Dave Friedman's Soul of Wit

In Other News, 2 + 2 = 4...

Sentence read today while reviewing CFA materials:

Rigidities in a national economy can prevent it from quickly joining growth in a world business cycle.

Say Italy? Or Japan? Or Mexico? Or Brazil? Or Russia? Or France?

The Fall Of the Berlin Wall

Mankiw notes that some former Soviet Bloc countries are friendly to starting businesses.

Those countries in which it is easy to start a business, of course, tend to be wealthier and more democratic than those countries in which it is hard to start a business.

That this should surprise anyone only demonstrates the ignorance with which most people lead their lives.

Wealth

Jane Galt on the wealthy:

Contra the belief I have encountered among my commenters, most rich people did not inherit most of their wealth, and most of their income comes from wages rather than capital. Some of my interlocutors seem to be working off an income distribution model they clipped out of the 1928 Catholic Worker.

I would agree with her on how wealthy people get their income but not in the way she likely thinks one should agree with her. The point is that the vast majority of Americans are (1) wealthy and (2) get the majority of their income from wages, not capital. The very wealthy (who, I presume, Galt is alluding to when she refers to "wealthy") do get their incomes primarily from capital, but it is nonetheless true that the vast majority of Americans have incomes far in excess of the average person's income and, therefore, by any right, they are wealthy.

Thoughts similar to mine at Mankiw.

Jesse Jackson Jr Is a Fool

It should come as no surprise that Jesse Jackson Jr is a fool, intelligence being closely linked to one's parents:

Rep. Jesse Jackson Jr., an Illinois Democrat, says he has allies on both sides of the Wal-Mart battle. The retailer recently opened a new store near Mr. Jackson's Chicago district. About 3,000 people applied for the store's 300 positions. Wal-Mart also hired local minority businesses to do accounting and logistical work for the store. But Mr. Jackson says he isn't ready to move into Wal-Mart's camp.

"I fundamentally believe in a living wage. What I refuse to believe is that the richest company in the world can't pay it. I can't reconcile that," he says.

Some quick observations: (1) Wal-Mart is not "the richest company in the world" as its profits are very small relative to its revenues; (2) Wal-Mart's wealth or lack thereof has no bearing on the wages it "should" pay its workers.

Kill political grandstanding. Elevate man.

And, speaking of racist blacks, let us not forget Wal-Mart's blunder when it had as one of its spokesmen the racist Andy Young:

The company's efforts took a step backward recently when Andrew Young, a former civil-rights leader hired to promote the company in urban areas, resigned under a cloud. Defending Wal-Mart in an interview with an African-American newspaper in Los Angeles, Mr. Young said mom-and-pop stores run by Jews, Koreans and Arabs had been "overcharging us" for poor-quality food. Mr. Young later called his remarks "completely and utterly inappropriate."

Gambling

I don't gamble, as I find it rather boring. But lots of people do gamble, and seem to enjoy it. For every breathless news story of some poker-addled blue collar mom who lets her kid die locked in the car in the casino parking lot, my bet is that there are thousands of gamblers for whom gambling is a diversionary activity no more harmful than skydiving or driving really fast on the interstate.

In other words, most people gamle for the same reason that skydivers like to jump out of perfectly good planes and some drivers like to drive fast: the thrill.

Becker makes a good point on the issue of online gambling prohibitions:

As with many other laws, restrictions on gambling mainly impact the poor and middle classes since wealthier individuals can and do gamble through equities, derivatives, housing, and in many other ways that are not readily available to families with modest incomes. There are many ways to spend money in ways that others do not approve. Why single out families with modest incomes who may enjoy the excitement of gambling, or the dreams gambling provide about striking it rich?

To his point about the wealthy being able to gamble on equities, derivatives, housing, and the like, I would also argue that the rich are better able to set up offshore accounts with which to gamble. If a gambling web site requires, for example, a credit card account, it is much easier for the wealthy to establish an account domiciled in, say, Prague or Hong Kong than it would be for a blue collar worker. Money buys access to circumvention of American law.

Existentialism, Revisited

Here's a news flash: regions change over time. Geographical areas, under the direction of man, are not static objects but rather are re-made to suit man's needs.

It is therefore unsurprising that rural New Jersey is being suburbanized as Philadelphia, Atlantic City, and New York City have grown over the past several decades.

Some, apparently, see this and engage in existential cries of disbelief:

For Dave Sandor, from Sicklerville, N.J., about 30 miles east from Cowtown Rodeo — which bills itself as the nation’s oldest continuously operated rodeo — the outing offered an escape from his job at the United Asphalt warehouse in Cedar Brook, and could be about as close as he will come to living his dream.

“I always wanted to have a farm, animals,” said Mr. Sandor, a soft-spoken 24-year-old who was taking in the rodeo with his wife, Amber, and his 3-year-old cousin, Christopher. “But it just didn’t work out that way. At least here, you could come and have a little part of that.”

But these days, broncos and bulls have to share a shrinking swath of grazing land with Capes and nouveau colonials in this southwestern corner of rural Salem County, N.J., which is rapidly becoming a bedroom community for Wilmington, Del., about 15 miles away; Philadelphia, about 35 miles away; and even Atlantic City, 55 miles away.

This kind of story is as stupid as it is old: the nature of development and economic progress is that some wealth will be created, which will pass some people by, and enrich others. Who cares? Far better to have progress than to have stasis.

"As an economist, I often find myself defending 'bad guys' "

Greg Mankiw explains what he does for a living.

Sounds a hell of a lot better than Stanley Fish.

Kill The IRS

So, it appears that the government is flush with revenues...because of the tax cuts of 2003.

The Wall St. Journal has an editorial in tomorrow's edition which, given the import of the economic lesson implicit in such a happy turn of events, is worth quoting in its entirety:

Yesterday's political flurry over the falling budget deficit shows that even Washington can't avoid the obvious forever: to wit, the gusher of revenues flowing into the Treasury in the wake of the 2003 tax cuts. The trend has been obvious for more than a year (see our May 23, 2005, editorial, "Revenues Rising"), but now it's so large that Republicans are trying to take credit while Democrats explain it away.

Republicans do deserve some credit, though not exactly the way they're claiming. Democrats are right that the White House February estimate of a $423 billion budget deficit in Fiscal Year 2006 was inflated, perhaps to be able to claim progress later this election year. Also not very important is the White House claim that it has already met its second-term goal of "cutting the deficit in half." That was always a minor and political ambition.

The real news, and where the policy credit belongs, is with the 2003 tax cuts. They've succeeded even beyond Art Laffer's dreams, if that's possible. In the nine quarters preceding that cut on dividend and capital gains rates and in marginal income-tax rates, economic growth averaged an annual 1.1%. In the 12 quarters -- three full years -- since the tax cut passed, growth has averaged a remarkable 4%. Monetary policy has also fueled this expansion, but the tax cuts were perfectly targeted to improve the incentives to take risks among businesses shell-shocked by the dot-com collapse, 9/11 and Sarbanes-Oxley.

This growth in turn has produced a record flood of tax revenues, just as the most ebullient supply-siders predicted. In the first nine months of fiscal 2006, tax revenues have climbed by $206 billion, or nearly 13%. As the Congressional Budget Office recently noted, "That increase represents the second-highest rate of growth for that nine-month period in the past 25 years" -- exceeded only by the year before. For all of fiscal 2005, revenues rose by $274 billion, or 15%. We should add that CBO itself failed to anticipate this revenue boom, as the nearby table shows. Maybe its economists should rethink their models.

Remember the folks who said the tax cuts would "blow a hole in the deficit?" Well, revenues as a share of the economy are now expected to rise this year to 18.3%, slightly above the modern historical average of 18.2%. The remaining budget deficit of a little under $300 billion will be about 2.3% of GDP, which is smaller than in 17 of the previous 25 years. Throw in the surpluses rolling into the states, and the overall U.S. "fiscal deficit" is now economically trivial.

This would all seem to be good news, but some folks are never happy. The same crowd that said the tax cuts wouldn't work, and predicted fiscal doom, are now harrumphing that the revenues reflect a windfall for "the rich." We suppose that's right if by rich they mean the millions of Americans moving into higher tax brackets because their paychecks are increasing.

Individual income tax payments are up 14.1% this year, and "nonwithheld" individual tax payments (reflecting capital gains, among other things) are up 20%. Because of the tax cuts, the still highly progressive U.S. tax code is soaking the rich. Since when do liberals object to a windfall for the government?

The other favorite line of critics yesterday was summed up by North Dakota Democrat Kent Conrad, who said the deficit would still "explode" in the long term because of the "coming retirement of the baby boom generation." But this is a political bait-and-switch. When Senator Conrad had the chance to do something about the "long term" by reforming Social Security in 2005, he refused. But now that the tax cuts he opposed are reducing the short-term deficit, he's back to fretting about the long term. At least Mr. Conrad is consistent in wanting a tax increase.

There surely is a long-term budget problem, driven largely by fast-growing entitlements for seniors. Federal spending is still climbing by 8.6% this year, with Medicare alone growing at an astonishing rate of 15.5%, or $33 billion in the first nine months of this fiscal year (which ends September 30). Thank the GOP prescription drug benefit for that future taxpayer burden. The only solution to the entitlement problem, short or long term, is to reform both Medicare and Social Security.

As for the 2003 tax cuts, the current revenue boom is one more argument for making them permanent. They are now set to expire in 2010, and, even if they are extended, federal revenues will continue to climb as a share of GDP as more taxpayers earn higher incomes and move into higher tax brackets. If liberal Democrats are really determined to soak the rich -- and we don't doubt it for a second -- they'll also vote to make the tax cuts permanent.

Imagine the economic growth--and, by implication, wealth--that would be created if we were to adopt a flat tax. Hell, we'd become like Estonia. That Estonia, a former Soviet bloc country, adopted a flat tax scheme while we have not, is to our eternal shame.

Populist Pustules

Rich Karlgaard, publisher of Forbes, writes of populists:

The newer generation of leftist populists, whose attitudes were formed in the 1960s, are a comical lot. They are college-educated--usually with multiple degrees--and live in blue-state enclaves like Boston, New York, Silicon Valley and Hollywood. Picture John Kerry duck hunting or Howard Dean at a Nascar race--populism as a pose. The newest and richest category of populist lefty is the Gulfstream Green. Think of Arianna Huffington jetting to Michigan to lecture factory workers on the evils of SUV ownership. Or Al Gore jetting to Cannes to warn of carbon emissions-caused global warming. (Personally, if I ever reach the point of owning a Gulfstream, I'll proudly tattoo its tail number on both arms.)

Scratch a political populist and you'll find a phony, every time. The very word, populist, implies trusting the people with their decisions. But, in practice, every political populist advocates the opposite: More, not less, control over your life. They must be defeated.

Another Example in Which Economists State the Intuitively Obvious

Having the fortune of not being a cloistered academic, and actually having wandered around many of the cities of this great land, I could have told you the following:

Existing research has found an inverse relationship between urban density and the degree of income inequality within metropolitan areas, suggesting that, as cities spread out, they become increasingly segregated by income.

Here's a quick test that you, too, can perform: drive from Bel Air to South Central Los Angeles and see how integrated those communities are. Then, come back to New York City, and walk from Mayor Bloomberg's townhouse to Spanish Harlem.

Then come back to me and let me know what you find.

Well, here, allow me to save you the trouble of actually having to travel to La-la land: You will find that New York is relatively integrated; that is, you can go from a billionaire's townhouse to a coterie of welfare mothers and crack whores inside of a thirty minute walk. An hour's drive in L.A. (across, obviously, a much longer distance, as the crow flies) will yield the same result.

Via Stuart Buck.

Oh, and if you want evidence that the idiots out in L.A. need to get over themselves, then have a look at this story wherein Darryl Hannah decides to sit in a tree to protest...a private property owner wanting to build a warehouse on his property! The horror!

Fuckin' celebrities. They're even worse than the economists.

UPDATE ON HANNAH: Volokh blogger Ilya Somin injects some legal analysis into this story, which, while obvious, is nonetheless important (obviousness seems to be a theme with this post, no?):

I think that Hannah and the other celebrity protesters have not thought the issue through as well as they should have. If they get their way, they might be able to save this particular garden. But if landowners such as Ralph Horowitz learn that once you let people garden on your property, you in effect lose your rights and can never remove the garden, they are likely to refuse to allow the creation of urban gardens on their land in the first place. This is especially likely if the government forces the owners to allow such gardens to stay in place permanently, once established. But even if the authorities merely let protesters such as Hannah & Co. usurp the owner's rights through private action, the same results might occur. Whatever one thinks of Mr. Horowitz, he did permit the garden to stay on his property for over a decade. It is unlikely that he and other similarly situated owners would do so if they had thought that it would lead to the permanent loss of their property rights.

To be sure, the government could (setting aside Takings Clause considerations) simply require owners to allow the establishment of urban gardens on any urban properties where local activists would like to plant them. But in addition to being a serious violation of property rights, this approach would severely undercut incentives to invest in urban property, thus imposing major economic costs on urban areas.

The Rational Consumer

Economists tell us that man is rational. (At least Consumer Man.)

Consider: I can stand on line for three hours and buy a $40 ticket or I can buy the same ticket online for $55.

If my time is worth more than $5 per hour then it is cheaper for me to buy the $55 ticket online than it is for me to stand on line for three hours and save $15. That is Rational Man.

And yet, irrationality persists.

Clearly the assumption that man is rational is faulty.

Detroit & Bangalore

Detroit is compared and contrasted with Bangalore:

To be sure, Detroit has many of the trappings of wealth that come from sitting in the lap of the richest country in the world: an excellent freeway system, a sparkling riverfront, good sanitation. Bangalore, in turn, has many of the afflictions of a poor country: pollution, open sewers, slums. But there is a palpable buzz in Bangalore’s air that comes when industrious people are engaged in creating wealth. That’s missing in Detroit, where a big chunk of the population lives off welfare.

While Bangalore grows, Detroit continues to lead the United States in population decline. Every week, on average, 370 residents leave its crime-ridden, economically depressed neighborhoods for a better life in the suburbs or elsewhere in the country. The city’s population, close to 2 million in the late 1950s, has shrunk to less than 900,000. Formerly the fifth largest city in the country—bigger even than Chicago—Detroit is now smaller than San Jose.

This is not to deny that some economic movement has occurred in Detroit in the last decade: The city in February pulled off the Super Bowl at the new state-of-art Ford Field Stadium without a hitch—no mean feat given that, until a few years ago, it could not even plow its streets after an evening snowstorm for kids to walk to school in the morning. General Motors has sunk $500 million to renovate the Renaissance Center, a complex of glass office towers that sat nearly vacant on the Detroit River for about two decades. In part due to generous tax subsidies, Detroit got its first significant new office building in a decade with the opening of the Compuware Center. Three new casinos have opened, including one in the thriving Greek Town area—one of Detroit’s few bright spots, where pedestrians actually can walk at night without fearing for their lives. And in a burst of government largesse, some old rococo gems such as the Fox Theater and Detroit Opera House have been restored, along with Campus Martius, once the busiest public square in America.

But these grand projects haven’t jump-started Detroit’s economic engine. While stores like Esprit, Nike, and Adidas open showrooms by the dozen in Bangalore, not a single major national retailer has expressed interest in Detroit since the closing of Hudson’s department store in 1982. The opening of a Ben & Jerry’s ice cream parlor in the Compuware building last year was cause for celebration.

In fact, Detroit’s landscape has barely changed since I first peered out the window of a friend’s upper-floor apartment at Wayne State University in 1987, into a hauntingly beautiful abandoned building across the street. Its rooms were stripped bare, every piece of cabinetry likely sold for firewood by local junkies. And its brick facade was marred by row after row of shattered windows—like a lovely face ravaged by pockmarks.

Entire blocks of such buildings have been razed in recent years. But with few new investors stepping forward to redevelop the sites, many have reverted to urban prairies. The 10,000 or so abandoned buildings that have escaped the bulldozers serve as both a reminder of the city’s lost glory and a taunt to its hopes of a renaissance.

Detroit is a dead city.

Kill it off.

Go read the whole thing, as they say.

UPDATE: See this previous post of mine for more about Detroit.

Winner Take All?

The Eclectecon asks if we are moving away from a "winner takes all" society in which a few large firms dominante a given market for goods or services.

My comment:

My (non-economist) take on this issue: as technology allows more and more people to become their own publishing house (blogs), video production staff (commoditized consumer electronics plus YouTube), and filters (RSS news aggregators), the idea that any one company should be able to win "all" of a market seems rather ludicrous.

Of course, implicit in my argument is the assumption that people will take advantage of the freedoms new technologies afford them. History has shown, of course, that many people do not adopt new technologies, either because they are intimidated by them or don't understand their impact.

So, I would hedge my argument: to the extent that a well educated person can take advantage of new technologies to free himself from the dictates of corproate America, corporate America will not be successful at dictating that person's experience. To the extent that a person is either uneducated or unwilling to learn about new technologies and apply them to his personal circumstance, a company will be able to control the market in which the consumer consumes.

That Which Is Obvious, Or, Economists Do Their Jobs

So, I'm studying for the CFA. Part of the CFA is introductory economics. Part of introductory economics is stating the obvious in such a way that it quickly becomes apparent that PhD does stand for "piled higher and deeper":

Public choice analysis indicates that vote-maximizing politicians have an incentive to increase spending on their constituents, particularly if they can do so without having to raise taxes. The presence of surpluses would make it tempting for politicial decision makers to undertake new spending projects. Thus, the occurrence of persistent budget surpluses over a lengthy period of time seems unlikely.

In a word: no shit. Translated into plain English: pork barrel politics is not going away because pork creates votes.

Other things that I learned* in today's economics lesson: the government can't do much about the economy with so-called discretionary policy measures (say, cutting or raising tax rates) because such actions require time (no dictatorship for us), by which time, the conditions warranting such policymaking have passed.

Politicians, then, are impotent prostitutes: they can no more control the economy than they can the weather and, at the same time, they have to fellate their constituents in order for their constituents to keep them in office.

Is this a great system or what?

*This is sarcasm. I no more "learned" this than I learned that Britney Spears is a slatternly bimbo, but, I digress...

Housing Bubble

The Wall St. Journal reports that novice vulture investors* are swooping in to buy up houses of people facing foreclosure:

The cooling market for real estate brought Michael Termine and Uso Mbanefo together.

Mr. Mbanefo, a 43-year-old entrepreneur struggling to launch a clothing-design company, had fallen behind on his mortgage payments. He needed to sell his four-bedroom house here quickly to avoid losing it in a foreclosure. That's when Mr. Termine, a 32-year-old novice real-estate investor, stepped in.

One afternoon in early April, Mr. Termine visited Mr. Mbanefo's office in a strip mall and offered to pay $400,000 for his house. Mr. Mbanefo showed Mr. Termine fliers for nearby homes offered at $600,000 or more. Mr. Termine pointed out that the inventory of unsold homes here, as in many parts of the country, has nearly doubled over the past year. Even so, Mr. Mbanefo said that he might be able to refinance his home, spruce it up and sell it for $500,000.

"I don't see it at 500," said Mr. Termine. "I think the magic number to move that house fast is 475." Before leaving, he reiterated his offer. "I have $400,000 waiting for you, in cash."

Lest you think Michael Termine is a well-capitalized vulture investor whose risk management capabilities are such that he can hedge the risk that he is incurring by laying out cash for an illiquid asset, consider again:

Most foreclosure investors run small, local operations, buying and reselling a handful of properties a year. Some are self-taught; others take courses touted on Web sites or in late-night TV ads. Invariably, they draw criticism from advocates for the poor, who accuse them of preying on the vulnerable.

"Our time has finally come!" proclaims a recent email advertisement from ForeclosureS.com, a Fair Oaks, Calif.-based company that markets training materials for would-be investors. A 90-minute telephone program promises to teach foreclosure specialists how to be a "white knight" and not "feel like a shark."

More people are falling behind on their mortgages, according to the Mortgage Bankers Association. The percentage of loans on which payments are at least 30 days overdue rose to 4.7% in the fourth quarter of 2005 from 4.4% a year earlier. With interest rates rising, it's harder for homeowners to refinance or sell quickly.

Such conditions are attractive to investors like Mr. Termine, who previously has owned a bar, worked in construction and tried acting. "I've always wanted to do the real-estate thing," says the father of two young children. "I just didn't know how."

Last year, Mr. Termine bought home-study materials from ForeclosureS.com, including six compact discs, for about $400. Then he flew to California in November to take an intensive three-day course. Mr. Termine says the lessons taught him to deal honestly and ethically with people facing foreclosure -- and make a good return for himself. "If I can create some kind of win-win, then it's worth it," he says.

So far, he says, he has used home-equity lines of credit to purchase four homes in foreclosure. He has sold two of them, he says, clearing about $160,000 in profits. Though he expects some transactions to be less lucrative, Mr. Termine predicts he can easily earn a six-figure annual income. One sign of his confidence: he bought himself an $82,000 red Porsche Carrera late last year.

It seems safe to say that some of these nouveau vulture investors, poorly capitalized, and unschooled in the complex field of risk mitigation (i.e., hedging and the like) will themselves become victims of a bubble.

*I'm using the term "vulture investor" somewhat loosely here. It typically applies to investors who buy unloved assets at depressed prices (think excess bandwidth in light of the telecom meltdown of several years ago). Vulture investors don't typically invest in illiquid assets like real estate.

In any event, the metaphor is a particularly poetic one, as vultures get much of their nourishment from carrion, i.e., dead animals killed by other predators or caprices of nature.

Economic "Development"

One of the hallmarks of "economic development" plans put forth by government is that they rarely, if ever, produce economic development or growth because, by virtue of their being centrally planned development projects they fail to address the business realities of the day in favor of political reality.

Political reality, such as it is, is often less about real assessment of need and more about expediency and currying favor with voters who are supposed to benefit from such projects.

Airports, of course, along with sports stadiums, have been one of the most common economic development projects in recent years, and the success of these projects has been questionable, especially in light of airlines' shaky finances:

Airports have long been considered economic-development tools for the communities that own them. Many, like Toronto, erected palatial terminals to showcase their cities and passed on the costs to airlines and passengers. Even as airlines have gone bankrupt, airport earnings have risen.

Now, the combination of financial woes of traditional airlines and the explosion of low-cost competitors around the world is forcing big changes in airport design and operation. Airlines, which have already won concessions from employees, travel agents and suppliers, are now putting pressure on airports to cut costs and fees. And low-cost carriers have sparked the creation of bare-bones depots, like Schiphol's "Pier H," in Europe and Asia.

$1.53/Gigabyte

I just bought a 250 gigabyte external hard drive, which I will use to backup my assorted computers.

Including taxes, the bill came to $162.55 which works out to a price of $1.53/gigabyte.

Half-terabyte hard drives (approximately 500 gigabytes) seem to sell for even less. According to the Wikipedia entry that you get to if you click the "terabyte" link in the preceding sentence, the entire contents of the Library of Congress comprises 20 terabytes. At the 250 gb to $163 ratio I quote above, that implies a price of $20,000 for 20 terabytes of storage, which, when you think of it, is surprisingly cheap, considering $20,000 won't even buy you a decent car, a house, an apartment, a yacht, or a horse.

Ain't technology grand?

Gas

There's this thing called "gas", which contrary to popular belief, is not the stuff that comes out of you when you fart, but rather is this thing that people use to power their "cars."

Bieng a city resident I have no need for "cars" and therefore am unaffected by the apparent price hikes of this "gas" in recent weeks. It is with mild amusement and no small amount of hubris that I go about my commute unaware of the pain that this "gas" is causing for people's "cars." But Jane Galt has some good observations about why people are so upset at the price of this precious fluid:

My thoughts:

1) Most Americans buy gas at least once a week

2) They buy a lot of it

3) They buy it by itself--if the price of milk or orange juice rises, it gets lost in the overall grocery bill, which is still falling in real terms.

4) The price is visible and because demand is almost completely inelastic, little effort is made at price discrimination--there are no coupons for cut price gas.

5) There is relatively little variation in gas prices compared to, say, generic food/drugs vs. name brands.

6) Gas is heavily implicated in other consumption. When the price of milk rises, you stop drinking milk and start drinking calcium-fortified OJ (or vice versa). When the price of gas rises, you stop going to the movies and start watching the science channel.

7) There are very few good substitutes for gasoline consumption.

8) It is relatively difficult to cut back on gasoline consumption, because commutes and things like grocery shopping make up so much of the total, and people only purchase new cars once every few years, if that.

In short, people have to buy it; they have to buy large amounts of it frequently; it's very difficult and painful to economize on; and the cost is highly visible. That's what makes it different from groceries or furniture. Or anyway, that's my guess.

Never mind, of course, that people have brought this problem upon themselves by refusing to live in places with adequate public transportation.

More gaseous thoughts at the invaluable Coyote Blog.

And, for the perspective of a real economist, check out the ElectEcon.

Personally, I just think people are morons, and, as morons are wont to do, they see that they are paying more in absolute terms than they used to pay for the same thing, and, therefore, politicians see an opportunity to curry favor. The consequence is that all coherence and rational thought evaporates like, well, gas. And ignorance persists.

This is all a function, in part, of statistical illiteracy (i.e., understanding the difference between absolute and relative pricing). For some of my comments on the pervasiveness of statistical innumeracy, see my comments at Althouse's blog post about self-selected (non-random) online surveys. Same innumerate principle applies to gaseous matters.

Productivity

It's often said that Ireland and America have stronger economies than France or Italy because their workers are more productive.

Procter & Gamble's experience in Italy should demonstrate that Italians are none too productive:

Italian women keep some of the cleanest homes around.

They spend, on average, 21 hours a week on household chores other than cooking -- compared with just four hours for Americans, according to Procter & Gamble Co. research. Italians wash kitchen and bathroom floors at least four times a week, Americans just once. Italians typically iron nearly all their wash, even socks and sheets. And they buy more cleaning supplies than women elsewhere do.

All that should make them the perfect customers for the manufacturers of cleaning products.

But when Unilever launched an all-purpose spray cleaner about six years ago, the product flopped. And when Procter & Gamble tested its top-selling Swiffer Wet mop, which eliminates the need for a clunky bucket of water, the product bombed so badly in Italy that P&G took it off the market.

What the world's biggest consumer-products companies failed to realize is that what sells products elsewhere -- labor-saving convenience -- is a big turnoff here. Italian women want products that are tough cleaners, not timesavers.

The Italians "are not ready for convenience in the way Americans are," says Elio Leoni Sceti, chief marketing officer at Reckitt Benckiser PLC, maker of Lysol cleaner and Woolite laundry detergent. "It's perceived as a step back."

What sort of cultural idiocy allows people to spend so much time cleaning and not producing wealth?

For those who don't believe that a propensity toward productivity is culturally iingrained, consider Richard Posner's argument about income inequaity and its cultural implications:

Cognitive skills tend to get developed at very early ages, while my colleague, James Heckman, has shown that non-cognitive skills, such as study habits, getting to appointments on time, and attitudes toward work, get fixed at later, although still relatively young, ages. High school dropouts certainly appear to be seriously deficient in the non-cognitive skills that would enable them to take advantage of the higher rates of return to greater investments in education and other human capital.

So instead of lamenting the increased earnings gap by education, attention should focus on how to raise the fraction of American youth who complete high school, and then go on for a college education. These pose tough challenges since the solutions are not cheap or easy. But it would be a disaster if the focus were on the earnings inequality itself. For that would lead to attempts to raise taxes and other penalties on higher earnings due to greater skills, which could greatly reduce the productivity of the world's leading economy by discouraging investments in human capital.

Certainly there is a point at which the returns gained from cleaning one's house or ironing one's socks are significantly less than the cost of time put into doing these chores. Were the Italian household a properly managed business, its old line businesses (excessive cleaning) would be shuttered in favor of more profitable pursuits. Just as productive people reap the benefits in America, so should they in Italy. And yet theirs is a calcified economy. Wrinkled socks is a pretty small price to pay for economic growth.

Underutilized Resources

Women are an underutilized resource:

Governments, too, should embrace the potential of women. Women complain (rightly) of centuries of exploitation. Yet, to an economist, women are not exploited enough: they are the world's most under-utilised resource; getting more of them into work is part of the solution to many economic woes, including shrinking populations and poverty.

Some people fret that if more women work rather than mind their children, this will boost GDP but create negative social externalities, such as a lower birth rate. Yet developed countries where more women work, such as Sweden and America, actually have higher birth rates than Japan and Italy, where women stay at home. Others fear that women's move into the paid labour force can come at the expense of children. Yet the evidence for this is mixed. For instance, a study by Suzanne Bianchi at Maryland University finds that mothers spent the same time, on average, on childcare in 2003 as in 1965. The increase in work outside the home was offset by less housework—and less spare time and less sleep.

What is clear is that in countries such as Japan, Germany and Italy, which are all troubled by the demographics of shrinking populations, far fewer women work than in America, let alone Sweden. If female labour-force participation in these countries rose to American levels, it would give a helpful boost to these countries' growth rates. Likewise, in developing countries where girls are less likely to go to school than boys, investing in education would deliver huge economic and social returns. Not only will educated women be more productive, but they will also bring up better educated and healthier children. More women in government could also boost economic growth: studies show that women are more likely to spend money on improving health, education, infrastructure and poverty and less likely to waste it on tanks and bombs.

Conceiving of people as resources is a somewhat bizarre, and unsentimental, way of thinking of one's fellow man*, but doing so is certainly better than the cult of victimology around which feminism has found its intellectual roots. Resources, after all, exist to be exploited. The exploitation of man's labor, at least in free societies, has benefits that redound to the man himself: a higher standard of living for him and his family, and all the ancillary benefits that come from earning more money.

*The use of "man" in its universal sense is intentional.

"“We do not really know what causes economic growth"

Imagine you went to the doctor, and he told you, "you have an infection in your throat but we don't really know what causes it, or how you got the infection. Here's some medicine, but we don't know if it will cure what ails you. Good luck!"

That is essentially the state of economics today:

“We do not really know what causes economic growth,” admits François Bourguignon, the chief economist at the World Bank. “We do have a good sense of what are the main obstacles to growth and what are the conditions without which an economy can’t grow. But we are far less sure about what are the other ingredients needed to create and sustain growth.”

More:

This bewilderment doesn’t just appear when economists confront the devilish problems of the developing world. Plenty of what goes on in the rich world also baffles them. I recently asked a well-regarded economist on Wall Street what puzzled her these days. “Interest rates,” she said. “They should be higher.” Sure enough, economic theory predicts that today’s long-term interest rates—the rates for mortgages or bonds that will be paid years from now—should be higher and heading upward because of an expanding U.S. economy and exploding fiscal and trade deficits. But the financial markets just won’t cooperate: Long-term interest rates have remained low and are actually heading down. Before retiring in January, U.S. Federal Reserve Chairman Alan Greenspan described these trends as “a conundrum.” Robert Samuelson, a Washington Post columnist, surveyed the explanations that economists offer to explain this anomaly and found that they are all flawed. In his view, the experts’ inability to explain something so fundamental “attests to our economic ignorance.”

Nor do economists have a convincing explanation for the value of the U.S. dollar. For more than a decade, economists have maintained that the dollar was too expensive and its devaluation was unavoidable. As predicted, the dollar plummeted 39 percent between 2002 and 2004. An inescapable effect of the economic equivalent of the law of gravity, explained the experts. In a country with a huge and growing trade deficit, out-of-control government budgets, a war expected to cost $1 trillion, and high energy prices, the currency’s value will inevitably tumble. Except that it didn’t tumble for long: The dollar’s decline was so fleeting that economics textbooks didn’t have time to register the change. The dollar recovered quickly, climbing 14 percent in 2005.

No doubt economics is important, and no doubt most people are woefully ignorant of economic principles. But is economics really a science? Do we have the empiricial knowledge required of an inquiry for it to be called scienec? Does it have hypotheses that can be tested or rejected? Is its epistemological framework scientific?

I don't have any answers to these questions, but the epistemology of economics seems a fascinating avenue of inquiry for someone sufficiently knowledgeable.

Taxachussetts: Hell On Earth

Health insurance has been made mandatory in Massachusetts. Coyote Blog has an appropriate take on this measure; meanwhile A VC has a stunningly ignorant--and liberal--take on the same.

A VC, it should be noted, is a venture capitalist-blogger. One would expect a VC to understand how ignorant an application of economics such legislation is. Do you want this guy investing in your company?

Related: Stuart Buck relates the story of a pharmacist friend of his:

His gut instinct was that Americans use too many prescription drugs, and that their usage would go down if insurance didn't cover so many prescription drugs. He said, for example, that he'll see people come in who are on 15 or 20 meds, half of which are unnecessary for their conditions. But then as soon as he tells them that a particular med isn't covered by their insurance, they always say, "Well, put that one back; I may come back for it later." Then they never come back for it.

Another example of over-expenditures: He filled a prescription for a new and expensive antibiotic that costs upwards of $75, but then the customer's insurance didn't cover it. When he told the customer the cost, the customer demanded that he call the doctor, at which point the doctor said that amoxycillin (a cheap generic) would do as well. This made him wonder why the doctor didn't prescribe the cheaper drug in the first place.

A third point he made was that if insurance didn't cover so many drugs, the drug companies would find a way to lower their prices, simply because they would realize that a particular drug would never sell if people had to pay $100+ out of pocket.

France & Germany Are Dying

How best to resurrect Germany and France?

Certainly not through Soviet-style central planning:

“WE MUST take the offensive and muster a massive effort,” said Jacques Chirac, the president of France, who went on to warn of the dangers of losing the battle for “the power of tomorrow” in a speech made last April. Standing beside him was Gerhard Schröder, then chancellor of Germany. In response to the formidable challenges posed by America, Japan and the emerging powers of China, India and Brazil, the two men announced that they had decided to step up their co-operation in a technological programme of vital strategic importance. A new fighter jet, perhaps, or a satellite surveillance system? No, the two heads of state were endorsing a plan to build a Franco-German internet-search engine, to be called Quaero (Latin for “I seek”).

The project would, said Mr Chirac, be undertaken with the help of government funds “in the image of the magnificent success of Airbus”. In a series of further speeches over the past few months, he has warmed to his theme: “We must take up the global challenge of the American giants Yahoo! and Google”; “Culture is not merchandise and cannot be left to blind market forces”; “We must staunchly defend the world's cultural diversity against the looming threat of uniformity”; “Our power is at stake.”

In July Mr Chirac noted that while French research has traditionally been good, it “now needs encouraging”. The following month the French government, the main financier and developer of Quaero, duly created the Agency for Industrial Innovation (AII), based in Paris, largely to oversee the project. The AII received an initial endowment of €1.7 billion ($2 billion). Michel Lemonier, a senior administrator at the AII, refuses to discuss how much of the budget is being allocated to Quaero because, he jokes, the leaders of other AII-funded programmes would be “very jealous”. Quaero is expected to be finished before any of the other planned AII projects, and may be online before the year is out.

None of these initiatives will create jobs if labor markets and economies are not freed.

Europe will drown in its wine and beer if it does not heed the imperative of free markets. It also bears mentioning that a few decades hence we may well be saying the same thing of China, if it fails to open its economy.

Markets in Everything

Lofts have come to suburbia:

Next month, Martin Sickles is moving into a loft apartment with all the hallmarks of a converted urban warehouse, from wrought-iron railings to a spare brick exterior out of the Industrial Revolution.

But his loft isn't in a century-old factory building on a gritty inner-city block. It's in a new development in rural Palmetto, Ga., surrounded by meadows, stables and an organic farm that will grow things like asparagus and edible flowers. "It's my little piece of New York," says Mr. Sickles. "But New York is too urban for me."

Coming to a subdivision near you: the McLoft. Amid ranch houses and McMansions, developers are putting up buildings that look like they're out of downtown Manhattan or Chicago. Unlike urban lofts, which started out as last-resort housing for arty types, these condos can be some of the priciest housing in suburbia. Instead of stepping out into sidewalks where vendors peddle gyro sandwiches and counterfeit handbags, residents are just minutes from mountain-bike trails or the mall. And while city lofts are known for creaky freight elevators and exposed ventilation ducts, their country cousins come with floating faucets, bidets and designer kitchens.

There are dozens of McLofts already built across the country, and more are on the way. In Reston, Va., builders are finishing up Midtown Town Center, where apartments priced up to $1.4 million will come with old-style wide plank floors and just a few interior walls, but they'll also have Italian cabinets, quartz countertops and a Morton's of Chicago within strolling distance. In Scottsdale, Ariz., Third Avenue Lofts looks like a plain red-brick warehouse with narrow metal awnings and balconies that suggest fire escapes, while inside the building has a gym and pool, and units that come in one of 30 different floor plans. The Georgia development where Mr. Sickles will live -- it's called Serenbe, a combination of "serenity" and "be" -- also includes townhouses and cottages. One of its marketing pitches: "Like having a Manhattan loft in the middle of the woods."

This all sounds supremely stupid, but if this dude wants to spend his money on fakery, then more power to him.

Me, I'm furnishing the 6,000 square foot loft I just closed on in Tribeca from DWR and Desiron.

UPDATE: The reference to me having closed on 6,000 square foot loft in Tribeca is a joke.

How to Make a Killing in Europe

It's quite clear to me that the E.U.'s major economies--France, Germany, Italy--are on the brink of systemic failure.

If I were a Frenchman, German, or Italian, I would invest my excess cash in dollar-denominated debt or equities, wait for asset prices to fall in my home country, and repatriate my cash to take advantage of the low prices. I would then sit back and wait for my country to implement badly needed economic and labor market reforms.

And reap a windfall.

Say what you will about the dangers the US deficit poses to the American economy: I think it will be stronger for a longer period of time than the economies of France, Germany and Italy. The Europeans are sitting on a potential gold mine when their economies tank; they need to be ready to pounce. The best way for them to do that is bide their time by investing in American debt and equity.

Schumpeter Triumphs

Hold Everything, the storage store owned by Williams-Sonoma, is due to close. Apartment Therapy reports, harshly:

Hold Everything, the long limp storage arm of the Williams Sonoma empire, is soon to close. We sort of thought this might happen. Hold Everything has always been thin on ideas, poor on service and high on price. Having The Container Store whallop the storage niche probably didn't help them either.

This, of course, is a perfect demonstration of Joseph Schumpeter's idea of creative destruction, wherein some business are destroyed as others innovate.

An interesting side note to add to this discussion: Apartment Therapy is an interior design blog read, in large part, by urban lefties who prattle on about economic irrelevancies such as "sustainable development" and "eco-friendly" trade policies, etc., etc., etc., ad infinitum. It is therefore interesting that one of their blog posts so elegantly and concisely captures the beauty and efficiency of pure capitalism.

The Container Store, of course, is the apotheosis of the retail experience. If you have not had the pleasure of going to one of their stores, go post haste. Then come back to me and explain to me what the BFD is about Wal-Mart.

UPDATE: Apparently, my reference to Apartment Therapy's readers as "urban lefties" has upset some of its readers. No offense is intended; there are far worse things to be than an "urban lefty." Hell, most of the country would consider me an urban lefty. Those who think that I'm attacking Apartment Therapy's readers are missing the point.

Rapacity

Memo to Bill "War on Christmas" O'Reilly and his populist sympathizers on the New York Times' editorial board: ExxonMobil's profits are not evidence of rapacity.

Consider this table:

This table was copied from Forbes Magazine, dated 2/27/06.

Says Forbes' Michael Ozanian in text accompanying the table:

Big oil companies have huge bull's-eyes on their backs. Record profits (like ExxonMobil's $36 billion) and $65 oil have made the industry the targets of politicians, newscasters and editorial writers who claim the oil comapnies have rigged the market and gouged customers. The cry is up for a windfall-profits tax. But wait. What if "windfall profits" were defined to include any fat margin? Media companies would be much more exposed than oil companies. Herewith, a sampling of newspapers and broadcasters with handsome operating margins. Recognizing their rich earning power, Wall Street accords media outfits much nice price/earnings multiples than it does mere oil producers.

Jodi Rell Is An Idiot

Why in the world would a state government give a company a loan to build a small auto manufacturing plant for a car company no one has ever heard of?

Car manufacturing is a hugely capital and labor intensive business, which is profitable only at scale. It is not an easy business to run profitably, especially in a high-cost state such as Connecticut, which state has recently decided to lend $1.5 million of taxpayer money to an outfit called AC Motors. The impetus for this loan is that it is being couched as a politically palatable urban redevelopment scheme. The urban area in this case is Bridgeport, a coastal town set between the economic success of Stamford and the academic sucess of New Haven.

There's not much going for Bridgeport, just as there is not much going for other areas of urban blight in Connecticut, such as Hartford, inner city New Haven, and downtown Stamford. Downtown Stamford has seen some resurgence as of late, but it is not because of government involvement. It is due to its proximity to New York City: many financial services firms have set up back office operations in Stamford because, although operations in Connecticut are more expensive than they are elsewhere, they are certainly cheaper than in New York City, and, as well, there is a large body of well educated workers proximate to Stamford.

Bridgeport has none of these advantages, and the proposed loan is being billed as a way to create manufacturing jobs:

A Nov. 15 news release from the office of Gov. M. Jodi Rell said that, by the summer of 2006, AC Cars was expected to begin production on three models in a historic 40,000-square-foot brick warehouse beside the Pequonnock River. The company would spend $4.5 million and create 141 "top-quality, well-paying manufacturing jobs," Mrs. Rell said in the release. The deal would be supported by a proposed $1.5 million secured loan from the State Department of Economic and Community Development.

Never mind that the proprietor of this car company, Alan Lunbinsky has a questionable background:

Yet for all the cheering for an alluring economic development project, as well as a clean deposit of political capital for Mrs. Rell heading into an election year, not everyone views the proposed move as a wise one — or even a plausible one.

The skepticism is multilayered, but the greatest concern centers on the company's chairman, Alan Lubinsky. In interviews with more than a dozen former investors, partners, employees, customers and industry experts on three continents, Mr. Lubinsky was often described as a man who has made ambitious plans but has not delivered on all of them.

In the last decade, these people said, he set out to rejuvenate a beloved but indebted century-old British car company, but instead it fell further into debt. Manufacturing in England has halted. Some longtime AC employees have filed claims that they were shorted weeks of wages, and some customers who had put down tens of thousands of dollars to order cars never saw a delivery. Some never got their money back.

For one trick towns like Bridgeport (or Detroit), which want to create jobs and economic vitality, the solution is not feel-good government interventionism. The solution is a long-term process of improving education for the town's residents. This starts by killing off public school unions, radically restructuring government's support of public education, and putting the power of choice in the hands of the consumers of education, namely, the parents whose kids are not being educated.

That this is at the very least a multi-year process suggests that it is not the stuff of feel-good politics.

Connecticut's program will fail. Of that I am certain. Bridgeport will continue to be a basketcase, offering its residents little in the way of opportunity

Economics is a Zero-Sum Game!

And Intelligent Design is better science than evolution!

Anyway, Ronald Bailey writes of the concern that some have of a pending death shortage. What, pray tell, is a death shortage? It is not, as one would think, the result of an increasingly pacific Muslim population because it is increasingly clear that that "religion" is incompatible with peace.

It is, rather, a concern of demographers and actuaries that as people live longer, the younger people will have fewer chances to move up in their careers, acquire wealth, etc. In other words, these Cassandras treat economies as static, zero sum games:

What are some of the baleful problems that this alleged death shortage will cause? "From religion to real estate, from pensions to parent-child dynamics, almost every aspect of society is based on the orderly succession of generations," declares Mann. "Every quarter century or so children take over from their parents—a transition as fundamental to human existence as the rotation of the planet about its axis."

As a consequence of the looming unnatural prolongation of the ancient cycle of birth and death, Mann outlines an improbably dystopian vision of greedy geezers growing ever richer as their deserving children languish in poverty. "In the past, twenty- and thirty-year-olds had the chance of sudden windfalls in the form of inheritances," writes Mann. "Some economists believe that bequests from previous generations have provided as much as a quarter of the start up capital for each new one—money for college tuitions, new houses, new businesses." Apparently, Mann thinks that parents today only invest in their children—pay for piano lessons, braces, college tuitions, or make them partners in the family business—because they know they're going to die soon. What makes him think that aging decimillionaires in the future won't have any money to spare for their indigent children? And just where does Mann think geezers will be investing their money so that they can take advantage of the magic of compound interest that he says will make them so rich? It's got to go into, yes, new businesses, new technologies, and so forth.

Mann dim-wittedly treats economics as a zero sum game. Evidently he thinks that there are a limited number of jobs available and the only way for a youngster to get one is for someone older to die. Consequently, Mann concludes, "it will not be feasible for most of tomorrow's nonagenarians and centenarians to stay at their desks, no matter how fit and healthy they are." Does Mann never wonder just how it was that United States created tens of millions of new jobs as our population grew and grew older over the course the last century?

Markets

I've never used eBay. I went on their site once, when the company first started, saw that it was all rather very confusing and uninteresting, and have not been back. But I'm obviously not typical in that regard, because eBay has been one of the most successful internet companies over the past ten years.

It would seem that its success is directly dependent upon the integrity of the market it runs. If you couldn't be sure that the 100 shares of Microsoft you just bought really were 100 shares of Microsoft,, then other stock markets that could guarantee such a transaction would likely arise and shut down the poorly run stock market.

It would seem, therefore, that eBay has a vested interest in maintaining the integrity of its market. Apparently, a number of eBay customers are incensed at an increase in fake goods being sold through its auctions:

In 2004, Tiffany secretly purchased about 200 items from eBay in its investigation of how the company was dealing with the thousands of pieces of counterfeit Tiffany jewelry. The jeweler found that three out of four pieces were fakes.

The case will go to trial by the end of this year, said James B. Swire, an attorney with Arnold & Porter, a law firm representing Tiffany. The legal question — whether eBay is a facilitator of fraud — is a critical issue that could affect not only eBay's future but Internet commerce generally, said Thomas Hemnes, a lawyer in Boston who specializes in intellectual property.

"If eBay lost, or even if they settled and word got out that they settled, it would mean they would have to begin policing things sold over eBay, which would directly affect their business model," Mr. Hemnes said. "The cost implied is tremendous."

I don't pretend to have an opinion on the merits of this case. But how can a market survive if its facilitator can't guarantee the integrity of its operation? if eBay is nothing more than a market, then how does the company survive a degradation in the integrity of its market's operations?

Sports Will Not Rescue Local Economies

I blogged here about the problems Detroit is having in attracting very many people to come there for more than one day during the course of the Stupid Bowl and its attendant events.

I argued primarily from the perspective of intuition: Detroit has never recovered from the race riots of the 1960s, it is more well known for its urban decay and blight than it is for its cultural vim and vigor, and its home-grown industry, auto manufacturing, has been in decline for decades. It is the apotheosis of blue-collar, rust belt despair and anachronism. It is a dead city, consigned, as I am fond of saying, to the ash heap of history. Nothing the NFL does for a couple of days will do anything to revitalize Detroit. Detroit should be written off, like New Orleans, yet it persists for some sentimental reason.

In any event, some economists agree with my assessment: the presence of the Super Bowl will have somewhere between no impact and marginal impact over Detroit's economy:

Detroit natives are watching in amazement as their city, long the poster child for urban decay, has undertaken a massive effort to clean itself up for the 100,000 out-of-town guests expected for Super Bowl XL. Major highways have been repaved, long-abandoned buildings have been demolished, and there's a plan to get the homeless off the streets for Super Bowl weekend, Feb. 3-5 -- all at a cost of about $100 million in public and private money.

The NFL and the Detroit Super Bowl XL Host Committee put the projected payoff at about $300 million, which would make the investment seem reasonable. But that's a fiscal Hail Mary that's never likely to result in a touchdown. Or so say a bevy of sports economists who argue that the economic impact of the Super Bowl is as hyped as the halftime show.

"The NFL says $300 million, but I'd say it's closer to $50 million," says Allen Sanderson, a University of Chicago economist.

"There are numerous studies by reputable economists showing that the Super Bowl has a significant positive economic impact on host cities," said NFL spokesman Greg Aiello, who's all too familiar with the critiques from Mr. Sanderson and other sports economists. "Businesses and city leaders know the Super Bowl draws thousands of people to their city who spend large amounts of money and that the Super Bowl gives the host city unmatched media exposure. Cities want the game because it has tremendous value. It's common sense."

Tell that to Phil Porter, a University of South Florida economist who has looked at the economic impact of six Super Bowls. He found that Miami-area hotel rates and occupancy levels increased only 4.4% for Super Bowl XXIX compared with the same period in the prior and following years. Similarly, he found that Super Bowl XXXIII, also in Miami, had no more than a $37 million impact on the South Florida economy. Economists Robert Baade of Lake Forest College and Victor Matheson of Williams College pegged it at $21 million to $32 million, about one-tenth of the NFL's claims.

In assessing last year's Super Bowl in Jacksonville, Fla., Mr. Porter looked at taxable sales data and, based on the statewide increase from February 2004 to February 2005, taxable sales in Jacksonville's Duval County should have gone up to $1.178 billion. In fact, they rose to $1.219 billion, meaning it was reasonable to assume that the Super Bowl resulted in a $41 million increase in taxable sales.

But the key figure, Prof. Porter and others argue, is taxes collected, not taxable sales. With a 7% tax rate, the gross economic impact of Super Bowl XXXIX comes to about $3 million. Factor in that it costs about $15 million in infrastructure improvements, security, overtime for police, fire and EMS personnel, and the economists claim that hosting the Super Bowl actually cost Jacksonville about $12 million.

How to Solve New Yorkers' Financial Woes

The New York Times has a long sob story about how people who live in the outer boroughs of New York City (that is, people who do not live in Manhattan) can't afford life in New York City.

Nowhere in the report is there any mention of the egregious rates of taxation foisted upon New Yorkers. Kill public education, eliminate rent control and stabilization, and adopt pro-growth economic policies, and well, you will find that many fewer people have to pinch pennies to survive.

None of this will happen, of course, so your only recourse if you want a nice life is to enhance your skills and knowledge and compete in the job market.

Or, you could just sit at home, read the New York Times, and wallow in its ignorance.

Blowing Smoke

From the New York Times:

Mark Twain is said to have had a good line about the pains of quitting smoking: It's easy. Done it a thousand times.

Twain was probably not on Mayor Michael R. Bloomberg's mind on Monday when he announced that he was calling for a 50-cent increase in the city's cigarette tax. But getting smokers to quit clearly was.

"There's a clear correlation," the mayor said in Albany. "You raise your cigarette taxes, fewer children go and smoke."

The problem is that smokers are a stubborn bunch. If lung cancer, heart disease, emphysema and the like have failed to stop them, why, some asked, would a simple pair of quarters do the trick?

"We're hooked," said Lou Sepe, who was pulling on a smoke yesterday afternoon outside his Times Square office. "That's the problem."

If increasing the cost to get something causes people to want that thing less, then it follows that the War on Drugs has long since been won. Of course, that war has not been won. Increasing an addict's costs will not compel that addict to overcome his addiction. That's just not how addiction works. The government, if it is to be in the business of smoking cessation programs at all, should focus its energies on educating an ignorant public, not fleecing them to build more schools or pave more roads, or do whatever else it is that government supposedly does better than the private sector.

Those people, such as the Mayor, who believe that increasing the taxes on a pack of cigarettes is a panacea are simply wrong. The Mayor's suggestion may be good politics--if ever there was a despised voting bloc, it would be smokers--but it's poor economic analysis and even poorer public policy.

Even if we were to argue that the best solution to stopping people from smoking is to ban tobacco outright, it is doubtful that the impact would be sustained over the long term. If we were to ban tobacco outright, as has been done with illicit drugs like marijuana and cocaine, illegal (and violent) markets would arise, and smokers would risk lengthy jail sentences in order to feed their addiction.

It is folly to assert that smokers can be convinced to quit smoking on the basis of the amount of tax they pay.

Certainly, there will be a minority of smokers who, upon seeing the new taxes on cigarettes, decide that they will quit. And of those smokers who decide to quit, an infitesimally small number will actually quit. But the amount of smokers who do quit on the basis of increased taxation is not worth the costs associated with such interventionism.

Tax Cuts Create Wealth

Reagan is known for two legacies: laying down the gauntlet to Gorby ("Mr. Gorbachev, tear down this wall!")*, and creating wealth via tax cuts.

John Rutledge, who was an economic advisor to Regan in the early '80s, argues for making tax cuts permanent:

Tax cuts initially impact asset prices by making investors recapitalize, or revalue, the equities of existing companies to reflect higher after-tax returns relative to interest-bearing securities, tangible assets like land and collectibles, and foreign assets. The return gap -- more than 100 basis points for the 2003 tax cuts -- makes investors sell relatively low-return assets, driving their prices down, and buy relatively high-return assets, driving those prices up, until after-tax returns have been driven together again. My estimates showed an initial positive impact on equity values of $560 billion to $938 billion, or 6% to 10%.

The restructuring impact of tax cuts on stock prices plays out over several years but is potentially several times larger than the initial price impact. The 2003 tax cuts were larger for dividend income (from 38.6% to 15%), than for capital gains income (20% to 15%); tax rates on interest income were unchanged. The positive impact on a stock's value will be greater the more profitable the company is, the greater percentage of equity rather than debt on its balance sheet, the greater its payout rate, and the greater its duration (a stock with a greater duration is more sensitive to changes in cost of capital).

In 2003, U.S. companies were poorly structured to benefit from the changes. Decades of high tax rates on dividends prompted managers to reinvest profits and hoard cash for acquisitions rather than pay out dividends regardless of the company's prospects. Meanwhile, deductible interest payments had encouraged managers to finance companies with debt instead of equity, which reduced profits and increased bankruptcy risk. According to the American Shareholders Association, the number of S&P 500 companies paying dividends fell from 469 in 1980 to 351 in 2002. By 2002 the S&P 900 large- and mid-cap companies paid out just 53% of profits, and financed companies with only 27% equity and 73% debt.

Once tax rates were cut in 2003, managers quickly learned they could profit from lower tax rates by restructuring balance sheets. Companies like Nextel issued equity to buy back debt. Other companies, like Microsoft, initiated new dividends and cleaned out their cash hoards through one-time special dividends. Most increased dividend payout ratios: Dividend payments received by shareholders have doubled since the tax cuts.

*Bonus points for you if you are smart enough to know the wall to which Reagan refers in the above quote, without clicking on the link. The wall in question is not, as someone I knew in college tried to argue, Pink Floyd's album The Wall. This miserable excuse for a college student genuinely thought that Reagan was making a reference to Pink Floyd's album.

Thought

There is probably a strong correlation between a country's wealth and the respect it accords its women. Oppressive regimes are poor and poor countries do not treat women well.

Michael Totten provides some anecdotal evidence about the treatment of women in Egypt that suggests my theory may be true,

Buy American

The characters: an aggressively obnoxious woman and the Korean cashier.

The scene: a Korean deli in midtown. The aggressively obnoxious woman is clutching a bag of grapes.

Aggressively obnoxious woman: Hello? Are these made in America?

Cashier: What? What's made in America?

Aggressively obnoxious woman: The grapes! Are the grapes American-made?

Grapes, you see, are fabricated in plants, just like cars and computers. And low-cost laborers in Venezuela have decimated the grape-fabricating industry here in the States.

That the woman was dressed in several thousand dollars worth of designer clothes, and carried a Balenciaga* handbag shouldn't matter: she's concerned about the American workers picking the grapes.

Right. And I have a bridge to sell you.

*Balenciaga handbag identified by the astute woman with whom I went to the deli, and whose jaw dropped upon seeing said handbag. They retail for $10,000 or so.

Markets In Everything

Professional closet organizers have their own professional organization, with licensing standards:

Competition is so intense that rival trade groups are forming. The new International Association of Professional Organizers touts itself as the only one requiring members to pass a test; there are 150 multiple choice questions and four essays, including one about inspecting clothing for moths. The older National Association of Professional Organizers outside Chicago says it's developing its own certification program, as does the new Association of Closet and Storage Professionals.

I hear closet organization fraud is a major problem.

Morons

So, apparently, all those hybrid-driving celebrities are none too bright when it comes to financial matters:

Since we're still on the subject of fuel mileage -- or at least still responding to email after a column two weeks ago on the Toyota Prius -- let's spill a few more gallons of petroleum-based ink.

The Prius is a nifty gadget and comes with lots of extras. But Toyota markets the vehicle on its fuel efficiency, and fans tout its fuel efficiency. And our point was to debunk the idea that saving gasoline is a virtue independent of economics, such that it makes sense, say, to spend a buck to reduce gas use by 50 cents.

Edmunds.com, the auto shopper site, guided us to Honda's Civic and Toyota's Corolla as conventional alternatives to the hybrid Prius. This was the source of our claim that the Prius retails for $9,500 more than comparable vehicles. In its own research, Edmunds concluded a Prius owner would have to drive 66,500 miles per year or gasoline would have to jump to $10 for the purchase to pay off.

But don't take our word for it. Kazuo Okamoto, Toyota's research chief, recently told the Financial Times that, in terms of fuel efficiency, "the purchase of a hybrid car is not justified."

Now, as an economic matter, overpaying for the privilege of saving gasoline is simply a subsidy to other gasoline consumers. Also as a regulatory matter: Thanks to the special genius of our corporate fuel economy rules, Prius buyers directly underwrite Toyota's ability to sell more SUVs and pickups in the U.S. market without paying the fines that Mercedes, BMW and Volvo long ago accepted as a cost of doing business in the U.S.

More seriously, many governments, such as New York City's have taken to use taxpayer money to buy these more expensive cars, under the rubric of environmental friendliness. Saving the environment has to be subordinate to using taxpayers' dollars wisely. The environment is a thing to be exploited; taxpayers are not.

Wal Mart "sells at low cost,...the quotidian products that huge numbers of Americans evidently want to buy"

An excellent editorial from the Wall St. Journal about Wal-Mart:

By any normal measure, Wal-Mart's business ought to be noncontroversial. It sells at low cost, albeit in mind-boggling quantities, the quotidian products that huge numbers of Americans evidently want to buy -- from household goods to clothes to food.

Wal-Mart employs about 1.3 million people, about 1% of the American work force. Its sales, at around $300 billion a year, are equal to 2.5% of U.S. gross domestic product. It is not, however, an especially profitable company. Its net profit margins, at about 3.5% of revenue, are broadly in line with the rest of the retail industry. In fiscal 2004, Microsoft made more money than Wal-Mart on just one-eighth of the sales.

The company's success and size, then, do not rest on monopoly profits or price-gouging behavior. It simply sells things people will buy at small markups and, as in the old saw, makes it up on volume. We draw your attention to that total revenue number because, in a sense, it tells you most of what you need to know about Wal-Mart. You may believe, as do service-worker unions and a clutch of coastal elites -- many of whom, we'd wager, have never set foot in a Wal-Mart -- that Wal-Mart "exploits" workers who can't say no to low wages and poor benefits. You might also accept the canard that Wal-Mart drives good local busin