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Economics

Our Unsustainable Model

http://thezman.com/wordpress/?p=5681

Everything is based on growth, real or imagined. Our institutions and culture are based on growth. We deliberately debase the value of labor through currency manipulation, for example, in order to encourage productivity and economic activity. The explosion of debt is so the welfare state can keep growing. Those massive credit markets everyone now fears is to keep the economy growing.

More workers needing to do less labor leads to an abundance that nobody can afford. Economic futurists should be looking at new models for a post-scarcity world.

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A Negative Railroad for Chicken

http://cleveland.cbslocal.com/2013/05/16/buckets-of-kfc-chicken-smuggled...

A new company has emerged in the Middle East that smuggles fast food from an Egyptian Kentucky Fried Chicken to Gaza residents through a tunnel.

People in the conflicted region can now satisfy cravings for food from the Louisville-based fast food headquarters by ordering through a company that charges the American equivalent of $30 for smugglers to bring the greasy goods from Al-Arish in Egypt to the doorsteps of hungry customers.

They tell me the grilled chicken isn’t greasy.

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The Worth of Work

Sippican Cottage muses on the difference between working and making:

Unlike most of the world, I am not allowed to have the Process be the Product. At the end of the day there has to be something tangibly different with the world or we don't eat. Sometimes we don't eat anyway. Most of the world we inhabit now is all Process and no Product. What is Twitter, or Tumblr, or Facebook, or a million other things you could name that consist solely of: This is how I go, when I go like this.

The federal government thinks the process is the entire product. The public school system can produce only public school teachers. The EPA is now supposed to protect the air from humans. The Department of Energy doesn't make any, and would prefer you didn't as well --or else. Cities like Detroit are trying to exist with no population now. Search your mind. You'll have to search hard to find exceptions, not examples.

As I have complained more than once, talking about jobs and creating jobs misses the point. What matters is creating value. Not just something you value, or that has an abstract value, but something that has tradable value. Something you can exchange for food and shelter.

The speedometer doesn't make the car go faster. Showing up to a job is no guarantee that the effort is genuinely adding to the global wealth. Process is a cost, an expense. It may be necessary, but keeping busy isn’t a sustainable strategy. The process must lead to a product. Otherwise, after all the effort, somebody ends up more hungry than if we didn’t go through the process at all.

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Economic Engineering

Here’s a metaphor for how I see the economic debate in the current election:

Imagine the economy is a bridge. The bridge has begun to groan and sway. Two engineers have proposed plans to strengthen the bridge.

The first engineer believes that more traffic moving faster over the bridge is the best solution. The second engineer proposes cutting away some of the bridge’s supports.

Obviously, neither one will fix the bridge. And either one will almost certainly bring it closer to failure.

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Diet Like Its 1993

In the midst of debunking arguments for organic foods, a Missouri farmer points out something recent headlines have missed:

Yes, this summer’s drought, which hammered the production of both organic and conventional foods, has led to a decrease in yields, but it’s worth noting that this year’s disappointing corn yield would have been a record yield just 20 years ago. The worst drought in nearly a century, and a national corn yield that would have been a record in 1993!

Food prices will still rise, since there’s not much slack in demand for corn and the stuff corn is used to make. But the underlying story is one of optimism and abundance. Similar drought conditions starved people in the 1930s. Thanks to advances in all the technology used by agriculture, we can weather the worst weather.

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Elementary School Costs More Than a House

Government policy always has economic impacts. Over time, these impacts accumulate and multiply upon one another. This leads prices of goods and services away from what they would be under a “freer market”. Distorted prices create distorted allocations, which may be good or bad, depending on how one feels about government manipulating markets in the first place.

At some point, though, the relative prices of things get so far away from “natural” prices that the system of valuation breaks down. This breakdown is what I call “The Great Repricing”.

Captain Capitalism runs a thought experiment which illustrates how relative prices have lost touch with relative values:

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Forget Money

[R]eal hiring is a function of real demand, which in turn is a function of purchasing power.

Quoted from: Karl Denninger

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Bluberry Miles

The local food co-op had blueberries on discount. Organic, of course. But they were grown in Chile.

“Eat local” isn’t a strong commandment, just a nagging slogan. When hipsters want organic blueberries, the market will find a way to satisfy them, climate be damned!

I bought some. Have not tried them yet; hope they were worth the trip.

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Iran and China Tied by Threads of Steel

Global politics and global economics are interwoven. The way the warhawks talk about Iran, one would think it is just another primitive society. It isn’t.

IRAN: The Minister of Roads & Urban Development attended a ceremony to officially launch work to electrify the Tehran - Mashhad line on February 1. The first phase of the upgrading project is expected to take 24 months to complete.

Electrification and infrastructure upgrades will raise the top speed of passenger trains from 160 km/h to 200 km/h, and allow journey times on the 926 km route to be cut from around 12 h to 6 h. Capacity will be increased with a view to raising annual traffic from 13 million to 20 million passengers.

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Two Views of Depression

MaxedOutMama looks at the GDP data for the two most recent quarters:

We didn't fall into a recession - we fell into a depression. …

  • Real spending on food dropped 2.6 billion.
  • Clothing and footwear dropped 4.4 billion.
  • Gas & fuel dropped 3.5 billion.

This economy is not improving. This is structural on real incomes.

Although I prefer measures of physical quantities (tons, yards, barrels), dollar-based statistics are not subject to much shenanigans over a recent short term.

Tam looked at the landscape a week ago and saw the same thing:

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The Value of Wisdom

Dan from Madison shares this video of “How to fold a suit”:

Lexington Green comments:

He makes it look easy. I always respect and admire practical, physical skills like this. Once the whole economy was composed of people who each knew hundreds of tricks of the trade.

Industrialization, specialization, and the division of labor into ever-smaller tasks enables each worker to produce more for his efforts. It allowed us to get off the farms and amass the wealth that enabled us to reach the moon.

The flip side of specialization is that nobody knows how to make an entire thing themselves. Each only knows a step in the production process, worthless without others doing all the other steps.

The Planning Tax

Northeast Minneapolis is not a rich part of town. It is, however, a haven for upwardly-mobile Progressive hipsters and University of Minnesota employees who do all they can to hide their six-figure incomes. Those demographics hate chain stores. Shopping local is part of their identity and a point of civic pride.

Any development proposal that might include an anchor tenant like Starbucks faces organic opposition. Similarly, any business required by zoning codes to receive a conditional use permit had better be some kind of cutesy shop and not a convenience store that would attract poor people. Never mind that lower-income households are in the numeric majority.

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A Tactical Vote for Obama

Borepatch saves me the trouble explaining why I will vote for the current President if the Republicans foist Mitt Romney on me:

Here's the problem: it's not Obama, it's Obama's world view. He's just particularly ruthless in pushing it aggressively. Obama isn't alone: he has the entire Intelligentsia on his side, the MSM, the European Elites, the international Non-Governmental Organizations (NGOs). They're all in the same tribe, which believes that things should be run by them, with a strong, interventionist government in charge (run by them, 'natch), and with the peons givering deference where it's due (to them, 'natch).

Romney's in that tribe. So's Newt, and probably Santorum. And 60% of the Republican Party. Only Ron Paul explicitly rejects that world view.

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Unicorns in Green Eyeshades

The Social Secuity Trust Funds are one of many topics where political factions talk past one another. Some say that there is no money in the funds, that the FedGov has spent them on other things. The response insists that the Trust Funds are invested in Federal securities, as required by law. It would be silly, says the responding faction, to leave piles of cash under a mattress in Washington, earning no interest. And to invest the Trust Funds in the private markets would represent a higher risk and create incentives for Wall Street to rip off the public, since the FedGov still has to redeem the investment even if the its market value goes down.

Turns out the Social Security Administration has a pretty good FAQ on the Trust Funds:

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All or Nothing in Washington and Rome

The Federal Government’s new rules requiring health insurers to offer contraception is sparking a lot of chatter. A lot of people seem to think that the popularity of contraception among Catholics is a fair justification for the mandate. Our fetishization of democracy has led folks to think that G-d’s law is subject to a vote.

Official and ancient Catholic doctrine opposes contraception. It has been argued and reasoned for centuries among the faithful. The doctrine is not subject to whim. The reported majority of Catholics who disagree with the Church would be well-advised to reconsider whether they are actually Catholic. The catechism is not a la carte.

The Obama Administration has opened new debate not only only the separation of church and state, but on the Church itself. And the Church has some conflicts:

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Ivy League Economic Thinking

Jonathan at Chicago Boyz writes:

Part of what’s happening is that the economy is recovering, to some degree because the Fed is signaling that it’s going to keep suppressing short rates and buying up long-term govt debt for the foreseeable future. This is an insane policy that funnels money to Obama’s Wall Street cronies while killing low-risk investment opportunities for middle-class retirees. It seems likely to lead eventually to significant inflation. Romney, as the likely Republican nominee, should be hammering the Fed for ineptitude and corruption, for running an unsustainable monetary policy and trying to goose the markets into the election. He should be hammering Obama for trying to reinflate the credit markets to buy votes. (The residential real estate market seems to be picking up, perhaps to some degree in response to Obama’s mortgage-subsidy vote-buying scheme. But it may also be that people see inflation coming and want to exchange cash, especially borrowed cash, for real assets.)

Obama has been very bad for the country. His high tax, high regulation, high cronyism, high uncertainty policies suppress productive investment and throw vast amounts of private capital down politically favored sinkholes. Conservative and moderate/uncommitted voters alike yearn for a Republican candidate who forthrightly defends free enterprise and the opportunity society against Obama’s decadent, stratified socialist ineptocracy. Romney, the great businessman, the man who has been running for president for six or seven years, is tongue tied.

I disagree with Jonathan and the popular view of Romney’s business career. The short version is that Romney evolved into a a vulture capitalist, using debt to buy earnings and cashing out before the debt wiped out the earnings of the companies Bain Capital targeted.

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Greed Isn’t Good Enough

Mitt Romney has been unable to articulate a detailed explanation of his two terms at the helm of Bain Capital. His campaign rhetoric has not dealt with the charges against Bain’s debt-fueled “vulture capitalism”. Instead he has attempted to adopt the mantle of business and capitalism itself. He repeats that profit is a good thing, and that he will not apologize for his success.

That stuff works in a stump speech. Profit is, indeed, a good thing. Romney alludes to Adam Smith’s words:

It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

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He Would Rather Have the Poor Poorer

Watch Lady Thatcher cut down the false problem of income inequality:

As the questioner framed it, “relatively less well-off” is not “absolutely less well-off”.

Economic activity is not a zero-sum enterprise. Every willing transaction makes all parties better off. Even if only 1% of the gain went to the poorer trader, the trade still makes him 1% better off.

There are two methods to ensure all parties benefit equally. Prohibit unequal outcomes, or forcibly equalize gains after the transaction. Either method reduces the number of possible transactions. Fewer trades mean less gain to be be divided. And as Thatcher says, “That way you will never create the wealth for better social services.” If you truly care about the poor, care about the poor, do not envy the rich.

Japanese Credit Catastrophe

Amidst the continued chicken-little bleating about the U.S. Federal debt, I submit this:

Japan’s credit rating was cut for the first time in nine years by Standard & Poor’s as persistent deflation and political gridlock undermine efforts to reduce a 943 trillion yen ($11 trillion) debt burden.

The world’s most indebted nation is now ranked at AA-, the fourth-highest level, putting the country on a par with China, which likely passed Japan last year to become the second-largest economy. The government lacks a “coherent strategy” to address the nation’s debt, the rating company said in a statement.

The problem is more than the sheer sum of debt. It is also the absence of a plan to reduce that debt.

Insulin for Uncle Sugar

The Sunday night headlines tell me there is no agreement to raise the U.S. government’s debt ceiling. The left end of my radio is convinced that a failure to keep borrowing means defaulting on the debt. They’re wrong:

assuming we have $150 billion (I'm a pessimist) in revenue to spend [for the month of August].

First, there's what we must pay.  That's $29 billion in interest.  We have $121 billion left.  Everything else is, legally, a choice.

[emphasis in the original]

Denninger works through the choices, and somebody—or bodies—will not get what they are expecting. But fully funding the raft of Social Security and VA benefits, plus paying the troops and returning zero-interest loans to the IRS tax refunds leaves more than $12 billion.

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