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Friday, November 30, 2012


The Chevrolet Volt

In 2009 President Obama ordered the bailout of the American auto industry GM because they were going bankrupt. With the promise of the bailout, GM was required to produce the new energy efficient Chevrolet Volt. This vehicle reportedly gets 60 miles a gallon and can save the environment from greedy American consumers. The government will subsidize each one of these cars sold to encourage cleaner energy. Is the Volt going to solve our problems as the largest contributor to "man made global warming"?

If we take a look at the numbers behind the scene for this vehicle, it is economically a disaster. According to Investor's Business Daily "Volt is a problem for GM: With Chevrolet falling well off the pace to sell its target of 40,000 cars this year — only about 13,500 have been sold — GM has shut down Volt production for the second time this year." The Volt is not as profitable or affordable/consumable as the Toyota Prius. The volt "costs about $89,000 to build" and GM is in the range of " losing nearly $50,000 on each Volt it makes." How much can American tax payers put up with before the bottom falls out of this government endeavor. Lets not forget that Volt owners are required to plug their car into the wall every so often to re-charge it. However the better part of all electricity consumed in America comes from coal, which is far from clean energy.

Because GM accepted a large amount of funds from the government, i.e. they touched the force, they are required to do what they are told. If the Volt does not pick up sales, more people may be out of work, and GM may have to drop the fuel efficient program required by the government in order to survive. Just because GM made a capital mistake and needed the government to bail them out,       "[t]axpayers shouldn't be required to finance another moment of the left's green fantasy."


Thursday, November 29, 2012



Power and Prosperity started with a question about the Soviet Union: whether or not a dictatorship, to enforce free market policies, would be necessary to restore that country's well being.  Olsen looks at that question all throughout the book, bringing forward the system that was used to create a powerful Soviet economy, and how it started to fall when groups of people started acting in their own welfare-maximizing interests.

China, for a time, emulated the Soviet system of state owned enterprises (SOEs), before famously moving in the direction of a more capitalist system.  That being said, they still retain some SOEs.  I know this because of a Reuters article, "Chinese state-owned enterprises defend further growth," by Charlie Zhu and Lucy Hornby.  The article presents arguments concerning the limitation of the remaining SOEs, how, unless they expand, they could hamper China's continued growth.  Furthermore, the article is heavily weighted with the conclusions of experts that it needs to expand for this reason, while still noting that the employment growth comes from the private enterprises.

The question is interesting.  China's stability and growth in recent decades clearly indicates that they were well within their production possibility frontier, to borrow a neoclassical phrase.  Yet, China has also had a managed currency for a long time, and I have heard analysis to the effect that it is the steady backbone of SOEs that have kept China more stable than the rest of the world in recent years.  I honestly don't know what this data is telling me: is control to this degree good or bad?  Moreover, how much does it depend on the nation's cultural expectations?


Shah Jahan's Stationary Banditry


In this article, John Kay attempts to draw conclusions about the Mogul empire based on observations from his recent visit to India. According to Kay, Shah Jahan "may have appropriated as much as 40 per cent of what we now call gross domestic product to support a lifestyle of exceptional ostentation and self-indulgence." He makes this statement after explaining how he was in awe after seeing the extravagant Taj Mahal and the other vast expenditures of Shah Jahan and his son, "who was exasperated by his father’s penchant for monumental building, anxious to maximise his own share of the loot and concerned by the scale of the levies on the population."

The actions of Jahan and his son, according to Kay, "epitomize rent-seeking." However, what Kay calls rent-seeking, I (and Olson) would call banditry, and a failure at that (if one accepts that a successful bandit leaves conditions favorable to his heir). As Olson would suggest, a stationary bandit collecting even close to 40% of GDP would surely lead himself to his own demise, as it did with Jahan and his son. I don't know much of the details of the Mogul empire, but I would guess that Jahan the first was successfully overthrown because the citizens saw reduced incentives to produce, which lowers the standard of living. History shows that if people are not satisfied with the standard of living their government fosters, the regime will eventually change. Although Jahan was overthrown by his son, I would guess that the people of India at the time were more tolerant of this change than they would be had Jahan I not taken so much. 

The second half of Kay's post is completely consistent with Olson's ideas in Rise and Decline regarding widespread rent seeking.  He even acknowledges the problem in the US, "The US demonstrates an unhealthy affinity between politicians and leaders of finance and business, facilitated by lobbyists and lubricated with campaign finance."

However, he got it wrong in one of his final statements, "The success of market economies is not achieved by policies that encourage people to be greedy and imposing as few restrictions as possible on what the greediest of them do. That was the world of Shah Jahan and it produced very little in the way of economic advance." I agree that public policies should prevent people from being greedy when it comes to their demand for rent or force (what that statement seems to be talking about), but the conditions in India at the time did not allow the Shah to rent-seek. He was government, and therefore the source of rent. A successful bandit leaves his society with enough resources to be productive, so he can have a continuous growing source of capital himself. As Kay stated, the Mogul empire ended after only two generations, which to me suggests that they were taking far too much to effectively maintain their force. 

Tuesday, November 27, 2012


Mail going the way of the Twinkies?

  Twinkies may not have been such a burden on the U.S. economy but what about the U.S. Postal Service?  The Postmaster General quoted that there are many similarities between Hostess and the U.S. Postal Service.  The Postal Service is 28 times the workforce of Hostess and the Postal Service only squeezes by on labor costs and a service on the brink of extinction.  
  Unlike a private enterprise, the Postal Service can’t close most locations even if they’re unprofitable. It can’t raise prices on its primary product by more than the inflation rate or change its pension or health benefits. And as of Sept. 28, when it exhausted its $15 billion borrowing limit with the U.S. Treasury, it can’t borrow any more money.  The U.S. Postal Service is running with no more than four days of operating cash on hand.  Labor costs have grown to 80 percent of expenses, even after 280,000 jobs were cut since 2000, as mail volume has dropped 26 percent from its peak six years ago.  
  In 2011, with mail volume and revenue well past its peak, the service signed a contract with its largest union that prohibits most employees from being fired if the service wants to downsize. The service is now offering its second round of early-retirement incentives, giving as many as 114,000 American Postal Workers Union members $15,000 apiece to retire. 
  Applying what we know of group theory, the U.S. Postal Service is in deep trouble because the demand for the goods and services they provide are almost no existent anymore.  They are a large government agency that can barely run anymore because of the loss of demand.  There are too many people to provide for and the unions won't allow the post workers to be fired.  Because of this the government has to bail out one of its own agencies to keep them going but with the fall out of Hostess, the Postmaster General sees too many similarities between them.  The postal service is barely running on a weeks worth of pay because of the loss of demand and they are at there limit of borrowing from the treasury.  So where do we draw the line for another business as important as the P.S. when it puts a strain on economy?   

Monday, November 26, 2012


Respect States' And Citizens' Rights Act

I want to talk about Amendment 64. Whether you are for or against the amendment is now no longer of concern for it is a part of Colorado’s Legislature. The pros and cons of the amendment are widely known and argued. I wish not to discuss these views but rather talk about an act that Colorado Representative Diana DeGette has introduced that, if passed, would exempt states from federal laws of which ban the sale, possession and use of small amounts of marijuana by adults. The bill is known as the “Respect States’ and Citizens’ Rights Act” and it so far has support and sponsorship from both Liberal and Conservative representatives within the state of Colorado. Basically the act would nullify certain sections of the Controlled Substances Act for states that have passed their own laws pertaining to the governance of marijuana – which we know is only two states; Colorado and Washington.

I am not writing this to bash Amendment 64 or to praise it. My position on the issue is not for this discussion. I simply feel it to be an important issue to talk about – specifically in regards to my feelings that the Federal Government should respect a state’s laws and allow for implementation of said laws. Like it or not, the people have spoken. The majority of voters want marijuana to be treated like that of alcohol and I for one feel the Feds should not interfere. In any case, it will be fascinating to see what the Feds do about this unprecedented situation. According to a Huffington Post article, “In Colorado, the governor, the attorney general and both U.S. senators say they need guidance from the federal government before deciding how to proceed on implementation of the law.” It should not have to be this way. The Feds should tell Governor Hickenlooper that they will stay out the way and allow the law to be fully implemented. By interfering, the Federal Government will be denying great sums of money that would otherwise be injected into Colorado’s economy. In fact, the benefits to the economy are perhaps the chief reason the amendment passed in the first place. Look at it this way: 55 percent of voters voted in favor of the amendment – does that mean that all 55 percent partake in the use of marijuana? Of course not! There had to be other motivations at stake and I believe those motivations were economically driven. Coloradans want this law to be enacted and the Feds should stay out of it. There is simply too much money to be made and too many jobs to be created for the Federal Government to come in and shut it all down. There are certain Colorado Representatives that feel the same way I do. For instance Mike Coffman, the US Representative for Colorado’s 6th congressional district, had this to say about the proposed act. “I voted against Amendment 64 and I strongly oppose the legalization of marijuana, but I also have an obligation to respect the will of the voters, given the passage of this initiative, and so I feel obligated to support this legislation.” At this point it has little to do with whether one supports or opposes the law – it should rather be of concern in fighting for our state’s rights to implement their own laws without the interference of the Federal Government.   

Yet these sentiments are probably too idealistic. In reality, the Feds will most likely do their damndest to interfere with what should otherwise be a completely isolated agenda for the states of Colorado and Washington. Only time will tell. With that said, it will certainly be fun to sit back and watch how it all plays out.         

Thursday, November 01, 2012


Government Intervention?

WARNING: The following is uncomfortable for me to talk about and may offend others…
After reading another article in The Economist, I am once again, reminded of Prof. Eubanks saying that “a good government is one with which its people prosper”. In this case, however, the author of the article is not talking about protecting private property rights. I am typically one to criticize a government for getting in the way of the private sector by taking on the role of job creator, but as the article reminds its readers, timing is everything and sometimes government spending can actually do more good to help the economy to recover than just sitting back and letting things work themselves out. The severity of the Great Depression as a result of laissez-faire economic tactics is really the only evidence needed to support the idea that sometimes it may actually be better for a government to act. Although I am one to argue that it is usually better in the long run to let things run their course, I have to consider that without government intervention, there may come a time that the economic state of the U.S. becomes so beaten down that there is no way to recover and “The Land of Opportunity” will crumble.
I realize that advocating for government intervention is uncomfortable for many of us. Perhaps, it will help to stress that there is a “tipping point”, where the amount of government spending used to stimulate the economy causes the net result to be extremely negative. Particularly in recent times, it seems the amount that has been thrown at the current situation (combined with policies that have largely disincentivized private sector job creation) may be considered something that has kept us “afloat”, but that has severely worsened the near and long-term economic forecasts. So alongside timing, balance is also key, meaning that when it is clear one government stimulus tactic is not working, doing more of the same thing is not going to make things any better. We are seeing the consequences of ignoring this very simple rule right now. The increased spending and debt accumulation that the U.S. government has acquired is not sustainable; it must be reduced. This means that many of the jobs kept or created with government “aid” will be lost in the near future, adding to the already millions of unemployed individuals.
So, even though it is uncomfortable for me to admit, in the face of severe economic decline it seems better for the government to act than not to act. It is, however, even more important that the correct tactics are used, in able to avoid situations like the one we are currently dealing with.

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