Economic Psychobabble

The New York Magazine is concerned about Kindle:

The ultimate fear is that the Kindle could be a Trojan horse. Right now, Amazon is making little or nothing on Kindle books. Lay down your $359 and you can get most books for $9.99. Publishers list that same Kindle version for about $17.99, though, and—as with all retailers—charge Amazon roughly half that price for it. Which means that Amazon keeps only a dollar on each book, while the publishers make $9.

But Amazon may be offering a sweet deal now in order to undercut publishers later. If their low, low prices succeed in making e-books the dominant medium, they can pay publishers whatever they want. “The concern is they want to corner the market,” explains one books executive, and then force publishers to accept a genuine 50 percent discount. “If they took over as little as 10 to 20 percent of the market,” says an agent, “publishers simply would not be able to exist.”

Seriously, this "fear" is completely asinine. Let's assume, just for the moment, that Amazon is successful in making the e-book the dominant medium. Do you really think that no other company will realize this movement is going on, create their own Kindle-esque product, and compete with Amazon? Of course not...Borders or Barnes and Noble or Apple will have one long before Amazon can use their market power to "exploit" publishers. And what this competition will do is force the e-book makers to offer publishers higher prices for their products--if Amazon tries to tell a publisher that they will only pay them (say) $5 for a book, Apple will come along and offer $7, and the publisher won't sell to Amazon.

Publishing houses have absolutely nothing to worry about with regards to e-books--in fact, they should relish the e-book and embrace it.

Anti-Speculation Bill: Stabilizing or Destabilizing.

The US Government's new Anti-oil-speculation bill sure sounds like it will help stabilize oil prices. In actuality, however, this law is more likely to destabilize prices rather than stabilize them, and could ultimately have some very unfortunate unintended consequences.

Prices are not simply the amount of money one needs to part with in order to obtain some good or service. They are also an extremely simple, yet powerful, method of storing and conveying information. Buyers and sellers who have high quality information about the supply or demand of a particular commodity, in particular why that price may be too high or too low, can exploit this information for a profit. In the process of exploiting this information, the information they hold about that commodity becomes embodied in the market price. For example, if I am one of very people who know about an untapped oil reserve, I have high quality information that the price of oil is likely to fall. This means I could make a profit by selling oil futures.

What the new anti-speculation bill means is that people with good information will no longer be able to exploit this information to earn a profit by "speculating" on the oil market. As a result, market prices will no longer fully reflect all available information, and individuals and corporations will be more likely to make bad decisions when those decisions depend on energy prices.

Presumably the government is concerned about speculators pushing the price of oil up further, implying that the bill will lead to market prices being too low. So the likely results of the anti-speculation bill would include consumers buying less fuel efficient cars than they otherwise would, using more oil-based energy than they otherwise would, and other decisions implying an overuse of petroleum based energy sources. Ultimately, this bill will exacerbate the energy problem confronting the US economy because consumers will not face the true costs of the decisions they are making.

The Paradox of Free Trade and the Left.

What caught my eye in this particular WSJ article on McCain's free trade focus is this quote coming out of the Obama camp: "If he wants to highlight trade, he should be doing it here in Ohio and Michigan and the states that are most affected by trade." This reflects the standard, but misguided, view of international trade. We import more things, pushing some people out of jobs, and we see those jobs disappearing. And sure, this hurts those whose jobs are lost. But while the sound bytes reflect only this effect, there are many more effects that will occur, all positive, which actually create more value than is being lost when jobs disappear. Despite the left's close ties with labor, I still find it paradoxical that the left should be so anti-free trade.

The reason these jobs disappear is because Americans are importing goods that were previously produced domestically, and the shift from domestic production to imports happens because the price of the imported goods are lower. Lower prices mean American consumers are able to acquire more goods and services with their incomes than they otherwise would. Walmart has built an empire on the business model of buying inexpensive imports and selling them at dirt cheap prices to working class Americans. And herein lies the paradox. To a political ideology so centered around the plight of the poor, free trade should appear to be a good policy. The poor are able to import products that are less expensive than those produced domestically, thus allowing them to buy more stuff in total.

If they really care about the poor, shouldn't they want more free trade, not less?

Like a Deer in Headlights

One element of the US slowdown that has been overlooked (at least I don't recall seeing it mentioned before) in the media thus far is the election--not in terms of how elected officials plan on fixing it (which is talked about), but rather, how the election itself might affect the economy. As of right now, US residents have no idea as to who will be in office in 2009, be it the neo-populist Hillary Clinton, the enigmatic John McCain, or the New Deal inspired Barack Obama. As of last night, the Iowa Electronic Markets have the Democrats trading at .513 and the Republicans at .473, pretty much a dead heat. And while Obama is currently well ahead of Clinton in terms of the Democratic nomination, it is only very recently that Hillary has fallen well behind.

The upshot of all of this is that the participants in the market are pretty much clueless as to who will win the election, and as a result, as to what direction the new leader will attempt to push the economy. Add to this the fact that the economy is one of the most salient issues in the US right now, along with the traditional "100 day honeymoon" where new presidents are pretty much given what they want in terms of policies, and you will expect to see some significant change in the American economic landscape come January-April 2009.

So maybe we should ask a different question. Is the US economy faltering? Or is it just a deer in the headlights of an 18-wheeler sized election barreling down on it, frozen due to the unpredictability the outcome? If so, we might see an economic recovery start as we get closer to the election--not because of Bush's silly stimulus package, but rather because the likelihood of each possible election outcome will become a lot more clear at that time!

Inflation in Zimbabwe

100,000%? Can that be right? Personally, I'm betting the official figures are actually too low, but who knows. I sincerely hope he gets voted out of office next month. I just worry that he won't leave...

How to "solve" the Howard Inflation

Seems like that is all that is in the news. Today, for example, Federal Treasurer Wayne Swan is using the Howard Inflation to attempt to reduce tax cuts. This follows his declaration of war on inflation. There is a lot of finger pointing going on, and Wayne Swan's answer is to return to the "dinosaur" Keynesian macroeconomic policy that everybody in the world realized was crap about 30 years ago. But, if Swan is accurate in identifying the underlying cause of the inflation, then the solution is simple--free trade!

He is implicitly describing inflation as being of the demand-push flavour (this is a bit dated, but the first paragraph sums it up on the demand-push issue). While I am not a fan of Keynes, that seems to be the framework Swan wants to use, so let's take a look. Demand-push simply means that aggregate demand is growing faster than aggregate supply. People want more stuff, markets aren't able to produce that stuff as quickly as people want to buy it, which causes them to compete the prices up. Why this is happening doesn't really matter. Swan, like any Labour politician, will blame things like lack of training and infrastructure and things of the like. But the standard Keynesian is to assume that aggregate supply takes quite a while change. Which certainly makes sense in the case of one-economy world.

But we don't live in a one-economy world. We live in Australia, replete with tariffs and import quotas and trade barriers galore. Get rid of those, and I promise you that aggregate supply will have no problem keeping up with aggregate demand.

Centralizing the Federal Budget

At first glance, centralizing the Federal Government's technology budget seems like a good idea. After all, it follows the best practice of private industry, where firms typically rely upon procurement departments for purchasing. In so doing, firms are able to save money by streamlining purchasing processes, leveraging their position as volume purchasers to negotiate lower input prices, and take advantage of economies of specialization. This all sounds good, but I remain very skeptical of Finance Minister Lindsay Tanner's plan. Not only is it the case that what is true of firms is not necessarily true of governments, but this plan also has the ability to have a huge effect on the balance of power in Canberra.

Firms seek to cost minimize because any reduction in cost is translated directly into profit for the owners. But the profit motive that drives private procurement departments is conspicuously absent in governments. Assuming there are cost savings, then, where do they go? The obvious analogue to owners in this situation is taxpayers. If the reduction in spending was returned to taxpayers in the form of a reduced tax burden, great, that is the best outcome possible. But this overlooks an important element of human action--if you want people to engage in certain types of behaviour, you need to make sure their payoff from that behaviour is higher than if they did anything else...in this context, the question we should ask is what incentive does the Finance department have to engage in the effort required to reduce costs, when the fruits of their labour go to the taxpayer, not them? The answer is very little. The same could be said about the second best case of using the reduction in costs to fund other government projects, like education or roads or something. Unless the Finance department sees a big chunk of the cash, they are not going to do it efficiently. If this goes forward, I see two likely outcomes. Note that they are not mutually exclusive.

The first outcome is that we might see a "second best" type solution which involves significant gold plating on the part of the Finance department. Gold plating occurs when a firm or agency is limited in the amount of profit they can earn (for example, the Finance department cannot earn a profit!). This limitation obviously reduces the incentives to increase revenues and reduce costs, since the only reason they might want to expend the effort to do these things is if they can get some private benefit from those revenue increases/cost reductions. And the way to do that in this situation is through overcapitalization (on-the-job consumption). For example, say your government agency is operating efficiently with $3m in revenues but $2m in costs. You can either return $1m to the federal government at the end of the year (and get nothing out of it), or spend the extra $1m on overcapitalization (things like computer upgrades or extra workers, that add capacity that you will not need or use) or on-the-job consumption (hiring limos instead of taxis, flying first class, and hiring former playboy playmates who can't read, let alone type, as personal assistants). This, in turn, increases your costs to $3m. On the whole, this gold plating equilibrium would be more efficient than the current system. Not necessarily by much, but the benefit is there. Cost savings will be made, but most of them will be passed on to Lindsay Tanner, not the taxpayer.

The second outcome, which I think to be far more concerning, is that this change would generate a great deal of "gatekeeper" type power to the Finance department. That is to say, the Finance department, and the Finance Minister himself (Lindsay Tanner), would have oversight power over the workings of all of the various cabinet agencies. After all, these rules would "enable the Department of Finance to withhold funds until certain milestones used by agencies to justify projects have been met." And in general, adding individuals with gatekeeper power is bad news.

Really, this plan is just a power play by Lindsay Tanner. He is using the guise of adopting best practices as exist in the corporate world to consolidate power for himself and his agency.