Monthly Archives: November 2013

The Curse of Oil

CNN reports that America will soon be a bigger oil producer than Saudi Arabia.  Jeremiah has mixed feelings about this.  We have been wanting energy independence for a while, but – do you want to live in Saudi Arabia?

Rulers have no incentive to develop non-oil sources of wealth, and the ruled (but untaxed) consequently have little incentive to hold their rulers accountable.

It’s one thing to have a dynamic economy in services and manufacturing, and then have to worry where your energy is coming from.  It’s quite another to have a moribund economy where extraction is the only bright spot.

There is a known correlation between dictatorships and extractive industries.  It’s oil, in the case of Russia, Venezuela, and the Middle East.  Along with oil, gold and diamonds prop up brutal dictatorships in Africa.  The Economist covered this correlation here, and Jeremiah included it in his Rules for Dictators.

It is much harder for a dictator to seize control of an advanced economy.  Communism infected Russia when its economy was just starting to industrialize.  Chavez controlled Venezuela because he controlled its oil wealth.  We hope for a boom in domestic energy, to fuel our own industries, but we hope not to become an exporter.


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The Knockout Game

HeadThis is really scary!  No, not getting punched by some kids.  It’s really scary that we can’t get a straight answer out of our news media.  Some news outlets report a new trend of random violence, and others say it’s an urban legend.  Come on, people.  It’s not the Kennedy assassination.

You have seen the videos.  Numbers are sketchy.  We found one source for eight incidents of “knock out the Jew” in New York, over the last month.  We found another source for six incidents in one month in New Haven.  Other headlines say it’s a myth, but read on and they acknowledge the events.  They only claim that, since there is already a lot of random violence, these new attacks aren’t news.

But CNN says violent crime is on the wane.  That’s the real myth.  Jeremiah debunked it here.  He is sick and tired of politically motivated news outlets trying to tart up, play down, and spin every goddamn story.  What if it really mattered?

What if there were civil unrest, or an epidemic, or a crime spree – and you got this kind of bullshit from the TV news.  You’d have one channel telling you to hide in the basement, and another saying “keep calm and go shopping.”

We are going back to our old standby, that paragon of journalism, Pravda.

See also:  Fight Media Bias

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Inflation at Tiffany’s

AudreyHepburnTiffany’s is having a good year.  Bloomberg attributes the upscale jeweler’s success to a rising stock market and house prices.  If you’re a Fed watcher,  you know that the “wealth effect” is official policy.

Tiffany’s is also raising prices.  That’s the inflation the Fed has been looking for.  It is starting with the rich, logically enough.  This really is trickle-down economics.  Unlike the supply side boom we saw in the 1980s, the Fed’s beneficiaries are not creating any new wealth.  They just happen to be nearer the monetary spigot.

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.

Now we have populists of all kinds – including the pope – calling for change and denouncing capitalism.  The tragic symptoms are obvious, but is capitalism really the cause?

Lenin (and Keynes) knew that the quickest way to destroy capitalism was to debauch the currency.  It automatically makes the rich richer, and it screws everyone else “in a manner which not one man in a million is able to diagnose.”  Not even the pope.

Update:  We wanted to tweak the pope over his misinformed attack on capitalism, but Matt Welch has done a better job.  Writing in Reason, Welch notes that the political left, which normally dislikes the church because of its stance on abortion, gay rights, and evolution, suddenly loves the pope when he comes out against capitalism.

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Government Is Not the Solution

Last week, we reported on the epiphany of Larry Summers.  In his speech to the IMF, Mr. Summers reluctantly admits our economy has structural problems that stimulus can’t fix.  This was a watershed moment in economic policy.  If you didn’t know from the content, you would certainly know it from the reaction.

Understandably, people want to pillory Summers because much of this failed policy was his idea.  You have to give the guy credit, though, for recognizing a mistake and admitting it publicly.  Less flexible thinkers have been caught off guard.  Paul Krugman is here, rearranging his position so that he continues – retroactively – to have been right all along.

Apparently our structural problems, demographic challenge, and persistent trade deficit are news to Dr. Krugman.  He is still not changing his policy, though.  It just means we’ll need fiscal and monetary stimulus for much longer than expected.

Jeffrey Sachs was more satisfying.  He repeats his call for a new framework to stimulate private investment in new industries – not “the old standard-bearers of housing, cars, and consumer goods.”  This sounds a lot like the restructuring Robert Dugger recommended for Japan.  Coincidentally, the Economist has an update on that.  Japan’s economy is stifled by red tape and bureaucracy.  We are truly following their footsteps, just as Dugger predicted.

There is an investment shortfall because the financial, regulatory, and policy barriers to high-return investments have not been addressed.

Sachs has the most practical solution we have heard, although we are a little wary of public-private investment schemes.  Jeremiah would like to try private-private solutions first.  Japan’s MITI worked well until it didn’t, and central planning in America – except for DARPA ­–has a pretty poor record.

Summers may have been the first to say it out loud, but we find this (emphasis added) in the FOMC minutes from October:

Participants also considered scenarios under which it might, at some stage, be appropriate to begin to wind down the program before an unambiguous improvement in the outlook …

So, the establishment is preparing for an early end to the stimulus – no digging ditches and filling them up, no alien invasion.  We will have to knock down those policy barriers or, as the entrepreneurs say, “get government off my back.”

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Don’t Get Scroogled

en-INTL_L_Scroogled_Keep_Calm_Mug_DHF-01113_mncoYou may recall Jeremiah warning you to stop using Google, because they collaborate with the secret police, and then following up on the machinations of Dr. Evil, Eric Schmidt.  Thanks to public pressure, the big internet companies are now pleading to disclose their secret court orders.

We also reported how collaborating is bad for business, and here we see investors pressuring AT&T and Verizon.  This is how you lobby for change in a capitalist society.  Keep up the good work!

I want to reiterate what we have said in the past – Yahoo has never given access to the NSA or to any other government agency. Ever.

Now, Yahoo plans to encrypt all personal data, and … here we have the highly amusing Scroogled campaign from Microsoft.  In case you’re new to this,

  • Stop using the Google browser.  Switch to IE or Firefox.
  • Set the browser’s search box to DuckDuckGo.
  • Switch your email to Yahoo mail.

If you’re technically inclined, you may want to add your own encryption, anonymous browsing, and VPN.  This is serious stuff, folks.  The internet has become a hostile environment for anyone with opinions that might some day be used against you.  Here is the tragic farewell of Groklaw.

Your data is probably not safe with any of these companies, but at least we can make privacy a competitive issue.

By the way, now it has been established that the NSA shares its stolen data with the DHS, IRS, DEA, and FBI – and maybe OFA – we will just call the whole apparatus “secret police” for short.  Readers are invited to submit glib abbreviations for the police-harassment-security-advertising complex.

See also:  Petition to Stop Reading Email

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America’s Structural Trap

GMJeremiah has been raving that all monetary easing since QE1 has been overkill.  Outside of the establishment economists in Washington, this is the majority view.  Everyone from fund managers to Occupy says the Fed is not helping – the former, even as they rake in profits.  Now, we have unearthed a paper that gives a name to the problem.

But first, here is Larry Summers speaking at the IMF economic forum.  If you can’t open the FT link, watch the speech on YouTube.  Summers has the nerve to say out loud what the others now claim to have been thinking all along.

Four years ago, the financial panic had been arrested … but, in those four years, the share of adults who are working has not increased at all.  GDP has fallen further behind [its] potential …

This may be why Summers was dropped from the short list for Fed Chairman.  He says there should have been a rebound after the crisis.  Summers goes on to suggest that our equilibrium interest rate may be negative, and he draws a parallel with secular stagnation in Japan.  The implication is that we only have full employment during a bubble, and – we may have been in this structural trap since the 1990s.

About ten years ago, Robert Dugger studied the situation in Japan.  Recently, people have taken new interest in his work.  We found this on Minyanville, and the original paper is here.  The charm of Dugger’s paper is that, reasoning from Japan’s experience, he was able to predict exactly how such a situation would unfold in America.  The details are uncanny.  You would think he had just written it last week.

In a structural trap. extremely loose monetary policy perpetuates deflation and low GDP growth, because unproductive but politically important firms are allowed to survive and capital reallocation is prevented.

A structural trap looks like a liquidity trap, except that the Fed can’t generate a credible expectation of inflation – because everybody knows the real economy is flat on its back.  What it takes to revive the economy is that you have to let old line companies go bust, so that workers – mostly young workers – can get new jobs in new industries.

TrapThat’s a lot of pain, but it would be over by now.  The alternative is that we languish in this weak recovery, possibly forever.  Larry Summers actually said forever.  Japan is going on twenty years.

Dugger recognized that no politician has the nerve for this, and that’s where an independent central bank comes in.  Remember Chairman Volcker tightening the screws in the 1980s?

Now that he is not facing another election, President Obama can afford to be bold.  He should appoint a monetary hawk as Chairman, and pursue a policy of structural reform.  That may be a stretch for the man who bailed out GM, but we can hope.

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Let States Run Welfare

Regular readers know that Jeremiah does not oppose redistribution, per se.  What he opposes is the concentration of power in the central government.  There is no reason to suppose that Washington knows best how to help the poor, and plenty of reasons to believe they are making a hash of it.

The problem has led some parents to take the radical step of quitting jobs to regain eligibility, said Shalonda Murray, executive director for Auntie Mame’s Child Care

There is also the issue of moral hazard, and we don’t mean freeloaders who abuse the system.  We mean honest, hardworking people who – thanks to a hodgepodge of federal mandates – face a series of “welfare cliffs” as they struggle up the income scale.

By now you may have seen Gary Alexander’s famous chart of the welfare cliffs in his state of Pennsylvania.  The cliffs are formed by suddenly losing your eligibility when you get a better job.  For instance, once you hit $30,000, you lose your housing assistance (and your EBT).  You finally got that raise, and now you’re $7,000 poorer.

welfare cliffThis is not an abstract math problem.  Anecdotes, like Shalonda Murray’s above, show that real people struggle not to get that fateful raise.  They’re clinging to the welfare cliff.

We find a system that entraps parents and children in dependency while not improving their overall well-being or their chances of joining the middle class.

Alexander did a nice job with that chart.  He should know the numbers, because he is Pennsylvania’s Secretary of Public Welfare.  Obviously, the benefits curve should rise steadily to join the earned income curve – with no cliffs.

Alexander’s Senate testimony is here.  His complaint is not mainly about the cliffs.  His complaint is that he must administer all these programs, which produce the cliffs through “myriads of conflicting rules and regulations from a massively disorganized bureaucracy.”  Here is a chart depicting his interaction with various federal agencies:AlexanderIt’s clear that he could do a better job, and cheaper, if the feds would just give Pennsylvania a block grant.  Better yet, lower the federal tax burden and let the states run their own programs.

See also: President Guts Welfare Reform

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