Oil Speculators


Here’s some good analysis comparing the oil and natural gas markets to question the theory that oil speculators are driving up oil prices. I am not opposed to tweaking the margin requirements for trading contracts but am opposed to attempts to exclude some market participants.

The Unemployment Trap

For long-unemployed, hiring bias rears its head:

“There’s much more subliminal discrimination against the unemployed that’s hard to document,” said Lynne Sarikas, director of the MBA Career Center at Northeastern University’s College of Business Administration. “Hiring is an art, not a science. You rely on a gut reaction.”
For example, employers may suspect that an unemployed applicant is seeking an available job for the wrong reasons, she said.
“A manager is going to get the vibe that they’ll take anything to get a job and if something better comes along they’re out the door,” Sarikas said.
Also, some long-term unemployed applicants may come across as too urgent for work, “and desperation doesn’t translate well in an interview,” she said.

How many of the unemployed passed on available jobs early in their unemployment, waiting for a better opportunity, because the continued extension of unemployment benefits from the government made this possible? They would have been better off in any job, rather than become long-term unemployed. The longer they stay unemployed the more their confidence and skills atrophy. Yet another good example of unintended consequences from a well-intentioned government.

Climate Change Questions


Mr. Stix posits some intellectually honest questions regarding implementation of climate change policy.

How do we overcome our hard-wired tendency to “discount” the future: valuing what we have today more than what we might receive tomorrow?

I agree it’s hard-wired. So “overcoming” it is clearly the role of religion.

Would any institution be capable of instilling a permanent crisis mentality lasting decades, if not centuries?

Fear of going to hell has worked for many religions for centuries….

How do we create new institutions with enforcement powers way beyond the current mandate of the U.N.?

May I suggest “The Prince” – these power-consolidation problems have well known solutions…

Could we ensure against a malevolent dictator who might abuse the power of such organizations?

Please re-read “The Prince” (I’ll save you some time – the answer is “No”…)

Bad Investments

From http://finance.yahoo.com/news/underwater-locked-130036830.html:

The couple bought the home for $415,000 and later took out a $65,000 second mortgage. Today, Maria and Jose owe $245,000 more than their home is worth (which is $235,000) and have a loan to value ratio of 204%.
Selling the home without harsh negative consequences seems impossible without government assistance, a prospect that is unlikely at best.
Either a foreclosure or a bank-assisted short-sale would, in the best scenario, stain their credit rating and make it harder to buy a new home in the next few years. So they continue to pay monthly into a mortgage where they have no equity.

The amount of equity in the house is inconsequential. When Maria and Jose bought the house for $415,000 they knew that it would take 30 years to pay it back, and that their payment would be about $2,600 a month. Nothing has changed! They made a commitment to pay the mortgage for 30 years, but now they’re having second thoughts because they see the property has gone down in value. In the insurance business we call that a “bad investment”. I am very much against government action to compensate people for bad investments.

John Shore, age 62, says he can’t retire and move because he’s locked into mortgage payments on his severely ‘underwater’ home outside of Fresno, Calif.

This is just silly. Mr. Shore was going to have a mortgage payment whether the house was “underwater” or not. If he can’t retire because of the mortgage he obviously knew that would be the case when he took out the mortgage (which, at a typical span of 15 or 30 years, is about the most predictable bill any of us ever encounters). I suspect what Mr. Shore meant to say was “I bought this house as a speculative investment hoping to ‘flip’ it and it didn’t work out as I had hoped. Now I want the government to cover my gambling losses so I can retire.”

What ever happened to personal accountability?

On Insurance Mandates

I thought I would share a few thoughts on the current controversy concerning insurance mandates, specifically as they relate to contraception. I feel I am very qualified to opine. You see, I spent my life in the insurance sector. As I sometimes joke, I spent a little time in the actuarial offices, I just didn’t inhale. I understand how insurance policies come, and how insurance policies go. And in that experience I’ve come to understand a few points about economics and insurance.

  1. Insurance is not designed to cover predictable activities. The purpose of insurance is to aggregate risk for unknown events. Insurance companies make bets about how likely a given event will be, and how much it will cost, based on their long term measurements of actual events. This allows them to charge you, the customer who doesn’t know how likely a given event will be, an average cost (plus a nominal profit) for coverage to pay for the unknown event should it occur. If an activity (such as eating, or a woman’s birth control for that matter) is predictable then it should be paid for out of pocket by the individual. It makes no sense to procure that item through insurance.
  2. Government cost savings calculations are a slippery slope with no intellectually defensible stopping point. The argument being presented for mandating contraception as part of insurance is that it saves money, since the cost of contraception is lower than the cost of pregnancy. The same can be said of food. The cost of feeding an individual for a year can be less than the cost of treating them for starvation (you can feed a person for a year for less than a couple days in the emergency room). So why don’t we mandate that insurance provide three square meals a day?
  3. Insurance mandates are a two way street. The political factions happy about getting free contraception through government mandate will probably be less happy when different political factions get into power and start mandating that all insurance plans cover firearms purchases. Clearly the cost of a firearm is lower than the cost of treating a person injured after an assault.

In my opinion we will all be happier in the long run if we quit using insurance mandates as a proxy for property redistribution by the government.

Reducing Government Expenditures


Mr. Tabbarok makes the case for government directed innovation and infrastructure investment:

Our ancestors were bold and industrious–they built a significant portion of our energy and road infrastructure more than half a century ago. It would be almost impossible to build that system today. Could we build the Hoover Dam today? We have the technology but do we have the will? Unfortunately, we cannot rely on the infrastructure of our past to travel to our future. Airports, an electricity smart grid that doesn’t throw millions into the dark every few years, ubiquitous Wi-Fi — these are among the important infrastructures of the 21st century, and they are caught in the regulatory thicket.

It seems to me that the low hanging fruit of government-provided infrastructure is largely gone, which is why there are fewer high-profile “shovel ready” public works projects. Everyone could see the benefit of the Hoover Dam and the interstate highway system. We built them and got significant return on investment. The remaining infrastructure projects, like those mentioned in the article, provide far less value. That’s why there is no political will to do them.

Airports – not sure what the problem is, other than TSA adding huge cost and invasion of personal privacy into the boarding process. The airports I fly through have functional concourses, jetways, luggage carousels, and runways. What else is needed, and why should the federal government be involved? If a local government wants to build a new airport for the convenience of its citizens or to attract new businesses they can do that with their own taxes. If Mr. Tabarrok meant to say “air traffic” then I would agree there is a place for federal government to regulate air traffic and that it needs to modernize the current system.

Smart grid – yeah we had a well-documented failure in 2003, but most people still experience excellent availability. When I think about raising my taxes to pay for improvements I say “I think the system now works well enough”. There may be some efficiency gains and information security benefits but I would leave it to the free market to work out those problems.

Ubiquitous Wi-Fi – no reason for bureaucrats to pick a technology for billions in government investment. If Wi-Fi is the right technology then Verizon and AT&T will figure that out and build the network. I think the private sector is doing just fine providing wireless data services.

My principle objection to government investment and infrastructure spending is that it puts government in the role of picking winners and losers. I prefer to see the free market perform that function.

I’m not opposed to all government spending but would limit it to only places where there is a clear, compelling advantage to the government’s involvement. In my view there are many areas the federal government is “investing” in that are far better solved by local governments or private enterprise. Federal government should be shrinking investment and returning the money to the states.

Trade Income Tax for Carbon Tax?

I plan to write more about this later, but wanted to bring it to your attention. Art Laffer is proposing a revenue-neutral carbon tax.

The concept of the revenue-neutral carbon tax is for the government to tax our carbon usage and refund the tax to us in the form of an income or payroll tax reduction. The idea is that since this will make carbon relatively more expensive that it will alter our consumption patterns to consume less carbon and thereby less pollution.

There are three problems with this plan as I see it:

  1. Carbon is an input into everything – find a product that isn’t made with petroleum! As soon as the tax is refunded to us with are either going to buy a product that uses carbon as an input, or buy a service from someone who will then use the money they made  providing the service to buy carbon. Carbon is a proxy for standard of living so if you think you can reduce our usage of carbon you’re really saying you can reduce our overall standard of living. There is nothing we want to buy that doesn’t consume carbon so the idea that this tax will somehow alter our preferences is not very believable
  2. The tax will only affect the United States – keep in mind that if tax ourselves to reduce our carbon usage it only serves to lower the price so that other countries can consume more. It is worth noting that even though a barrel of oil currently sells for about $100 a barrel oil companies can still pull it out of the ground for as little as $2 a barrel. The demand is what is driving the high costs, not the actual production cost. As we lower our consumption, and the price drops, you can be sure that other countries will pick up the slack. At the end of the day the same amount of carbon will be burned (globally) so this policy does nothing to address the burning of carbon on a global scale.
  3. It’s regressive – this will impact the poor, who use a higher percentage of their income on carbon, more than the rich. This will likely cause all sorts of additional market distortions and tax complexity as the bureaucrat social engineers attempt to rectify the situation.

Because of these reasons I don’t believe this policy is useful for reducing global consumption of carbon (won’t help with man caused global warming, if it exists). It might work well for localities looking to reduce their carbon usage to help with air pollution or other externalities. If those localities so desire they could give it a try. I do not support this as a nation-wide policy for the United States as it would unfairly tax those citizens living in less populous areas.

What is U.S. Citizenship Worth?

From the WSJ:

“A survey published in November found that 60% of about 960,000 Chinese people with assets over 10 million yuan ($1.6 million) were either thinking about emigrating or taking steps to do so. The U.S. was the top destination, followed by Canada, Singapore and Europe, according to the survey by the state-run Bank of China and Hurun Report, which analyzes trends among China’s wealthy.”

Several months ago I was trying to sell a policy protecting against “civil unrest in the event of a U.S. government default on debt” to a young lady, Oxford graduate, and she gave me the following interesting suggestion:

“The U.S. could wipe out the deficit if it simple guaranteed citizenship to anyone willing to pay $1M.”

I wondered, “Why would anyone want to do that?”