Archive for February, 2013

Slow horses for fast courses

February 28, 2013

Until recently, the United States has been viewed as a champion race-horse built perfectly for the capitalist race arena. Since 2008, the scene has changed. Led by the equivalent of a knackered old Dobbin, named Barack Obama, the United States is now desperately seeking refuge from any race-course, hoping to live out its days in some protected pasture, reinforced by hay supplements, well roped-off from roving predators.

Until recently, J C Penney was a major player in the US shopping mall stakes, a fine pedigree honed to the sales-discount-loving American public. Then the company hired a former Apple employee, Ron Johnson, as its new chief executive. With zero understanding of the shopping mall environment, Mr. Johnson knackered his new company by removing all the bullets from its six-gun. No sales discounts! No coupons! No customers! ‘Hey! Empty stores make the environment better for our work-force’ was Mr. Johnson’s reply to mounting criticism.

Have any of you dragged your way around a JC Penney’s store in recent months. A glutton for punishment, I have made periodic forays in order to chronicle decline and fall. Perhaps six people in the store, most of them, relying on canes or perambulators. Store workers with empty eyes, like those of death row inhabitants awaiting their last meal. No management in sight. This is the Titanic before its final descent, was the image that I took with me, as I raced across the mall to Macy’s to recover in the pure oxygen of a vibrant market-place.

In 2012, the first year of mr. Johnson’s ‘reforms’, J C Penney lost $4.3 billion of sales from the previous year, a 31.7 per cent decline in like-for-like sales. During the last quarter of 2012 alone, the company’s total revenue declined by 28 per cent and shopper numbers declined by 17 per cent. And that was the Christmas Quarter!

Well Mr. Johnson, unlike President Obama, has learned a lesson. He has now abandoned his disastrous pricing policy. Back to sales discounts! Back to coupons! Whether or nor the customers will return is the $64,000 question. The $1 billion question is whether Mr. Johnson will remain in charge. Unlike Barack Obama he does not have a four year tenure. And J C Penney’s biggest shareholder is Bill Ackman, whose hedge fund company, Pershing Square, owns 18 per cent of the company.

I suspect that Bill Ackman will respond much more ruthlessly in the case of J C Penney than did Obama-supporters in November 2012, when confronting a much more serious collapse of their nation’s wealth and prestige.

Hat Tip: Barney Jopson, ‘J C Penney drops key reform’, Financial Times, February 28, 2013

Here they all go again: a new-house price bubble in the making

February 27, 2013

Politicians, builders, mortgage companies, realters, and impecunious would-be home-owners all love house price bubbles, at least until those bubbles burst. One would have thought that the post-2007 experience would have opened some eyes and closed some wallets. Apparently not, at least in the market for new houses.

:New home sales jumped 28.9% in January from a year earlier to the highest annual sales pace in four years, according to data released Tuesday by The Commerce Department. Sales of previously owned homes rose 9.1%. The disparate selling pace exists even though a typical new house cost 37% more than one already built, the widest price gap since the figures started being tracked in 1968, according to an analysis of home prices by Barclays Capital.” Robbie Whelan and Conor Dougherty, ‘Builders Fuel Home Sale Rise’, The Wall Street Journal, February 27, 2013

This disparity, both in price and in volume, is driven by all the actors in the U.S. housing market. Most especially, the nation’s home builders have re-mastered the art of selling that they deployed with disastrous consequences during the mid-2000’s. No cash? No problem! Bad credit? All the better! Under-water? Here’s a snorkel!

During the past two years, more home builders have offered to pay closing costs and to arrange home loans through in-house mortgage operations. They have drawn heavily on Obama-government-backed mortgage programs that enable buyers to purchase a home without any down-payment. In such circumstances, it has become much easier for a down-and-out would be home-owner to purchase a pricier new house than a less expensive existing house. Predictably, those buyers pour in, like moths to the flame, heedless of the tragedy of the late 2000’s and beyond.

“Two years ago, Lynda Riley and her husband started combing listings of existing homes in Stafford, Va. about forty miles from Washington. With past credit problems, including a 2008 bankruptcy filing, they figured they would spend $200,000 to $250,000 for a townhouse or a three bedroom. After seeing more than 10 pre-owned homes, Ms Riley and her husband spent far more than their budget, paying $426,000 for a new, four-bedroom house with a two-car garage and shiny kitchen appliances. Their builder, Drees Homes of Fort Mitchell, Ky., helped with $5,000 in closing-cost assistance, and they received a gift of $12,000 from a family member to help cover a down payment. ‘It’s much easier to buy a new home thsn an old one,’ said Ms Riley…’The builder’s whole attitude was, ‘No worries.’ They help you and they trust you. They really, really want you to get approved.'” ibid.

‘Do come in my parlor’, said the spider to the fly.

When United States presidents blatantly lie

February 26, 2013

From kindergarten upwards children across the United States are taught to revere the presidency – to view presidents as akin to Gods. In itself, this reflects a terrible error of judgment about mankind. There are no Gods among men. All human beings are flawed and prone to moral failure.

Given the false adulation proffered by so many Americans to their president, serious repercussions follow when the supposed God blatantly lies to the people. For, if the Gods lie and those lies are exposed, honesty is debased across a wide segment of the population. And when a population at large feels morally free to lie, serious economic and social problems arise.

The first presidents of the United States – George Washington, John Adams, Thomas Jefferson and James Madison were well aware of this. They were justly revered as Founders of the new Republic, men who had earned true honor through courage and valor given to few individuals. Unfortunately, such a commitment to the truth has been gravely dishonored among more recent presidents – far less worthy of the position than those revered predecessors.

Richard Nixon lied blatantly about Watergate, was caught out in that lie, and ejected from the presidency. Ronald Reagan lied about Iran-gate, was caught out in that lie, and forfeited the remainder of his presidency to ineffectiveness. Bill Clinton lied about sexual misbehavior in the White House, was caught out in that lie, and ended his presidency in moral disgrace. Barack Obama lied blatantly about the source of the spending sequester, was caught out in that lie, and will suffer the consequences for the remainder of his second term.

Not one of those presidents considered the wider implications for American children of lying for their own perceived self-advancement. Shame on all of them, not least for the bad example that they set for their own offspring.

Unhealthy crony-capitalism: the tie between Obama and Comcast

February 25, 2013

“If Dwight Eisenhower had General Motors and George W Bush had Halliburton, Barrack Obama arguably has Comcast. US presidents are often linked to one or two corporations that donate a lot of money to them and then benefit from their actions. Comcast, which is America’s largest cable television and internet provider and is a near monopolist in most of its large cities, is no exception.” Edward Luce, ‘The corporate tie that binds America to a slow internet”, Financial Times, February 25, 2013

Let us review the evidence concerning the crony-capitalist ties between Obama and Comcast. Comcast’s most influential employee is David Cohen, its senior vice-president and one of President Obama’s largest fund-raisers. Mr Cohen raised several million dollars for Obama in 2012. But Comcast’s relationship with Barack Obama goes much deeper than that. This month, the Federal Communications Commission waived through Comcast’s $16.7 billion purchase of the 49 per cent of NBCUniversal that it did not already own. One of its assets is MSNBC, the liberal mouthpiece for the Obama administration.Two weeks ago, MSNBC hired David Axelrod, Obama’s former chief strategist, and Robert Gibbs, Obama’s former spokesman, as contributors. Jay Leno recently joked: ‘The economy is so bad MSNBC had to lay off 300 Obama spokesmen”.

Why is the strong tie between Obama and Comcast so weak for the nation? Because the rise of Comcast over the past decade parallels the relative decline in internet service in the United States.

In the late 1990’s the US had the fastest speeds and widest market penetration across the globe. Today the US comes in 16th, with an average of 27 megabites per second, compared with up to quadruple that in countries such as Japan and the Netherlands.

In terms of price, the comparison is equally unflattering. The average US cost of 1 Mbps is $1.10 compared with $0.42 in the UK and $0.34 in France. South Koreans joke that when they visit the US, they are taking an internet vacation. Countries such as Estonia, Portugal and Hungary provide a significantly superior internet service. Note that this internet gap did not merit a mention either in Obama’s Inaugural or in his State of the Union address. Surely not, with all those Comcast dollars spilling out of his trouser pockets.

“Countries such as Japan and France have embraced competition to push the rapid adoption of high-speed internet. The US is happy to tolerate duopoly (Comcast is one of two fixed-wire internet providers in 22 of America’s largest 25 cities). As a result, only 7 per cent of American homes are served by fibreoptic wire compared with more than half in South Korea and Japan. It is the difference between a steam train and a bullet train. Yet there is little outcry in Washington.” Edward Luce, ibid.

Bob Woodward calls out Obama on his sequester lie

February 24, 2013

All politicians circumnavigate the truth – that is one political disease that will never be eradicated. It comes with the territory. When a president of the United States engages in blatant lying, however, on issues that are readily verifiable, there can be only one reasonable explanation. That president believes- in Obama’s case with good reason – that the media will cover up his terminological inexactitudes. They will cover up for a black president what they would not now ever dream of covering up for a president of any other skin pigmentation. And that is contemptible racial discrimination.

Obama failed, however, with respect to his great sequester lie, to take account of one journalist – Bob Woodward of The Washington Post – whose entire reputation depends on speaking truth to power. And once again, in this instance, Bob Woodward lives up to his remarkable reputation.

The Obama-lie under consideration relates to the forthcoming budget sequester – the $85 billion of across the board federal spending cuts that will begin on March 1, 2013 and extend over the coming ten years, for a total cut of $1.2 trillion. The first occasion of this Obama-lie occurred on October 22, 2012, when the President attempted to displace the blame for this initiative onto Congress. The Obama-lie could not be less ambiguous:

“The sequester is not something I’ve proposed. It is something that Congress has proposed.” (Bob Woodward, ‘Obama’s deal-changer’, The Washington Post, February 24, 2013

Obama was supported in this lie two-days later by his chief-of-staff, Jack Lew, who had been budget director during the sequester negotiations in 2011. Again the lie could not be less ambiguous:

“There was an insistence on the part of Republicans in Congress for there to be some automatic trigger. It was very much rooted in the Republican congressional insistence that there should be an automatic measure.” (Bob Woodward, ibid.)

In his extensive research for his book,The Price of Politics, Bob Woodward discovered the big lie. He demonstrated beyond any shadow of a doubt that the automatic spending cuts were initiated by the White House and were the brain-child of Jack Lew and White House congressional relations chief, Rob Nabors.

“Obama personally approved of the plan for Lew and Nabors to propose the sequester to Senate Majority Leader, Harry Reid (D-Nev). They did so at 2:30 p.m. July 27, 2011, according to interviews with two senior White House aides who were already involved. Nabors has told others that they checked with the president bwefore going to see Reid. A mandatory sequester was the only action-forcing mechanism they could devise…the final deal reached between Vice President Biden and Senate Minority Leader Mitch McConnell (R-Ky) in 2011 included an agreement that there would be no tax increases in the sequester in exchange for what the president was insisting on, an agreement that the nation’s debt ceiling would be increased for 18 months..) Bob Woodward, ‘Obama’s deal-changer’, The Washington Post, February 24, 2013

So there you have it folks, straight from the typewriter of the hero of Watergate. Whose version do you believe, and why?

Al-Gebra conspirator arrested : Obama may earn second Nobel Prize

February 23, 2013

A public school teacher was arrested by the F.B.I. today at John F. Kennedy International Airport as he attempted to board an international flight while in possession of a ruler, a protractor, a compass, a slide-rule and a calculator. At an early-morning press conference, Attorney General Eric Holder stated his belief that the man is a member of the notorious Al-Gebra movement.

Holder did not identify the man, who has been charged by the F.B.I. with carrying weapons of maths instruction.

Al-Gebra is a serious threat to the United States”, the Attorney General said. “They derive solutions by means and extremes, and sometimes go off on tangents in search of absolute values. They use secret code names like ‘X’ and ‘Y’, and refer to themselves as ‘unknowns’; but we have determined that they belong to a common denominator of the axis of medieval, with coordinates in every country. As the Greek philosopher, Isosceles, was wont to say, ‘There are three sides to every triangle’.

When asked to comment on the arrest, President Obama said: “If God had wanted us to have better weapons of maths instruction, He would have provided us with more fingers and toes.” White House aides told reporters that they could not recall a more intelligent or profound statement by the President.

It is widely considered in Norway that a second Nobel Peace Prize for President Obama is justified by this remarkable insight.

Hat Tips: Rod Giles and Herbert Rowley

Obamacare kills small-business full-time hires

February 23, 2013

The Grim Reaper is on the march once again. President Obama routinely kills private sector jobs as he pursues socialism through whatever channel is available. And Obamacare is an invaluable channel for him to vent his wrath on laissez-fairecapitalism across the United States.

From January 1, 2014, Obamacare requires firms with 50 or more ‘full-time-equivalent workers to offer health plans to employees who work more than 30 hours a week. Employers who cross the 50 employee threshold and fail to offer health insurance confront a $2,000 annual penalty for each uncovered worker beyond 30 employees.So, by hiring the 50th worker, the firm pays a penalty on the previous 19 workers as well.

As is too frequently the case when socialists legislate to control the private sector, enormously high perverse incentives are created. Thousands of small businesses will confront a $40,000 tax penalty should they expand and hire a 50th worker. A simple example illustrates the magnitude of the disincentive to expand.

Suppose that a firm with 49 employees hires a new worker for $12 per hour for 29 hours per week.There is no Obamacare health insurance requirement. Now suppose that that worker moves to 30 hours per week, becoming ‘full-time, under the Act. This triggers the full penalty. So, in order to obtain 52 hours of extra work from that worker, the extra cost rises from $12 per hour to %52 per hour. In terms of rational choice, what would you expect profit-seeking firms to do?

Well the answer is already there for all to see. Although Obamacare starts in 2014, the measurement period utilized by the Feds to determine a firm’s average number of full-time employees, began on January 1, 2013. And here is what is happening, most especially among fast-food restaurants that typically register annual profits of only between $50,000 to $100,000.

In a growing number of McDonalds and Burger King outlets, each such outlet hires employees to operate the cash register or to flip burgers for 20 hours per week. Those worker then head to the other outlet for another 20 hours per week. This exchange of employees avoids the Obamacare health insurance/tax. Many other such outlets are now known as the 49’ers because they cap their employees at 49. Businesses that hire young less-skilled workers put a ceiling on the work-week below 30 hours. These firms are known as the 29’ers.

Among the fast food franchises that now engage in such rational behavior are: McDonalds, Burger King, Red Lobster, KFC, Dunkin’ Donuts, Taco-Bell, Red Lobster and Olive Gardens. And they are just the trail-blazers among the small business sector.

Note that once one outlet adopts such a policy, others are compelled to follow or to run a high risk of liquidation. Margins are narrow in the fast food industry and outlet liquidation is always high.

Give Barack Obama credit. He really knows how to destroy capitalism. Lenin did it through inflation. Obama does it through his signature health program.

Hat Tip: ‘Obamacare and the 29ers’, The Wall Street Journal, February 23, 2013

This time the law favors the G.O.P.

February 22, 2013

The law governing the fiscal cliff at the beginning of January 2013 favored President Obama and the Democratic Party. If nothing new was legislated the Bush tax cuts would be rescinded in their entirety, hitting households earning in excess of $250,000 per annum more heavily than others, but hitting all income tax paying households to some degree.

Wisely, the GOP agreed to isolate the tax impact, allowing the Bush tax cuts to prevail for all households save those earning in excess of $400,000 per annum. Any new tax hike now requires GOP assent at least until 2014, given the GOP majority in the House of Representatives.

The law governing the sequester, due to take place on March 1, 2013 now favors the GOP. Across the board spending cuts amounting to $85 billion for 2013 and a total of $1.2 trillion over the coming decade automatically go into effect in the absence of new legislation. Given the debt crisis and the big government crisis that currently confront the United States, conservatives should welcome this sequester, crude though its impact will be. They should welcome it because it is the only spending cut that this socialist President cannot block with his veto, and because cuts several orders of magnitude larger are essential within the next few years if the United States is not to morph into Greece.

Should the President choose to make the cuts as painful as possible in order to provoke electoral outrage, he will need to do so with a fine calculation of which he is congenitally incapable. For several Democratic senators confront re-election in Red States in 2014. Should Obama lose those seats through intemperate behavior, the 2016 elections will open up interesting possibilities for a re-invigorated GOP.

Armen Alchian and UCLA economics: triumph and tragedy

February 21, 2013

Armen Alchian founded the UCLA tradition in economics, a tradition that sadly no longer permeates the corridors of that once great Department of Economics. The tradition emphasizes, through the medium of verbal analysis, supplemented by ‘unsophisticated’ empirical testing, that individual behavior is self-seeking and rational and that such behavior has many unanticipated consequences. It recognizes that rationality is the outcome of evolution and learning, and focuses attention on frictions such as uncertainty that serve as brakes on the ability of individuals to make decisions and to coordinate, the one with the other.

Armen Alchian was a brilliant builder of teams, successfully bringing together a group of market economists, any one of whom would have secured a Nobel Prize in Economic Sciences had that prize been awarded by a non-socialist economics academy. The scholars who graced Armen’s academy during the Glory Years of Alchian’s reign included, Robert Clower, Harold Demsetz, Jack Hirshleifer, Alex Leijonhufvud and Earl Thompson. Only Chicago during its own glory years could out-match that superb free-market combination.

In 1974, while visiting the Center For Study of Public Choice in Blacksburg, I was privileged to present a paper before those UCLA giants. Harold Demsetz invited me eager to hear about my manuscript on classical liberalism that I was penning in the basement of the President’s House on the VPI campus. All the above-mentioned scholars were present and the chapter that I presented benefited greatly from their piercing commentary.

For those who may be curious, the chapter is question is entitled ‘Justice’ and it is published as Chapter 7 in Charles K. Rowley and Alan T. Peacock, Welfare Economics: A Liberal Restatement. Basil Blackwell 1975. The chapter comprises what I like to think of as a devastating critique of John Rawls’ Theory of Justice.

Although I was hard-pressed in that UCLA seminar, I do remember with lingering delight the roar of laughter that embraced the room when I was able to reprimand Harold Demsetz for falling into the fallacy of the free lunch and the fallacy that the grass is always greener on the other side! Harold himself, generous scholar that he is, led the laughter, acknowledging that he had momentarily ignored two of the caveats for which he is personally famous for enunciating.

I returned to Blacksburg glowing with the knowledge that the United States was graced with at least three economics programs that would not easily allow the United States to go down the road to serfdom: Chicago, UCLA and Virginia Tech.

Some two decades later, at a meeting of the Western Economic Association in Vancouver, Canada, I learned that the glory of UCLA was shutting down. Ironically, the occasion was a lunch in honor of Armen Alchian. I was blessed to be seated at the UCLA table, in the company of Armen Alchian, Harold Demsetz, Jack Hirshleifer and Axel Leijonhufvud. Two then-young Turks in the Department – David Levine and John Riley – were singing Alchian’s praises. While they did so, one of the greats whispered an entirely different story into my saddened ears.

Riley and Levine are both mathematicians, with little time for verbal economics. Somehow a Department chairman had allowed them to assume control of the UCLA graduate program. There was little place for verbal economics under the new regime. Alchian, Demsetz, Hirshleifer and Leijonhufvud had all been removed from the graduate program as technically unqualified. Had the world gone completely crazy, I wondered, when two nobodies could eject the stars of their universe without a whisper of rebellion!

Well, the world had not gone crazy, as my public choice intuitions quickly advised me. UCLA is a state university and in the non-profit world, adverse consequences are not irrational. Alchian himself, no doubt, completely understood what was happening, as ambitious individuals carved lucrative positions for themselves under the guise of second rate mathematics.

Alchian no doubt predicted what would follow: Demsetz, Hirshleifer and Leihonhufvud were all encouraged to take early retirement, or move on, in order to open up opportunities for more second-rate mathematicians to downgrade the UCLA graduate program to the mediocrity of its saltwater competition.

Armen Alchian still has the last laugh. His theory of unintended consequences satisfies the empirical test on his own campus. Levine and Riley may now understand that the grass is not always greener on the other side. But the laugh, ultimately, is hollow, as I am sure all lovers of free markets will understand.

Armen Alchian (1914-2013): Great economist denied an earned Nobel Prize

February 20, 2013

Tempus Fugit. The great economists of my preceding generation inevitably exit the stage. Friedrich von Hayek, George Stigler, Milton Friedman, Mancur Olson, William A. Niskanen and James M. Buchanan have already regrouped in a formidable free market paradise. They are now joined by yet another free-market giant, Armen Alchian, one of my favorite economists, and yet another member of the Editorial Advisory Board of The Locke Institute.

Armen Alchian marked his name indelibly in the history of economic thought for three important reasons.

First, he was one of the last economists of his generation to communicate economics primarily in the form of words, and not mathematical equations. Indeed he well-outlived the 1960 warning advanced by Aaron Director, Editor of the Journal of Law and Economics that by the year 2000 there would be no point in an economist submitting an article to any journal of economics in the form of words, because the Editor would not be able to comprehend it!

Second, despite the fact that many economists deploy the word ‘unrigorous’ to refer to communications in words rather than in mathematics – indicating of course, by relying on a word rather than a symbol, that they also are unrigorous in their judgments – Alchian was profoundly rigorous. He wrote with impeccable logic and remarkable clarity to reach startling conclusions.In consequence, many of Alchian’s papers, even those published in the 1950’s – are still widely cited, at least by those who can understand the written word.

Third, Armen Alchian wrote a remarkable 1964 textbook, University Economics, subsequently co-authored (with William R. Allen) under the new title, Exchange and Production that still holds its own for undergraduate programs and even as an introductory text for graduate students. Examinations based on this book are widely used to test the logic-proficiency of economics students. Mathematically-inclined students fail these tests in significantly greater proportions than those less well-endowed in the language of symbols.

Alchian’s first major article, ‘Uncertainty, Evolution and Economic Theory’, was published in 1950. It remains as a founding paper in the theory of the firm. In that paper, Alchian relied on the survivor test to explain why firms really do maximize profits. Those that fail to do so wither and die. Those that maximize profit, even by chance, survive. Simple, but utterly convincing.

Alchian’s most important contributions concerned the economic analysis of property rights. He focused directly on the relationship between rules governing property and the economic outcomes that would follow. Insights ranged from a property-rights theory of the firm (co-authored with Harold Demsetz), to the economics of ticket sales policy for the Rose Bowl (why they are not market-clearing), to the circumstances where ethnic and racial discrimination are more or less likely to occur (more likely in the public sector and in the regulated sector of an economy than under unregulated capitalism). Alchian pointed out that government aid to higher education was a transfer from the relatively poor to the relatively rich, similar in nature to subsidizing drilling expenses for someone sitting on a large pool of untapped oil.

Of course, Alchian’s insights upset many students, and many faculty, whose economics were based more on ideology than on scientific logic. Surely his insights rattled the Swedish socialists who dominate the Committee that determines who should and who should not win the Nobel Prize in Economics. Other free-market greats,such as Hayek, Friedman and Buchanan, overcame such prejudice, not least because their scholarship was so profuse.

What Alchian wrote bore the hallmark of genius. Unfortunately, he wrote less frequently, balancing his time between the golf course and his academic pursuits. And the Nobel Committee ignored Alfred Nobel’s instruction that his prizes should be awarded, not for volume, but for originality. Like all bureaucrats, they are risk-averse; and volume offers a modicum of protection against critics who themselves are time-constrained, and cannot read 600 papers and 30 books within the short-time-span accorded to a Nobel Prize evaluation.

Hat Tip: David R. Henderson, ‘An Economist Who Made Science Less Dismal’The Wall Street Journal, February 20, 2013