Thursday, May 27, 2010

Another Katrina?

If I told you there was a leak in a gold pipeline and gold coins were spewing out all over the bottom of the ocean, you would know some intrepid treasure hunters would be on the case recovering all that free gold. So why is precious oil washing up on the marshes of Louisiana and why has this become such an environmental disaster? Why doesn't BP offer a bounty for every barrel of recovered oil?  Is it possible that loose oil is just too difficult to recover? No, I don’t believe that’s the problem. This spill is a lot like Katrina in the sense that it shows how, for a number of reasons, we are incapable of taking care of ourselves in a crisis.

I used to be in the waste-water treatment business and I can tell you that, (this is going to surprise you), water and oil do not mix. Moreover, oil tends to float. Much of it is just sitting on the surface! The technology for separating oil and water is simple, cheap and plentiful. All we would need is a bunch of unemployed sailors, (like maybe fishermen who can’t fish), some barges with giant tanks, a bunch of huge pumps, floating skimmers, some hoses, and land and/or sea based oil water separators.

The problem with this is, the permits for all this would take some two years to get, the equipment would most likely have to be imported, the fishermen are getting unemployment checks so don’t need to work, there’s probably more money in a juicy lawsuit, the environmentalists want the issue around for political gain, and besides, the government will bail everyone out anyway, so why sweat! Meanwhile, the oil floats and spreads out.

Isn’t that just like Katrina? New Orleans didn’t have to worry about building their city below sea level in hurricane alley because the Government built them a nifty levee system and then threw hundreds of billions at them when it failed. Private donations are still flowing like water and they got to use the whole fiasco for political gain. It worked so well, they are rebuilding below sea level again.

Ben Franklin famously said; "Those who would trade liberty for security deserve neither."  Ronald Reagan went further and said;  “You and I are told increasingly that we have to choose between a left or right, but I would like to suggest that there is no such thing as a left or right. There is only an up or down -- up to man's age-old dream -- the ultimate in individual freedom consistent with law and order--or down to the ant heap of totalitarianism, and regardless of their sincerity, their humanitarian motives, those who would trade our freedom for security have embarked on this downward course."

We always think of totalitarian regimes as those led by a strongman like Saddam Hussein, Fidel Castro, or Kim Jong il, but is it possible that all that's needed for totalitarianism to flourish is a culture of dependency and an illusion of security? 

Monday, May 24, 2010

Aspirin was Invented in Europe, Right?

There are about 60,000 miles of blood vessels in the human body. Yet if a pinpoint sized blockage occurs in exactly the right spot, it can quickly kill a person with 59,999.99 miles of otherwise healthy blood vessels. All it takes is one strategic blockage to bring the whole system down. Want an aspirin?

With that in mind, consider the line of argument you may have heard about the financial meltdown and how it could not possibly have been caused by subprime loans and the Community Reinvestment Act (CRA). The argument goes something like this: “Yes, there were some subprime loans that went bad and some of them were even mandated by the CRA which Bill Clinton re-wrote along with help from Barack Obama and ACORN to force banks to make really bad loans and yes, the bad lending was massively encouraged by Fannie Mae and Freddie Mac which again was championed by Clinton, Obama, ACORN, the Congressional Black Caucus, and the entire Democrat Party with an assist from some key Republicans including even George W Bush. But there were nowhere near enough of these government sponsored bad loans to explain the systemic meltdown we saw in 2007 and 2008. Nothing to see here. Move along.”

What is so fascinating about this argument is that I’ve heard it from some of the same economists and “experts” who argue that Greece may cause a chain reaction and bring down the Euro, then Europe, then the Northern Hemisphere, and finally the World! So we are being asked to believe that a country with about 2% of the entire GDP of Europe can bring down the whole world while Fannie Mae, Freddie Mac and the CRA couldn’t possibly have been the blockage that gave the financial system a coronary?

Can both of these views be right? Is most of Europe healthy to start with? Was the rest of the US mortgage market healthy too? What if there is both disease and a strategic blockage? I’m jus’ askin’.

PS You may want that aspirin just in case…

Tuesday, May 11, 2010

Economics, Morals, and Linkage

Let's do a simple thought experiment:  imagine a world where you could ingest any substance you wanted, and some other anonymous sucker would suffer the consequences. Want a whole cheesecake? Fine! Eat away and some Mongolian or Kazakh would put on the weight. Want to get drunk on whiskey and beer? Go ahead. Some African or Israeli will get the hangover. Like fried foods? Not to worry. Live on fried chicken and french fries and some other sucker will suffer the coronary.

How long do you think we'd survive as a species in that world? I'd give us about a week. The only thing that's kept us alive all these centuries is the accountability of knowing that high risk behavior could kill us. End accountability, end the linkage, allow the amoral transfer of unlimited risk to anonymous others, and we are doomed.

Guess what? That is the economic world we live in and the death spiral is playing out in various places around the world including the US.

What do Greece, California, healthcare, runaway deficits, the mortgage meltdown, rising taxes, and high unemployment all have in common? Yeah, I know they are all in the news, but that's not the answer. No the correct answer is that in all cases, these things got to crisis levels because of Demand Side Economics (DSE) and its breakdown in Economic Linkage. Economic Linkage is the degree to which benefactors and beneficiaries are in a direct relationship. Once the link is broken, the amoral nature of DSE is obscured thus opening the door to the death spiral. That is the scenario we are seeing played out today.

In a previous post I defined Demand Side Economics (DSE) and this would be a good time to read it, or re-read it. Go ahead, follow the link. I can wait... The Irony of Keynes - Demand Side Economics

Ok, now that you have the background, you may be asking; Why would we fall for DSE time and time again after being burned whenever it is tried? And how do we get around the moral problems of DSE redistribution? The answer is Linkage. No linkage, no direct moral confrontation. We are allowed to act in morally ambiguous ways when the victims are anonymous. This is why Air Force pilots have an easier time dropping a bomb on a city than an infantryman does killing one person in hand to hand combat.

In Greece, the Greek beneficiaries of DSE who could retire at 53 with full pay and sail the Mediterranean knowing that some German would keep working and eventually bail out his bankrupt government was acting rationally, though not morally. The Californian legislator who kept himself in office by delivering DSE goodies to his constituents while bankrupting his country and state knows Washington will bail him out and stick the bill with some hard-working unborn innocent in Kansas. He is acting rationally, but not morally. American taxpayers and voters know they are passing debts onto their children and grandchildren, but hey, they like their social security, medicare, mortgage deductions, and new right-to-healthcare more than their obligations to someone else's kids. They are acting rationally but amorally too. The thing is, we are good at morals when faced with judgement face to face. But what if the poor sucker who has to pay for our greed is someone we will never have to face? This is how civilizations die.

Saturday, May 1, 2010

Voter Avoidance Tax

The VAT is coming. By now, enough trial balloons have been launched that it is beginning to look like the movie “Up” where the entire house takes flight under a colorful canopy of helium filled gum-drops. The “Value Added Tax”. The name alone is enough to make statists get a tingly sensation running down their legs. What is it about this particular tax that so sparks the imagination of Big Government types? Well, for one it’s a hidden tax. Second, it's a stealth tax. And third, it is a tax that no voter will ever be aware of paying. Wait a minute, all three of those things are the same! That’s just it, the hidden nature of the VAT is it’s only “Raison D’etra”. (that’s French for we’re all screwed...)

The VAT collects a ton of money, requires a huge expansion of police power, no one pays it directly, and politicians can raise it endlessly without ever being held accountable. In short, it is the perfect tax from the government’s perspective. From the citizens perspective, not so much. When you hear VAT, think “Voter Avoidance Tax”. It’s the perfect crime.