Bastiat’s Bastions

A country runs a trade deficit when the value of its imports exceeds the value of its exports.  A trade deficit is also referred to as a negative balance of trade.  There is a common misunderstanding as to the interpretation of a trade deficit.  The Progressive Policy Institute, for example, describes the U.S. trade deficit as a necessary indication that, “The United States is currently consuming more than it is producing.”  This line of reasoning suggests that consistent trade deficits lead a country into aggregate debt with other countries.  However, a country’s gains from productive activities are not fully captured by a location-based measure of production, such as GDP.  Many U.S. companies produce abroad and import a substantial proportion of their final product to U.S. markets (e.g., Nike).  Such production logistics contribute dollar-for-dollar to our trade deficit.  However, they are in no way an indication that we are consuming more than we are producing.  Rather, the trade deficit fails to account for U.S. gains from U.S.-owned production overseas.

This is an important consideration, as the United States usually runs a substantial Foreign Direct Investment (FDI) surplus, whereby more U.S. owned production occurs overseas than non-U.S. owned production occurs within the United States.  The current account provides a more complete measure as to whether our country is living within its current means.  A country’s current account in a given time period is equal to its balance of trade plus its net factor income from abroad (i.e., income inflows from assets located abroad net of income outflows from foreign-owned assets located domestically) plus its net income from international transfer payments.  Unfortunately, we have also run a consistent current account deficit in recent years.  This is a much tighter indication that our purchases exceed our income and that we are borrowing to buy some of the current production of other countries.  The resulting debt will have to be repaid through future current account surpluses.  Though the current account is presently telling us the same thing about our spending levels as is the balance of trade, this may not always be the case.  Given a sufficient amount of income from foreign assets, trade deficits are sustainable for a country.  However, current account deficits must be repaid.

Judging the sustainability of a country’s spending levels by its balance of trade is like judging a basketball team’s success in a game by the number of points that the team scores.  Though points scored is an argument in determining whether a team wins, it is not the final story.

-SS

The L.A. Times reports some of the problems with the new homeowner $8000 tax credit in this story.  Besides fresh ground for tax cheats to exploit, this tax credit may not be worth getting.

In my introductory economics class, we just finished looking at how taxes get passed forward to buyers in higher prices or back to the sellers in reduced prices received.  What we saw in class was that if the buyers faced few alternatives, while the sellers had many, most of the tax gets paid for by the buyer in the form of a higher price.  If the sellers have few alternatives, but the buyers have many, the sellers pay most of the tax in terms of a lower received price, while the buyers pay only a little more than the original price. 

Of course, if the government subsidizes buyers in a market instead of taxing them, the same thing happens, but in reverse.  Subsidies are only negative taxes, so a subsidy to buyers in a market just raises the amount the buyers are willing to pay to the sellers.  Consider the $8000 tax credit to home buyers.  This tax credit merely raises the amount buyers will pay to sellers.  And since the buyers have many alternatives while the sellers, often facing foreclosures, have few alternatives but to sell, have few alternatives but to sell, the price the buyers pay ends up rising almost by the amount of the tax credit.  Few new homes are being built in response to the tax credits.  So mostly, the tax credit for buyers boosts the prices received by those facing losing their homes in a foreclosure, where only the bank receives the money. 

So those considering buying a home before the December 1st deadline because of the tax credit should probably think twice.  Most of the tax credit will go to the sellers. 

But even if some of it goes to the buyers, shouldn’t it be worth the buyer’s effort?  The answer is maybe, but  maybe not.  One provision of the tax credit is that the buyer has to live in the home at least three years, or the buyer must repay half of the tax credit, or $4000.  If the buyer faces the possibility of losing her home, facing repayment of $4000, while having to pay $7000 more for a house and getting an $8000 tax credit may not be that good of a deal.   

-MC

Was it Yogi Berra that said “I’m having deja-vu all over again”?

Back in October of 2006, I was rather peeved at listening to the morons on TV talk about how “clutch” Derek Jeter was. Later, they maligned Alex Rodriguez, and how “un-clutch” he was. I objected at the time, and wrote a post, which you you can read here. Take a look before you continue.

The point there is the same point here – it is difficult to make inferences based on small samples. A few post season games and a couple dozen at bats are indeed a small sample. If you flip a coin 12 times, sometimes it comes up 8 heads, even if the coin is “fair”. Sometimes heads comes up 4 times in a row.

Part of my motivation then (and now) is that I rather dislike Jeter — he gets a bit too much love from the media in my opinion. And part of my motivation then (and now) is that I think A-Rod gets too little love from the media. But so that you know that “fair is fair”, I’d like to revisit the issue again. After the recent “clutch” performance, I am equally peeved that the same morons are now calling Alex Rodriguez a “clutch” player!

The announcers on Fox clearly missed my original post. Might they suggest that whomever is “hot” now is “clutch” and forget that this same person was not “clutch” before? Is A-Rod a better player now in the post-season? Or is it simply random variation? I’ll go with the latter.

As I wrote before:

We could all disagree about exactly what is meant by “clutch”. Perhaps late in close games? Bottom of the ninth? Or simply in the playoffs? But even if we settle this disagreement, it is still very difficult to tell who is a clutch player, because by the nature of these situations, there are very few “clutch” situations during a season (or even a career).

…

Dr. Jahn Hakes and Dr. Skip Sauer (both economists at Clemson while I was in graduate school) have done some work on identifying clutch hitting in major league baseball. For an example of their work, click here. What do they find? They cannot find statistical evidence of persistently clutch hitters.

…

Why is that a couple of sports nuts economists, armed with PhDs from top schools, years of play by play data, and tons of computing power can’t find evidence of consistent clutch hitting, but the talking heads on Fox know it? Hmmmn.

I suggested in that old post, that if you like this type of stuff, read a book called Moneyball by Michael Lewis. It’s about how the GM of the Oakland A’s (Billy Beane) listened to scouts (announcers?) less and started doing more statistical analysis in drafting baseball players. The A’s have been quite successful despite their relatively low payroll. It’s an awesome book for someone interested in baseball, statistics, economics, or even business in general.

And for you amusement, I provide you two more tidbits.

Tidbit #1:

For those of you who don’t like baseball statistics, OPS is a measure that is pretty much the gold standard for measuring the productivity of hitters. OPS = On base % + Slugging %. The bigger the number, the better the player.

Jeter’s career regular season OPS = 0.847
Jeter’s career post-season OPS = 0.858

A Rod’s career regular season OPS = 0.965
A Rod’s career post-season OPS = 0.977

Uncanny, isn’t it? That difference (about 0.012 in both cases) is roughly one additional single per every 100 at bats! Quite a difference, eh?

Tidbit #2:

I have taken the worst 15 game stretch of Jeter’s post-season career and the worst 15 game stretch of A-Rod’s career and added up the stats. Can you tell which is which?

A: 15 games, 0.167 BA, 0.470 OPS, 0 SB, 5 R, 1 HR, 4 RBI
B: 15 games, 0.119 BA, 0.445 OPS, 1 SB, 3 R, 0 HR, 0 RBI

Neither one is pretty — which is the point! Prediction: A-Rod has a ho-hum World Series.

–CT

Player A is Jeter, Player B is A-Rod. But nobody ever told you about the ugly stretch for Jeter, eh? It started in the ALDS in 2001 and ends after game 7 of the 2001 World Series. Are they really so far apart?

With the mapping of the human genome, it isn’t difficult to conceive of the day when we might diagnose mere embryos with congenital diseases or unhealthy predispositions.  Such power creates a dilemma: Would it be a better world if couples were to simultaneously create multiple embryos (through in vitro fertilization of stored eggs and sperm) and allow for the genome of each embryo to be mapped for selection purposes.  Coupled with a better understanding of the genetic sources of congenital disease, such a system of embryonic sampling would allow couples to put their better genes forward in virtually every pregnancy.  The result would be a healthier lot of babies and parents.  Diseases such as autism often place an irrevocable strain upon affected families, as evidenced by the exceptionally high divorce rate among parents of autistic children.  If it became a medical possibility, many parents would likely value the ability to identify and unselect “pre-autistic” embryos among a larger set of embryos. 

Of course, embryonic sampling based on DNA mapping would, by design, lead to large-scale abortion.  However, large-scale abortion already occurs in the case of in vitro fertilization.  In the current procedure, doctors select the best embryo or set of embryos based on such factors as cell count and symmetry of growth and discard the others.  Embryonic sampling based on DNA mapping, should it become viable, would not be any sort of modern eugenics project.  Couples would still choose with whom they wish to combine their DNA.  Embryonic sampling would merely allow them the option of a better expected expression of that combination.

-SS

Some months ago I was asked to find someone who could determine the feasibility of a device reinvented by a local fisherman.   The machine was an alternator driven by a bicycle that charged a car battery bicycle.  An electric motor hooked up to the battery turned the wheel of the bicycle.

The claim was that the device produced electricity.  Of course, it produced a charge, but used more energy than it produced—a perpetual motion machine.  Such machines have been invented and reinvented for hundreds of years.  And well-meaning garage inventors reinvent perpetual motion devices with every up-tick in energy prices.   But physics triumphs and we know that the law of conservation of energy and matter still rules.  Only part of the energy from the battery gets converted to work, with the rest being converted into friction and heat.  Energy is not created out of nothing.

In trying to reinvent the health care delivery system, Senator Baucus seems to have invented a perpetual financing device , but one that will only push up prices and inhibit real innovation.  What Senator Baucus wants to do is to tax the very providers of health devices, such as heart stents, artificial hips, and diagnostic machines in order to help pay for the new health care system that the federal government is reinventing.

There is a slight problem with all of this.  Taxes collected from businesses are only partly paid by the producers, with the rest of the tax paid by the buyers in the form of higher prices.  The easier sellers can move to something not taxed to sell, the more the tax gets passed along to buyers.  The more these taxed items are covered by insurance, by other people paying the bill, the more the tax gets passed along to the buyers.  If buyers have many non-taxed alternatives and find it easier to switch to them than the sellers can switch to non-taxed goods to sell, then less of the tax gets passed to buyers and the sellers will have to pay more of the tax.  Of course, if sellers find switching easier than buyers, the taxed gets passed on to the buyers.  In other words, the side of the market that can avoid the tax the easiest by switching what they have been doing will be the side that contributes less to paying the tax.

With medical devices, it is very likely that the sellers find it easier to go from making wheel chairs to making non-taxed items than wheel chair users can switch to some non-taxed item.  Still, to the extent that the tax is borne by sellers, it reduces profits in these industries and reduces innovation as well.

What looks like will happen with this financing plan is that the tax will be passed along to buyers including Medicaire and insurance, who will raise taxes and raise premiums to pay for the higher priced devices which will lead to higher prices for the medical devices, higher premiums and higher taxes.  Of course, after a while, the increasing out-of-pocket expenses reduce purchases along the way.

This financing scheme looks as if it were designed by the same guy who hooked up a car battery to an electric motor, a bicycle and an alternator.  The problem is that both of these end up coming to halt and are unsustainable schemes.  Genius at work?  Not!

-MC

With most school districts in the country having resumed operations by this last week, someone asked me about the effect of people going back to school on the country’s economy.  Well, this is actually very simple.  Every year when school vacations begin, unemployment goes up and when school starts back up, the nation’s unemployment rate goes back down.  Total employment usually goes up in the summer as well, as many outside jobs open up, especially for teens. 

Definitions are important here, as how we define things affects how we measure them.  The unemployment rate is not how many people do not have jobs, as not everyone is looking for a job.  School children in high school often do not seek jobs in the summer, but even fewer look for jobs during the school year.  Should we count as unemployed those who aren’t even in the market?  The answer is no.  Think of someone calling people up in a survey.  They first ask the person’s age, then whether the person has a job.  Then they ask if the person looked for a job in the past month.  Those who neither have a job nor have looked for a job are counted as not being in the labor force.  The rest, those with jobs or have actively looked for a job in the last month, are counted as being in the labor force.  Of those in the labor force, those who do not have a job, are counted as unemployed.  So, to be counted among the unemployed, a person has to be without a job now and has to have been actively looking for work.

A bureau within the U.S. Department of Labor, the Bureau of Labor Statistics (BLS), surveys a rather large group of households across the country to find out what percent of the labor force is without a job, the unemployment rate.  Below are some historical unemployment figures from the BLS website. 

Labor Force Statistics from the Current Population Survey

 A bureau within the U.S. Department of Labor, the Bureau of Labor Statistics (BLS), surveys a rather large group of households across the country to find out what percent of the labor force is without a job, the unemployment rate.  Below are some historical unemployment figures from the BLS website. 

 Note that every June this number seems to go up from the month before and every September the number drops back down by about the same amount.  Every December, the figure drops off and rises in January.  All of these amount to predictable patterns, that economists and statisticians call “seasonality.” 

By the way, here are the unemployment rates for the same time period, but with adjustments made for seasonality.

 Labor Force Statistics from the Current Population Survey 

The rise in summer unemployment is mostly in teenage unemployment as teens enter the labor market looking for summer jobs.  Summer employment actually expands, but so does unemployment as not all of the job seekers find what they are looking for.  With the start of school, this pattern reverses itself.  Not that with increased retail activity in the Christmas shopping season, the same thing happens.  To keep from confusing monthly rises and falls in employment or unemployment rates with more serious changes beyond these mere seasonal patterns, economists and statisticians adjust the raw figures by the seasonal pattern.  If December unemployment rates run 0.2 percentage points lower than average and January’s rates run 0.3 percentage points, then these months’ rates are adjusted by 0.2 upward in December and 0.3 percentage points downward in January.

Not only do statisticians make adjustments of this sort, but so do retailers and so do families.  For instance, my job is a nine-month position, and I get paid in those nine months.  I stash money aside the months I work so that I can maintain a similar spending pattern every month.  I can predict it, so I do not get caught by surprise.

 So, when you read about monthly changes in employment and unemployment figures or even gasoline pump prices, before being alarmed, check to see if the figures you are viewing are seasonally adjusted or not.   While our trees in the deep south may not change that much, our economic seasons change much the way the rest of the country changes.

 -MC

If you visit a local McDonald’s for lunch and encounter a long line, you probably view the experience as a sign of poor service.  While on vacation, however, you may not perceive a long line in the same way.  An anecdote to follow suggests that tourists, in the absence of complete information, often flock to the restaurants and other attractions that feature the longest lines.  There are several reasons for this apparent behavior.  Firstly, many tourists lack information and thus view long lines as a signal that informed tourists believe an attraction to represent a good experience.  In this sense, long lines at tourists spots are self-reinforcing and therefore valued by tourist-driven firms as more than an end result of good business practices (i.e., to maintain sales momentum).  Secondly, some tourists value common experience.  A tourist who enjoys discussing common experiences with friends might seek popular spots (long lines) to increase the likelihood of such conversations.  Lastly, tourists aren’t typically pressed for time and are therefore more willing to trade time for an experience that is likely to be memorable. 

An examination of firm behavior allows us to attribute these motivations and behaviors to the average tourist.  Specifically, several tourist-driven firms are observed to create the illusion that clients are pouring out the door of their establishment.  However, the author has observed no examples of this queuing illusion among firms that are not tourist-driven.  The cases surrounding this observation center upon Café du Monde, a popular New Orleans tourist spot.  The author has never visited Café du Monde due to its almost ever-present, amusement park sized line.  The author has, on the other hand, visited several nearby cafes.  A few such cafes, including Café Beignet, depend upon the business of residual tourists who came to Café du Monde but could not wait the necessary time for service there.  There is no doubt that Café Beignet enjoys a steady stream of business.  However, the café exaggerates its own popularity by preventing each waiting customer from approaching the register until it is his turn to order.  Consequently, the line at Café Beignet begins much closer to the establishment’s door than to its counter and pours onto the outdoor sidewalk even when business is relatively slow.  Some approaching tourists see this and likely think the following: “Café du Monde must be really good given the line, but it will take over an hour to be served there.  Café Beignet must be pretty good given the line, and it will take only fifteen minutes to be served there.  I’ll try Café Beignet.”  Thus, long lines (or the illusion of long lines) beget longer lines at Café Beignet and other nearby cafes that feature the same policy.  Otherwise, why would these already crowded establishments create twenty feet of dead space between the counter and the line of waiting patrons.    

Such a strategy would never work for a firm that hosts a large proportion of repeat customers, as people don’t often fall for the same trick twice.  However, it is a good strategy for Café Beignet, as the typical tourist (a) doesn’t realize the illusion until it is nearly time to order and (b) probably will not be back at any rate.  When on vacation, a tourist should understand that he is not in Kansas anymore.  Firms certainly do. 

-SS

Last week the “Kash for Klunkers” program (I will just call it KFK from here out) came to an end.  The end of this program should be no cause for sorrow.  This was a bad idea from the George Bush (the elder) campaign against Bill Clinton in 1992.  In the past, there have been several local or regional KFK programs around the country, some in Los Angeles sponsored by Unocal Corporation 1994 as offsets to allow Unocal to expand its emissions (see Robert Hahn, An Economic Analysis of Scrappage, Rand Journal, 1995).  Note that for Unocal’s expansion to have been allowed, the offsets had to have reducee targeted emissions by more than Unocal’s emission increases.  While some local targeted buyouts may be cost effective, general buyouts, as the recent Congressional $3 Billion KFK program seem more like mere subsidies for the auto industry–more pork-flavored bailout.  And as we have heard on the news lately, more of the bailout from the KFK program has gone to Japanese rather than U.S. automakers.

As Harvard’s Jeffrey Miron points out in a CNN.com paper (reposted at Cato), the program does little to reduce fossil fuel consumption, and may even result in increasing gasoline use, as the more fun-to-drive new cars see more miles driven than older vehicles.  In fact, David Bernstein, in his recent working paper reports that the Energy Information Administration finds that a 14 year old car will travel around 8,600 miles per year compared to 14,300 for a new car.  Miron’s “fun to drive” explanation along with better gas mileage (cheaper to drive, so more miles driven).  Bernstein estimates that with the greater number of miles driven by the new cars relative to the old cars, that gasoline consumption will increase by 85.8 gallons per car for the first year after the KFK exchange of vehicles.

The fact is, many of these older vehicles would have been traded in for newer cars anyway, and these older cars would soon be off the road.  And very soon, these older cars that have been destroyed with KF K, will be replaced by other poorly maintained, old, high polluting vehicles.  What KFK has done is to raise the price of used cars by taking these cars off of the market, and it is expected to raise the price of auto parts, as these cars will not be supplying parts.  And this will hurt the poor more than anyone else,

The KFK policy, which Bernstein shows is more likely to raise gasoline consumption, can only be justified as some part of sort of stimulus program, and for the auto industry, it seems to have done just that.  It has also been a boon to those trading in their old gas guzzlers.  However, it does nothing for those producers in other industries that have seen downturns, such as those in recreational boat industry.  Nor has it helped consumers who did not have a gas guzzler to junk.

The program reminds me of one of FDR’s programs.  My Dad, who was almost 10 at the beginning of the Great Depression and in his 20s before it was over, told me of an FDR program that was a precursor to KFK.  He told me of bulldozers digging large holes and cattle being driven into those holes, shot and buried.  This took beef off of the market and drove beef prices up, just as new and used auto prices have been pushed up by the KFK program.  And just like the KFK policy, wealth was destroyed and resources were made scarcer than they had been.  Imagine, while people were going hungry across the country, cattle were being destroyed and wasted.  KFK does the same for transportation for the poor.

Bastiat destroyed the logic of BMO’s KFK policy and FDR’s “Let them go hungry” in his opening essay of his book “Economic Sophisms,” titled “Abundance and Scarcity.”  Bastiat showed that the greater lot of society is never made better off by reducing their ability to consume.  While this may be a beneficial path for certain special interests, the rest of society suffers as a result.

KFK is gone.  Let us vow to never repeat the mistakes of the past.  But we are bound to repeat them.

-MC

Recently on BasilandSpice.com, there was an article about suggestions from The Center for Science in the Public Interest concerning the safety of Gulf oysters and the very real dangers of eating oysters harvested from warm waters at warm times of the year.

In the article, The Center for Science in the Public Interest suggests to governors of the various states to ban the importation and interstate sales of Gulf Oysters.  This suggestion, however, is quite troubling, as there may be better ways to provide this safety.

I should first be upfront and state that I live in coastal Louisiana, where most commercial Gulf of Mexico oysters are harvested.  One of my colleagues across campus from me helped Ernie Voisin develop a high pressure technique for treating oysters for Vibrio Vulnificus.  This technique is used by Mike Voisin, an area businessman, to treat the oysters he markets.  I work on an economic development authority, a local governmental body, with Mr. Voisin, who chairs the body.  So, I come from the area where these oysters are harvested and work with people whose businesses might be enhanced from such regulations.

Oysters, particularly from warm water, are dangerous to eat raw.  Any raw shellfish is risky.  Thorough disinfecting and techniques to avoid cross contamination should be practiced in any kitchen serving shellfish.  I love to eat oysters any time of the year.  However, at warmer times, I eat them only after they have been cooked!  A ban on interstate sales of Gulf or any other oysters is just unnecessary.  Warnings, consumer information, might be more reasonable.  In case the well-meaning folks at The Center for Science in the Public Interest are unaware, oysters are not only eaten raw, at least, here in Louisiana, we often cook our oysters.  I enjoy chicken and turkey, too, but I always sure fowl is thoroughly cooked.  After problems with spinach and lettuce contamination last year, I make sure that I do not eat or serve unwashed lettuce or spinach.

Should there be bans on interstate sales of lettuce or spinach because some people fail to wash their lettuce?  What about on chicken or pork?  Of course not.  Instead, buyers should be made aware of the risks of eating certain foods in raw or unwashed conditions.

Warnings on menus and on containers about risks of oysters in warm months should suffice to keep us safe from Vibrio Vulnificus.  Maybe it is because I am from coastal Louisiana, but for as long as I can remember, there has been a common rule of thumb regarding consuming raw oysters: “only eat raw oysters in months with an ‘r’ in the month.”  This means never in May through August.  I would be more cautious and add April and October to those months to avoid raw oysters.  For instance, the regulations in Louisiana on raw seafood can be seen here.

Now, there are raw oysters that are completely safe to eat, such as those treated with high pressure, and those who want to eat raw oysters in the summer should look for these oysters.  While not endorsing Mr. Voisin’s hydrostatic high-pressure treated oysters in any way (Bastiat’s Bastions is hosted on a state taxpayer-support server, and I use my taxpayer-provided computer to write this), I do wish to point out what Mr. Voisin’s company has to say about their treated oyster on their website.

Cooking oysters is another way to avoid the risk of Vibrio Vulnificus.  This is far safer than relying on government agencies which may fail to maintain perfectly maintain safety in the food supply.  When I think about the great variety of ways to cook oysters, I hear in my mind the voice of “Bubba” from “Forest Gump” where Bubba goes on for what seems like days reciting all of the names of shrimp recipes.  I am not sure if there are as many ways to prepare oysters, but I think it might be close. A simple search for “oyster recipes” on your favorite search engine is bound to turn up something both tasty and healthy.  So, cooking and washing works far more effectively than regulation.  Why should people who know how to cook be kept from this ingredient just because some people do not know how?

However, eating only cooked oysters, treated oysters or not eating them at all will not keep you safe from this disease. Exposing an open wound to warm seawater is another path to infection of Vibrio Vulnificus, making cuts and scratches at the beach quite dangerous, especially for anyone with a compromised immune system.  Opening raw oysters to cook them should also be done with care, as it is easy to get scratched or cut by the rough and sharp edges of an oyster in the process.

The Centers for Disease Control has an excellent page dealing with Vibrio Vulificus. The University of Georgia and the University of California have an excellent webpage on oyster safety, as well.

-MC

Take a look at this article  on BasilandSpice.com, where many of our Bastiat’ Bastion posts are reposted.  Fellow BasilandSpice Blogger John Mason writes about what is happening to the money supply and different components of the money supply, such as cash held outside of banks.  After you read the chapter on the Money Supply, you will make more sense of what he is talking about.  Then you can comment.

-MC