Sunday, March 30, 2014

Let’s talk about fairness.

As Joan Rivers always says “Can we talk?” Today let’s talk about fairness. I often hear a segment of the political spectrum calling for fairness as they run for this office or that. From the highest office in the land, to use a cliché, to the local dog catcher, politicians want to bring up issue of fairness. And once these folks have won their office we see them use the fairness argument to gain support for which ever policy it is that they want to implement. 

Most folks say this is all well and good. “How can you be against fairness?” After all we have been taught since we were very young to be fair to others. The problem with the question “How can you be against fairness?” is that it is one of those catch-22 questions in the category of “Do you still beat your wife, Senator? Please answer Yes or No?”

In economics we learn that there is no such thing as fairness. There is only a transaction between two parties. And let’s face it, all of life is a transaction. I have something you want and you have something I want and we make a deal. This transaction is nothing but a contract between you and me and the role of government is not to insure that the contract is fair but that the parties who have freely entered into the transaction follow the rules and that the rules are lawful.

There is a sharing rule in the Boy Scouts and it works this way. If two boys have a candy bar to share then one of the boys divides it and the other boy then gets to pick which piece he wants. You will be amazed at how equal the two parts of the candy bar are using this process. The rule is one that has been around for a long time in the Scouts. I learned it some 60 years ago when I was a Cub Scout. 

As Milton Friedman said: “The most important single central fact about a free market is that no exchange takes place unless both parties benefit.” There is no such thing as fairness only transactions that benefit all the people making the transaction.


Friday, March 28, 2014

Sovereign Debt in Turkey (the Ottomans)

In 1868, the Ottoman government spent 17% of its entire tax revenue just to pay interest on their debt.

They were well past the point of no return where they had to borrow money just to pay interest on the money they had already borrowed.

The increased debt meant the interest payments also increased. Three years later in 1871, the government was spending 32% of its tax revenue just to pay interest.

By 1877, the Ottoman government was spending 52% of its tax revenue just to pay interest. They were finished. They defaulted that year.

This is a common story throughout history.

By-the-way, the US is now spending 26% of available tax revenue to pay interest on its debt....


Charter Schools are all about experimentation and choice.

The broad range of different Charter Schools results in mass experimentation and choice.  One school tries to combine multiplication tables with the active physical exercise of running in place.  Another school tries to focus on meditation and remembering what 7 times 8 equals.  Another charter school simply tells their students that they are staying in class until each student can recite perfectly what 4 times 9 equals.

Parents then choose the school that “appears” to produce the best results.

On the other hand, some believe that education is simply too important to allow citizens choice when it comes to which school their children should attend. So these perfectionists and central planners form a committee and this committee votes on various choices (remember the quote “a camel is a horse designed by a committee”?)  

Unfortunately the more important the “controllers” think the function is, the more likely they will demand exactly how you do it, where you do it, what you charge for it. They hate mass experimentation, and they generally fight consumer and citizen choice.

It is too bad because experiments tend to demonstrate what works and what doesn’t.  Committee decisions reward the ability to talk longer and wear down the opposing ideas.


Thursday, March 27, 2014

Enough Work to Afford Play

A note on that four letter word: 'WORK".

In 1700, four of every five jobs, about 80 percent, were on the farm. You know, digging in the ground from before dawn to after dark six-and-a-half days a week. Today, thanks to automation, fewer than 1 in 50 people work on the farm. By 1850 most jobs were in manufacturing. These jobs were for the most part 10 hours a day 6 days a week. Thanks to automation, today, that number is only 1 in 7 and we are looking at 8 hours a day 5-days-a-week with lots of time off.

Technology has disrupted work patterns throughout history. New technology has resulted in less work and an increase in wages but at the cost of short term hardships for some.  A few examples were the followers of Ned Ludd (the Luddites) who did not like the new technology of the weaving looms and smashed them in acts of uncivil disobedience and Captain Swing and his followers who smashed threshing machines.

What will we see in the future? Will more automation result in more people losing their jobs? Will these people find a leader and will they smash the robot order-taker or automated burger flipper at the local McDonald's?

Considering the past, we see that there is a short term cost but can we convince people that the cost is worth the future benefits. Keynes predicted that society would eventually produce more stuff than it needed and would have to start to ration work. Today we work fewer days a year and fewer hours a week than in Keynes day and that is without making allowances for the time we spend in school and in retirement. We spend a lot of time not working and our grandchildren will have even more free time to develop more ways in which their grandchildren will have even more free time.

As Arthur C. Clarke wrote "the goal of the future is full unemployment so we can play." 


Sunday, March 23, 2014

Volunteer Work and the Minimum Wage

A bit of economics today but first let’s talk about altruistic behavior and self-interest behavior.

We are encouraged to volunteer for various jobs in our local community and, for the most part, we respect people that volunteer to “help” their neighbors. In my community I can “work” for free at the Oklahoma City Museum of Art, The Fred Jones Jr. Museum of Art, the Norman Veterans Center, food pantries, homeless shelters, or I can adopt a section of roadway and keep it clean of trash. This type of voluntarism is altruistic behavior.

We also volunteer for self-interest motives. A good example of this is students who take summer internships that pay little or nothing. They do this because it is a good investment in their future. It will increase their “human capital” and they will make contacts that will help them get a full-time, good paying job later on. 

We respect people that volunteer for free because they are helping the community and we applaud those that take internships for free or very little pay because it shows that they have initiative and are going to make something of themselves.

So you ask, what does this have to do with economics? And well you should. 

We live in a free society and the people I have described above have offered their services for $0.0 per hour, or at well below market value, to other people that need their services. Why shouldn't people then be able to offer their services on the labor market at a price determined by the free market and not the government? The example of internships is just that. A person working an internship is gaining on-the-job training, work experience, and the development of the habits of punctuality, motivation, dependability, and the ability to work with others. These are the same values that a young person working at a fast food restaurant will gain if that individual want to continue working very long at that job.
The point is that the government “ALLOWS” a person to give their time for free if the government determines that it is the “RIGHT” thing to do. But if I want to give my time at a fast food place for an amount that the owner and I agree on I can't do that if it is below the legal minimum wage. In many cases that means that the owner will not offer a job because it cost more for him to hire me than I can provide in value to him. I have never worked for anyone that is in the business of going bankrupt. 

Just a note about my experience in the job market. When I was about 12 years old one of the many jobs I had was with the manager of the local drive-in theater. I made a deal with him that I would show up on Sunday afternoon and fix the speakers that people hung on their car windows. I could do any repair work needed in about three or four hours and for this I received 'free' movie tickets for the two theaters in our small town. At the time the tickets were worth about .50 cents each and I would get two each week. What did I learn? I learned to show up at the job every week on time, to work quickly, and to do the job I was asked to do. Not bad for two free movies a week in my opinion...and by the way, I worked my way up to assistant manager of those theaters before I graduated from College.

Another related trend is the do-gooders insisting that all business internships be paid at least the minimum wage.
Interestingly, it is not very easy to get hired into an unpaid business internship because the company might very well invest more in educating the individual than any production that it receives - even at a zero pay rate.
You can be assured that if the minimum wage advocates get their way with internships, we will see fewer college students experiencing today's real work world.


Wednesday, March 19, 2014

Are you ready to be an entrepreneur?”

Much is written about: “How to succeed as an entrepreneur”, but rarely are you asked: “Are you ready to be an entrepreneur?” 

Are you the right person at the right time in the right place? This is question number one. The quality of the opportunity matters only if you can answer this first question with a sold “YES”.

You may be the wrong person, today, tomorrow and forever – sorry. In that case I can’t do much for you, other than to encourage you to invest your time and energy in some other productive way.

You might be the right person at the wrong time or find yourself at the right time but the wrong place. I worry about this because if you have all the makings of a terrific entrepreneur but fall flat on your face the first time out, you may be hesitant to take the plunge again.

Monday, March 17, 2014

Happy Birthday World Wide Web

Happy Birthday to the WWW (World Wide Web). It is now a quarter of a century old. And would you believe that your hardware is faster, better, more reliable, and CHEAPER than ever before! And this is to say nothing about the software you use.

One example of this change is that back in 1989 the best 'desktop' computer for your home (a Tandy 5000 MC Professional System with VGA color graphics, 20 MHz processor, 32-bit, and the MS-DOS OS. BTW it does not include a monitor, mouse or hard drive) cost $4999.00. Now if you consider the average hourly wage back then was $9.75 then it would cost over 500 hours of your time (pre-tax hours) to buy this top end product. BTW if you wanted a 40MB hard drive that would be an additional $1,500 or about 150 more hours of your time. Also there were less than a half dozen 'home' computers on the market in 1989.
Today there are hundreds of home computers on the market and, at the average income of $20.50 an hour, you can buy a Dell laptop (The Dell Inspiron 15z Ultrabook Touch. 1.9 GHz processor, 6 GB memory, 500 GB hard drive and it comes with a monitor, mouse, and lots of software that was not dreamed of 25 years ago.) for about $600. That is 29 hours of your work time (pre-tax that is) and you get bit more computer for you money [that's sarcasm folks].Now this leads me to the Economic point for today. From “GDP and Measuring the Intangible” by Arnold Kling: “Because it fails to account for consumer surplus, GDP statistics lead us to take an overly pessimistic view of the economy. There is no Great Stagnation. There is only a widening gap between the rate of economic improvement and our ability to measure that improvement.”

Economic improvement goes hand-in-hand with technology and it is a wonderful thing. You can never know who will 'invent' something new, develop a new use for an old product, or, for that matter, no one can know what product will catch the public's imagination [I refer you to the pet rock fad the '70s]. A product that will 'take off', creating jobs that never existed before, adding to the GDP, increasing the standard of living for everyone, providing new uses for 'resources' [remember when I said that it is not a resource until there is a demand for it to be used to create something?], and lead others to think of new products which continues the cycle ad infinitum.

I am always amazed at what 'new stuff' I see created on a daily basis.

BTW here are a couple of predictions about computers from people who knew, or I should say, “should have known better”:

"I think there is a world market for maybe five computers." Thomas Watson, president of IBM, 1943 

"There is no reason anyone would want a computer in their home." Ken Olsen, founder of Digital Equipment Corporation, 1977

"Almost all of the many predictions now being made about 1996 hinge on the Internet's continuing exponential growth. But I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse." Robert Metcalfe, founder of 3Com, 1995 


Tuesday, March 11, 2014

Comparing the Broadband Three Trials to The Trial by Franz Kafka

I am reading the book Blogging Enron: TheEnron Broadband Story by Ellison Cara, 2014, and while reading about the tribulations and 'trials' of Joseph Hirko, F. Scott Yeager, and Rex Shelby and the way that the government went after them I was reminded of the book by Franz Kafka, The Trial. There are a lot of similarities in these books, not to say they are the same but they are similar. The major difference is that one book is a work of fiction written in 1914-15 and the other is a true account of the government prosecution of the “The Broadband Three”. 100 years difference between the two accounts and yet it looks as if human nature has not changed.

From The Trial by Franz Kafka:
“Someone must have slandered Josef K., for one morning, without having done anything truly wrong, he was arrested.” 

“They're talking about things of which they don't have the slightest understanding, anyway. It's only because of their stupidity that they're able to be so sure of themselves.”

“ is not necessary to accept everything as true, one must only accept it as necessary. 'A melancholy conclusion,' said K. 'It turns lying into a universal principle.’”

“The two of them (police officers) felt K.’s nightshirt, and said he would now have to wear one that was of much lower quality, but that they would keep the nightshirt along with his other underclothes and return them to him if his case turned out well. ‘It’s better for you if you give us the things than if you leave them in the storeroom,’ they said. ‘Things have a tendency to go missing in the storeroom, and after a certain amount of time they sell things off, whether the case involved has come to an end or not. And cases like this can last a long time, especially the ones that have been coming up lately.’” 

“K. was living in a free country, after all, everywhere was at peace, all laws were decent and were upheld, who was it who dared accost him in his own home? He was always inclined to take life as lightly as he could, to cross bridges when he came to them, pay no heed for the future, even when everything seemed under threat.”

From 'Blogging Enron':

“...Federal Judge Melinda Harmon once referred to as ‘the black hole’ of the Enron litigations.”

“...(Enron Task Force)...which, according to prosecutor John Kroger, had been told to ‘get scalps quickly’ at Enron.”

“The government used plea deals to entice Enron executives to turn on one another...[The] Government used them ruthlessly in the Enron cases.”

The indictments against “The Broadband Three” were that press releases contained false information and inaccurate information used to raise the price of Enron stock so they could sell stock and make a profit. The problem with this is that: 1) the defendants did not create the press announcements, 2) the content of the announcements were totally in sync with the best technical information available, 3) Enron stock prices did not rise in the period under investigation, and 4) the “Broadband Three” did not own any Enron Corp stock during that time period.

“Before bringing its indictment against The Broadband Three, the Feds allowed the physical network, including the computers containing all of EBS’ software code, to be dismantled and auctioned off piecemeal. Therefore, the defendants and the jurors were denied the only tangible evidence that would have proved or disproved the government’s case convincingly.”...“The government claimed that the software didn’t exist, and that defendants Rex Shelby, Joe Hirko, and Scott Yeager had lied about the capabilities to inflate the stock price.”

Your government at work...and if you have not you should read 'The Trial'...It is free on the internet..... 


Friday, March 7, 2014

Students graduate without understanding basic economics

From Henry Manne’s 1997 article The Judiciary and Free Markets:

"Unfortunately, the truth is that in universities the world over, the tremendous analytical power and insights of market economics are unappreciated. For whatever political or ideological reasons, we have deprived generations of university students of a clear understanding of basic economic forces and their proper role in a free society."

In my opinion it is not possible to separate these three areas of knowledge; economics, politics, and history. To understand any one of these you must also understand the other two. There is an overlapping relationship between them and any student that graduates from any college without a solid grounding in economics, political science, and history is not educated.


The US Oil Boom

The Forbes list of the world's richest people came out a few days ago and on that list are: George Bishop (GeoSouthern in South Texas oil), Rodney Lewis (Lewis Energy San Antonia TX), and Daniel Harrison III. (I could list more but my space is somewhat limited.) Last year the Forbes list had 1,426 billionaires and this year there are 1,645. Their average net worth was $4.2 billion last year and this year it is $4.7 billion. 

Now you say, "Jerry, those are just the rich folks. What about the working stiff?" OK, up in North Dakota, because of the oil boom, they have the lowest foreclosure rate in the country - 1.56% - and the state also has the lowest 'overdues' - 2.61% or of 55,566 mortgages in the state they have fewer than 1,400 that are delinquent. Wyoming is also doing about the same. The National Association of Home Builders tell us that these two states are 'well over' the normal homebuilding demand. Just for reference the state of new Jersey has a foreclosure rate of 11.87%.

Two other items deal with economic growth.

The Federal Reserve reported today that the net worth of American households rose to a new all-time record high ($80.66 trillion in Q4 of last year). In Q1 of 2009, a cyclical low, the amount was $55.71 trillion. An increase of $25 trillion in 4+ years. Now that means that, on an inflation-adjusted basis, the average household has made a complete recovery from the Great Recession of 2007-2009. 

As for rest of the world: the MSCI world index has reached a new record high. According to data from the World Federation of Exchanges the value of world stocks hit $65.3 trillion which recaptured the equity value which was lost during the global recession of 2008-2009. 

Just soon food for thought,


Wednesday, March 5, 2014

New business springs up for the Mardi Gras

How about a great new business just in time for Mardi Gras. And as I have said any number of times here at 'Lucky and Good' where there is a demand there will be business folks looking to fill the need. 

Now if you have every been to Mardi Gras you know that it is sometimes hard to find a bathroom. Great party but the facilities are a bit sparse. What do a lot of folks do...well, they find convenient wall or alley and do their business right there in public and right in the street.....Now there is a new App for you mobile device call just call up the app and there are a lot of people around the Big Easy that will, for a price, let you use their private bathrooms...this is a safe and non-public way to take a leak...I looked at the app and along the parade route the cost can be as high $5 per use...Now the neat, pun alert, thing is that the user can rate the bathrooms based on everything from overall cleanliness to quality of toilet paper and the user can also pay through the app or with cash.....

I wonder how the local, state, and federal government is going to regulate and tax this enterprise in free market economics....


Tuesday, March 4, 2014

The Ten Pillars of Economic Wisdom

David Henderson tells us that there are 'Ten Pillars of Economic Wisdom'.

1. TANSTAAFL: There ain't no such thing as a free lunch.
2. Incentives matter; incentives affect behavior.
3. Economic thinking is thinking on the margin.
4. The only way to create wealth is to move resources from a lower-valued to a higher-valued use. Corollary: Both sides gain from exchange.
5. Information is valuable and costly, and most information that's valuable is inherently decentralized.
6. Every action has unintended consequences; you can never do only one thing.
7. The value of a good or a service is subjective.
8. Creating jobs is not the same as creating wealth.
9. The only way to increase a nation's real income is to increase its real output.
10. Competition is a hardy weed, not a delicate flower

David Henderson is Associate Professor of Economics at the Graduate School of Business and Public Policy, Naval Postgraduate School in Monterey, California.


Monday, March 3, 2014

Ernest Hemingway articulates the concept of the "Stupidity Lag"

Ernest Hemingway articulated the idea of the "Stupidity Lag" as well as I have ever heard it in ‘The Sun Also Rises’.

“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”

The Halo Effect and uncertainty in Business

Just finishing up The Halo Effect by Phil Rosenzweig this morning and now will pass on a point he made. 

The point I want to talk about is one that I think a lot of folks do not consider and it is the fundamental uncertainty that is the world of business. As Rosenzweig states “People want the world to make sense, to be predictable, and to follow clear rules of cause and effect.” 

As my old daddy use to say “Ain't goin' happen son.”

Business owners and managers want to believe the world in which they operate is predictable and that an action on their part will lead to a known outcome. This is human nature. The problem is that all decisions are made in an uncertain world and in an uncertain world many things conspire to change the outcome of a decision. In the economic world nothing is more uncertain than the customer. Will the customer embrace or reject a new product? Who would have ever thought that people would buy Pet Rocks? Now if a business owner can anticipate what the customer wants or needs you would think a business will make money and not have to make many new decisions about production. This would be true if the business owner does not have to contend with the actions of new and old producers in the market place. Stability in the market place means that new producers will enter the market when there is a profit to be made and this will drive the price of the product down until the utility margin is reached.

Another source of uncertainty in the market place is technological change. Now some businesses are relatively stable, meaning that the business owner/manager does not have to change the product much (how much can you change toilet paper? Producers leave it to the ad folks to convince consumers that their toilet paper is better than the others, yuck, how would you like to have that job?) and that customer demand remains relatively steady. Technological innovations can make a shambles of the decisions that a manager has made. (What happened to those businesses that built and serviced tube type radios and TVs?)

All this leads us to the conclusion that making decisions in the business world is a gamble. The manager must gather accurate information, carefully analyze that information, and make decisions on what he or she knows. This will improve the odds of success but will not guarantee success. This is just a bet that the owner/manager is making and if the bet pays off then the owner/manager wins (and pulls in the "big bucks") and if it does not pay off then those same folks will be looking for a new job.

As Robert E. Rubin wrote in his memoirs, “Once you’ve internalized the concept that you can’t prove anything in absolute terms, life becomes all the more about odds, chances, and trade-offs. In a world without provable truths, the only way to refine the probabilities that remain is through greater knowledge and understanding.”

And as Phil Rosenzweig points out “Wise managers know that business is about finding ways to improve the odds of success—but never imagine that it is a certainty.”


Dowsing to find water and great investments

This headline caught my attention: “California farmers hire dowsers to find water.”  In turbulent times (droughts, financial emergencies) some will resort to almost anything, including pure quackery to find an answer.

For centuries, dowsers have used copper sticks or wooden rods that resemble large wishbones.  When the two rods or sticks cross one another, that marks the spot where they predict finding water underground.

Water dowsing or water witching has been used not only to find water but also to search for oil and metals.  In the 17th Century it was even used to track criminals and heretics in the South of France.

Dowsing sometimes works but every once in a while but so does a wild and uneducated guess. In study after study, dowsers have not lived up to their claims.  In the short term, a few get luckier than others.  But in the long run, results average about the same as a random guess. Remember that typically one out of 16 coin flippers will get the heads/tails call absolutely right 4 times in a row. 

Dowsing is pure superstition, a belief that one event leads to the cause of another without any scientific evidence linking the two events. The word superstition was first used in English in the 15th century, which was borrowed from the same word in French.

Water dowsing has a lot in common with some financial advice that one will hear in the investing and trading world.  Charlie found us a good location to drill our well (perhaps on land where it was hard to dig a dry well) compared to Charlie told us to buy Consolidated at $27 a share.  The credibility of the advice is almost always based on a small sample size (frequently a sample of just one).

Even though I don’t walk under ladders, never open an umbrella indoors, am careful to never break a mirror, and am always cheered when I find a penny or four leaf clovers, I try to put these thoughts aside when I have an important decision to make.  I prefer to rely on: 1) large data sets 2) empirical evidence and 3) logic – not superstition. 


Sunday, March 2, 2014

Voodoo Economics

Voodoo Economics

We all know about 'trickle down' economics but is what we know true?

Much was said about "trickle down" when President Reagan was in office. Often called "Reaganomics" or "Voodoo" economics by the opposition both of these terms are viewed negatively and are still used to attack tax cut proponents. Thomas Sowell has a different take on trickle down and calls it a myth in his book Basic Economics: A Common Sense Guide to Economy. He makes the point that workers are always paid first and then the profits flow upward later, if at all. Historically tax revenues have, in most cases, gone up when tax rates have been cut. The problem, opponents say, with cutting tax rates is that the benefits are given to the wealthy (in general) in order that they will trickle down to the people. I can not find any support for this straw man argument it in any economic writing or theories.

When advocating a lower rate of taxation, or for less governmental interference in the economy, we are not asking that wealth be transferred to the rich or the "1%" as is claimed. The economic process works in an opposite way. When investments are made, the first money that is spent is in hiring folks to do the work. If you don't hire people to do the work then nothing gets done. When a person starts a business he must pay to get a location for the store, he must pay to set up the store for business, he must pay someone to deliver the products that he will sell in the store, and he must, unless he does all the work himself, hire someone to work in the store. Money goes out first to pay expenses and then later comes back as profits. Of course all businesses do not make a profit and if there is no profit then the business owner has paid out a lot of money and received little or nothing back. The government numbers show that there is a high rate of failures of new businesses. The percent of failures in the first year is 25%, second year is 36%, and the third year is 44%.

Now if we look at those business that are successful and last longer than three years, we see that there will be a number of years from the initial investment to the point that the investor gets a return on his investment. An example that Dr. Sowell uses is an oil company where, from the time that the first exploration for petroleum is started to the time when the first gasoline gets to the pump can be ten or more years. During that time all the employees have been paid and all the other cost to refine the gasoline have been paid. Money is going out before the profit comes back.

To quote Dr. Sowell “In short, the sequence of payments is directly the opposite of what is assumed by those who talk about a 'trickle-down' theory. The workers must be paid first and then the profits flow upward later – if at all.”


#trickledown #voodoo #voodooeconomics #business #businessprofits "the1%

Saturday, March 1, 2014

Characterizing Government

Government is slow, political, favor giving, dumb, inefficient, corrupt, lies with impunity, and generally immune to prosecution. They are not transparent and in the process of screwing things up, they are overly optimistic about future revenues and greatly underestimate future costs. You can generally do quite well betting against government "guarantees". 


#government #luckyandgood #biggovernment #corruption