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Sep 1, 2008

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Aug 30, 2008

Leading The People

If You Don't Agree Now, You Will Later

The University of Chicago was an intellectual school in 1967 (probably still is), and it had a diversity of students, I among them. Most students were liberal or very liberal; some were aspiring revolutionaries. I had read a little and liked limited government, freedom to start a business, and personal freedom. I doubted that a more powerful government was going to change the world in any good way. This made me a "conservative" in most discussions.

I have a clear memory of the end of one discussion. I was talking to one of the radical guys in my dormitory, call him Brad. He argued that only a radical change in government would bring about a better society. I disagreed. He said that I should join the demonstrations against the University to end the Vietnam war. I thought a sit-in demonstration against the University was misdirected. I suggested the he should demonstrate against the government; the University was not at war.

He said that his movement would become stronger, and eventually I would agree with him. I asked, what if I didn't agree with him, even later? He flashed anger and told me that if I didn't agree on my own, he would make me agree. I saw that as the end of the discussion.

I thought of this conversation when I saw Jonah Goldberg's post of 08/26/08 at National Review (via Instapundit) about the radical bombers Ayers & Dohrn. Goldberg wrote:

[edited]  I am amazed, simply amazed, at the amazement of many liberals that Ayers and Dohrn should matter to anyone. Well, it seems puzzlement over the inability of others to get over this stuff extended to Dohrn herself. Fast-forward to 1993. In a predictably sympathetic profile in the New York Times, Dohrn said: "I was shocked at the anger toward me."
People like Brad, Ayers, and Dohrn won't take No for an answer. Their self confidence and superior intellect (smile) tell them that they have the right answer for whatever problem they are interested in. They are better than the people who don't agree with them, and they don't mind using force when they can't get agreement.

Brad admitted that he would eventually force me to do things his way. Ayers and Dohrn knew that their cause justified blowing up their opponents. Dohrn does not understand what all the fuss is about; she only followed the path that she thought was right as a soldier for the good.

Jonah Goldberg referred to some liberals who sympathized with Ayers and Dohrn. Those liberals understand that a vision of change may require coercion. They sympathize that Ayers and Dohrn were admirable in their goals and their willingness to take risks. Bombing was just a bit enthusiastic.

People like Brad propose solutions with the same general theme:

  • They have a solution that will work if we would only stop arguing and agree with them.
  • They may need to omit some information about the new arrangements and what these will cost. They observe that ordinary people do not think well enough to make decisions in their own long-term best interest. Dissenters are either uninformed or selfish.
  • There is no need to argue about the specific meanings of words. The good of the society justifies telling some lies, if it comes to that.
  • They do not limit themselves to offering another possibility. They reorganize everything into a comprehensive new system, breaking the existing relationships between people and defining a new set of relationships described by charts, graphs, committees, and regulations. It is an awesome task that keeps many of them at work in the bureaucracy.
  • They are best qualified by superior education and intellect to implement the solution.
  • The solution requires that we all pitch in and not be greedy. The people with the most resources will put their extra income or property into the pot.
  • There must be complete cooperation. Alternate solutions go against the community spirit, and these are elitist and illegal.
  • There will be severe penalties for non-compliance. All good people will want to comply.
  • If there are not enough resources to pay people for their work according to the solution, then those people with the appropriate knowledge and experience will contribute some of their effort for free. Whatever it takes for success.
  • They will modify or replace the solution if it doesn't work. They will design a new solution the same way they designed the first solution, through thought, research, and discussion among themselves. Further solutions may require more resources.
  • Providers within the solution will be monitored, measured, and adjusted to achieve best practice and efficiency. Daily records and monthly reports will assure that providers are in compliance and are delivering the highest quality services. Payment will be based on written quality measures.
This may seem exaggerated, but it has happened in many areas of American life. It is halfway accomplished in healthcareBy board certified Emergency Medicine Physician 911DOC, with disastrous results.

Brad's Friends want to be elected, then use that power to make your life better, and you better, whether you agree or not. Brad's Friends are not motivated by respect for their fellow citizens or a regard for the truth. They want to produce a grand experiment to make a better world. Eventually, they will make you agree with them.


The Man of System

Adam SmithBiograph.com  (1723-1790) was a Scottish economist and philosopher. His book The Wealth of Nations details the first system of political economy and is considered the bible of capitalism.

Smith’s  The Theory of Moral SentimentsLibertarianism.org  includes this observation of two ways of seeing the world. Smith appreciated the natural and harmonious view of spontaneous order. But, the “man of system” sees society as something he can manipulate “easy as the hand arranges pieces upon a chess-board.”

[edited to modern usage]:  The man whose public spirit is prompted altogether by humanity and benevolence will respect the established powers and privileges of individuals. He will respect even more the great orders and societies into which the state is divided.

He may consider some of those privileges as partly abusive. But, he will be content to moderate what he cannot eliminate without great violence. When he cannot conquer the prejudices of the people by reason and persuasion, he will not attempt to subdue them by force. He will observe the advice of Plato never to use violence to his country no more than to his parents.

He will accommodate his public arrangements to the confirmed habits and prejudices of the people, as well as he can. When he cannot establish what is right, he will not disdain to reduce the wrong. When he cannot establish the best system of laws, he will work to establish the best that the people can bear.

The man of system, to the contrary, is apt to be very wise in his own conceit. He is often so in love with the supposed beauty of his plan that he cannot allow the smallest deviation. He establishes it completely and in detail without any regard to the interests and prejudices which may oppose it. He seems to imagine that he can arrange the members of a great society with as much ease as he could arrange pieces on a chess-board.

He does not consider that chess pieces have no will of their own. But, in the great game of human society, every piece has its own will, possibly opposed to what the legislature wants. If those two wills act in the same direction, the game of human society will go on harmoniously and is likely to be happy and successful. If those wills are opposite or different, the game will go on miserably and society will always be in disorder.


Links


Lying is Moral When Your God is Electing Democrats
08/29/08 by Jon Sanders at TownHall.com

Conservatives believe lying is wrong. Numerous studies have shown that conservatives are far more honest than political "liberals" As author Bruce Walker pointed out, 60 percent of Americans consistently identify themselves as conservative; in short, "Conservatives are not just a majority of Americans, but an utterly overwhelming majority of all Americans."

So yes, leftists don't have the "luxury" of being able to tell voters, who believe lying is wrong, that they think it's OK to lie to get elected. You see, getting elected is the god of the Left from which all morality flows.


Democrats Offer Stealth Liberalism
08/29/08 Wall Street Journal - Potomac Watch by Kimberley A. Strassel

If today's liberal storyline were correct, a proud "progressive" candidate should win voter acclaim with promises of higher taxes, government regulation, an encompassing health-care entitlement, protectionism and corporate-bashing. We can't know if that's the case, since the "progressive" Mr. Obama is doing such an excellent job of hiding those policies behind the conservative rhetoric of "choice," "tax cuts," "free trade" and "freedom."


How to be Annoying and Useless:
An Introduction to JCAHO and Press-Ganey

04/06/08 by EtoTheIpi at DocsOnTheWeb
A doctor complains about bureaucracy imposed for no real improvement:

Now, Press-Ganey. This is a survey company that asks patients to respond to questions about the quality of care they received. Really it is the PERCEIVED quality of care measured, often from non-paying "customers", who demand perfection and know very little about medicine (a hospital, by the way, is not a hotel. Sorry.) A 'mean nurse' can [ruin] your Press-Ganey scores relative to other hospitals. A doc who will say "no, I know better" to the annoying patient will drop you to the bottom of the list.

Control has been handed to the paper pushers and taken away from the doers. I weep for our profession.


Councils Recruit Unpaid Volunteers To Spy On Their Neighbours
08/30/08 by ThisIsLondon.co.uk (via Instapundit)

Neighborhood Councils in Britain are recruiting 'citizen snoopers' to report litter louts, dog foulers, and even people who fail to sort out their rubbish properly.

The 'environment volunteers' will also be responsible for encouraging neighbours to cut down on waste.

The move comes as local authorities dish out £100 fines ($180) to householders who leave out too much rubbish or fail to follow recycling rules.

'With council tax so high, the last thing people want to pay for is an army of busybodies peering through their net curtains at their neighbours as they put out their rubbish.'


Obama and Ayers Pushed Radicalism On Schools
09/23/08 - WSJ.com by Stanley Kurtz

(edited) Bill Ayers founded the Weather Underground in the 1960's. Ayers and his cohorts bombed the Pentagon, and he has never expressed regret for his actions. Barack Obama's first run for the Illinois State Senate was launched at a 1995 gathering at Mr. Ayers's home.

Ayers founded the CAC in 1995, ostensibly to improve Chicago's public schools. The CAC's agenda flowed from Mr. Ayers's educational philosophy, to infuse students and parents with a radical political commitment, downplaying achievement tests in favor of activism. Mr. Ayers wrote in "City Kids, City Teachers" and "Teaching the Personal and the Political," that teachers should be community organizers dedicated to provoking resistance to American racism and oppression.


Obama and Ayers - 09/23/08 at JustOneMinute (via Instapundit)
Obama explains his relationship with Bill Ayers, in an interview with Chris Wallace of Fox News on 04/27/08.

(edited) OBAMA: Now, Mr. Ayres is a 60 plus year old individual who lives in my neighborhood, who did something that I deplore 40 years ago when I was six or seven years old. We served on a board together that had Republicans, bankers, lawyers, focused on education, who worked for Mayor Daley. The same Mayor Daley probably who when he was a state attorney prosecuted Mr. Ayres’s wife for those activities. I (inaudible) the point is that to somehow suggest that in any way I endorse his deplorable acts 40 years ago, because I serve on a board with him.


Obama, Ayers and the Annenberg Challenge
09/22/08 at GlobalLabor by Stephen F. Diamond

(edited) The Chicago Annenberg Challenge was far more than a chance for Ayers to engage in "radical" efforts to raise the political consciousness of young students. It was a front in a battle for control of the Chicago Public School system. The Challenge represented an authoritarian and bureaucratic agenda - a desperate attempt to foist upon troubled classrooms a "politically correct" curriculum, and to use parents as canon fodder to control teachers and administrators.


The Authoritarian Radicals - Diamond's complete paper is at The Social Science Research Network.

Stephen F. Diamond, Santa Clara University - School of Law (09/1/08)

Abstract: The Chicago Annenberg Challenge was a $160 million dollar reform effort in the Chicago public school system led by Barack Obama and Bill Ayers among others. An analysis of the Challenge suggests that an authoritarian form of politics shared by Ayers and Obama was a critical part of the reform effort. This form of authoritarian radicalism has its roots in the American New Left and Black Power movements. The paper contrasts the authoritarian and anti-union approach of the Challenge with a democratic alternative.


Ayers-Dohrn-Obama Tie Shouldn’t Be Dismissed
10/06/08 - PajamasMedia by Bob Owens

[edited] Obama's campaign manager David Axelrod tried to explain Obama’s involvement with Ayers, “Bill Ayers lives in his neighborhood. Their kids attend the same school. They’re certainly friendly, they know each other, as anyone whose kids go to school together.” This is obvious fiction. Obama's children are in elementary school; Ayers’ children are adults.

Ayers’ wife Bernardine Dohrn has largely escaped recent scrutiny. She was either a leader or the leader of the Weathermen, with ties now to both Barack and Michelle Obama.

Dohrn was a principal signatory of a Declaration of War against “AmeriKKKa”, now a standard spelling among radicals. Dohrn participated in multiple bombings and was accused of planting a bomb at a San Francisco police station that killed an officer and maimed others, according to an FBI informant.

Ayers and Dohrn infamously played host and hostess to Barack Obama’s political “coming out” with a meeting at their home, where outgoing State Senator Alice Palmer tapped Barack Obama to be her handpicked successor.

Other direct connections between the Obamas and the Ayers are much harder to discern and have never been thoroughly investigated.


Daley reins in radicals the Chicago Way
10/11/08 - Chicago Tribune by John Kass

[edited] Obama and Ayers are neighbors and they worked together on school issues with the same foundation. Obama's political coming-out party was held in Ayers' living room when Obama was running for his first political office. The boss of Chicago is Mayor Richard Daley. Mayor Shortshanks has thrown his protective embrace around both men. These are facts.

The reason Ayers is not a big deal in Chicago has to do with the Chicago Way, and the left fork of that road that has been bought and paid for by the Daley machine, subsidized by taxpayers who foot the bill for public relations contracts from City Hall.

University-educated consultants get city contracts to spin the news, shape symbolism, and tell out-of-town reporters that Ayers is no big deal. They won't bite the hand that feeds them. For an examination of the Daley spin machine—and its cost to taxpayers—please see Tribune reporter Dan Mihalopoulos' story in the Sunday editions.


NYT Won't Run Op-Ed Criticising Bill Ayers
12/23/08 - PajamasMedia by Bob Owens

The New York Times published an Op-Ed article by Bill Ayers on 12/5/08. They declined to publish a rebuttal by Larry Grathwohl. Grathwohl is the only informant to penetrate the Weather Underground for the FBI, and lived the history Ayers wants to rewrite. Here is an excerpt of Grathwohl's reply.

[edited] Billy goes on about how the Weather Underground came into existence because “peaceful protests had failed” and “after an accidental explosion killed three comrades.”

The explosion of the townhouse in Greenwich Village was the result of a bomb factory which was preparing bombs containing roofing nails for use at a Fort Dix enlisted club. The inclusion of roofing nails can have but one purpose and that’s to injure or kill people.

Prior to this event Bill’s wife, Bernardine Dorhn, placed a bomb of the same design at the Park Police Station in San Francisco and killed Officer McDonnell. Additionally, I was still inside the Weather Underground when the townhouse blew up and the commitment to sabotage and terrorism had already been established and the purpose was the overthrow of the United States government.

Aug 25, 2008

1 President + 1 Vice President = 1 President

The Vice President Doesn't Matter Much

John Nance Garner IV nicknamed "Cactus Jack" was the 44th Speaker of the US House of Representatives (1931-33) and the 32nd Vice President of the United States (1933-41). He served as Representative from Texas between 1902 and 1933. He was an experienced and successful politician.

He is famous for his evaluation of the Vice Presidency as "not worth a bucket of warm piss."

US Senator Barack Obama has chosen US Senator Joseph Biden to run for election as his Vice President. There is much discussion about how this will help or hurt Obama's chances for election.

The theme is that Biden brings much needed experience in Senate politics and in foreign policy. Sen. Biden has served in the Senate and on the Judiciary and Foreign Relations committees since 1973, has been chairman of both committees at times, and is the current Chairman of the Foreign Relations committee.

The VP should be able to be President in his own right, and a person who we would trust. We should care about the political positions and character of the VP because the choice reflects Obama's judgment. It doesn't matter a bit what experience he brings to the Obama presidency.

The President doesn't need the VP to agree with him, and usually doesn't ask, for fear that he will seem weak, ignorant, or indecisive. The President has access to the best intelligence and advice in the country, anyone he wants. The VP does not provide a special resource. The VP serves in the President's cabinet only to the extent that the President directs or allows him.

The VP seems to matter because the public thinks that he matters. The public likes the idea of a "team" running the country. It is natural to consider two people in agreement as more stable than one person. In fact, the President jealously runs the show.

The VP is most useful during the election because he gets more publicity than other supporting politicians. He can attack the opposition without making his candidate President look mean. He can advertise the President's policy after election.

A VP can build support for his own run for President, and he can give his supporters more influence.

Albert Gore was VP for eight years under President Bill Clinton. He has acquired $100 million by being chief lobbyist for green causes while in office, and an investor and partner in green companies enabled by public policy and legislation that he influenced.

The VP does not add to the skills of the President or provide balance in governing. He becomes President in Waiting, Lobbyist in Chief, gives aid to his factional political supporters, and can use his influence to become rich.

The VP is a distraction from the central question of the election, which is what worldview and judgment does the candidate for President bring to the job?

--------
08/31/08 - Governor of Alaska, Sarah Palin is McCain's choice for Vice President.

This supports Palin's political career by pleasing Palin's political supporters, and some people will support or oppose McCain because he has picked her. She has the political identity of a strong, independent, religious, pro-life, woman and mother.

There is debate about her political experience. Weak because she was mayor of a small town, and is governor of a small state. Strong because she has been a successful reformer, removing corruption and negotiating for lower taxes and efficient government.

McCain reveals his judgment by choosing her as a person who could be president. Actuarial tables tell us that McCain's chance of dying within 4 years is 16%, 1 in 6. Obama's chance of dying within four years is 2%, 1 in 50.

From the Social Security Period Life Table, Expectations for life as of 2004. Of 67,016 males age 72 in 2004, 57,395 are expected to be alive 4 years later. That is a 14.4% expectation of death. I simplify that to 1 chance in 6 that Palin will need to serve as President, including some chance that McCain could be disabled.
The question remains. Is McCain or Obama the better choice for President as an individual, regardless of VP? How is the judgment of McCain or Obama revealed by his choice of person he believes would be a good President in his place?

Aug 2, 2008

Econ 201: The Myth of the Economic Multiplier

$1000 Business Sales x 4 Economic Multiplier = $4000 Economic Benefit. No.

PBO's (politicians and business owners) often want to develop businesses using taxpayer money. The politicians may subsidize loans, give tax breaks, sell public land cheaply, buy private land for the project, build utility services and roads, and provide subsidies. The PBO's need justification for the public expense. A claimed economic multiplier helps them get the money.

I usually suspect the motivations of the PBO's. The politicians or their family members may own part of the business, be its suppliers, or sell the land used. The politicians may get contributions from the business owners and/or the unions that supply workers to the business. The business may receive contracts from the town at favored prices.

PBO's gain public support by giving an inflated "Economic Value" or "impact" for the project. This sounds good but has no meaning. Call the project X-Corp. The Economic Value of X-Corp is supposed to be its spending increased by an Economic Multiplier of about 4. If X-Corp spends $1 million per year, it is supposed to have an Economic Value of $4 million to the people of its town and state.

The Economic Multiplier comes from counting transactions. X-Corp pays dollars to its employees and to other businesses. Then these people and businesses re-spend the dollars to more employees and businesses, and so on, in a spreading wave of re-spending that makes everyone happier. The Economic Multiplier is supposed to estimate how much additional value is generated from this re-spending.

The PBO's might say that a 5% sales tax on the $1 million in X-Corp's sales, plus a 5% income tax on the $4 million in increased Economic Value, produces $.25 million ($250,000) in additional tax revenue, each year.

This looks like a big win for the public. The tax revenue over 10 years is worth up to $1,755,000 in public expense up front to get X-Corp going and produce that $4 million in economic benefit each year.

That would justify the public investment, if it were true.

Note that a single payment of $1,755,000 today is worth 10 yearly payments of $250,000, if similar investments earn 7% interest.
Two nagging thoughts.
  • When X-Corp sells $1 million in goods, does it really produce $4 million in benefits to the community? X-Corp collects the first million; who is getting the other $3 million? (They aren't)
  • If Bob pays his neighbor's son Jim $10 to mow his lawn, does this send $40 in value into the community? (No) Is Bob's situation different from X-Corp? (It isn't)

Transactions Overcount Benefits

Economic Value and the Economic Multiplier count transactions, which overcounts value.

Passing dinner rolls around a table shows what is going on. Don't laugh. The first person accepts 6 rolls from the waiter. He takes one roll and passes five to the next person, who passes 4 to the next, and so on.

The appearance of 6 rolls at the table is new value appearing in the dinner table economy. The wave of spending and re-spending sends value around the table. The Economic Value approach sees 6 rolls of spending, followed by a wave of 5+4+3+2+1 of re-spending, for a total of 21 rolls of Economic Value, and a 3.5 Economic Multiplier (3.5 x 6 = 21). But there are only 6 rolls. The re-spending distributes the rolls; it doesn't create more rolls. The real value of 6 rolls is overcounted by looking at the roll-passing transactions.

In the same way, X-Corp pays its employees and suppliers for the value they provide to X-Corp. The X-Corp employees and suppliers pay others for goods and services. The others pay still others for the goods and services received from them. And so on. The money, like the dinner rolls, distributes the value created by X-Corp to all of the people who are directly or indirectly providing goods and services to X-Corp and its employees. Money moves away from X-Corp in exchange for the resources (value) moving to X-Corp and finally to X-Corp's customers.

Many layers of suppliers do not increase the value created by X-Corp. That value is set by X-Corp's sales. That value does not increase as it is distributed among all of the people who somehow contribute to X-Corp's products. The Economic Multiplier is 1. In other words, there is no Economic Multiplier when we look at value rather than the many transactions that distribute value.

The True Value of X-Corp

Say X-Corp sells $1 million in goods each year. A 5% sales tax on the $1 million in sales, plus a 5% income tax on the $1 million in value that X-Corp distributes to its employees, suppliers, and owners (however indirectly) produces $.10 million ($100,000) in additional tax revenue, each year.
Note that $100,000 tax revenue per year for 10 years is worth $702,000 in public expense up front to get X-Corp going, and $1 million in benefit is distributed to X-Corp's workers and suppliers each year.
It sounds great when a PBO says: "Spending $1 million in public funds today to support X-Corp will generate $250,000 per year in increased tax revenues over the next 10 years (worth $1,755,000 today). There may be some continuing subsidies, which are well worth giving to X-Corp for the $4 million in economic benefits (4X multiplier) generated each year by the $1 million yearly sales by X-Corp."

The reality is not so good: "Spending $1 million in public funds today will generate $100,000 per year in increased tax revenues over the next 10 years (worth $702,000 today). There may be some continuing public subsidies, which we hope are worth the $1 million in income produced each year by the $1 million yearly sales of X-Corp."

More bad news. Any spending by X-Corp for supplies and services produced out of town does not give income to people in the town and it is not taxed by the town government. Any sales by X-Corp out of town do not contribute sales taxes to the town. This reduces the benefits coming back to the town from starting X-Corp, and reduces the amount of investment by the town that makes sense.

The Government is a Bad Investor

It is probably not good for the community when a government spends taxes to start up and subsidize X-Corp, regardless of the amount.
  • The PBO's are happy to overstate the economic value by 4 or 5 times to get the deal done. The PBO's must expect benefits for themselves that don't depend on any widely distributed public ones. Why should the PBO's look too deeply into the math? Why trust PBO's who are willing to fool us?
  • The town usually invests more into X-Corp than the increased tax receipts are worth. It is not an investment in the usual sense; the town does not own any part of X-Corp, although the town is providing resources to start it up and maybe keep it going.
  • There is no guarantee that X-Corp will last 10 years, but the town provides its support up-front. The PBO's may receive enough value that they don't suffer if the business fails in a few years.
  • Businesses started or operated with a government subsidy are not likely to be the most efficient. So, they are more likely to be driven out of business by competition, making the return in taxes worth less than expected.

Worse, subsidized and favored X-Corp may compete successfully with other unsubsidized businesses. The inefficient, tax supported X-Corp can replace another efficient, completely private, tax-paying company. This makes everyone worse off, other than the X-Corp PBO's.

New businesses should pay for the infrastructure improvements they need. This assures that the business is beneficial to the town. It rewards businessmen who organize all costs into their business plan without draining resources from the government. Government only has the money contributed by its citizens. Tax revenue shouldn't be distributed to businesses in the hope of making "everyone" wealthier.

Not Priming the Pump

An economy that uses money is vast, complicated, and wonderful. It is easy to think of it as magical, as if we can "tweak" the system to get more stuff from somewhere. In fact, work produces things of value, and the economy is a system for organizing work and distributing those things, using money as a placeholder in transactions.

That is all. No magic and no multipliers. The rules of the system are simple. People exchange goods and services as they wish. The complexity comes from the number of people involved, and the detailed organization of work that they create.

People use analogies to understand complex systems. False analogies are "Priming the pump" and "Jump-starting the economy." The idea is to add some money to an economy to get the transactions flowing and increase wealth more than the amount of money added. These are both closely related to the false idea of the Economic Multiplier.

Some water pumps cannot pump air when starting up if their valves are dry. They need a wet internal seal to pull the air out of the supply hose. Pouring in some water to "prime the pump" solves the problem. The pump moves the air, then moves the water it was designed for. The priming water is a stimulus that helps the pump to start up when there is air in the line.

A car battery can be too weak to start a car, but the car can run and recharge the battery (using its electric generator) if the car can somehow be started. The power from a good second battery "jump-starts" the car for driving, and provides a power stimulus only needed briefly at the start.

These are weird and false analogies when applied to an economy. An economy is a group of people exchanging goods and organizing work. There is no central pump. People don't forget how to transact business or spend money. They do not get out of the habit of working or become sluggish. Money does not create wealth by "flowing around". Money is a placeholder in transactions for the exchange of goods and services between people. A transaction recognizes something of value but does not create that value.

A PBO relies on the Multiplier when he talks about "stimulus" or such. He says that taxpayers will benefit when the government gives people public money, because the long term improvement in the economy will repay any expense. As usual, this is very convenient for the PBO, and wrong. The economy is not like a pump, engine, or thick syrup that needs to start flowing. There is no long-term improvement in the economy from the "priming", only a one time increase in work to create the goods in exchange for the new money.

Taxing Peter to Pay Paul

Government is supposed to collect and spend taxes for public goods, such as roads, police, education, and parks, that have some relation to benefiting the general public. PBO's use the Multiplier and glib analogies to ask for government subsidies as a public good. We would all now be rich from government spending if this were true.

Government "investments" and subsidies are actually transfers of money from taxpayers to PBO's. It makes taxpayers poorer to the same extent that it transfers goods to the PBO's and the public. This does not create wealth overall, and usually destroys wealth as bad deals and failed projects eat the real value of collected taxes or government borrowing.

Personal Experience Of Transactions

People like receiving money, and they usually like spending money. Transactions produce pleasure on both sides. These feelings make it seem like the Economic Multiplier should be true. It is hard to argue against feelings, and it may take more than the above analysis to convince you that the Economic Multiplier is hot air.

Jim is an employee. He keeps almost all of his pay for his benefit. This supports Jim's feeling that transactions create value. Transactions deliver opportunities to him when he is paid, and he receives value personally when he pays others.

Jim has some expenses that support his job and cannot be avoided, such as for commuting, more expensive lunches, and office clothing. He enjoys these, except for the small expense of commuting.

Bob sells office supplies to X-Corp. He buys the supplies from manufacturers, then packages and delivers them. When X-Corp pays Bob $1000, he keeps about $80 as his pay (8% profit), and transfers $920 to others. Bob divides the money among the people who produced $1000 of value: he, his employees, and his suppliers. Almost all of the money and goods that Bob receives and spends is distributed to others.

Bob pays income tax on the $80 that he earns, and the others pay income tax on the portion of the $920 that each one earns. So, the total tax paid to the government is based on $1000, once.

Economic Benefit/Impact and the Multiplier counts transactions as being value. This is almost correct for Jim, who collects almost all of the value of his transactions. It is wildly incorrect for Bob, who organizes the work of others. Most people are like Jim, so they tend to believe the Multiplier without thinking much about it.

Looking For The Multiplier

The presentation above gives a direct explanation. But, you might think that I missed something or used bad logic. We can examine the Multiplier in other ways.

The Spending Goes On And On

PBO's claim that when X-Corp spends $1000 it produces $4000 of Economic Benefit/Impact. If true, then this good effect is not limited to X-Corp. There is nothing that distinguishes between corporate and personal spending. Every amount spent would have the Multiplier effect.

So, when Bob's employer gives him $1000 it goes on to create $4000 in Economic Benefit. When Bob spends the $1000 for rent, it creates $4000 in Economic Benefit. Also, when his landlord re-spends the $1000 on mortgage and heat. You would have to believe that every dollar in circulation is going to produce $4 in Economic Benefit, every time it is spent. This is a dreamworld.

In the real world, Bob receives money in exchange for his work (the value he creates), and he spends that money to acquire goods (value that others create). Once. No Multiplier. There are no additional Economic Benefits lying around.

Trading Vegetables

Some examples at a small scale show the details of what happens in transactions, the use and effect of money, and how value is created and distributed. The complexity of an economy is produced by linking together millions of such chains of transactions.

1. Barter

Bob grows beans in his spare time. Tom grows tomatoes. They tire of eating just their own produce, so they meet to exchange 5 pounds of beans for 5 pounds of tomatoes. The Multiplier cannot apply here. The magic of money is not involved. Only Bob and Tom are affected by this trade. They are happier because of the trade, but no one else is happier. Bob and Tom get the benefit of this trade once, not 4 times.

2. Olive Oil

Bob's beans are not ready; he brings a bottle of olive oil. Tom gives tomatoes to Bob and takes the oil. Bob will come back in a few days with the beans in exchange for the oil. Tom can keep the oil if Bob doesn't deliver the beans. Bob brings the beans two days later and takes back the oil. The oil gave Tom some value to hold so that the exchange could be done in two parts. The value of the oil assured Tom that he wouldn't lose value on the trade.

3. Money

Bob's beans are not ready; he brings $10 instead of olive oil. We can say that Tom sells tomatoes to Bob for $10. Later, Bob sells beans to Tom for $10. Money is changing hands. Still, there is no Multiplier.

4. Three People

Pam joins the group, selling peppers.
                      Tom     Bob    Pam       
Bob buys tomatoes    $ 10    $-10   $
Tom buys peppers      - 5              5
Tom buys beans        - 5       5
Pam buys beans                  5    - 5
                     ----    ----   ----
                     $  0    $  0   $  0
Three people exchange vegetables. Money provides value for trades that are separated by time and divided into smaller amounts. It is confusing to describe these exchanges entirely in words. The table shows where the money went in exchange for the vegetables traded.

For example, Bob buys tomatoes from Tom for $10. The table shows that Bob spent $10 and Tom received $10.

The money balances each trade, so the people are even in value at each moment. Olive oil might be used instead of money, but it is less convenient, and not everyone would agree to holding olive oil in exchange.

Three people sell their vegetables, buy what they want, and end with the same cash they started with. This would be impractical without money as a way of completing individual transactions. They have a more interesting dinner as a result.

These exchanges traded $25 worth of vegetables. That value was created by growing the vegetables. The money revealed value, and helped to exchange value, but it did not create value. There is clearly no multiplier in this closed system.

5. Economy

Mike appears and buys vegetables for sale in town. He buys $60 of vegetables and sells them in town for $100.

Mike produces $100 of value for his customers, the value of his sales. The vegetables were worth $60 in the country; Mike added $40 in value by transporting them to willing customers.

Customers provided $100 in value (money) to Mike. Here is where the value went or is going to go:

1 Mike       34   Mike's profit (his pay)
2 ABC Gas     5   Mike's Delayed expense 
                   for gas, 25 mile trip
3 ABC Garage  1   Mike's Delayed expense
                   for tune-ups
4 Tom        20   Tomatoes
5 Bob        20   Beans
6 Pam        20   Peppers
            ---
           $100   Mike's sales to customers
The $100 in sales to customers is the total value available. The other transactions distribute it to all of the people who support Mike's efforts. Mike receives $40 and Tom, Bob, and Pam receive $60. Soon, Mike pays $5 for gas used on his trip. Later, this trip costs another $1 in related car maintenance.

A PBO talking about Economic Benefit would count $100 paid to Mike, plus $60 paid to the growers as $160 in economic benefit. This counts the $60 transfer payment twice. In a typical Economic Benefit analysis, transfer payments are counted many times to get the Multiplier of 4. This overcounts value and gives an inflated result.

This shows some of the complexity in an economy. The ABC Garage contributes a little value to Mike's business without knowing it. The growers know that Mike is selling their vegetables, but don't know or care much about the details. Mike saw that he could make some money when he compared the price for vegetables in the country to the sale price he expected in the city.

Discounted Value (optional reading)

Discounted Value is the value today of payments to be received in the future. I said above that 10 yearly payments of $100,000 is worth $702,000 today, at a 7% interest rate. The exact math is complicated, but the idea is easier.

What amount would you loan X-Corp in order to get back 10 payments of $100,000 over 10 years? $1 million is too much. You would just get back your money over time, without earning anything from the loan.

This is like calculating a home loan, except we want to know the loan amount that produces a payment of $100,000, rather than starting with a loan amount and calculating the payment.

We will start by being generous and then correct ourselves. Say we loan the full $1 million, and want to earn 7% interest. X-Corp has roughly one-half of the money on average during the 10 years of the loan. X-Corp starts with $1 million during the first year. In the last year, after making 9 payments, X-Corp has about $100,000 in loan outstanding. We can estimate the total interest at 7% x 10 years x $500,000 (half the loan) = $350,000. Our rough estimate of principal plus interest is $1,350,000, so the rough payment is $135,000 for 10 years.

The detailed calculation (not shown) gives a payment of $142,400. So, a $1 million loan at 7% yearly interest is paid back by $142,400 per year for 10 years.

We need to loan less money if the repayment is only $100,000 per year. $100,000 is 70.2% of $142,400. A loan of (70.2% x $1 million) = $702,000 is repaid by $100,000 per year.

So, the government can spend up to $702,000 to get X-Corp started, if it wants at least a 7% return on this investment, and if it expects $100,000 per year in increased taxes in repayment.

Links

The Multiplier from The Concise Guide To Economics, by Jim Cox, 1997.

He sees the Multiplier as "theory run amok" and notes other mistakes in analyzing an economy. The description is direct and somewhat technical, but you can get the idea without understanding the mathematics.

-- --
With multiplier, poultry has $8-billion economic impact
from BNet, from The Mississippi Business Journal, by Becky Gillette, July 2, 2007,

It never hurts to puff up the importance of a business by using the Multiplier. Notice the word "impact" because no one is quite sure what the effect really is.

The farm gate value of poultry in Mississippi in round numbers is $2 billion," said Mississippi Farm Bureau president David Waide. "That is huge." Waide said the multiplier impact of the industry as dollars get turned over in the economy is approximately four times the farm gate value. That would give poultry an $8-billion impact on the state's economy.

-- --
Economic Multipliers and Local Economic Impact Analysis
by David Kay, Cornell Local Government Program, December 2002

This talks about the Multiplier with a scholarly tone. It says that the "direct effects" should be estimated carefully. Then, just Multiply to get the overall economic impact. That is it for explaining the Multiplier. Notice the use of "impact" again, because people don't know what the effect really is.

Headlines like these recent real-life examples are prized by project promoters and business boosters. They often appear when advocates for private sector projects are seeking public support. The dollar figures featured in the stories are large, even "huge". They signal to readers both economic importance and political significance.

An economic multiplier lies behind nearly all [dramatic development] headlines. Multipliers are typically used to turn large dollar impacts into even larger ones. They do this because they translate project-specific effects into economy-wide impacts.

The local spending impacts associated directly with a specific project or economic activity are the starting point of any impact analysis. Known or planned facility construction and operating expenditures are a typical example. Called "direct effects", they are nearly always the most important data to estimate well in any impact analysis. To estimate economy-wide impacts, numbers known as multipliers are literally multiplied by the direct effects.

-- --
The Tax Rebate Was a Flop.   Obama's Stimulus Plan Won't Work Either
August 6, 2008 - By Martin Feldstein
Mr. Feldstein is former chairman of the Council of Economic Advisers under President Reagan, a professor at Harvard, and contributor to The Wall Street Journal.

My analysis of the Multiplier conflicts with Mr. Feldstein. The US Government recently distributed $100 Billion dollars to stimulate the economy by increasing spending (transactions). It failed miserably. Partly because people were not inclined to spend it all. Partly because there is no Multiplier. The Government believes that "confidence", and "impact" are somehow the same as value. The government relies on a Multiplier to create more benefit than the dollars spent.

"Those of us who supported this fiscal package reasoned that the program would boost consumer confidence as well as available cash. We hoped the combination would cause households to spend a substantial fraction of the rebate dollars, leading to more production and employment.

An optimistic and influential study by economists at the Brookings Institution projected that each dollar of revenue loss would increase real GDP by more than a dollar if households spent at least 50 cents of every rebate dollar."

-- --
Keynesian Economics Is Wrong
04/10/09 by Daniel Mitchel (video 7:29)

Politicians claim that more government spending can stimulate an economy, an economic theory by Keynes in 1935. The Center for Freedom and Prosperity Foundation produced this video which examines both the theory and evidence. Allowing politicians to spend more money does not produce better economic performance.

Jul 11, 2008

College is an Expensive IQ Test

They Let You Pay Them. It Doesn't Mean They Are Worth It.

The law says that a company cannot give an employment test unless it has been shown to be non-discriminatory in effect. That means it doesn't screen out people of color at a different effective rate than white people.

So, employers don't create their own tests or use standardized tests. Interviewers talk randomly about whatever they want, using personal judgment to decide if the candidate is "a good match". This is supposed to be less discriminatory!

If a new hire does not succeed, his degree from a "good school" provides protection for the manager who hired him.

Big Boss: I hear that Jim isn't working out. You hired him. How did that happen?
Little Boss: Jim had a degree from a good school. How could I know?


Disparate But Not Serious
05/18/07 - Wall St Journal by James Taranto

What most professional jobs require is basic intellectual aptitude. And what has changed since the 1970s is that the court has developed a body of law that prevents employers from directly screening for such aptitude.

The landmark case was Griggs v. Duke Power Co. (1971). A black coal miner claimed discrimination because his employer required a high-school diploma and an intelligence test as prerequisites for promotion to a more skilled position. The court ruled 8-0 in the miner's favor. "Good intent or absence of discriminatory intent does not redeem employment procedures or testing mechanisms that operate as 'built-in headwinds' for minority groups," Chief Justice Warren Burger wrote.

This became known as the "disparate impact" test, and it applies only in employment law. Colleges and universities remain free to use aptitude tests, and elite institutions in particular lean heavily on exams such as the SAT in deciding whom to admit. For a prospective employee, obtaining a college degree is a very expensive way of showing that he has, in effect, passed an IQ test.

Instead of facing an imperfect hiring exam, there is a court approved path through college that happens to cost $100,000 and 4 years of full-time study. Even then, the benefit for the applicant is unknown, except for a group of elite schools with even higher fees and great reputations.

In college at the University of Chicago, I talked to a graduate student in Physics. He had overheard some shocking comments between two professors.
Professor A: What is the quality of the new physics grad students?
Professor B: One or two look promising. The rest should find something that they are good at.

U.Chicago had a nationally recognized physics department. A student had to be dedicated to physics study and have high grades and recommendations to be admitted to the program. Yet, their professors thought most of them were in the wrong place and weren't good enough for careers in physics!

We would like to think that institutions within our society are valuable to us. I'm sad to report that they are in it for themselves. You can't assume that what you are getting is valuable and efficient just because you are buying their product.

A student thinks that his college degree is valuable to future employers. It is, but only as an indicator of his intelligence. His college professors don't train students for careers, and most businesses have the attitude "Forget what you learned in school. This is the real world."

Let's be smart enough to allow people and businesses to talk to each other using any criteria they want, especially for hiring. If a person meets discrimination at one employer, then there are other employers. If a person meets discrimination at ALL employers, then no court order is going to help. It certainly doesn't help to require paying $100,000 and 4 years to schools so the employers will not be sued for unintended discrimination. That is court-required discrimination against the non-rich.

How College Selection Affects Earnings
Stacy Dale - Mathematica Policy Research
Alan Kreuger - Princeton University - 02/16/11

Dale and Kreuger found a big boost to later earnings for students attending highly selective colleges in 1976 and 1989. They controlled for commonly observed factors such as high school GPA and SAT scores.

They further adjusted for student ability by considering the average SAT score of the colleges to which the students applied. This accounted for almost all of the variations in earnings. The remaining effect of college choice on earnings was close to zero.

Certain subgroups benefitted from a prestigious school. Dale and Kreuger considered black and Hispanic students, and those who had relatively less educated parents. Their boost to earnings remained large after the above adjustments.

This suggests to me that the value of highly selective schools is "signaling", as compared to attending less prestigious schools. The prestige of the school may remove some of the negative bias in hiring that affects minority students and those showing the cultural differences of being raised in a less educated household.


The College Scam
01/28/09 - TownHall.com by John Stossel

Do four years of college produce a wealthier life? Maybe the college is just there when people are reaching their potential. And what is the increase in earnings?

[edited] During the campaign, Barack Obama repeated the common statistic, "On average during your lifetime you will earn a million dollars more if you get a bachelor's degree."

Rachele Percel borrowed to pay $24,000 a year to attend Rivier College. "I was told to take out the loans and get a degree in Human Development because when you graduate you're going to be able to get that good job and pay them off, no problem," she told me.

She failed to find a decent job for three years. Now, she holds a low-level desk job doing work she could have done straight out of high school, and she is $85,000 in debt. She says, "I definitely feel like it was a scam."

A recent survey asked thousands of students: Would you go to your college again? About 40% said no.

Dr. Marty Nemko is an education consultant and career counselor:

The bachelor's degree is America's most overrated product. The million dollar increase in earnings is a misleading statistic. It includes billionaire super-earners who raise the average.

More importantly, many college kids would have been successful whether they went to college or not. You could take college-bound students and lock them in a closet for four years: they are going to earn more money. Those are the kids who already tend to be more intelligent, harder-working and more persistent.

Those in the bottom 40% of their high school class have a very small chance of graduating college. Colleges actively recruit those kids. Eight years later, many of them have no degree and lots of debt. They think of themselves as failures. It is immoral that the colleges do not disclose that!"

Universities still throw around that million dollar number. Arizona State recently used it to justify a tuition hike.

Charles Murray's recent book, "Real Education", argues that many students just aren't able to handle college work. Graduation statistics seem to bear him out.


For Most People, College Is a Waste of Time
8/13/08 - WSJ Opinion by Charles Murray, W.H. Brady Scholar at the American Enterprise Institute. This essay is adapted from his forthcoming book, "Real Education: Four Simple Truths for Bringing America's Schools Back to Reality" (Crown Forum).

Mr. Murray provides a plan to make colleges relevant again, because of these problems.

Advanced skills for people with brains really did get more valuable over the course of the 20th century, but the acquisition of those skills got conflated with the existing system of colleges, which had evolved the BA for completely different purposes.

Outside a handful of majors -- engineering and some of the sciences -- a bachelor's degree tells an employer nothing except that the applicant has a certain amount of intellectual ability and perseverance. Even a degree in a vocational major like business administration can mean anything from a solid base of knowledge to four years of barely remembered gut courses.


Aptitude Tests  vs  College

Fred:  My high grades and SAT scores got me into Big College. I'm on my way.

Mike:  After you pay $100,000 in tuition/expenses and lose four years of wages.

Fred:  There will be some studying, but also parties and girls.

Mike:  Too bad you couldn't present your grades and SATs to some company, earn while you learn, party in your own apartment, and buy a Ferrari with that $100,000.

11/13/11 - Carpe Diem by economist Mark J. Perry

George Will:  [edited]  There were 2,000+ personnel tests available to employers in 1964. But, an Illinois official ruled that these might be unfair to disadvantaged groups. Employers were burdened to prove that a test was a "business necessity" for a particular job if it had a "disparate impact" [ Black and White applicants did unequally on the test].

Many employers feared endless litigation. They switched to requiring college degrees as indicators of intelligence and diligence. This was one reason college attendance increased from 5.8 million in 1970 to 17.5 million in 2005.

Peter Thiel:  [edited]  Higher education is a giant selection mechanism. 10% of the value of a college degree comes from learning, 50% from getting into a selective university, and 40% from graduating from a selective college known to employers.

It might be much more efficient if employers could use intelligence tests instead of expensive four-year college degrees that add very little educational value.


Advice Goddess: Ever Heard Of Community College?
08/25/08 - Amy Alkon posts about the pressure of going to a name college, and selfishness. Many commenters report what college was worth to them.


Technology is reducing college costs. Why is tuition going up?
11/2008 Washington Monthly by Kevin Carey [edited]

The average price of attending a public university, adjusted for inflation, more than doubled over the last two decades. The steepest increases came in the last five years.

Colleges have become more efficient and productive through technology, and the cost of teaching is starting to decline. Almost none of those savings are passed along to students. Colleges are pocketing the difference, even as they raise tuition.

Virginia Tech is reputed to be a first-rate engineering school. Engineers need to learn math. But, budget cuts in the math department reduced the number of professors despite increasing numbers of math students. This kind of irrationality is typical in higher education, where departmental budgets often have little relationship to costs, revenues, and demand.

Colleges spend the money elsewhere. The Delta Project on Postsecondary Education Costs found that tuition and fee revenue per student at public research universities increased by 34 percent from 2000 to 2005, inflation adjusted. Spending per student declined on instruction and academic support.

This is not new; overcharging for introductory courses is standard in higher education. Colleges use the excess revenue from huge, inexpensive lecture hall classes to support other, money-losing activities. Freshmen have always been cash cows, and technology has made them more so.

Colleges are status-seeking institutions. Research and scholarship, Division I sports programs, new buildings, and high SATs are all components of status. Status seeking would be perfectly acceptable if a college’s reputation were based largely on teaching. Colleges would balance the competing interests of students, faculty, administrators, alumni, and the public. Self-interested institutions would prosper, and students would get a high-quality, reasonably priced education.

But status in higher education is not based on comparable measures of student learning, because such measures aren’t publicly available; lobbyists for colleges and universities have made sure the data is kept under wraps. It is effectively impossible to judge institutions by their outputs, by how much students learn. So, the pecking order is based on inputs like freshman SAT scores and tuition cost. Price has become a symbol of quality, instead of a component of quality. Colleges have many incentives to raise prices and none to lower them. Lower prices send a negative signal, often driving away students.

Rational comparison would still leave a niche for prestige universities, because there will always be rich people willing to pay for the status of elite colleges. Yale University now gives away complete sets of lecture course videos at open.yale.edu. Yet, more students than ever are ready to pay $50,000 per year for those same courses. Those students aren’t paying a premium for what they learn, they are paying for a piece of paper certifying that they learned it at Yale.


Down with the Four-Year College Degree!
12/03/08 - Cato-Unbound by Charles Murray (10/2008)
The link leads to more papers on the subject.

[edited] So what’s my beef with the current college system? Imagine that you have been asked to design America’s college education system from scratch. One of your colleagues submits the following proposal that is cruel and possibly insane, but it is the system that we have.

•  We will set up a single goal to represent educational success, which will take four years to achieve no matter what is being taught.
•  We will attach an economic reward that often has nothing to do with what has been learned.
•  We will urge large numbers of people to seek that goal, despite having insufficient ability, wait until they have spent a lot of time and money, and then deny it to them.
•  We will stigmatize everyone who doesn’t meet the goal.
•  We will call the goal a “BA.”


Why College Is A Waste Of Money
12/23/08 - EasyOpinions by Andrew Garland
(via Subprime Education by Mark Steyn)

A college student reports on the waste and dispair imposed by a college system that discards about half of the students who try for a degree.

[edited] My high school was a small charter school with the mission to send all of its students to college. Our course work supported an obsession for college preparation. Most kids had full-blown college fever by senior year.

I'm now a sophomore at UMass Amherst. At least a few of the people from high school have already dropped out -- after blowing tens of thousands of dollars on tuition and fees at expensive, but not especially good, private colleges. They were great, smart people, but I knew that they lacked the focus, drive and maturity they would need to graduate.

This money came from parents, from federal Pell Grants, from the colleges, and from student loans that these kids will have to pay back while working low-wage jobs.


Why is law school so expensive?
01/13/10 - IdeoBlog by Larry Ribstein.
Via Cafe Hayek.

[edited] The current system forces everybody who wants to practice any kind of law into three-year, high-priced law schools. This will never produce competition. The cartel forces practical/doctrinal training to coexist uneasily with lawyer-scholars, and results in training that compromises the needs of all kinds of lawyers.

Where is the argument as to why high-level training should be forced down the throats of everybody who wants to practice law?


Does U.S. News Make Law Schools More Expensive?
Frank J. Macchiarola and Michael C. Macchiarola

[edite] The accreditation process gives law schools a virtual monopoly on bar admission. The 200 ABA approved law schools exclude prospective attorneys who cannot afford the cost of a legal education as currently delivered.

This exludes lower cost alternatives like on-line education, credit for accelerated coursework, a two-year curriculum, or clerkships and internships. In fact, the position of law schools as the preferred vehicle for entry into the legal profession is little more than one hundred years old.

The framework of ABA rules has prevented law schools from pursuing radical innovations without jeopardizing accreditation, reputation, or standing.


College Aid Is Corporate Welfare
05/21/12 - The Atlantic by Andrew G. Biggs  (via Advice Goddess)

[edited]:  Recent research suggests that colleges capture a significant portion of federal aid rather than lowering costs to students. Simply put, much of federal student aid is corporate welfare for colleges.

Cellini and Goldin looked at for-profit colleges by eligibility for federal aid. Riegg and Goldin found that aid-eligible institutions charge 75% higher tuition across all states, samples, and specifications, even when controlling for the content and quality of courses. The higher tuition is about equal to average federal assistance. This suggests that institutions raise tuition to capture the maximum aid available.

Are for-profit colleges essentially different from non-profits? "For-profit" suggests greedy businessmen who raise tuition whenever possible. We might think that non-profit colleges would charge less out of altruism. But, they charge the same or more, offering more services over time to attract the best students with the best financial aid at ever higher prices.

Jul 8, 2008

Seduction and Politics

Is A First Date Too Soon For Love?

A woman waits at a table in a small Italian restaurant. A man arrives, gives her a questioning look, and approaches.

Jim: Hello, are you Pam?
Pam: Hi, you must be Jim.
Jim: [sits down] It is so nice to see you Pam. Sorry I'm a bit late.

Pam: It's been 30 minutes. What happened?
Jim: Various things. The details are not important. I'm just glad to be here now.

Pam: Well, OK. I see that you are a man of mystery.
Jim: [eyes flashing] I believe in living fully in the present, the past is gone.

Pam: You know, I do know something about your past. My friend Alice told me that you have dated a lot of women.
Jim: Pam, I don't know why she would say that. I have dated some, but I wouldn't say "a lot". Not much more than average. Anyway, the details are not important. I'm happy to be here with you now.

Pam: You are certainly handsome, and I like your direct and confident manner.
Jim: I'm not like other men. I have big plans for the future.

Pam: Oh, what are those?
Jim: I want a stable relationship, a loving wife, children, and I enjoy working hard to make my beloved happy. I would never argue. There really is no need for disagreement. I want a happy family and to bring us all together.

Pam: I like that as an ideal, but how can people avoid all disagreement?
Jim: I only want good things, so there is nothing to disagree with. The people who disagree with me are dumb. I see that you are smart. Don't worry. It will all work out after you are committed to me. You will see.

Pam: You are going a little fast here for a first date. I don't know much about you. I think we should date for a while before we talk about a glorious future. I would like to see who you really are.
Jim: I say these things because I really mean them. My words are sincere, and they are based on my plans and dreams. I really am who I seem to be. Don't insult me by asking who I "really am". I'm telling you all about me, and you are going to love me.

Pam: Alice told me more about you. Don't you remember her? She dated you a year ago, and was excited about your plans together for marriage and children. But, you left her for a prettier girl with social connections.
Jim: Of course I remember Alice. I hope she is well. I think she misinterpreted what I said. I haven't changed my position, but I needed to recognize some changing facts. I always intended to marry her and have a stable relationship, a loving wife, children, and to enjoy working hard to make her happy. Things just didn't work out. The details are not important, and they are in the past. I'm happy to be here with you now.

Pam: Yes, we are here now, and you are really cute and say such nice things. I want to believe you and know what our future might be together.
Jim: This is only our first of many times together, but I love thinking about the future. A future of a stable relationship, a loving wife, children, and working hard to make her, uh, you happy.

Pam: What will life be like for us?
Jim: I don't believe in disconnected lives. We will combine our dreams, efforts, and savings. Yours will be mine and mine will be yours. You will work hard with me to build a wonderful future. I will use our resources to show people how great we are, and they will look up to us as shining examples. I also think a powerboat and a basement bar would be fun. We'll have the best parties in the neighborhood.

Pam: That sounds like work. I'm not really a party girl.
Jim: You are going to love it. Believe me.

Pam: What is that paper?
Jim: It is an engagement letter. We can't be really engaged, it is too soon. First date and all. I don't want to rush things, but I need your support in writing.

It only says that if we spend time together, and if you marry me in November, our bank accounts will merge in happiness, and we won't disagree with each other about our plans after that. As an honest person, I think you will sign this. There is no obligation. I just need to know that I can effectively carry out our plans for real emotional change if we are married in November. This is only fair if we have an exclusive relationship. There are a few other things that aren't really important.

Pam: What is your profession?
Jim: I'm a politician. I'm on the way to a greatness that was always my destiny. Come along with me, my darling.

Jul 4, 2008

No Price Gouging Here

We're Honorable, So We Don't Have Any Stuff
It had been raining for three days. Jim went to Sam's Hardware Store in town. There were deep road puddles everywhere.

Jim: Hi Sam. I'm looking for a good water pump. My basement is drowning.
Sam: Hi Jim. I'm sorry to tell you that I had three WP-ABQ pumps in stock before this rain. A pretty good value at $140 too. But, they sold out.

Jim: I'm in trouble. There is 3" of water in my basement and it is rising slowly. I really need that pump.
Sam: I feel for you. My last pump sold to a guy who didn't need it now, but wanted to be safe. At the standard price of $140, he decided not to wait.

Jim: Have you ordered any more of them? When could I get one?
Sam: My usual re-stock is in two weeks.

Jim: Cripes! Can't I get one any faster? I'm willing to pay more.
Sam: Pay more. That reminds me of that big rain 4 years ago. I wanted to do some good, and make some extra money, so I rush ordered 8 of those pumps, and even paid a private trucker to ship them. I figured I could sell them for $280 each, and I'd be OK even if I had a few left over.

It worked out pretty good, until one of my customers (go figure!) complained to the Office of Consumer Protection. Said that I had "price gouged" him, because the usual price is $140. After the lawyer's fees and the fine, I was out $4,500. That sure taught me a lesson. Now, I only deal at the usual price. It isn't worth the trouble and risk to order ahead at that price.

Jim: How about a rush order now?
Sam: I could ask for a fast shipment and charge you $25 more. I even have a form from the Office of Consumer Protection. But, you would need to have it notarized at the bank, and it would still take 3 days for the pump to get here. Do you want to do that?

Jim: No Sam, it seems I'm stuck. I'll have to drive 20 miles to MillistonVille and see if they have any there.
Sam: Good luck on the roads. Be careful of some suppliers. Those pumps are great, but you don't know if they're used or broken until you hook them up.

Jim: Thanks Sam.


Feelings

Feelings about price gouging are emotional and wishful. They are something like  "The universe is against me, and my fellow man wants to charge me for help and supplies. I can't do anything about the universe, but I can prosecute those no-good businessmen."

We all wish that a guardian angel would help us in an emergency, but we are stuck with help from our fellow man. Some will volunteer. Some will pay higher costs to deliver goods at a higher price, possibly much higher. Some will have inventory that they parcel out at what the market will bear.

Should we investigate and prosecute the ones who are making a windfall profit? No.

People with the right skills, who own goods in sudden demand, or who have the connections and experience to acquire needed supplies, are just lucky. It may seem wrong that some people can profit from other's needs, but that is just the way the world works. The people in need cannot make their lives better by promising to investigate and punish those people who can help them. This promise to punish discourages all help: help from the good-willed as well as help from opportunists.


Planning Ahead

The idea of "price gouging" poses the question: In which situation are you better off?
(1)  The goods you want are sold-out and unavailable at the usual,
    lower price, or
(2)  The goods are available at a temporarily higher price.

In case (2) you can decide if the price is worth it.

When merchants are punished by laws against price gouging (as in New Jersey), they have no incentive to plan ahead by stocking up. So, if you individually have not purchased ahead, you are out of luck.

A good effect of free market pricing is to usefully ration limited supplies. At twice the price, many people will limit their purchases to just cover the emergency, rather than buy up everything they can. More people are able to get needed supplies.


Failures At Gas Stations

The worst effect of price gouging laws is to dissuade companies from planning ahead for emergencies. Existing companies are much more knowledgeable and better positioned to serve the public than emergency teams trying to set up infrastructure in one or two days.

Consider a gas station with no emergency electric generator. If public power fails, they can't pump gasoline. Why don't they all have a generator?

Generators are expensive to buy, install, and maintain. The station can't recover these costs in normal times, as they compete against stations that don't incur that expense. The responsible station must rely on much higher prices in emergencies, when they can pump gas and their competitors can't. But, they can't charge higher prices in emergencies, so they don't acquire emergency equipment.

The same goes for larger gasoline storage. The station doesn't need it in normal times. The costs of a larger storage tank could only be recovered by "price gouging" in emergencies.


Provide Choice

Our politicians should allow free trade at any price. This would not stop them from providing emergency services. It would merely allow an additional private choice in emergencies. Politicians can advise people that aid is on the way. People need not buy the goods they need at higher prices if they want to wait "just a bit" for government help. Let the people decide.

Politicians do not make things better by denying the public an option. That is the government monopoly at work. A cynic might say that politicians do not want to be compared to privately provided emergency services. It might make them seem less useful.


Links

Gas Prices: The Real Story
09/12/08 - Rich at Shots Across The Bow investigates why gas prices are spiking in Tennessee. Supply, not gouging.

But now Ike is headed for Galveston, and the pipelines are being shut down completely. When you're in a low stock condition, you are relying on a steady flow of gasoline to maintain smooth distribution. When that steady flow is disrupted, you're only hours away from shortages.


Consequences of Price Gouging Laws
06/01/09 - Knowledge Problem by Michael Giberson

[edited]:  West Virginia's price gouging law was triggered by the May 9 declaration of emergency for a flooded area. Marathon Oil temporarily halted sales to independent gasoline retailers lacking a current supply contract. Marathon said that it would lose money on sales made under the capped prices.

West Virginia's “anti-price-gouging laws allow businesses to increase prices to recoup costs if the increase is directly attributable to additional costs imposed on the business.” That is an unclear standard.

Georgia had higher prices due to supply disruptions last September. Fines for price gouging have ranged up to $20,000 plus restitution.

Marathon's wholesale gasoline costs have increased over the three weeks since the declaration of emergency in West Virginia. How much of that increase is “directly attributable to additional costs imposed on the business”? Marathon may have reasonably decided not to risk a lawsuit, and not pursue the opportunity to “recoup costs” under the law.

It is legal to not sell gasoline to new customers. So, why should it be legally risky to offer gasoline at some high price to those new customers?

Jul 1, 2008

Magic Power

Could They Do The Magic If They Wanted To?

A friend in college told me about his mother and what she knew about electricity. She regarded electricity as a type of magic and was resentful that she had to pay for it. She thought that it ran everywhere through the walls of the house. The reason that there were wall sockets was so the plugs on appliances would not damage the walls when plugged in. Otherwise, you could jam the plug anywhere and get the electricity. The plugs were designed so you could be charged for electricity when you used them. She was a good person, but didn't understand physics.

Electricity certainly is a type of magic supplied by a mysterious universe. It isn't free magic. Two wires run between a generator and an appliance. If you use the power of an engine or a waterfall to spin the generator, then you can absorb some of that energy in the appliance and force the appliance motor to spin, or let the energy escape into a resistance wire and get light or heat.

This only works if you build the generator, the appliance, make and install the wires, and power the system with other engines, using gas, coal, oil, nuclear, or water power. And dig up and refine the fuel for those chemical engines, or build the dams to control the waterfall. It has only taken about 180 years to get all of this developed. There is a bill for electricity because all of this work was and is done by people, and they want to be paid.

History 1821 First electric motor, 1837 Industrial electric motors, 1878-86 Commercial light and power stations, 1913 Electric refrigerator, 1953 345,000 volt transmission line.

+++

This history is generally true for all of our technology. It all seems easy after it is done, but it is the result of continuing effort by millions of people serving hundreds of millions of people. It has taken time and immense investment to create and combine all of the pieces to get the current results.

People with little engineering knowledge (most people) become suspicious that it is all easier than they have been told. They think: those engineering nerds could give us all this and more for less cost, if they would only think a bit harder and do the magic better. Why not get electricity from sunlight and 100 miles per gallon from gasoline? It has been done! Don't they understand that we need this? They are the keepers of the magic, and maybe they are releasing the secrets slowly so that they can be paid more.

Politicians are pushing exactly this position under the phrase "addicted to oil". Politicians are saying that a little push here, and a subsidy there, will show the way toward an energy future that was being hidden by the nerds. Favored "green" companies will be paid by the government along the way. That is what "subsidy" means. And those companies will pay the politicians. That is what "campaign contribution" means.

"Political" means "sneaky and lying" in normal usage. It is amazing that people trust the announcements of politicians more than the system of free investigation and discovery that has produced our technological world. Political strategies written on cocktail napkins are supposed to replace practical scientific knowledge and careful investment in productive technology.

Federal and state governments have acted to slow the development of oil and coal, to slow the construction of conventional power plants, and to stop nuclear power and refineries. These activities are legal, so politicians say that they haven't stopped them. These activities are highly regulated, and many were allowed to get to completion when the regulatory process prevented operation, after all the money had been invested and lost.

Imagine being an investor in one of those projects that was regulated away. It only takes one or two such cases to effectively stop development.

Politicians have also slowed the development of wind and solar (!) because these affect scenic views or use so much land. Ethanol production is highly subsidized because the subsidies benefit farmers, who have an outsized influence in rural states. Ethanol is useful as a costly additive to gasoline to reduce emissions of ozone and unburned fuel. Not enough ethanol can be produced or used at present to replace gasoline.

An "addiction" is short feelings of happiness combined with a long, painful decline in health and thinking. My personal relation to oil involves hot showers, driving to work and play, and being warm in the winter. This is a comfortable life, not an addiction. The true addiction is the false hope of the extreme green movement. Short periods of self-congratulation are combined with a long decline in what people will enjoy in their lives.

"Weaning ourselves off of oil", implies moving from infantile to adult behavior, from a simple food provided in complete care, to an adult menu of natural food.

There is little other "food" to eat. There is no established path from "easy" oil to "adult" (what)? "Weaning" implies we are just lazy, and should go use the adult energy. There is no "adult energy", and no analogy.

I'm not against green. Use french-fry oil for diesel engines, if you can stand the smell. Put up a wind turbine, if you can get a permit and no one can see it. Cover your roof in solar panels, if you are rich. Just don't expect these marginal actions to support everyone. Not yet.

It may help to think about recycling, another program pushed by green government. Did recycling lower the taxes in your town? What are the efficiencies of having two big trucks come by on Tuesday rather than one? How many miles per gallon do those trucks get? Does the town pay a subsidy to the recycling centers, or do the centers pay the town? Do the recycling companies contribute to the "campaigns" of your town officers?

Don't block development of oil, coal, gas, and nuclear power. If you do, then french-fry oil, wind turbines, and expensive roof panels are what you are going to get. Maybe. After many uncomfortable or expensive winters.

Links

Energy Matters presents an overview of types of energy production and some difficulties. See the section on Wind Turbines.

Ethanol Fantasy Fuels a Food-Price Nightmare
05/08/08 - John M. Berry at Bloomberg.com. About food prices, farm subsidies, and the futility and disruption of growing corn for ethanol fuel.

US halts solar energy projects over environment fears
06/2008 - The US Bureau of Land Management (BLM) is putting a two year hold on new solar energy projects on public land, to study the impact on plants and wildlife. "Solar plants may cover thousands of acres. We need to determine what the environmental consequences are. What does it mean when you spray the land with herbicides or remove vegetation?"

U.S. Lifts Moratorium on New Solar Projects
7/3/08 - The BLM announced that it was lifting the freeze, barely a month after it was put into effect. I suspect that the regulatory "hold" on the project was quite a thrill for the developers, and that this is welcome news. Do we live in a nation of stupid laws, or of political influence? The result for past proposed nuclear power plants was not so good.

Residential solar electric: still too expensive?
06/24/08 - A system that provides $420/year of electricity costs $40,000. This is a 1% return on investment, assuming no repairs or maintenance. Maintenance is conveniently up on the roof.

Alternate Energy - The 1% Test
7/18/08 - With some thoughts about engineering "magic".

Powering Down NY at The New York Post. From INSTAPUNDIT
8/04/08 A commision report approved the operation of the Indian Point nuclear power plant. New York Attorney General Andrew Cuomo has a different view.

"It's no surprise that Entergy's panel of paid consultants has turned a blind eye to the unacceptable risks posed by Indian Point," Cuomo huffed.

Cuomo, of course, has been trying to get the plant closed for more than a year now - playing upon apocalyptic fears of environmental destruction or terrorist attack.

The Green Hornet
8/06/2008 - A Wall Street Journal opinion that questions Mr. Obama's energy policy. It nicely reviews the current energy structure of the US.

"On Monday, Mr. Obama said that the U.S. must "end the age of oil in our time," with "real results by the end of my first term in office." This, he said, will "take nothing less than a complete transformation of our economy." Mark that one down as the understatement of the year. Maybe Mr. Obama really is the Green Hornet, or some other superhero of his current political myth."

Energy Policy for the Ignorant at Powerline
8/25/2008 - Comments about Speaker of the House Nancy Pelosi. She believes that natural gas is a clean non-fossil fuel, is against drilling for anything, and is setting US energy policy.

PELOSI: I'm -- I'm investing in something I believe in. I believe in natural gas as a clean, cheap alternative to fossil fuels.

Wind Energy Bumps Into Power Grid’s Limits
08/27/08 - NY Times (via Instapundit)
Energy production is big and complex. We need a policy to empower knowledgeable people (businesses) to handle all of the details, not just a new idea here and there. Changing big things takes time.

[Increasing wind power] would require moving large amounts of power over long distances, from the windy, lightly populated plains in the middle of the country to the coasts where many people live. Builders are also contemplating immense solar-power stations in the nation’s deserts that would pose the same transmission problems.
Preparing 240 Miles of Power Lines for Winter’s Wrath
11/09/08 - NYTimes.com by Ken Belson (via Freakonomics)
[edited] Doug Wassil and Eric DeChent inspect the 1,600 towers that support high-voltage electrical lines in New York City, Westchester County and points farther north. They use binoculars, hoists and voltage meters to ensure that the towers’ concrete bases, steel beams, ceramic insulators and other hardware will withstand high winds, freezing cold, and heavy snow.

Consolidated Edison’s towers, some nearly 500 feet tall, carry much of the power New York City needs from upstate. If a falling tree, high wind, or ice downed a line carrying 500,000 volts of electricity, parts of the city and its suburbs could go dark.

Disaster Resistant Energy Sources
11/10/08 - ChicagoBoyz.net by Shannon Love [edited]
Advocates of alternative energy seem to work from an unconscious conception that energy is to some degree a luxury good. They believe that we can live safely, healthily, and well without it. They plan in a cavalier manner, assuming that conditions will always be ideal and predictable, and if not, well, we can do without luxuries if we have to.

Energy is the heart of our lives. Without it, most of us will die within days. Losing 50% of our energy during a northeastern blizzard would kill millions. Sustained shortages of energy would kill more slowly, but just as surely, as we reverted back to the horrific lives of our ancestors. We need to think about rare scenarios because we are so dependent on energy that it would take only one such scenario to destroy everything.

People who advocate alternative energy need to tear their eyes away from the marketing brochures and instead try think hard about how to keep an old woman in the slums of Detroit warm in the heart of a once-in-50-years blizzard. If they can’t do that, they need to shelve their plans.

Problems With Green Energy
12/26/08 - AmericanThinker by Thomas Lifson

Darn, there are always a few glitches.

[edited] Reliability and maintenance problems of green energy sources are highlighted in a strikingly honest report in today's New York Times by Kate Galbraith.
In winter, wind turbine blades ice up and may hurl chunks of ice as they rotate, biodiesel fuel congeals in the gas tanks of buses, and solar panels produce less power in the weaker sun, or no power when covered with snow.

Even in northern California, with mild winters and little snow, solar panels can generate about half as much as in the summer, depending on how much they are tilted.