Octopodial Chrome

I just found a great article on how large corporations become functionally indistinguishable from the State: the full impact of economic decisions is not understandable and hence poor decisions are made. An example in the article is Home Depot centralising all purchasing from fifty states to Atlanta, Georgia and then exporting it to India. On paper it looks like a great idea: lower purchasing costs. But the actual impact is a multitude of problems as the India purchasing agents don’t understand the lingo of American purchasing. The decision has costs that were not apparent.

This isn’t really surprising when one thinks about it. The State is just another large corporation (albeit one with a monopoly on force). It’s perfectly natural that if the State cannot make wise economic decisions then neither can other large corporations.

Sorry for the paucity of blog updates the past few months. I’ve been working an exceedingly time-consuming project at work and have had very little personal time.

Here’s a good read about the decline of American manufacturing. It argues–convincingly IMHO—that the business philosophies of the 1970s destroyed our economic might.

Mark Gimein argues that the mortgage crisis will worsen considerably, especially in California. Apparently year-over-year prices have dropped 28%. One might wonder if they’ve bottomed out, but there’s an issue which will result in an even worse drop. It turns out that the fall in prices (due to the sub-prime crisis) means that it will become economically sound for prime mortgagers to simply leave their homes rather than owe (and pay for…) twice their market value.

This in turn will lead to still more foreclosures and abandonments. It could be a real estate perfect storm.

Robert H. Frank offers economic-naturalist explanations for a host of questions: why women wear high heels; why milk comes in rectangular containers but soft drinks in cylindrical ones; why whales are nearly extinct but chickens are not; and quite a bit more. He has a book out soon entitled The Economic Naturalist; I’d like to get a copy of it.

Robert J. Samuelson writes about the coming demographic crisis. Politicians promise they care about future generations, when the retirement of the Baby Boomers will destroy those generations.

Slate points out that Starbucks actually helps mom-and-pop coffeeshops. It turns out that Starbucks creates a market for coffee consumption, and that this generates a spill-over effect for other (better) coffeeshops. One guy in Los Angeles actually opens new coffeehouses near existing Starbucks locations! It’s pretty cool how economics can be counter-intuitive sometime—and a good warning who’d like to interfere with the market.

Economist Stephen Rose bursts five myths about the suffering middle class with some facts—something generally in short supply.

Here’s an interesting fact: you save more gasoline going from 15 to 18 miles per gallon than from 50 to 100 mpg. This doesn’t seem to make sense at first—100 mpg is twice 50 mpg—but it’s actually true. The problem is that miles per gallon isn’t a linear measure. This is why in Europe they use litres per 100 kilometres (a somewhat ugly measurement, but that’s the Europeans for you); here we could use fluid ounces per mile.

Thus my car would get 3 ounces per mile, while a Toyota Prius gets 2.7 ounces per mile, a Honda Civic gets 4 ounces/mile, a Toyota Tacoma gets 5.6 oz/mi and a Dodge Durango gets a whopping 8 ounces per mile. Yes, that’s right: every mile you drive in a Durango burns an entire cup of gasoline!

A car which gets 15 mpg burns 8.5 ounces per mile; a car which gets 18 mpg burns 7.1—the switch saves 1.4 ounces/mile. A car which gets 100 mpg burns 1.3 ounces/mile, while one which gets 50 mpg burns 2.6—that switch only saves 1.3 ounces per mile.

This shows why averaging fuel economy figures just doesn’t work. Imagine a fleet with a dozen cars getting 14 mpg and one car which gets 48 mpg: the average fuel economy is 16.6 mpg which leads one to think that the fleet as a whole would burn 7.7 oz/mi. But convert those numbers to ounceage: 12 @ 9.1 oz/mi and 1 @ 2.7 oz/mi averages to 8.6 oz/mi—the fleet’s average mileage is really 14.9 mpg, not 16.6 mpg!

Miles-per-gallon is simply a deceptive unit.

It’s a fundamental principle that if something is priced more cheaply then it’s used more, and if it’s priced more expensively then it’s used less. It’s also a fundamental principle of a free market that a commodity’s price should accurately reflect its cost to produce: a carrot’s price should include the farmer’s time; the alternative uses to which he could put his land (e.g. building condos instead of planting carrots); the cost of extracting the steel for his tractor (including the cost of the mine it was pulled from, the smelter which produced it, the employees which removed it from the ground &c.); the cost of designing said tractor, and so forth and so forth ad infinitum. It should be clear to see that if, for some reason, farmers got free land for carrots then they would produce more carrots, and that carrots would be cheaper, and thus more carrots would be eaten.

It’s less clear to realise that those extra carrots aren’t really free. That free land could have been put to another use—a more productive use (how did it become free anyway; did we all pay taxes to buy it from Peter and sell it to Farmer Paul?). But we see the cheaper carrots in the store and don’t see the park our kids could have enjoyed, or the housing we could have lived in, or the university whose researchers would have discovered a cure for cancer.

Fortunately, most products do more-or-less reflect their cost to produce. One notable exception is food: due to subsidies, some of the worst foods are cheaper than some of the better ones—and Americans are fatter than ever before as a result. Another instance is gasoline. A report on the real cost of gasoline examined all of the costs which go into gasoline production and found that gasoline should cost between $5.60 and $15.14 per gallon. Last I checked, its actual price is around $3 per gallon.

To put it another way: you're already paying between five and fifteen dollars a gallon; you're just not paying it at the pump. If you cut back your gasoline consumption by four gallons a month, you'll save about twelve dollars but will still be paying eight to forty-eight dollars in taxes for those four gallons you didn't use. You can see why it doesn't make sense to cut back on gas usage.

This would explain why the United States uses more gasoline per day than the next twenty nations.

A friend pointed me to Sudden Debt, a finance & economics blog. It has an intriguing article about income vs. debt. That chart is frightening: the massive increase in debt vs. the modest increase in income is bad, bad, bad. Because it’s a differential over the course of years, that means that debt is exponentially worse than it was.

Henry Blodget details how federal tax policy hurts saving and encourages spending. Basically, if you save money you end up paying more in taxes than you make in real terms, primarily because of inflation: taxes are based on nominal gains, not real gains—if you invest $100 and have $103.60 at the end of the year, that’s actually $100.60 in constant dollars, but you pay $1.20 for the nominal gain and end up with $99.40. Given the option between spending $100 today and spending $96 in a decade, wouldn’t you go for $100 today? I know I would.

Reihan Salam & Will Wilkinson argue that a Playstation 3 is a better investment than a spouse. The short version is that the return on investment of a games console is better than that of a spouse, with smaller recurring costs.

According to this graph, the United States combined have an economy greater than that of the next four nations, and greater than that of the next fifteen. It’s good to be an American!

Ben Stein—a conservative economist and famous actor (remember Bueller? Bueller?)—writes about protecting investors from rapacious executives. After all, as he writes, stockholders hire a board of directors to manage their firm, and the board hires executives to run it—so why aren’t executives more cognisant of their duty to improve shareholder value? If an executive is just an employee, why does he cost so much more than other employees (it used to be on the order of 10–20 times, and maybe 40–80 when the company was doing extremely well—now it’s hundreds of times the average salary)?

R. Preston McAfee has released a free Introduction to Economics. I’m not able to judge its quality, but it looks reasonably good.

Johan Norberg writes about the good Nike has done in Vietnam. While it’s true that their wages and working conditions are poor by our standards, they are more than generous in Vietnam; indeed there are more seeking work at Nike than elsewhere, and local shoe factories are trying to learn lessons therefrom. Something you won’t here from anti-globalisation loons. Not that there aren’t some very good arguments against unwise globalisation, and not that there aren’t some excellent arguments in favour of what’s called fair trade (really a silly name, since any free trade is fair, else it wouldn’t be made).

Shortly after Hurricane Charley, David Brown illustrated how so-called price gouging saves lives. It does this by encouraging vendors to meet needs, and by fairly rationing goods in a manner that state rationing cannot. The innumerate fools in charge in the South are killing people with their ludicrous anti-gouging measures.

I never thought that I would write these words, but George W. Bush is an idiot; he recently spoke out against price gouging. Well, the sad fact of the matter is that there is no such thing as price gouging. Thomas Sowell aptly demonstrated that it’s proper for prices to rise after a disaster. For example, after a storm a chainsaw is more valuable than it had been before—shouldn’t items sell for their value? And in fact they do—if the price is more than an item’s worth, people won’t pay it. It’s impossible to sell something for more than it’s worth. I note that the news has recently reported gas lines—well, if gas prices were allowed to rise quickly enough, there would be no lines: when it’s sufficiently expensive people will only buy it when they need it.

Someone, get our president (and our legislators, and the majority of our public commentators) some lessons in simple economics.

Some time ago I read about the Retirement InCome—for Everyone (RIC-E) Trust, and was intrigued by the idea (albeit chagrined at the ego of its creator, one Ric Edelman). Still, it’s interesting: for a $300 fee and $5,000 or more in cash, one can set up a tax-deferred trust for anyone. In return, the recipient receives an investment vehicle which is invisible for purposes of bankruptcy, divorce, federal student aid &c., and which guarantees that it will be used for retirement: the giver specifies the earliest age at which money may be withdrawn. The services of Edelman’s investment advice company are free, but if one wishes then one can use another firm instead. Moreover, anyone can add money to the trust in $500 increments—this means that the recipient can use it as a supplement to his 401(k) and IRAs. A trustee who is neither the recipient nor the giver (nor either’s spouse) must be named, but the recipient may replace the trustee at any time.

Certain of the advantages above make me wonder if it might not be worthwhile for my brothers & to set funds up for one another. I could create one for Thomas, and name Stephen the trustee; Thomas could create one for John, and name me the trustee; John could create one for Stephen, and name Thomas the trustee; and Stephen could create one for me, and name John the trustee (each giving equal amount, so in the end none would gain or lose). Then we’d each have an investment good for retirement or disability, provided with a highly-qualified investment advice, but otherwise under the radar for all other purposes, which would be quite valuable. We’d be protected, too, since if there were a falling-out between brothers then trustees could be changed.

The sole problem is that even for me $5,300 is a fair chunk of change to part with until I’m 59½. Still, it’s a pretty good idea.

I recently found an excellent article on the harm done by the minimum wage. The author—who manages rest stops and camping grounds—hires old folks who mostly are content to work for free camping and a few bucks to cover gas for their RVs. They do a good job and are generally conscientious. It’s exactly the sort of situation which economists mean when they say that people are willing to trade some benefits for others. If the minimum wage is increased, then he will have several bad options: eliminate the jobs; contract out the jobs; automate the jobs; raise prices. None of these are good.

There should be no legislated minimum wage: the minimum wage is the least anyone is willing to work for. That’s fair. It sounds bad, but remember that there’s competition for labour: if someone needs hired help, he’ll pay more than the prevailing wage in order to get more employees. We can see this now: almost no-one is paid minimum wage. Fast food joints are now paying almost twice what the law requires, and they’re not doing it out of the goodness of their hearts, but because they need to. Adam Smith’s invisible hand wins again.

Bruce Bartlett explains why offshoring (what he calls outsourcing) is good for everyone in the long run. It’s a painful subject for many, as I know (indeed, it’s not beyond imagination that I might someday see my job taken to a foreign land), but in the long run it’s a good thing.

Ever since I purchased my fine condo, I’ve been hounded by hundreds of letters offering me huge sums of money (at not-negligible interest rates). Most if not all of these are sucker’s loans—only a fool would sign up for one. Just today I received one claiming that I could receive $20,000 just by asking for it. No mention was made of how much that $20,000 would cost me, but I’ve a nasty feeling that it’d be not a small amount.

On the one hand, I do believe that it is important for folks to be able to freely arrange their affairs. On the other, it worries me that there are enough morons out there for this type of business to be profitable.

Larry Kudlow writes that the economy is in good shape, and that a wave of job-creation should take place soon enough.