Philip Greenspun’s Weblog

I met a money guy today at a party here in D.C. As part of the trend of the financial center in the U.S. shifting towards Washington, D.C., his private equity fund is based here. He concentrates on Latin America. Where did he think the best opportunities for investment were? “Colombia, Brazil, Peru, Mexico, and Chile,” was the response. “Avoid Venezuela, Ecuador, and Bolivia due to political risk.” What about the political risk in his favorite countries? “A lot of Latin American governments are in better shape and more fiscally responsible than the U.S. government.”

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I took a taxi today from National Airport to Northwest Washington, D.C. The District has replaced the zone system that prevailed for decades with conventional taxi meters. Fares are about $1.50 per mile, compared to $2.00 per mile in New York City and $2.80 in Boston.

My driver owned his taxi, a brand-new Toyota Prius. There are few government-imposed limits on entry into the taxi market in D.C. A driver takes a class, passes a test, pays a few hundred dollars per year, and welcomes his customers. Taxis are plentiful and the prices are pretty low, which is no doubt appreciated by the politicians and their staff members who use them.

In New York City, by contrast, the artificial scarcity of medallions generated by the government has driven up the price to $766,000 (source). Taxis can be tough to find, especially outside of Manhattan, and the customer needs to pay enough to provide the owner with a return on a $766,001 investment (a lot of New York cabs seem to be worth about $1 for the vehicle, so add that to the cost of the right to work (the medallion)). The drivers see very little of this money, as competition keeps their wages minimal (more).

The situation is similar in Boston, with medallion prices a significant fraction of a million dollars.

Students of politics might not be surprised that in a city where many taxi customers are politically powerful, things are set up so that taxi rates and availability are as favorable as possible for the consumer.

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When Americans elected someone who identifies himself as “black” as president, folks said that this might usher in a new era of open minds and tolerance. I’m wondering if, ironically, Obama will end up presiding over the greatest increase in employment discrimination that the country has ever seen.

I’ve started six companies and had the good fortune to operate most of them during the prosperous period 1985-2006. I hired whites and blacks. I hired women and men. I hired 18-year-olds and 55-year-olds. I hired Muslims, Hindus, Jews, and Christians. In addition to Americans, I hired people from Pakistan, India, China, Germany, England, Canada, Australia, Japan, Croatia, South America, and various parts of the former Soviet Union. Was I trying to make a statement about diversity? No. I was trying to stay in business. We had growing demand from customers and, thanks to the strong economy, there weren’t many qualified applicants for the jobs that I offered. I felt lucky whenever I could find someone whom I was enthusiastic about hiring.

This article (dated from some time in 2009 according to the text) says that, due to the 25 million Americans who are unemployed or underemployed, there are typically 200 applicants for every job opening in the U.S. If we assume that 15 of those 200 are pretty well qualified, that leaves an ample opportunity for personal prejudice to operate. If an employer does not like workers of a particular race, he need not hire any and won’t face any financial consequence. More realistically, if any employer is prejudiced against older workers, who are rendered less attractive by government mandates to provide them with ruinously expensive health insurance, he or she can hire a workforce of twentysomethings.

In Obama’s speech he noted that “My administration has a Civil Rights Division that is once again prosecuting … employment discrimination”. I think this makes sense. In a healthy classical free market economy, there would be almost no involuntary unemployment and a firm practicing discrimination would risk being overtaken by competitors. In a moribund planned economy, however, there is ample opportunity for cost-free employment discrimination and only a larger government can discourage it (though the Framers might ask why this isn’t a job for the 50 states; see The Dirty Dozen).

As government tends not to be perfectly efficient, my prediction is that Obama has a good chance of presiding over a massive expansion of employment discrimination in America. I expect this to fall hardest on older workers.

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I’m wondering if Barack Obama’s State of the Union speech will discourage private investment. Obama promised a range of economic planning initiatives, including support for favored exporters, additional support for the residential housing market, and subsidies for renewable energy. It is uncertain as to whether Congress will approve new spending or regulations, but in the mean time consider the perspective of a Jane Businesswoman. Suppose that Jane invested in washing machines last summer, having gotten a good deal from a manufacturer. But then the Federal Government launched Cash for Clunkers, which induced all of Jane’s customers to max out their credit borrowing to buy new cars and take advantage of the Clunker windfall. As none of Jane’s customers could afford to buy a car and a washing machine during the same season, she took a beating on the investment.

How can Jane feel comfortable investing in something other than the industries that are now going to get special favors from Congress? No problem, you might think. She can invest in renewable energy. But so are all of the other people chasing the new government handouts. Then what happens if Congress does not follow through? The investment in renewable energy becomes a loss as well.

Could it be that any promise of government economic planning will reduce private investment until the subsidies are either implemented or definitively rejected? If so, perhaps the government should do its economic planning in secret and then announce new initiatives when they are enacted, the way that electronics and software companies do with their new products (early announcements tend to depress sales of the existing product).

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Got an email today from the airport where we fly our little planes:

Due to recent cost increases by the Transportation Security Administration (TSA) for the security threat assessment (STA), the Massport board of directors have approved a fee increase for SIDA badge related costs.

Perhaps this reveals a bright side to the government running nearly 50 percent of the economy: they can prevent deflation.

Background: Our airport, which had never experienced any security threats or problems (in fact the U.S. Air Force was comfortable leaving its planes unguarded and unlocked out on the ramp), after 9/11 decided, in conjunction with the TSA, to implement the same kind of security badge system in place at America’s largest commercial airports (the DFW airport explains the process). Never mind that we had only five commercial flights per day, each one on an ancient 19-seat turboprop; far busier airports managed the same problem by painting a red stripe on the ramp and telling their general aviation pilots not to walk over the red stripe. The airline went bankrupt in 2007 and since then we’ve had no commercial flights, but we still have the badges, the card readers, the keypads, the fingerprint readers (never got those to work), etc. Hangar rents were doubled and I’m not sure that the extra funds were sufficient to pay for all of the new security gates. The “security threat assessment” mentioned in the email is the TSA checking to make sure that Joe, the guy who has been a flight instructor at the airport for 20 years, has not been convicted of murder, rape, or extortion in the preceding two years since his last STA (this application shows the complete list of crimes).

[I’m not sure why the cost of checking for murder convictions has gone up, actually. I don’t think that the TSA has the energy to visit every courthouse in the U.S. Therefore they are probably checking it on a computer system. So basically we are paying for someone at TSA to type in a person’s name in a search box and click “submit”. Why the airport itself could not do this is unclear. Presumably giving access to the fancy computer system to an airport employee would not be as effective as having the trained professionals who approved Umar Farouk Abdulmutallab for his coat-less luggage-free trip to Detroit do the typing. Anyway, regardless of who types the query, shouldn’t the cost of a computer search come down slightly every year? Nearly everything in private industry that is computer-based has gotten cheaper.]

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Here are the parts of the transcript of Barack Obama’s State of the Union address that struck me…

“The plan that has made all of this possible, from the tax cuts to the jobs, is the Recovery Act. That’s right – the Recovery Act, also known as the Stimulus Bill. Economists on the left and the right say that this bill has helped saved jobs and avert disaster.”

I would have liked to see the fact of persistent unemployment confronted more directly. Business people are greedy. The world is awash in dollars (unlike in the 1930s when the money supply was strangled by being pegged to a limited supply of gold). If a business person could hire an American and make a profit by doing so, the American would be hired. Some combination of regulations, taxes, costs, and education level make it unprofitable to hire those Americans who are currently unemployed. Obama proposes complex, temporary, and patchwork changes to some of these factors. If a small business person were smart enough to navigate this landscape of regulation and limited-time tax breaks, couldn’t he navigate the regulatory and tax landscape in Singapore, Brazil, China, or India?

“Well I do not accept second-place for the United States of America.”

This reminded me of the last time that I played the SET Card Gamewith a 9-year-old girl. I told her that “second place was just first loser”. Whenever she looked away, I stole cards from her deck and put them on mine. After winning, I ordered a three-foot-high red and gold trophy engraved with her name and “Second Place – First Loser” underneath. When it arrived at her apartment, her 3-year-old sister opened the box and scattered styrofoam peanuts across three rooms.

“But to create more of these clean energy jobs, we need more production, more efficiency, more incentives.”

More central planning. One of the nice things about a market economy is that prices send signals to producers and consumers. In our current economy, the prices of most agricultural products are tweaked by various subsidies and regulations. A farmer certainly cannot look at the wholesale price of a crop and use that to decide whether it makes sense to plant the crop. He or she might make more money by getting the government to pay him not to grow anything! The prices of houses are distorted by tax credits for buyers. If you’re a builder, should you break ground on a new house? Whether it will be profitable may depend entirely on whether the government extends the tax credits, something entirely unpredictable and beyond your control. A few more “incentives” should be sufficient to render all previously acquired business skills obsolete.

“we need to export more of our goods. Because the more products we make and sell to other countries, the more jobs we support right here in America. … We will double our exports over the next five years.”

I’m not sure that this central plan makes sense. Working hard to build stuff and then sending it offshore for foreigners to enjoy does not sound like a way to increase our standard of living. Imagine if we grew wheat, harvested it by hand, and exported it. That would result in a huge increase in export-related jobs, but would we be better off? Shouldn’t the goal be to get foreigners to work really hard making things and sending them here? While we send them back as little as possible? (We were doing a great job for a while with China, sending them dollars that we printed and taking electronics in return.)

“we’re working to lift the value of a family’s single largest investment – their home”

I wrote about this planned economy element in “Tax subsidies that encourage speculation in housing”, and in “Why do we want to maintain the world’s highest housing prices?” (April 2008). The Soviets built plain and functional housing, reserving their heavy investments for factories, mines, and machines. What do our central planners know that the Soviets didn’t know?

“We will continue to go through the budget line by line to eliminate programs that we can’t afford and don’t work. We’ve already identified $20 billion in savings for next year.”

We’ve figured out to save almost enough to pay out bonuses at a single Wall Street firm. An alternative way to look at this is that, with combined federal and state government spending approaching 50 percent of GDP, Obama and his team have figured out how to cut 0.14 percent.

“Starting in 2011, we are prepared to freeze government spending for three years.”

If you invest in a U.S. business today, be prepared for massive government expansion and tax increases in 2014.

“Since the day I took office, we have renewed our focus on the terrorists who threaten our nation.”

I.e., the TSA continues to hassle grandmothers, families traveling together, flight crews in uniform traveling together on the 3rd day of a trip, business frequent flyers, et al., while extending a welcome mat to a 23-year-old Nigerian man who checks no bags for a trip across three continents, carries no coat for a visit to Detroit in December, and whose own father reported him to the CIA as planning to carry out Islamic terrorism in the U.S.

[Personal anecdote: Together with a captain and flight attendant, after an overnight in the middle of a 4-day trip, I tried to go through an airport security screening. We were all wearing our uniforms and bedecked with airline IDs (these can be checked against a national database, complete with photos (the initiative for developing this came from the carriers and pilots, not the federal government)). Something in one of my pockets set off a metal detector. Two TSA employees spent 15 to 20 minutes hassling me, patting me down, reading my Jeppesen charts, etc. They did not ask the other members of the crew “Is this the same person that you flew down with yesterday?” Nor did they ask themselves “Why are we looking for a small piece of metal on this guy when, at any time during the flight, he could reach for the crash axe?” or “Why would a pilot need to have a weapon in order to harm passengers? Wouldn’t simple incompetence suffice?” While hassling me, these TSA workers were not available to look at other people and items going through security.]

“We are helping developing countries to feed themselves”

With our farm subsidies, import restrictions, and dumping surplus bags of grain into poor countries, wouldn’t it be more accurate to say that we are a major impediment to Third World agriculture?

Conclusion: Another smart person in love with central planning. How does this love develop? Suppose that you notice that a trip to the supermarket works out better with some advance planning. And then you notice that you’re smarter than the average American. So you decide that the U.S. economy would work better with a touch of planning and, by Jove, you’re just the person to do it!

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In December 2007 I posted my prediction that Barack Obama would win the 2008 election and then we’d all be depressed a year later. The last paragraph:

In December 2009 we will suffer a massive nationwide psychological depression. People assume that all of their problems can be blamed on George W. Bush personally. When the hated King Bush II has been back to Texas for a year and the beloved Obama has been in office for a year, people will look around for a quick status check. They will still be stuck in horrific traffic. They will still be paying insane prices for crummy housing in bleak, lonely communities. Their children will be getting a terrible education at the local public school, perhaps developing to about 15 percent of their potential. If in a hip urban area, criminals will still be smashing their car windows and taking their GPS. They will realize that virtually none of the things that are unpleasant about their life have anything to do with the federal government, except for the war in Iraq, which a quick check of the headlines will reveal that we are still losing.

Now that Barack Obama is preparing to give his first State of the Union speech, I’m wondering if this prediction was accurate. Has Iraq turned into a stable democracy, contrary to my prediction? If so, is the replacement of Iraq by an expensive losing war in Afghanistan equally depressing?

I certainly did not predict the big stock market collapse of 2008 (depressing) and the subsequent transfer of most of America’s remaining wealth to Wall Street (extremely depressing to everyone outside of Manhattan). So we’d have to subtract out any depression caused by the financial collapse and wealth transfer from depression caused by Congress and Obama’s inability to improve American lives in the ways expected by enthusiastic voters.

So… was the prediction basically accurate or not? (I’m still smarting from my inaccurate prediction that Democrat Martha Coakley would win the Massachusetts Senate election.)

[Separately, the peasants will not be able to fly their little airplanes while the King addresses his subjects. The FAA has issued a temporary flight restriction for 8-11 pm on the night of the speech, forbidding people from taking off or landing at the little airports near Washington, D.C. Got a $50 million Gulfstream G-550 parked at Dulles? There’s an exception that will let you take off for Davos or Aspen.

It could be worse. If you’re a flight school in northwest Washington State, this Olympics TFR imposes a two-month moratorium on flight training. So you get to relax for two months with no revenue. As with other security-based TFRs, the government is not going to compensate the flight schools or airplane owners for loss of revenue and loss of use.]

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About a week ago, I swung down to Manhattan to see the Bauhaus show at the MoMA before it closes (tomorrow, January 25, is the last day!). On a Friday afternoon, even before the 4 pm “free entry courtesy of Target” crowd rushed in, the place was almost as packed as the sidewalks in Times Square. Tickets for the Tim Burton show had all been given away by mid-morning, so my $20 ticket did not get me into that (though the people who showed up shortly after 4 pm and paid $0 got timed tickets). There were more people standing in front of most paintings in the museum than had been on the Friday afternoon flight from Boston to LaGuardia (150,000 lb. jet). The Monet Water Lilies were gathered together in a room for contemplation. About 200 art lovers were chatting and cell phoning in the room, giving it a high school basketball game ambiance. Here’s a video that I made with a first-generation Android phone: youtube.

The Bauhaus show had some lovely colorful stuff. It was interesting to see how craft-y a lot of the stuff was. In particular, they did a lot of wall hangings that were custom-designed and then handwoven. It would be nice if there were a consumer-priced Web service that would allow you to design a tapestry and then have a computer-controlled loom weave it.

The adjacent Gabriel Orozco show features a stunning slimmed-down Citroen (photos; my Android video).

MoMA is so crowded that it is unclear that the art can be viewed as intended. A rock show is designed to be experienced by 10,000 people and, in fact, probably would not work without the people present. A movie is designed for 500 people to see simultaneously and sized accordingly. Most of the stuff in MoMA was intended to be quietly contemplated in a rich person’s house. Are Monet’s Water Lilies still the same work when consumed in a noisier environment than Grand Central Station? As the population of the planet expands, perhaps there is a need for artists to create work that improves when it shares a room with hundreds of people chattering away on mobile phones.

After the MoMA, my hosts took me to dinner at Anthos, a nearby Greek restaurant. Some of the food was excellent, but the $100/person price tag (we had one bottle of wine, almost the cheapest on the list, and split a single dessert) was more memorable than the meal. My local friends did not blink at the prices, though neither of them is TARP-funded.

At breakfast the next morning, a 6-year-old boy at the table demanded that his father cut up the pancakes for him. I expressed shock that a 6-year-old kid couldn’t cut his own pancake. Even a 2-month-old puppy could manage to eat a pancake unassisted. My contribution to the meal was an entire package of bacon, baked for 10 minutes at 400 degrees just as suggested on the back of the label. The young boy tasted one strip and, without malice, stated simply that “this is the worst bacon that I’ve had in my entire life.”

Back at LaGuardia, there were literally more TSA agents than passengers in the terminal. Our flight to Boston had 10 seats occupied on a plane that holds 76. The Obama Economic Miracle has yet to reach the airlines…

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I would appreciated comments on a draft of a book review of The Dirty Dozen, about the Supreme Court cases that have made our modern federal government possible.

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I asked friends to explain their rationale for voting before and after the recent Massachusetts election that sent Republican Scott Brown to fill a U.S. Senate seat that had been held by Democrats since 1954. Opinions of Coakley ranged from “mediocre party hack” to “evil opponent of citizens’ rights to, for example, videotape the police making arrests.” Nonetheless, all voted for Coakley with the expectation that she would hold the Senate seat until her death or retirement. The main reason cited was that they wanted her to be in the Senate to vote for the latest $1 trillion health care spending bill. I.e., they were electing her for decades, regardless of her fitness for the job, because they thought that her one vote on one bill would be so important.

I pointed out that the health care bill wouldn’t change anything in Massachusetts. We already have a similar state law that requires residents to purchase health insurance and, if they can’t afford it, sticks taxpayers with the bill (this increased demand for health insurance has resulted in insurers raising premiums to the highest prices in the U.S., and probably the world). “But people in other states won’t have guaranteed insurance,” was the response. I pointed out that the federal bill would still leave tens of millions uninsured (earlier post). “It will be a lot better than what they have now.”

I then reminded the Coakley voter that Massachusetts gets back only 82 cents of every federal tax dollar (source). Did he or she really want to pay for health insurance for some guy in Alabama ($1.66 back for every dollar put in)? The answer was a resounding “Yes!” If we wanted to be altruistic, was it truly better to buy gold-plated medical care for people in other states than to help out folks in Haiti who have nothing? The answer was that we can easily afford to do both.

Separately, a look at the election results map revealed that there was a fairly strong correlation between being bled by the government and voting for the Republican and being fattened by the government and voting for the Democrat. Economic basketcase towns such as Springfield, where the primary sources of income are Welfare or government jobs, were solidly for Coakley. Inner city districts where people live in public housing (perhaps next door to Barack Obama’s Aunt Zeituni) voted for additional government expansion; suburban districts where people work long hours at private employers and pay heavy taxes to support 35-hour/week government workers voted for Brown. What can the Democrats learn from this? If they can somehow ensure that 51 percent of voters are collecting Welfare, working for the government, or somehow else being net beneficiaries of government spending, they should be able to control the U.S. indefinitely.

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