Attacking Markets

Recently the NYT published an editorial pretending to be and article on academics that defend markets.  Do read to the end to get all of the corrections.  A year-and-a-half earlier they had a straight editorial by JP Kennedy II on the alleged The High Cost of Gambling on Oil.  It seems obvious that it is good to have market prices but for some reason the NYT wants to fight that.  If it isn’t obvious then take a look at Fattouh, Kilian, and Mahadeva who find that speculation is not a driver of the price of oil.  

Now the price of oil is down.  Does that mean that speculation is a good thing?  The price of natural gas is down.  Does that mean that speculation is a good thing?  The humble onion has a highly volatile price compared to oil (thanks Mark Perry) and futures trading is banned.  Does that mean that lack of speculation leads to volatility?  I have a friend of a friend that actually buys onions to speculate in them.  This does make sense because the highly volatile prices present profit (and loss) opportunities that overshadow the cost of actually owning the onions.  

It is easy to see what the academics are thinking, “NYT dude, it’s obvious that prices are useful signals.” MWG concludes it would be nice to know what is the NYT is thinking.  Of course, markets and the prices they create are good to help establish a higher degree of certainty.  There are some serious questions about the extent to which certain institutions should be in these markets but the basic one is easy.  Incidentally, the value of reducing uncertainty is one the current administration should take to heart.  Political uncertainty and market uncertainty exacerbate the challenges of trying to create a profitable business.

The End is Near and It’s Going to Be Awesome

I just finished Kevin Williamson’s new book, The End is Near and It’s Going to Be Awesome.  It is an interesting read and I think I need to read it at least twice because it is so interesting.  Not necessarily right and not necessarily wrong but very interesting.    His point is that politics as a method of solving problems has failed.  I would add that it has often failed and that the civil war is a political failure.  That is, there were economic solutions that were, ex ante, better than war.  Politics failed because the negotiations did not happen.  Politics is failing again in the last half century.  Williamson isn’t the only person to make this argument.  He is, perhaps, the only person to conclude that the failure will lead to different processes and less bad solutions.

It is an interesting book because it recognizes the effectiveness of markets at many things but, contrary to Mark Perry, there are not markets in everything.  Thus, although markets will usually lead to less bad decisions than politics, we need to decide, for example, if we should institutionalize, ignore, or find some other way to care for the psychotic folks on the street.  It is a very market oriented book that also recognizes there are limits to markets.  It is worth the read and perhaps a reread.


Market Solutions

From the Weekly Standard, and now on the website, Anderson and Cowan find a neat, unintended, solution to Obamacare for young and heathy individuals.  Short-term health insurance has traditionally been avoided by most consumers because it is sold based on what the actuary says.  If you are sick it is really expensive or simply not available.  This means it is cheap for the young and healthy.  Anderson and Cowan identify numerous examples where an individual could buy short-term insurance, pay the Obamacare fine, and still be better off.  As long as the short-term insurance gets the individual from one Obamacare open enrollment period to another they can save a thousand or more dollars each year and get better coverage.  If they become unhealthy then they can join Obamacare at the next open enrollment.  By law, Obamacare cannot hold a pervious condition against an applicant.

MWG opines that the savings are the lower limit because of the likelihood of imposing Obamacare fines in 2014.  Obamacare is most notable for being politically driven. See Kevin Williamson for a discussion on the the administration’s emphasis on the political success of Obamacare.  Williamson misunderstands marketing but he is terrific with markets.  MWG does not believe that the administration will fine millions of citizens in the year of an election.  Of course, nobody from the administration is on the ballot so there is some chance that some subset of scofflaws might be dunned for fines.

Williamson’s misunderstanding of marketing might come from Mad Men.  Decades ago the job of marketing was to sell the product that was produced.  In today’s integrated business the job of marketing is to satisfy the customer.  Admittedly, integration is a work in process but we are closer to integration than the old silos.

AEI Optimism

I’m not sure what they put in the water cooler over at AEI but if you are down and looking for good news, I recommend you go to AEI because they almost always find some.  Jim Pethokoukis has a post entitled Five Good Charts of 2013- and a Really Terrible One.    Here are the descriptions with the good news first:

1. US industrial production –  the output of manufacturers, utilities and mines — finally surpassed its prerecession peak:

It has taken six years for the economy to get back to where it was.  Yea!  The economy is sputtering upwards.

2. Americans finally felt wealthy enough to stop paying down debt.

If debt is good for the nation then it must be great for households.

3.  The US economy generated another 2 million jobs in 2013, leaving the labor market about a million jobs short of its prerecession level:

See comment on number one except not quite as good.

4. A growing number of those jobs were full-time rather than part-time work:

Part-time jobs are still approximately double the percentage that they were before the recession.

5. The US budget deficit fell sharply and should continue to decline the next few years:

The chart doesn’t show the deficit falling.  It shows the deficit falling as percentage of (growing) GDP.  Still this would classify as a glass half full if it wasn’t for the train wreck of Obamacare.

Then the bad news:

… but still plenty of work to do when you look at the shrunken share of Americans with jobs:

The percentage of Americans with jobs fell from 63 percent before the recession to between 58 and 59 percent after the recession.  it has not moved significantly in the last four years.

This is serious people.  Rather than spending our time arguing about if we should deny opportunities to folks by raising the minimum wage let’s look at serious proposals to increase opportunities.  There are opportunities in the tax code, in regulation (Keystone anyone?), and elsewhere.  Of course, one of the most perplexing issues is Obamacare.  Its progenitor  wants changes to come only by executive decree.  These kinds of willy-nilly changes only increase the uncertainty and drag on the economy.

MWG are not feeling the AEI optimism on the economy.  Many states are doing great things but the federal government is strong and persistent headwind.  It is possible that the 2014 election will focus Washington DC on opportunity but we are not convinced.  We think Jim’s charts will look pretty much the same next year.

Mexican Miracle

Daniel Yergin in today’s WSJ (links are not working) reports on a Mexican miracle:

The “undoable” in Mexico has now been done. With passage of constitutional amendments by its Congress last week, Mexico has overturned the 1938 nationalization of its oil industry and opened its energy sector to outside investment. Notably, the political party that led the reforms—the Revolutionary Party (PRI)—is the one that nationalized the industry 75 years ago.

This appears to be a miracle with Mexico going back to a market based process for oil.  MWG classifies it as a miracle even though a major cause was more prosaic- Pemex, the national oil monopoly was not able to produce enough revenue for the government despite the fact that oil prices had gone up by a factor of five.  Oil production in Mexico had declined 27 percent in the last ten years while Texas oil production is booming in the last few years (See Mark Perry as the links don’t work today).

There is also an accounting play to this reform as Yergin explains:

But the law now provides for a number of different kinds of contracts. Some would permit foreign companies to book Mexican resources as reserves under U.S. Securities and Exchange Commission rules. And that is what most international companies will require, since reserve additions are a key criterion by which investors judge their performance.

Proper reporting of reserves is crucial to get technologically advanced organizations to invest.  The real challenge in Mexico will come in a decade or so when oil is booming but some other problems lead some political figure says, “Let’s take back what is ours.”  MWG hopes that Mexico will continue its good decision making.

Meanwhile back in the USA we are trying to quasi-nationalize the one-sixth or one-seventh of the economy relating to medicine.  Mexico took 75 years but they got to a better answer.  May we learn from their example.

Well said

David Neumark has a nice piece in the NYT today for folks that want to think about helping low-income individuals and families.  His main point is that even if you thought minimum wage increases would help low income people it is an inefficient way to do it compared to the earned-income credit (EIC):

The fundamental difference is that the earned-income tax credit aims benefits at low-income families with children, rather than simply low-wage workers. This is in large part its virtue, and it makes a lot more sense than the minimum wage’s focus on low-wage workers. Do we really care if a low-wage teenager in a middle-class family makes an extra dollar an hour?  Economists of all persuasions in the minimum-wage debate agree that mandated wage floors do a bad job of directing benefits to low-income families.  This is confirmed in recent research by my graduate student Sam Lundstrom, calculating who would be affected by increasing the current federal minimum to $8.25 from $7.25.  He finds that only 21.3 percent of the affected workers would be in poor families, while 30.9 percent would be in families with incomes more than three times the poverty line.

The EIC tax policy has been effective at getting resources to the poor.  Given that most individuals are poor for a limited time there is reason to suspect it is effective too.  That is, by encouraging work, tax policy helps increase the number escaping poverty because low wage jobs often lead to higher wage jobs.  Much is built into the structure of the EIC.  It is unlikely to be optimally structured so if you want to find an effective way to help the poor on a federal level then EIC is an easy choice.

Neumark and his associates have been looking at some combinations of minimum wage and EIC.  One of the problems he finds is that raising the minimum wage has adverse employment outcomes for some groups.

Policies that help the poor are easy to find.  EIC and welfare changes are two easy choices.  The challenge is to make the incentives towards work while providing, for most people, temporary support.

A MWG quibble: Neumark says

The decline in the real value of the minimum wage is indisputable.

The answer is it depends on when you start.  See the chart for the full history of real and nominal minimum wage.  Since the minimum wage was established in 1938 it probably has had a real value greater than 2013 for most of the years but if you  start from 1938 or a variety of other years then the 2013 minimum wage is higher than the starting point.  So it depends what year you start from.  MWG finds it disputable.

Economic Inequality

The US has done a lot of things that have correlated with economic inequality.  Let’s do more of them!  That seems to be the argument that Liam Moran is trying to make today as he adds to the Pope Francis discussion.  Amongst other things he notes:

Today the richest 1 percent of Americans control more than 40 percent of the nation’s financial wealth, while the bottom 80 percent control just 8.5 percent.

Since 2000, the federal minimum wage, adjusted for inflation, has lost value, while the average CEO salary has risen by nearly 300 percent.

So, we have two data points.  The first, inequality, has little or no impact on the poor.  The economy is not a zero sum game.  We need some number of rich to provide opportunities but a variety of outcomes will do.  If moving the statistics is important then privatizing social security would help.  The second point has inequality within the minimum wage argument.  Again, it is not a zero sum game.  More importantly, it is critically important not to take opportunities away from individuals by raising the minimum wage.

Then there is this:

The real danger of this logic is its nudge toward apathy. Shrugging passively at poverty depends on the supposition of its immutability, which conservatives like Ambrose attribute to unfortunate but endemic flaws among the poor themselves.

MWG cannot respond for Ambrose, but in general, conservatives are market driven with the dynamics that markets produce.  Conservatives support opportunity for all.  The conservative challenge is finding the right balance between incentives and support.  The left is not market driven and tends to support government solutions that have done little to ameliorate poverty in the US over the the past half century.  These solutions do provide some succor but seem most effective at keeping individuals in poverty.  We need to judge policies by what they do rather than how they make some of us feel.


Mandela RIP

When Nelson Mandela became the leader of South Africa in 1994 MWG was among the many that were concerned.  The dreadful treatment he received in prison and his history as a Marxist led one to fear that South Africa would squander its opportunity like so many other countries around the globe had.  Instead of settling scores he became Shakespeare’s Propero and forgave when he had the opportunity for retribution.  Although South Africa has fallen back in recent years it still remains moderately free on the Heritage Freedom Index.  South Africa’s score of 61.8 compares very favorably to the dismal regional average of 53.7.  Sometimes greatness endures.

It is a sad contrast to the current US president.  There is no reason for him to have scores to settle and yet he invests most of his time in doing just that.

E.J. and the Pope

EJ Dionne never fails to entertain.  He is the one columnist that almost always makes me laugh out loud.  Today he almost injured me when he said:

As the first leader of the Catholic Church from the Southern Hemisphere, he is especially mindful of the ways in which unregulated capitalism has failed the poor and left them “waiting.”

We shall leave for another time whether  or not unregulated capitalism is an oxymoron.  South America is one place that various elements of centralized economies get tried over and over again but there is only one market economy.  Peron and Chavez are ways to personalize various versions of centralized economies.  The Heritage Foundation provides a ranking of economic freedom.  Four (Bolivia, Ecuador, Argentina, and Venezuela) of the 33 economies in the repressed category are on the South American continent.  Only one, Chile, makes it to mostly free.  Actually the Pope’s understanding of South America should lead him to conclude that market economies help the poor and centralized ones do not.

Kevin Williamson has a pithy explanation on NRO of the differences between centralized economies and market economies:

[T]he actual result of the free-market economy is not to transfer power away from states to corporations but from states and corporations to people.

Nicely said.