Thursday, December 29, 2011



Ethanol Subsidies Dead?

Who knew?
the short version is that the Senate back in June kicked off opposition to continued ethanol subsidies via a bipartisan amendment: it didn’t pass, but Congress has just let both the ethanol subsidy and a restrictive foreign tariff (on Brazilian sugar-cane ethanol) lapse.

This is a pretty big deal. Hundreds of ethanol refiners will likely go out of business absent the 45 cents/gallon tax break. Gasoline refiners, still required by law to add ethanol to gasoline, will now find cheaper Brazilian ethanol more attractive and U.S. farmers will see a decrease in the price of corn.

The good news: corn will now return to food production and the disastrous rise in meat and cereal prices will ease. Dare we hope drop? American consumers will be the winners here. That, in the end, is all that matters.

[UPDATE:] The ethanol refiners who invested millions of dollars in their businesses are not unlike the solar panel makers (e.g., Solyndra) who relied on government-backed loans to flesh out their business models. An entire ethanol industry was created by government legislation and will now die without it. And, I suppose, the laid-off ethanol refinery workers will be eligible for retraining subsidies because their employment was ended by the re-establishment of free trade.

Get a little, give a little. And so it goes.

Wednesday, December 28, 2011

The New Paradigm

Job Creation Is the Price We Pay for Obamacare: From "Hire-and-Grow" to "Cut-and-Survive"

Why Does Business Respond To Incentives?

Prospects Darken For Solar Energy Companies

"Although global demand for solar power is still growing — about 8% more solar panels will be installed this year compared with 2010 — bankruptcies, plummeting stock prices and crushing debt loads are calling into question the viability of the solar energy industry that since the 1970s has been counted on to advance the world into a new energy age. Only a handful of manufacturers are now profitable in the face of too much capacity, which has contributed to a plunge in prices as government subsidies have been curbed.

I've read many economist's attempts to debunk the Austrian theory of trade cycles by asking (sneeringly) why businessmen would be so stupid as to continually "malinvest" during times of government-induced low interest rates.  After all, the shtick goes, wouldn't they eventually learn that it's a fool's game?

It's not an implausible argument, but same economist-pundits, so far, remain silent as to why businessmen, over and over again, form entire companies in unprofitable industries simply because the government is offering tax advantages and loans that can be wiped out with the next change of Congress.

I think there's a parallel here they're ignoring.

Monday, December 26, 2011

Saye's Law Revisited

Mark Cuban:
I'm working with a company that at one point had a product that was not only best in its class, but also technically far ahead of its competition. It created a better way of offering its service, and customers loved it and paid for it.

Then it made a fatal mistake. It asked its customers what features they wanted to see in the product, and they delivered on those features. Unfortunately for this company, its competitors didn't ask customers what they wanted. Instead, they had a vision of ways that business could be done differently and, as a result, better. Customers didn't really see the value or need until they saw the new product. When they tried it, they loved it.

So what did "my" company do when it saw what its competitor had done? It repeated its mistake and once again asked its customers what they wanted in the product. Of course the customer responded with the features that they now loved from the other product.

Anecdotal to be sure, but a pretty good illustration, I think, of the fact that businesses do not wait till consumers have expressed their preferences to begin production. Production must precede consumption and it's production that creates demand. I know, it seems obvious to many of us, but not, alas, to enough of us.

Sunday, December 25, 2011

GOP: Hostage to Its Own Tax-Cut Rhetoric?

Don't Extend The Ill-Conceived, Evil Payroll Tax Cut
The one-year, 2.0 percentage point Social Security tax cut was enacted a year ago as part of a package that also extended 99-week unemployment benefits for a year, and postponed the expiration of the Bush income tax cuts for two years. Interestingly enough, opinion polls taken at the time showed that the Social Security tax cut was the only part of the package that the public did not support.

That this temporary cut in the Social Security payroll tax enjoyed bipartisan support a year ago shows the extent to which the Keynesian Superstition pervades both of our political parties. Members on both sides of the aisle bought into the fantasy that “putting money into people’s pockets” would increase demand. It didn’t. Economic growth slowed markedly at the exact moment that the payroll tax cut was enacted.

If the Republicans had any sense, they would have exposed this so-called "payroll" tax cut for what it is. But, ever-so-sensitive to their reputation as tax-cutters, they've rolled over for a puny, non-stimulative cut that further endangers an already-tottering Social Security system.

It was a shameful display of craven fear. Sigh. If only Ron Paul would get his head out of his ass on foreign policy.

The Export Fallacy: Mistaking Effect For Cause

One day, at about age six, I remember lying on the front lawn looking up at the big, old maple trees that shaded the house. It all of a sudden occurred to me, watching the branches sway back and forth, that by flapping their limbs, the trees were creating wind.

Now, it wasn't too much later that I learned that the process actually happened the other way around, but it remains my earliest recollection of learning to distinguish between cause and effect. A relationship that continues to baffle many.

We're seeing an example of it right now in Europe. As the European Union struggles to solve the financial problems of its southern members, a meme has begun to circulate that the European problems aren't cause by debt, but by an undesirable balance of payments.

It is neither positive nor negative for the future of the euro, which is the main issue concerning the markets. In the meantime, the eurozone soldiers on with a plan which policymakers seem to think will restore confidence to markets, but infact has very little bearing on the underlying balance of payments crisis. - Jeremy Warner, Daily Telegraph

We have another euro agreement but one that misses the point. What is going on in the euro area is not a crisis of government profligacy. It is a balance of payments crisis of a fixed exchange rate regime. - Trevor Greetham, Fidelity Worldwide Investment

This is nonsense -- conventionally wise nonsense -- but nonsense nonetheless. This isn't a crisis caused by damaging balances of payments -- those are just symptoms of economic conditions. Ludwig Von Mises wrote:

The imports and exports of money and bullion are viewed as the unintentional outcome of the configuration of the nonmonetary items of the balance of payments. This opinion is utterly fallacious. An excess in the exports of money and bullion is not the product of an unhappy concatenation of circumstances that befalls a nation like an act of God. it is the result of the fact that the residents of the country concerned are intent upon reducing the amount of money held and upon buying goods instead. - [Human Action, Ludwig Von Mises Institute, 1998, pp. 448-449]

It's well understood that, with the advent of the Euro, the Southern Europeans suddenly found themselves holding currency that was at par with the mighty Germans and French. BMW's, Brie and Riviera vacations were all on sale. At the same time, their governments went on a spending binge due to cheap bond rates and tens of thousands were added to already-bloated government payrolls at very comfortable salaries. With cheap prices for foreign goods and an influx of cash into the local economies, Italians; Greeks; Spaniards; and Portuguese (whose money had never been very stable or safe) embarked on a buying spree that resulted in goods trade deficits and negative balances of payments.

Now, the thinking goes, these trade deficits must be reversed: the south must export more and the north (Germany, specifically) must import more to "balance things out". But how is this to be accomplished? What magic wand can the Europeans wave to change the behavior of hundreds of millions of citizens? After all, countries don't trade with countries, people trade with people. And the people of Europe behaved quite rationally given the economic situation.

If the current problems of the Euro-zone are to be fixed, the only solution is to allow interest rates in the south to rise which would curtail government spending and begin to reduce the amount of excess cash (cash not backed up by produced goods) now being spent on imports. This won't be allowed to happen, apparently. In fact, the opposite is taking place. Under severe political pressure, the ECB is being instructed to print even more Euros.

So, in addition to leaving the conditions in place that produced southern Europe's goods deficits, the EU's great desire to inflate their way out of their problems will result in the endangerment of Germany's juggernaut of an export machine. As prices rise in Europe, Germans will find foreign goods increasingly attractive and increase their imports. At the same time, German exporters will have to raise their own prices decreasing their sales abroad.

Chronic trade deficits are caused by monetary inflation and over-valued foreign exchange rates. The lack of one of those can sometimes compensate for the other (see: Japan, lack of inflation, high yen, trade surplus), but the two together are a sure-fire formula for the exact opposite of what the Europeans claim to want. The balance of payments is a result of government regulation and monetary policy. As such, it cannot be the cause of economic problems.

When European trade balances go even further into the red, great consternation will ensue.

Friday, December 16, 2011

The Legacy of 'Look-Say'

Ann Althouse summarizes the plot. Full story here.
Someone carved "sult" on a lady's car, and she had an ex-boyfriend who — twice! — had texted "sult."

When they tracked the man down, police asked him to write "You are a slut," and he wrote "You are a sult."

The guy is obviously a victim of the education industry's insistence in the eighties that written English is not a code substituting particular letter for sounds, but a system of hieroglyphs which one must learn to recognize on sight. The look-say people, to this day, insist that English is not a perfectly-phonetic language and that their methods are still valid. And I suppose they have a point. After all, the word "slut" could be spelled s-l-u-t or . . . s-l-a?-t? No, that would be slat. Come to think of it, there's no other possible combination of letters that would produce the word "slut".

I guess we're left with the conclusion that the look-say method of teaching reading leads to better law enforcement.

D.C. Vows Support for California HSR

U.S. stands by California bullet train project despite critics
The California High-Speed Rail Authority's chief executive defended the decision to start rail construction in the Central Valley, saying high-speed rail systems around the world conventionally start in the center.

In America, high-speed rail systems conventionally start on the left.

Thursday, December 15, 2011

Macro Follies

TheMoneyIllusion asks, "Why is Aggregate Demand So Confusing?"

Oh, I don't know.  Because there's no such thing?

Al Gore on How to Save Capitalism (Really)

Luckily, Al Gore is no longer in a position of political power, so his manifesto for "sustainable" capitalism need not scare too many business people. It does, however, provide insight into the minds of those who would really prefer capitalism didn't exist at all. Here's the point which stood out most to me.
Identify and incorporate risk from stranded assets. "Stranded assets" are those whose value would dramatically change, either positively or negatively, when large externalities are taken into account—for example, by attributing a reasonable price to carbon or water. So long as their true value is ignored, stranded assets have the potential to trigger significant reductions in the long-term value of not just particular companies but entire sectors.
Translated into English: Write down your capital assets that will be made essentially worthless from the imposition of carbon taxes and emissions limits. You might as well do it now, because you are just ignoring the inevitable reasonable pricing that our policies will impose imply. In other words: We will bury you, so dig your own grave while you can. It'll cost you less in the long run.

See No Evil, Arrest No Evil

The Occupy Wall Streeters' primary demands were that Wall Street be brought to justice for having caused the recession. And why wouldn't they expect action? After all, the president has been demonizing bankers and financiers (along with Republicans in general) since he took office. But, oddly enough, still no arrests. Flopping Aces may have the reason.
Information is coming out in drips and drabs. No investigating committee wants to turn over too many stones. After all, what Wall Street banker, who has given $1000′s or has bundled tens of thousands of dollars for the current president wants to take the fall for this. Do you think they will stay quiet? Do you think one of them is going to be arrested and then he says, “Yep, I did it all. It was all my idea.” No, if he is pushed against the wall, he is going to starting naming government names and government legislation and, more importantly, the names of the government regulation who told them, “Start lending money for housing to specific groups of people and we will buy these loans from you.”
I think he's nailed it. Honor among thieves as it were.

"Good as Gold?"

In an article featured today at RealClearMarkets, John Steele Gordon promises to tell us how to make money as good as gold. He starts with a fairly long and mostly accurate synopsis of how and why gold developed into money in the first place but stumbles in his conclusion.
In the late 19th century, when all the world’s important countries were on the gold standard and the world economy and global trade were increasing rapidly, so was the supply of gold. Major gold strikes were found in California, Australia, Nevada, Yukon, Russia, Alaska, and South Africa in that period and much of that new gold ended up in central banks. This allowed for a steady increase in the money supply as the world economy expanded. In 1867 there was about $2.5 billion in monetary gold. By 1893, the figure was $3.75 billion. By 1918, there was over $9 billion.

But in recent years, humans have been pulling only about 50 million ounces a year out of the earth, worth at current prices about $87.5 billion. Even in the current period of sluggish growth, the world economy is expanding by about 2 percent a year. That’s roughly $1.5 trillion in increased global gross product, compounding every year. Barring a highly unlikely massive gold strike, there simply wouldn’t be enough gold to back the needed money supply. The traditional gold standard thus would act as a tremendous drag on the world economy.

That's just not true. Any amount of gold can back any amount of money. The dollar could today, for example, be pegged at 1/1700 of an ounce of gold.. If the price of gold rose to $10,000, we could still define the dollar at 1/10,000 of an ounce and go on a gold standard then. The amount of gold backing a currency matters much less than the fact that each note is defined as a specific weight. Now, Mr. Steele is also worried that the money supply wouldn't grow along with the production of goods and services. He needn't be. As production expanded, the same amount of money would simply cause prices to drop. Or, if you prefer, the purchasing power of each dollar would increase.

Mr. Steele's solution to this supposedly impossible situation is for central banks to simply target the price of gold. If gold rises, the Fed would reduce liquidity and increase it when gold falls. It is, in my opinion, a vastly preferable system to what we have now and might well be as close as we could ever practically come to an ersatz gold system. But it pales against the traditional standard, because it lacks redeemability of dollars for gold.

And it is only that redeemability -- the power of every citizen to trade his paper dollars for a chunk of gold from the central bank's reserves -- that leverages the inflation-fighting qualities of that relic that is perhaps not so barbarous after all.

Wednesday, December 14, 2011

Can Austerity Work?

The current conventional wisdom claims a resounding "no", but ThinkMarkets believes that, though little reported, there is some evidence that Greece is starting to turn around.
This evidence is not widely known or reported. I heard about it from Nick Kounis, head of macro research at ABN Amro.

He pointed out, at a Capital Link Forum in New York last week, that Greek exports are growing, albeit from a low level. In the past couple of quarters Greek export growth rates outpaced German export growth. The reason, Mr. Kounis said, is that Greek wages declined while German wages increased. This improved Greek competitiveness.

If strong export growth continues, international trade will make up for the fall in domestic consumption as the industrial structure shifts to selling more to the rest of the world. By 2013 greater exports could bring back growth, Mr. Kounis says.

And austerity could work even better if reduced government expenditures resulted in reduced marginal tax rates. But that might be a lesson the Europeans (and, for that matter, the Americans) don't really want us to learn.


Tim Worstall has more wealth than the bottom 25% of Americans added together.


On Corporate "Personhood"

"Corporations don't have rights, people do." Or so the Democrats would have us believe. Ilya Somin explains the foolishness of this claim.
Much of the criticism of Citizens United stems from the claim that the Constitution does not protect corporations because they are not “real” people. While it’s true that corporations aren’t human beings, that truism is constitutionally irrelevant because corporations are formed by individuals as a means of exercising their constitutionally protected rights. When individuals pool their resources and speak under the legal fiction of a corporation, they do not lose their rights. It cannot be any other way; in a world where corporations are not entitled to constitutional protections, the police would be free to storm office buildings and seize computers or documents. The mayor of New York City could exercise eminent domain over Rockefeller Center by fiat and without compensation if he decides he’d like to move his office there. Moreover, the government would be able to censor all corporate speech, including that of so-called media corporations.

A recent seminar caller to Limbaugh's show tried to advance the idea and when Rush insisted that corporations are people, feigned hysterical laughter. I think we can shut the Democrats up easily enough on this, though. Just tell them that if corporations aren't people, they can't pay taxes.