Thomas Geisel, chief executive of New Jersey’s Sun Bancorp Inc., says the bank paid back its federal money in June because of legislation that imposed limits on bankers’ pay, among other areas. “Lawmakers let emotion and ego get in the way of making good business decisions,” he says.

“I was elected to represent the interests of Montana, not General Motors, which is something that GM should have considered before letting the federal government assume control of their company,” Rep. Rehberg said recently.

The best way to repay taxpayers is to run the business as efficiently and cost-effectively as possible,” Mr. Socia wrote. “Uncompetitive supplier agreements do not support this priority.” [In response to Montana senators' insistence that GM source supplies from a Montana mine].

I am not sure how much of GM’s ‘decision’ to let the federal government assume control was ultimately GM’s decisions, but regardless they now do have control and it will be interesting to see how what will happen with GM. Hopefully we’ll continue to have some transparency around the whole issue, so that we can tell if the government is able to run GM well. But from the sounds of it the federal government pushing GM around to chose certain suppliers who are constituents or reinstate a constituent’s contract for a dealership is putting the odds in favor of those libertarians who think the government has no role in running a business.

Capitalism:

Capitalism typically refers to an economic and social system in which the means of production (also known as capital) are privately controlled; labor, goods and capital are traded in a market; profits are distributed to owners or invested in new technologies and industries; and wages are paid to labor. (Wikipedia)

Statism:

A major government or state role in the direction of the economy, both directly through state-owned enterprises and indirectly through the state-directed economic planning of the overall economy. (Wikipedia)

It is often stated that we live in a mixed economy, one where statism and capitalism co-exist. In some markets there is little to no government intervention in others there are large interventions by the government. I can think of no markets where government intervention does not exist outside of ‘black-markets’, or more abstract concepts of a market such as trading favors in a relationship, but these usually fall within the private social institutions grouping.

I think it is important prior to expressing an opinion on something as broad as capitalism (or statism) to think about what social institutions create the concept of capitalism (or statism) and which particular social institutions are part of a critique or complaint. Usually the complaint is relative to a small aspect of a social institution rather than it to its entirety (or simply a critique about human nature rather than any particular social institution). Aligning our rhetoric with what we are truly perceiving helps with social discourse.

In fact the United Steelworkers couldn’t get any trade complaints passed through the Bush administration so their hoping for some traction with Obama (particular since he pledged to increase trade enforcement). They are currently trying to get ‘trade enforcement’ considerations by Obama on imported Chinese tires.

Well Obama ended up signing a 35-percent tariff on imported tires (a tariff acts like an additional tax on tires from China, read more about tariffs via wiki). The action provides a 35-percent tariff the first year, beginning September 26; 30 percent the second year; and 25 the third. That’s on top of the four-percent tariff that the U.S. already imposes. Then the statute expires completely at the end of 2013. The reason for the increased tariff is that current trade laws have a anti-dumping law which in this case has been investigated by the US International Trade Commission which has determined that (see their report),

On the basis of information developed in the subject investigation, the United States International Trade Commission (Commission) determines, pursuant to section 421(b)(1) of the Trade Act of 1974,1 that certain passenger vehicle and light truck tires2 from the People’s Republic of China are being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products.

So basically the Chinese are able to import tires that are less expensive and that this causes market disruption. I wonder if saddle makers made similar complaints to their US representatives in the advent of the automobile, claiming that automobiles will subject their industry to market disruptions.

I thought a quick overview of why this hurts all of us would be beneficial. China can produce tires with less expenses than a US company. They can do this because of differences that exist within their economy, like lower wages and lower costs of production. This provides the US market with less expensive tires. When a tariff is enacted it increases the price of imported tires and limits the number of imported tires that come into the US market (this later point is because Chinese firms profit margin decreases because the demand for their tires decreases due other additional costs imposed by the tariff and they produce less tires for export).

In fact, I just purchased a set myself, and was happy to buy a reliable well made tire from China that costs less money. If these tires were more expensive due to a tariff or not available because the Chinese companies can no longer remain profitable, then I would have to purchase more expensive US made tires, or pay for more expensive tires from China. That would leave less money in my pocket, and every other consumer who picked out less expensive Chinese tires. This makes me less well-off, there is less money to spend on other things like donations to universities or going out to dinner in my neighborhood.

Well, one my ask, why would a President want to hurt all of the consumers of tires in the US. Its not that the President wants to hurt consumers, but rather the US Steelmakers and a few other special interest have convinced the President that they are worth helping. Too bad US consumers can’t get the attention of the White House like special interest do.

I agree with a WSJ blog that this shouldn’t be viewed as a beginning of a Trade War, as it may just be a warning shot, but it still is unnecessary and doesn’t allow me to freely contract with a company providing me a more favorable alternative to US made tires.

To quote the president in a speech given Aug. 2, 2008,

When special interests put their thumb on the scale, and distort the free market, the people who compete by the rules come in last.

Well I’m following the rules as is every other consumer who wants to purchase less expensive tires, and we are coming in after the special interest. Hopefully people will start to learn that politicians manipulate public sentiments to get elected (i.e., they tell us what we want to hear which does not follow what they end up doing).

Why Should One Get Support While the Other is Hurt

Just take a quick look at a website devoted to the science of temperature monitoring and temperature data analysis. (http://www.climateaudit.org/) This stuff gets complicated very quickly. That’s why we tend, as a society to look at the experts, to try to ascertain what the consensus is about a certain subject.

With GHG it appears to be fairly straightforward. There are tons of scientist, politicians, and personalities telling us that humans are killing our planet quickly and that if something isn’t done there will be massive societal problems. For me its hard to weight the evidence. Some of the arguments I have heard form the various perspectives are compelling. For now I haven’t come to a decisive decision, as I hope to read more on the subject, but it seems that there is some contention on to what degree the changes in temperature are atmospheric versus land, man-made or natural cycles, and the degree that temperature changes will negatively affect our livelihood. There is much more uncertainty in the professional climate studies subculture than leaders, politicians, and personalities want us to think.

I do think that an effective GHG cap-and-trade program will increase costs in the U.S. suppressing manufacturing even further and negatively affecting our disposable income and thus most peoples standard of living (at least perceived standard of living, which is all that matters). This is my professional economist perspective, from reading several studies and analysis by various economist and think-tanks. So I suggest we weigh some of the uncertainties about GHG science with some of the known costs of reducing emissions. The conversation is too often heated with groups and individuals biases and ignores the uncertainty of the science and risks of limiting emissions.

I did find an interesting petition, signed by 31,478 American scientists, including 9,029 with PhDs, stating that the science which backs the claims of greenhouse gas legislation is flawed. (See for yourself)

My buddy Kenny pointed me to a good link on the discussion surrounding global warming. Still a lot of opinion (he mentioned that climataudit.org, “is a crap pseudoscience blog. It’s use is only to reaffirm what people want to believe, using the guise of doubt.”)

ARS Technica

A good quote from the discussion:

[Global Warming trends is] not an easy demonstration to make, at least in the forward looking sense (the backward looking version is just a bunch of dull, daily temperature readings, albeit lots of them in lots of places — the forward predictions are models). I’d say demonstrating evolution is actually easier. There’s hard rock geology behind it. Most of those who aren’t persuaded don’t want to be.

Global warming, however, is all about extracting a pretty small signal (the increasing average temperature) out of a whole bunch of noise (day to day fluctuations, actual natural changes that are always going on, etc.).

Unless you’re a specialist reading the literature, you’re basically going to end up taking this one on trust.

There has been push back from environmentalist for the lack of stringency of the bill (see this op-ed), whereas conservatives criticize the bill for the negative consequences to the economy and increased costs to households (see this report).

For me it is fairly simple. If we increase the cost of doing business in the U.S., then companies will move to other countries to produce goods and services (internet searches are energy and carbon intensive). This decreases the economic activity in our country while moving carbon intensive industries to countries with no carbon limitations, resulting in the same or even more likely a larger carbon footprint for the world and reduced economic activity in the U.S.

If the goal of the government was to move to a green economy to reduce our carbon footprint than they should stop subsidizing the production of carbon intensive fuels and uses for those fuels.

A cap-and-trade program simply attempts to increase the costs of using carbon based fuels, by requiring an emitting entity to hold an allowance, which costs money (similar to a tax). There is another way to reduce carbon, among others, by increasing the cost of producing carbon based fuels. An interesting aspect of this approach is that the cost of producing carbon based fuels is lower due to government subsidies.

The US government subsidizes the production of carbon based fuels, most notable oil, coal, and natural gas, through numerous programs and incentives.

Here are a couple of methods of subsidizing oil (from GreenPeace article)

Tax Breaks for Domestic Oil Exploration and Production.
Defense of Persian Gulf Oil Supplies.
Provision of the Strategic Petroleum Reserve.
Support for Oil-related Exports and Foreign Production.

Also, the subsidization of royalties (from NY Times article).

In the United States, the federal government’s take — royalties as well as corporate taxes — is about 40 percent of revenue from oil and gas produced on federal property, according to Van Meurs Associates, an industry consulting firm that compares the taxes of all oil-producing countries. By contrast, according to Van Meurs, the worldwide average “government take” is about 60 to 65 percent. And that figure, of course, excludes countries that do not allow any private ownership in oil production.

Last fall, the Interior Department agency that collects oil and gas royalties has been caught up in a wide-ranging ethics scandal — including financial self-dealing, accepting gifts from energy companies, cocaine use and sexual misconduct. Maybe this is why we have some of the lowest royalties in the world. (See NY Times article, and Colorado Independent Article)

So, let’s stop subsidizing the production of carbon based fuels, and do this by first increasing royalties and increasing the transparency and oversight of the Interior Department. Allowing the cost of carbon based fuels to reflect their true market costs will create an incentive for green development, while reducing government intervention and manipulation. Win win situation between the greens and libertarian/conservatives. And increasing government royalties could allow us to pay for all the other government services, so the liberals win as well, albeit to the detriment of the libertarians.

See the End Oil Aid website for further information on ridding our market of harmful oil subsidies.

The country’s biggest banks have made moves to bolster their balance sheets by about $56 billion since the government disclosed the results of its financial “stress tests” two weeks ago, Treasury Secretary Timothy F. Geithner said Wednesday.

So the question that came to my mind after reading the article is, “Where is all this money coming from?’

That’s right. The Federal Reserve has been expanding the money supply so quickly that banks that only a few months ago couldn’t raise capital and were looking at a qquick demise are now able to raise $56 billion.

It is har dto measure precisely the amount of monetary expansion occurring as a result of numerous actions by the Federal Reserve. This analysis has it pegged at close to $1,100 billion. Another shows the increase at closer to $700 billion.

So what’s the problem with such a quick and extensive expansion of the money supply. This is the debated questions, or rather more specifically the debate is two parts (1) is the monetary expansion needed and (2) will the long term consequences be worth the debated short term gains.

Simply put, excessive monetary expansion creates inflationary pressure which devalues the US dollar making it less attractive to foreign investors and creates uncertainty and instability. The argument is that the benefit of monetary expansion is to stimulate the economy in the short run. There is little to no empirical evidence that this is true and economist do not agree on this being true.

During Federal Reserve Chairman Bernanke’s December 1, 2008 remarks he states,

Expanding the provision of liquidity leads also to further expansion of the balance sheet of the Federal Reserve. To avoid inflation in the long run and to allow short-term interest rates ultimately to return to normal levels, the Fed’s balance sheet will eventually have to be brought back to a more sustainable level. The FOMC will ensure that that is done in a timely way. However, that is an issue for the future; for now, the goal of policy must be to support financial markets and the economy.

Obviously in Bernanke’s mind, this is something to think about in the future, or in economist’s jargon, in the long run. Keynes was a proponent and some say the creator of monetary expansion policy and a critic of Keynes, Ludwig von Mises, stated in response to Keynes arguments for monetary expansion,

…we have out lived the short run and are suffering from the long run consequences of [Keynesian] policies.

In response Keynes simply states,

In the long run we are all dead.

Well in the long run for the current monetary expansion, we may not be all dead, I will be alive, Bernanke will likely still be alive, albeit likely no longer the Federal Reserve Chairman. What I think is the more realistic retort to the reasonable criticism of von Mises is “In the long run, people tend to forget what caused the mess.” They might not be dead, but the problem is dead as people tend to only think of things statically and don’t see connections between past behaviour and decisions and current unfavorable predicaments. When the long run comes, they’ll likely blame something that is occuring in the short run.

Just as the current economics crisis is thought to be a result of short term speculation rather than the long term consequences of government intervention in the economy, and most notably the housing market (see article on the relationship between the economic crisis and government policy). I’m excited to see how people perceive the future inflation and devaluation of our currency.

This post will focus on some of the methodological problems of economics, which I felt Colander clearly presented in the last chapter of the book. To start it is necessary to clearly express some of the differences between what most people think of as economics and the professional academic world. To most economics is supply and demand and maybe some marginal analysis, its concepts, general theorems and ideas described in models and logic. Yet in the professional academic world its more akin to physics, utilizing highly mathematical models to test hypothesis. The questions are no longer formed by inquiry into the world but rather focus on the mathematical models ability to be used. The models prescribe the inquiry rather than inquiry itself.

In the book, Colander makes a distinction between positivism, where the focus is on knowledge gaining is a result of empirically testing well-specified hypothesis, and a sociological approach to methodology. To quote Colander,

a sociological approach does not assume that scientist are searching for truth. Truth is one of their goals, but only one; professional advancement, recognition, and wealth are other of perhaps equal or more importance.

The interviewees described this as part of their graduate studies, that they choose their dissertation on not what interests them but what will most likely get them a job at a top research school. So they are taught these mathematical models, feel its necessary to use them to do their dissertation, to get a job to teach the same mathematical models.

Colander,

Positivism says science ends with formal empirical testing; if formal empirical testing is impossible, no science is possible. A sociological approach says that science does not end with formal empirical testing-that there are reasonable ways of processing information upon which people can agree.

So that’s one of the problems of the discipline’s methodology-the focus on the things that are empirically testable through well-specified hypothesis. Unfortunately some of the most interesting questions of life aren’t easily well-specified. The graduate students interviewed expressed interest in the pursuit of truth, but felt limited and dis-empowered by spending so much time mastering constrained optimization and econometric modeling which give them tools that can only be used for certain questions. They should have the opportunity to learn how to go about the search for truth with as many reasonable tools as possible.

Colander position of utilizing a sociological approach to methodology makes sense in fact its in line with economist’s own views of others,

Positivism assumes individuals search for the truth, even if it is not in their self-interest. The sociological approach that I use, paradoxically, assumes scientist are the same type of rational beings that neoclassical economics assumes all people are. to be a neoclassical economist whose methodology is positivism is to be inconsistent.

The up-side is that there are plenty of economist who understand the limitations of positivism. The discipline continues to evolve and change. I think the next step is for it to better appreciate a more multi-discipline approach with a sociological approach to methodology.

There’s much more to share about The Becoming of an Economist, but it must be returned to the library. I hope to read the redux soon.

There is a smoke stack on the back of every government program. That is to say that every government programs impose a cost on third parties where the third parties are not receiving compensation.

This came out of the context of discussing when government may need to intervene in the market. Milton Friedman and some other classical liberals (libertarians) think that the only case for government is when it is not feasible for market arrangements to make individuals pay another individual when harm is imposed on the that second individual. Requiring contractual parties to pay third parties, outside of the contractual agreement, who are harmed by the agreement, compensation for that harm.

After Milton Friedman made this point he brought up the concept of a smoke stack on the backs of every government program. That while it is important to consider these situations where government may intervene, it is also important be realistic about the ’smoke stacks’ that will be turned on as a result of utilizing the government.

He also mentioned Terry Anderson and PERC who has shown that often private arrangements are better for the environment than ‘command and control’ government regulation.

Watch the interview yourself.

I came across the group ‘The Cap Solution‘ through a few different avenues, energy industry related research, at the public library as an advertisement in the front hall, and at the local farmers market on a bulletin board. The Cap Solution is consortium of the Environmental Defense Fund, the Blue/Green Alliance, and the United Steel Workers.

Here’s what they stand for:

The cap solution in a nutshell

Capping carbon pollution encourages the growth of renewable energy and energy-efficient industries. It brings customers to these businesses, which in turn will create good jobs and help revitalize American towns.

They are correct that it will encourage the growth of renewable energy as a GHG cap will increase the costs of traditional generation (e.g., coal and natural gas). I’m not sure if it will create jobs, as that assumes the jobs lost from the coal and natrual gas generation sector will be more than replaced by jobs associated with ‘green energy’. Their logic does fully fall apart with the comment that a GHG cap will, “revitalize American towns.”

Let’s explore this logic a bit further:

New jobs americans can do tomorrow

Take the wind turbine. It’s a machine. Americans are good at machines. A typical wind turbine has 8,000 parts and is made of 250 tons of steel. Somebody’s got to make that steel, fabricate those parts, assemble those parts, deliver the assembled turbine to a wind farm, erect the turbine and manage the wind farm. That’s a lot of jobs right in the American workers’ sweet spot. And this is just one example. A Carbon Cap will create demand for energy efficient windows, LED lighting, ball bearings for turbines and thousands of other products.

So here is where I strongly disagree with their logic. If we implement a GHG cap we increase the price of manufacturing in the US, particularly the cost of manufacturing energy intensive products. Steel is energy intensive. So while we increase the costs of doing business and producing steel and India and China do not increase the costs, they become more competitive in the market and thus will be most likely the producers of the new wind turbines. In fact this article, claims that China will be the biggest producer of wind turbines in 2009. So why, in particular, is the United Steelworkers supporting this legislation. Well as an economist I tend to think of incentives, what is it that the United Steelworkers like, what reward would they possibly seek…protectionism.

This can be seen by the Cap Solution’s simple sentence:

And by starting now, we’ll make sure these products are made here and exported all over the world. Instead of becoming more products we have to import.

In fact the United Steelworkers couldn’t get any trade complaints passed through the Bush administration so their hoping for some traction with Obama (particular since he pledged to increase trade enforcement). They are currently trying to get ‘trade enforcement’ considerations by Obama on imported Chinese tires (see article).

Its unfortunate that the environmental leadership in our country can’t make the connection between increased costs of production and the health of our economy, and how the health of our economy allows us to purchase environmental services (e.g., pollution control and preservation). I also find that most people forget that the reason we get to even consider worrying about GHG is that we have a high standard of living. I fear that our ability to worry about GHG, our high standard of living, will erode as we start to turn our worries into policies. Policies that increase the costs of doing business in the U.S., while not simultaneously increasing the cost of doing business in other countries, putting all of us at a competitive disadvantage.

This group, waiting in line for free food for unemployed, aren’t waiting in line to volunteer for a non-profit, or learn about environmental degradation, they’re unemployed and employment and security definitely come before environmental protection.

1) Consumer spending and investment drives our stock markets’ success. Stock market prices reflect the long term potential of companies, which is on a quarterly basis viewed as their ability to make quarterly earnings estimates. Their ability to make quarterly earnings estimates is dependent on selling their goods and services.

2) The ability of companies to sell their goods and services is dependent on consumers ability to pay for these goods and services. Consumers usually use credit to pay for things, hints our recent negative savings rates.

3) The results of the stimulus package and write-off of banks bad debt with tax payer dollars will revive the economy in the short term. This will be perceived in the short term by consumers simply as “things are fixed.” I highly doubt most consumers understand the need for an economy to self-correct and truly purge itself of bad assets and investment decisions. The propping up of these bad assets and investments will stimulate the economy in the short term, but will inevitable have to be paid for via increased taxes, inflation, and write-offs. Most people could care less if short term decisions don’t match their long term goals, hints our recent negative savings rate.

4) As consumers perceive things are fixed and they start spending again companies will make or exceed quarterly earnings estimates and the market will increase. The cheap dollar will increase exports, money will flow again, debts will be put off, taxes will stay the same, all will look good, until…

5) Eventually the economy will falter again and the government will try its same old trick of stimulating out of a problem, but next time it will be much more difficult due to the accumulation of debt, liabilities, and propped up bad assets that are now being created to stimulate ourselves out of this mess. The business cycle will become shorter and likely more severe.

So I think I may move to a long position for the next 24 months or so and then transfer back into cash or gold, and wait for the next crash.

A few additional notes.

I think there are still bad assets on the books of some companies, likely concentrated on the financial sector. There is little to no incentive to mark these assets down, when the government is unpredictable (companies wait to find out if they will be bailed out like the rest).

I see this view as a balance between acknowledging what is inevitable in the long run with how humans will respond in the short run.

Consumers could also use the short lived boom to reduce their debt and begin saving again. To some this shouldn’t matter as savings will turn into investment, but for a post-Keynesian, this will lead to lower aggregate demand and a decrease in consumption.

The governments interference in the economy in the short run could hamper this movement. The current discussion on Cap and Trade comes to mind, although likely wouldn’t increase prices for some months.

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