Change at last?!

Well we have a new president in the wings.  Bush has been a disaster and I’m glad he’s finally going.  However I wonder how much change we’re really gonna get.  Obviously everyone’s list of things they want to change is different.  Here’s my in no particular order of importance and how much change I expect:

1.  Get rid of government support for domestic ethanol and the tariff on Brazilian ethanol or wherever else it comes from (yeah right).

2.  Get rid of farm subsidies (yeah right)

3. Get government out of the energy policy business (yeah right).  I don’t object to emissions taxes or tradable permits to capture the cost of pollution.  In fact this is the right thing to do from an economic perspective.  But we should get rid of tax breaks that favor specific technologies whether they be oil, gas, wind, solar, Priuses or whatever else.  These are almost always special-interest giveaways and once they become embedded are very hard to get rid of even if the technology in question becomes obsolete.

4. Get a government with an ingrained understanding of the benefits of trade (yeah right).  Bush supported trade when it was convenient and otherwise imposed safeguards.  Most trade restrictions, such as the safeguards or when we asked the Japanese to voluntarily restrict their exports to us in the 80s, are about as smart as asking OPEC to pump less oil so we can have more employment in our domestic oil industry.

5.  End the economic sanctions on Cuba.  Obama used to give this some play.  Hopefully he’lll revive it now that the election is over.

6.  Make the car companies compete on their own merits (yeah right).  If you had a choice between investing in the next Google or GM which would you do?  Why would you want your government to invest your tax dollars any differently?  Do I feel sorry for the workers who will lose their jobs and retirees who stand to lose benefits?  Yes, but those workers and retirees will only be increasing and if these companies aren’t profitable then their ability to help them will decrease further.  Instead of pouring more money down the hole, why not husband it and if there are bankruptcies, use the money to assist the workers and retirees (yes there may be problems with this too but better than not stopping the continual drain).

I’m sure I’ll think of more as time goes on.  I sincerely hope the next 4 or 8 years are better than the last, but I’m fearful alot of the things on my change list aren’t gonna improve soon.

Smart Economists doing Stupid Things

Princeton Professor and former Fed vice chairman Alan Blinder recently published a piece in the New York Times called Is History Siding with Obama’s Economic Plan? One of his main conclusions is that Democratic presidents are better for economic growth:

“Data for the whole period from 1948 to 2007, during which Republicans occupied the White House for 34 years and Democrats for 26, show average annual growth of real gross national product of 1.64 percent per capita under Republican presidents versus 2.78 percent under Democrats.”

Blinder is presumably saying you should vote for Obama because Democratic presidents implement policies that cause higher growth.  When professional economists make statements like this they typically exercise alot of care.  Why?  First, because of the danger this is simply a correlation and not cause and effect.  An example is the Super Bowl Stock Market Theory which states that when an old NFL team wins the Super Bowl, the stock market will rise that year, and when an old AFL team wins, it will fall.  This has been right a stunning 85% of the time.  But would we go so far as to say an NFL team winning causes the stock market to go up?

Presidents definitely affect economic growth, but when and how much?  It is likely that economic growth is affected not only by the current president, but by his predecessors, especially in his first years in office.  The dot-com bust, for instance, had already begun when Bush assumed office.  Was the slower economic growth it caused his fault?  I looked at a GDP series and if you assumed the predecessor was responsible for the first two years of economic growth under his successor, then the result reverses and Republicans look better.  Which proves as little as Blinder’s result.

How much does an administration affect the economy?  As Professor Blinder admits:

“Such a large historical gap in economic performance between the two parties is rather surprising, because presidents have limited leverage over the nation’s economy. Most economists will tell you that Federal Reserve policy and oil prices, to name just two influences, are far more powerful than fiscal policy. Furthermore, as those mutual fund prospectuses constantly warn us, past results are no guarantee of future performance. But statistical regularities, like facts, are stubborn things. You bet against them at your peril.”

Usually when an economist knows there are other factors such as Federal Reserve policy and oil prices, they try to control for them.  You might also want to look at which party controls Congress, since this affects policy as well.  Professor Blinder makes no such attempt.  Statistical regularities may be stubborn things.  But without controls they are likely to be biased.  And like the NFL Stock Market Theory they may not indicate much.

One might also question how meaningful the Democratic and Republican labels are for the policies that affect growth.  We often associate freer trade with Republicans.  Yet Bill Clinton pushed NAFTA and W. Bush implemented the protectionist steel safeguards.  We often associate Republicans with less social spending.  Yet under W. Bush we’ve had extremely profligate farm bills and handout to anyone and everyone, whereas Clinton and Gingrich sought to phase out farm subsidies and promote welfare reform.  If we label Clinton Democrat and Bush Republican, how should we label Obama?  He consistently trashes trade and every vote on a trade bill he’s cast has been against.  He is a staunch supporter of ethanol and farm subsidies.  With the exception of tax policy, his policies are alot closer to what we’ve seen under Bush than under Clinton.  I think history will eventually side with Clinton and Gringrich, but not with Obama.

And not with Professor Blinder’s analysis, which has more holes than swiss cheese. It is a sad day for economics when someone so smart and lucid (see his piece on free trade) gets so blinded by politics as to allow himself to publish something like this.

The Grass is Always Greener

I can’t tell you how many times people have told me how great Canadian healthcare is:  its free (or cheap) and covers everyone.  Apparently, however, its not better for everyone.  According to this article, wait times are 5.5 weeks for CT scans and 14 weeks for MRI scans.  So what do Canadians do when they can’t wait that long?  Well one thing they can do is to come to the US.

I’m not saying the US healthcare system is unequivocally better than Canada’s, but the reverse isn’t true either.

How flawed arguments can cost you money

GE wants your tax money for wind power.  But they promise you will get it back because wind projects more than pay for the tax credits they receive through creating new jobs, and generating company profits and taxes for the government.  Using similar logic, T. Boone Pickens is championing domestic ethanol.  Producing it instead of buying foreign oil will “recirculate the money in the country, (rather) than have it go out the back door on us”.   Sounds good?

Well let’s see.  What would happen if GE doesn’t get the tax credit.  Would all that economic activity disappear?  No.  Either someone else gets the tax credit, or taxes go down, or the government borrows less.  Each of these eventualities have positive economic effects.  In the first case should wind power get the money, or are there other projects which would create even more jobs, profits and tax revenue.  If the money is returned to taxpayers, how much of these would be created by more consumption and investment?  The proper comparison is therefore between resources spent on wind or other projects, not wind or nothing at all.  If spending on wind our best option?  Well the fact that a tax credit is needed, when other business don’t need it to be profitable, seems to argue no.  In this specific case one could argue that its just levelling the playing field because of all the subsidies given to oil and coal.  This is true, but not what GE is arguing.

T. Boone’s “recirculation” also leaves out part of the puzzle.  It seems like our choice is between spending, say $100 on oil, or $120 for the ethanol equivalent of energy, but in the ethanol case we get back most of our money because it goes to domestic corn farmers and ethanol processors.  What’s missing?  Well those domestic producers are consuming some bundle of labor, land, fertilizer and other resources.  Those resources don’t get recycled, they get flushed down the toilet.  They could have been used instead to feed cows to produce beef for export, for instance.

To flesh this out, say we had $200 and resource bundle A which is what it takes to produce the equivalent of $100 in oil in ethanol.  Say resource bundle A costs $120, but those costs get “recirculated”.  If we buy $100 of oil from abroad we are left with:

$100 cash, $100 of oil, and resource bundle A

If we produce ethanol we get:

$200 cash, $100 equivalent of oil

Which is better?  When we buy from abroad we have $100 less cash but resource bundle A.  Which is worth more?  Well the fact that those resources cost $120 seems to indicate that that’s what its worth.  Maybe some beef farmer can turn that into beeef which he can sell for at least that amount.  So domestic ethanol loses us at least $20.

I find it amazing that a businessman as accomplished as T. Boone Pickens could make an argument as flawed as this.  Don’t be fooled.

If the Government doesn’t fund it, it won’t get done!

If the Government doesn’t fund it, it won’t get done.

We hear this justification for government spending on a host of things.  The biggest most recently is probably ethanol.  Is it a good reason for the government to step in?

Well, we might notice first of all that lots of useful products got developed with little or no government assistance: cars, airplanes, computers, the I-Phone, for instance.  When things are useful, people tend to be willing to pay for them.  When they are absolutely critical, people should be willing to pay a lot for them.  So it seems odd that the government needs to step in for some product its proponents claim is so critical.

Let’s look at how things work in the private sector.  Someone decides the world needs a new product to solve some problem.  Why?  For the glory, for the money, or maybe they just wanted to build a better mousetrap.  There are many motivations out there.  They now need resources which means they have to convince a venture capitalistic or bank to fund them, or reach into their own pocket.  What happens if the idea doesn’t work out?  The funding gets cut off.  Is that a bad thing?  Not if the idea was a bad idea. If it was a good idea, chances are someone in this technologically rich world with venture money sloshing around will rediscover it (or something even better).

Now let’s look at how things work when the government fund development.  Some product gets developed and if it works, then society gets some benefit though one may question whether that free money might not encourage producers to produce more than people want.  If it doesn’t work, or after the good has outlived its usefulness (as is often the case), then you have special interests who say they now need more money to keep things going.  And you also have a group of politicians closely tied to those special interests because they gave them money the first time.  Both groups now spend resources protecting their perk (i.e. access to your tax money), so they can profit even though they are losing money for the economy in general.

It is this failure to respond to the market telling you that your product sucks, or is no longer useful, which makes government funding really wasteful.  Farm subsidies may have served some limited purpose during the Depression (though I doubt it), but 68 years and billions upon billions of dollars later, they don’t today.  Ethanol probably never served a useful purpose, yet we are saddled with it and probably will be for years to come (definitely under Obama and maybe even under McCain if the overriding of the farm bill veto is any indication).  The private sector was saying for a long time that ethanol was an idea which wouldn’t fly.  It would have been better had we listened.

Wow maybe this trade thing isn’t all that bad

Trade’s many enemies like to portray a world of evil multinationals moving jobs to third world countries where they take unfair advantage of the natives and foul up the environment.  As shown in the following article this is not necessarily the case.

Get your green pants here

Some may complain this is only one factory and in general trade exploits foreign workers, harms domestic workers and ruins the environment.  I’m sure there are cases where this happen but in the aggregage where is the evidence.  Presumably if foreign workers had worse prospects at multinationals, they wouldn’t work there.  Economic evidence seems to indicate multinationals pay better than domestic firms and provide other benefits (one example study).

Since trade lowers prices and greater variety of goods it is unequivically beneficial to consumers.  But does it hurt domestic workers?  If a factory moves offshore and its workers are laid off then it MAY hurt them.  Some may find better jobs however.  It is likely also that decreased costs to others will great other jobs.  If for instance the price of steel dropped by half, prices of cars and appliances would drop.  When prices drop people buy more and more workers are needed to produce these goods.

It is true that there are other countries with laxer environmental standards than ours.  Are there are some with stricter.  When trade gets restricted (such as the steel safeguards), the distinction is rarely made.  As the above article shows, productions of individual goods abroad is not necessarily going to be dirtier than here is the US.  If you really favor restricting trade for environmental reasons, then it should be on a targeted basis with clear analysis as to what the total environmental costs are there and here.  And also keep in mind that as countries get richer, their citizens tend to require a cleaner environment.  Making countries richer through trade is probably be a good way to make them cleaner too.