Aftermath of Japan’s Earthquake: Risk of A Nuclear Reactor Meltdown

The aftermath of Japan’s horrible 1-2 earthquake-tsunami punch has brought to light another potential catastrophe: growing risk of an outbreak of radioactive contamination from a meltdown in one of the affected nuclear reactors.

From Marketwatch.com:

Japanese nuclear authorities warned of a meltdown Saturday of the core of a nuclear reactor at a plant in Fukushima operated by Tokyo Electric Power Corp., also known as Tepco, according to Kyodo News. Authorities said that there was a high possibility that nuclear fuel rods at the reactor of Tepco's Daiichi plant may be melting or have melted, Reuters reported, citing Jiji news. The Daiichi No. 1 nuclear reactor is about 240 kilometers (150 miles) north of Tokyo. Friday's 8.9-magnitude earthquake damaged the plant's cooling mechanism, leading to overheating that reportedly damaged the fuel rods in the reactor's core

Should this become a sad reality, expect a global political backlash on Nuclear energy. The debate have already began as this link shows.

A breakdown of Japan Energy Sources from Wikipedia.org and MutantFrog.com

Meanwhile, demand for traditional oil, natural gas and coal is expected to take up the slack from Japan’s debilitated nuclear energy (Bloomberg).

Science Models Fail To Predict Japan’s Earthquake

If you think man has acquired enough expertise to know the environment, think again.

From the Washington Post, (bold highlights mine)

They have long been ready for the Big One in Japan. But when it arrived Friday, it was still surprising, still utterly devastating, and it left scientists around the world humbled at how unpredictable the heaving and lurching earth can be.

Japanese geologists have long forecast a huge earthquake along a major plate boundary southwest of Tokyo, and have poured enormous resources into monitoring the faint traces of strain building in that portion of the earth's crust. They have predicted in great detail the amount of property damage and the number of landslides such a tremor would generate. They have even given the conjectured event a name: The Tokai Earthquake.

Lesson: Despite the massive advances in technology, there is a limit to the knowledge man can acquire from the innate complexity of nature.

As aptly pointed out by Friedrich von Hayek in his Nobel Prize speech ‘The Pretence of Knowledge’… (bold emphasis mine)

The chief point we must remember is that the great and rapid advance of the physical sciences took place in fields where it proved that explanation and prediction could be based on laws which accounted for the observed phenomena as functions of comparatively few variables - either particular facts or relative frequencies of events. This may even be the ultimate reason why we single out these realms as "physical" in contrast to those more highly organized structures which I have here called essentially complex phenomena. There is no reason why the position must be the same in the latter as in the former fields. The difficulties which we encounter in the latter are not, as one might at first suspect, difficulties about formulating theories for the explanation of the observed events - although they cause also special difficulties about testing proposed explanations and therefore about eliminating bad theories. They are due to the chief problem which arises when we apply our theories to any particular situation in the real world. A theory of essentially complex phenomena must refer to a large number of particular facts; and to derive a prediction from it, or to test it, we have to ascertain all these particular facts. Once we succeeded in this there should be no particular difficulty about deriving testable predictions - with the help of modern computers it should be easy enough to insert these data into the appropriate blanks of the theoretical formulae and to derive a prediction. The real difficulty, to the solution of which science has little to contribute, and which is sometimes indeed insoluble, consists in the ascertainment of the particular facts.

And this applies to sociology too.

Bottom line: We should be leery of anyone who peddle to us the reliability of predictions based on science or math models, especially those who advance the policy of interventionism.

And this applies to whether we deal with the financial markets and the economy or with environmental issues such as global warming.

Japan’s Earthquake-Tsunami In Pictures

Below is an awesome picture which virtually illustrates of how man is seemingly helpless against wrath of nature. (please spare me the climate change drivel)

It’s just one of the 40 incredible tragic images captured by the Boston’s The Big Picture from yesterday’s 1-2 punch of earthquakes compounded by tsunamis that struck Japan.

See the rest here (ht: Mark Perry)

Map of the Libyan War

A map of the ongoing Libyan War as presented by the Economist

Okun’s Law: A Failing Industrial Age Economic Model

A popular traditional economic model has reportedly been losing its efficacy.

That’s according to the Wall Street Journal Blog, (bold emphasis mine)

In 1962, Yale professor Arthur Okun laid out in very clear and understandable terms a long-standing relationship between economic growth and the behavior of unemployment. If the economy dropped one percentage point below its long-term growth rate in a given year, the unemployment rate tended to rise by about a third as much. So a recession that pulled economic output three percentage points below the economy’s long-run trend would push the unemployment rate up by a percentage point.

Okun’s law has been a staple tool for economists ever since, but it’s been driving them crazy lately because it doesn’t seem to be working all that well.

The blog gives some possible reasons why the popular model can’t seem to explain today’s environment.

But they seem to overlook what matters.

Anyway here’s a clue from the same article...

Productivity – or output per hour worked by a country’s labor force — continued to rise in 2008, unusual for a recession, and surged by 3.7% in 2009

My bet is that economic models based on the industrial age will fall massively short of explaining the radical changes being brought about by the dramatic advances in technology that has been shaping the current economic framework.

It’s The Spending, Not Debt Stupid!

In excoriating mainstream media’s miasmatic logic, author and Professor Steven Landsburg eloquently explains why government debt isn’t the problem.

Instead, government spending is.

Writes Professor Landsburg, (bold emphasis mine)

This is economic illiteracy in spades. The fact is that every single dollar of interest we pay on the national debt comes right back to the pockets of American taxpayers. If you don’t understand that, then you’re not thinking clearly about the national debt.

Suppose the government owes $100 and pays $3 a year in interest. The alternative to paying that interest is to raise current taxes by $100 and pay down the debt. If you do that, taxpayers are going to have $100 less in assets, and will therefore earn less interest on their savings. That costs them (roughly) the same $3 a year.

In other words, the damage was done back when the government spent that $100 in the first place. (Of course, if the $100 was spent wisely, the damage might have been worth doing. Or not.) Once that $100 has been spent, the taxpayers are out $3 a year forever regardless of whether the debt is ever paid off.

That’s why I say that the government’s interest payments come right back to the pockets of American taxpayers. The government pays $3 a year as an alternative to taxing you $100 and paying down the debt. The choice to do that puts an extra $100 in your savings account, which earns you $3 a year. There’s the $3 a year coming right back to you. Notice that it comes back to you regardless of whether the government makes its interest payments to Americans, Chinese or Martians. All of the benefits come back to American taxpayers.

Of course, you might choose not to save that $100 the national debt is saving you. That’s fine. Then presumably you’re spending it on something that you value more than an interest flow of $3 a year. Congratulations. You’re a winner.

Or you might grumble that you have no savings vehicle that will pay you the same rate as the government’s paying on its debt. That’s where you’re wrong. You can save by buying government bonds. That will get you exactly the same rate the government’s paying on its debt.

Bottom line

Again Professor Landsburg,

If the government borrows an extra $10 trillion dollars tomorrow in order to cut taxes by $10 trillion, it will have to make, say, an extra $300 billion a year in interest payments (for which we are collectively responsible) and at the same time, we’ll collectively earn an extra $300 billion on our savings portfolios. No favor to the taxpayers, but no harm done either.

It’s important to understand this in order not to be bamboozled by tricksters who try to misdirect every conversation about government spending into a conversation about government debt. It’s spending, not debt, that can impoverish us, and that’s what we should be talking about.

This serves as another vivid example of how the mainstream (deliberately or unwittingly) misreads the effects as the cause, and of ignoring the alternative paths or choices of action (here taxes versus borrowing). For the latter, it has been a predilection for most to focus on the tangible (debt) and dismiss the intangible (tax). Unless you are aware of it, this part of our mental heuristics.

Applied to financial market analysis, this is a fundamental reason why many celebrity gurus got it so bad—most of them misread debt as the primary driver of people’s action via the “aggregate demand” channel. They ignored or underrated money's non-neutral role and the impact of globalization.

Of course, the Landsburg lecture on borrowing and taxation is universally applicable, which means such tradeoff applies to the Philippine government as well.

To paraphrase the famous US Bill Clinton quote, It’s the spending, not the debt stupid!

The World’s Top Billionaires: List of Emerging Market Billionaires Grows

A little over half of the world’s new billionaires hail from Emerging Markets, particularly from the BRIC (Brazil,Russia, India, China)

According to Forbes,

Brazil, Russia, India and China produced 108 out of the 214 new names added. Lakshmi Mittal of ArcellorMittal fame topped the list at No. 6 among the rich guys in the BRIC countries. His net worth was put at $31.5 billion. ArcellorMittal is the world’s largest steel maker. Brazilian investor and owner of a number of oil and mining companies, Eike Batista, will probably forever be known as the man who helped bring the 2016 Summer Olympics to Rio de Janeiro. His net worth is around $30 billion. Not bad being the son of the guys behind the world’s leading iron ore exporter, Brazilian multinational Vale.

Others in the Top 20:

9. Mukesh Ambani, India, Reliance Industries, $27 billion
11. (This name is perfect…with a name like this, you have to be filthy rich) Li Ka-Shing, China, Hutchinson Whampoa, $26 billion
14. Vladimir Lisin, Novolipetsk Steel, $24 billion

see list here

Let me add that among the top 500, there are lots of non-BRIC emerging markets billionaires. The distribution appears diffused where some are from Latin America (Columbia, Chile, Mexico, Argentina) MENA (Saudi Arabia, South Africa) and ASEAN.

For ASEAN region we have:

Malaysia: Robert Kuok, Lee Shin Cheng, Quek Leng Chan, Teh Hong Piao, Syed Mokhtar AlBukhary and Yeoh Tiong Lay & family

Philippines: Henry Sy (ranked 173rd)

Indonesia: Michael Hartono, Peter Sondakh, Martua Sitorus and Low Tuck Kwong

Thailand: Charoen Sirivadhanabhakdi

The growing list of Emerging Market billionaires are just symptomatic of the wealth convergence happening from today’s ‘globalized’ environment.

Celebrity Gurus Who Missed The Markets Quite Badly

The Business Insider presents a list of celebrity gurus whose predictions flunked badly.

The Business Insider writes,

Today marks the two-year anniversary of the bull market. In the past twenty four months, the S&P has nearly doubled, from 666 up to 1320.

During this period countless gurus have said it was a sucker's rally and told you to sell.

We hope you didn't listen to them.

Read it all here

My take: what is popular is mostly wrong.

More: wrong information+ inaccurate assumptions + misleading theories =misdiagnosis and subsequently wrong predictions or market actions.

If these people can't read the markets right, then how much more can they be relied on to prescribe the right policies.

Is the Enthusiasm for Democracy Sustainable?

Because of the ongoing revolutions in the MENA region, Pew Research attempts to distill on the sustainability of enthusiasm for democracy using past experiences.

In a recent study, using the East Europe’s experience, the Pew Research finds that enthusiasm for democracy has declined.

Pew Research’s James Bell writes,

These findings do not mean that East Europeans were inclined to abandon democracy. Publics across the region broadly endorsed the demise of communism. Rather these opinions point to the gap between what East Europeans hoped for and what they perceived in terms of political change. On one hand, East Europeans generally agreed that two decades of political and economic change had disproportionately benefited business owners and politicians, rather than ordinary people. On the other, many East Europeans felt democratization had yet to match expectations. In 2009, the median percentage in each country who said a fair judiciary, multiparty elections, uncensored media, freedom of religion, freedom of speech and civilian control of the military were very important significantly exceeded the median percentage who claimed these institutions described their country very well.

Reflecting on Mr. Bell’s statement, the issue isn’t about the loss of interest on democracy but rather the mismatch between people’s expectations on their definition or their concept of democracy and that of economic prosperity.

So when economic distribution has had “disproportionately benefited business owners and politicians” this only means that the political economic framework has segued from communism to one of crony capitalism based on a social democratic form of governance.

Furthermore, expectations for more freedom have not been met perhaps due to the same reasons.

This phenomenon seems to reflect on the Philippines too. After two People Power revolts, Filipinos have still been waiting for Godot.

Filipinos appear to be impassioned on democracy as demonstrated by the eagerness to vote. However eventually they get frustrated again. That’s because their expectations clashes with the reality: Filipinos largely see economic salvation from political distribution rather than from their own efforts.

We, Filipinos, seem to have little understanding that political distribution is a zero sum game (one gains the other losses, i.e. picking on Pedro’s pocket and giving to Mario), while economic distribution is a net value added.

Yet this doesn’t mean that any nation aspiring for democracy isn’t fit for it. It takes time for people to learn, understand and embrace the concept of economic freedom and civil liberties as this is a process of discovery.

And it all starts with the “right” education.

$1.1 Trillion Spent On Arms Is $1.1 Trillion of Wasted Resources

$1.1 trillion was spent by nations for defense.

According to the Economist, (bold highlights mine)

THE ten biggest defence budgets for 2010 add up to a total of more than $1.1 trillion, according to the latest Military Balance report from the International Institute for Strategic Studies (IISS), a think-tank. The defence budget of America alone, at $693 billion, accounts for more than 60% of the total. But when defence spending is compared to the overall size of each country's economy, Saudi Arabia tops the list. It spends over 10% of GDP on defence, more than double the proportion spent by America. China ranks second in the world's biggest defence budgets (spending some $76 billion) and also boasts the largest armed forces. Only America, India, Russia and North Korea (not shown) have more than 1m military personnel. Defence budgets have grown since 2005, but the balance of military power may be shifting. Western countries, many of which are engaged in Afghanistan, now face budget constrains and cuts, whilst emerging economies, such as Brazil and China, have increased military spending in line with economic growth.

That’s $1.1 trillion of resources wasted on whimsical government actions designed to promote self interests of the politicians.

Then US President Dwight Eisenhower’s “Chance for Peace” Speech poignantly reverberates on this dilemma. (pointer Robert Higgs) [all bold highlights mine]

The worst to be feared and the best to be expected can be simply stated.

The worst is atomic war.

The best would be this: a life of perpetual fear and tension; a burden of arms draining the wealth and the labor of all peoples; a wasting of strength that defies the American system or the Soviet system or any system to achieve true abundance and happiness for the peoples of this earth.

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.

This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals.

It is some 50 miles of concrete highway. We pay for a single fighter with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.

This, I repeat, is the best way of life to be found on the road the world has been taking.

This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.

Bottom line: Politicians use the threat of war to expand control over us. Yet unknown to many, most of these military expenditures represents nothing more than a waste of valuable resources.

The Real Economic Effects Of Monetary Policy Distortions

At the Thinkmarkets blog, Professor Andreas Hoffmann and Gunther Schnabl explains lucidly the real economic effects of monetary policy distortions.

Mr Hoffmann and Schnabl write, (all bold highlights mine.)

Speculative capital inflows and accelerating reserve accumulation in emerging markets are counteracted with sterilization measures and capital controls. In Brazil capital controls prevent a free allocation of capital to the best uses. In China non-market based sterilization and credit rationing is used to further stimulate the already overinvested export sector. While sterilization keeps credit generally tight (for instance for consumers), the export industries and state owned enterprises enjoy low-cost credit to keep the capital stock growing. As sterilization operations also hold inflation low, the real exchange is kept undervalued what helps to clear the overproduction on international markets.

Even worse: In countries with large raw material sectors, the global liquidity driven raw material price inflation causes huge public surpluses, which are distributed by mostly autocratic governments ad libitum. Rising public expenditure and/or thriving stabilization funds replace “competition as a discovery procedure” by guided structural change and state funded economic development. Dubai loves to invest in a palm shape island and Babylon towers. Russian bureaucrats see potential in pharmaceutical and military industries. Venezuela and Algeria pump money into social security systems to create political stability. The Saudi Arabian General Investment Authority sets up glamorous new cities that shall create more jobs in the name of the King.

While all these policies may be well intended, they distort markets, as public investment in subsidized industries misguides private investment decisions. Investment in industries, which are picked by the government, is risky. Once the golden rain stops, the readjustment will set in. This may happen, once the advanced economies exit from easy money policies as growth prospects lighten up or inflation accelerates. Only then, it will be obvious which of the many economic miracles which we currently observe is real and which is an illusion.

My comment

Notice the distributional effects?

The sectors that benefit from these policies are primarily those connected with the government or the government itself, as I also explain here and here.

And it is why policies of monetary authorities have systemic (externality costs) impact and can’t be ignored or dismissed by free market advocates.

The welfare-based political structure, crony capitalism and central banking have all been intertwined or all interconnected.

Has China’s Competition For Brides Led To Global Imbalances?

Competition for brides, due to gender imbalance, has led to China’s huge savings. That’s according to a study reported by Wall Street Journal Blog.

Writes the Wall Street Journal, (bold emphasis original italics mine)

Too few brides may be contributing to China’s trade imbalance.

That’s because “desperate parents” are using education and wealth to make their sons stand out as catches in an increasingly competitive marriage market, Professor Wei said.

Speaking on a panel at the Council on Foreign Relations in New York on the U.S.-China trade imbalance, Professor Wei said that China’s efforts in the past ten years to step up the social safety net haven’t reassured consumers enough to ease their savings.

Most Chinese consumers save for their children and for retirement, Professor Wei said, a finding put forth in a paper he wrote with Xiaobo Zhang, “The Competitive Saving Motive: Evidence from Rising Sex Ratios and Savings Rates in China.”

Acknowledging that the marriage market was somewhat “outside macroeconomic thinking,” Professor Wei said that his research shows a “very clear pattern” of household savings rates — as well as entrepreneurship — rising as the competition for brides becomes more keen. He and Mr. Zhang, a senior research fellow at the International Food Policy Research Institute, elaborated on the phenomenon in another paper, published last month by the National Bureau of Economic Research, “Sex Ratios, Entrepreneurship, and Economic Growth in the People’s Republic of China.”

The most recent paper explains that areas in China with an acute imbalance of young men seeking wives tend to benefit economically from a high level of hard work and entrepreneurship. The authors attribute this initiative to the competitive marriage market. Young men who want to begin businesses have to turn to their families for start-up money; parents and relatives prepare for that by saving.

My comments:

While there may be some truth to this, which is why this study came about, this seems more of an example of Nassim Taleb’s narrative of Birds do not write books on birds

Think of the following event. A collection of priestly persons from Harvard or some such place lecture birds how to fly. The bird flies. They write books, articles, and reports that in fact the bird has obeyed them, an impeccable causal link. They even believe their own theories. Birds write no such books, conceivably because they are birds, so we never get their side of the story. Meanwhile, the priests broadcast theirs.

I don’t think the desire of every Chinese family to save is about securing a “bride”.

If this is true then once a groom marries, the couple tends to wind down savings as the incentive to acquire a bride has already been achieved. But of course the argument extends to the next generation, thus becomes circular.

Marriage is just a part of our manifold social activities, surely there many other factors involved such the state of undeveloped capital markets, uncertainties over health, cultural quirks, and government policies among many others.

The above is also a good example of the predilection to aggregate people with numbers and of the experts’ tendency to fall for the clustering illusion trap-seeing patterns where there is none.

Moreover, the study also puts into context Jessica Hagy’s graph of social signalling here.

Of course for me global imbalances is no more than another charade where experts try to pass the blame of their national policies to the others.

This is aside from the folly of applying reductio ad absurdum arguments into people’s trading activities, which has been seen and argued in the context of politics, based on statistical figures rather than trading activities as seen from the human dimensions.

Bottom line: Patterns or correlations does not imply causation.

Does Higher Education Pay Off?

Higher education is not only in a bubble, but is fast becoming an unviable activity or unworthy of personal investments—meaning costs exceeds the returns.

So argues Professor Laurence Kotlikoff at the Bloomberg, (bold highlights mine)

The notion that education pays and that better education pays better is taken for granted by almost everyone. For college professors like me, this is a very convenient idea, providing a high and growing demand for our services.

Unfortunately, the facts seem to disagree. A recent study by economists Stacy Dale and Alan Krueger showed that going to more selective colleges and universities makes little difference to future income once one accounts for the underlying ability of the student. Their work confirms other studies that find no financial benefit to attending top-tier schools.

It’s good to know that Harvard applicants can safely attend Boston University (my employer), and that "better" higher education doesn’t pay better. But does higher education pay in the first place?

The answer seems obvious. On average, doctorate holders earn more than those with master degrees, who earn more than those with bachelor degrees, who earn more than high school graduates. How can education not pay?

The answer is that education isn’t free. Top undergraduate programs are now charging students $50,000 a year to eat, sleep and, hopefully, attend class. But that’s just the direct cost. Education’s hidden cost is the time spent learning rather than earning.

Read the rest here

Again the soaring costs of education are largely due to government’s numerous interventions, which renders what used to be a stepping stone personal development, as unfeasible.

Moreover, rising costs of education also reflects on the old political economic order. This is going to change see here and here.

The Economic Basics of Protectionism

This is great stuff from Professor Mark Perry. Economics 101 of Protectionism versus Free trade.

Professor Perry writes, (bold emphasis mine)

The graphical analysis above shows what happens economically to a country that moves from: a) free trade with the rest of the world, with consumers paying the world price for a given product, to a b) protectionist trade policy and a new higher price that includes a tariff (tax) that reduces the amount of trade that takes place. Here are the key outcomes of this protectionism:

1. The domestic producers are now better off because they are protected from more efficient foreign competition, and can charge higher prices and increase output. Economically, they have converted consumer surplus (gains) to producer surplus (gains) because of the tariff, and that transfer is represented by the yellow area labeled "Producer Surplus" above. Nothing lost there on net because of the tariff, although domestic producers have used the political process to gain at the direct expense of domestic consumers, who now pay higher prices and purchase fewer units.

2. With a tariff (tax) on imports, the government is now able to generate "Tax Revenue" in an amount represented by the blue rectangle above. This is also a transfer, this time from what used to be consumer surplus (gains from trade) to the federal government. Nothing necessarily lost here either on net, assuming that the government will transfer the tax revenue back to the consumers in the form of beneficial government spending (maybe) or lower taxes elsewhere (maybe).

3. However, the two pink triangles labeled "Societal Loss" are the amount of losses to the consumers and the economy (society) from the protectionist tariffs that are NOT offset by a gain to some other group: producers or government, and represent what economists call the "deadweight loss" or "deadweight cost" of protectionism.

Bottom Line: The deadweight losses from protectionism mean that the economy is worse off on net, or that there has been a reduction in total economic welfare, the total number of jobs, wealth, prosperity, and/or national income. You could argue about the size of the deadweight loss triangles, but it would be really hard to argue that they don't exist. Protectionism has to make the country worse off, on net, and that proposition is supported by 200 years of economic theory and hundreds of empirical studies.

Two additional comments:

-You get economic lessons free on the web.

-When you get to hear people babble about the benefits of protectionism, you can be assured that they’re not dealing with economic realities. Instead, protectionism is grounded on emotionally charged politics—characterized by the rhetoric of good intentions (social signaling or arguing for social conformity purposes or for getting votes), rather than what truly works.

The Tipping Point Of The Industrial Age Political Order

Politics has been shifting along with the evolution in the economy. The problem is that most people’s mindset has still been stuck with archaic models and or of visions of the previous order.

Old One Horse Shay (Wikimedia)

Walter Russell Mead captures neatly this intuitive ‘resistance to change’.

Mr. Mead writes, (bold highlights mine)

Krugman and the Times editorial board are both examples of something important in American life today: left-liberal intellectuals are increasingly able to understand that individual supports of the blue social model are crumbling. But they are still so captivated by the blue model, so profoundly convinced that the Progressive movement’s solutions to America’s social ills in 1910 are still valid today, that they cannot yet look beyond the blue model to imagine a different and brighter future for the United States....

If, as Krugman posits, demand for US workers will be falling in both manufacturing and the professions, how exactly will labor unions get higher wages for their members? Factories will be closing in Krugman’s world and law firms will be turning more and more work over to computers or shipping it overseas. Perhaps stronger unions could make it harder for companies to do this for a while, but ultimately facts speak. Stronger unions making tougher wage demands will not exactly persuade American (and foreign) investors to create new jobs in this country — or to slow down their efforts to reduce their US workforce by outsourcing and automation. When human workers receive rising wages, become harder to fire, and are governed by ever more convoluted and expensive work rules, replacing them with computers becomes more attractive, not less.

Unions tend to flourish when demand for workers is rising (as in China today); they do not and cannot protect the situation of workers as a whole against a background of falling long-term demand for their work.

The problem isn’t that this or that piece of the blue social model is breaking down and needs to be fixed so that the rest of the model can go on working well. It’s not that the university system is broken and that if we fix that the model still works. Ditto the public sector unions or the situation of the labor movement as a whole. Mandating an expensive new set of health care entitlements at a time of looming insolvency won’t help either.

The problem with the blue social model today is systemic. It’s not a problem with one piece or another. The pieces are all falling down and breaking apart at once. It is what happened to the “One Hoss Shay” in Oliver Wendell Holmes’ poem about, they used to teach us back in Pundit High, the breakdown of Calvinist religion in New England.

Read the rest here.

Like the transition of the economic order from agriculture to industry, we are seeing also the same transition from industrial era to the information age. And since the economy drives politics, so will the political structures shift accordingly.

The important point is that these ‘political-economic’ transitions represent a discovery process. It will NOT happen overnight. It will come with painful episodes of trial and errors with many fine tuning along the way.

It will also come with the auto response mechanism known as “resistance to change” especially from entrenched parties that had long benefited from the old order. Walter Mead’s take down of left-liberal intellectuals go along this line of thought.

Labor unions can be compared to current government budget deficits modelled after Bismark’s welfare states. All have been based on the industrial age top-down concept.

And the same top-bottom dynamic goes along with information flows as seen through the previous mainstream media model. But the web has been providing intense competition such that the old force appears to be breaking down. And unlike governments and their apologists, who seem plagued by intellectual stasis, many in the media appear as trying to cope with the changes of the current trends.

While the welfare construct could be seen to have worked earlier, these economically unsustainable platforms have been giving way. In short, the politics of the industrial age may have reached its tipping point.

And as the revolutions in Greece or the MENA, or the standoff in Wisconsin manifests, they operate on a common denominator—the political economic structure of the industrial age has been crumbling.

Many will struggle to maintain the old order, and that’s why transitions are never smooth. But at the end of the day, we are likely to learn how to adjust to these new realities in spite of the conflicts. Alternatively, this extrapolates to "don't fight the trend".

And I close with Mr. Mead’s conclusion...

This is the essence of progress: as we move forward less of our society’s time and energy goes into just staying alive; more of it goes into living better. The key to that now is to move as quickly as possible to reshape these critical professions with the full power of information technology

Amen.

Graphic On Social Signaling

Here is an awesome graphic representation of social signaling from the ever insightful Jessica Hagy. (published on her website Indexed as “So Who’s Winning”)

The Crucial Role of Entrepreneurship To Economic Prosperity

The US Economic Report of the President acknowledges the crucial role played by entrepreneurship in wealth generation...

America’s small businesses are an essential building block to economic growth and prosperity, in part because entrepreneurs create a disproportionate share of net new jobs in the U.S. economy.

The report includes the following data. (bold highlights mine)

One particularly important contribution of small firms to the Nation’s well-being is the jobs they create. According to the SBA’s Office of Advocacy, small firms accounted for 9.8 million of the 15 million net new private sector jobs created between 1993 and 2009—nearly two out of every three of the period’s net new jobs. In normal times, new small businesses account disproportionately for employment growth. Although many new firms fail, surviving Supporting America’s Small Businesses | 145 firms create enough jobs to offset those lost to firm exits, so that most jobs created by firm births persist. A recent Kauffman Foundation study, for example, shows that startup firms created 3.1 million gross jobs in the United States in 2000. By 2005, about half of the initial firms had failed, but the survivors still employed 2.4 million people (Kane 2010).

(source Tim Kane, Growthology.org Kauffman The Foundation of Entrepreurship)

I am reminded of the great Ludwig von Mises who wrote,

In the capitalist system of society's economic organization the entrepreneurs determine the course of production. In the performance of this function they are unconditionally and totally subject to the sovereignty of the buying public, the consumers. If they fail to produce in the cheapest and best possible way those commodities which the consumers are asking for most urgently, they suffer losses and are finally eliminated from their entrepreneurial position. Other men who know better how to serve the consumers replace them.

Entrepreneurs, aside from the capitalists, are the heroes of the modern capitalist (market) economy.

Gender Equality: Women's Growing Role In The Society

Below is an interesting chart from the Economist.

The Economist writes,

A CENTURY ago, women were scarcely allowed to vote, let alone stand for

election. Today women hold seats in parliaments across the world, and in one case are even in a majority. This is one of many achievements that will be celebrated on March 8th 2011, which marks the 100th anniversary of International Women's Day. Policies and quotas have helped women in politics and in business. In Norway, women make up nearly 40% of board members of the largest listed companies. Yet on average across Europe they only occupy one in every ten board seats. This may improve, with more women than ever now in the global business-school pipeline. In 2010, nearly 106,000 women sat the GMAT exam, an MBA entrance exam, accounting for over 40% of examinees. In the OECD, a club of mostly rich countries, 61% of women are active in the labour force. But the difference in male and female employment rates in many countries is still large and persistent. While progress has been made, there is a long way to go before gender equality is reached.

As people around the world learn to embrace the tenets of the division of labor, women will certainly play a greater role in the society.

The Government Owns YOU!

The government presumes to own what you earn, and you are a tax evader!

That’s what the new tax regulation implies.

From the Inquirer.net

Every private citizen earning at least P500,000 annually will now have to file the equivalent of a statement of assets and liabilities and net worth (SALN)—previously required only of public officials.

The Bureau of Internal Revenue (BIR) said the new rule was meant to give regulators “the whole income picture of [an individual] taxpayer” and to help improve collections by clamping down on tax evasion.

The order, Revenue Regulation No. 2-2011, was signed and issued on March 1 by Finance Secretary Cesar V. Purisima.

Every citizen making at least P38,461 a month (assuming he receives 13 months’ worth of salaries each year) will be required to file a personal SALN to justify his or her gross income to the BIR.

The Philippine Government wants to control you.

Of course, the middle class and the politically unconnected will be the hardest hit, since this is a slippery slope or prelude towards MORE taxes.

And obviously this is being done for the benefit of the politicians and the bureaucracy. See the difference between political and so-called market "greed"?

Maybe these guys don’t know what is going on in the Middle East and Africa.

UPDATE: My friend Paul How deals with the same problem here

Will The US Fall For Osama Bin Laden’s Trap?

From Eric Margolis at the Lew Rockwell.com, (bold emphasis mine)

Bin Laden’s primary goal is overthrowing US-backed autocratic regimes across the Muslim world. Attacking western targets that supported them was only secondary.

Col. Gadaffi was not totally wrong when he blamed al-Qaida for Libya’s uprising. Bin Laden was not pulling the strings of Libya’s rebellion, but al-Qaida’s revolutionary philosophy and anti-western jihad certainly inspired many young people from Morocco to Bangladesh.

That’s Washington’s big problem. Invading Libya will intensify the fires burning in the Arab world and create yet another anti-western jihad.

This is exactly Osama bin Laden’s strategy: draw the bull in the china shop – US into many small wars in the Muslim world – and so bleed it dry. So far, the US has been cooperating with Osama’s master plan.

“I Told You So!” Moment: Oil-Stocks Correlation Breakdown

Great graphic from Bespoke Investment

Bespoke Invest writes,

As shown, the correlation between the stock market and oil remained positive up until just recently, but the breakup between the two has been swift and extreme. At the moment, the one-month correlation between the two stands at -0.70.

As to whether US stocks will continue to fall as oil prices move higher or if the current retracement can be interpreted as just as a normal correction has yet to be determined or resolved.

Putting on too much emphasis on the present action of the US equity markets could mislead because these markets seem to be digesting on new information or simply undergoing a normal profit-taking environment. Remember, no trend moves in a straight line.

Bottom line: the oil-equity causal relationship can't be read as a reliable indicator.

The Low Correlation Between the Stock Market And Economic Growth

Analyst John Mauldin cites Crestmont Research’s Ed Easterling who argues “stock market is not correlated with economic growth”.

They say “secular bear markets even have higher nominal GDP growth than secular bulls”, with the chart below as proof…

And also say “34% of the years since 1950 with economic growth have experienced declining earnings per share (EPS) growth!” Again a series of chart below as proof…

I am puzzled.

If “low correlation” means economic growth has not functioned as a good indicator of the direction of the stockmarket price trends, then why the heck, do these experts keep talking about various aspects of “economic growth” at all? This is obviously a cognitive dissonance.

One factor for the insistence of the “economic growth” conversation could be that they don’t agree with the referenced opinion.

A second factor could be entertainment value. Experts write to entertain more than to disseminate positive knowledge.

A third factor could be to use of such contrarian evidence as cover to their earlier misdiagnosis of the markets and the attendant mistakes in prediction.

Finally this could all be about social signalling.

Yet this just goes to show how more and more ‘experts’ appear to be getting lost or confused about what’s been going on. In other words, traditional methodologies and metrics are becoming more dysfunctional.

And all this provides more credence to what I’ve been saying all along.

Why Global Labor Unions Have Been On A Decline

Labor unions have been on a declining trend, not just locally but internationally.

Trade or Labor Unions, according to the Wikipedia, is “organisation of workers that have banded together to achieve common goals such as better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members (rank and file members) and negotiates labour contracts (collective bargaining) with employers. This may include the negotiation of wages, work rules, complaint procedures, rules governing hiring, firing and promotion of workers, benefits, workplace safety and policies. The agreements negotiated by the union leaders are binding on the rank and file members and the employer and in some cases on other non-member workers.”

Labor unions, for me, function as political force, which uses government laws for extracting economic privileges, at the expense of the company owners, non-labor union workers and taxpayers indirectly (such as the GM bailout) or directly (government unions).

The main goal of the labor union is to restrict manpower supply and to raise wages and benefits above market levels. And in doing so, labor unions add to the imbalances in the labor markets, which results to higher unemployment levels and the lack of competitiveness among many others.

For public unions the desire is for more taxpayer funded privileges.

In other words, labor unions thrive on a non-competitive environment.

As shown in the above (interactive) chart by the New York Times, since the 1980s labor or trade union around the world has seen a sharp decline except for a few, e.g. Iceland.

The main reason: rising international competitiveness or globalization.

Cato’s Dan Griswold explains (bold highlights mine)

Economic theory offers a number of reasons why growing international competition would be damaging to the interests of labor unions. More competition in product markets means greater elasticity of demand for labor—that is, global competition means that demand for labor is more sensitive to any change in wages.

Employers competing in global markets cannot simply pass higher wage costs along to consumers in the form of higher prices because consumers themselves can choose to buy substitute products from lower-cost, often nonunionized producers.

Expanding capital mobility means that employers are more able to shift production to lower-wage countries if necessary. A more mobile company is better able to threaten or employ an “exit” option in response to union demands. In the face of product competition and capital mobility, union demands for higher wages can lead instead to fewer domestic union jobs, as has been the case in a number of firms and industries.

In contrast, in markets insulated from robust competition, unions can more readily demand a share of a company’s or industry’s profits without fear of compromising the survival or competitiveness of the employer. Insulated markets create rents in the form of abovemarket profits that unions can then bargain with management to divide between them at the expense of the consuming public.

In short, the more a country is open to trade, the bigger likelihood of the diminished role of labor unions.

There are other non trade factors are involved too.

They include, adds Mr. Griswold, more rapid growth of certain categories of workers, such as women, southerners, and white-collar workers, who are less favourable to unionization; the deregulation of transportation industries; declining efforts of unions to organize new members; government activity that substitutes for union services, such as unemployment insurance, industrial accident insurance, leave policies, and other workplace regulations; the decline in pro-union attitudes among workers; and increased resistance among employers

For me, another very critical factor second to globalization has been the ongoing transition from industrial era to the information age.

Labor unions had basically been tailored for vertical organizational structures. But times are changing. As technology (via the web) becomes more entrenched, the nature of work has gradually been reconfiguring. And this provides lesser opportunity for unionization to take place, aside from the financial incentive or viability to maintain one.

As Alvin Toffler writes in Revolutionary Wealth,

Work is increasingly mobile, taking place on airplanes, in cars, at hotels and restaurants. Instead of staying in one organization, with the same co-workers for years, individuals are moving from project team to task force and work group continually losing and gaining teammates. Many are ‘free agents’ on contract, rather than employees as such. Yet while corporations are changing at a hundred miles per hour, American unions remain frozen in amber, saddle with the legacy organizations, methods and models left over from the 1930s and the mass production era.

In other words, digitalization, automation, robotics and other technology enhancements which raises productivity are taking many people out of the industrial era work. The more outsourcing and specialization takes place the lesser role played by the labor unions.

Investing guru Doug Casey also sees the same,

The good news, however, is that coercive unions are on the way out. They're anachronisms. They're leftovers from the time when people were like interchangeable parts in the giant factories they worked in. People were so replaceable that one person was little better or worse than another – because they were basically biological robots. In the early industrial era, labor was in over-supply, society was poor, and conditions were harsh everywhere. It's understandable why workers felt they had to band together for self-protection. But the industrial era is gone. The assembly line with thousands of workers is totally outmoded. In the global information age, trying to extort high wages for manual labor is pointless. Soon robots will be doing almost everything, then nanomachines will replace the robots. People will only be doing work that requires thought, judgment, and individuality. Those aren't things that can be unionized.

It pays to look at the big picture.

Labor union trends worldwide have not been declining because of culture or politics, but because of economics.

Video: Egypt's Wael Ghonim On The Egyptian People Power Revolt

Egypt's Wael Ghonim in a TED talk says Egypt's revolution is about People, Technology, Knowledge and Freedom. (Hat tip Mises Blog)

"The Power of the People Is Much Stronger than the People In Power"- Wael Ghonim

Will The US Bring Back The $1 Coin?

The US Congressional watchdog, the Government Accountability Office (GAO) says bringing back the $1 coin in replacement of the $1 note seems viable.

The GAO writes, (HT Mark Perry) [bold emphasis mine]

According to GAO’s analysis, replacing the $1 note with a $1 coin could save the government approximately $5.5 billion over 30 years. This would amount to an average yearly discounted net benefit—that is, the present value of future net benefits—of about $184 million. However, GAO’s analysis, which assumes a 4-year transition period beginning in 2011, indicates that the benefit would vary over the 30 years. As shown in the figure below, the government would incur a net loss in the first 4 years and then realize a net benefit in the remaining years. The early net loss is due in part to the up-front costs to the U.S. Mint of increasing its coin production during the transition. GAO’s current estimate is lower than its 2000 estimate, which indicated an annual net benefit to the government of $522 million. This is because some information has changed over time and GAO incorporated some different assumptions in its economic model. For example, the lifespan of the note has increased over the past decade, and GAO assumed a lower ratio of coins to notes needed for replacement. GAO has noted in past reports that efforts to increase the circulation and public acceptance of the $1 coin have not succeeded, in part, because the $1 note has remained in circulation. Other countries that have replaced a low-denomination note with a coin, such as Canada and the United Kingdom, stopped producing the note. Officials from both countries told GAO that this step was essential to the success of their transition and that, with no alternative to the note, public resistance dissipated within a few years.

My added comments:

-The previous unsuccessful efforts to replace notes because of simultaneous circulation of both notes and coins is a vivid example of Gresham’s Law at work.

Gresham's law, according to wikipedia.org, is an economic principle "which states that when government compulsorily overvalues one money and undervalues another, the undervalued money will leave the country or disappear into hoards, while the overvalued money will flood into circulation." It is commonly stated as: "Bad money drives out good", but is more accurately stated: "Bad money drives out good if their exchange rate is set by law."

In short, undervalued coins are hoarded and overvalued notes remain in circulation.

-We seem to be seeing more signs from the political authority to float trial balloons or ‘conditioning’ of the public of the possible return of the precious metals as part of the monetary system.

Add to the above a milestone, Utah recently passed in the House a bill recognizing gold and silver as a legal tender. (hat tip Mises Blog)

Reply To A Free Banking Critic: People’s Actions Represent Choices From Alternatives

A critic of free banking, asks

How much of the world’s problems are due to

Fiat money? Bailouts, Subsidies? Deregulation? Government deficits?

I’d say,

First, laws or policies shapes people’s behaviour

Second, people act for a purpose.

If a go to a burger store, I don’t usually ask how much of the burger I ordered consisted of

Mayonnaise, Tomato, Hamburger patty, Salt, Mustard, bread etc...

My purchase of a burger in that particular store represented my action out of the following possible alternatives:

-I am hungry (need to eat),

-I just want to eat (perhaps want to try out this new store),

-I am in a meeting

-I’ll buy it for someone else

Or etc...

In short, I acted on a ‘bundled’ product as a result of my choice from the above set of alternatives

As Ludwig von Mises explained (bold emphasis mine)

Action does not measure utility or value; it chooses between alternatives. There is no abstract problem of total utility or total value. There is no ratiocinative operation which could lead from the valuation of a definite quantity or number of things to the determination of the value of a greater or smaller quantity or number. There is no means of calculating the total value of a supply if only the values of its parts are known. There is no means of establishing the value of a part of a supply if only the value of the total supply is known. There are in the sphere of values and valuations no arithmetical operations; there is no such thing as a calculation of values. The valuation of the total stock of two things can differ from the valuation of parts of these stocks.

The simple message is that people’s actions are intertwined with the presented alternatives from where we make choices. One cannot draw the “valuation of a definite quantity or number of things”.

We cannot isolate one variable from the other. People’s actions are responses to an ever dynamic “bundled” environment shaped by laws, markets, culture, environment, etc...

So applied to central banking, for every transaction we make, half of it represents money issued by the government.

Thus if the central bank decides to inflate, people’s alternatives will be shaped by the changing state of the purchasing power of money. So it will be a feedback loop which spreads or ripples to most of human activity or the society covered by such policies.

As argued here, the central bank, inflationism, government deficits, welfare state, bailouts and political privileges can be seen as a holistic interconnected network of political economic arrangement. But you can’t isolate one from the other because these factors are sustained upon by each other.

And that’s also why the alter ego to inflation is usually price control. Because people’s response will likely be met by populist political policies which tries to mitigate the short term predicaments.

If people’s action can be isolated, then hyperinflation won’t result to societal devastation. And we would probably be still under the Roman empire.

The above is an example of an intellectual strawman. The logic tries to argue from an intellectual state, but in reality represents irrelevance to actual human conditions.

Finally it is further a non sequitur to say “no system is perfect” as an excuse to argue for central banks. It is NOT about being perfect, it is about being the most efficient.

Professor Ludwig von Mises has seen through such red herring...

The analogy with the state of perfection is obvious. The fully satisfied individual is purposeless, he does not act, he has no incentive to think, he spends his days in leisurely enjoyment of life. Whether such a fairy-like existence is desirable may be left undecided. It is certain that living men can never attain such a state of perfection and equilibrium.

It is no less certain that, sorely tried by the imperfections of real life, people will dream of such a thorough fulfillment of all their wishes. This explains the sources of the emotional praise of equilibrium and condemnation of disequilibrium.

We can chose to live in a perpetual state of (social utopianism) fantasy, or we can act to improve our lives based on economic reality.