Dim Bulbs

I live in Concord, Massachusetts – the town made famous by the brave militiamen who fired the shot heard round the world on April 19, 1775.  A couple months ago Concord was in the news again when our Town Meeting voted to outlaw the sale of bottled water. That vote was an embarrassing shot in the foot but revealing. Many of today’s Concordians have little faith in the market or in their neighbors’ ability to make their own decisions. And please don’t suggest that the Town Meeting expresses the will of the people.  It is an easily and frequently manipulated form of government that serves the special interests of those willing and able to pay an exorbitant and unnecessary poll tax in the form of two to three long nights of listening to uniformed debate among scientific poseurs.  That a group of (perhaps) well-meaning folks are able to pass inane and unenforceable vanity legislation that bans bottled water is evidence of the system’s susceptibility to gaming and being hijacked.

Unfortunately, the ranks of those who would micro-manage our lives is growing. Concord has empowered a group to study how best we can foster a sustainable lifestyle in our community. The group has inflated its apparent profile by recruiting like-minded allies from those political precincts that believe no man’s home is his castle. A recent article (manifesto?) in the local weekly by our sustaining leader was full of over wrought statements about things we can no longer do if we want to sustain “our precious planet.”  These unsustainable sins include the usual suspects; burning fossil fuels, installing incandescent bulbs, and of course buying produce from large, remote farms. This litany of neo-Malthusian dogma confirms the observation by the great British biologist Sir Peter Medawar that:

“…the spread of secondary and latterly of tertiary education has created a large population of people, often with well-developed literary and scholarly tastes, who have been educated far beyond their capacity to undertake analytical thought.”

Almost every prediction by neo-Malthusians has proven pathetically inaccurate. Paul Ehrlich, the late author of the 1968 book, The Population Bomb, prophesized that increasing population would outstrip resources and lead to food riots. Ooops, instead we became too obese to riot over food. Ehrlich was so certain that inexorable scarcity would drive resource prices up that he unwisely accepted a bet with economist Julian Simon that prices on a group of metals (selected by Ehrlich) would increase dramatically; of course he was wrong – all of the metal prices went down. Similar catastrophic warnings from groups such as The Club of Rome, that in its 1972 report The Limits to Growth, made dire predictions about the exhaustion of 19 essential minerals that have yet to materialize.

Worse than having continually to prove them wrong scientifically and intellectually are the consequences of the actions the neo-Malthusians do manage to enact to save us from our stupidity in order to inflict upon us theirs. The earth is running out of oil, cars burn a lot of gasoline, the people don’t appreciate the need to conserve and so Car Average Fuel Economy standards are necessary. Never mind that CAFÉ grossly distorts the automobile market and undermines U.S. manufacturers who are forced to make and sell, at a loss, vehicles that people won’t buy at a price that would make them profitable. The neo-Malthusians, never ones to consider or admit their culpability, blame the demise of GM and Chrysler on the unremitting stupidity of corporate management. If only those companies had made more fuel-efficient unprofitable cars they could have avoided the embarrassment of bankruptcy! It wasn’t the 13 MPG (city) Chevy Silverado or Cadillac Escalade that drove GM off the road. That was accomplished by the snappy 25 MPG Chevy Aero and its predecessor Geo, cars so cramped and ugly that even neo-Malthusians wouldn’t buy them at break-even prices. Prices on those cars have to be lower than cost because car buyers are too stupid to properly discount their fuel cost savings and the priceless  satisfaction that comes from sustaining the earth by driving a car that looks like those circus vehicles from which climb a dozen clowns. Neo-Malthusians seem to prefer Volvos – an unsustainable car soon to be made in China.

Why do neo-Malthusians behave this way? There are, I believe, three primary reasons. The first is given by Medawar; they cannot (or, charitably, will not) understand the dynamics of markets and technology. Today’s ratios and correlations are not destiny. The future is not a straight-line projection of the recent or current situation but the result of complex dynamical interactions among existing and unforeseen factors that are beyond our capacity to fully comprehend. This was the analytical failure of the original Malthus and his heirs continue to make it. In almost very case the neo-Malthusian argument is simplistic (“it’s obvious that… there is only so much…”) and does not survive analysis. When economists prove that a cherished policy like forced recycling wastes resources and damages the environment, the neo-Malthusians often react with ad hominem slurs.

Second, neo-Malthusians believe that they are smarter than the market or society as a whole. They cannot appreciate or accept that a largely self-directed system can properly price and allocate resources. So, for example, the Germans pour billions of Euros into a misconceived solar energy industry. We are busily reducing demand for real jobs by subsidizing putative green jobs and are almost certain to repeat Spain’s experience of destroying two jobs for each created in its subsidized solar industry.

Third, they fail to appreciate the potential of people to solve creatively and positively problems. If no one is smarter than you and you can’t see any other solution, then there can’t be one. As Simon pointed out, “The ultimate resource is people—skilled, spirited, and hopeful people who will exert their wills and imaginations for their own benefit, and so, inevitably, for the benefit of us all.” Better to ban soft drinks than to embrace the amazing potential of genetic engineering to produce better, more nutritious, less costly and, yes, more sustainable food sources. Restrictions on progress deny us the benefit of human creativity in exchange for the conceit of some poorly educated activist or bureaucrat.

We are on the way to imposing a fate similar to car buyers on people who buy light bulbs. In a few years the incandescent light bulb, invented or perfected by Thomas Edison in 1880, will, like heroin, be illegal to purchase and perhaps to possess. This will impose unnecessary costs on customers and the environment. Removing the incandescent bulb from the portfolio of lighting sources will increase lighting costs; there are several places in my home where light is needed very occasionally and it would take a few decades to amortize the additional cost of a compact fluorescent bulb. By anointing the CFL, the competitive pressures to improve them and to reduce their costs are reduced. CFLs are not an unmitigated environmental boon – they require more resources, including energy, to produce than do incandescent bulbs and they currently contain mercury which makes some people concerned about exposure in the event of breakage.

The mercury fear may be allayed by the development of solid-state light sources such as LEDs that are on the horizon. But LEDs are so efficient that they will likely stimulate greatly the demand for electricity. As reported in a recent Economist story, research by Jeff Tsao of Sandia National Laboratories published in the Journal of Physics D: Applied Physics found that if the real price of electricity remains constant, the number of megalumen-hours consumed by the average person will rise tenfold, from 20 to 202 and require twice the quantity of electricity to operate.

How can this happen? As any economist will tell you, decisions are made on the margin. A person consumes a lighting program defined by the rate of lighting (lumens), volume (square footage illuminated) and duration  (hours of illumination) and as the marginal cost of expanding that program decreases relative to other goods, that person will increase their consumption of light.

In the end we, and perhaps even the neo-Malthusians, will see the light. I, however, am not waiting for the LED to supplant the CFL but instead am depending on old-fashioned economic phenomena of incentives and trade to keep me supplied with evil incandescent bulbs. I am very sure that the Mohawk Indians or someone like them will soon branch out from selling over-taxed cigarettes and enter the incandescent lighting business.

Posted by Bob

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Stimulus II – Beyond Parody

The President has announced a second stimulus which, by the way, is not referred to as a stimulus, given the success of stimulus I. It is being referred to as an infrastructure rebuilding program, or some such thing. The purpose is not to stimulate the economy before the election; it is too late for that, but to get some positive ink portraying the Republicans as dyed-in-the-wool obstructionists. There are many good reasons for questioning this $50 billion largess.

I have always found it odd that Democrats, in particular, push for fixing roads and bridges during a recession. They quote studies that say our infrastructure is crumbling which, I’ll agree, is probably correct. However, it was crumbling even faster before the recession when it had more vehicles plying their way across it. Where was the concern, then? If the recession hadn’t occurred they would be in even worse shape. Obama also mentioned redoing airport runways. Are we to understand that planes are landing on crumbling landing strips. Where are the FAA and the transportation safety boards? The railroads are also being included in this spending spree. I thought they were privately owned.

Government bodies have done this for years: pushing off maintenance and repair because doing it would require either raising taxes or, shudders, restraining spending elsewhere. Runways, roads, and bridges are physical capital that need to be maintained and upgraded on a regular ongoing basis, not an episodic one whose primary goal is to obtain votes or campaign contributions.

Attempting to use infrastructure projects to boost the economy is doomed to utter failure. A critical complaint about government spending to counteract recessions is the lag between the approval of spending funds and the actual spending. Infrastructures are at the extreme end of this spectrum. By their very nature they are long-lived with the funds entering the economy relatively slowly. This round of projects is to be a six-year endeavor. The unemployed won’t be with us if they have to wait that long for the economy to turn around.

A second point is the question of whether or not we should put all of our stimulus funds into one sector: civil engineering projects. On the margin does the citizenry think this is the most critical area to devote resources to, today. I don’t know the answer, and it is doubtful we will ever find out. A third point is that these big infrastructure projects are not very good at getting people back to work. These projects tend to be very capital intensive so that for any given amount of stimulus dollars spent they increase employment less than many other activities would.

The upshot is that the politicians are continuing to treat the populace with callous disregard by their dereliction of responsibility to keeping the roads, bridges, and runways at acceptable levels of repair. (Would a private insurance company be willing to underwrite coverage on some of these roads and bridges?) The spending of the $50 billion won’t impact employment or GDP now. It may add excess demand for resources in three years when the Fed is trying to slow the economy. The only things that it can be assured of doing are increasing the national debt and giving politicians talking points. It would be funny if it weren’t so sad.

Posted by Jim

Are All Deficits Created Equal?

One of the ongoing debates in Washington and throughout the Land is whether we need a second dosage of stimulus. By all accounts the first one has been a colossal bust, Joe Biden and Robert Gibbs notwithstanding. Over $800 billion was budgeted: on top of the TARP, GM and Chrysler bailouts, and the never-ending Fannie Mae and Freddie Mac trips to the Treasury’s ATM to address the dramatic economic slowdown. This recession is the worst since the early 1980s. The responses to each are instructive.

In the 1981-82 recession, President Reagan made two critical choices. First, he supported Fed Chairman Paul Volker’s efforts to bring inflation down from its, by US standards, outrageous rate of 13%. This courageous act extended the recession but helped lay the groundwork for a quarter century of prosperity. Secondly, he cut tax rates. More precisely, he slashed the tax rates. Individuals and businesses now kept a larger share of what they produced. The tax rates didn’t kick in until 1983 so people deferred activity from 1982 until then, thus making 1982’s performance worse than it could have been. Tax revenues rebounded over time even though the deficit rose initially. (To be sure, Congress couldn’t restrain the impulse to spend the gusher of revenues.) Over the 1982-1988 period, the American economy grew by one-third(!) – the equivalent of annexing West Germany. The key was that the government didn’t suppose it knew best as to what activities and actions would be the most productive. It left those decisions to the individual firms and citizens. Clearly, it worked well.

Fast forward to today. The President and the Congress have earmarked most of the funds to prop up profligate state and local governments and school districts. These funds were used to prevent layoffs. There were going to be layoffs because the public sector unions REFUSED to forego pay increases, even while 55% of all Americans had either lost their jobs or had their pay reduced in the past two years. Anecdotes are rife about the callousness of the union leadership when it came to adapting to the new reality or throwing some members overboard. The real issue is whether these subsidies to other government units will result in the economy growing. To date, they haven’t. Joe Biden is reduced to touting the fact that two hundred thousand homes have been weatherized. Wow! There are over one hundred million homes in the US. You do the math on when this will be complete. I don’t need to remind you that these weatherizing programs have been notorious for their shoddy workmanship and flagrant theft over the years.

The premise underlying the Keynesian models that are being used by the administration and the pundits supporting them, personified by Paul Krugman, is that it doesn’t matter where one puts another dollar into the economy as long as another dollar is put in. I doubt if Keynes himself believed this. Resources need to be put to their highest valued uses if an economy is to prosper. The Harvard economist, Robert Barro, has shown that the government multiplier effect is, at best, about 1 and often below 1. For those who remember their introductory economics, a multiplier greater than one is the holy grail of government spending: take a dollar from individual A and give it to individual B and, voila, there is now more than a dollar of output. This is alchemy at its best.

Current macroeconomic research shows that the problem with most advanced economies such as ours is not the lack of sufficient demand but the relative dearth of investment, productive investment. Building more homes barely qualifies as productive investment, especially when at the margin those who were induced to buy one can’t afford them. This is the 21th century version of digging a hole and filling it back in. Government policies: the tax subsidy to home ownership; the community reinvestment act (CRA); HUD policies in the late 1990s; low interest rates from the Fed; and congressional meddling (read: Barney Frank); all contributed to the massive over-investment in housing. This mal-investment, if you will, now needs to be wrung out of the system. Since houses are long-lived assets this will take awhile.

Another key component of current macroeconomic thinking is that expectations of what the future will bring matter. Markets do not like uncertainty, either. The expected return of higher income tax rates in 2011 has influenced decisions. Projects that look marginally profitable today will be under water with the higher taxes, so these projects get shelved. The quagmire known as the health care reform act continues to causes firms to cringe as more of its details become known. While many of its mandates aren’t direct taxes; that is, they won’t show up in the government’s financials; they act like taxes, thereby reducing economic activity.

Recoveries tend to mirror the decline: if the latter was sharp, the former also tends to be since there is significant slack that can be easily absorbed without creating bottlenecks. That is another reason this recovery is so troublesome. The economy hasn’t bounced back and has slowed precipitously so far this year, in spite of the massive injections of money that have ballooned the deficit. Increasing the deficit with no prospect for growth to generate the revenue to pay for it is a recipe for disaster.

Germany took the tack opposite that of the US. It lowered tax rates and reduced regulations and it did not spend itself silly. Its recent growth, as that of many other European economies, has dwarfed that of the US. It is said that Albert Einstein defined insanity as doing the same repeatedly and expecting different results. The Administration has obstinately clung to its approach, despite its abject failure. The failure is clear from the current results. A comparison to the 1981-82 recession, and the results coming in from elsewhere around the world indicate that the approach the US has taken is seriously flawed. We can have deficits either with increased government spending on projects that pass the political test but not necessarily the economic test, or we can have deficits resulting from reduced tax revenues due to lower marginal tax rates. The latter is the preferred approach if the goal is to return the economy to its long-run growth path.

Posted by Jim