Guile on the Nile

Probably no nation is so constantly reminded that its best days are behind it than is Egypt. Tourists from around the world marvel at the extraordinary monuments, some over 4600 years old, erected by the people who lived and prospered on the shores of the Nile. The ancient Egyptians were not only accomplished builders and engineers but they developed an expressive form of writing, papyrus to write on, a reasonable calendar, and pioneered effective techniques in medicine and surgery. What have Egyptians accomplished since? Between Cleopatra and Omar Sharif the Egyptians haven’t played a leading role in much of anything.

We have been told for years that the Arab “street” was seething with hatred for western, especially American, thought and culture. In the past few weeks we have discovered that the people who actually go out in the street seem to share a lot of our values and wish we supported them instead of their government. We learned much the same thing last year when the Persian street tried to overthrow a stolen election but, shamefully, we watched as the mullahs crushed them. The government that condoned voter intimidation by the New Black Panthers extended the same courtesy to the Revolutionary Guards. We did a little better this time, although in truth, the Egyptian demonstrators neither looked to us nor relied on us. They seem to have been inspired by the earlier Tunisian uprising that booted out the long serving Ben Ali.

Most revolutions, including our own, are caused by economic forces, often related to foodstuffs. The Tunisian revolution was sparked by a frustrated and humiliated young vegetable vendor, Mohamed Bouazizi, who operated an unlicensed cart in the town of Sidi Bouzid. After a policewoman confiscated his cart and produce, slapped him, and spit on him, he attempted to complain to the municipal authorities who denied him an audience. As anyone who has ever dealt with the Registry of Motor Vehicles can appreciate, a frustrated Bouazizi then set fire to himself and, subsequently, to the political power structure of his country. Bouazizi’s despair and choice of death is symbolic of the economic stasis that has frustrated the aspirations of Muslims, especially Arab Muslims, since the end of their golden age 700 years ago. A lot of reasons are given for the decline of the Muslim Arab world but one is surely excessive government regulation and limitations on people’s economic lives. Some reports indicated that Bouazizi had tried unsuccessfully for five years to get the permits required for his vegetable stand.

Most of the discussion following the revolts has understandably focused on the political outlooks for the two countries. But the success of both will depend on creating effective and growing economies. Unshackling the Egyptian economy will be extraordinarily difficult; some like the Wall Street Journal’s Daniel Henninger think it nearly impossible. Tunisia looks to have the better chance. Tunisia is more economically liberal than is Egypt. Tunisia, one of the more liberal economic environments in the Arab world, ranks 55th on the World Bank’s index of ease of doing business. Egypt, the largest Arab country, ranks 94th. In perceived corruption, the Egyptians rank 98th while the Tunisians are only 59th. With respect to property rights, a decent proxy for economic freedom, Tunisia is tied for 40th, Egypt trails far behind tied for 73rd. Perhaps the most comprehensive rankings, the World Economic Forum’s Global Competitive Rankings place Tunisia 32nd and Egypt 81st. Every one of the restrictions, regulations, and impediments to a competitive market economy has an entrenched beneficiary who will fight to preserve his favored position. The Egyptian army, seen by many as the guarantor of political liberalization, has extensive interests in the economy; some estimate its holdings at 20 to 30 percent of the nation’s productive assets. Good luck getting them to part with it. Half the population is under 24 and most are unemployed or under-employed.

What can the Egyptians do to get their people usefully employed? Apart from the Nile and a little bit of oil, Egypt doesn’t have many natural resources. They have a lot of tolerably literate people and not much else. One possibility, suggested by Egyptian Keynesians, is to build some more pyramids; there is a precedent and constructing each would employ tens of thousands of people for decades. But the country already has about 140 of the things and its not clear that anyone even knows how to build one anymore. The Mexican option, sneaking across the U.S. border, is not practical since few Egyptians speak Spanish, which has become a requirement for getting an entry-level job in many parts of the U.S. The Greeks, a once-great people who retired early, were able to lie their way into the subsidizing arms of the E.U. but it’s unlikely the Europeans would fall for that again; they won’t even admit Turkey, a Muslim country with a real economy. Most of the rich nearby Muslim countries are either furiously trying to develop indoor golf courses and ski runs or buying off their own restless populations.

There is one nearby country that has a vibrant economy, a flair for developing innovative products, but a relatively small and expensive labor force and so might be interested in investing in Egypt and outsourcing production. That country has even fewer natural resources than Egypt but has a per-capita income six times as great. Many of that country’s citizens can even trace their ancestry to Egypt. Of course, they parted ways on very bad terms about 3000 years ago.

Posted by Bob

The Evolution of the Fastball

It is a scientific fact: Man evolved to throw and to hit baseballs. Even before we were advanced toolmakers, we were proficient throwers and clubbers. These skills and the anatomical specialization to perform them well are uniquely human. Our nearest cousins, chimpanzees, will occasionally toss sticks and rocks around but they cannot direct them accurately. Many paleontologists believe that the development of the ability to throw and to swing sticks with accuracy and authority marked a major turning point in hominid evolution. These capabilities enabled early hominids to escape the tedium of playing soccer and had enormous social advantages as noted by Professor Richard Young:*

“The best throwers and clubbers in a community would rise in the male dominance hierarchy and thereby obtain more breeding opportunities.”

Any evolutionary advantage that confers a rise in the male dominance hierarchy and greater access to breeding females is sure to spread rapidly through the species and to be continually refined by competitive pressures. The relative advantages of exceptional throwing and batting skills persist to this day, as a quick glance at the seating section for ball players’ wives and girlfriends confirms. (More evidence could be cited easily but this is a family-friendly blog.)

The critical evolutionary developments for throwing and hitting came in the shoulder and hands. The shoulders of other apes are designed so that the socket accommodates vertical extension of the arm – handy for hanging from trees but not so good for pin-point control from the mound. The human shoulder has the greatest degree of rotational movement of all our joints and it is also the most vulnerable to injury. Baseball made famous the rotator cuff, the bundle of muscles and tendons that hold the upper arm and shoulder together. The fellow below is doomed to hang around in the bush leagues.

Our hands and fully opposable thumbs are far better suited for throwing and especially for gripping bats and racquets than those of chimpanzees whose hands likely resemble those of our common ancestor. Even the fatty tissues or pads on our hands are positioned and sized to absorb the impact shocks of clubs and bats colliding with skulls and baseballs.

Our throwing ability has come pretty far in the past 500,000 years or so. The Baseball Almanac lists 27 pitchers whom have reached or exceeded 100 miles per hour in a game since Nolan Ryan cranked it up to 100.9 in 1974. The fastest speeds on that list belong to Mark Wohlers a former Atlanta Braves’ closer, who recorded 103 mph in a 1995 spring training game and Joel Zumaya, a Detroit Tigers reliever who reached 103 mph in 2006. The current record is held by The Cuban Missile, the Reds’ Aroldis Chapman, who was recorded firing a baseball at 105 mph in 2010.

Evidence on a pitcher’s velocity was very spotty in my dad’s day and not much better in mine. For the most part, the relative speeds of pitchers were judged subjectively by other players. Technologies such as photovoltaics and slow motion cameras that used frame counts to estimate speeds had progressed somewhat when I started paying attention but they were primitive compared to the radar guns that became standard in the 1980s.

Before the radar gun became a fixture at ball games, pitchers had to travel to laboratories, often weapons facilities with the expertise to measure projectile speeds, and use various paraphernalia to measure the velocity of their throws. In 1917 a Bridgeport Connecticut weapons laboratory using a device called a gravity drop interval recorder** clocked Walter Johnson at 91.36 mph, Christy Mathewson at 86.59 mph and “Smoky Joe” Wood at 84.55 mph. I suspect that, like a stop-watch, these devices were triggered by human action and the tiny delay this entails accounts for the relatively low measured velocity.

The recently deceased Bob Feller, the great Cleveland Indians’ pitcher of the 1940s and 50s who was known as Rapid Robert was especially eager to measure his heater. A famous black-and-white film shows Feller throwing a baseball past a speeding police motorcycle at Aberdeen Proving Grounds. Although the test is inherently flawed, Feller claimed that he was measured at 104 mph. In 1939 Feller and teammate Johnny Humphreys threw baseballs into a 2-foot square hole cut in the side of a trailer in which photovoltaic tubes spaced 5 feet apart measured the balls’ velocity. Rapid Robert’s reading that day was a less-than-spectacular 81.14 mph, significantly slower than Humphrey’s 86.59 mph which equaled Mathewson’s earlier trial.

How fast can a ballplayer throw? We might already be at or near our natural physiological limit. At this point in our evolution, the human elbow is likely be the limiting factor in how hard a pitcher can throw. Glenn Fleisig, a scientist at the American Sports Medicine Institute, tested cadaver elbows (the first thing most kids ask when told this is “how do you get a bunch of cadaver elbows?”) and found that their ulnar collateral ligaments (UCLs) snapped at about 80 Newton meters (about 59 foot-pounds for those of us who have adopted non-metric standards – Myanmar, Liberia and the USA) which is approximately the same rotational torque as experienced by a professional pitcher’s elbow in throwing a fastball. UCL replacement is better known as “Tommy John surgery,” named after the first pitcher to undergo the procedure. Curiously, many pitchers return from UCL replacement surgery throwing faster than before. This raises the issue of whether discretionary surgical arm enhancement might be pursued in the future and how it ought to be treated relative to chemical enhancement.

There has been some recent discussion that human athletic performance is peaking. Records last longer and many believe that we’ll soon exhaust our native potential. I’m not so sure, the performance enhancing drug era proved that we could exceed normal constraints with a little help from chemistry. The next era of enhancement may be surgical improvements to what Nature has given us.

Footnotes:

*Richard W Young, Professor emeritus, Department of Anatomy, University of California Medical School, Los Angeles, California, “Evolution of the human hand: the role of throwing and clubbing,” Journal of Anatomy, 2003 January; 202(1): 165–174. Professor Young’s article focuses on evolution of the hand for throwing.

**I have tried unsuccessfully to find out what a “gravity drop interval recorder” was.  Ballistics experts and physicists I have asked have not heard of the device.  I suspect it was a contraption that utilized the known and constant rate of acceleration due to gravity to time a ball over some course but have no idea how the beginning and termination of the ball’s flight was captured by the machine.  If a reader knows about this apparatus, I’d appreciate learning more about it.

Posted by Bob

That’s Why They Play the Games

Figures often beguile me, particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice and force: ‘There are three kinds of lies: lies, damned lies and statistics’.” Mark Twain(1)

Felix Hernandez, the workhorse ace of the hapless Seattle Mariners, was awarded the 2010 American League Cy Young Award despite having, at 13-12, by far the worst winning percentage among the candidate starting pitchers and the lowest number of wins by a starter in the history of the award. Hernandez won a lot easier on the ballot box than on the mound, collecting 21 of the 28 first place votes cast by baseball writers. The election set off a debate about the purpose of the award and the appropriate bases for selecting the winner. Many traditionalists, while acknowledging Felix’ enormous talent, are uncomfortable declaring that a barely .500 pitcher is the best in the league. Others, many of them in the sabermetric community, are trumpeting the selection as a triumph of scientific analysis.

For our purposes, I will accept the notion that the Cy Young Awards are intended to honor the best pitchers in each league and will concede also that the voters honorably and conscientiously seek to interpret the candidates’ records to determine who is best. I do think they have become overly mesmerized by the sabermetricians’ efforts to distill the pure essence of individual performances.

Historically, our definition of best pitcher emphasized the number of wins credited to the pitcher. For context, I have reproduced below the ESPN Cy Young Predictor developed by Bill James and Rob Neyer, based on a statistical analysis of past winners(2). As you can see, Hernandez tied or led all of the leading starting pitchers in every major category except won-lost record.

The N-J formula projected the Yankees’ CC Sabathia the winner followed closely by Tampa Bay’s David Price with Hernandez a distant sixth. I am not endorsing the N-J predictions, but I am using them because their research reflects the historical pattern of voting and is reasonably representative of the type of calculations, explicit or implicit, that most of us fans perform when determining our favorites for the award. My preferred candidates were David Price and John Lester. (I do not consider relievers valid Cy Young candidates so I never examined the three listed by N-J.) My impression based on listening to sports radio and TV was that Sabathia was the leading choice among commentators. So I was more than mildly surprised when Hernandez won by a landslide.

The N-J formula is the weighted sum of various statistics: Cy Young Points (CYP) = ((5*Innings Pitched/9)-Earned Runs) + (Strike Outs/12) + (Saves*2.5) + Shutouts + ((Wins*6)-(Losses*2)) + VB. (3)

Wins are the single most important factor in the N-J formula with a multiplier of 6 while innings pitched (divided by nine) is next with a multiplier of 5. Wins seem to have been the least important factor to the Cy Young voters. Using the N-J formula, had Hernandez been able to convert four of his losses to wins (17-8) he would have gained 32 points and passed Sabathia. Three conversions of losses to wins (16-9) and he would have passed Price and been only 3 points behind CC. Either a three or four game swing would put have put Hernandez in the same general range as that of Tim Lincecum who won the 2009 NL award with a 15-7 record and Zach Greinke, the winner of 2009 AL edition for a 16-8 season. But 13-12? To the extent that N-J captures accurately the historical consensus weighting of performance factors – what would justify such a large departure from traditional patterns? If Felix had been 12-13 with otherwise identical statistics, would the voters have still given Felix the reward? I can’t prove it, but I suspect that a losing record for a starting pitcher would be a non-starter. But, if we accept, as many do, the superiority of the granular statistics over the won-lost record, why not so award a losing pitcher?

The voters seem to have concluded that Hernandez should be judged only on, as an AP writer said, “things he could fully command.”(4) So voters discounted (ignored) his won-loss results and focused on the other measures with ERA, innings pitched and strikeouts weighted most heavily. The sabermetric community is reported to have emphasized Wins Over Replacement Player (WARP), a measure of calculated wins relative to those credited to a player of slightly below average major league quality, often a triple-A player of the sort likely to be called up to replace a player (pitcher in this case).

I love to compare and debate player statistics as much as anyone but I do want to point out something that is too often neglected – baseball statistics don’t really measure individual performance. The pitcher has total command over absolutely none of the factors measured by statistics though his influence is relatively greater in some areas than others. For example, the pitcher is relatively more responsible for his strikeout and walk numbers than for his won-lost record. In this sense, emphasis on granular statistics such as ERA can provide some insight into the relative performance of pitchers.

No one will be able ever to develop a perfect measure of a player’s contribution to his team’s success. Not because of the fact that teams win or lose together, as your old coach told you (although he was correct) and not because it is a difficult analytical challenge but because it is logically and mathematically impossible. This is because a baseball team is engaged in what economists call joint or cooperative production and it is impossible to determine precisely the marginal value of an individual team-member in a joint production setting.

Pitchers are the most obvious examples of joint production of outs and runs. Baseball is fairly unique in that outputs are produced jointly by the defense and offense. A hit or an out is produced jointly by the batter and the pitcher and, in most cases, his fielders(5). In fact, in the early days of the game the pitcher’s explicit function was to put the ball in play by throwing it “for the bat” and then later to throw either above or below the belt as directed by the batter. Today, some batter-pitcher combinations are more “efficient” at producing hits (to the chagrin of the pitcher) and thus the manager is interested in the historical rates of success his batters have had against that day’s opposing pitcher.

The team’s final output is a win or a loss. Wins or losses are the result of the intermediate products called runs and outs. These final and intermediate outputs are produced jointly by the team members whose efforts comprise the team production function. Any team production function involves at least two inputs and is not separable into the sum of two input functions. In other words the output of team members is not additive and this has serious implications for estimating functional relationships. This point, made by Armen A. Alchian and Harold Demsetz in 1972 is not a trivial or esoteric technicality but a fundamental basis of our modern understanding of the nature of firms and the role of managers.

Alchian and Demsetz observed further, “In team production, marginal products of cooperative team members are not so directly and separably (i.e. cheaply) observable. What a team offers to the market can be taken as the marginal product of the team but not of the team members (emphasis added). Clues to each input’s productivity can be secured by observing the behavior of individual inputs…” The impossibility of perfect measures of individual performance and contribution in a team setting is the primary reason that human managers are important; judgment based on experience and observation is a necessary ingredient.

Team or joint output whether it be runs or wins cannot be attributed precisely to the efforts of the individual team members. The fact that the batting order matters is evidence of the joint nature of producing runs. The manager seeks the batting order that maximizes the joint production of his hitters. Therefore responsibility for output or runs is shared. Branch Rickey recognized long ago that runs batted in (RBI) could be a very misleading measure of individual contribution because it depends greatly on the success of the preceding batters.

Statisticians and sabermetricians using regression analysis must assume the separability (additivity) of the baseball production functions. (Even non-linear regression is really a set of linear regressions covering portions of the observed data.) The typical multivariate regression formula seeks to explain the dependent variable, Y, as the weighted sum of the independent variables, xi, where the weights or coefficients, Bi, represent the proportional influence of each independent variable plus a residual.  If the underlying function is not additive then the use of a linear or additive regression technique introduces bias into the estimate. The severity of the bias depends on the underlying form of the production function. Another layer of distortion or bias comes about when sabermetricians use regression coefficients to build composite models such as Wins Above Replacement Player. The true WARP (if such a thing exists) is almost certainly non-linear and so constructing a linear representation of it using biased coefficients based on linear representations of other non-linear functions seems capable of introducing serious distortions into the analysis. I am not saying that the modern statistics are not useful; many are intriguing but all contain a measure of distortion and their use involves some bias and it cannot be said they are necessarily more objective than some of the old stand-bys.

My other, and in many ways more important, concerns about discounting wins and losses are that the pitcher often contributes to a team’s wins in ways that are not evident even with the most granular of statistics. Winning a ball game in the major leagues is very hard, winning around twenty games is extremely hard and to do so a pitcher must overcome a number of specific moments or threats where a single pitch can have significant consequences. Some pitchers seem to make those pitches when they most need to and so win more games than do pitchers with similar skills and statistics. Pitchers’ effort is somewhat elastic; a pitcher with a big lead will tend to bear down less than one in a tight game. This is rational; the return on full effort adjusted for the cost of potential injury or arm fatigue is not as high with a five run lead as with a one run lead and a man on second. This is true of games as well, a pitcher who can win late in the season with a postseason spot on the line or in the postseason with a title on the line has often to perform at a higher level to overcome the extra intensity of his opposition at those times. Those wins, in my opinion, reveal more about the pitcher than do wins earlier in the year. But if we discount all wins as “being beyond the control of the pitcher” we sacrifice that value and information. So, until we have a rigorous and unbiased model of the baseball production function and means of imputing personal performances into that model, I think we should continue to give a lot of consideration to the actual results of games played.

****************

Posted by Bob

Footnotes (for the appearance of scientific rigor):

1.There is some evidence that Twain misattributed the origin of the line to Disraeli, see http://www.twainquotes.com/Statistics.html where Courtney and perhaps Carlyle are suggested as possible antecedents.

2.The Neyer-James model seeks to predict the award winner based on historical evidence and patterns; it does not necessarily reflect either observer’s own judgment as to who should win.

3.Saves almost always accrue only to relief pitchers. The VB term is a bonus to reflect the historical tendency to recognize pitchers from league-leading teams but did not come into play this year.

4.Felix Hernandez wins AL Cy Young, November 18, 2010 http://sports.espn.go.com/mlb/news/story?id=5820623

5.The catcher is involved in the sense he is necessary for the pitcher to perform his part of the process so it would be reasonable to say a hit involves 3 players. An out, whether by strikeout, force-out, throw-out or caught fly, involves at least three players. Other forms of out, such as pick-offs, usually involve three or more players to produce.

To Extend or Not to Extend

As I write (Nov. 30, 2010) the Congress is about to start debating whether or not to extend all of the Bush era tax cuts or just a subset of them in order to deal with the deficit.  The Republicans want all of the current tax rates to be continued indefinitely, that is, until a real overhaul of the tax code could be tackled.  They appear to be willing to settle for a minimum of a two year extension.  The Democrats, led by President Obama, want the current rates continued except for those making over $250,000.  Senator Chuck Schumer, of NY, put forth the option to extend the rates for everyone making under $1,000,000.  The public, that is, us, prefer to extend them for everyone.

 

The reasoning underlying the Democrats views’ is suspect at best.  Obama says we can’t afford them, and it will only affect 2% of the taxpayers.  These 2% pay about 45% of all income taxes; the bottom 50% pay 3.5%.  Looked at another way the top 2% are paying 13 times as much as the bottom 50%.  As it stands the top 2% are certainly contributing heroically to funding the government.  Let’s look at the charge that we can’t afford not to raise the rates.  As is usual in government, when one is trying to make a point the cost/savings for multiple years are given because it balloons the figure.  We can’t “afford” maintaining the current rates for everyone else either, on their reasoning.   One factor, and it is a big one, that the Dems have overlooked is that those in the top bracket aren’t going to sit there to be shorn.  They will alter their behavior and reduce their taxable income.  In effect, the increased tax revenue will be less than estimated, by a long shot.  Further, in their efforts to reduce taxable income these individuals will spend resources to avoid taxes rather than devoting those resources to growing output.

 

We have the spectacle of columnist, Froma Harrop, shrilly saying  that;

“And what business is it of the chairmen — Erskine Bowles, a Democrat, and former Wyoming Sen. Alan Simpson, a Republican — to set an arbitrary (and low) maximum percentage on the tax revenue relative to gross domestic product that our society is allowed to collect? Their job is to find ways to bring down deficits. Period.”

She then goes on to say,

“For all the talk of the painful, painful(!) sacrifices needed to achieve the chairmen’s goal of reducing the federal deficit by $4 trillion through 2020, one thing should be kept in mind: Simply ending all the George W. Bush tax cuts would do the same thing. No one starved in the Clinton era. In fact, people did darn well then. That’s something for Democrats to think about now, before Republicans take over the House and start the fiscal voodoo dance all over again.”

You can’t make this stuff up.  I’m always amused by liberals/ progressives belief that 50.1% of us should be able to tell the other 49.9% what to do when it suits them.  The Bill of Rights were enacted precisely because the Founders recognized that the likes of Ms. Harrop were lurking out there.  Survey after survey shows that most Americans, 70% or more, believe that an individual’s total (State, Local, and Federal) tax burden shouldn’t exceed 25%.  These results hold for every subgroup out there .  Well, almost all.  I’m sure that the polls don’t have subgroups for: clergy (of any denomination); college English professors; carping liberal columnists; or unionized government employees.  These would demand expropriation of all income from those who made more than they did.  This is typically their definition of “the rich”.

 

Turning to Ms. Harrop’s comparison with the 1990s.  It is a totally inappropriate comparison.   Ms. Harrop confuses correlation with causation. To start with, the economy was still in the glow of the Reagan years.  The benefits of increased investment were still accruing.  Lawrence Meyers, who Clinton appointed to the Federal Reserve Board, had an economic consulting firm that analyzed the Clinton tax increases.  Their conclusion was that the economy grew slower and total taxes collected were lower than they otherwise would have been.  So, in fact, the Clinton higher tax rates weren’t a boon to the economy.  They didn’t appear to be a bad thing because of other decisions that were being made.  The two most important were the election of the Republican majorities in 1994 that slowed the growth of government spending and the slashing of the capital gains tax rate, against Clinton’s wishes, by the way.  These two events, against the backdrop of the Reagan growth agenda of the 1980s more than swamped the negative effects of the Clinton tax increases.

 

Sen. Schumer defends his proposal by falling back on the most naïve version of Keynesian economics.  He still believes in the concept of the marginal propensity to consume out of current income, fifty some years after Milton Friedman showed that people consume out of permanent income.  He seems to believe that if we just put more money into the pockets of people with high average propensities to consume the economy will grow.  Two problems with that: first, most obviously, we have been doing that for two years and have nothing to show for it; and second, what is being discussed by the Congress is not a tax cut but the prevention of a tax increase, which even Schumer realizes would be a disaster.

 

The Republicans push for maintaining the current taxes for everyone reflects the understanding that investment and job creation come from those making more than $250,000.  From a supply-side approach, the response to incentives is very disproportionately from the higher income small businessmen and other entrepreneurs.   Lowering marginal tax rates typically doesn’t cause a bank clerk, say, to increase their level of economic activity while it will to a business owner, or potential business owner.

 

Obama’s attitude was put on display during the campaign when he responded to Joe the Plumber, saying that he was for redistribution.  Raising rates for the so-called rich (m any two income families in NYC would fall into this definition of rich) appeals to his political orthodoxy which trumps his obligation create an environment in which the economy can grow.

 

When the dust settles where will we be?  I expect that the tax rates for all will be extended for at least two years and as a quid pro quo, unemployment benefits will also be extended for another 26 weeks. It is important to keep in mind that this will only prevent things from getting worse than they are.  In order for the economy to gain real traction, the plethora of mandates and regulations spewing out of the Executive branch must stop and many need to be repealed.  Simply put, regulations have the same effect as taxes but don’t get run through the government income statement.  The EPA, Health and Human Services, and the Dept. of the Interior are loose cannons that are circumscribing our daily lives to our detriment.  The Health Care bill needs to be rescinded and begun anew.  The financial reform legislation, another unread 2000+ page monstrosity, needs to be put in abeyance while cooler heads revisit every provision.   The energy drilling moratoria across the country need to be reassessed.

 

The vote on the tax rates will give a clear picture if the Congress got the message that the “Tea Party” sent on November 2.  If they didn’t the message , be prepared for another housecleaning in 2012.

 

posted by Jim

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

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