Who Destroyed All Those Farm Jobs?

The President tells us that Bain Capital is in the business of destroying jobs. Shame on them. What I want to know is: Who destroyed all those farm jobs? How much better off would we be today if those awful people had been prevented from reallocating capital to other activities?  If only we could get rid of the tractors and combines and replace them with oxen and plows . . . .

The Population Bomb and Peak Oil Nonsense

In 1968, Paul Ehrlich published The Population Bomb, which argued that mankind was facing a demographic catastrophe with the rate of population growth quickly outstripping growth in the supply of food and other resources.Such arguments are continually advanced by those who believe that governmental action is required to save the world from this inevitable Armageddon. Most economists recognize that, left alone, free markets will ultimately provide more resources.
In 1980 Ehrlich entered into a famous wager with one of them, Julian Simon, in which he chose five commodity metals that he believed would increase in price. All five commodities that were selected as the basis for the wager continued to trend downward during the wager period. Ehrlich, naturally, complained that he was just "unlucky" in his picks and timing. Mankind was still facing a scarcity of resources that would inevitably cause prices to rise and choke off economic growth. The data, however, suggests that Ehrlich was not just unlucky, but that he was betting against the natural actions of markets to create more supply whenever prices rise.
Such evidence does not deter Ehrlich's successors from arguing that we have, for example, reached "Peak Oil" production that necessitates massive investment in solar panels and windmills. This is just more nonsense. Oil is not in short supply at current prices and oil capacity is growing worldwide. The shale oil boom in the US will be replicated around the world (China appears to be the first country to follow). The full deployment of the world’s oil and other commodity potential depends only on price, technology, and government getting out of the way.

Consumption Inequality

Kevin Hassett from AEI has published a new study that looks at consumption inequality over time rather than income inequality. Consumption is, of course, a better measure of economic welfare than income because individuals are able to smooth consumption over their lifetimes. Most (responsible) people spend less than they earn while working and much more than they earn during retirement. Income measured would tend to overstate, then understate their economic welfare. A person who earns a lot one year and little the next (quite common -- see June 7, 2012 entry) is not really rich one year and poor in successive years. Another reason is that income measures do not take taxes or transfer payments into account. A person who is paying a high level of taxes is not nearly as well off as income might indicate, and a person receiving assistance payments (unemployment, social security, food stamps) is not nearly as bad off.

What Hassett found was that consumption inequality has not increased nearly as much as income in the last 30 years, and has actually fallen in the latest economic contraction (income inequality also always widens during expansions and contracts during recessions).

Year          Ratio of Top Quintile to Bottom Quintile

1984                                 3.8
1994                                 3.7
2004                                 4.7
2010                                 4.4

Tax the Risk Takers

It's easy to identity The Rich, The 1%,  after they have achieved their wealth. But how do we identify them before they have achieved that level of disrepute? That's much harder. For every person who has achieved that status, there are lots more who tried and failed. Lots more who risked the time, effort and money necessary to try to achieve that level of success. Why would so many people do that when they know the odds are against them? Because the payoffs to success are large.

Let's say (just to make the math simple) that the payoff for successfully starting a new business is a million dollars, and the probability of success is 5%. Then your "expected payoff" is .05x1,000,000=$50,000. If it costs you $40,000 in capital and opportunity cost (what you could have earned working at your current job), then you should be willing to start this business (unless you are a risk averse person).

Now imagine that government decides that the 5% of triers who are successful should be taxed even more to support those who weren't successful or haven't tried. Suppose the payoff for success drops to $800,000. That's still a lot of dough. They don't need it. It's only fair, isn't it? Well, if you look at everything on a post trial basis, it sort of does. But let's look at what happens to the risk equation. Your expected payoff now drops to .05x80,000=$40,000. Investing $40,000 to start that business no longer makes economic sense. Now imagine that government passes a lot of legislation that makes success less likely. Or it subsidizes your established competitors who have sent campaign contributions to Congress. Now the expected payoff will drop to even less than $40,000. In this simplified example, nobody would start a business.

The real world equation isn't quite this simple, but the principles and the math are the same. The more you tax the payoff for success and the more impediments to success you throw up, the fewer people you will have taking the risks in the first place. Is that what we all want? That is why you have to focus not only on how government affects those who are successful, but also on how it affects those who might be trying to be successful.

We Don't Need No Stinkin' Energy Policy

Mark Perry noticed how the US oil and gas industry has pivoted over the last few years from producing more gas produce more oil. How could this possibly have happened without a National Energy Policy directing them to do so? Is it possible that this occurred simply because the market price of gas fell while the market price of oil was rising?

The Next Bubble

Guess what the next government-sponsored bubble will be? The chart below form Mark Perry suggests that the tuition bubble will occur for the same reasons the housing bubble did. Just as government decided that too few people owned homes, it has decided that too few people go to college. Government has poured gobs of money into subsidizing student loans just as it poured gobs of money into subsidizing mortgages.  The predictable result is that the underlying purchase (housing or college) soars in price. Schools happily raise prices — and lower standards — to siphon up the federal money. All of this without respect to whether the borrower's future income stream will be able to service the debt easily. One more example of how good intentions cannot overcome bad economics.