Freedom isn't free

And neither was my lunch. But only one of them costs $500 billion a year. The Dutch are in many ways freer than we are (i.e., not just pot), and seem to spend way less on their military. Maybe we could get some better freedom for cheaper if we'd shop around a bit instead of going to that damn defense industrial complex megamart every time.

Another Inconvenient Truth

The Austrians would be way less irritating if they would quit calling it... Quoth Ron Paul:

However, despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policies of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

As noted earlier, what the Austrians are saying now is that hyper-inflation is on the way. Hopefully they'll be wrong this time. I guess we'll see.

On the auto bailout

This is as good a rip on the automaker bailout as I've seen

Christmas 2008

So we watched a lot of basketball and some movies, played with the dog, and had a tofurkey feast. Tofurkey is one of those things that sounds like it'll be awful, but then you try it and it beats your meager expectations. It's not great, but the hilarity of the thing makes up for a lot of taste deficiency. I never really liked real Turkey either, in fact I'd say that I prefer tofurkey, though on any given day I'd rather have something else than either one...

Merry Christmas

For anyone that doesn't live between, say, Las Vegas and the international date line, Merry Christmas. I'm in that first category there, but Christmas will get around to me shortly, when it's good and ready...

Can we pull an "Iceland" on ourselves?

To oversimplify a bit, the international component of the US economy is kind of like this: we buy materials, components and finished goods from foreign countries. They buy materials, food and other stuff from us, but in a lower dollar amount than our imports. This is an accounts deficit, which means that there's a net flow into the US of goods and services and a new flow out of the US in US dollars. Easy enough.

So, the foreign exporters are getting a bunch of US dollars. They're not spending them on US goods and services - if they were, we wouldn't have a deficit. What are they doing with them? Well, they're using them as currency among themselves. Some nations use USD as currency directly, others depend on it for purchasing oil, which is traditionally sold in terms of the USD. The rest of it? Used to purchase US government debt. The big debt holders are Britain, China and Japan, but there are scores of others holding onto US debt in smaller quantities.

That works great for us - we get a whole bunch of stuff from the foreign countries AND our government gets to spend what it wants without having to worry about covering expenses with tax revenue. It works great for the exporters too - they get a huge market for the stuff that they make, and they earn interest on our debt. Two great ways to build a national economy. As long as the US economy grows quickly enough that we don't get strangled by the interest payments on the debt (and so far it has), we're all set.

There's a crucial dependency here though - the value of the US Dollar. A few thoughts there:

1. I believe that some countries, notably Iran, are now pricing their oil in Euros rather than USD, bolstering the Euro and weakening the dollar.
2. If our current economic retraction lasts a while, our GDP growth won't continue to pace the interest on our debt, meaning that the overall percentage of the national budget that goes to interest will rise, at the expense of other programs, or even more debt (a vicious cycle).
3. If the Fed attempts to inflate their way out of the current situation (i.e., keep printing money until we recover), we're likely to see overshoot inflation, where the economy has recovered but the value of the dollar continues to fall.

A little of this might be okay - a weaker dollar favors US exporters and of course makes the overall debt picture more favorable. Too much though, and the foreign debt holders won't really want our relatively worthless USD anymore. We'll have to start paying more and more interest if we want them to buy our debt. Our economy also depends on imports. We can feed ourselves, but we need to buy oil, manufactured goods, and many of the raw materials that we use to drive our own manufacturing. We owe a lot of money to foreign countries, and our economy depends on the ability to get new loans going forward. If we inflate our way out of present debt, we could make the foreign countries very upset, shaking their faith in the dollar, and breaking our current cycle.

We could become like Iceland - unable to afford outside goods, struggling to pay for even basic necessities like oil for transport and heat, and with all the other bad side effects of runaway inflation - difficulties for fixed income earners, an even worse credit collapse, etc.

The Austrians, eternal enemies of easy money, are already worried, telling everyone that the deflation we're worried about now is way better than the alternative. Not sure how serious it is yet (what do I know really), but I'm certainly worried. I might be motivated to be the first rat off the ship, running to durable goods (dare I say gold?) at the first sign of inflation's return?

The Magic Roundabout

So roundabouts are kind of superior to how we roll here in the US. With a traffic light or a stop sign, there's always a chance (sometimes a significant chance) that folks will have to stop even if there's no one to whom they're actually yielding way. Our intersections also apparently take up more space and result in more accidents. Still, this seems a bit crazy (it actually exists, in England),

Happy Solstice

Exactly one month late, here are some photos from the SB Summer Solstice Parade.

Unintended Consequences

So guess NY discouraged Goldman Sachs from paying bonuses to their execs given that the firm was getting federal bailout $$$. Makes sense, but the unintended consequence? NY State lost $178 million as a result. We're nowhere near there yet, but this points in the direction of the class warfare endgame: whenever the middle class gets rid of the upper class, they become the upper class. If Wall Street isn't bankrolling NY State's expenses, then the remaining New Yorkers are (sooner or later).

On Silverlight

You'd think this should be obvious enough for everyone, but just in case there's any remaining doubt:

It's a trap!!!

Seriously. Microsoft. Proprietary technology. Cool gimmicks for developers. "We're totally supporting Mac and Linux this time." Yeah, and Lucy's totally not going to pull the ball this time. Good grief.

Dude, sequels are only fun if they're not clones of the original. This one won't even be worth a netflixing.

More on the missing Entwives

Giles chimes in on the paucity of women in CS and, as usual, has something useful to say.

On slackeration

Q: How do you know you're reading a blog and not something more "traditional?"
A: Inconsistent post frequency.

Yeah, so I've been crisscrossing California watching ultimate, playing ultimate and buying a car. I've got a few thousand pictures, a few blisters, and a 2005 silver Honda s2k to show for my efforts.

Somewhere in there Clinton and Obama did some stuff, a stimulus package was passed (probably too late to be of any huge use), Memphis choked their way out of a national championship, the stock market continued to hammer itself, and there's a shit ton of UEFA Champions League football on my tivo (of course I'm a huge fan of the idea of soccer, but I'm a decent fan of footie in practice as well. =)

Will I post more in the future? Probably. Maybe. We'll see.

Oldie But a Goodie

Way back in 2001, as Bush was being inaugurated, the Onion called it.

Yuck!

Okay, does this creep anyone else out? Next thing little Sally will be water-boarding her Barbies...

NAFTA?

Obama on NAFTA, as analyzed by Keith at Marginal Revolution: "Apparently Obama is to economics what Mike Huckabee is to evolutionary biology."

Anyway, free trade benefits those who produce efficiently and harms those who don't. Mexican unskilled labor is more efficient because it's cheaper. American corporations that employ Mexican labor are more efficient because they have lower labor costs. Obama is worried about inefficient producers within the US, the kind that are displaced by Mexican labor. The people who, despite coming of age in the most advanced economy in the history of civilization, are unable to contribute anything more to society than the picking of fruit and the assembly of unreliable automobiles.

Listen, China's financing our deficits. In the short run, we can keep up with rising debt by inflating our way out. Sooner or later though, the Chinese are going to get smart and start investing in Euros (or heck, their own booming economy!) instead. Once that happens, we're going to have to pay our bills. With what does Obama plan on paying? Unreliable SUVs and expensive fruit? Moral of the story be: if we want to hold our own in a global economy (a given considering that we owe money to half the globe), we'd better find something that we can do better than the Mexicans can. If, despite our advantages in deployed capital, credit, educational system, tradition, and rule of law, we can't manage that, no amount of protectionism is going to help.

If Obama really wants to promote positive change, maybe he could start by asking himself why the competition between US and Mexican labor is even close. Seek productivity gains, not rents.

Score one for the Austrians

Remember when I invoked the Austrians and their belief that Keyensian attempts at spending our way out of recessions are too slow and actually end up being useless in the short-term and harmful in the long-term? Well, here's some data supporting that claim. Executive summary: in more than a dozen attempts, stimulus packages have either never, or almost never pulled the US economy out of recession.

So, what am I going to do with my stimulus check? I'm not sure. Any idea if there's a prediction market out there where I might go long on lottery tickets and short on economics textbooks?

So, do they have pictures of Senators in the break room?

Okay, so it's kinda funny that a British Minister (as in cabinet secretary, not religious post) got detained by the Department of Homeland[1] Security on his way back from a meeting on addressing terrorism. Apparently it wasn't the first time, but I'm sure that, if it helps Britain, Mr. Malik never refuses American hospitality[2].

The real question: we don't detain Senators, do we? I mean, it's granted that there's a no-fly list where you're guaranteed to get harassed, but is there a white list too? A list of people that it would be politically disadvantageous to mess with? Presumably, a pissed off Senator or even Congressperson might be able to ask some uncomfortable questions about DHS's romp through the search-and-seizure provisions of our Constitution.

Even if we assume that Congress is too impotent to warrant exemption, certainly there's a system in place to ensure that high-ranking DHS personnel themselves aren't exposed to the entirety of their creation, no? Or do they just take the train?

[1] Yeah, "homeland" sounds funny, but "fatherland" and "motherland" were already taken by the Germans and the Russians, respectively.
[2] apologies to Gandhi...

Didn't Gump already do this?

A bunch of RIT kids run cross country. 2 miles per shift, 1 shift every 3 hours, 8 shifts a day, 12 days. Considering the setup, the kids were on an absolute tear: about 6.5 minutes/mile. Sounds like an adventure

Consequences and Consequentialism

So I've been posting up quite the libertarian storm lately, which for those who have known me a long time seems somewhat out of character. Well, the opposition to wars against Iraqis, Terror and Drugs aren't new, but what's with the attacks on social projects? Aren't I the dude who was always carrying water for social security and public education?

Well, yeah. Unfortunately, the primaries have reminded me that, just like the driver of a sports car finds his actions limited by the laws of physics, social planners are limited by the laws of economics. I'll probably get into those laws shortly, with the usual motivation of exploring my understanding through writing, but for now I'd rather work on clarifying some points for my extensive readership. There are what, three of you now!?!

Anyway, in case it wasn't clear, I want everyone to have access to health care. I'm less inclined to use "every American" than "everyone," but I also recognize that the developing world will take a while to develop, and no amount of effort will bring it up to our standards overnight. I'll probably address this issue separately in the near future, but some glaring issues come to light. First, what do we mean by "healthcare?" Second, we spend an astonishingly large amount on healthcare now, so how might throwing more money at the problem possibly help? Third, while single-payer seems attractive for any number of reasons, what makes health care so special that market competition won't give us the benefits it gives us everywhere else? Fourth, if kids are really expensive, maybe we need to make sure that the people having them can pay for them. My opposition to the plans offered by the Dem candidates are consequentialist: can our economy afford to spend even more on health care without seriously looking at the supply side of the equation?

Public education is a similar situation. If we assume that income inequality is a rough approximation of productivity inequality, better outcomes for all depend on better productive capacity. Productive capacity is limited by social programs that provide incentives for forgoing productive work, but it's also limited by lack of education. In simple terms, my policy preference on this matter is identical to health care: I want for the poorest among us to be able to secure for their children better education than they can presently afford. There are balance of payments issues here of course, but more important is the matter of efficiency in the deployment of cash. I'm running out of ways to run from the conclusion that we're not getting very good education for our dollar. Significantly, outcomes seem largely affected by the character of the students that a child studies with, an effect that puts middle and upper class students at a huge advantage. This is a tough nut to crack since it won't respond directly to a simple commitment to spend more. We have to answer some hard questions about where the responsibility of the state begins and the responsibility of parents, families and peer groups ends. Once again, possibly a topic for another post, a tough commitment for me to make given that I've been spamming on econ for a week now already.

I think what I'm trying to say here is that I'm not trying to be heartless, but I'm trying to avoid bad outcomes from good intentions. Raising the minimum wage sounds great until you price a swath of workers out of the market and leave a bunch of them unemployed. Protectionism sounds great until you've sheltered antiquated industries from world developments for so long that the structural adjustments necessary to once again be competitive have gone from hard to impossible (I'm talking to you, rust belt). Tight accounting practices sound like a great way to prevent the next Enron until you realize that the cost of doing business has gone up enough that you're really just preventing the next Google from listing in the NASDAQ or NYSE instead of somewhere in Asia.

The consequence of consequentialist thinking is that intentions don't count. The War on Poverty hasn't cured poverty. The War on Drugs hasn't removed drugs from the streets. The War on Terror hasn't made the country less terrified. It's not that I'm opposed to having our cake and eating it too, it's that a lot of times it's just not an option.

Austrians, Keynesians and Stimuli, Oh My

So, Congress is ruminating on recession, studying a stimulus, etc. What's up with that?

Today we consider two mythical points in space: the aggregate supply capacity of an economy and the aggregate demand. Consumers in an economy demand that producers supply goods and services, and money is the mechanism of that demand. With murmers of the 'R' word in the streets, we fear that the two mythical points have been torn asunder.

The problem, say the Keynesians, is not that the consumers don't want all that the market can supply, rathe the problem is that they lack the money necessary to demand it. The solution is to provide the money. How to do that? Well, we can lower interest rates, but they're already at 3%. With inflation somewhere between 2% and 3%, we're damned close to what I'm pretty sure they call a liquidity trap, or a situation where a bank loses money by lending. So the Fed's done most of the what the Fed can do.

When monetary policy isn't getting it done, the Keynesians turn to the fiscal. The idea is to have the government run a deficit in lean times in order to inject money into the economy, boosting aggregate demand up to meet the supply point like it should. In practice, this means increases in spending for Democrats and tax cuts for Republicans. There are different market distortions involved with each, but the idea is the same. Milton Friedman (talking about Keynesians, he wasn't one) emphasized the unimportance of the delivery mechanism by advocating that the money be dropped from a helicopter. As a side note, Keynesians would also suggest that the government run a surplus during fatter years in order to pay back the deficits incurred during the lean ones, but I bet you can guess how often that happens.

Not so fast, cry the Austrians (the part of the Austrians will be played in this election cycle by one Ron Paul). Aggregate demand was falsely blamed, they say, it was the supply all along. If demand is trailing supply, that's just because producers have foolishly gotten caught up in bubble/boom thinking and invested too much in things that aren't nearly so valuable as presumed. Real estate, for example. Last time it was tech stocks, who knows what it'll be next time. When you're faced with a hangover, the sensible lesson is to avoid the next binge.

With that in mind, injecting money is the worst idea EVER. The Fed drops interest rates, the federal government sends everybody a check for a few hundred bucks and suddenly there's a lot of money in the economy looking for someplace to go. It could go into sensible investments, providing long-term value benefiting everyone in the economy. Or it could be rashly deployed, blowing a bubble in some other industry and leading to another period of irrational exuberance, followed by another "correction" once people realize that the new emperor is no more clothed than the others. The Austrians, we can safely say, will bet on irrational exuberance over sober investments every single time the money gets cheap.

A stimulus package therefore is a suckers game. The market crashed when everyone realized that selling dogfood online wasn't the revolution it was cracked up to be. Bush, Congress and the Fed threw money at the problem, literally. Consumers took the money, avoided the stock market (won't be fooled again) and blew a big real estate bubble (okay, they will be fooled again). What happens when the real estate bubble pops? The powers that are loosen the purse strings...

So... are we smoothing the business cycle by injecting money where it's needed, or are we chasing our own tail, causing the next boom/bust cycle by responding heavily and tardily to the last? You're the judge, and Super Tuesday's tomorrow. It's a pretty lame joke that starts "so 6 Keynesians and an Austrian walk into a primary, " right?

For the record, this isn't an endorsement of Ron Paul. More of an exploration of how far away from the status quo his positions really are...

1..5.times do puts "I win" end

Who among us could see this without immediately wanting to save the kid some time by writing a one-liner? Well, certainly not me.

The iTaser

So, get your orders in for the all-new leopard-printed, mp3-playing, fashion-forward taser. Mace is SO last season. I haven't verified it, but the article says that 43 states allow civilians to carry these things, so I suppose we'll see more and more folks accessorizing in the near future. Hat tip Bruce Schneier.

On Recessions and Dynasties

Folks have taken to debating whether or not the US economy is in a recession. If so, when did it start? How long will it last? Etc. For some reason, I can't stop associating this debate with the talking heads who deliberate over the Patriots dynasty. Are the Patriots a dynasty? At what point did they become one? When will their reign end? Are they the best dynasty EVER?

Now, while sports dynasties are ill-defined, there is at least a technical definition for recession: two consecutive quarters of negative economic growth. Unfortunately, those engaged in this debate are probably using a looser definition than that (read: their own custom-made definition). Worse, even if we did stick to the tighter definition, the clowns would probably be fighting over who's growth numbers to use.

Those crazy Italians

"Nine-party coalitions are fragile, and Italy's 61st postwar cabinet was no exception."

On the road again

Running with a friend, I'll probably work out some sort of time goal as the training proceeds. I think I probably also just wanted another chance to feel like I this:

Income Inequality

So, income inequality is on the rise. No huge surprise - taxes were cut a few years back and we have a progressive tax system. Still, it is what it is, and it's going to matter during this election cycle. I've made a point of avoiding the humdrum of primary debates, yet I've still managed to catch clips of Giuliani talking up supply-side and Laffer Curve, and both Obama and Edwards bemoaning the workers who were "left behind." So, is this a bad thing?

Yes:

• It's not a healthy society that allows some to be billionaires while others are unable to afford a doctor's visit.
• The productivity of the worker has increased too: it would appear that workers have been unable to fully reap the benefits of their own improved skillsets.
• The prices of healthcare, housing and college educations have been rising faster than inflation. These costs were formed a higher percentage of middle class budgets to begin with and are therefore disproportionally eating away at the the already disproportionately small wage gains.
• As a practical matter, humans value relative wealth over absolute wealth. I'd rather that we both earned $10 than for you to earn $20 while I earned $15. Conspicuously large differences in relative wealth are bad for social stability.
  

No:

• Even if incomes have been rather stagnant, average overall compensation has been rising with productivity. How can wages stagnate when compensation increases? Well, employers pay a pretty big share of the rapidly rising healthcare costs, right? Is there a better claim to "fair" distribution of income than that income match productivity?
  
• As discussed earlier, the whole "real wage" thing is still comparing apples and oranges. The rich earned their windfalls in part by driving the technological gains that improve the goods available for purchase. Even if low earners can't buy many more things than before, it's worth noting that a lot of the things they buy are better. Cell phones instead of regular phones, broadband instead of dial-up. Many of these improvements might be luxuries, but some are probably driving significant increases in quality of life.
• India and China have much wider income gaps than we do, they're growing faster than we are and they're kicking our ass at manufacturing and low-skilled services. If we have any hope of keeping our place in the world economy, we're going to need to adapt quickly, probably turning into a service-based knowledge economy. Someone has to replace the Big Three at the top of the list, and the stratospheric compensation packages are going to draw those people. Basically, we need to make sure that the next Google is founded in Silicon Valley instead of Bangalore or Hong Kong (n.b., SarbOx isn't helping there).
  
• We can't just take the money from the rich and spend it on healthcare anyway. Healthcare is already a scary-large portion of our economy and we'd be burning the candle at both ends if we sacrificed economic growth (what the rich would otherwise be doing with their money) in order to increase healthcare spending. Healthcare might be a problem that we just need to grow our way out of?

What am I missing here?

All work and no play

So, since we just finished talking about earnings stagnation, I figure it's time to note another inequality gap that's been growing over the years: the Leisure Time Gap. Modern technology and productivity aids have allowed Americans to enjoy ever more free time each week. Unfortunately, not some segments of the population have been left behind. It looks like the rich haven't gotten their fair share of the leisure time gains.

Now, there are some free marketeers who don't see a problem here. In their minds, the rich are making a free choice, opting to work harder and longer for more money instead of taking a break and earning less. They don't see a problem with a society where honest rich folk are forced to make a decision between surplus earnings and free time.

But I do see a problem. Asking a rich person to sacrifice some of his money in order to get some time with the kids is liking asking a Wal-Mart employee to sacrifice some of his free time in order to take night classes and train up for a better job. That's being a little cold-hearted, isn't it?

My proposal? A fair-minded progressive tax. We can set a "leisure poverty line" at 80 hours worked per week or so. Any CEOs, attorneys, surgeons, or other folk who work more than 80 hours per week would be considered impoverished and would not have any obligations under the system. Those working 80-60 hours/week would be taxed 10% of their leisure time, those working 60-40 would be taxed at 15%, 25% for 40-20 and 35% for 20-0. The numbers could be adjusted as we see fit, but you get the general idea.

As with the income tax, the purpose of the progressive taxation would be redistributive. Using needs-based screening, we'd aim to place the maximum amount of leisure time in the hands of those who have the least under the current system. A workaholic CEO for instance might currently be working 90 hours a week and earning $10 million a year, clearly well below the leisure poverty line. The beggar camped out in front of the CEO's office building might be earning a hundred dollars a week on 0 hours of productive work. Under my system, the beggar would be taxed 35% of his windfall leisure time and would be expected to perform 39.2 hours/week of unpaid labor for the CEO. That's 168 hours, minus a 56 hour/week sleep allowance, multiplied by 35%. We might also consider allowances for eating and/or exercising, subject to such restrictions as might be negotiated in committee or decreed by the executive branch after enactment.

Certainly there are some inefficiencies in the system. The beggar might for example lack poise in the board-room or might not be fully informed about the market in which the CEO's company is engaged. While these potential inefficiencies are readily acknowledged, we must accept that equality is worth some minor sacrifices from society at large.

Hat tip Tim @ 4HWW.

On Inflation and Real Wage Stagnation

When someone tells you that real wages have stagnated, or declined, or failed to keep up with inflation, what does that mean? I thought it meant that a worker in year X could purchase more with his take-home pay than a similarly employed worker presently. I've become convinced though that inflation might not mean what we think it means.

They tell me for instance that 50 cents spent in 1980 would get you the same amount of goods and services as a dollar spent in 2000. Okay, so an iPhone costs $400 today, which means that our mid-80's counterparts were shelling out about $200 right? Small price to pay for being able to listen to Air Supply albums on your phone! Now let's go back to the chart and figure out what the Greatest Generation was paying for their MRIs in 1950...

I heard John Edwards talking about how many of us Americans have been "left behind" by economic growth in the last few decades. I think I might be one of those Americans, but I can't seem to find any data on what a developer of rich internet applications earned in 1980. Can anybody help me out?

Okay, so the CPI isn't measuring exactly what we seem to think it's measuring, is it? I think it was Locke that said something about paupers in London living better lives than the kings of savages. Maybe he was on to something. The Crown Jewels of London couldn't buy a transistor in 1900, and there was never a Roman Emperor who could muster the wealth to purchase a single coach-class plane ticket from Rome to Gaul.

Yes, this is a "rising tide floats all boats" argument. It's a "smaller piece of a bigger pie" argument. It's a "apology for economic inequality" argument. But is it a bad argument?

On Sennholz

So, Ron Paul's economic theory is of the Austrian school. Paul credits Hans Sennholz both for inspiring his enthusiasm and influencing his economic theory. Sennholz has passed, but his writings live on: was he legit? Let's see...

In July of 2000, Hans notes the potential danger of derivatives based on mortgages:

Rising debt is not the only threat to the economic boom. Derivatives are the single greatest danger, especially to financial institutions. These are options, futures, and options on futures which are highly leveraged speculation on virtually everything: interest rates, stocks, stock indexes, and foreign currencies. Even bonds and mortgages may yield derivatives as they are split into the interest-only portion and the principal-only portion. American commercial banks, brokerages, and insurance companies are the primary source and traders in derivatives now exceeding $35 trillion. What would happen to derivative players if the markets should suddenly begin to readjust, if interest rates should rise suddenly or price inflation should return in force?

Fair enough. He predicted the 2007 crisis right before the 2001 crisis. Right reason, wrong readjustment. What did Sennholz have to offer more recently? Well, in Feb of 2006, he gets is almost exactly right:

And where in the cycle are we today? Most symptoms seem to point to the third phase when goods prices begin to rise and the inflators become inflation fighters....Surely consumer goods prices have been rising at modest rates because massive imports from China and other Asian countries have diminished the price pressure. But these countries compete for raw materials and energy products, such as petroleum, which has raised those prices significantly. Moreover, American real estate prices have been soaring, which enabled many home owners to consume the rising equity and go deeper into debt....The fourth and final phase of the cycle is not yet in sight. Yet we must face and get ready for the ordeal that is bound to come at home and abroad.

So, we have a dog and a tail: monetary policy and the business cycle. But which is dog and which is tail? Does the Fed create the business cycle by over-inflating the economy until it breaks under the pressure and readjusts and the cycle continues? Or does the business direct the Fed to make what attempts it can to smooth out an exogenous boom-bust process?

Sennholz, Paul and their ilk think that the dog is chasing it's tail: using a sub-market lending rate to inflate the economy is the problem, not the solution. It's an argument that makes sense, but someone's being left out. Even if the Fed put the gun in our hands, it didn't pull the trigger. Someone had to be buying all those houses, brokering all those mortgages, and investing in all those derivatives. Sure all that money has to go somewhere, but sometimes a bad investment is just a bad investment.

Did you know the Korean War was over?

Me neither, but here it is. Look at the bottom of the "Legacy" section. Of course this is just between the Koreas: Bush has suggested that we'd sign a peace treaty if Kim gave up his nukes. Then again, Congress never declared war on Korea anyhow, so there's no "war" to conclude anyway...

Identity Crisis

So, there are three things I want to be doing on June 1:

1. Running the San Diego Marathon my friend Olivia
   
2. Running the State Street Mile with my dog.
3. Attending RailsConf in Oregon.

I think there might be three semi-distinct "I's" wanting each of those three things...

On Structural Unemployment and Fair Trade Coffee

Okay, so there's a glut of coffee, and it stands to reason that situation isn't temporary. Coffee growers are too productive and they've made more coffee than the world has use for. As in any case of structural un- or under-employment, the obvious long-term solution would be for a substantial portion of coffee growers to get jobs doing something else. The United States once had its vast majority employed in farming, but now fewer than 1 in 20 US citizens is involved in agriculture. The same progression from field to factory to office has taken place in Europe and is taking place in China and India right now. In the long run, there isn't much future in coffee farming.
Fair enough, but "in the long run," Keynes reminds us, "we're all dead." What to do about the coffee over-production now? Let's explore our options:

• Nothing. Let the farmers respond to market incentives on their own and switch to more profitable sectors. Which sectors? In Latin America, narcotics and cattle come to mind. The former is profitable but a country dipping its fingers too deep into the narcotics trade risks getting the kind of US "support" that no nation wants. The latter is less profitable, more legal, and probably worse for the environment. Plus, cattle ranching and coffee farming are pretty distinct skill-sets. Ultimately, we'd hope that coffee-glutted countries could focus resources on education and industrial development, providing the training and job opportunities necessary to employ a workforce at a higher rate of productivity. Chavez demonstrates that we ought to know better than that: growers and their economic planners will eschew the "long run" and opt instead for a short run... to the Left.


• Make the purchasers pay more. This is the kind of outside-the-box thinking that might earn you a Green Party nomination. Well, pay more to whom? The problem is that there's too much coffee, somewhere, someone is making coffee that the market doesn't need. Do we pass a law requiring Starbucks to buy the remaining world surplus and let it rot? That spirals out of control - artificially propping the price will either raise supply, reduce demand, or both. If demand (and Starbucks's margins) are resilient enough in face of the higher prices, the producers will supply MORE, leaving us worse off than before. In the end, consumers are paying more for their coffee, Starbucks is making less money. Worse, we now have even more farmers producing even more coffee that the world doesn't want instead of learning to produce something that the world does want. Finally, how much "more" must the purchasers pay? Market prices are set by supply and demand, but who decides what price is "fair," and by what standard?


• Have the government pay more to make up the "difference." This is basically the same thing as making the purchasers pay more, except that the "more" comes from a broad tax-base instead of the actual consumers of coffee.


• Have the government pay growers NOT to grow coffee. No, I'm not joking, paying farmers NOT to work is a time-honored tradition. We solve the glut problem and prop the market price, but the cost of the subsidy is still a drag. More importantly, instead of paying coffee growers to grow useless coffee, we're now skipping the middle man and simply paying them to be useless. This might be a good stop-gap, but economies can't stand long with large portions of the economy being dead weight. Eventually we'd want to wean the farmers off of the dole, a trickier process said than done. Agricultural lobbies in industrialized countries have shown themselves to be incredibly tenacious in defending subsidies, so Latin American governments would be wise to proceed with caution here.


• Count on responsible consumers to pay more out of the kindness of their hearts. This is the Free Trade premise: instead of paying $X for coffee, pay $X for cofee + $Y for guilt-removal. It's an interesting gambit, and it might even work if the proponents got the market right. What do I mean by "getting the market right?" Well, the Free Traders seem convinced that Starbucks sells coffee. This is a conception that, while certainly valid, misses the point. It's like saying that an artist sells canvases and ink. Starbucks isn't making money by importing coffee from Brazil, marking it up X%, then selling it to sheeple. If they were, a competitor would come along, import the same coffee, and sell it for X-Y%. Starbucks differentiates by adding value, most obviously by brewing the stuff for you, but also by providing a consistent product line that's available wherever you go, offering pleasant facilities, opportunities for socializing, and whatever else. If your coffee chain got those things more or less right and made up for the any deficits by differentiating on social policy you'd might be able to stay afloat. Basically "feel-good" doesn't cost you anything in terms of overhead, so you can pass whatever market advantages you get from it on to the farmers. All that said, the effect is going to be pretty small. You're counting on good will, Starbucks is counting on contemporary decor and the pull of the familiar...


• Help Starbucks help you. Nope, not kidding here either. Starbucks is popular, prevalent and well-marketed -- a combination that boosts overall demand for coffee. Higher demand leads to higher price, which leads to happier farmers. The effect probably isn't big enough to erase the long-term need for coffee growers to innovate, differentiate, or get out of the market, but it might help a bit in the short term.

So, what's a socially-minded, coffee-drinking consumer to do? Quit focusing on keeping farmers afloat in a dead-end career and do what you can do to help them become more productive. Take out a micro-loan. Support educational visas so that developing countries can send more folks abroad to train and then bring the skills they learned back to their local economies. Do what you can to oppose for the War On Drugs, which leads to violence and corruption in producing countries, threatening the stability and rule of law necessary for economic growth. Don't vote for politicians who advocate protectionist policies since the bubbles they create will eventually burst, making an immediate disaster out of what should have been a gradual adjustment. It might be a lame sound bite, but it's the only way I know how to close: The only fair trade is free trade.

On State Unemployment

First quick thought since returning to Blogger... I was looking at some recent state unemployment data (via Wikipedia, if you're interested) the other day, and I noticed that of the 10 states with the highest unemployment rates in the country, 8 have minimum wages higher than the federal minimum (and, IIRC, Louisiana was one of the ones that didn't, and it was hit by a hurricane). Of the 10 states with the lowest unemployment, only 3 have wages higher than the federal minimum.

So, coincidence? If not, which way does the causal arrow point? Do states with high unemployment vote in Democrats, who in turn raise minimum wage? Or does raising the minimum wage increase the cost of labor, causing businesses to purchase less of it? My vote is with the second. You can't violate the Laws of the Market, and one of those is: ceteris paribus, demand decreases as price increases.