We are creative SOBs

January 19, 2007 by

Reading the following post at Cafe Hayek, I am drawn to the comments and the discussions of how Mexican tortilla manufactures would circumvent price controls. The initial theory was that they would make the tortillas smaller, however the regulation targets weight and not quantity. This is not a brilliant move by the regulators. From my reading of the Gulag Archipelago I am reminded of Solzhenitsyn’s discussion of the bread rations in prison. The prisoners were guaranteed a certain weight of bread each day; however the camp officials sold the ingredients on the black market and the prisoners lived off of soggy misshapen lumps of “bread.”

My prediction is that the quality of corn tortillas will decrease.

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Labor in the Letters

January 19, 2007 by

I wish to comment upon a January 13, 2007 letter to the editor in The Washington Post.  It reads as follows:

“Three Jan 8. letters commented on the economic views of George F. Will’s Jan 4 column, “The Right Minimum Wage.”  None cited his comments that reveals his lack of respect for workers. He said, “labor is a commodity.”

Labor is done by human beings.  Regarding labor as a commodity was supposed to have ended with the Emancipation Proclamation.”

 This letter is evidence of media bias, although given its quality and substance I am unsure of the direction of the bias.

 George Will is not showing a lack of respect.  Labor is a commodity because in this instance it is a homogenous service that varies little with the person providing the service.  Specifically ones humanity, all our likes, dislikes, thoughts and dreams, has little effect upon ones ability to flip burgers or make change.  Labor is a commodity because at the entry level, where the minimum wage will most likely apply, for any individual there are a potential six billion replacements.

The consequence of the minimum wage is that as unskilled, commodity, labor becomes more expensive, people will substitute into machinery and skilled labor.  The legislation will have destroyed the jobs of the very people it was supposed to help.

 

Dying Despots

January 18, 2007 by

Castro is a decrepit commie dictator.  He has also been receiving medical care from a Spanish doctor.  Some people have attacked Castro’s use of a non Cuban doctor as an indictment of socialized medicine.  I believe this is fallacious for the following reasons:

  1.  There is no reason to expect a nation the size of Cuba to produce the best doctors in every or any field of medicine.
  2. There is no reason to assume that a man of Castro’s stature and wealth would seek anything but the best medical care money can provide.

Let’s reframe the argument.  Suppose he received care from a Cuban doctor and that the surgery was an unabashed success, would that prove anything?  At the very least it would prove that socialized medicine created one doctor that El Presidente would entrust with his life.  That’s it.

The institutional test of socialized medicine is not whether the rich will live but the quality of service offered to those unable to opt out of the system.

Two minutes to midnight

January 18, 2007 by

My trade deficit with Kiariz coffee increased by $5.95.  The Doomsday clock advances another notch.

MR hearts JMK

January 17, 2007 by

Hugo Chavez calls Jesus the “greatest socialist in history.” Ok. We can solve this in one paragraph.

Jesus taught a moral philosophy; Socialism is an economic order. One’s philosophy exists independently of the economy. Jesus advocated non violence and the voluntary acceptance of God. Socialism can only exist when it is forced upon the masses, this violates non violence and voluntary acceptance. If Jesus was a socialist, Rothbard was a Keynesian.

Minority Report and the Hand Formula

January 17, 2007 by

Tom Cruise’s sci-fi film Minority Report portrays a world where murders can be seen in advance and prevented. Thanks to the “pre-cogs” who make this possible, Washington D.C. of 2052 has not had a murder in six years. The only attempted murders to occur now are those taking place in the heat of passion; intentional plans to murder are easily stopped long before they happen. Individuals are arrested by the Department of Pre-Crime and punished with many years in a comatose state.

It seems that the disturbing twist to this film is that individuals are punished for horrible crimes that they had yet to commit. The movie attempts to draw forth insights about free-will and punishment of people’s thoughts rather than actions. The more I think about it, however, the more disturbing twist to the story is the failure to heed the Hand Formula.

The Hand Formula is a calculus of negligence:”The Hand Formula finds negligence when the actor’s burden (B) is less than the probability (p) of harm, multiplied by the degree of loss (L). B < p x L .”

The Hand Formula can easily be used as a guide for punishing crimes. To dissuade a particular crime, the legal system can manipulate either the amount of punishment or the probability of apprehension to arrive at an appropriate price for committing the crime.

The basis of Minority Report is that that the probability of apprehension for murder is 100%. However, if murderers are always stopped and apprehended before they happen, then the punishment should approach zero.

Perhaps what is disturbing about Minority Report are not the questions of free-will and cognition that it raises but rather the deviation from rules of efficiency that the lengthy punishment seems to imply.

Imagine a world where “pre-cogs” stop murders 100% of the time and the “pre-criminals” are put in a “kill-tank” (similar to a drunk-tank) for the duration of a day. Is this disturbing? I think not. The rare instances in people’s lives when they lose control are stopped before serious damage is done. Murders, both intentional and those of passion, do not occur. This sounds like a pretty nice criminal system, and it doesn’t seem (at least not to me) to carry the aversion that the movie’s system provokes.

Elves of the Orient

January 17, 2007 by

According to the Financial Times, the United States is running a record $214 bn trade deficit with China. This widening gap will supposedly pressure the Secretary of the Treasury, Hank Paulson, into asking Beijing to appreciate their currency. Why?

Nothing could be better for the American consumer than to continue our current trade relationship with China. In fact, if I were a man of great influence and power, I would wish for a further devaluation of the RMB. The trade deficit exists because the Chinese send us stuff and in return they receive bits of green paper. This paper is then stacked and locked behind several feet of steel in a very large vault.

One morning as Lou Dobbs is walking out of his house to retrieve his morning paper, he stops to admire the sunrise. To his complete surprise, the sky is full of Chinese bombers. The bomb bay doors open. To his shock and horror, stereos, appliances, and other consumer electronics slowly parachute to the earth. The Chinese are not here to deliver hot fiery death; their purpose being far more sinister. They are dumping. Lou falls to his knees and throwing his hands in the air he weeps for America.

Imagine the worst case scenario, the Chinese refuse to take our currency and instead start catapulting goods onto American soil. These sadistic Christmas elves resolve to not stop their bombardment until our wish lists are emptied. The trade deficit reaches infinite proportions. Everyone loses their job. Corrupt Chicago politicians dance upon Wal-Mart’s corpse.

The horror. The horror.

Differences in unemployment between states

January 17, 2007 by

Sometimes it is good to take a look at your country at a more divided level than at the most aggregated level. Let’s take a look at unemployment rates of various states (thanks to the BLS for the data). Hawaii, Utah, and our very own Virginia have the lowest unemployment rates (Oct 2006) at 2.1, 2.5, and 2.9% respectively. The highest unemployment rates are residing in South Carolina, Mississippi, and Michigan at 6.6, 6.7, and 6.9% respectively. That’s more than a 4% gap between them.

Does this tell us a little something about labor mobility and transaction costs? It is understandable that the unemployment in Hawaii would be low as we’d imagine that more jobs are created over time and due to the high costs of relocating to Hawaii they may tend to be filled by the locally unemployed instead of the nationally unemployed. Seems like a possible explanation. But why Utah? 2.5% nestled between Colorado (28) at 4.4% and Nevada (22) at 4.2%. West Virginia (41) is sitting at 5.1% unemployed while VA is sitting at 2.9%

Now can we explain this by costly relocation expenses? Probably not, Alaska is 48th with 6.4% unemployed, not too easy to move there, but then again, the increase in number of jobs is probably less prevalent in Alaska than Hawaii. Alaska also has its governmental problems of paying people to live there. In terms of unemployment fighting, maybe not the best solution. Perhaps people are more willing to relocate due relative reduction in transportation costs due to the promise of future subsidized living in Alaska. I haven’t heard much about this program in a while, so I’m not positive about the details or whether or not it still exists. Just throwing around some ideas.

Georgia (34) (while not a peach in its own right, excuse the pun) is below South Carolina by nearly 2%, While Alabama (6) is sitting at a pretty 3.2% unemployment rate, a good 3.5% below Mississippi’s astounding 6.7% unemployment rate. While I don’t have all the answers I attribute the unemployment rate differences between adjacent states to a few things here are 5 of the many factors (not relayed in order of importance.)

  1. Transaction (relocation) costs.
  2. Asymmetric information—Unemployed in Birmingham don’t know they can go to Birmingham for a job.
  3. Family—A kind of transaction cost, or at least expected transaction costs. A family oriented unemployed person in Birmingham knows that moving to Jackson while affordable means having to drive 3 or 4 hours whenever he/she wants to see their parents. This additional costs may outweigh the benefits of finding a job faster in a market more favorable for job-seekers.
  4. Government regulations and legislation—Policies and Laws like the Alaska pay to live here may have direct or indirect impacts on the unemployment rate. The size of welfare and unemployment checks could make a big difference. I’ve personally heard stories of people who were collecting unemployment checks from states with higher payouts (based on costs-of-living) while living and looking for work in states that are cheaper. Thus the unemployed have relocated but are still on the pay-rolls of the state that pays more, in order to take advantage of higher checks. This skews the distribution of rates across the country.
  5. Make-up of the unemployed—Who are the people that are unemployed? DC’s 3% higher unemployment than Virginia may be explained by the make up of those unemployed. All the displaced government workers between political regimes, who are looking for new jobs but want to stay in the political realm may not be willing to relocate.
  6. Illegal Immigration—A topic that surely contributes to the unemployment rate, but merits its whole own discussion.

Comments or other explanations?

Culture and Economics

January 17, 2007 by

People on both sides of the Atlantic think they can judge the economic systems of their countries by looking at cold facts and statistics such as the unemployment rate, the poverty rate, gdp per capita and so on. While this certainly has some merits, it fails to capture the essence of the systems observed; that is, the people living in those systems.

When you lay out a set of incentives, over time human behavior adjusts in an optimal way to these incentives. In a democratic system this creates a feedback loop. For example; in America people for the most part have to rely on their own labor to live a comfortable life. This has shaped a work ethic and a respect for wealth. In Europe, a welfare system was installed when people still had this work ethic. The next generation, ‘freed’ from cultural leftovers to work hard and not take advantage of the welfare system adjusted in an optimal way to this system. They try to get away with working as little as possible and taking as much advantage of the state as possible.

The tragedy here is that this also takes away a certain dependence on your fellow humans and a realisation that your all in the same boat, trying to survive by working. Instead you start to regard each other with suspicion, wondering if your neighbor is living of your tax dollars. If this neighbor is a recent immigrant from Morocco and doesnt speak your language because he doesn’t have to to survive this suspicion turns into xenophobia.

And here lies the danger, because in the feedback loop people go back to vote, and they start to vote nationalist and socialist, a logical outcome of a welfare society with high immigration. They turn inwards, and become statist. This is Western Europe in the present.

Statistics don’t tell the whole story in economics. It’s the interplay of political systems and institutions, and purposeful behavior.

First Post

January 17, 2007 by

Here goes nothing…