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Reuternomics July 31, 2006

Posted by federalist in Economic Policy.
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Love James Taranto’s term here, from Best of the Web Today:

Reuternomics
From a Reuters dispatch on minimum-wage legislation:

The House of Representatives voted on Saturday to give some of the lowest-paid American workers their first raise in nearly a decade. . . . The House in the early hours voted 230-180 to raise the $5.15-per-hour minimum wage in three 70-cent steps until it reaches $7.25 in mid-2009.

The last minimum-wage increase was in 1997. Reuters doesn’t cite any examples of workers who’ve been making $5.15 an hour for nine years while sitting around waiting for Congress to give them a raise, and we doubt that many such people exist.

Furthermore, Reuters fails to realize that as the minimum wage is raised these minimum-wage earners may not get a raise, but rather could lose their job altogether.

Is Technology a Public Good? July 30, 2006

Posted by federalist in Economic Policy.
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Basic research seems to meet the classic criteria of public goods:  Namely, once a development is made it is hard to exclude anyone from using it, and the fact that one person uses it does not diminish its value to anyone else.

In fact, it may be useful to refer to an elevated class of public goods we could call “synergistic goods,” which are public goods that actually become more valuable when they are “consumed” by more people.  When a basic technology is studied and used, it tends to get refined and developed more than if it were retained by a single consumer.  For example, this is the motive behind the success of open-source software.

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Free Trade July 29, 2006

Posted by federalist in Economic Policy, Government Regulation.
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By failing to lower tariffs and subsidies, nations meeting at the Doha Round for trade negotiation have committed themselves to keeping world markets inefficient.  Consumers and citizens are left to shake their heads and wonder why.

Free trade maximizes the economic good created by a market.  So why do countries insist on subsidizing their exports and penalizing imports?  And even when others do, why would a nation as strong as American continue to play that game of protectionism?

If other countries want to send us money in the form of subsidized goods, why not take it?

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Market Solutions to Illegal Immigration July 27, 2006

Posted by federalist in Economic Policy, Government Regulation, Human Markets, Unions.
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John Fund today digs up a history lesson that we shouldn’t have to relearn.

Conservatives who say we must “beef up” border security seem to disregard the enormous expansion of government authority that would entail — or that it would be limited by the same ineffectiveness and bureaucracy that constrains the rest of the government. Thus, according to law-enforcement experts, we have tripled the size of the Border Patrol in the last decade and still done little to stem the flow of illegal aliens into the country.

This is a story of dealing with illegal immigration, though he could be talking about almost anything government has tried to do through force of bureaucracy.  You see, we solved this problem once before with a “guest-worker” style program started in the 1950s.

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Union Monopolies: Government-sanctioned, Mob-approved July 26, 2006

Posted by federalist in Economic Policy, Government Regulation, Unions.
5 comments

Unions in principle sound reasonable: If the capital behind production can organize itself into corporations for collective risk-taking, presumably the labor involved in that production should also have the right to “incorporate” to collectively bargain for security.

The problem is that in practice every union turns into a mafia seeking above-market rents on its monopoly.

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Constitutional Proscriptions on Taking July 25, 2006

Posted by federalist in Government Regulation.
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If we read the Fifth Amendment correctly, there are probably a lot of things our government does at present that should be prohibited.

An excellent letter to the editor today by Prof. Hadley Arkes of Amherst College details these Constitutional proscriptions on “class legislation.”  Speaking of the federal rejection of the Maryland law that tried to impose healthcare mandates on Wal-Mart:

We ought to recall that our constitutional tradition already encompasses that kind of protection, and we may not need any further legislation. In the old Legal Tender cases in 1870, Chief Justice Chase noted the provision in the Fifth Amendment that barred the taking of private property for public use without just compensation. He pointed out that the principle behind that clause surely ran more deeply and broadly: If “property cannot be taken,” he said, “for the benefit of all, without compensation, it is difficult to understand how it can be so taken for the benefit of a part without violating the spirit of the prohibition.” If private property cannot be taken for public use, surely it may not be taken, by law, for private use.

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Tax Arbitrage July 24, 2006

Posted by federalist in Taxation.
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Democratic governments have demonstrated a tendency to grow in size.  The inflationary force stems from political pandering and special interests (the tyranny of many motivated minorities).

Democracies do occasionally muster quantum reversions towards small government.  Witness the great reforms of the early 1980s in the United Kingdom, the United States, and New Zealand.

But in the normal course of affairs tax arbitrage is the sole beautiful mechanism that can oppose the inflationary forces on government.  If you get enough free nations in close enough market proximity, then people and businesses can choose to move away from the governments with high taxes, onerous regulations, and entrenched special interests, and towards those with lower burdens.

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Ignoring the Obvious Solution to Nuclear Waste July 23, 2006

Posted by federalist in Energy, Government Regulation.
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This news report answers itself:

Critics are outraged that the [nuclear power] industry still lacks a good solution to spent fuel a half-century after the first large-scale plant began operating….

Gees, so did everyone in the 1950’s really just rush out and build nuclear power plants, without a plan for dealing with the tons of nuclear waste they would produce?  Well, no.  Turns out that roughly 97% of spent fuel can be recycled.  And that was what we were going to do, until:

In 1979, President Jimmy Carter banned reprocessing, fearing that a byproduct, plutonium, which is used in nuclear weapons, would fall into the wrong hands.

For some reason even though we’ve reversed almost everything else done during the Carter administration this reprocessing ban is still in effect.  At least in this country.  According to N-BASE,

The main nuclear countries which reprocess spent fuel are the UK, France, Japan and Germany. There are a number of other countries which also send some, or most fuel from their nuclear power stations for reprocessing, such as Switzerland and Belgium.

The irony is so rich we could retire on it.  These European countries host the most rabidly enviro-health-safety conscious governments on earth.  Japan and Germany don’t even have nuclear weapons programs, but they recycle.  Meanwhile, the United States would rather store its recyclable fuel in pools and silos until it can open a long-term storage site for it to waste away over hundreds of thousands of years.

NASA, phone home July 22, 2006

Posted by federalist in Economic Policy, Government Spending.
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NASA is basically a PR stunt that has gotten terribly out of hand.  I mean, we made it to the moon, we got all those great dual-use / spin-off technologies like Tang beverages and Tempurpedic foam.  Why is the United States still spending money trying to safely send men into orbit?

My guess: There’s a bunch of bureaucrats sustaining their careers with press conferences featuring the ethnically and gender-diverse crew of each shuttle mission.  All those wide-eyed schoolchildren with big dreams seem to keep the funding spigot wide open, and keep the appropriators from asking if this is the best use for our country’s limited basic research dollars.

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Currency Arbitrage July 21, 2006

Posted by federalist in Finance.
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Ending penny production has been a topic of debate since as early as 1990.  Now that it costs more than face value to mint pennies and nickels there has been enough written on the subject that I don’t need to revisit the arguments here.

I have kept a stash of pennies in my hardware organizer for years.  Metal washers cost at least a nickel, so it’s generally cheaper and easier to drill a hole in a penny and use that.

But this is just funny: Apparently pennies minted prior to 1960 are worth 3-6 cents to collectors, and any penny minted prior to 1982 contains 2.5 cents of copper at current rates.

Brings back a whole other meaning to “currency arbitrage.”

Why do we still have performing arts? July 20, 2006

Posted by federalist in Open Questions, Uncategorized.
5 comments

I’m not much of a fan of the professional performing arts.  I did see a production of Webber’s Phantom of the Opera a few years ago.  Then I saw his movie version that came out in 2004.  And then I wondered out loud what I had been quietly wondering all along: Why do people still go to see live productions of plays or concerts?  In this case the movie made the live production look like a farce.

And that’s beside all the hassle of the theater: parking, lines, waiting.  You rarely have a perfect view.  You’re packed in with other people coughing, whispering.  You can’t pause or rewind.

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Dismantle the Nanny State? July 19, 2006

Posted by federalist in Economic Policy, Government Regulation, Social Politics.
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A recently repealed law requiring motorcyclists to wear helmets is a hot issue in Pennsylvania.  At first glance it always seems odd that government is in the business of coercing people into taking care of themselves by criminalizing voluntary behaviors that put nobody else at risk.  Doesn’t a citizen have the right to endanger himself?

Well, no.  For example, as explained today by Pennsylvania State Representative Tony Melio, “The cost to care for someone who is seriously injured in a motorcycle accident falls on us all.”  Or to put it more pointedly, we forfeited the right to put ourselves at risk when we demanded that everyone else take care of us.

We created this nanny state, and we gave up some personal freedom in the process.  If the government could just sweep injured motorcyclists into a ditch and leave them there, then presumably anyone could ride around not only helmeted but also blindfolded for all the government cares.

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Glad That’s Over July 18, 2006

Posted by federalist in Economic Policy, Government Spending.
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Now that Discovery is back, let’s keep the space shuttles on the ground.

NASA has budgeted over $32BB to continue flying the space shuttle and International Space Station over the next 5 years. This is done with a vague justification that these operations are necessary stepping stones for human exploration and colonization of space. In an era of a thriving commercial space-launch market, it is hard to argue that there is a compelling public interest in manned space exploration, especially given the cost of energy (which is the greatest marginal cost in getting people and materials into space).

Alternative energy sources and technology are a much more pressing public interest, including our 21st-century moon shot: fusion energy. The U.S. has reluctantly committed just over $1BB to the international ITER project to research fusion energy over the next seven years. If we instead invested NASA’s $32BB manned spaceflight budget in fusion development, we could advance the technology necessary to power both the world and future space exploration with a limitless supply of cheap energy fueled by nothing more than heavy water.

Public Stem-Cell Research July 17, 2006

Posted by federalist in Government Spending, Social Politics, Taxation.
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Liberal hubris on display again today on the Philadelphia Inquirer’s editorial page.  Today’s editorial addresses the subject of Stem-Cell Legislation with the revealing title, “So what’s left to debate?”:

The Bush rules were morally inconsistent, hamstringing five years of U.S. academic research while letting drug companies do what they pleased. Reasserting this stand now ignores the big changes since 2001 in the politics and science of stem cells.

This is not moral inconsistency.  It is revealing that the left-wing can’t see the nuance in rejecting public funding for something while letting private entities engage in that practice.  We have seen this myopia before: Liberals couldn’t understand why taxpayers would object to NEA funding of art that offends many people.  Or why taxpayers shouldn’t be required to fund abortions even though abortion is legal.

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Valuing Human Life July 14, 2006

Posted by federalist in Economic Policy, Government Spending, Healthcare, Social Politics.
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Suppose you were captain of a ship sinking in the North Atlantic.  Of course, you’re going down with your boat, but after putting the women on the life raft you have room to add exactly one more person.  Everyone else will certainly die.  And it turns out that there are only three people left to save: A toddler, a young man, and an elderly man.  You know nothing about any of them, and there’s no time for interviews.  Who do you choose to take the last spot on the raft?

Your answer to this question may be rooted entirely in your relative emotional response to seeing each of those individuals sent to his death.  But what’s the right answer?  Hopefully you could be persuaded that the person that should be saved is the most valuable of the three.  And how do you determine the relative value of people — not to yourself, or to their loved ones, but to society in general?

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What is Parenting Worth? July 10, 2006

Posted by federalist in Economic Policy, Finance, Human Markets, Social Politics.
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We all had a good laugh when Salary.com suggested that the fair wage for a stay-at-home mother is $134,121, not least because while they suggested that every mother spends time as a CEO and a Psychologist, they neglected to mention her valuable work in the oldest profession.

There is, however, an interesting question along those lines: What is parenting worth?  We often forget that people are productive resources.  Therefore, producing people is itself a productive endeavor.  So what is the marginal value of producing a typical person?

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Prioritized Public Spending July 9, 2006

Posted by federalist in Economic Policy, Government Spending, Social Politics.
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Resources are limited, so the objective of any agent — individual, corporate, or government — is to spend its limited resources in the best possible way.  What is the “best possible way”?  There is a science (Economics) to answering this question, which roughly begins with the agent assessing its options for resource utilization and determining the expected benefit of each option.

If you’re an individual, you may invest your limited time in either recreation, education, or employment.  You may spend your limited money on consumption or investment.  (It often seems that people do a very poor job of making economic trade-offs.  For example, I can’t imagine that any informed agent would choose to drop out of high school, have two children, watch TV all day and spend every disposable penny leasing a luxury car.  But some people make that choice.  In a world of free people we could probably do a lot more to educate our individual economic agents.  Especially since our economy as a whole accrues the benefits of higher individual education, employment, and investment.)

For-profit corporations are probably the world’s most efficient economic agents.  They are working machines designed to acquire and expend resources as intelligently as possible.

A big problem with government agents is that they seem incapable of either acknowledging that resources are limited, or else that there are intelligent ways of allocating those limited resources.

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Have you checked your money market accounts lately? July 2, 2006

Posted by federalist in Finance.
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A Money Market is the most liquid and least risky investment you can buy.  If you have any significant amount of cash sitting around, it should be in a Money Market Account (MMA) or fund.  With the inflation rate also breaking the 2% level, a typical checking or savings account will not even preserve your money’s buying power.  But Money Markets roughly follow the Fed Funds rate, which is now 5.25%.  Or at least they’re supposed to.

I was recently reviewing MMAs at Citibank, Wachovia, and Commerce Bank, and I discovered that all three of those banks have MMAs with current rates as low as .25%!  I confronted all three and asked them how they could advertise a product as a money market and pay a rate completely divorced from the money markets, which have been climbing steadily since July 2004.  All three basically answered, “We can pay whatever rate we want.”

Looks like a class action waiting to happen, but in the meantime there’s no reason for anyone with more than a few thousand liquid dollars to be accepting rates below 1%.  Instead, open a brokerage account with a company like USAA, Vanguard, Fidelity, etc., and put the money in one of their money market funds currently yielding more than 4.7%.

For a premium there are also MMAs that are FDIC insured.  And if you’re in a very high tax bracket there is probably a tax-exempt money market fund for your state that would give you about the same after-tax yield.  In any case, just be aware that you can’t trust your bank to pay a fair rate on your money.

Gaming Financial Management July 1, 2006

Posted by federalist in Finance.
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In the Wall Street Journal today Ron Lieber described Randy Kurtz’s RK Investment Advisors, a money manager with a novel product: He will invest client’s money in separately managed accounts. The core holding of every account is an S&P500 ETF. To quote from the article:

“Then, he plans to pick a couple of stocks each year and invest no more than 10% of his clients’ funds in each. … For his efforts, Mr. Kurtz keeps one-third of all returns above and beyond the return of that index. … If the portfolio doesn’t beat the benchmark, he earns nothing.”

Sounds great, right? You get your beta and, if he’s a great stock picker, you also get the alpha from that. And if his picks go south, presumably he’s in a lot more pain than you, because he gets nothing – not even a management fee! Could incentives be any better aligned?

The answer: Quite. In fact, Randy Kurtz’s money management plan is nothing but a legalized form of three-card monte. If I’m in his position, here’s how I play it: First of all, I spend $10 in commissions to get each client’s money into the ETF in a margin brokerage account. Then at random I pick a high-volatility stock or two, which I buy on margin. The trick is that I pick different stocks for each of my accounts. Then all I do is wait. Some stocks will outperform tremendously, and I will share 33% of their profit (above the relatively low cost of margin, trading, and the ETF management fee). Some stocks will tank, and I personally lose nothing. Essentially, I’m playing the lottery but somebody else is buying the tickets! Of course, my losing clients will probably leave. I may even encourage them to. After all, when I’m trolling for new money I would like to say that I have made outsized returns for the majority of my clients. I will sweep my losers under the rug and polish my winners to attract the next marks. [Update: Mr. Lieber clarifies that Mr. Kurtz claims to hold the same portfolio across all clients.  While odd, this does resolve the moral hazard I suggest here. Please see Comments for further clarification!]

The asset management industry hosts plenty of swindles. I’m not talking about full-fledged frauds here – fortunately both the industry and the government do a good job of controlling those. Rather I am thinking of fully-disclosed financial products that would never be purchased by people who really understand them.

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