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Tuesday, June 28, 2011

Just Reading Along

Richmond Fed - The good thing about this is that the overall rose to 3 from -6 in May, which was a dizzying drop from 10 in April. The bad thing is that inventories of finished goods took a wild hop up to 23 (from 10 > 12 in recent months). Inventory builds aren't necessarily bad if shipments are rising, but in May shipments moved to -13, and in June shipments were still marginally negative at -1. So this may be a report I don't want to read next month. Also the backlog of orders was still quite negative at -16. Prices paid current and expectations are in the 4s - better than last month, but still in compress territory. Prices received are in the lower 2s, and expectations are similar.

The average workweek fell to -5, but that is not too paid because number of employees was still healthily positive at 12. Wages are still rising; in April that index was 22, it fell to 6 in May and rose to 9 in June. So probably manufacturers are trying to control costs by limiting overtime, and are staffing more to ensure that happens.

Note: I am not certain, but I suspect that part of the Texas slump shown yesterday is related to Japanese supply problems. Autos we pretty much know about, and because May Southeastern PMI was better than national, I think autos had a limited, although negative, influence to date. Electronics component shortages should be showing up about now.

Given the power problems in Japan, I am expecting some continuing influence. The long and the short of it is that out of 54 reactors Japan has 17 now running, no new restarts have been approved (on those that were shut down for normal maintenance), and this summer at least four more have to shut down for maintenance. At least three utilities have asked for the 15% power conservation; the problem is compounded because some of the larger companies had shifted movable work out of the Tokyo area only to find themselves facing new restrictions.

On the positive side, that's five posts in three days, which your fans appreciate greatly, and that pushes the MoM wisdom rate into a steep increasing curve. On the other side, there is the distinct and persistent lack of bulldog posts, leaving the charm index falling YoY.
The bulldog is maintaining a sorrowful, determined silence, expressing her sentiments only through eyes of woe and quivering jowls. Her position is that any meaningful economic stimulus would involve securing a continuous and reasonably priced supply of pork, preferably the bony kind.

She also regards the corn ethanol subsidy as a plague upon the face of the earth.

She refuses to vote for the current administration again; she had thought Obama's policies would be appropriately porky, but it now becomes clear that it was only pork for very small portions of the populace, in which portions she was not included.

She cannot imagine a Democratic party without pork for the masses - a position that many government unions share and that genuinely poses a problem for Democrat messaging.
Pork in its present form is BAD, BAD, BAD!

It's almost *always* wasteful. It makes us all *poorer*. Pork is not a solution to poverty, it is a contributing *cause* of poverty.

There is a valid way to do things though -- and that is via cold hard cash. Right now pork may be used to buy senate/house votes. This kind of "buying" is actually morally valid *IF* it is done solely for the collective good of those represented. In that case it is just a representative wheeling and dealing on behalf of his constituents, which is what they are elected to do. Usually though, the pork is directed in such a way to buy the most votes and *NOT* to provide the most collective benefit to constituents.

If I were a congressman, I would require that my votes (the ones that are up for sale anyways) be bought in cash. That cash would either be dispensed directly to the people I represented, or would go to the state government (if a senator) or local government(s) (if a representative). "Unfortunately" that would not let me "target purchase" the votes of swing groups as a means of improving my chance of being reelected. But maybe the people would see that what I was doing was fair and efficient rather than corrupt and wasteful, and reelect me for that reason.
Hell, let's make some money!

Let's say a vote has options A and B.

My folks would prefer A. In fact, we estimate it's worth $A to them.

They can deal with B, but we estimate it would cost them $B.

So, let the bidding begin!

Those that want me to vote A, start voting with your $. Ditto for you guys that want B.

The bias is $A+$B in favor of A.

So if the "B team" is willing to give my state/district more than $A+$B dollars over what the "A team" is offering, then I vote B. Else I vote A.

Free market politics at work.
State and local government employees are now
starting to feel the pain. Pink slips and lower total
compensation are on the horizon. Federal employees are next. These cuts will be widespread and have a
greater local impact because the bottom 80% spend most of their income. That, combined with no tax relief
for taxpayers, will crush spending and therefore the
velocity of money.

It occurs to me that I took your "pork" a bit too literally and you just meant keynesian "stimulus" spending in general (even if much of it might essentially be in the form of pork).

If you want the economy to recover, you need to convince people that the future holds promise -- that working and investing today is worth their while because it will pay off. Some short term stuffing of pockets with cash borrowed from their own futures (that they will have to pay back with interest) is no such promise -- it is a cheap trick that people can see right through. To be convincing we need changes that are major, real, permanent and in the right direction.

We are in a world of global competition. Some like Sporkfed would seem to like us to bury our head in the sand and pretend we are not (tariffs). But that won't stop the world (and reality) from eating us for lunch.

We need to be motivated and efficient, smart and innovative, productive and competitive.

Every time a central planner gets in the way it saps motivation, it destroys efficiency, the smarts and innovation of the individual are displaced by the ignorance, hubris and special-interests of the central planner. Once those go, productivity and competitiveness are nothing but popular fiction.

We need rule of law -- simple and straightforward so everyone can know it, judge it, live by it, and judge others when they violate it. And it needs to be enforced, without "discretion". What we have now is insanity. There is no law. What we have now are masters.

We need strong property rights. Motivation to learn and work and innovate to obtain what we desire in life is mortally wounded when our property is taxed away and transferred to others against our will.

Anyone who wants the economy to recover needs to fight for those things we need. Before they can fully do that, though, they need to overcome their own individual blind spots and recognize what it is that they themselves have accepted as the true path that is actually the path to ruin.

When we force the politicians to start taking real steps towards these ends, when it becomes apparent that that is really going to happen, that's when our economy will begin to recover. When we get them all in place, and people learn that they have to strive for their own success and not depend on others to hand it to them, that's when our economy will become unstoppable, unbeatable and a marvel to behold. On the other hand if we let things go as we have, we're toast.

I'm not confusing tariffs with protectionism. I'm
not sure how proposing changes to our tax and trade policies is sticking my head into the sand. I remind
everyone that tariffs as a trade policy were the norm
in this country far longer than "free trade" has been.
It seems that everyone's answer is that labor must be the ones who sacrifice to get the economy moving. Since labor's share of that productivity gains
have been declining for 40 years, good luck with that.
spork, the problem is you are looking at tariffs in a vacuum.

Very early on, tariffs were the bulk of the taxation (along with excise taxes). That is not very burdensome when you have an otherwise lightly-regulated business environment (and I am leaving financial institution regulation out of that environment). In short, whatever import supply is stifled gets offset by a domestic open-environment that will increase domestic supplies.

What you are proposing is a tariff-heavy environment onto an already heavily-regulated domestic environment. In short, you are stifling import supply but you don't get any domestic increase because they're already constrained by heavy regulation. The only beneficiaries in that environment are the established elites (including government employees); the rest of the plebes get no benefit whatsoever and in fact get harmed by higher prices and higher sales taxes due to those higher prices.

Arguably the only sector that has seen a decrease in effectual regulation is the FIRE sector. Not surprisingly that sector became too large to sustain itself, it needs the other sectors to be healthy to survive otherwise the FIRE sector becomes parasitic. I would also put government into the FIRE sector as the large majority of federal and local budgets are for insurance-type functions; either directly via transfer payments or indirectly via regulatory functions.
I'm not arguing that regulations in some industries aren't
over done. But the sad fact is that we can't compete
with China when it comes to wages and regulations.
Cut all you want here. It's still cheaper in China, Vietnam
etc... Tariffs are one way to level the playing field. Sadly
We chose to devalue the dollar instead.

"It seems that everyone's answer is that labor must be the ones who sacrifice to get the economy moving."

If that's what you got from my post, you're reading it all wrong. Do I want to sacrifice stuff to get the economy moving? Hell yeah. What stuff? Theft, corruption, and the repression of our natural rights. I would want to "sacrifice" those even if the economy were doing OK - we don't need them, nor should we want them.

Government has basically one (*) valid role to play -- the protection of our natural rights. That includes things like preventing other countries from attacking us (national defense) and preventing other people from denying us our rights (rule of law, contract enforcement). In fulfilling those roles government will by necessity consume resources. To maintain/restore our republic (which has been rather destroyed by the civil war, the 16th and 17th amendments, and the perpetual growth of federal power) these resources need to be gathered by some means from the states (as per the original constitution -- not direct taxation). This could either be taxes on the states, inter-state tariffs and/or inter-nation tariffs. I'm OK with either or both -- as long as they are implemented in a neutral fashion. I.e., tariffs should be balanced -- if you impose a 2% tariff then it should apply to all goods and services across the board and should apply in both directions. Taxes and/or tariffs should ONLY be used by the federal government to raise the necessary resources for its one true purpose -- protecting our rights. Neither taxes nor tariffs should ever be allowed to be used by federal politicians to transfer wealth in a manner which advances their own agendas.

Note that all tariffs are isolationist in effect to some degree. Small tariffs are a little isolationist and large tariffs are very isolationist. When you use a tariff not solely as a means to raise funds (with a bit of isolation as an unavoidable and *unwanted* side-effect), but instead for the isolationist effect itself, then I believe it is fair to label you an isolationist. (It seems you are after the isolation effect and are under the mistaken impression that that won't be devastating to almost *everyone* in this country.)

Also note that taxes/tariffs are necessary evils -- and I want to stress the "evil" part of that phrase. Voluntary trade between individuals is a natural right, whether those individuals are in the same city or on opposite sides of the world. Tariffs to some extent repress that right. In essence, funding government (so it can defend our natural rights) via tariffs is trading off a small amount of one natural right (trade) to preserve the remainder of that right and all of the others. Increasing tariffs beyond what is need to fund the minimal government needed to defend our natural rights is itself a violation of our rights. If you get a tariff to protect your job, you are violating my rights by repressing my ability to trade with whomever I want. You are effectively stealing from me.

(*: There are some other lesser roles where government may be required -- basically in cases where "tragedy of commons" scenarios or any other situations arise where it can be mathematically shown that individuals working towards their best interests [even while respecting each others natural rights] tend to cause systemic failure rather than success. For example, government can have a valid role to play in limiting how many fish people can pull out of shared river systems. Though, even in that case government is not needed/desirable if all affected parties can reach their own agreement without government's help/interference.)
"But the sad fact is that we can't compete with China when it comes to wages and regulations."

No, the real fact is that we *MUST* compete with China. We don't have to be competitive with them for every single product, but overall we must be competitive. Tariffs do nothing but *damage* our ability to compete.

And "when it comes to wages", robots work for even less than Chinese workers. Wise job choices: Get a job designing/making/running robots, or get a job that can't be replaced by robots. Poor job choices: Trying to compete with robots or Chinese "meat-bots". (If you've got a kid, expose them to computers and robotics and sensors and stuff like that -- if they're any good at any of it, make sure they get what they need to become real good at it and show them all of the potential so they are eager to do so. At any given time there may be a "glut" of computer programmers or engineers, but there has never been anything approaching a glut of the good ones that companies actually like to hire. I have rejected kids with MS degrees and 4.0 GPAs from top schools because they exhibited no actual talent whatsoever. Maybe 1 in every 20 or 30 people I look at are really promising -- and they are damn hard to actually get because they have so many options available.)

I'm not so sure that we couldn't beat China on regulations if we actually tried. Yes, we will not want to pollute to the level they do, but there is more to regulations than just that factor.

We also have other advantages, such as a somewhat better property rights record. And we have plenty of room for improvement there: E.g., corporate taxes are a rather retarded means to fund governments, and we have the highest corporate tax rates in the world.

We can also attract the best/brightest with better protection of everyone's natural rights than what China provides. And once again, we have *plenty* of room for improvement there. (And note that importing such people will also "import" the need for service sector jobs, providing our less skilled citizens with something they can do to make a living.)

If we can get government off our backs and get it to limit itself to its true purpose (protecting rights), then we can and will be competitive with China.
"Tariffs are one way to level the playing field."

No, they don't. Not even close.

Say you've got some good G that is currently produced cheaper in China ($C) than in the US ($U). Chinese consumers can buy it for $C, US consumers can buy it for $C. The consumers have a level playing field (ignoring transportation costs).

Now add a $T tariff to the mix. Now consumers in China can buy G for $C and those in the US have to pay min($US, $C + $T). There is no longer a level playing field -- consumers in the US are getting hosed.

Now what if good G is actually something a business uses? The tariff now means that that US business sees their costs go up. Their response will likely have to be an increase in the price they charge consumers for their goods. That business is now *LESS* competitive.

Now that business tries to sell its finished goods back to China (or any other country). Well, even if we didn't make the tariff neutral (i.e., we instead only charge the tariff for incoming goods and not outgoing ones), the government of China will likely "rectify" that situation by putting up its own $T tariff on incoming goods (from the US only). So now that company's finished goods have a double whammy when trying to sell to China -- their sale price is higher (because of the higher cost of good G), AND there's a $T tariff on top of their sale price.

And what is the government doing with all of the income provided by high tariffs? Politicians are likely transferring it to their own special interests. That results in massive waste (aka all of us getting poorer). It also results in the playing field being very non-level, clearly favoring the politically connected. It also helps continue and expand corruption due to use of such money to buy votes.
I would be willing to consider adopting a "Mutually Assured Destruction" tit-for-tat tariff policy. It would be a bit complicated:

- say you have two "zones": the "US" and the "EU"
- say the highest tariff the EU imposes on goods sold by citizens of the US to citizens of the EU is MAX_IMPORT%
- say the lowest tariff the EU imposes on goods sold by citizens of the EU to citizens of the US is MIN_EXPORT%

Then the policy would mean that the US automatically slaps an *extra* MAX_IMPORT% - MIN_EXPORT% tariff on all goods imported from the EU to the US. (This will amount to exactly 0 so long as the EU has a perfectly neutral tariff policy.)

Furthermore, a tariff by any other name is still a tariff. Specifically, VAT is effectively a tariff. (Right now EU companies get to sell to the US with no tariff or tax -- but US companies selling to the EU get a VAT charge added.)

I call it a "Mutually Assured Destruction" policy because all tariffs hurt. Even protective/reactive ones like this one *will* hurt us. But it will also hurt the EU. It's basically like going to war -- there will be death and suffering on both sides. The only way out is to achieve peace. And in this case peace would mean that the EU stops conducting a non-neutral tariff on trade with the US.

The min/max business is to prevent a foreign country from conducting mercantilism in specific market sectors. Attacking any of our states is to declare war on us all, as is attacking any of our commerce sectors.
Foo - nice points.

When a country is conducting trade wars against you, it is valid to respond by imposing tariffs. But it is not generally going to be productive if you impose tariffs to boost non-competitive industries in your own country.

I think we would do better in redressing some trade inequities by actually enforcing many of our standards. For example, the electrical standards are routinely violated in production runs for consumption from China and several other countries.

In general, you hurt your economy's growth rate long term by subsidizing energy costs, especially imported energy much (off-the-ground help to initiate energy production isn't so bad as long as it isn't that major), by imposing tariffs on goods to bolster internally unproductive industry, by refusing to defend property rights, and by taxing domestic industries at rates higher than they would face in a similar economy.

You can make an exception for industries that are inextricably linked to national security, but that has to be kept to a minimum.

Any type of regulation that drives up internal energy costs is usually intensely destructive. Subsidizing energy costs to end users is a trap.

As far as I can see, the subsidies for most wind/solar the west have adopted are hurting these economies. There is little out and much in, and over time it is very equivalent to the housing bubble - you are slowly creating an economy based on an unsustainable premise.
It's a shame we don't live near each other; I could help close the bony pork deficit with the trimmings and leftovers when I make pulled pork. I'm hearing that pork producers are culling herds, and I see it in the grocery stores where I find spareribs declining in price. I can get the larger racks, which are from older hogs, for $1.49/lb.

She's right, though, about ethanol. When one drives through rural Minnesota one notices that a)there are only two crops: soybeans and corn; and b)rural Minnesota ain't doing too bad, because there is money evident in the small towns and regional trading centers.
Impose a tariff on Chinese goods and China has less money to buy US debt and US debt interest rates go up.

Basically the deal made with China about 20 years ago was "As long as you buy our debt, you can sell your goods here."

One must realize that "Buy our debt" means "Pay for our social programs and regulatory structure; in return you get our jobs."
To expand a bit on Charles' last point -- China is engaged in mercantilism and they are doing it by pegging their currency to ours. They have a few ways to achieve this peg:

1. Buy American goods. Of course, they don't want to do this as that would tend to bolster *our* productive capacity. That would be a mercantilist wash, and they aim to win.

2. Invest in private enterprise in America: Such investments often lead to prosperity in America (and the ones that don't tend to lose the investor their money). Again, this is no good for the mercantilist.

3. "Invest" the money in something which is massively *NONPRODUCTIVE* for America but still has a guaranteed return of funds (with interest). BINGO! US government debt is an excellent way for China to peg their currency and win the mercantilist game. And what makes it so "excellent" is that when the US government spends money a very large fraction is simply wasteful and does not help bolster useful productive capacity in this country.

So government waste not only makes us poorer immediately (by stealing our wealth and blowing it), it *ALSO* helps make us poorer in the future by enabling China to play (and win) this mercantilist game and siphon off jobs.

Government waste includes things such as inefficiencies related to and caused by medicare/medicaid, wars/bases and other excessive military spending, and other inefficiencies such as due to wasteful pork spending. And social security, combined with other government programms that cause inefficiencies in our economy, results in an extra large portion of funds taking the route: China -> US gov -> SS recipient -> buy "Made in China" goods
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