Economics & Finance

The Administration is again trying to jawbone the Chinese into revaluing their currency, i.e., floating it in the expectation that it will rise against the US dollar and make our exports to China more attractive. So on the one hand we have this giant communist country, growing rapidly, very nationalistic and whose leadership is not uninclined to gin up external conflict (in part to deflect domestic attention from its own authoritarianism); and on the other hand we have some short-sighted American pols trying to buy votes from stakeholders in US manufacturing companies. (Our recent boosting of textile tariffs is part of the same pattern.)

Politicians and exporters always want to run a weak-dollar policy, but it’s bad for importers, investors (remember who buys our bonds?) and most everyone else. We are attempting to contain China militarily and diplomatically while provoking it economically. That’s just stupid.

UPDATE: Larry Kudlow reprints an excellent NY Sun editorial on this topic.

UPDATE 2: Austin Bay puts the Chinese-currency controversy into geopolitical context, arguing that our anti-China economic moves are payback for China’s easing of pressure on North Korea in the context of the multi-party talks there. He may well be correct about the Administration’s motives, but I am skeptical that it is wise for us to respond by economic means. Indeed it may have been unwise of us all along to assume that China shares our interest in restraining NK, and to depend on China to do our work there for us (as Arthur Waldron argued in part in his article in Commentary a couple of years ago).

UPDATE 3: Brad Setster’s post on this topic is excellent, as are many of the comments on his post. (via Tyler Cowen via Chris Masse)

Glenn Reynolds notes a new book by Matthew Simmons that argues that Saudi oil reserves are closer to being depleted than is commonly believed, and that we are all in trouble if this happens. I don’t buy it.

The world has huge non-Saudi oil reserves. What keeps most of them unexploited is the extremely low Saudi marginal cost of production: SA can at any time increase its production, and by so doing lower prices and make expensive investments in new extraction technologies worthless. Peter Huber made this argument well here.

So what happens if the estimates of Saudi oil reserves are indeed overstated and Simmons’s oil-shock scenario comes to pass? It seems likely that a lot of oil-extraction ventures that aren’t worth the risk now, with the Saudi marginal cost of production at just a few dollars a barrel, would become worthwhile. And once the investments in those projects are made there is little reason not to continue producing oil from them. That wouldn’t be good for the Saudis but it would be fine for consumers. I doubt that the end of Saudi oil, unless it occurred precipitously, which is unlikely, would raise long-term prices very much if at all.

UPDATE: Glenn Reynolds has updated his post to include links to a couple of other critics of Simmons’s argument.

My home state of Minnesota has raised the minimum wage, from $5.15 an hour to $6.15/hr. While chief sponsor of the bill Sen. Ellen Anderson, D-St. Paul said “$6.15 is still a barebones pay rate.“, she feels it shows that “[w]e support you. We believe everyone who works hard in our state should have the opportunity to succeed.”

The article notes criticism by Republicans that this is merely a “feel-good” vote. A local business man complained, “it’s going to make a substantial impact to our cost of doing business. What we’ll have to do is pass that along to our customers. People can only afford to pay so much for your product. You’re going to price yourself out of business.”

On May 2nd, Florida similarly increased the minimum wage to $6.15 per hour. Florida’s new minimum wage is indexed to inflation, so the state will readjust the minimum every fall. A a spokesman for the Florida Chamber of Commerce said that “such increases will result in higher prices for Floridians, which will hurt elderly people living on fixed incomes.” Apparently, the socialist group ACORN had pushed for the state’s minimum-wage law, which was enacted last year as a constitutional amendment.

That’s the background.

Read more

I was just reading this news item, which discusses the provisions that various emergency agencies have set up in order to take care of animals during disasters.

This is certainly nothing new, and it’s eminently practical since livestock are a major form of agricultural assets. Protecting farm animals against needless death is a way for the state governments to protect their tax base.

But people are taking steps beyond moving cows or horses out of harms way. Emergency shelters for people are now preparing to meet the needs of pets as well as their owners.

Megan McArdle says that it’s very difficult to declare yourself wealthy because the goalposts keep retreating as you move up the income ladder. That’s certainly true, but I think that I’ve found an indicator of the relative wealth of the nation as a whole.

Glenn Reynolds speculates about declining political support for the death tax:

I think that one difference may be that society does less to “make it possible” for people to get wealthy now. A hundred years ago, or even fifty, the politics of inheritance taxes were different. But then the government mostly defended the country and engaged in various public-good activities, like building roads or supporting research. There was pork, and income transfer, of course, but it was a much smaller part of the picture. So the notion that one was “giving back” to a system that made wealth possible made some sense.

He’s right, but it’s worse than that. Modern government not only transfers wealth on a grand scale from one group to another, it seeks to make the accumulation of wealth much more difficult in the first place. A quick calculation of how many marginal dollars one has to earn in 2005 vs. 1900 to accumulate an additional dollar of after-tax estate value makes clear how much harder it is now. (And that calculation considers only explicit taxes, not the many regulatory and legal costs — licensing, zoning, environmental regulations, safety regulations, EEOC regulations, lawsuits, etc. — that didn’t exist in the past.) From the perspective of many people who are actually trying to create wealth, government is the enemy. The way to make things better for everyone is to reduce disincentives to wealth creation, not to punish further those who are successful enough to run the government’s gantlet.

Leftists who write things like “fuck the small businessman” would do well to ask themselves where our society’s wealth comes from. It comes largely from productivity gains based on capital investment. Inheritance is traditionally an important source of such capital. Taxing inheritance reduces the capital stock, because government won’t invest it as effectively as family will, and because productive people have less reason to work hard, save and invest when they can’t share their wealth with their heirs. It’s also wrong to confiscate people’s property.