    Loan data during the sub-prime lending debacle unambiguously supports Bloomberg as minority lending skyrocketed. Progressives imputed racist motives to excessive minority lending, arguing that “predatory” lenders “tricked” minorities into accepting loans they couldn’t afford so they could later foreclose. There is some truth to the first part, as banks solicited minority borrowers with loans they had to know were risky. But they had little incentive to foreclose, as that always resulted in a deep loss. What did motivate lenders?

    Homeownership was no more affordable for black households during the 2004-2007 sub-prime lending bubble than it was in the 1960’s for a variety of reasons. But current Democratic presidential candidate Deval Patrick argued in 1994 as Deputy Attorney General of the Department of Justice that any final lending distribution that contained racial disparities—disparate impact—relative to population was a violation of federal law unless the lender could prove otherwise. Such “proof” of non-discrimination would be difficult to produce at best, since the disparity itself was considered proof of racial prejudice, and the cost of a legal defense is generally crippling. This was called “confiscation by consent decree” at the time and later “extortion by consent decree” for which Gaussian credit risk models didn’t apply.

    Avoiding Black Swans

    Former trader –now internationally recognized risk expert – Nicholas Nassim Taleb describes in his 2007 book The Black Swan “how high impact but rare events dominate history, how we retrospectively give ourselves the illusion of understanding them thanks to narratives, how they are impossible to estimate scientifically, how this makes some areas – but not others – totally unpredictable and unforecastable, how confirmatory methods of knowledge don’t work, and how thanks to Black Swan-blind “faux experts” we are prone to building systems increasingly fragile to extreme events.”

    Was the 2008 systemic failure an unpredictable Black Swan event? Politicians and their regulators who push the “Wall Street greed” narrative argued that nobody could have foreseen it, but Taleb exempts only economist Nouriel Roubini Crisis Economics (2010) from that delusion, who (pg. 16) concludes “it was probable. It was even predictable…” based on the failure of prudential regulation. But how did that fail? Systemic failure had long been predicted (by me and others, including the Federal Reserve) based on the progressive policies that attributed illegal racial discrimination motives to traditional income and appraisal underwriting.

    No Skin in the Game

    The sub-prime lending bubble of 1995 through 1998 financed with opaque securities issued by independent finance companies that following SEC rules reported phantom profits burst with no systemic consequences. By 2000 many of these former sub-prime lenders and securitization practices had migrated to the federally insured commercial banks in part to finance Community Reinvestment Act (CRA) lending commitments. These increased 500 fold after the deregulation of interstate Banking in 1994 when discretionary regulatory permission for M&A activity was held hostage to a favorable public CRA Report. Pushed by regulators and pulled by the big potential M&A payoff, borrower down payment requirements were virtually eliminated and bank “regulatory arbitrage” minimized capital requirements, virtually eliminating any Skin in the Game (Taleb, 2018). This asymmetric “trade” was irresistible.

    The Perfect Storm

    The Big Short by Michael Lewis presents the progressive narrative of “greedy” speculators who were shorting the housing market but doesn’t explain why they failed to prevent the bubble from inflating to systemic proportions by bankrupting lenders. The reason is that the cheap Federal Reserve credit continued to be channeled to the housing bubble by Fannie and Freddie. Historically conservative, they were now led by politically anointed CEO’s who, facing no bankruptcy constraint, willingly followed the path to perdition. This path was paved by HUD’s “Mission Regulator” who not only ratcheted up the lending goals well beyond prudent limits but in 2005 imposed a new goal that they maintain a 50% market share with these private lenders. Propped up by the federal government, all the big players were going for broke simultaneously.

    This was guaranteed to fail. Financial institutions reported several trillion dollars (pgs. 157-158) of home mortgage credit losses after the bubble burst and 10 million homeowners lost their homes over the next six years in spite of massive government efforts to avoid or delay foreclosure. Like the lending bubble, the foreclosure bubble was much bigger for minorities. Yet The Financial Crisis Inquiry Commission Democrat Majority Report (2010) spun the narrative that the systemic “risk” was due mainly to traditional liquidity concerns.

    I’m from the federal government and I’m here to blame you.

    That’s no joke. During the Obama Administration Patrick, then Governor of Massachusetts led the multi-state suit against lenders alleging discrimination in foreclosures based on disparate impact. At the same time, current DNC Chairman Tom Perez was pursuing “disparate impact” cases against lenders under the Fair Housing Act as Attorney General Eric Holder’s Deputy.

    In a 2009 Financial Times editorial Taleb proposed ten principles to avoid a repeat of 2008:

    What is fragile should break early, while it’s still small.

    No socialization of losses and privatization of gains.

    People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.

    Don’t let somebody making an incentive bonus manage a nuclear plant – or your financial risks.

    Compensate complexity with simplicity.

    Do not give children dynamite sticks, even if they come with a warning label.

    Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence.”

    Do not give an addict more drugs if he has withdrawal pains.

    Citizens should not depend on financial assets as a repository of value, and should not rely on fallible “expert” advice for their retirement.

    Make an omelet with the broken eggs.

    All good advice, all ignored by politicians and regulators who created the Rube Goldberg dystopia they rail against.

    —-

    Kevin Villani

    Kevin Villani was Chief Economist at Freddie Mac from 1982 to 1985 and HUD from 1979-1982. He 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, Economics & Finance, Public Finance | 11 Comments »

    COVID-19 Update Morning 2-14-2020

    Posted by Trent Telenko on 14th February 2020 (All posts by )

    There are currently 65,213 confirmed COVID-19 cases worldwide, including 1,486 fatalities. Of which 4,823 new cases and 116 new deaths were reported in Hubei province, China.
    .
    There are several trends in this update, as well as the headline summary. First Community spreading of COVID-19 is now established in Hong Kong (attached graphic), Japan and Singapore.
    COVID-19 in Hong Kong

    COVID-19 in Hong Kong

    .
    Second, the shut down of China as an economic power seems near complete. See the JP Morgan coal for electricity usage and the Goldman Sachs economic projection charts attached to this post. The JP Morgan chart shows that while traditionally daily coal consumption – the primary commodity used to keep China electrified – rebounds in the days following the Lunar New Year collapse when China hibernates for one week. This is not the case this now. There hasn’t been even a modest increase, indicating that so far there hasn’t been a return to work.
    .
    2020 Chinese Coal/Electrical Consumption

    2020 Chinese Coal/Electrical Consumption

    .
    Short Form — Lack of Chinese coal use/electric power generation indicates the scale of Chinese industries that are shut down…AKA near total.
    .
    And the “Just-In-Time/Sole-Source in China” world-wide, Multi-national corporation, economic shut down virus is gathering a huge economic momentum. Nissan has shut down auto production in addition to South Korea’s Hyundai for lack of Chinese parts. Rumor has it that Ford has the same issue — as their heater coils in their autos are sole sourced in China — and will soon shut down auto production.  Anything cheap or disposable in the world economy is sourced in China, and the Chinese economy is now off-line for the foreseeable future.
    Near Term Economic Projections for China

    Near Term Economic Projections for China

    .
    Third, China is again playing games with COVID-19 numbers and particularly the announced deaths to keep the death rate at 2.1%, saying deaths were “double counted”?!? (See JP Morgan graphic).
    .
    Dodgy Chinese COVID-19 Infection Numbers

    Dodgy Chinese COVID-19 Infection Numbers

    .
     This has been ‘officially noticed’ by the White House.
    .
    See:
    White House does not have ‘high confidence’ in China’s coronavirus information, official says
    .
    .
    Fourth, American COVID-19 are now officially 15 with a case in San Antonio, Texas from a Wuhan evacuation flight and no deaths. I say “officially” as there possible COVID-19 death in Boise, ID. See:
    .
    .
    The possible COVID-19 victim was a 71-year-old man found dead on Feb 9 in an advanced state of decomposition. He returned from China Feb 5. The initial testing came up negative, but additional tests are being run. The cause of death has not been released.
    .
    An idea of what “Community spreading” in Singapore means can be seen in the following report:
    .
    “Singapore Casino employee confirmed with COVID-19; symptomatic Feb 5, hospitalized Feb 9
    On February 13, 2020, the Central Epidemic Command Center (CECC) pointed out that the confirmed case of coronavirus disease 2019 (COVID-19) in Singapore announced on February 11 is an employee at the casino in Resorts World Sentosa Casino. The employee developed symptoms on February 5 and was hospitalized in isolation on February 9. Travelers who visited the casino during the communicable period (February 4-9) are advised to call 1922, put on a face mask and seek immediate medical attention as instructed if suspected symptoms develop within 2 weeks. Moreover, such travelers should inform the physician of any relevant travel history when seeking medical attention.”
    .

    .

    World Headline Summary:
    .
    o China says 1,716 medical workers have been infected
    o Singapore reports largest daily jump in cases amid increased human-to-human transmission
    o Hong Kong reports 3 new cases
    o Hubei’s new party boss orders quarantine tightened
    o President Xi touts new “biosecurity law”
    o Hong Kong Disney land offers space for quarantine
    o Chinese company says blood plasma of recovered patients useful in combating the virus
    o US mulling new travel restrictions

    -end-

    Posted in China, Civil Society, COVID-19, Current Events, Economics & Finance, Energy & Power Generation, Health Care, Medicine, Politics, Urban Issues, USA | 59 Comments »

    The Roaring Twenties, Revisited

    Posted by David Foster on 6th February 2020 (All posts by )

    Here’s a piece that mentions some of the technological, social, and economic trends that were important in the 1920s, and goes on to discuss seven tipping points that the author thinks will be key in the 2020s.

    Posted in Economics & Finance, Energy & Power Generation, History, Society, Tech, USA | 13 Comments »

    Are Professional Economists Idiots?

    Posted by Kevin Villani on 21st January 2020 (All posts by )

    That’s the view of Nassim Nicholas Taleb, Wharton MBA, mathematical finance PhD and author of Skin in the Game and The Black Swan.

    Taleb, a libertarian, aims his critique of intellectuals yet idiots (IYI) broadly but particularly at the contemporary economics profession. His targets are those described by the Mises Institute:

    “The professional economist is the specialist who is instrumental in designing various measures of government interference with business.”

    The economics profession in the U.S. today is mostly involved in research and education that broadly investigates “market failures” or is directly engaged in public action – regulation, tax, expenditure and off budget guarantees – to manage industries and the macro-economy purportedly in the public interest. This is the opposite of laissez faire economics, political advice to a 17th century French minister to “let it be” later developed into an economic theory by the 18th century philosopher Adam Smith and popularized by 20TH century economist Milton Friedman, a libertarian and cofounder of FFE (and my advisor, twice removed). How and to what end did the economics profession evolve from a philosophy of leaving economic decisions to individuals in the marketplace with few exceptions to public economic management of the United States and global economy?

    From Individual to Collective Economic Decision-making

    Benjamin Franklin, considered the leading intellectual and inventor of the 18th century whose inventions are still in use today, admitted to Harvard at age 12, but instead indentured to his brother’s tannery, advised

    “Tell me and I forget, teach me and I may remember, involve me and I learn”

    That’s his rendering of a Confucian saying dating back thousands of years. Taleb, a Wall Street trader prior to his writing and academic career, echoes Franklin’s emphasis on direct experience, arguing that capitalism isn’t an ideology or system but a set of mutually agreeable arrangements worked out over the centuries through trial and error by market participants who bear the full consequences of their decisions.

    Exiting the Constitutional Convention, Franklin, a great political theorist, when asked whether the Constitution had created a monarchy or republic replied

    “a republic, if you can keep it.”

    Taleb argues that if given the choice Franklin would have more accurately described the Constitution as a federation with powers over economic activity limited to promoting free trade among states. But these limits were lost more than a century later when progressive President Woodrow Wilson first created the Federal Reserve System then used entry into the war to “make the world safe for democracy” as the means to create the “modern state” managed on scientific economic principles. A half century later, focusing on the “principal –agent” problem of the modern corporation run by managers who had no “skin in the game” John Kenneth Galbraith in The New Industrial State (1967) argued for public management by an intellectual elite, replacing business experience with academic success.

    From Competitive to Crony Market Capitalism and Rent-Seeking

    Franklin had warned the Convention delegates that

    “We must all hang together or most assuredly we will all hang separately.”

    The libertarian U.S. Constitution never mentioned democracy, and principal-agent conflicts are orders of magnitude worse in the public sector. As public choice theorists have since noted, we neither hang deep state managers nor otherwise hold them accountable. Democracy may depend on the deep state as political theorist Francis Fukuyama argued in a recent Wall Street Journal article (12/20/2019), but it can’t hold it accountable, as Michael Lind argued in a subsequent Journal article. Accountability erodes with each additional layer of government as decisions are elevated from “at risk” individuals in the marketplace to private, local, state, and federal governing bodies and is virtually eliminated at international entities (e.g., the IMF and World Bank). In no case is democracy a substitute for markets because the most intolerant minority with the most to gain or lose inevitably dominates.

    Market capitalism is the source of all human economic progress. Is there a sufficiently good reason for collective economic management? Adam Smith never argued in his Theory of Moral Sentiments (1759) that the invisible hand was perfect: the actual full quote favored nationalism over globalism. In The Wealth of Nations (1776) he did say:

    “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”

    same paragraph
    but in the same paragraph admonished government from any attempt to do anything about it. Britain had long been what we now call a crony capitalist economy that heavily favored the political elite, which in Smith’s view further government intervention would only exacerbate.

    Taleb’s “idiots” are Galbraith’s inexperienced intellectual elite economic managers and advisors who have no skin in the game. Professional economists are generally smart, rational (many ideologically dedicated ”virtue merchants”) exploiting a one sided trade, in economic jargon crony “rent seekers” – redistributing income (rents) from the generally lower income non-politically connected. (I would argue there is a minority in resistance, primarily in business schools and conservative think tanks.) It’s their statistical analysis and reasoning to justify rent seeking opportunities he often finds idiotic, faux science or scientism.

    Public intervention to mitigate downside risk (as do e.g., public pension and retirement systems, housing, school and other entitlements, loan and deposit guarantees and other forms of insurance (e.g., flood) that can supposedly be financed without pain by taxing the idle rich or unlimited debt financed by money printing (Modern Monetary Theory) is a religion promising heaven without the threat of hell. Come Judgment Day when the system fails systemically, well insulated politicians and bureaucrats will subsequently label it “an extremely rare and random “Black Swan” event that nobody could have seen coming” and professional economists will join the chorus. The general public gets fleeced and market capitalism gets blamed.

    Name any of sixty economic issues and presidential candidate Elizabeth Warren has a plan. The lyrics to the Beatles swan song album of a half century ago concludes “whisper words of wisdom, let it be.

    Kevin Villani

    —-

    Kevin Villani was chief economist at Freddie Mac from 1982 to 1985. 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 how politicians and bureaucrats with no skin in the game caused the sub-prime lending bubble and systemic financial system failure.

    Posted in Book Notes, Economics & Finance, Public Finance | 25 Comments »

    Shovel That Code

    Posted by David Foster on 11th January 2020 (All posts by )

    …into that server!

    Joe Biden gave coal miners facing possible unemployment some advice:  learn to code.

    In reality, of course, programming/coding is a skill that can exist on multiple levels.  Someone writing a simple spreadsheet model for some kind of repetitive tracking problem is working at a different level from someone writing a well-defined module within a large system for a bank, who is in turn working at a different level from someone writing interrupt-level hardware drivers for an operating system, or for someone creating the idea and user interface, as well as the code, for a new consumer-facing product.  Some of these tasks will usually pay less than what a skilled coal miner is paid, some of them will pay considerably more.

    And also, programming is not an infinite reservoir of job demand. Much work that previously required considerable high-skill programming has now been largely automated by software tools and/or by complete application systems, and considerable programming work is being offshored–see my post telemigration.

    Biden also asserted that:  “Anybody who can throw coal into a furnace can learn how to program, for God’s sake!”

    Ignoring the inherent ridiculousness of this claim as a factual assertion…does Biden actually think that manual stoking of coal furnaces is a thing in today’s economy?  Does the Bureau of Labor Statistics show a large count of people employed as stokers?

    In reality, the mechanical stoker was invented well over a century ago.  They were common in high-horsepower steam locomotives by 1900, and were and are used in coal-fired power plants.  I doubt if there was much manual stoking going on by 1940, except on steamships…and coal as a fuel for ships was rapidly on its way out by that point, as it was being displaced by oil

    Plus, Biden was talking about coal miners.  Does he think that there are coal-fired furnaces in coal mines?  If there were, you would likely get a massive explosion from igniting of any gas in the mine.

    Biden clearly understands as little about the software industry as he does about the energy industry.

    This is the man who says he was Obama’s point man on a “jobs of the future” initiative.

    Can you imagine what these people would do to the economy if they ever achieved the degree of power that they so avidly seek?

     

     

    Posted in Big Government, Economics & Finance, Elections, Energy & Power Generation, Tech | 24 Comments »

    What Future for the Global Auto Industry? Discussion Post

    Posted by David Foster on 7th January 2020 (All posts by )

    In December, I announced an upcoming discussion of the future of the auto industry and, in particular, of the role and impact of electric cars.  In that post, I included a number of links to worthwhile reading on the subject.  Let’s do the discussion this week, in comments to this post.  I have a few thoughts to get things going:

    –It is true, as Vitaliy Katsenslson points out in his essay, that electric cars are much simpler than conventional cars…but I would qualify this statement as mechanically simpler than conventional  cars.  They are significantly more complex electrically and especially in terms of the electrochemistry of the battery…a hidden kind of complexity, but important nonetheless. From what I have read, there seems to be considerable uncertainty about the expected lifespan of new lithium-ion battery models..which lifespan, of course, has a major impact on the overall economics of electric cars.

    EVs are expected to have lower maintenance costs and requirements than conventional vehicles, based on their relative mechanical simplicity.  This is probably true, in general, although a lot of the problems with cars these days seem to be with systems other than the engine and drivetrain..airbag sensors, seat actuator motors, various sensors, etc.

    –Range limitations and “range anxiety” have been significant inhibitors to EV sales.  Vitaliy K makes the excellent point that it is much easier to set up an electric-vehicle charging station than a conventional gas station, with its underground tanks and consequent regulatory complexities, and he believes we will see tremendous growth in the number of such charging stations and consequent reductions in EV range anxiety.

    It takes about 45 minutes to an hour to fully charge an EV (using Tesla as a model and assuming a high-power charger such as Tesla’s “Supercharger’), which implies that people are going to need something else to do while their vehicles are charging, away from home or the office.  Restaurants and shopping centers become obvious venues for charging; however, this leads to another issue, that the driver may wind up being away from the car for a couple of hours or more, tying up the charger for that whole interval: this issue would need to be reflected in the pricing of the charging facility.

    Also, while it is true that setting up EV charging is simpler than opening a gas station, it is not necessarily trivial if one is setting up multiple high-capacity chargers.  A Tesla supercharger draws 150KW, so putting 30 of them in a parking lot would result in an incremental peak demand of up to 4.5 megawatts.  I doubt if the electrical systems feeding many restaurants, or even shopping centers, could accommodate 4.5MW of additional demand without some work by the utility supplying the power.

    –Efficiency:  It is true that the conversion of stored energy into motion is much more efficient in an EV than an internal-combustion-engine vehicle; this is mainly a matter of the engine thermodynamics.  BUT, if the charging electricity comes from a natural gas plant of a coal plant, you are looking at best at a 60% fuel-to-electricity conversion efficiency, and there will also be losses in power transmission and distribution.  If the electricity comes from solar or wind, then..depending on the time of day and weather conditions of the charging..you may be faced with a double battery storage situation, where energy is stored in a utility or home battery until needed for charging, and then stored again in the vehicle’s battery.  That double-storage situation carries both efficiency losses and, more significantly, additional capital costs.

    EVs do have the ability to capture much of the energy that would otherwise be lost in braking, and this is especially valuable in start-stop driving situations, as with local delivery operations, and probably extends the lifetime of the mechanical brakes.

    –Performance…EVs have excellent acceleration capability (when adequately powered) due to the torque characteristics of electric motors.  They may be able to achieve very good handling if battery installation provides for a very low center of gravity.

    –Climate…not speaking here about ‘climate change’, but about climate in its ordinary meaning.  In a conventional car, heating is basically free, using rejected heat from the engine (ignoring the energy used to power the fan, but that’s a small part of the picture), whereas in an electric car, heat must be generated using electricity from the battery, which of course has a negative impact on range.  Also, the battery itself will have lesser performance in cold weather.  (And the regenerative braking feature is also limited in very cold weather.)

    –Relative Costs…a high % of EVs today are either sold with subsidies by national/local governments, are built and sold in response to government edicts, or are bought in significant part for status purposes by individuals and organizations. Can EVs compete on cost head-to-head with IC vehicles on a nonsubsidized, free-choice basis?  This would seem to be largely a matter of how successfully battery costs are further driven down and how long battery lifespans turn out to be in actual service.

    It should be noted that electric vehicle sales in China have cooled rapidly…down 44%…since the government reduced most subsidies at the end of June.  What would be the ‘true’ demand in the US without consumer incentives and mix requirement on the manufacturers?

    Read the rest of this entry »

    Posted in Business, Economics & Finance, Energy & Power Generation, Environment, Marketing, Transportation | 43 Comments »

    Business Stories

    Posted by David Foster on 8th December 2019 (All posts by )

    We’ve talked before here about the point that most fiction seems to be about people who are lawyers, policemen, criminals, soldiers, spies, students, politicians, and noble but struggling writers. But there are indeed some works of fiction, and some vivid personal memoirs, in which business plays a central role without being portrayed simplistically or as stereotypically evil. Here are some that I like…please add your own favorites in the comments.  (I posted this at Ricochet, in slightly different form, about a week ago)

    The Current War, a recent movie about the late-1800s power struggle to determine which technology…AC or DC…will dominate America’s electrical distribution system. Edison, Westinghouse, and Tesla are the key characters, played by Benedict Cumberbatch, Michael Shannon, and Nicholas Hoult respectively. My review is here.

    The Big Short, a 2015 film about the 2007-2008 financial crisis, based on Michael Lewis’s book. A hedge fund manager concludes that the subprime-loan market is not sustainable, and makes a billion-dollar bet against the relevant mortgage-backed securities. Based on real events. I thought it was very well done.

    God is an Englishman, R F Delderfield. Following his return to England from the Crimean War, Adam Swann identifies a business opportunity: although railroads are being built throughout the country, there will always be sources and destinations of freight which are not on the tracks. Hence, the potential for a nationwide gap-filling road haulage business based on the systematic use of horse-drawn wagons. (This is the first book of a three-book series called the Swann Family Saga.)  Reviewed here.

    Oil for the Lamps of China, Alice Tisdale Hobart. This 1933 novel is about a young American working as a sales rep in China, focused on selling oil for his employer (unnamed, but clearly based on Standard Oil) and increasing volumes by promoting the kerosene lamp as a better alternative to traditional lighting methods. The book was the basis for a 1935 movie of the same name…the film has its moments, but overall is not worthy of the book.

    Father, Son, and Company, by Thomas Watson Jr. This is the best business autobiography I’ve read. It’s about Watson Jr (the long-time CEO of IBM), his difficult relationship with his father, the company they built, and the emergence of the computing industry. It is an emotional, reflective, and self-critical book, without the kind of “here’s how brilliant I was” tone that afflicts too many executive autobiographies. I reviewed it here.

    A Man in Full, by Tom Wolfe. The central character of this 1988 novel is Charlie Croker, an Atlanta real-estate developer who has gotten himself into way too much debt. Other characters include Charlie’s current and former wives, the Black mayor of Atlanta, the bankers who must deal with the debt problem, and a warehouse worker at one of the Croker enterprises. The book also casts a not-very-complimentary light on the Atlanta society/arts scene.

    Trial by Fire, Stephen Buck. The adventures of a Honeywell field engineer in the early days of process-control computing. The book’s title reflects the point that the industrial processes being controlled frequently involved combustion, sometimes in scary circumstances. Much of the author’s work took place outside the US, in countries ranging from Poland to Brazil.

    Read the rest of this entry »

    Posted in Academia, Arts & Letters, Aviation, Biography, Book Notes, Britain, Business, Economics & Finance, Film, Tech, Transportation, War and Peace | 8 Comments »

    Robot Gets Hired, Tries Hard, But Can’t Do the Job

    Posted by David Foster on 16th November 2019 (All posts by )

    At Boeing.

    Those fearing imminent mass unemployment driven by robots and AI should be following stories like this.  They also should be looking at the actual productivity numbers.

    See also the details of work and the realities of automation.

    Posted in Aviation, Business, Economics & Finance, Tech | 21 Comments »

    Book Review: Red Plenty, by Francis Spufford

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

    Red Plenty by Francis Spufford

    —-

    The idea of centralized economic planning is a very seductive one.  It just seems to make sense that such planning would lead to more efficiency…less waste…and certainly less unnecessary human suffering than an environment in which millions of decision-makers, many of them in competition with one another, are making their own separate and uncoordinated decisions, resulting in pointless product redundancy, economic cycles driving unemployment, and lots of other bad things.

    Red Plenty…part novel, part nonfiction…is about the Soviet Union’s economic planning efforts as seen from the inside.  The characters include factory managers, economic planners, mathematicians, computer scientists, and “fixers.”  Published in 2010, Red Plenty is now quite timely in view of the current vogue for socialism in American political discussion.

    Marx drew a nightmare picture of capitalism, when everything was produced only to be exchanged; when true qualities and uses dropped away, and the human power of making and doing itself became only an object to be traded.  The alternative? A dance to the music of use, where every step fulfilled some real need, did some tangible good, and no matter how fast the dancers spun, they moved easily, because they moved to a human measure, intelligible to all, chosen by all.

    How might this actually be accomplished? Stalin mocked the idea that planning an economy required much in the way of intellectual depth or effort.  Get the chain of command right, Stalin seemed to be saying, build it on the right ideological principles, and all that was left was a few technical details, a little bit of drudgery to be carried out by the comrades at Gosplan with the adding machines.  But it turned out to be a little more complicated than that.

    Maksim Maksimovich Mokhov is one of the lords of the Gosplan file room, in which there are hundreds of folders, each tracking the balances and plans for a particular commodity. A good man, who takes his job seriously, Maksim has risen as high as you could go at Gosplan before the posts become purely political appointments..his was the level at which competence was known to reach its ceiling…Not just a mechanical planner, he realizes that the file folders  cast only the loosest and most imperfect net over the prodigious output of the economy as the whole, and has worked to understand the stress points, the secret path dependencies of the plan.  His specific responsibility is the chemical and rubber sector, and he is particularly concerned, at the time when he enters the story, about problems in the viscose subsector.

    Arkhipov, Kosoy, and Mitrenko run one of the most important plants in the viscose supply chain, and they are three worried men.  The plan goals aren’t being met, and they know that the path to career death is separated by only a few percentage points of plan fulfillment from the other one, the upward path, the road to glory and local fame. (A couple of decades earlier, it wouldn’t have been just career death on the table.) This plant makes two viscose-derived products, yarn and tire cord.  The yarn line works fine, the tire cord line, not so much…but no problems with the machine can be found.  There is no prospect of getting a replacement machine in any relevant timeframe.

    Arkhipov and his associates come up with a plan to solve their problem…read the book to see what it is and how it turns out.

    Nikita Khrushchev, in September 1959, told a crowd that “the dreams cherished for ages, dreams expressed in fairytales which seemed sheer fantasy, are being translated into reality by man’s own hands.”  Modern technology, combined with the benefits of a planned economy would make it possible.

    Because the whole system of production and distribution in the USSR was owned by the state, because all Russia was (in Lenin’s words) ‘one office, one factory’, it could be directed, as capitalism could not, to the fastest, most lavish fulfillment, of human needs.  

    The American exhibition in Moscow in mid-1959 (site of the “kitchen debate” between Khrushchev and Nixon) was attended by 3 million Soviets (including some of the characters in this book), and although many of them thought that the American claims of broad-based prosperity were exaggerated or worse, the experience surely helped feed the longing for a better life for the Soviet Union’s ordinary people.

    Leonid Vitalevich Kantorovich pioneered the application of mathematics to the optimization of economic activities…these methods surfaced as a possible toolkit for the planning organizations circa 1960. Could these methods help achieve Khrushchev’s stated goal of broad-based prosperity?

    For example, consider several factories, producing a common set of products but with different efficiency characteristics.  Which products should be made by which factories in order to optimize overall efficiency? A set of equations can be constructed representing the constraints that must be observed–labor, machine utlization, etc–and the relative weighting of the variables to be optimized.  Although these techniques have been used to a considerable degree in capitalist countries, they would seem tailor-made for a starring role in a planned economy.  Selling the new methods in the Soviet Union, though, could be tricky:  the linear-programming term “shadow prices”, for example, sounded like something that might have politically-dangerous overtones of capitalism!

    One of the first applications involved potatoes, the distribution of same. The BESM (computer) is using Leonid Vitalevich’s shadow prices to do what a market in potatoes would do in a capitalist country–only better. When a market is matching supply with demand, it is the actual movement of the potatoes themselves from place to place, the actual sale of the potatoes at ever-shifting prices, which negotiates a solution, by trial and error.  In the computer, the effect of a possible solution can be assessed without the wasteful real-world to-ing and fro-ing, and because the computer works at the speed of flying electrons rather than the speed of a trundling vegetable truck, it can explore the whole of the mathematical space of possible solutions, and be sure to find the very best solution there is, instead of settling for the good-enough sollution that would be all there was time for, in a working day with potatoes to deliver.

    And even in the planned Soviet economy, there is still a market in potatoes, right here in Moscow, the leftover scrap of capitalism represented by the capital’s collective-farm bazaars, where individual kolkhozniks sell the product from their private plots…The market’s clock speed is laughable.  It computes a the rate of a babushka in a headscare, laboriously breaking a two-rouble note for change and muttering the numbers under her breath…No wonder that Oscar Lange over in Warsaw gleefully calls the marketplace “a primitive pre-electronic calculator.”

    So put the BESM to work minimizing distance that the potatoes have to travel..a proxy for efficiency and freshness:  price is not a consideration, since the state selling price of potatoes has been fixed for many years.  But BESM can only work with abstract potatoes: Not, of course, potatoes as they are in themselves, the actual tubers, so often frost-damaged or green with age or warty with sprouting tublices–but potatoes abstracted, potatoes considered as information, travelling into Moscow from 348 delivering units to 215 consuming organizations…The economists recognize the difficulty of getting a computer model to mirror the world truly.  They distinguish between working at zadachi, ‘from the problem’, and of fotografii, ‘from the photograph’…This calculation, alas, is from the photograph.  It deals with potato delivery as it has been reported to Leonid Vitalevich and his colleagues.  There has been no time to visit the cold-stores, interview the managers, ride on the delivery trucks. But the program should still work.

    The author notes that “the idea that the computer had conclusively resolved the socialist calculation debate in socialism’s favour was very much a commonplace of the early sixties.”

    But despite all the planning paperwork, despite the attempts at computerization, people like Chekuskin remain essential to keep the Soviet economy functioning at all.  He is a fixer, he works the system to ensure that his customers–factories, for the most part–can get the parts and materials they need in order to keep operating.  Before the revolution, he was a salesman: now, the economic problem is not selling, but buying.  Chekuskin explains what a real salesman was, back in the day:

    You’re thinking of some fellow who works in a sales administration, sits by his phone all day long like a little king, licks his finger when he feels like it, and says, “You can have a litttle bit”…That’s not a salesman.  You see, the world used to be the other way up, and it used to be the buyers who sat around examining their fingernails, hard enough as that is to imagine.  A salesman was a poor hungry bastard with a suitcase, trying to shift something that people probably didn’t want, ’cause back in those days, people didn’t just get out the money and buy anything they could get their hands on.  They had to be talked into it.”

    But with Communism, the things changed.  Back then, people didn’t want to buy.  Now, they don’t want to sell.  There’s always that resistance to get past.  But the trick of it stays the same:  make a connection, build a relationship.

    Volodya, is a young propagandist recently assigned to the huge locomotive plant in Novocherkassk, a dismal town that also features a university.  Unfortunately, it was classified by the planners as a “college town”, in need of the calorific intake required to lift pencils and wipe blackboards, but there were forty thousand people living and working in the industrial zone out by the tracks now, and between the students and the loco workers, a locust would have been hard put to it to find a spare crumb. White bread was a distant memory, milk was dispensed only at the head of enormous queues.  Sausages were as rare a comets.  Pea soup and porridge powered the place, usually served on half-washed plates.

    Eventually, people can’t stand it anymore–and decisions by two separate planning organizations have the result that on the very same day, food prices are increased and so are the production quotas at the locomotive factory.   There is a raucous mass protest, featuring signs like MEAT, BUTTER, AND PAY and CUT UP KHRUSHCHEV FOR SAUSAGES.  The loco plant manager, Korochkin, does not handle the situation well, and the rage grows.

    The ensuing catastrophe is vividly described as it is observed by the horrified Volodya.  Troops open fire on the protestors:  26 people are killed an 87 wounded.  Death sentences and long prison terms are handed down.

    This was a real event:  it happened in 1962.  News about the events did not appear in the state-controlled press for thirty years.

    Read the rest of this entry »

    Posted in Book Notes, Capitalism, Deep Thoughts, Economics & Finance, Leftism, Management, Markets and Trading, Russia, Systems Analysis, Tech | 37 Comments »

    Ayiti Pa Nimewo Yo

    Posted by Jay Manifold on 26th October 2019 (All posts by )

    I. Departure

    Our transportation to Aéroport International Toussaint Louverture was a decrepit Honda Civic with no working inside door handles, no exhaust system, and a barely functional starter. The guesthouse driver poured a liter of water into the radiator immediately before starting the engine so that it would not overheat, even though the drive was only 3 kilometers. Our luggage proved too big for the trunk, so most of the team’s belongings were wedged in beneath the open trunk lid, which was not secured by so much as a single bungee cord. Threading through the remnants of at least a dozen barricades on Avenue Gerard Téodart half an hour before sunrise, we high-centered on some rubble and dragged a sizable rock for several hundred meters before the driver backed the car up to dislodge it. After we made the turn onto Boulevard Toussaint Louverture, there were no more barricades, thanks to the proximity of a MINUSTAH logistics base and a Police Nationale d’Haïti station. There were pedestrians, of course—Port-au-Prince is very much a city that never sleeps—but not many, and few vehicles thanks to severely interrupted fuel deliveries, which had nearly stranded us altogether. One of the team members riding in the back seat later told me that the gas gauge was on “E.”

    What is happening when a Third World country loses a key component of its energy supply, and what might be the lessons to learn for those apprehensive over a significant breakdown of logistics in the US?

    Read the rest of this entry »

    Posted in Americas, Civil Society, Current Events, Economics & Finance, Energy & Power Generation, Human Behavior, International Affairs, Latin America, North America, Personal Narrative, Society, Systems Analysis, Transportation | 24 Comments »

    Summer Rerun—Hoffer on Scribes and Bureaucrats

    Posted by David Foster on 22nd September 2019 (All posts by )

    Nothing is so unsettling to a social order as the presence of a mass of scribes without suitable employment and an acknowledged status…The explosive component in the contemporary scene is not the clamor of the masses but the self-righteous claims of a multitude of graduates from schools and universities. This army of scribes is clamoring for a society in which planning, regulation, and supervision are paramount and the prerogative of the educated. They hanker for the scribe’s golden age, for a return to something like the scribe-dominated societies of ancient Egypt, China, and the Europe of the Middle Ages. There is little doubt that the present trend in the new and renovated countries toward social regimentation stems partly from the need to create adequate employment for a large number of scribes…Obviously, a high ratio between the supervisory and the productive force spells economic inefficiency. Yet where social stability is an overriding need the economic waste involved in providing suitable positions for the educated might be an element of social efficiency.


    and

    It has often been stated that a social order is likely to be stable so long as it gives scope to talent. Actually, it is the ability to give scope to the untalented that is most vital in maintaining social stability…For there is a tendency in the untalented to divert their energies from their own development into the management, manipulation, and probably frustration of others. They want to police, instruct, guide, and meddle. In an adequate society, the untalented should be able to acquire a sense of usefulness and of growth without interfering with the development of talent around them. This requires, first, an abundance of opportunities for purposeful action and self-advancement. Secondly, a wide diffusion of technical and social skills so that people will be able to work and manage their affairs with a minimum of tutelage. The scribe mentality is best neutralized by canalizing energies into purposeful and useful pursuits, and by raising the cultural level of the whole population so as to blur the dividing line between the educated and the uneducated…We do not know enough to suit a social pattern to the realization of all the creative potentialities inherent in a population. But we do know that a scribe-dominated society is not optimal for the full unfolding of the creative mind.

    –Eric Hoffer, The Ordeal of Change

    (This essay was published in the late 1950s or early 1960s. Hoffer was talking here not principally about the United States but about what were then called “underdeveloped countries.”)

    (2019 update)  Also, Francis Bacon noted four hundred years ago that one reason for sedition and mutiny in any polity was breeding more scholars than preferment can take off…A modern translation of might be “graduating more PhDs than have any hope of getting tenure,” or, more generally, “graduating more people with degrees, and especially advanced degrees, than can use those degrees to pay for the cost of getting same.”

    The extended Bacon quote:  “Therefore the multiplying of nobility, and other degrees of quality, in an over proportion to the common people, doth speedily bring a state to necessity; and so doth likewise an overgrown clergy; for they bring nothing to the stock; and in like manner, when more are bred scholars, than preferments can take off.”

    Posted in Academia, Civil Society, Economics & Finance, Education, Political Philosophy | 5 Comments »

    Summer Rerun–Book Review: Little Man, What Now?, by Hans Fallada

    Posted by David Foster on 14th September 2019 (All posts by )

    Little Man, What Now?

    (edited, with updates)

    I’ve often seen this 1932 book footnoted in histories touching on Weimar Germany; not having previously read it I had been under the vague impression that it was some sort of political screed. Actually it is a novel, and a good one. The political implications are indeed significant, but they’re mostly implicit rather than explicit.

    Johannes and Emma, known to one another as Sonny and Lammchen, are a young couple who marry when Lammchen unexpectedly becomes pregnant. Their world is not the world of Weimar’s avant-garde artists and writers, or of its risque-to-outright-degenerate cabaret scene. It is far from the world of a young middle-class intellectual like Sebastian Haffner, whose invaluable memoir I reviewed here. Theirs is the world of people at the absolute bottom of anything that could be considered as even lower-middle-class, struggling to hold on by their fingernails.

    When we first meet our protagonists, Sonny is working as a bookkeeper–he was previously a reasonably-successful salesman of men’s clothing, working for the kindly Jewish merchant Mr. Bergmann, but a pointless quarrel with Bergmann’s wife, coupled with a job offer from the local grain merchant (Kleinholz) led to a career change. Sonny soon finds that as a condition of continued employment he is expected to marry Kleinholz’s ugly and unpleasant daughter, never an appealing proposition and one which his marriage to Lammchen clearly makes impossible. Lammchen is from a working-class family: her father is a strong union man and Social Democrat who sees himself as superior to lower-tier white-collar men like Sonny.

    When Sonny and Lammchen set up housekeeping, their economic situation continually borders on desperate. Purchasing a stew pot, or indulging in the extravagance of a few bites of salmon for dinner, represents a major financial decision. An impulsive decision on Sonny’s part to please Lammchen by acquiring the dressing table she admires will have long-lasting consequences for their budget.

    The great inflation of Weimar has come and gone; the psychological damage lingers. Sonny and Lammchen’s landlady cannot comprehend what happened to her savings:

    Young people, before the war, we had a comfortable fifty thousand marks. And now that money’s all gone. How can it all be gone?…I sit here reckoning it up. I’ve written it all down. I sit here, reckoning. Here it says: a pound of butter, three thousand marks…can a pound of butter cost three thousand marks?…I now know that my money’s been stolen. Someone who rented here stole it…he falsified my housekeeping book so I wouldn’t notice. He turned three into three thousand without me realizing…how can fifty thousand have all gone?

    Inflation is no longer the problem, unemployment is. There are millions of unemployed, and those who do hold jobs are desperately afraid of losing them and will do anything to keep them.

    Both Sonny and Lammchen are limited and flawed people with many redeeming and even lovable attributes. Sonny, possibly as a result of upbringing by his cold and sleazy mother, is lacking in a sense of worth and in self-confidence–when he returns to the business of selling menswear, the store’s establishment of a quota system (apparently a radical innovation at the time) is so stressful to him as to greatly harm his sales performance. His devotion to Lammchen and to the coming baby (“the Shrimp”) is unshakable and keeps him going. Lammchen herself, despite her generally sweet nature, can on occasion be a irrational, unrealistic, and very unfair to Sonny, although these episodes are of short duration.

    In pursuit of possible employment for Sonny, they move to Berlin, where life definitely does not get any better. Germany’s vaunted social-welfare system does provide a certain amount of help for the couple, but there is a psychic cost. When they apply for the nursing-mother allowance to which Lammchen is clearly entitled when Shrimp is born, they find themselves enmeshed in a bureaucratic paperwork nightmare. They finally do get the money, but Lammchen is so upset by the experience that she resolves to vote Communist in the next election. (Yeah, that’ll help.) Sonny does receive compensation during his periods of unemployment, but this does little to ease his feeling of uselessness and fears for the future. After finally getting hired by Mandel’s Department Store, he passes a group of still-unemployed men:

    Pinneberg had the feeling, despite the fact that he was about to become a wage-earner again, that he was much closer to those non-earners than to people who earned a great deal. He was one of them, any day he could find himself standing here among them, and there was nothing he could do about it. He had no protection. He was one of millions.

    Despite the social safety net, despite a few helpful friends and acquaintances, the dominant feeling of Sonny and Lammchen is that they are utterly alone in the world, like children in a dark wood or like American pioneers on the great plains–but without the hope.

    Neither Sonny nor Lammchen is a very political person, but they have the strong feeling that “the system” is rigged against them. While Lammchen does make an anti-Semitic remark early in the book (“I’m not too keen on Jews”), neither she nor Sonny seems to be among the growing number who blame Germany’s Jews for their economic difficulties–indeed, Sonny is appalled when a Jewish businesswoman tells him of her mistreatment at the hands of Jew-haters. The couple’s (rather vague) political leanings are to the Left, and they attribute the source of their problems to the rich and the powerful generically. They have no faith in the political system or leadership.

    Ministers made speeches to him, enjoined him to tighten his belt, to make sacrifices, to feel German, to put his money in the savings-bank and to vote for the constitutional party. Sometimes he did, sometimes he didn’t, according to the circumstances, but he didn’t believe what they said. Not in the least. His innermost conviction was: they all want something from me, but not for me.

    Of Lammchen’s political views, the author says:

    She had a few simple ideas: that most people are only bad because they have been made bad, that you shouldn’t judge anybody because you never know what you would do yourself, that the rich and powerful think ordinary people don’t have the same feelings as they do–that’s what Lammchen instinctively believed, though she hadn’t thought it out.

    Sonny is resolved to succeed in his sales job at Mandel’s department store, and is greatly helped by an older salesman, the very dignified Mr. Heilbutt, who possesses both practical sales skills and general life skills that Sonny has not yet developed. For the most part, though, the relationship among store employees is of a dog-eat-dog, knife-in-the-back nature, and some of the customers are very difficult–like the man who comes into the store accompanied by his wife AND his sister AND his mother-in-law, with vociferous opinions about each item from the first two women and a constant repetition of the complaint we-should-have-gone-to-a-different-store from the mother-in-law.

    When Sonny again becomes unemployed, this time for a protracted period, Lammchen is able to bring in a little money by doing sewing for more-affluent families, while Sonny takes on the role of a house-husband. The author implies that this situation has become common in Germany, as Lammchen asks:

    What d’you think, Mr Jachmann? D’you think it’s going to be like this from now on with the men at home doing the housework while the women work? It’s impossible.

    Read the rest of this entry »

    Posted in Arts & Letters, Big Government, Book Notes, Civil Liberties, Economics & Finance, Film, Germany, History | 4 Comments »

    How the Conservative Party has sold out Britain.

    Posted by Michael Kennedy on 7th September 2019 (All posts by )

    King George III and Lord North have been blamed for botching negotiations with the American colonies. Now, the same Conservative Party seems determined to botch another negotiation; with the EU. In both cases, the party and negotiators were determined to keep the relationship intact, no matter how unequal.
    An excellent piece in the claremont Review explains.

    Many statesmen warned from the outset that British ideas of liberty would not survive a merger with the E.U. The most eloquent early diagnoses came from the Labour Party, not the Tories. That is because the fundamental disposition of the E.U. is to favor technocratic expertise over representative government, and the Tories have not generally been the British party that placed the highest priority on the passions of the masses. In 1962, as Tory Prime Minister Harold Macmillan was eying EEC membership, Labour leader Hugh Gaitskell warned, “[I]t does mean the end of Britain as an independent nation state…. It means the end of a thousand years of history. You may say ‘Let it end’ but, my goodness, it is a decision that needs a little care and thought.”

    Interesting that Labour saw the danger first. In the US, the party of the Administrative State is the Democrats although both parties are heavily invested as Angelo Codevilla has pointed out.

    Eventually even the reliably anti-Brexit Economist came to see that some of Britain’s major problems had arisen from constitutional meddling. David Cameron’s 2011 Fixed-Term Parliaments Act, in particular, made it much more difficult to call the general elections that would ordinarily have been provoked by the resounding repudiation of Theresa May’s withdrawal package. Blair and Cameron, the magazine noted, “came to power when history was said to have come to an end. They saw no need to take particular care of the constitution.” E.U. membership hid these problems—if Britain wasn’t paying attention to its constitution at the time, it was partly because it had been using someone else’s.

    I had not realized that “Judicial Review” of laws was an American phenomenon. John Marshall has reached far into the future with his ruling in Marbury vs Madison.

    Read the rest of this entry »

    Posted in Big Government, Britain, Economics & Finance, Elections, Europe | 56 Comments »

    Labor Day Rerun: Attack of the Job-Killing Robots

    Posted by David Foster on 2nd September 2019 (All posts by )

    (This is a 3-part series, link to next post is at the end)

    Here’s a new factory for making automobile frames, specifically designed to minimize the need for human labor.  The CEO of the company that built it actually said, “We set out to build automobile frames without people.”

    At the start of the process, rough steel plates are inspected by electronic sensors, automatically pushing aside any that deviate from tolerances.  Conveyors take the plates through punching, pressing, assembling, and nailing machines, as well as a machine that can insert 60 rivets simultaneously in each frame.  A set of finishing machines then rinse, dry, spray-paint, and cool the frames.  Aside from a few men moving frames between conveyor belts, the floor routine of the plant requires almost no hand labor.

    And today’s robotics and artificial-intelligence advances go far beyond automating routine manufacturing labor and take over the kind of cognitive functions once thought to be exclusive to human beings. Here, for example, is a new AI-based system that displaces much of the thought-work which has been required of the people operating railway switch and signal installations:

    The NX control machine is in effect the “brain” of the system. It automatically selects the best optional route if the preferred route is occupied.  It will allow no conflicting routes to be set up. It eliminates individual lever control of each switch and signal.

    Pretty scary from the standpoint of maintaining anything like full employment, don’t you think?

    Read the rest of this entry »

    Posted in Book Notes, Business, Economics & Finance, Tech | 24 Comments »

    Labor Day Rerun: Technology, Work, and Society

    Posted by David Foster on 1st September 2019 (All posts by )

    Here is an intriguing book concerned with the exponential advances in technology and the impact thereof on human society.  The author believes that the displacement of human labor by technology is in its very early stages, and sees little limit to the process.  He is concerned with how this will affect–indeed, has already affected–the relationship between the sexes and of parents and children, as well as the ability of ordinary people to earn a decent living.  It’s a thoughtful analysis by someone who clearly cares a great deal about the well-being of his fellow citizens.

    Read the rest of this entry »

    Posted in Book Notes, Britain, Capitalism, Civil Society, Deep Thoughts, Economics & Finance, History, Society, Tech | 9 Comments »

    “After Minimum Wage Hike, Labor Day Will Be Replaced by Cheaper, More Efficient, Robot Labor Day”

    Posted by Jonathan on 22nd August 2019 (All posts by )

    … Foremost on the front burner is an attempt by the Democrats to raise the federal minimum wage to $15 an hour. A fiscal review by the Senate Budget Committee, however, showed that doing so would make human labor costs so prohibitive that all human workers would quickly be replaced by AI software, self-serve kiosks, or those creepy headless Boston Dynamics robots. As companies could no longer afford to pay people $120 to not do a lick of work on the first Monday in September, “Labor Day” would have to be changed to “Robot Labor Day,” and the focus would switch to celebrating how our robot friends keep companies in business, rather than how minimum wages and unions almost destroyed them.

    Read the entire post.

    Satire, like skateboarding, is not a crime – yet.

    Posted in Economics & Finance, Humor, Leftism, Politics | 37 Comments »

    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 »