Month: April 2009

… turns out to be $100,000 per hour. Here’s an ABC News story about the U.S. military trailing a potentially hostile Cessna 172 (weighs less than an old VW Beetle) coming in from Canada. The plane was tailed by two F-16 fighter jets for five hours and we evacuated the Wisconsin State Capitol building. The article notes that each F-16 costs $50,000 per hour to operate (remember that this is a single-engine airplane whose acquisition cost is half that of a Gulfstream; let’s not ask what it will cost the USAF to operate the new F-22 fighter jet!).

I’m surprised that the F-16s were able to stay aloft, especially at such a low (fuel-inefficient) altitude, for so long.

The real story here is probably what we can expect as the government takes over ever larger sectors of the economy. Suppose that an average citizen had decided to intercept and follow a Cessna 172. He or she would have hopped in a Mooney or a Bonanza, both substantially faster than the 172, and spent $100 per hour on gas and overhaul reserve. When the government tries to accomplish the same task, it does a more thorough job (2 planes, armed), but it costs 1000 times as much.

Full post, including comments

Two economists published an op-ed in today’s Wall Street Journal, “From Bubble to Depression?” that is interesting because it purports to explain why the housing crash wrecked the U.S. economy whereas the dotcom crash did not. One interesting portion of the article recalculates the U.S. inflation rate during the housing bubble, using actual costs for purchasing real estate rather than “owners’ equivalent rent”, a fictional concept introduced by government bureaucrats trying to keep the published CPI low. Inflation calculated using the costs that buyers faced would have been 6.2% instead of the published 3.3% for 2004. The authors point out that consumer interest rates were about 6% and inflation was about 6%, which made money free for consumers and they borrowed.

What solutions do these megabrains of Economics (one of whom has a Nobel in Economics) offer for our current mess? None!

Full post, including comments

The April 1, 2009 New York Times carries a story “Doctors Opting out of Medicare” that finds that only about 40 percent of medical doctors at a New York City hospital would accept Medicare reimbursement. The remaining 60 percent were able to earn more money by taking patients who paid cash or had private insurance. The article fails to mention the fact that U.S. has fewer physicians per capita than other developed countries (the OECD average was 3.1 per 1000 residents; the U.S. has about 2.4; France has 3.3; Israel has 3.8). The U.S., despite our recent bout of attempted national economic suicide, has a tremendous amount of personal wealth. What do you get when you combine wealth with a limited supply? High prices. State and federal governments are pushing forward various schemes to increase the number of Americans covered by health insurance, thus increasing demand for health care. The supply of physicians, however, is already extremely tight. Any attempt by the government to offer compensation below a market-clearing level will result in physicians opting out and saying “I’m only going to work for rich people who pay cash and/or pay a lot more than their standard insurance reimbursement.”

Decades of immigration to the U.S. and the resultant population explosion (from 200 million people during the 1970s to more than 300 million today) have not been matched by an explosion in the number of medical schools or the size of med school classes. This means that virtually all health care cost control measures, short of sending American patients to Europe or Cuba for treatment, are doomed to fail.

The U.S. government controls how much is paid for more than half of American health care dollars spent, but the American Medical Association (doctors’ union) controls how many doctors will be licensed to practice in the U.S. Unless we can somehow revoke the laws of supply and demand, we’ll probably have to spend a dramatically higher percentage of GDP if we want the currently uninsured to enjoy comprehensive medical care. We’ll have to pay existing doctors enough that they’ll be happy to work 6 or 7 days per week.

Full post, including comments

The May 2009 Atlantic article “The Quiet Coup” by Simon Johnson, an MIT Sloan professor, has strong echoes of the April 2009 Harper’s magazine. The Harper’s author noted that financial firms took home roughly 40 percent of U.S. corporate earnings, which drained all of the smart people out of the manufacturing economy and into paper shuffling. The Atlantic article says that banana republics get into trouble because “powerful elites within them overreached in good times and took too many risks” (echoes of Mancur Olson). “inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. … In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). .. elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse.”

“From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.”

“Big banks, it seems, have only gained political strength since the crisis began.”

“Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards—contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible.”

“Boris Fyodorov, the late finance minister of Russia, struggled for much of the past 20 years against oligarchs, corruption, and abuse of authority in all its forms. He liked to say that confusion and chaos were very much in the interests of the powerful—letting them take things, legally and illegally, with impunity.”

More: read Quiet Coup”

Full post, including comments

Peter Singer, the philosophe terrible of New Jersey, argues in The Life You Can Save: Acting Now to End World Poverty that it is our responsibility to provide sufficient aid to poor people in foreign countries so that nobody starves or dies.

The obvious objection to this argument is provided by Thomas Malthus (1766-1834), who predicted that human population growth would inevitably exceed growth in food production. Singer does not mention Malthus until page 121 (out of 173). Malthus is dismisssed in a couple of pages by noting that if everyone on Planet Earth became a vegetarian we would then have enough grain to feed everyone. [Not a refutation of Malthus because universal vegetarianism would yield a constant increase in calories available against an exponential increase in population.] Singer does not reference Gregory Clark, author of A Farewell to Alms, the most heavily researched exploration of Malthus and his applicability to the modern world (Clark analyzes data going back to the 12th Century in England). Much of Singer’s support for a cheerful economic outlook is provided by references to Jeffrey Sachs (see this weblog posting from 2006). Sachs is cited uncritically starting in the Preface and continuing throughout the book, as though Sachs had proved his assertion that if we guarantee every impoverished person on the planet free food, free housing, free education, and free health care, all currently poor countries will experience a development process comparable to Germany during the Industrial Revolution.

Neither Sachs nor Singer deals with the example populations that are in fact guaranteed all of these things, e.g., Saudi Arabians. The result of all of these guarantees in Saudi Arabia has been one of the world’s highest birthrates, not a boom in education or industry.

Singer, in asserting that there is enough food for everyone, no matter how many babies we produce, is not taking the long view. It may be that agricultural production is in a temporary boom due to the fact that we have been digging up coal and oil that required millions of years to form. Chemical fertilizer has been the source of much of the increased productivity of agricultural land and (1) it won’t be available forever, (2) it gives a constant, not exponential, increase in output. It might not be a moral act to help increase the long-term population of a country above the level that can be fed on naturally fertilized land. Singer does not mention the use of fertilizer or question how sustainable current levels of agricultural production are (nor does he note that we’ve already more or less proven that the world’s fisheries were not sustainable at prior levels).

Singer argues that part of our obligation to help the poor is that we have made their lives tougher. For example, subsistence fisherman in Africa find that Russian and Chinese factory trawlers have stripped their traditional fishing grounds bare in order to serve European markets. Singer does not mention that people in advanced countries, merely by being advanced, have provided a lot of assistance to poor countries that wish to develop. A poor country does not need to develop calculus, physics, chemistry, and biology. A poor country does not need to invent antibiotics, water purification systems, refrigeration, internal combustion engines, the stored program computer, TCP/IP, or any of the other essentials of the modern world. All of that can be copied for free from rich countries and bought ridiculously cheaply from China.

The most interesting section of the book describes psychology experiments in human nature. Researchers have shown that we’re more likely to help another person if we think that we’re the only person who could help, e.g., an experiment with two students in a room showed that they each was less likely to respond to a cry for help from an adjoining room than if only one student were present. We like “identifiable victims”: people were more willing to give toward a $300,000 medical bill to save one girl’s life than they were to pay $300,000 to save eight children. We don’t like futility: we’re more likely to give money to save 1500 people out of 3000 at risk than we are to save 1500 out of 10,000. Karl Marx noted that the existence of paper money made people less likely to help. He thought participants in a barter economy would be more likely to send a starving neighbor a ham than modern Europeans would be to send some coins. Modern research has confirmed Marx’s suppositions.

Singer tries to figure out how much it actually costs to save lives in Africa. A group handing out mosquito nets can save lives (from malaria) at $200 per life per year. But the person saved from malaria might also die from another infectious disease or from a lack of clean water. Different organizations give different benefit estimates for their various programs. Adding up all of the numbers, it looks as though it will cost thousands of dollars per year to keep each additional child alive. Could Americans afford this? Singer assumes that we can, but he doesn’t consider the facts that (1) the number of poor children in the world may grow exponentially, and (2) Americans are currently insolvent if you consider the likely cost of Medicare, Social Security, and public employee pensions.

Singer cites Rajan and Subramanian, economists who found that incoming foreign aid can wreck a local economy by driving up the value of the local currency and making it unprofitable to continue processing food and making clothing and footwear. Lives might be saved temporarily, but long-term economic growth will be stunted, a recipe for further impoverishment if long-term population growth remains strong.

Singer’s most convincing point is that our agricultural tariffs and subsidies harm poor farmers by preventing them from competing with American and European farmers in world markets. (The 2008 farm bill provided $300 billion subsidies, was vetoed by King Bush II, and then 2/3rds of Congress voted to override the veto (see weblog entry from July 2008).)

Singer says “My students often ask me if I think their parents did wrong to pay the $44,000 per year that it costs to send them to Princeton.” [The cost now is up to $50,000 per year.] Singer’s response is that by going to such an elite university they are going to earn more money and it won’t be immoral as long as they share some of that dough with the poor. Singer is apparently unaware of the economists who researched this and found that people accepted to Ivy League colleges, but who chose not to attend, ended up with the same lifetime earnings as those who attended. I.e., being smart enough to get admitted to Princeton is useful, but attending Princeton has no economic value over attending a state university. Singer does not consider that his own continued participation in a gold-plated playground for rich kids might be immoral by the standards he espouses in this book. If he were to segue over to Rutgers ($9000 per year in-state), that might attract more bright students to Rutgers. Their families would collectively save millions of dollars that could be donated to the poor.

Singer never does address the question of whether by helping to keep alive 1 poor person today, you would simply be creating 100 hungry mouths to feed some years down the road (by which time you might be dead, your survivors wouldn’t be so generous, and now 100 people would starve to death instead of 1). Let me repeat a couple of passages from my review of The End of Poverty:

One reason this 396-page book isn’t more convincing is that Sachs cannot come up with a single example of a country that has been lifted out of poverty by foreign aid. He talks about saving Russia with financial engineering, but Russia’s clever people were making jet fighters, atomic bombs, and helicopters long before they ever met Sachs. He talks about the Marshall Plan for post-WWII Germany, but Germany didn’t suffer from overpopulation and the lack of education that plague modern poor countries; investing in folks that had conquered France in six weeks probably did not seem very risky…

The most serious flaw with the book, in my opinion, is that Sachs fails to devote even one sentence to the modern fact that labor is mobile and global. Transportation and communication costs fall every decade. An ambitious, hard-working, intelligent, and well-educated person has never had an easier time moving from a poor country to a rich country. … If an African achieves the standards of a First World nurse, he or she can easily emigrate to Europe or the U.K. where such skills are in high demand. The emigre enjoys a much more comfortable lifestyle in the rich country, can make free voice calls to friends and family back in Africa, and can fly home in 8 hours on a discount airline. Educated and productive people are the biggest assets of most countries and, more so than ever, they can simply choose to walk away. Sachs talks about building medical schools in Africa so that doctors and nurses will be plentiful, not noting that the U.S. has jobs for perhaps 200,000 more doctors than U.S. medical schools are going to graduate in the next decade or so.

It is difficult to say what Singer’s The Life You Can Save: Acting Now to End World Poverty adds to Sachs’s 2005 book. The lasting benefits of foreign aid are difficult to find, yet rich countries and people continue to put hundreds of billions of dollars every year into foreign aid. Singer says that this makes us immoral cheapskates. However, the kinds of arguments that Singer put forth to prove that people should give more could easily be used to prove that people should give less. The grain and packaged foods that you paid to send to a poor country may result in the bankruptcy of a local farmer or food processor. The very possibility of foreign aid handouts may discourage businesses in poor countries from investing in agriculture, health care, and education. Would you start a private health clinic if you thought that Paul Farmer was going to show up next month and offer health care for free?

As we Americans are painfully discovering, it may not be possible for per-capita income to grow unless people work harder or are better educated than previous generations. Given that there are only so many hours in the day and that we in one of the world’s richest countries have been unable to build a competent system of schools, that makes world poverty a tough challenge. Too tough, perhaps, to be substantially attacked from an office in Princeton, New Jersey.

Full post, including comments

A few tidbits from the April 2009 Harper’s Magazine (sadly not online):

The U.S. government spent $79,000 last year on phone service for Bill Clinton. New York City collected $624 million last year in parking fines. Texas is the state that retains the highest percentage of people born there, 76%.

The article “Infinite Debt” by Thomas Geoghegan claims that it was the high profits available to financial firms that wrecked the U.S. economy, by diverting all of our resources (smart people, capital) from manufacturing into banking. “[Because usury laws were repealed] when banks get 25-30 percent on credit cards, and 500 or more percent on payday loans, capital flees from honest pursuits, like auto manufacturing. … The people who could have saved GM and Ford went to off to work at AIG, Merrill Lynch, or even [?] Goldman Sachs. … In 2002 and 2003, financial firms took more than 40 percent of the profits that accrued to U.S. corporations … more than double the share the financial industry was taking–about 18 percent–when Ronald Reagan left office. … Who helped the financial sector make too much? We did. In a sense, we use our credit cards to help liquidate our own jobs…”

“Usury Country” by Daniel Brook is about payday lending, but also about how tough it is to work private industry in the U.S. “The average income of a full-time working at Walmart, today the nation’s largest private employer, is only slightly more than $17,000 per year. Fully 47 percent of Americans now report living paycheck to paycheck.” What happens when they get hit with an unexpected bill? They borrow at 500 percent interest from a “payday loan” or “check cashing” bank, expecting things to be better when the next paycheck arrives. In fact, 75-90 percent of these borrowers have to roll the loan over the next time and the next time and the next. They end up paying 20 percent of their income in taxes and another 20 percent to payday loan companies.

[Note to young people: The 47 percent of Americans living paycheck to paycheck is more or less the percentage who do not work for the govenment or in government-supported industries, such as health care. A Walmart cashier earns $17,000 and will soon pay $7 to drive through the airport tunnel here in Boston. The toll-taker working for the Massachusetts Turnpike who collects that $7 gets an average income of $70,000 per year and can retire at age 53 with a full pension and benefits. What if our $17,000/year cashier takes the bus? She’ll hand her new higher fare to an MBTA bus driver earning an average of $55,000 (as of 2006) and retiring at age 41 with a full pension (if the driver started work at age 18; source: Boston Globe).]

An article on Cambodia reminds us that American taxpayers supported the Khmer Rouge, who went on to murder uncountable numbers of their fellow Cambodians; the Soviets were opposed to Pol Pot.

Some thought-provoking facts in the magazine, worth a trip to the library, even if you don’t agree with the authors’ conclusions.

Full post, including comments

With our attention diverted to the tragicomedy of GM and Chrysler, one or two major newspapers seems to dying each month. As taxes increase and government expands as a percentage of GDP, this is worrisome. Mancur Olson wrote that the fundamental cause of economic stagnation in a rich country was special interest groups getting the government to do them a favor at the expense of dispersed consumers. Stories about government handouts aren’t visually interesting and don’t work well on TV news. A story about some sort of sweetheart deal for a particular group would usually require a lot of numbers to be understandable and therefore wouldn’t work well on radio. The local newspaper may be the only representative of the average taxpayer or consumer on an issue where a special interest is lobbying state or local government. How much is at stake? State and local governments spend about $3 trillion per year, not too different from federal spending ($4 trillion; source).

If need be, we could get cars from China and India. Without local newspapers, though, how will consumers and taxpayers find out how seriously they are being bled? A guy in Shenzen or Bangalore cannot be an effective reporter here. A typical example of good local reporting is this New York Times story on the Long Island Railroad, It required four reporters and ran to 7 pages. The story includes facts about how some train drivers earned $215-277,000 per year due to hard-to-understand work rules, how more than 90 percent of L.I.R.R. retirees, most in their 50s, were classified as disabled and received additional pensions (totaling up to $170,000 per year). Despite the billions of dollars in extra costs to taxpayers, the cost of this disability pension festival to most individual taxpayers is never going to be more than a few thousand dollars per year, not enough for them to spend a year digging around in public records. Even if an individual taxpayer did discover the same facts and published them on a personal Web site, would he or she attract the attention of public officials? (so far Mancur Olson has proved to be correct; various elected officials promised to investigate while the scandal was in the public eye, but there don’t seem to have been any conclusions or changes in policy)

When the dust settles on our downsized economy, we may we may find that the loss of hundreds of local newspapers hurts long-term growth more than the loss of a few automotive brands.

Question for readers: What could replace the local newspaper as a check to special interest power in state and local government? The replacement needs to generate enough money for a comparable number of full-time reporters. I don’t think that the answer is as simple as “an online newspaper” because ad revenues right now aren’t strong enough to pay for a full staff of reporters.

Full post, including comments

I attended a seminar this evening presented by one of our largest banks (name not mentioned to protect some friendships). A middle manager introduced Eugene White, an economist from Rutgers. “I earned nothing last year,” said the hard-working bank employee. “Zero for 2008. No bonus. No options. No stock.”

Over dessert and coffee I asked one of the guy’s subordinates if the boss wouldn’t also have gotten some sort of base salary. “Sure,” he replied, “but maybe as low as $500,000 per year.” How did that round to zero? “Well, he might have made $12 million the year before.”

And you thought Peano arithmetic was challenging….

[What did we learn at the seminar? Professor White showed a comparison of events 1920-1936 with events 1990-2009. The similarities that lead many to say that we’re going into a Greater Depression were acknowledged. White claimed that the main divergence is in monetary policy. This time we lowered interest rates and expanded the money supply much earlier into the downturn. White said that he was confident in an eventual recovery because we still had some productivity growth. An attendee asked about risks from changes in government policy and taxation, noting that there was very limited productivity growth during the 1970s due to high taxes and limits on the ability of businesses to deduct (depreciate) capital expenses. White did not have a convincing answer to any question involving Congress, taxes, and the expansion of government.]

Full post, including comments

This month’s Atlantic has an interesting article about China by James Fallows. The last portion writes a bit about a recently founded battery company that is now the world’s largest supplier of rechargeable batteries, employing 130,000 people.

[BYD unveiled] the world’s first mass-produced battery-powered hybrid car that could be recharged on normal household current. … much of the U.S. press tittered about mistranslations in the BYD promotional material and the stodginess of the car’s design. “Oh, we can always make the car look better!” Stella Li told me when I asked her about that. “Designing the car, building the car, that is the easy part.” She was being deliberately breezy: she went on to explain the company’s faith that its demonstrated edge in battery technology, plus its engineering skills and “vertically integrated” manufacturing system—it builds almost all of the car’s components itself—will give it a long-term advantage. And against the snickering of the U.S. auto press was Warren Buffett’s purchase of 10 percent of the company, for $230 million, late last year.

[Coincidentally, the New York Times has an article today on the Chinese electric car industry.]

Full post, including comments

In a rare example of clear understandable prose from an economist, Joseph Stiglitz wrote an editorial yesterday for the New York Times explaining how the next $500+ billion of taxpayer funds are to be handed over to Wall Street. The folks who are going to pay for this are in high school right now and there is nothing that they can do about it, but it is worth seeing that the supposed hypercomplexity of Wall Street is not always beyond the comprehension of a layperson.

The article made me wonder why, if government action is required (and there are those who say that the Audacity of Doing Nothing would be better), we need to accept cronyism. For example, if the government thinks that mortgage-backed securities aren’t worth as much as they should be (“when people get an answer that they don’t like from a market, they cry ‘market failure!'”), the government could go into the market with $50 billion every day and offer to buy mortgage-backed securities from any willing seller, taking home the securities offered at what seemed like the best price. With that kind of buying, eventually the prices would come up and banks would have unloaded a lot of mortgage-backed securities.

Full post, including comments