Is the climate changing?

Here in Los Alamos New Mexico, surrounded by the largest wildfire in New Mexico's history (almost 100,000 acres burned by tonight), we normally have about 7.5 cumulative inches of rain from Jan 1 to the end of June. This year we have 0.19 inches thus far, the deepest drought since records began to be kept. Texas and Arizona have similar stories, while to the North of us state after state is fighting massive flooding.

Don't tell me the climate isn't changing. We can certainly argue about why, and about how much human activity has contributed to it, but worldwide the weather is showing distinct changes.

Our next president

There was general relief when Barak Obama was elected president. He promised to change Washington, encourage bipartisan government, get us out of Afghanistan and Iraq, keep unemployment below 8% despite the recession, and initiate a new and friendlier relationship with Russia, Iraq and the Middle East. Now almost three years later he has accomplished none of these things.

He has, however, lumbered us with a non-bipartisan, incomprehensible 2000+ page health care bill that adds another trillion or two to the national debt, increased the size and cost of the federal government by around 20%, proposed budgets that, according to the GAO, increase our national debt to more than 100% of our GDP within the next few years, and gotten us into another war in Libya. And unemployment is still stuck above 9%, and the economy is still floundering, despite the stimulus packages.

In retrospect, this even makes the Bush administration look a lot better

President Obama is still a likable, articulate guy, but clearly he isn’t the president we need in these difficult times. And perhaps we ought to have expected that, since he has never run a business, met a payroll, governed a state, or shaped much legislation in his short stint in the Senate. He is eloquent on the podium but ineffective in action. He seems to be, as the Texans say, “all hat and no cattle”.

So now the question is whether the Republicans can find anyone who looks like a better bet. This is certainly an opportunity for them – Obama is beatable in this upcoming election – but only if the Republicans pick a reasonable, moderate, competent candidate who actually understands economics, and not some far-right ideologue.

Otherwise we get another four years of President Obama, which would not bode well for the nation.

Recommended: Declaration of Thingamajig

For some wry humor about a serious topic, look at the Declaration of Thingamajig animation over at the Daily Kos website.

Keynesian Economics and Big Dams

There is a good bit of argument about whether Keynsian “pump priming “ (government spending to increase demand in recessions) really works or not. It would appear that it hasn’t worked well in the current recession, but some would argue that the “stimulus” package wasn’t large enough to be effective, while others argue that with our current national debt, we really couldn’t even afford the stimulus package we got.

All of this reminds me of big dams. Big dams are usually sold as solving two problems : (1) providing cheap electric power and (2) providing flood control. The problem with this sales pitch is that the two uses are in conflict. For power one wants the lake behind the dam as high as possible for maximum head in the turbines and for maximum reserve, yet for flood control one wants the lake as low as possible so it can absorb the maximum flood waters.

The parallel I see with Keynesian economics is that to preserve the government’s ability to borrow money to fund stimulus packages in recessions, one needs to keep the public debt low to preserve the ability to borrow in emergencies. Our problem now is that we have already borrowed up to the hilt, so it is hard to borrow lots more to provide government stimulus funds. We are like the dam that suddenly needs to absorb flood waters, but is already full.

Keynesian economic theory may or may not be correct, but if one believes in it, one must also believe in keeping public debt low so that there is ample room to borrow for stimulus in recessions. Politicians don’t seem to have figured that out yet.

Rethinking Our Assumptions

It’s amazing that we still supply about $2 billion per year to the Pakistan military, even though most of the military is anti-American, elements of the ISI (Pakistan’s intelligence agency) actively support the militants, Osama Bin Laden turns out to be hiding in the middle of the Pakistani military establishment, and twice in recent weeks we have shared intelligence with Pakistan about militant bomb factories, only to see them (from overhead intelligence) vacate the premises within 24 hours of the time we share the intelligence.

And in response to the embarrassment of finding Bin Laden in their midst, and our (understandable) unwillingness to trust them with advance information about our raid, the Pakistani military and the ISI have become even more publically anti-America and uncooperative. So why are we continuing to treat them as an ally?

The argument is that, bad a partner as Pakistan is, we need them as much as they need us, so we ought to keep trying and sending them billions. Perhaps this is an initial assumption we ought to revisit.

Certainly we aren’t going to ”solve” the Afghanistan problem without cooperation from Pakistan, but (a) we clearly aren’t getting that cooperation, and (b) even if we got the cooperation, there appears to be little likelihood we would change the centuries-old deeply-embedded tribal culture in the badlands that supports the militants – a tribal culture that even the Pakistani government itself can’t control or suppress.

Suppose we simply got out of Pakistan and Afghanistan (and Iraq) and left them to sort things out for themselves, since our decades-long involvement, expensive as it has been in lives and dollars, doesn’t really seem to have made much difference (despite the repeated upbeat claims by the administration)?

No doubt there would be civil unrest, even civil war, and lots of bloodshed if/when we left the field. Unfortunate, but is there really anything we can do about it without simply occupying these nations with American troops for decades?

No doubt militant elements would arise again in these badlands, but they can’t really do us much harm from there. We (and Europe) need to defend our own borders better anyway, and if we did that we would minimize the damage any illiterate Kalashnikov-toting tribesmen from the badlands could do to us. Its not even clear they care much about American soil – mostly they seem to care about killing strangers (like American troops) in their own valleys.

In any case, the militants that have thus far successfully attacked America and Europe have all been better-educated people who grew up in Europe or America or some of the more civilized nations of the Middle East, like Saudi Arabia. The 9/11 attack wasn’t carried out by backwater tribesmen from Waziristan. Afghanistan provided a temporary haven for the 9/11 planners, but neither the operational smarts that planned the attack nor the street soldiers that carried it out came from there. Those came from (our ally?) Saudi Arabia.

So perhaps it is time to go back and re-examine our original assumptions that (a) we Americans with our money and military power can significantly change the existing culture in Af-Pak (and Iraq), and (b) that we need to do so. Perhaps neither of these initial assumptions is true.

Perhaps like the old cold-war “domino theory” we have been seduced by a plausible but ultimately fallacious assumption.

Recommended: The Texas vs. California Example

Jay Ambrose, over on the RealClear Politics web page, has an interesting article: The Texas vs California Example. As he points out, California is what the liberals want - lots of social programs, high taxes to pay for them, lots of regulation and interference in the markets, strong union support, etc, etc. Texas is what the conservative want - low taxes, minimal regulation, minimal government, right-to-work laws, etc, etc.

So we have a real test here, and the result is clear - California is a fiscal mess, hemorrhaging jobs and businesses at an astounding rate, while the majority of the new jobs in the nation since the recession started have been created in Texas.

To those (few) who pay attention to evidence, that ought to be a significant argument.

Recommended: The Conservative Revolutionary

Walter Russell Mead has a brilliant analysis of the "Arab Spring" and our (feckless) foreign policy response to it over on the American Interest blog under the title The Conservative Revolutionary. It is pretty clear that Washington politicians and their advisers (Republicans and Democrats alike) haven't a clue how to respond to these uprisings or the brutal government suppression that accompany them. We bomb Libya but ignore Bahrain, we deplore the brutality in Syria but say nothing about the Army takeover of the revolution in Egypt. Clearly we have no coherent long-term plan or policy toward the Middle East -- we are just making it up as we go along.

For a nation that spends a lot of its time lecturing other nations about how they ought to become Democratic, we seem to be terribly naive about what it takes to build and sustain a democracy.

Recommended: Land of the Lawless

Victor David Hanson is a bit of a curmudgeon, but he makes points worth listening to. In his June 7 piece Land of the Lawless he raises a valid point: how come, despite the War Powers Act, the President hasn't asked Congress for permission to continue the military involvement in Libya as required by law? And he points out a number of other places where this administration has simply ignored or overturned or failed to enforce the law when it suited its ideological goals.

It is a worrying trend.

Recommended: Why the President Must Come Up With Demand-Side Solutions, And Not Go Over to the Supply Side

Clearly our current Keynesian economic policy isn't working. We have bailed out companies, backstopped banks, pumped a trillion dollars of "stimulus" into the economy, printed money (alias Quantitative Easing), and extended tax cuts -- and yet unemployment is still officially above 9% (and unofficially really at about 20+%), and growth has been almost non-existent the first part of this year. The administration keeps claiming (almost hysterically) that we are in recovery, but is sure isn't evident to most of us.

In that connection, Robert Reich's article Why the President Must Come Up With Demand-Side Solutions, And Not Go Over to the Supply Side is worth reading and thinking about.

Whatever we have been doing up to now simply isn't working (and this includes both Democratic "stimulus" spending and Republican tax cuts). It's time to try something else. As the famous Einstein definition goes: "Insanity: doing the same thing over and over again and expecting different results."

Free Markets X – Emergent Properties

Emergent properties have to do with very complex and sophisticated behavior emerging from a large number of very simple components. For example, neurons in the brain, though biologically complex, are functionally very simple. All they can do is send a signal pulse down the axon (long, thin part) when stimulated at the dendrite (short part near the cell body). Functionally one could do the same thing with nothing more than a battery, push button and piece of wire.

Yet hundreds of millions of these functionally very simple neurons, acting together in a brain, produce thought, self-awareness, and even great music and literature and mathematics – all emergent properties from this assembly of very simple pieces.

Free markets exhibit similar emergent properties. Each individual transaction in a free market is very simple – a consumer considering buying something offered by a seller. The consumer considers the price, how much they want it, whether they can afford it at that price, and whether they would rather spend the money on something else. The seller considers what it cost to make the item, and how much added profit she/he thinks can be added and still find a buyer.

Yet from millions of these simple transactions emerges a market that is remarkably efficient at allocating goods where they are most needed, moving goods from areas of surplus to areas of scarcity, and signaling producers what to produce more of and what to produce less of.

And the market does this without any single person in the market “consciously” trying to control or optimize the market. Indeed, no single person could do that, because no single person could ever have anywhere near as much information as the market as a whole has from each of the hundreds of millions of individual consumer choices being made every day. Instead the market reacts to the feedback signals from all the purchases made or not made at given prices, constantly dynamically adjusting itself as supplies vary and consumer desires change.

At least it does so unless someone interferes and corrupts the feedback signals

Free Markets IX – Subsidies Cause Waste

Here is a basic principle of economics: subsidies cause waste.

Most commodities have multiple possible uses. Ideally one wants to use them as efficiently as possible. Free markets make that happen. Take the walnut example from the last posting. Walnut wood can be used as firewood, but it has more value made into fine furniture. Both firewood users and furniture makers bid for the wood, but since it is more valuable to the furniture makers they will bid higher, and will get more of the wood. Firewood users will be encouraged by the high price to find some other less-valuable wood for their fireplaces.

One again, it is price signals that produce efficient allocation of commodities across their possible uses.

Now consider subsidies. Subsidies from the government distort the price signal, so that the market no longer allocates goods efficiently to their “best” (most valuable) use. If gasoline is high priced, people are careful in using it, and are encouraged to drive less and buy more fuel-efficient cars.

But if the government subsidizes gas to keep it cheap, then there is less incentive to be careful in using it, and more gets wasted or used for less-than-its-best use. And of course it isn’t really cheaper; it’s just that part of the cost (the subsidized part) is hidden because it comes out of our taxes (used to pay the subsidy) instead of being paid directly at the pump.

Subsidized water is a classic case of subsidies encouraging waste. According to a 1997 report by the University of California, California farmers got about $236 million in water subsidies in that year, making it economically attractive to them to grow water-intensive crops in what is essentially desert ( a really dumb idea, unless like Israel, desert is all you have).

In a free market without subsidies, the cost of scarce California water would rise to its “real” market value, which would be a lot higher. That would give farmers an incentive to use the water more efficiently on crops that were not so water-intensive, to find ways of watering (like drip-watering) that wastes less water, or even perhaps to move their farming to land with more natural rainfall, leaving more of the limited California water for urban areas.

Politicians love subsidies as a way to favor supporters and gain votes, but inevitably the corruption of the market price signals by subsidies makes that market less efficient and results in waste.

Free Markets VIII – Running Out of Oil

One of the common misconceptions is that economies have a fixed amount of various commodities. Take oil, for example. We have been hearing for decades that we will soon run out of oil, but it simply isn’t true. There is plenty of oil in the ground yet. What is true is that the easy-to-retrieve oil is fast running out, and we are having to look for oil in more and more remote places, or extract it from things like tar sands with expensive processing, and that is pushing the price of oil up steadily.

It’s price signals again. As the cheap-to-produce oil runs low, the price of oil rises and that makes it economically attractive to find and pump more expensive oil from places like the deep sea. or to use expensive processing to extract oil from tar sands, or to look for ways of producing oil from algae or the like. When oil was cheap, none of these things were worth doing. As oil becomes more expensive, they suddenly become economically viable sources.

And of course as oil prices go up, consumers begin to think more carefully about their use of it. Frankly oil is far more valuable as a chemical feedstock than as a fuel. It’s like burning good walnut in your fireplace – yes it does keep us warm, but that walnut would be a lot more valuable to us made into fine furniture. So as oil become more expensive, we consumers get smarter and more careful about using it.

What is true is that there is a relatively fixed amount of a commodity in an economy at a given price. If demand pushes the price up there will be more of the commodity because there will be an incentive at the new higher price to find or create more of the commodity. The world’s supply of oil is really dependent upon its price.

So what will really happen is not that we will run out of oil, but that the price of oil will continue to rise as it becomes more and more expensive to extract it, and because it is more expensive consumers will become more and more careful how they use oil. At some point (perhaps soon) it will become too expensive to simply burn as a fuel, and so we will have to find alternate energy sources while we use the remaining very expensive oil for more valuable uses.

Here again is where politicians who don’t understand economics can make things worse. Reacting to price rises by “fixing” the maximum price of oil or gasoline is exactly the wrong thing to do, popular as it might be with voters. That simply makes it economically unattractive to extract the more expensive oil, and so soon produces a real shortage.

So here is the question……

As I have explained in a number of different ways in my Free Markets series, economics isn’t really all that complex. When a commodity is in short supply, the price rises and that price signal encourages (1) consumers to ration their use of it, (2) producers to increase the production of it, and (3) entrepreneurs to find unused supplies of it elsewhere and import it to the region suffering the shortage.

Conversely, when there is a surplus of a commodity, prices fall and that price signal encourages (1) consumers to use more of it, (2) producers to produce less of it, and (3) entrepreneurs to look around and try to find a place that is short of the commodity, so they can make money moving some of the surplus to the shortage area.

Not hard, is it? Pretty much common sense. But unfortunately neither voters nor politicians appear to understand even these simple principles, choosing instead to believe a number of ideological myths completely unsubstantiated by evidence or experience. And we get terrible, counterproductive public policy as a result – like out-of-control medical costs, unsustainable pension promises, a ballooning federal debt and a steady loss of jobs to other nations with more rational policies..

So here is the fundamental question: can a democracy really work if the voters don’t understand even the basics of economics, and are so gullible that ambitious politicians can get elected and re-elected proposing the most nonsensical and absurd economic policies (like reducing the federal debt while not touching Medicare, Social Security or defense, which account for most of the budget)?

The proper functioning of a democracy depends upon an intelligent, educated, engaged electorate, which is why democracy fails so badly in many third world countries. Judging by the popular economic myths prevalent in the nation, by the proportion of the population who can’t even make correct change, let alone do fractions or understand the terms of a home mortgage, we may not be adequately educated to run a successful democracy.

Sarah Palin’s complete misunderstanding of the Paul Revere story is funny, but before we laugh too loud we should be aware that she is typical of the educational level of the country as a whole, which may be why she has such a following. Can a democracy continue to function with a populace so disconnected from reality?

Re last post: Quote of the Week

It seems to me that at this time we need education in the obvious more than the investigation of the obscure.

Oliver Wendell Holmes Jr

Free Markets VII – Subsidies and Health Care

Human nature being what it is, what would happen if each American were given a credit card that someone else subsidizes (ie - pays the bills on)? It’s not hard to imagine – we would all soon find that we need all sorts of expensive things that we have been doing without up to now. And whoever is paying the bills would soon find themselves over their head in debt.

We are back to price signals. For goods in scarce supply (which is most things), price is how we allocate the existing supply to those who need them most. If gas is dirt cheap, I don’t worry about how much I use. But if gas is in short supply and therefore costs $10 a gallon, lots of us will find that we can do with less driving and more walking or biking, leaving the available gas for those to whom it really matters and who are therefore willing to pay the high price.

Now think about Medicare. I pay a relatively low premium, and can then get almost unlimited use of the health care system – almost like my hypothetical American credit card. Not surprisingly, I want the very best medical care available, and am not loath to go into the doctor’s office even for minor complaints. The result – medical costs (to the government) soar and we have an acute shortage of doctors and nurses. (Sound like Britain? It should, because that is what has happened in their “free” health care system).

Now if I actually had to pay most or all of the costs of medical care, I would shop around a lot more, often settle for less than the most expensive treatment, take better care of myself, and not bother the doctor with many minor complaints. That would reduce my medical costs, and by the way free up doctors and nurses to see more people who really did have serious medical issues.

That, in a nutshell, is half of what is wrong with our current health care system, and putting more people under Medicare or other subsidized programs will just make it worse.

The other half is that Medicare “fixes” the prices it will pay hospitals and doctors, usually at a lower rate than they would be in a free market economy. What always happens when one imposes price controls? A scarcity develops, just as is happening in the medical profession. At the fixed price, it simply doesn’t pay to go through the difficult and expensive process of becoming a doctor (several studies predict a shortage of 100,000+ doctors in the next 20 years), and even existing doctors begin to find it not worth staying in the profession. Or at least they stop taking Medicare patients. Either way, the price fixing is reducing the supply even more.

The truth is, medical help is a scarce commodity (there is not enough of it to give everyone everything they want), and in a free market price signals would encourage consumers to seek medical help only when they really needed it. Some consumers will even choose to use their money in other ways rather than seek health care -- that may sometimes be an unwise decision, but in a free country people are free to make unwise decisions.

Despite the political rhetoric, our current Medicare system simply doesn’t make economic sense, and expanding it will only make the problem worse. Too bad more politicians (and the voters who elect them) don’t understand basic economics.

Re last post on prohibtions and smugglers

By chance, The Economist June 2 issue has an article on drug policy relevant to the last post:.  Here are the first four paragraphs of that article:

NARCOTICS liberalisation was once the cause of freethinkers and hippies. Now a more sober bunch is criticising the “war on drugs”. On June 2nd the Global Commission on Drug Policy, a group including ex-presidents of Brazil, Mexico, Colombia and Switzerland; the prime minister of Greece; a former secretary-general of the United Nations; and, from America, an ex-secretary of state and ex-chairman of the Federal Reserve, called for the decriminalisation of all drug taking, and for experiments in the legal regulation of the sale of drugs, starting with cannabis.

Calls for a rethink of the 50-year-old policy of prohibition have been growing. As the report pointed out, drug consumption has continued to rise, even as billions of dollars and tens of thousands of lives have been spent trying to stamp it out. In the ten years to 2008, the most recent data available, the number taking cannabis worldwide increased by 8.5%, of cocaine by 27%, and of opiates by 34.5%. America’s federal government alone spent $15 billion in 2010 on drug control; perhaps $25 billion more went in other public spending. .

Prohibition has brought many short-term wins but no lasting ones. The authorities drove cocaine smugglers out of the Caribbean in the 1980s. But they then popped up in Mexico. A campaign against “narcos” there has cost at least 35,000 lives in the past five years—and is driving them into the chaotic countries of Central America. Guatemalan officers found 27 headless bodies near the Mexican border last month, and blamed the Mexican Zetas “cartel”.

A similar merry-go-round is spinning in the Andes, where production driven out of Peru and Bolivia and into Colombia in the 1990s is now being swept back in the other direction. As cocaine taking has fallen in America it has risen in Europe: Latin American “cartels” have diversified their export strategy (wrecking parts of West Africa, a convenient staging post, along the way)

Free Market VI – Of Prohibitions and Smugglers

At various times and in various places around the world governments have tried repeatedly to prohibit various things in heavy demand – alcohol, drugs, prostitution, gambling, weapons, etc., etc.  Generally such prohibitions have two related effects: (1) the price of the prohibited items goes sky high, and (2) as a result, smuggling becomes highly profitable and flourishes.  And by the way, the prohibition generally fails to stem the market in the prohibited goods.  In fact, it sometimes stimulates that market.

Why this is so should by now be obvious.  There is a demand.  Attempts to enforce the prohibition reduces the supply, so the price goes up.  This is what always happens when there is more demand than supply of an item.   If the demand is strong, the price can get pretty high before people stop buying.  At a high price, the profit is enormous (after all the cost of production hasn’t been changed by the prohibition), and quickly attracts a brisk trade in circumventing the prohibition.

We have a prime case study in our own country – prohibition.  Between January of 1920, when the Eighteenth Amendment to the Constitution was ratified, and December of 1933, when the Eighteenth Amendment was repealed by the Twenty-First Amendment, it was illegal to produce or sell alcoholic spirits in the USA.  This prohibition not only didn’t eliminate alcohol from the US (by 1925 there were reported to be some 50,000 speakeasies serving alcohol in New York City alone!), it provided massive profits to smuggling gangs and encouraged their rapid growth.

Unfortunately this relatively simple lesson in economics doesn’t seem to have been learned, because we are repeating exactly the same mistakes with our decades-long “war on drugs”.  We have spent billions fighting the drug trade and the result is that the drug smuggling business is now far larger than it used to be, involving far more people and far more money (more than the gross national product of medium size nations!), and far more violence.  Yet in fact most of the drugs involved are exceedingly cheap to produce (marijuana was just a roadside weed before it got promoted to a prohibited, and therefore desirable, drug), and if they sold at their natural “free market price” wouldn’t be profitable enough to interest most potential distributors.

The fundamental lesson of free markets is that prohibiting a good or service in high demand doesn’t take it off the market.  It just creates a highly profitable business providing the good or service illegally.   The only way to reduce the sale of this good or service is to reduce the demand.

The same logic applies to all the other things we try to prohibit – prostitution, weapons smuggling, trade in ivory, rhino horn and the pelts of endangered species, etc.  The only effective way to eliminate them is to reduce the demand - trying to reduce the supply is futile. As long as the demand is there, there will be a market, legal or illegal.

If we really want to reduce drug use, we need to (1) work though education and medical advances to reduce demand, and (2) legalize the sale of drugs, so that the market price drops precipitously and takes all the money out of the trade. This is not a problem that can be solved by moralizing.  It was created by market forces and has to be solved by market forces.