"The World's Best Hope": The U.S. Founders as Development Economists

China's Economy: A Long-Term, Incentive-Based View

Global Climate Change Policy: Some of the Economic Issues Involved

Global Climate Change Policy: Some of the Economic Issues Involved

By Robert E. Wright, Nef Family Chair of Political Economy, Augustana College SD for Greenfest, 19 April 2013

I’ve never understood why some people, mostly political conservatives its seems, push back so hard on claims that humans are changing the global climate. We’ve been doing it on a local scale for hundreds of thousands if not millions of years. Our buildings are mostly about climate control and in fact that euphemism is even used in the HVAC -- or heating, ventilation, and air conditioning -- business. A fire in a cave is a form of local climate control, as is a shelterbelt or hedgerow. Our cities are regularly several degrees warmer than the surrounding countryside, and the larger the city, the larger the differential. That several centuries of factories and a century of automobiles has caused larger scale changes is, therefore, not surprising to me. I don’t know if the claim is true or not as I am no expert in such matters but it does strikes me as quite plausible.

Of course simply because humans are changing the global climate – and specifically that we are making the climate warmer and more volatile – does not in and of itself necessitate any policy response. Policies should be implemented only when their total expected benefits exceed their total expected costs; policy proposals that would generate costs that exceed benefits should be rejected.

So first we need to know if the expected climatic changes will be positive or negative on net. If they are expected to be positive then clearly no policy action is necessary, unless it be to ask if we would benefit more by inducing even more global climate change. The net effect of climate change is a serious question, one that economists are better equipped to answer than scientists are because the latter typically do not understand how market economies adapt to changing circumstances. You might recall how an economist name Julian Simon schooled a biologist, Paul Ehrlich, who in 1968 predicted that we’d all be dead by now. Scientists and politicians tend to think that if things are different they are likely to be worse but economists generally show that different can be just different, with little to no net effect.

Higher sea levels, more violent storms, higher temperatures, stressed ecosystems, and so forth sound bad but if change is gradual and somewhat foreseeable they need not impose catastrophic costs. Robert Fogel won a Nobel Prize, for example, by showing that if railroads had not existed, U.S. economic growth would have been just three months behind where it actually stood in the nineteenth century. That sounds preposterous at first given the huge stress on railroads to economic development, but Fogel pointed out that without railroads, factories simply would have located along navigable rivers instead. Steel would still have been created but used in ships and buildings instead of for rails. And South Dakota would be more heavily populated in the middle and less heavily populated on each end. In the end, in other words, it doesn’t much matter if we have a fixed port at New Orleans or at Baton Rouge or at Vicksburg, or if we switch to a floating dock system. Where there is a will, which is to say a profit, there is a way.

More volatile weather looks like a loss all around and there is little to be said in favor of it, but the risks can be spread via global insurance markets and reinsurance. They can also be mitigated, with a little help from more enlightened public policies dissuading people from living in the most risk prone areas, like Fargo and parts of the Gulf Coast. They can also be mitigated by new construction standards and techniques like putting power lines underground instead of under trees. Bad things, like earthquakes, are going to happen anyway and better that they do so in a robust risk management environment than in a less developed one. Still, on net, it seems liked increased climatic variability will prove somewhat costly. How costly, though, I don’t know. And neither do you, or anyone else.

And here again economics has something important to say. How much should be willing to spend today to prevent, say, $1 trillion of damage in the future? If the future is tomorrow, then something up to like $999.99 billion. But what if the damage isn’t going to occur for, say, 30 years? The answer depends on how much money is worth and what the likelihood of the future damage is. If the damage is almost certain, money isn’t very valuable, and we are expecting no inflation, then we might use a discount factor of say 1 percent, in which case it would be rational to spend up to $742 billion today, if we compounded annually, to save the expense of paying $1 trillion in thirty years. If money is more valuable, some inflation is expected, and the savings of $1 trillion is somewhat uncertain, we might use an annual discount factor of 10 percent, in which case it would be rational to spend up to only $57 billion today to save $1 trillion in 30 years. If 20 percent is a better discount figure, then anything more than $4 billion expended today would be irrational.

Of course nobody knows what the expected costs of global climate change are, even if many suspect that the sign is negative. Nobody is quite sure when the costs will be borne. And the appropriate discount rate for any pre-emptive policy action is also far from certain. We can say, however, if the costs are distant and somewhat predictable, they will be minimized through market adjustments like those I just outlined. If the costs are imminent and largely unpredictable, we are all screwed already anyway. There is little that policymakers can do in either case, at least in the developed world. What we should focus on, therefore, are the world’s poorest and most vulnerable people as they will be hit far harder by climatic variability and their economies will be less flexible in their responses to gradual climatic change. So we should be concentrating our efforts on the world’s poor, a billion Latin Americans, a billion Africans, a billion Indians, and some 2 billion east Asians. But we should be doing that anyway, regardless of the state of the climate or the climate debate.

China PMI barely Above Contraction; Chinese Stocks Slump as Manufacturing Slows

Bloomberg reports Chinese Stocks Slump Most in Three Weeks as Manufacturing Slows

China’s stocks fell, dragging the benchmark index down the most in three weeks, as data showed the country’s manufacturing growing at a slower pace.

The Shanghai Composite has slumped 9.7 percent from a Feb. 6 high, on concern slowing growth will hurt earnings. China’s economy expanded 7.7 percent in the first quarter, missing estimates, as industrial production and fixed-asset investments in March fell short of forecasts. Rising Chinese home prices may limit scope for stimulus as President Xi Jinping seeks to prevent a real-estate bubble.

“This has been a very narrowly based recovery, predominantly driven by infrastructure investment, but now even infrastructure investment is also apparently slowing down,” said Tao Dong, head of Asia economics excluding Japan at Credit Suisse Group AG in Hong Kong.

China PMI barely Above Contraction

As I have said on numerous occasions, China's infrastructure build-out is both ridiculous and unsustainable. Yet that does not stop for one second the cheerleading.

For example please consider the Markit report headline for China Manufacturing that shows Operating conditions improve marginally in April



It is really tough to spin that stagnation, assuming you even believe it (I don't), into something positive. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC managed to do just that.

Qu stated "The HSBC Flash China Manufacturing PMI came in at a two-month low, but still managed to expand modestly in April, albeit at a much slower pace. However, new export orders contracted after a temporary rebound in March, suggesting external demand for China’s exporters remains weak. Weaker overall demand has also started to weigh on employment in the manufacturing sector. Beijing is expected to respond strongly to sustain the economic recovery by increasing efforts to boost domestic investment and consumption in the coming months.”

Really?

50.5 is "modest expansion"?! Would 49.5 have been "modest contraction?"

Let's at least be honest about this. At best China is stagnating and this is in spite of an unwarranted and unsustainable infrastructure build-out.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

A Brief Lesson in History: Video of Mish Presentation at the Wine Country Conference

My speech, "A Brief Lesson in History", is available at Wine Country Conference Speaker Presentations.

The videos are the actual presentations, and we are making a couple of them available each week for three weeks.

John Hussman’s presentation "An Unstable Equilibrium" was posted last week.

Speaker presentation material, Yahoo! Finance media interviews, and associated articles on Advisor Perspectives are now available online at Wine Country Conference Speaker Slides.

If you enjoy the videos and slides please consider making a Donation to the Les Turner ALS Foundation. Specify "Mish Campaign" on the donation to earmark funds for research.

All told, we raised nearly $500,000 for ALS research, subject to final audit. $100,000 of that came from a very generous matching donation from the Hussman Foundation.

Thanks again for a successful 2013 WCC and we look forward to many more! The 2014 conference will raise money for autism research and programs.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Graph Shows Who Is And Who Isn't Paying Their Fair Share of Taxes

In response to 55% of Americans Say Their Income Taxes are Fair; 46.6% Paid No Income Tax in 2011 one seriously misguided soul responded "your hate for low income people disturbing".

The above response was humorous because the math shows a large number of people are unhappy even though they pay no income taxes at all. Nowhere did I state or imply any hatred of anyone.

On a far more credible note, I received an email from Ironman at the Political Calculations blog who posted this chart on "Who Really Isn't Paying Their Fair Share of Income Taxes?"



click on chart for sharper image

I asked Ironman to explain the chart. Here is his reply.

We used U.S. Census data to model the total aggregate income earned by individual Americans for each $100 increment of income in 2009 to create the "blue" income distribution bell curve using regression analysis, which we originally did as part of another project, where we modeled the total money income distribution of Americans.

We then took the Tax Policy Center's data for the percentage of tax units without income tax liability for given levels of income and modeled that as well - and in doing that, we also get the percentage of tax units that do have income tax liability over the same income range.

We then multiplied the percentage of tax units with income tax liability by the total amount of aggregate income earned within a given amount of income to determine the portion of that aggregate U.S. income that is subject to income taxes.  That result is represented as the "red"-shaded bell curve on the chart.

The unshaded region under the "blue" total aggregate income curve is then the portion of income earned by Americans that is not subject to income taxes. 

What If?

In a followup email, I asked Ironman what the result would have been, if a 100% tax on all income above $1 million had been in place. To that question he replied ...

"By our calculation, the U.S. government would have taken in $800 billion more in tax revenue if it had taxed people making more than $1 million at 100 percent, according to IRS data from 2008, the year Ryan used as his base point."

Thus, even taxing people making over $1 million at a rate of 100% would not have balanced the budget. Of course, if you tax anything at 100%, you are not going to get anywhere near the amount theoretically expected.

Some might point out interest income, but others would point out disability and food stamps. Specifically, I would like to point out Unwilling to Work; 25% in Hale County AL Collect Disability, 14 Million Nationwide; A Simple Solution.

Simply put, if you pay people enough to do nothing at all, you are going to encourage a lot of fraud by people willing to do nothing.

Regardless of what you think about top income earners, the system is setup to encourage fraud and avoidance at both ends of the scale.

Who suffers? Those in the middle.

Perhaps it's time for a consumption tax, excluding food, medicine, and essential clothes. Perhaps some combination of flat income tax in conjunction with a consumption tax excluding food, medicine, and essential clothes.

My only fear in suggesting such a thing is government nearly always screws things up by implementing things in a manner that will make matters worse.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Netherlands on Edge of Economic Crisis; Unemployment Surges as Home Prices Collapse

Netherlands is underwater in more ways than one. Der Spiegel reports Underwater: The Netherlands Falls Prey to Economic Crisis

More than a decade ago, the Dutch central bank recognized the dangers of [the housing] euphoria, but its warnings went unheeded. Only last year did the new government, under conservative-liberal Prime Minister Mark Rutte, amend the generous tax loopholes, which gradually began to expire in January. But now it's almost too late. No nation in the euro zone is as deeply in debt as the Netherlands, where banks have a total of about €650 billion in mortgage loans on their books.

Consumer debt amounts to about 250 percent of available income. By comparison, in 2011 even the Spaniards only reached a debt ratio of 125 percent.

The Netherlands is still one of the most competitive countries in the European Union, but now that the real estate bubble has burst, it threatens to take down the entire economy with it. Unemployment is on the rise, consumption is down and growth has come to a standstill.

Even €46 billion in austerity measures are apparently not enough to remain within the EU debt limit. Although [Dutch Finance Minister and Euro Group Chief] Jeroen Dijsselbloem has announced another €4.3 billion in cuts in public service and healthcare, they will only take effect in 2014.

"Sticking the knife in even more deeply" would be "very, very unreasonable," Social Democrat Dijsselbloem told German daily Frankfurter Allgemeine Zeitung, in an attempt to justify the delay.

Dijsselbloem's Hypocrisy

Note how Dijsselbloem is ready and willing to stick austerity measures of any kind on every other eurozone economy but his own.

Unemployment Surges as Home Prices Collapse

The Australia Macro Business blog picks up the story in Dutch unemployment surges as house prices fall.

Earlier this month, I posted on how the Netherlands was facing a potential economic crisis on the back a severe housing correction, whereby house prices fell by -8% in the year to December 2012 to be down -18% since prices peaked in 2008, pulling many Dutch households into negative equity (see next chart).



The release of labour force data overnight suggested the Netherlands’ economy has deteriorated further, with Dutch unemployment increasing to 8.1%, a level not seen since the 1980s, with job losses most accute in the building industry (see next chart).



The jump in unemployment follows the contraction in the Dutch economy, whereby GDP has contracted by -1.2% over the past year (see next chart).



The sharp deterioration in the Dutch economy is placing pressure on the central government to abandon austerity measures, which it has pursued for the best part of two years and is partly responsible for the contraction in demand.

Best is Yet to Come

As noted, the hypocrites want austerity for everyone but themselves. Regardless, the Netherlands economy is headed for a much sharper contraction as is France.

Simply put, the entire eurozone is in deep trouble even as the nannycrats insist the worst is behind. Ironically, the best is indeed ahead, and the best is a breakup of the eurozone.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com