Richard Nixon ended the gold standard in 1971. At the time gold was pegged at $35 per ounce. Countries who sold goods to the United States would continually run trade surpluses. They would end up holding large supplies of dollars as a result. Eventually it became obvious that the US could not redeem all the dollars with gold, so country after country started converting their dollars into gold, thus drawing down the US gold stock. It was then that Nixon shut the gold window. The US would no longer exchange its dollars for gold. The world entered a period of generally floating exchange rates.
There are some that would love to return to some kind of gold standard. Very few professional economists would go along with this. The reason is because economists subscribe to the Quantity Theory of Money. This gets down in the weeds a bit, but let me explain this concept with the following formula:
MV = PY
where M = money supply
V = velocity of money
P = price level
Y = real GDP
Real GDP is growing globally. As a historical norm, V is relatively constant. If M is gold, we have a variable which is hardly growing at all. The fact that it has a high value is because of its scarcity. Now looking at the formula, if Y is globally increasing, P (prices) must be forced down. This would result in deflation which is an economy killer.
At the time of this writing, the spot gold price is $1314 oz.
Monday, October 21, 2013
Wednesday, September 18, 2013
The New Global Economy -- Facts and Fallacies
In 2006, Israel fought a war with Hezbollah. Israeli Jets bombed encampments in Lebanon, while Hezbollah rained rockets on northern Israel. Yet, in spite of an all out war with much destruction, the Israel economy grew 5% and its currency soared. Why so little harm to the country's economy amidst so much destructive violence? As Greg Ip pointed out (The Little Book Of Economics) it was because of globalization. Israel's economy is led by advanced tech companies whose markets are the rest of the world. But in 2009, Israel went into recession with the rest of the globe. Israel didn't have a banking crisis, but because its major trading partners did, it was hit with the collateral damage.
Many smaller countries like Israel rely heavily on trade....up to 80% of their GDP can be dedicated to it. In the US, only 14% is, but that is still up significantly from 1960 when it was just 5% of GDP. The reason why rich countries buy toys and clothing from poor countries is because the latter have a comparative advantage in producing simple labor intensive products. That frees the US workers to earn more by building aircraft, conduct heart bypass operations, produce microprocessor chips, or make movies. Of course a number of countries produce the same products, but when the Japanese import a superior car, it compels the domestic producer to improve its product or die. The consumer is the winner with superior products at a lower price.
Of course politics often conflicts with economic reality. When Harvard economist Greg Mankiw said that outsourcing was beneficial when looking at the big picture, it created a political firestorm. But politicians rarely look at the big picture. How was Mankiw right? If a company outsources some of the basic programming to India, US consumers of that software are better off. And this cheaper end product can now find a wider market causing other kinds of jobs to expand in that company (e.g. sales, support, etc).
Apple employs about 43,000 people in the US, but more than 10 times that many through contractors in other countries. But in spite of this, only 2% of all wages earned in the sale of an iPod are earned overseas while 70% are earned in the US. And because of the lower price, sales boom creating more demand and more US jobs. So the winners are Apple shareholders, employees, and, of course, consumers.
Of course there will always be losers. Some domestic employment in high wage labor intensive manufacturing will take a hit. It is thus imperative that our education system stay on top of the ever changing labor market to insure that people have the skills that are in demand.
Many smaller countries like Israel rely heavily on trade....up to 80% of their GDP can be dedicated to it. In the US, only 14% is, but that is still up significantly from 1960 when it was just 5% of GDP. The reason why rich countries buy toys and clothing from poor countries is because the latter have a comparative advantage in producing simple labor intensive products. That frees the US workers to earn more by building aircraft, conduct heart bypass operations, produce microprocessor chips, or make movies. Of course a number of countries produce the same products, but when the Japanese import a superior car, it compels the domestic producer to improve its product or die. The consumer is the winner with superior products at a lower price.
Of course politics often conflicts with economic reality. When Harvard economist Greg Mankiw said that outsourcing was beneficial when looking at the big picture, it created a political firestorm. But politicians rarely look at the big picture. How was Mankiw right? If a company outsources some of the basic programming to India, US consumers of that software are better off. And this cheaper end product can now find a wider market causing other kinds of jobs to expand in that company (e.g. sales, support, etc).
Apple employs about 43,000 people in the US, but more than 10 times that many through contractors in other countries. But in spite of this, only 2% of all wages earned in the sale of an iPod are earned overseas while 70% are earned in the US. And because of the lower price, sales boom creating more demand and more US jobs. So the winners are Apple shareholders, employees, and, of course, consumers.
Of course there will always be losers. Some domestic employment in high wage labor intensive manufacturing will take a hit. It is thus imperative that our education system stay on top of the ever changing labor market to insure that people have the skills that are in demand.
Saturday, August 10, 2013
FALLACIES
According to economist Thomas Sowell, there are four basic economic fallacies. The Zero Sum Fallacy, the Fallacy of Composition, the Chess-Piece Fallacy, and the Open-Ended Fallacy.
The Zero Sum Fallacy
This states that what is gained by X, is lost by Y. This is often used by politicians to pit one group against the other, the latest being the 1% (the very rich) against the 99% (the rest of us). It is indeed a fallacy since the 1% are the investor class, and we need investment and risk taking to make the economy grow. When it does, we all benefit. As John F. Kennedy pointed out, "A rising tide floats all boats". (emphasis mine)
The Fallacy Of Composition
This states that what is true of a part is true of the whole. We often see politicians passing legislation which benefits a special interest, and selling it to the public with arguments like, "it will create jobs". At times like this, we need to keep in mind Star Trek's Spock who stated, "The needs of the many outweigh the needs of the few". Special interest legislation is just the opposite. Case in point would be the trade barriers protecting the domestic sugar crop. As a result, the consumer pays substantially more for this product, and the products that use sugar.
The Chess-Piece Fallacy
This fallacy states that large scale grand plans can benefit individuals. China's Mao had a massive program called The Great Leap Forward in which central planners tried to manage a billion people. It was a disaster resulting in the mass starvation of millions of people. Unlike chess pieces, human beings have their own individual preferences, values, and plans, all of which conflict with the goals of any specific social plan. The problem is that usually the social planner's response to a failing program is "if at first you don't succeed, try, try again". This is a formula for disaster.
The Open-Ended Fallacy
Who could be against health, safety, or open space? But each of these things is open-ended, while resources are limited. No matter how much is done to promote health, more could be done. No matter how safe things are, they could always be safer. And no matter how much open space there is, there could still be more. Obvious as this may seem, there are advocates, movements, laws, and policies promoting an open-ended commitment to more of each of these things, without any indication of limits. Open-ended demands are a mandate for ever-expanding government bureaucracies with ever-expanding budgets and powers.
The Zero Sum Fallacy
This states that what is gained by X, is lost by Y. This is often used by politicians to pit one group against the other, the latest being the 1% (the very rich) against the 99% (the rest of us). It is indeed a fallacy since the 1% are the investor class, and we need investment and risk taking to make the economy grow. When it does, we all benefit. As John F. Kennedy pointed out, "A rising tide floats all boats". (emphasis mine)
The Fallacy Of Composition
This states that what is true of a part is true of the whole. We often see politicians passing legislation which benefits a special interest, and selling it to the public with arguments like, "it will create jobs". At times like this, we need to keep in mind Star Trek's Spock who stated, "The needs of the many outweigh the needs of the few". Special interest legislation is just the opposite. Case in point would be the trade barriers protecting the domestic sugar crop. As a result, the consumer pays substantially more for this product, and the products that use sugar.
The Chess-Piece Fallacy
This fallacy states that large scale grand plans can benefit individuals. China's Mao had a massive program called The Great Leap Forward in which central planners tried to manage a billion people. It was a disaster resulting in the mass starvation of millions of people. Unlike chess pieces, human beings have their own individual preferences, values, and plans, all of which conflict with the goals of any specific social plan. The problem is that usually the social planner's response to a failing program is "if at first you don't succeed, try, try again". This is a formula for disaster.
The Open-Ended Fallacy
Who could be against health, safety, or open space? But each of these things is open-ended, while resources are limited. No matter how much is done to promote health, more could be done. No matter how safe things are, they could always be safer. And no matter how much open space there is, there could still be more. Obvious as this may seem, there are advocates, movements, laws, and policies promoting an open-ended commitment to more of each of these things, without any indication of limits. Open-ended demands are a mandate for ever-expanding government bureaucracies with ever-expanding budgets and powers.
Wednesday, July 31, 2013
The Greatest Anti-poverty Program In The History Of Man
"Man born of woman is short-lived, and glutted with agitation." -- Job 14: 1
During the heated federal budget battles of 2011, one liberal Christian group took out a full page ad in a national newspaper with the provocative question, "What Would Jesus Cut?" The ad asked readers to sign a petition asking Congress to oppose any policies that involve cutting domestic programs that help the poor.
The first anti-poverty program in the US extends as far back as the 1930's with Roosevelt's New Deal. This has been followed by many other "programs"....The Fair Deal, The Great Society, The New Frontier, etc, etc. Has the poverty rate dropped? Sadly it hasn't. There always seems to be a hard core that will never disappear...hovering above 10% of our population.
But for most of us, the free enterprise system has lifted more people out of poverty than all the government anti-poverty programs combined. In 1800, the average person had a standard of living no better than people living in the Stone Age. Even in advanced cities like London, only one quarter of the population could expect to live beyond five years of age. For the lucky few who survived childhood in the eighteenth century, the life that awaited them was difficult and short. So for all of history until about 200 years ago, the world was desperately poor.
Then, with the industrial revolution something changed. We had economic growth fueled by the free market system, incentivized by the profit motive. Jump now to the 21st century. The average American in 2007 enjoyed 35% more real income than 30 years ago, and every income bracket has benefited. In 1850 the average life expectancy was 38 years. Today it is 78. The first public school opened in Boston in 1817. Today we have 13 years of mandatory taxpayer funded education in all 50 states. All of this is funded by the greatest antipoverty program ever known.....the free enterprise system. As professor of economics (NYU) William Easterly stated, "profit-motivated capitalism is still the best case for the poor."
Of course, we will always need the safety net for the hard core poor mentioned above. But in looking at poverty here and around the world, social welfare programs are the band-aid. Free enterprise is the cure.
During the heated federal budget battles of 2011, one liberal Christian group took out a full page ad in a national newspaper with the provocative question, "What Would Jesus Cut?" The ad asked readers to sign a petition asking Congress to oppose any policies that involve cutting domestic programs that help the poor.
The first anti-poverty program in the US extends as far back as the 1930's with Roosevelt's New Deal. This has been followed by many other "programs"....The Fair Deal, The Great Society, The New Frontier, etc, etc. Has the poverty rate dropped? Sadly it hasn't. There always seems to be a hard core that will never disappear...hovering above 10% of our population.
But for most of us, the free enterprise system has lifted more people out of poverty than all the government anti-poverty programs combined. In 1800, the average person had a standard of living no better than people living in the Stone Age. Even in advanced cities like London, only one quarter of the population could expect to live beyond five years of age. For the lucky few who survived childhood in the eighteenth century, the life that awaited them was difficult and short. So for all of history until about 200 years ago, the world was desperately poor.
Then, with the industrial revolution something changed. We had economic growth fueled by the free market system, incentivized by the profit motive. Jump now to the 21st century. The average American in 2007 enjoyed 35% more real income than 30 years ago, and every income bracket has benefited. In 1850 the average life expectancy was 38 years. Today it is 78. The first public school opened in Boston in 1817. Today we have 13 years of mandatory taxpayer funded education in all 50 states. All of this is funded by the greatest antipoverty program ever known.....the free enterprise system. As professor of economics (NYU) William Easterly stated, "profit-motivated capitalism is still the best case for the poor."
Of course, we will always need the safety net for the hard core poor mentioned above. But in looking at poverty here and around the world, social welfare programs are the band-aid. Free enterprise is the cure.
Wednesday, July 3, 2013
The "Evils" Of Outsourcing
Outsourcing is the contracting out of an internal business process to a 3rd party. In short, it often manifests itself in a company hiring cheap overseas labor which replaces domestic jobs. On the surface, this seems disturbing. But there is more than initially meets the eye. First, we are talking about a global economy, and if a domestic company is producing a labor-intensive product, they had best produce that product in a low cost labor market, or they could be out of business. Their international competition most certainly will have low unit labor costs, and their final prices will reflect that. A politician may wring his/her hands about it, but short of throwing up tariffs, there is nothing that can be done. And you won't find a legit economist on the planet that would agree to the old days of high tariffs.
By the same token, those that complain the loudest about outsourcing never even mention "insourcing". That is, international companies like BMW and Michelin locating plants in South Carolina, and Honda, Nissan, Mercedes, and Hyundai having manufacturing in Alabama. It is Europe, with its liberal labor practices, high tax rates, and restrictive tariffs that has been outsourcing millions of jobs.
The upshot is that globalization has resulted in a loss of some jobs.....unionized factory jobs in autos, steel, and textiles. But manufacturing insourcing has more than offset this in right-to-work states. By the same token, there have been significant increases in the services industries, technology, and knowledge based industries. Nonetheless, some would balk at the service industry...they would argue that it doesn't pay well. But many service based jobs (trade, finance, insurance, banking, retail, travel, delivery, education, healthcare, entertainment, government, etc) have very competitive wages. And here is the salient point: A booming service economy is a symptom of economic sophistication.
By the same token, those that complain the loudest about outsourcing never even mention "insourcing". That is, international companies like BMW and Michelin locating plants in South Carolina, and Honda, Nissan, Mercedes, and Hyundai having manufacturing in Alabama. It is Europe, with its liberal labor practices, high tax rates, and restrictive tariffs that has been outsourcing millions of jobs.
The upshot is that globalization has resulted in a loss of some jobs.....unionized factory jobs in autos, steel, and textiles. But manufacturing insourcing has more than offset this in right-to-work states. By the same token, there have been significant increases in the services industries, technology, and knowledge based industries. Nonetheless, some would balk at the service industry...they would argue that it doesn't pay well. But many service based jobs (trade, finance, insurance, banking, retail, travel, delivery, education, healthcare, entertainment, government, etc) have very competitive wages. And here is the salient point: A booming service economy is a symptom of economic sophistication.
Sunday, June 16, 2013
The Law Of Unintended Consequences
Often, well intentioned policymakers pass laws they believe will make the harsh world a bit more warm and fuzzy. But often the blowback creates more problems than it solves. This is the Law Of Unintended Consequences. Consider the Americans with Disabilities Act (ADA) which was intended to safeguard disabled workers from discrimination. A noble cause, but the data shows that after the ADA was passed, the employment of the disabled dropped. Why? Employers where so worried they couldn't discipline or fire bad workers who had a disability that they avoided hiring such workers in the first place. Then there is the Endangered Species Act. When landowners feared that their property may be becoming the habitat of a species on the endangered list, they would begin by cutting back on any vegetation that would serve as nesting sites for these species. The net result was that the species in question would have an even more difficult climb to survival.
But the flagship example is the marriage between The Community Reinvestment Act (CRA) and government sponsored enterprises (GSEs). It basically led to the housing bubble which broke late 2007 and the Great Recession that followed. The intent of the CRA was noble. It empowered federal regulators to pressure banks to make loans to low-income people. We then had GSEs like Fanny Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp) buying mortgages from banks. Without these GSEs buying the mortgages, the banks would be limited on how many loans they could make. The banks have a reserve requirement of 10%, and when they hit that limit, they stop loaning money. But if a GSE buys the mortgage, then the bank has more money to lend. By the end of 2007, government sponsored mortgages accounted for 81% of all mortgage loans in the US (Grant's Interest Rate Observer; May 30, 2008; 3) The seeds of destruction where now in place. We had more and more money available to be given to sub-prime buyers who if it were not for the CRA would never have been considered for a loan because of the risk of default. Was there also "predatory lending"? You bet. If a 3rd party (GSEs) is going to buy your mortgage, you have off-loaded the risk. As the demand for housing continued to climb, so did the price. It was just a matter of time before the bubble popped.
There are many more examples. Just about every attempt to social engineer has a blowback. Can we learn from the past to be more cautious and look a bit more before we leap? We can only hope.
But the flagship example is the marriage between The Community Reinvestment Act (CRA) and government sponsored enterprises (GSEs). It basically led to the housing bubble which broke late 2007 and the Great Recession that followed. The intent of the CRA was noble. It empowered federal regulators to pressure banks to make loans to low-income people. We then had GSEs like Fanny Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp) buying mortgages from banks. Without these GSEs buying the mortgages, the banks would be limited on how many loans they could make. The banks have a reserve requirement of 10%, and when they hit that limit, they stop loaning money. But if a GSE buys the mortgage, then the bank has more money to lend. By the end of 2007, government sponsored mortgages accounted for 81% of all mortgage loans in the US (Grant's Interest Rate Observer; May 30, 2008; 3) The seeds of destruction where now in place. We had more and more money available to be given to sub-prime buyers who if it were not for the CRA would never have been considered for a loan because of the risk of default. Was there also "predatory lending"? You bet. If a 3rd party (GSEs) is going to buy your mortgage, you have off-loaded the risk. As the demand for housing continued to climb, so did the price. It was just a matter of time before the bubble popped.
There are many more examples. Just about every attempt to social engineer has a blowback. Can we learn from the past to be more cautious and look a bit more before we leap? We can only hope.
Saturday, June 8, 2013
Why Is The Crime Rate Dropping?
Who can forget the profound statement made by the former mayor of Washington, DC, Marion Barry, when he said, "Outside of the killings, Washington has one of the lowest crime rates in the country." Criminologists do tend to divide lawbreaking into crimes against property and crimes against people. It is interesting to note that since the early 1990s, both have been steadily dropping. Finally, a happy statistic. But it is a head scratcher. What are the reasons for the drop?
Is it stronger gun control laws? Is it larger police departments? Is it improved policing with techniques like DNA testing? Is it a better economy? Is it a dampening of the crack-cocaine market? Perhaps an aging population? To some extent, all of these MAY have some influence. But economist Steven Levitt has the most intriguing theory -- Roe v. Wade....the legalization of abortion. It began with 20 year old Norma McCorvey. All she wanted was to end her pregnancy. But in Texas, as in most states at the time, abortion was illegal. Various groups with a cause made McCorvey the lead defendant to legalize abortion. The defendant was Henry Wade, the Dallas County district attorney. McCorvey's name had been disguised as Jane Roe, and on January 22, 1973, the court ruled in favor of Ms. Roe, allowing legalized abortion throughout the country. By that time it was far too late for McCorvey/Roe to have her abortion. She ultimately gave birth and put her child up for adoption. Ironically, years later she would renounce her allegiance to legalized abortion and became a pro-life activist.
I'm sure you see where this is leading. Levitt's thesis is that a child born in an adverse family environment is far more likely than other children to become a criminal. Exactly 20 years after Roe v. Wade, when the pool of potential criminals had dramatically shrunk, the soaring crime rate took a sudden dip downward, and has continued to this day. Can we definitively say that Levitt was right? Perhaps, but the only way we could really confirm his thesis is if we banned abortion, then 20 years hence monitored to see if the crime rate started to spike again. But waiting 2 decades for an answer requires a lot of patience. Ergo, it is best to keep an open mind to all possibilities. On a personal note, I am against the aborting of a human life. But that is no reason to ignore all possibilities in explaining the world around us.
Is it stronger gun control laws? Is it larger police departments? Is it improved policing with techniques like DNA testing? Is it a better economy? Is it a dampening of the crack-cocaine market? Perhaps an aging population? To some extent, all of these MAY have some influence. But economist Steven Levitt has the most intriguing theory -- Roe v. Wade....the legalization of abortion. It began with 20 year old Norma McCorvey. All she wanted was to end her pregnancy. But in Texas, as in most states at the time, abortion was illegal. Various groups with a cause made McCorvey the lead defendant to legalize abortion. The defendant was Henry Wade, the Dallas County district attorney. McCorvey's name had been disguised as Jane Roe, and on January 22, 1973, the court ruled in favor of Ms. Roe, allowing legalized abortion throughout the country. By that time it was far too late for McCorvey/Roe to have her abortion. She ultimately gave birth and put her child up for adoption. Ironically, years later she would renounce her allegiance to legalized abortion and became a pro-life activist.
I'm sure you see where this is leading. Levitt's thesis is that a child born in an adverse family environment is far more likely than other children to become a criminal. Exactly 20 years after Roe v. Wade, when the pool of potential criminals had dramatically shrunk, the soaring crime rate took a sudden dip downward, and has continued to this day. Can we definitively say that Levitt was right? Perhaps, but the only way we could really confirm his thesis is if we banned abortion, then 20 years hence monitored to see if the crime rate started to spike again. But waiting 2 decades for an answer requires a lot of patience. Ergo, it is best to keep an open mind to all possibilities. On a personal note, I am against the aborting of a human life. But that is no reason to ignore all possibilities in explaining the world around us.
Subscribe to:
Posts (Atom)