Tuesday, July 29, 2014

WWCF: Sea To Shining Sea - Pot Freedom or Marriage Equality?

Which Will Come First?

50-State Legalization of Marijuana


50-State Licensing of Same-Sex Marriage

Let's be clear: both of these are coming and soon. Let's be clear as well on our position: it is a good thing. The magnitude of the first is substantially larger in terms of causing good. Ending this significant front in the evil War on Drugs will bear much fruit. The magnitude of the second is substantially larger in terms of indicating good. That society and its institutions are nearing a point of accepting and dare I say celebrating the choices and joys of others says volumes about where we have arrived morally and intellectually. Before we move on to the prediction side of this post, let me lay one more point down: one does not have to morally agree with either the use of marijuana or the act of homosexuality to still reach the moral conclusion that we (individually or through the government) have no right to use force to disallow either one. The first-best solution is for the government to play no role in either one of these peaceful activity/association.

It may seem obvious to some that a U.S. presidential candidate will campaign on legal pot for every chicken quite soon giving marijuana the upper hand. After all, the New York Times now supports it. Indeed as their new series puts it 37 states representing about 76% of the U.S. population current have liberalized marijuana laws. But in order for this race to declare a winner, the subject must be fully legal and recognized both within each state and federally. It is just a matter of time before Colorado or Washington residents see just how illegal marijuana still is within their borders. Oh, wait, it already happened...

Still, the trend is undeniable on the marijuana front. And when one looks at the state-by-state prohibition of state recognition of same-sex marriage, one sees significantly more opposition (see the chart at the bottom of the link). Yet, the trend here is both certain and strong. 

What really puts same-sex marriage ahead of the game is the fact that it has been scoring victories in the courts, and that really gets to the heart of this WWCF including why this isn't a fair fight. Marijuana is still the outcast. It is the humorous back story in the R-rated movie. Same-sex marriage is the lovable story line in the family-TV comedy

The ultimate force driving same-sex marriage ahead in this race is that while it literally needs governmental approval to exist, marijuana only needs governmental tolerance (or impotency in the face of economic forces more powerful than puritanical desires). The fight for marijuana legalization relies much on the unseen (the benefits of ending prohibition). The fight for same-sex marriage relies much on the seen (the people denied benefits).

I give the edge to same-sex marriage and I predict we'll have both realized (nation-wide, state and federal) within a decade. Freedom wins! Freedom wins! Freedom wins!

Cross posted at Liberty.me.

Monday, July 28, 2014

Highly Linkable

I've been on some of these. Perhaps I should set a goal to eventually be on each one. See if you can spot the one Forrest Gump was on. There is also one that looks a lot like the one where Joan Wilder first got into trouble (but it isn't the one; that one was in Mexico posing as Columbia).

Let's hit these by author in this edition:

First, Don Boudreaux makes quick work of the childish argument "If perfection is so good, why isn't anybody perfect?" Next, he points out something cool about keeping cool this summer.

Megan McArdle hits all the notes on why we need to end the corporate income tax. One quibble: I completely disagree with her idea of replacing it with higher taxes on capital gains/income. There is no logical or moral reason to tax the same thing twice and in a way that encourages wasteful consumption--taxing savings and investment encourages consumption today that otherwise would not take place.

Speaking of consumption, Scott Sumner points out that one implication of Piketty's wealth tax ideas would be wasteful consumption. Moving away from consumption, let's discuss aggregate demand, which isn't just consumption as Sumner points out. I know a lot of smart people who don't understand that they don't understand this concept.

Next time you're aggregate demanding you might want to use the retail version of Uber as detailed by Erika Morphy.

Finally, Timothy Taylor discusses the government's arrival on the scene of "The Great Honey Bee Panic of the 21st Century" (title all mine) just as the market is done making short work of the problem.

Sunday, July 20, 2014

How The Worms Might Turn

Political thought experiment/prediction: In an effort to stay politically relevant and viable, Republicans become the party steadfastly and openly defending the old-age entitlement state (Social Security, Medicare, et al.). Democrats visit the Wizard and come away with courage, a brain, and even a heart for those truly needy. They shun the process of robbing from the young and non-white to give to the elderly (especially white elderly who tend to be of above-median wealth). All the easier for Democrats as the programs undeniably become cash-flow insolvent.

The demographic trends for Republicans are not good. They are the newspapers of political parties as their supporting base is growing older (hence, dying off). We've already seen a glimpse how quickly this prediction's premise can play out.

Democrats are the cable television of political parties as their supporting base is somewhat locked in, but they continue to disappoint. They aren't seeing the growth either, but they've managed to avoid major depletion. This might change given a disruptive enough force (perhaps libertarians can drive a large enough wedge between cronyism and the Occupy sympathetic).

Tuesday, July 15, 2014

Trying To Understand Inflation

Scott Sumner makes the case that economists generally can’t agree on what inflation is, and even when they do, their understanding is at odds with the general population. Let’s explore this a little:

Imagine an economy with one laborer, me, one capital owner, you, two consumers, you and me, and two kinds of goods, apples and oranges. It takes me one hour to produce one apple and one hour to produce one orange. I can only work a maximum of 500 hours in total per year. I get paid one dollar an hour, but you get half of my wages (this makes it easier to introduce a monetary system into this fictional economy rather than having the capital owner retain the product--just assume after production the fruit is co-owned by you and me hence we "buy" it from the coop). Let's start with the price of apples at $1 and the price of oranges at $1. Another way of looking at it is to say the price of an orange is one apple and the price of an apple is one orange.

Fast forward to one year later where apples and oranges begin the year at the same price of $1 each (sticky prices) but then rise to $1.17 for apples and $1.05 for oranges (details how are below), my wage rate is still $1 per hour (sticky wages), but my productivity has increased whereby it only takes me 45 minutes to produce either fruit. In this story how can we meaningfully talk about "inflation"? Prices have risen, but so has productivity. In fact, productivity has potentially increased 33%. And wages are flat for the time being. None of these variables alone really tells the story. John Cochrane might say we’re on to something.

And if a monetary authority (an entity that controls the supply of money such as a central bank) targets "inflation", we start to see big problems. David Beckworth tells it better and more thoroughly than I can.

Picking up on one of Beckworth’s claims, we can see from our hypothetical apples and oranges economy that it will look like the supply of money needs to be loosened when in fact it needs to be tightened to allow total spending in the economy (nominal GDP) to be maintained.

Let's assume in the first year I produce 300 apples and 200 oranges, and then you and I each separately purchase/consume 150 apples and 100 oranges. Total spending in year 1 is $500 (500 fruits at $1 each). 

[here comes the yada, yada, yada...]
In the second year I produce 360 apples and 240 oranges taking just 450 hours to do so thanks to my enhanced productivity which leaves time every day to pretend I'm Rip Van Winkle while on the clock (you'll see below why I would stop working at some point short of maximum output--360 and 240 are somewhat arbitrary numbers). My total wages are $500 still since I'm still getting $1 per hour for 450 hours of labor and 50 hours of napping. You still get half of my wages, but additionally the central bank gives you $100 and me $75 (out of thin air) so as to maintain the monetary authority's desired ~2% inflation target in the face of a 33% rise in productivity* ($175 is about a 35% increase over the $500 monetary base). I have $325 and you have $350. As we attempt to make our purchases of apples and oranges presumably to get at a similar consumption arrangement as before (half of each type of fruit for each of us), we bid up the price of each good somewhat so that the market can clear and in the process we change the consumption arrangement some. Your greater purchasing power allows you to bid up your slightly preferred fruit, apples, a little relative to oranges. The prices settle at $1.17 for apples and $1.05 for oranges (these prices are arbitrary in the example—just one of many ways the math will work out). You walk away with 190 apples and 121 oranges while I get 170 apples and 119 oranges (just one of many possible outcomes). This makes total spending in period 2 $675 [$1.17 x (190+170) + $1.05 x (121+119)].

We can summarize the economic situation: Total spending, "nominal GDP", is up dramatically (35%) while the "real GDP" is only up 20%. The monetary authority wanted only about 2% price inflation but got a 15% level. The economy could potentially be producing 11% more fruit than it is actually producing. The Cantillon Effects of you getting $100 and me only $75 from the central bank may be unrealistic and are not central to the story. I believe there is something to it and it can have distributional effects as it does here (both in the price change and ultimately the quantities of apples and oranges we each get to enjoy). Don’t get lost in this, though; it is not the central theme—rather understand that inflation is a murky subject and policy based on it can have severely adverse consequences.

It was my expectation of the central bank's inflation targeting which led me to shirt instead of producing more--I happened to stop at 360 apples and 240 oranges. The high rate of money supply growth was a negative shock to my purchasing power. I should have seen my $1 per hour going further as the price of apples and oranges came down in nominal-dollar terms, labor-hour terms, and substitute-good terms (apples for oranges and vice versa). If instead of targeting inflation the central-bank targets nominal GDP to rise about 5% such that nominal GDP should be about $525 in year 2, prices will be allowed to fall and my purchasing power because my wages are sticky will be rising; hence I will be incentivized to produce closer to the the economy's full potential. In which case I will be doing a lot less shirking. Year 2 would look more like this: I produce close to 667 total fruit, the money supply increases about 5% rather than 35%, the prices of apples and oranges each fall about 25% (a 33% productivity increase implies a 25% price decrease) but is offset some with the 5% increase in money supply, and the economic distortions are minimized. Happily ever after . . .

*The key here is that the central bank doesn’t completely understand the increase in productivity, and it realistically wouldn’t. In a more realistic, fluid economy what they would see would be falling prices or at least downward price pressure for apples and oranges. Productivity gains would equally be disguised as underemployment (after all, I am napping). The feedback loop keeps telling them to fight deflation—i.e., increase the money supply.

Monday, July 14, 2014

Highly Linkable

America is under attack. Literally thousands of people are invading from our exposed southern flank. We must summon great courage to repel this threatening force of . . . oh, wait. It's children. This is perhaps a tipping point in the clustered calamity that is our xenophobic immigration policy, our lack of coherence in dealing with people in need (you can't cry "amnesty creates moral hazard" when the moral hazard is an economic boon), and our inhumane and uneconomic and tyrannical drug war. Luckily, one Grumpy Old Man is here to provide wisdom.

What's the worst low-carbon energy alternative? The answer, my friend, is blowing in the wind . . .

Russ Roberts and Mike Munger discuss many steps forward, while Megan McArdle laments one step back.

This is a subtle, (should be) obvious, and great point by Art Carden on the minimum wage debate. If you don't get this, you are truly living in economic, ivory tower fantasy land.

Sticking with Art, here is his attempt at Bryan Caplan's challenge to pen how conservatives are often quite authoritarian. Sex, drugs, rock & roll, war, and so much more. Bryan made the case that liberals (more appropriately named progressives) are quite authoritarian. I strongly agree with both, and one thing that stands out to me is how much more blatant conservatives tend to be in their acts of authoritarianism.

Sticking with art of a different sort, Sumner makes two excellent points about the city of Detroit's apparent art wealth--namely that Detroit can dig out some by selling some assets and that it is the reasonable thing we should expect but some find it hard to apply this logic when dealing with a government entity.

Sunday, July 13, 2014

Investing Is Not A Sport

Investing using the sports mindset will leave you saying, "I've made a huge mistake." And it doesn't just take something as colossal as buying real estate in Iraq circa 2002. It is little decisions made all along the way. Examples:
  • Buying a stock and then watching its day-by-day or even minute-by-minute performance. This includes trying to explain every fluctuation in price. Most of what goes on over short periods is random noise. This is actually true of sports as well, but it is part of the allure of sports. However, following your investments' gyrations will lead to poor decision making and potentially heart failure.
  • Falling in love with a stock. You aren't a fan, you're an investor. You're making an educated evaluation of the asset's value. She's a beauty, but don't fall in love. She's one in a million and there are bound to be plenty better. 
  • Thinking that you "obviously" should have purchased some asset that recently had a great run. There is nothing obvious before the fact in investing. That "couldn't miss" real estate deal undoubtedly had tremendous downside risk that just didn't happen to play out. Remember, the reason you're even thinking about it is because it happened to be a winner. "If only I'd had money back circa 2002-03, I would have gobbled up Apple stock." Yeah, Apple's comeback was about as obvious back then as the 2004 Red Sox's comeback against the Yankees in the ALCS right before Big Papi stepped up to the plate in the bottom of the 12th. In hindsight the winning outcome seems logical and likely because it is the winner. We don't have to fully create the narrative as to how it could come to be. Reality has done that for us, but there were many, many other possible outcomes. Often some of these were individually more likely than the actual outcome. 
  • Getting wrapped up in performance rather than process. We choose teams and individuals to root for based on a lot of reasons many of which are based on past performance. But successful past performance in investing means buying yesterday's winners--a strategy that doesn't correlate very well with future investing success. Good investing is about finding a good process. That process should generate future investing success.
  • Talking yourself into taking a lot more risk than you should simply because the risk started small. Remember this amazing lucky break cum colossal mistake? You are never "playing with house money". 
  • As a related point, if you find yourself playing in the equivalent of the championship game, realize that you are mistaken. Investing doesn't work that way. You don't accrue your way into a large reward/low risk situation. Investing is about choosing a risk/reward mix over the long term.
  • Sitting a turbulent/uncertain/rough period out on the sidelines. There are no sidelines in investing. Cash is an asset. The mattress, safe deposit box, and interest-free checking account are all examples of investments--albeit, very poorly performing ones. The game is still going on whether you are playing a highly active role or trying to avoid all volatility. Inflation is constantly trying to eat away at the value of your net worth. And ALL periods are turbulent, uncertain, and rough. 
Perhaps golf offers the closest analogy to investing: your performance is largely independent of others' performances, your choices imply the risk/reward mixture (laying up versus going for the green), there is a cumulative effect between actions, the course you choose to play should be dictated by your abilities and your knowledge of the course will affect your performance, about the best you can hope for is a little better than "par", discipline is more rewarded than ability, etc. But even this analogy runs into strong limitations. Investing is always continuously cumulative. You never get to start a new round or new hole. Knowing how to successfully invest relies more heavily on learned skill than raw ability. 

Sunday, July 6, 2014

Highly Linkable

Terry Anderson is thinking sensibly about climate change. (HT: Don Boudreaux)

Speaking of Don Boudreaux, he has a fantastic new series of videos out as part of MRUniversity's "Everyday Economics" series. I highly recommend these short, extremely well-made videos.

Steve Landsburg points out an amazing physical-world derivation of pi. Here is the full paper. I don't suggest you pull this little nugget out the next time you're gambling, Eddie, gambling money on pool games, but it is pretty cool. Aside from being impressed by this myself, I think it demonstrates something about political economy. It is understandable that because brilliant people can discover truths like this other people believe brilliant people can discover the truths about how to govern other (not-so-brilliant) people's lives.

Two from Megan McArdle: In the first she offers an explanation as to why so many people are saving too little (AKA, building too much personal debt). In the second she talks about the social media frenzy surrounding the Supreme Courts' Hobby Lobby decision and how the calls of BOYCOTT! are very unlikely to actually succeed. This supports a thesis I have had about how the world has changed. To wit: Cults and cult leaders are less likely today while riots are more likely. Negative, tipping-point events can be blown out of portion and escalated more easily today, but they're not as long-lasting and sustainable as they were in the past. In the past information restriction, a critical tool of the cult, was much more easily accomplished. Hence, it is easier to incite a mob, but harder to inspire a movement.

I plan on reading the new book The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters and this recent EconTalk encouraged my excitement for it. But John Tamny at Forbes raises a few negatively critical points that are worth considering.

Vintage Photos:
Moscow in 1968
Street scenes of NYC in the 60s and 70s
More street scenes of NYC in the 70s
Other color photos of NYC in the 70s
Besides being very cool to look back at these places and people in the past, there is something I notice--more evidence against the Great Stagnation theory. For one we can see some stark differences between life back then and modern life in these cities. The second is a bit more subtle. In the previous era the USSR could appear to compete with the USA economically (e.g., having a large number of cars, the world's biggest X, etc.). In the current era the shortcomings are too obvious. Life today in the USA is filled with so many creature comforts available to so many of us, that in the comparison we rightfully consider Moscow as the capital of a undeveloped economy.