Software Nerd

Wages: Sticky on the downside

2009-11-08T12:07:00.000-08:00

Economists speak of wages being "sticky" on the downside. What they mean is this: companies are usually slow to cut wages. New hiring freezes up very fast at signs of an economic downturn. Layoffs take place pretty soon too -- at least in the U.S. (not so in Europe, with its laws). For current-workers, wage freezes are common. However, wage cuts seem to be a last resort.

For most companies, this is poor economics. For most companies that are slow to cut wages, the main factor is a misguided ethics. Contrary to left-wing myth, managers usually feel good about paying their employees what they consider to be a fair wage, and managers often think of employees as being part of their team. Managers often feel it is their responsibility to try to keep their employees' wages steady. In addition to this, employees think the same way too. Therefore, they would often see a cut in wages as unfair to them.

This downward "stickiness" means that markets take longer to readjust, and to rebound.

Sometimes, companies will try "job sharing". This allows workers to work part time for less pay. It has the effect of keeping more employees on the payroll. However, if it does not reduce the actual wages-per-hour, it does not address the real issue: cutting costs. (It can be a good managerial strategy in some more limited slow-downs.) During the depression, Ford company had many workers working 3 days a week. Instead, if they'd been working all five days for what was previously 5-days pay, the company would have been able to make more goods for less. This would allow them to cut prices to customers. If there is insufficient demand even at those lower prices, then it is better for the extra workers to work in some other industry. This process of falling prices for labor and for goods would quickly work its way though the system and the end result would be a more efficient placement of capital and employees across industries.

Instead, politicians always try to slow the re-adjustment. This was Hoover's huge mistake post 1929. He called in businessmen and got their geniune committment to slow the process of readjustment; though he criticized the Smoot-Hawley law, he did not veto it increasing protectionism that slowed the process of re-adjustment; finally, instead of allowing commodity prices to adjust downward, he supported them (farmers wanted their prices to stay high). On top of all this, there were public works and cheap credit: two other ways governments stifle re-adjustment.

History surely rhymes.

The 2010 Green Stimulus?

2009-11-02T16:31:00.000-08:00

After a sharp upward turn off its bottom, the stock market has paused. Talk of a second-stimulus is circulating. Today, the president met a few businessmen and one of the main ideas being pushed was the "retrofitting" of American homes, to make them more energy efficient.

That seems like something most politicians could get behind:

it spends money on jobs that voters will attribute to government ("the seen");
it bows to environmentalism, while not hassling big business directly as Cap-Trade might;
many (voting) home-owners getting the subsidy will think it is cool to get something for nothing, and then have lower energy bills on top of that; and,
most important -- the negatives are dispersed, and the inflationary component will probably not hit before the mid-term elections ("the unseen").
even the xenophobic Republicans could buy into a plan that "reduces our dependence of foreign oil"

If Obama gets some type of healthcare bill done, this is where he might turn his attention. So, I expect a "Green Stimulus" which is sold as something that will set America up for the 21's century and create lots of jobs.

Therefore, I expect to be on a roller-coaster for a few years.

Early Christianity till the 6th century

2009-08-14T17:22:00.000-07:00

I just listened (thanks to Librivox) to about half of an old book, titled History Of The Christian Church During The First Six Centuries.

The book documents Christianities leaders, branches and debates up to around 600 AD. The book documents the growth of the church. It also explains how they changed some practices -- e.g. did not insist on circumcision -- in order to make conversion more palatable to gentiles.

However, the author did not explain why those gentiles (or other Jews) would switch to the Christian sect of Judaism. After Constantine moved the Roman empire to Christianity around 300AD, the rise of the religion can be explained by political sponsorship. However, I did not find what I was looking for: i.e., an explanation of the motivation (intellectual or other) of people who adopted Christianity in the first three centuries.

Three of the four largest religions -- Christianity, Buddhism and Islam -- spread very widely. I'm curious about how religions spread without political sponsorship. Why did Christianity grow in the first century or so? Why did Buddhism spread in China? (Political sponsorship was the key to its spread in India, and it faded when that sponsorship ended.) Perhaps a lot of Islam's success may be explained by early political sponsorship; but, here too, its spread to Indonesia and to the south-west coast of India seems to have been via evangelism.

Older faiths just "were". Conquerors would convert new kingdoms to their faith, but there seems to have been little evangelism in older religions like Hinduism, Zoroastrianism, Mithraism or the old Greek or Roman practices. Could a large part of the success be explained by the evangelical impulse itself? Could it be as simple as that? I.e. that only a few religions made an organized effort to spread their faith, and that the three major ones are among the few that did?

Apart from the desire to evangelize, perhaps these religions owe much of their spread to the fact that they developed some types of methods, institutions and networks that were geared toward evangelism.

Looking at the original theology of these three religions, I cannot find anything radically unique to set them apart from other sects of their time. So, though I don't know enough to rule out that they really did fill some intellectual need that was not filled by their successors, I suspect that theology is only a minor factor.

One tidbit that I found interesting was that the author identifies two hold-outs against Christianity after the Roman emperors had adopted it officially. The first was rural areas, particularly if they were isolated. No surprise there. The other holdout was the scholars in universities, who continued to dismiss Christian mysticism for a while after others had converted.

One negative with this book is that the author hints at mystical explanations for some historical events; but, it is not enough to distract.

All in all, it was a mildly interesting book. It helped make the period more real to me, but I'm still left with the questions I began with.

The Story of my Boyhood and Youth - by John Muir

2009-07-15T17:27:00.000-07:00

I chose this book to get a glimpse into frontier life, not knowing that John Muir went on to form the Sierra Club and to become a hero to some environmentalists. Still, his book "The Story of my Boyhood and Youth" was a pleasant read about his boyhood years.

Muir's father immigrated from Scotland to Wisconsin, when John was just 11 years old. While the book provides a feel of frontier life, my guess is that there are better alternatives. Much of this book tells of the birds and animals that Muir delighted in learning about around his farm. Though I didn't anticipate it, I found some of the anecdotes of animal life quite interesting. While his anthropomorphism of animals is explicit, it is not off-putting by being incessant.

The last couple of chapters were a pleasant surprise, when the autobiography turned away from his farm, and spoke about him leaving home.

I listened to this book using the free audio version from Librivox.

1930 WSJ Blog

2009-06-07T05:07:00.000-07:00

Somebody has decided to read the Wall Street Journal from 1930 (library microfilm) and post a daily summary on a blog. The idea is to get a feel of that year, when the depression had just set it, to see if we can learn anything about our current situation.

A daily update is more detailed than I'd have liked. If he would do a summary paragraph or two each week, that would work well for me.

The blog is called "News from 1930"

Conceptualizing "recession"

2009-06-05T11:06:00.001-07:00

Officially, recessions are measured by how the economy is changing. I think this is wrong. While it is useful to know if an economy is getting better or if it is getting worse, the primary measure of health ought to measure it against what it could be, not against what it was in the last quarter.

Example: Imagine that the economy goes into a tailspin, that unemployment shoots up from 5% to 10%, and that GDP plummets from $ 14 trillion to $13 trillion. Now, imagine that things start to improve after about 1 year. However, imagine two different scenarios...

Come-back scenario: A year after turning downward, the economy starts to pick up again. In another year, it is back where it began, with unemployment at 5% and GDP back to $14 trillion. The dip and return took two years; but, as currently conceptualized, the recession would be measured as being 1 year long, because that is when the economy started to rebound. (i.e. the recession is measured from "peak" to "trough").

"New normal" scenario: Under an alternative scenario, a year after turning downward, the economy flattens, and then climbs almost imperceptibly. Then, another year out, it starts to climb a little faster, but is still quite laggard. Finally, 5 years later unemployment is back down at 5%, and GDP is back to $14 trillion. Even though the dip and return took so many years, the recession would be measured as being 1 year long, because that is when the economy stopped going any lower.

This way of conceptualizing a recession is faulty. We need a measure of economic health that meaningfully describes how an economy is doing, compared to its potential, not a measure that accepts the previous quarter as a "new normal" and rejoices in small upturns.

Reverse Immigration

2009-06-05T06:14:00.000-07:00

This is a software-related post. Ignore it if that does not interest you.

Over the 8 years, U.S. salaries in software-development jobs have not risen much. Meanwhile, salaries for similar jobs in India have continued to rise. (The same relative change is probably true across other industries as well.)

Salaries in India can still be 25% of U.S. salaries. However, there are additional costs when the customer is in the U.S. Today, large U.S. companies budget India-based work at about 50% of U.S. based work. An experienced U.S.-based programmer may cost $120k to $140K, when one adds salary, health-insurance, company-paid social-security, and U.S. based infrastructure. An equivalent India-based employee would cost about $60k-$70k, when all costs are considered.

That is still a large difference, but much narrower than it used to be a decade ago. It has been interesting to see how such changes take place. The process is slow, giving companies and employees a fair amount of time to adjust. And, it is slow for "natural" reasons, not because of some government protectionism. A decade ago, many companies were still wary of off-shore development. They began to dabble and test the waters. Then, in the 2000's -- especially with the cost-cutting required after the stock-market bust -- some companies actually set themselves targets: e.g. "in 5 years, 20% of our development must be done off-shore".

The process would have been even slower if the free-market had prevailed. In a free-market, one would have had more immigration from India to the U.S. This would have reduced the wage-differential by lowering U.S.-based costs, while one would have seen India-based cost rise slightly more than they otherwise did. In the end, one would have had significantly more U.S.-based wealth-creation.

Now, with the downturn, companies are again under cost-cutting pressure, and looking to off-shore development as one means.

In February, IBM did something I've never heard of before. While laying of software-developers, they offered to transfer them abroad, to India, China or Brazil (1). IBM would help them move and also help them get set-up. However, once there, the U.S. workers would have to accept local levels of salaries and benefits. I doubt many people took up this offer, but it is good to see IBM being creative about this, and offering their employees a solution that is far better than being jobless.

Reverse immigration would be a true sign of the decline of the U.S. As an immigrant myself, I understand there are costs (in terms of friendships, proximity to family, familiarity with one's environment, and optional cultural values like food) in moving far from home. So, when people vote with their feet, it is a serious indicator. I don't expect this, but nor would I rule it out ... some two decades hence.

Notes:
(1) Computerworld, Feb 6, 2009 "Workers Losing Jobs at IBM Get Overseas Option"

Time for another default?

2009-06-01T12:54:00.001-07:00

Should the U.S. declare a default on its governmental debt?

I never imagined I would suggest that the U.S.A. renege on its borrowings, but I'm starting to entertain the idea as a "lesser evil". Federal debt was about 55% to 65 % of GDP at the start of 2007; now, with all then new government spending and "rescuing", it is slated to rise to 90% of GDP by 2011.

This 90% number understates the magnitude, because the government has also taken on large, new "off balance-sheet" obligations. For instance, in 2007, the government's official position was that it was not responsible for money borrowed by Fannie and Freddie. A CBO report, from 2001, said this:

A typical disclosure from a Fannie Mae prospectus states, "The Certificates, together with interest thereon, are not guaranteed by the United States. The obligations of Fannie Mae are obligations solely of the corporation and do not constitute an obligation of the United States or any agency or any instrumentality thereof other than the corporation."

However, when push came to shove and the U.S. government (ex Treasury Secretary Paulson) did not dare insist on the explicit provision in the prospectus. Instead, late in 2008, the government decided to make the guarantee of Fannie/Freddie debt explicit. Later, the government also guaranteed debt of certain banks.

The US is in the exact position in which many poor borrowers find themselves: they don't know how they'll repay their debt tomorrow, but they really, really need the money just now. It is always easier to push the problem to the future, and borrow now. This does not work unless lenders evade too. Politicians are usually happy to evade this way, and to push any problem beyond the next election. In this case, the major lenders are politicians too, with foreign central banks holding large amounts of US government debt.

As a U.S. taxpayer, I will end up paying for this evasion. Continued evasion simply means that the U.S. will be encouraged to borrow more, and to inflate more, and waste more. The solution is simple: recognize the problem now, and begin to deal with it. A default would be a rude wake-up call: something that nobody could evade. It would make the poor creditworthiness of the U.S. government explicit. If we need a default to scare everyone into action before things get still worse, a default would be a lesser evil.

Fannie/Freddie debt was different from direct U.S. government debt, because it did not have an explicit government gurantee. This is debt the government did not have to take on. This debt would have been the ideal candidate for a default, because it could be done while upholding true government debt. Even a small gesture -- for instance, if the government had said they would guarantee a part (say 80%) of the Fannie/Freddie debt -- would have put lenders on notice.

Major lenders to the U.S. governments are not idiots! Until recently, with debt around 60% of GDP, they could have held up hope that future U.S. taxpayers would foot most of the bill. Some evasion was involved, and the big lender of the recent few years --the Chinese government -- had its own political reasons to evade. However, the recent U.S. government spending has worried them, and the Chinese have been scolding the U.S., saying the government needs to be more careful with spending.

This week, we saw a small example of the pressure that lenders can bring to bear. Secretary Geitner has just gone to China and is reassuring them that the U.S. will try not to exceed an annual deficit of 3% of GDP. These are promises, promises... If the U.S. had insisted that the lenders to Fannie/Freddie at least take a "haircut", that would have been something concrete, a real loss rather than a probable one.

What would have happened if the government had not backed Fannie/Freddie 100%? It is possible that the recession would have got deeper faster. Instead of being able to keep interest rates low, anything like a default would have sent interest rates up. Home prices might have dropped even lower than they did, unemployment might have risen higher, the stock market may have gone lower. However, the economy would have readjusted to the new realities rapidly. That is what happens when the amount of evasion is lessened: people not only adjust to the new reality, but -- in terms of real wealth -- build up from that base more rapidly than from an economy propped up by inflation.

It is less than a century since the U.S. defaulted on its debt, when F.D.R. brazenly rescinded its promise to pay its debts in gold. A dollar used to be a promise to pay about 1/21th of an ounce in gold. In about a year, it was changed to a promise to pay 1/35th of an ounce. The SCOTUS upheld this as being constitutional. Creditors would only get 57% of their loans back! It was a dishonorable act.

I think the U.S. should pay back its creditors. This is a rich country, that produces a great deal of wealth every year. If the government did not fritter away such a large portion, we could easily do the honorable thing. I fear though, that we have to choose between a small dishonor today that serves as a wake up call, or a much worse fate in the future.

"Babbit" by Sinclair Lewis

2009-05-30T10:38:00.000-07:00

I recently listened to "Babbitt", by Sinclair Lewis. I've wanted to read one of the better "naturalist" authors, and this was a good recording.

Mr. Babbitt, is a middle-aged, middle-class, real-estate broker, who votes Republican, goes to church, and is the member of the right club; but, he is not very zealous about any of these aspects of his life. He is even open to alternatives in morality and politics, and he explores some of them. Babbitt is not a caricature we would reject as ridiculous. He is a realistic portrayal of a man who has chosen values which are about average for his background.

Sinclair Lewis does not sympathize with Babbit's values. There are parts of the book that are satirical in highlighting Babbitt's hypocrisy. Nevertheless, Lewis appears sympathetic to Babbit the man; the man who is not quite happy with his choices, and is trying to be open to alternatives.

Part of the author's sympathy seems to come from his assumption that the alternative lifestyles are not much better than Babbitt's. Should Babbitt move to the backwoods and get in touch with nature, or should he mingle with the bohemians in the city, or should he aspire to move into the upper classes. The author gives us a brief look into each of these, and what we see is not inspiring. Each of these is simply another type of life, not better, but just as routine and unfulfilling to those born to it or those who have chosen it. The message seesm to be that we have some choice, but -- in essence -- it does not make of a difference. The differences are only cosmetic; we are born into a social class, or we work our way into it, and then we adopt its customs, which are no better or worse than the others.

Lewis's book is naturalism at its best. The actors introspect, and make choices, and direct their lives... and yet, the summarizing message is that this is extremely difficult, and perhaps essentially futile. We do not see someone being absolutely carried along with the trend; but, we surely do not see any heroic battles either. The actors are not born with some inherent flaw that they cannot will away; yet, we find them constrained by their own values and choices, unable to radically change the choices they have made.

While I cannot recommend this as inspiring fiction, I think it is definitely worth reading a few such books. I think this type of naturalism has didactic (and "cautionary tale") value. While the naturalism will leave the reader uninspired, the plot carries one along as if one were watching a real reality show.

Personally, I will probably read more Sinclair Lewis, but primarily as part of my interest in that period of American history from the 1880s to WW-II.

The Aftermath of Financial Crises

2009-04-26T19:43:00.000-07:00

In their paper, "The Aftermath of Financial Crises", economists Reinhart and Rogoff look at data from other financial crises (from across the world). They ask: to what extent did key indicators like unemployment and GDP deteriorate, and for how long?

They document a lot of variation among the various crises. Here are the averages they found, across the various crises. (The figures in parentheses are the current US figures for this crisis.)

Unemployment: Up 7%, across 4.8 years (US current: up 4%)
House prices: Down 35%, across 6 years from the top (US current: down 28%)
Equity prices: Down 56%, across 3.4 years (US current: down 42%)
Per capita real GDP: Down 9% across 2 years (US current: down 1%)

There is a lot of variation among the different episodes included in this sample. Still, they were all chosen because they were largely bank/financial/credit crises. (So, for instance, the dot.com bust-up is not included.)

I found graphs of U.S. data for three of the above measures (from the late 1980's to today). Then, I marked the averages from the study on the graph, to answer the question: if this US crisis turns out to be about averages, how far are we from the turning point. [I did not graph the real per capita GDP. Instead, the real GDP is shown -- i.e. not per-capita].

In summary, if the current US recession is typical, we can expect another year of flat or falling real GDP (falling per capita); unemployment would go to 11% over the next three years or more; house prices would come down a bit more and not recover for another 5 years.

An average does not tell us what will really happen; but it does provide a feel for the order of magnitude that is typical, to allow us to use that as a benchmark.

The popular vote

2009-01-24T08:04:00.000-08:00

Does the media hype around Obama tell us that he is one of our most popualr modern presidents? I don't think so. The media does love him; i doubt the general public does. Inauguration-coverage of the public is also a biased sample. If one interviews people as they come to a concert by a particular rock-band, a vast majority of them will be fans. This cannot be extrapolated to the general public.

Of course, it is true that the vast majority of Americans do not think that Obama's brand of socialism is some major evil. I guess the general viewpoint could be something like: "a decent enough guy, who seems thoughtful, who seems willing to tackle the country's problems, and who should be given an opportunity to do so". This does not mean that the GOP-voters among them want to change their votes. Most of them would still prefer McCain (or Huckabee, etc.), but do not think ill of Obama, and are approach him with the spirit of: "let's work together".Obama is in a honeymoon period.

Today, I think the best objective measure of his more enduring (non-honeymoon) popularity is to look at people who actually voted for him. He got 53% of the popular vote. This is a good number, but nowhere near a "vast" majority. For some historical perspective, here is the percent of popular vote to winners of the last few elections:

2008: Obama - 53%
2004: G.W.Bush - 2nd term - 51% [Remember Bush stupidly talking about how he was going to use this great "political capital"]
2000: G.W.Bush - 1st term - 48%
1996: Clinton - 2nd term 48%
1992: Clinton - 1st term 43% [Not commensurate, because Perot took about 19%]
1988: Bush Sr. - 53% .... .... Look at that! Who would have thought that boring old Bush Sr. got the same as what Obama got
1984: Reagan - 2nd term 59% ... Now we're talking about a real sweep!
1980: Reagan - 1st term 51%
1976: Carter - 50% ... Not too bad for him; that's better than Clinton's second term
1972: Nixon - 2nd term 61% ... who would have thunk it! He even beat the gipper! Ended up impeached.
1968: Nixon - 1st term 43% [Not commensurate, because a third party took 13%
1964: Lyndon Johnson 61% [Barry Goldwater got just 38%... shame on America! But, it shows that we are not at some extreme point in our history]
1960: JFK 50% [For all the talk of Camelot, and all the excitement about Jackie's wardrobe, the split on votes was 49.7% to JFK and 49.5% to Nixon]

Protestant Reformation

2009-01-10T11:17:00.001-08:00

"The Reformation" spread across Germany and Scandinavia around 1530. In the 1530's, Henry VIII had famously broken with the Catholic Church. Though he do so partly because he wanted a divorce, he probably could not have done so without the numerous English noblemen and clergy who agreed with the ideas of the Reformation, and wanted change for their own reasons. About 30 years later, Mary Queen of Scots abdicated her throne in the face of the Scottish Reformation.

Super-fast revolution: What amazes me is this: Martin Luther nailed his "95 Treatises" to a church door in 1517. Just 20 years, saw change across many countries. How did it spread so fast? Were people so angry about the existing corruption and the status-quo? Many noblemen saw the reformation as a way to increase their local political power: was role did this play compared to the intellectual argument? I need to get a good book about the history of the Reformation.

Marx and Russia: Karl Marx published the "Communist Manifesto" in 1848. The Russian revolution took place 70 years later, in 1917. Since Communism wanted to overthrow the church, the rulers, and the middle class, it is not surprising that it took longer than the Reformation, even though it occurred in a time when ideas travelled more quickly.

A picture: Here are time lines for Luther and Marx, with Rand thrown in as a bonus.

Notice how rapidly Luther's ideas took hold.

Also, when a young Objectivist is pessimistic, tell him that we've got till 2026 if we go at the pace of the Communist revolution!

Cromwell's speech to the "rump parliament"

2008-12-17T16:00:00.001-08:00

The stock-market is down 40%, with middle-class savings decimated, and the finger (sadly) pointed at "Wall Street". On top of this, news just broke of an unprecedented financial scandal, where Bernie Madoff seems to have confessed to a $50 billion fraud! And, the governor of Illinois is accused of blatantly auctioning a senate seat.

These are dangerous times, because uninformed public anger at such events can be harnessed by a demagogue. Imagine Oliver Cromwell, giving his famous speech today:

20 April 1653
It is high time for me to put an end to your sitting in this place, which you have dishonored by your contempt of all virtue, and defiled by your practice of every vice; ye are a factious crew, and enemies to all good government; ye are a pack of mercenary wretches, and would like Esau sell your country for a mess of pottage, and like Judas betray your God for a few pieces of money.

Is there a single virtue now remaining amongst you? Is there one vice you do not possess? Ye have no more religion than my horse; gold is your God; which of you have not barter'd your conscience for bribes? Is there a man amongst you that has the least care for the good of the Commonwealth?

Ye sordid prostitutes have you not defil'd this sacred place, and turn'd the Lord's temple into a den of thieves, by your immoral principles and wicked practices? Ye are grown intolerably odious to the whole nation; you were deputed here by the people to get grievances redress'd, are yourselves gone! So! Take away that shining bauble there, and lock up the doors. In the name of God, go!

Cromwell did not turn out well.

Internet Explorer vulnerability

2008-12-15T11:28:00.000-08:00

If you use Microsoft's Internet Explorer browser on Windows XP: a particularly vicious "vulnerabilty" was recently discovered, and some bad guys have started to exploit it. This vulnerability does not reequire you to click or to download anything special. If a web-site has been compromised, you can get it simply by visiting a page.

If you browse web-sites that you trust, and that you have reason to believe have good security practices (e.g., Hotmail, Amazon, or your bank), you ought to be fine [though there are never any guarantees]. On the other hand, if you visit new web-sites frequently, or web-sites hosted by amateurs, it's a good idea to use Firefox or some other browser for a few weeks, while Microsoft rolls out a patch.

I don't normally warn folk about viruses; this isn't one of the regular scare stories that does the rounds of email. [For more info see this.]

Cheap and Easy Forums

2008-12-04T18:28:00.001-08:00

Someone asked me how to create a forum with features like OO.net. They wanted something that was cheap and easy to maintain, with no programming required.

Hosted Forum: The software OO.net uses is "Invision Power Board" (IPB). The company offers an option where they will host the forum for you. If all you need is a forum, and little else, they have plans starting at $10/month.

Free Hosted Forum: Cheaper still is to use a free forum hosted by someone else. There's a web-site called "InvisionFree" which hosts an older version of IPB. You can register and create a forum in minutes, by specifying a name, and defining some categories and sub-forums. For instance, I created one called "ObjectivistCove" in about 15 minutes.

Free software on your hosted site: Finally, one can pay about $5/month for web-hosting on one of the cheaper sites (like 1and1 or GoDaddy). With a hosting-plan that provides Apache, PHP and MySql, one can install free forum software like phpBB, which rivals IPB in features. This is cheaper than an IPB-hosted solution, and also allows you to host other software on your site. The downside is that you have to download/install/upgrade/back-up yourself.

Starnesville

2008-12-04T04:12:00.000-08:00

When I first drove through Detroit, I saw a poverty-stricken city, with burnt-out homes, tall abandoned office buildings and hotels with boarded doors and broken windows, and liquor-stores neighboring some reverend's loudly-advertised house of redemption. Poverty was not all, though. Worse still were the wide, well-laid boulevards, and the intricately carved stone facades... the evidence of better times. Not just poverty, but decay.

The industrial equivalent can be found driving into Chicago. One drives past Gary, Indiana, with huge factories standing abandoned.

But the "prize" for resembling Starnesville (from Atlas Shrugged), probably goes to a "Detroit suburb" built in the Brazilian jungle.

Mean Bankers

2008-11-23T10:07:00.000-08:00

In Atlas Shrugged, Part 1, Ch X: a businessman wanna-be whines "... I worked like a dog, trying to get somebody to lend us the money. But that bastard Midas Mulligan put me through the wringer." Mulligan is portrayed as a tough banker who was able to identify people with good credit (who would pay him back, and then some) from bad.

It was he who had invested in Rearden Steel at its start, thus helping Rearden to complete the purchase of the abandoned steel mills in Pennsylvania. When an economist referred to him once as an audacious gambler, Mulligan said, "The reason why you'll never get rich is because you think that what I do is gambling." [Atlas Shrugged]
I was reminded of Mulligan, when I read the following description of James Stillman, a prosperous banker from the late 1800's:

"A caller would enter Stillman's office, assured, perhaps a little enthusiastic. Without a word the dark, elegant little man at the big clean desk would motion him to a chair upon which the light fell full. He would look at him, quite impassively, through veiled, impersonal eyes. The man would begin stating his case.

Minutes would pass. The caller would make assertions that seemed to require response. Not a sound from the grave, composed Buddha at the desk, whose eyes seemed to have penetrated through the other to some distant spot in the room. The visitor would fidget, cough, and finally finish what he had come to say.

Invariably would follow a long, cruel pause.

Then, as if from far away, [Stillman] would begin to speak. In low, impressive tones he would rip the proposal to shreds". (Source: John Wrinkler, quoted in Money of the Mind, James Grant, 1992 page 67)

Consider this though: despite the description above, Stillman is said to have made many loans, actively prospected for new business, and his bank expanded rapidly. [Source: James Grant 1992]

If only we had some more mean bastards running our banks, we would be in better shape today.

William Blackstone (Part 2) - Foundations of Ethics

2008-11-02T13:10:00.000-08:00

In a previous post, I described Blackstone's approach: the laws of nature determine how inanimate objects act; the laws of nature determine what animals must do to subsist. Animals have no choice but to obey nature if they are to subsist.

Next, Blackstone turns to human beings. Unlike the lower animals, he notes, we have the faculty of reason, and must use our reason to understand the natural laws. Reason, he says, leads us to three fundamental principles of human action:

live honestly
hurt nobody
render to every one his due

Notice the absence of altruism and patriotism. None of those laws says "help your neighbor" or "serve your country". Blackstone may agree that altruism is a virtue, but he does not list it as fundamental. (He notes that Justinian jurisprudence laid down the three fundamentals noted above.)

Next, Blackstone notes that man requires motivation to apply his reason. Man needs something to push him to use his reason, and discover the laws of nature. What is that universal human motivation? His answer: self-love. He calls self-love, "the universal principle of action". Blackstone says that we can reduce the laws of human action (i.e. ethics) to a single precept: "that man should pursue his own happiness." Notice that this is not a statement of Politics; Blackstone is not saying that the government ought to allow people to pursue their own happiness. He makes it clear that this is what people ought to be doing. He says: "This is the foundation of what we call ethics".

(After this, the text goes downhill as Blackstone tries to fit revelation into his epistemological framework. I won't comment on that. )

Here is the text described above:

Man, considered as a creature, must necessarily be subject to the laws of his creator, for he is entirely a dependent being. A being, independent of any other, has no rule to pursue, but such as he ascribes to himself; but a state of dependence will inevitably oblige the inferior to take the will of him, on whom he depends, as the rule of his conduct: not indeed in every particular, but in all those points wherein his dependence consists. This principle therefore has more or less extent and effect, in proportion as the superiority of the one and the dependence of the other is greater or less, absolute or limited. And consequently, as man depends absolutely on his maker for everything, it is necessary that he should in all points conform to his maker's will.

This will of his maker is called the law of nature. For as God, he created matter, and endued it with a principle of mobility, established certain rules for perpetual direction of that motion; so, when he created man, and endued him with freewill to conduct himself in all parts of life, he laid down certain immutable laws of human nature, whereby freewill is in some degree regulated and restrained, and gave him also the faculty of reason to discover the purport of those laws.

Considering the Creator only as a being of infinite power, he was able unquestionably to have prescribed whatever laws he pleased to his creature, man, however unjust or severe. But, as he is also a being of infinite wisdom, he has laid down only such laws as were founded in those relations of justice, that existed in the nature of things antecedent to any positive precept. These are eternal, immutable laws of good and evil, to which the creator himself, in all his dispensations conforms; and which he has enabled human reason to discover, so far as they are necessary for the conduct of human actions. Such among others are these principles: that we should live honestly, should hurt nobody, and should render to every one his due; to which three general precepts Justinian has reduced the whole of the law.

But if the discovery of these first principles of the law of nature depended only upon the due exertion of right reason, and could not otherwise be attained that by a chain of metaphysical disquisitions, mankind would have wanted some inducement to have quickened their inquiries, and the greater part of the world would have rested content in mental indolence, and ignorance its inseparable companion. As therefore the creator is a being, not only of infinite power, and wisdom, but also of infinite goodness, he has been pleased so to contrive the constitution and frame of humanity, that we should want no other prompter to enquire after and pursue the rule of right, but only our self-love, that universal principle of action. For he has so intimately connected, so inseparably interwoven the laws of eternal justice with the happiness of each individual, that the latter cannot be attained but by observing the former; and, if the former be punctually obeyed, it cannot but induce the latter. In consequence of which mutual connection of justice and human felicity, he has not perplexed the law of nature with a multitude of abstracted rules and precepts, referring merely to the fitness or unfitness of things, as some have vainly surmised; but has graciously reduced the rule of obedience to this one paternal precept, "that man should pursue his own happiness." This is the foundation of what we call ethics, or natural law. For several articles into which it is branched in our systems, amount to no more than demonstrating, that this or that action tends to man's happiness, and therefore very justly concluding that the performance of it is a part of the law of nature; or, on the other hand, that this or that action is destructive of real happiness, and therefore that the law of nature forbids it.

Original text via Posner Memorial Collection (CMU). Audio-recording at Librivox.

William Blackstone (Part 1) - Laws come from Nature

2008-10-30T04:01:00.000-07:00

William Blackstone (1723 - 80) was a eminent English jurist. In the introduction to his "Commentaries on the Laws of England", he briefly speaks of the philosophy underlying law. He appears to be influenced by John Locke. On reading his description of the philosophy of law, I imagine a man struggling toward the ideas later expressed in Rand's "The Objectivist Ethics" essay, but not getting there. Instead, he wanders back into conventional wisdom.

Here's a synopsis of these two pages.

Blackstone has a deist notion of God: He created the universe, and set things in motion; and, that's about it. This is not an interfering God. This is not a God who will change things to help us out. being perfect, He won't even change his own plans. To us humans, then, what is relevant is the will of this God as expressed in his design of the universe. Blackstone sums it up thus: "This will of his maker is called the law of nature". The best way to read the commentary is to keep that one statement in mind as the encapsulation of Blackstone's view. Whenever he speaks of God's will, he is talking about the laws of nature.

Blackstone traces natural law from inanimate objects, to animals, and then to the "noblest of all ... beings". Given the laws of nature, other laws are not arbitrary. Inanimate objects react within certain immutable laws of nature. Lower animals follow the laws of nature, too. They cannot think or choose in the way humans can. Yet, unlike inanimate objects, their actions are animated by an end: their own subsistence. " ..., such laws must be invariably obeyed, so long as the creature itself subsists, for its existence depends on that obedience." Reminds me of Rand identifying life as the end behind all goal-directed action.

I'll describe how Blackstone proceeds to humans, in another post. For now, here is the text that I have described above:

Introduction: Section 2

… when the Supreme being formed the universe, and created matter out of nothing, he impressed certain principles upon that matter, from which it can never depart, and without which it would cease to be. When he put that matter into motion, he established certain laws of motion, to which all movable bodies must conform, And, to descend from the greatest operation to the smallest, when a workman forms a clock, or other piece of mechanism, he establishes at his own pleasure certain arbitrary laws for its direction; as that the hand shall describe a certain space in a given time; to which law as long as the work conforms, so long it continues in perfection, and answers the end of its formation,

If we farther advance, from mere inactive matter to vegetable and animal life, we shall find them still governed by laws; more numerous indeed, but equally fixed and invariable. The whole progress of plants, from feed to the root, and from thence to the feed again; --- the method of animal nutrition, digestion, secretion, and other branches of vital economy; --- are not left to chance, or the will of the creature itself, but are performed in a wondrous involuntary manner, and guided by unerring rules laid down by the great author.

This then is the general signification of law, a rule of action dictated by some superior being; and in those creatures that have neither the power to think, nor the will, such laws must be invariably obeyed, so long as the creature itself subsists, for its existence depends on that obedience. But, laws, in their more confined sense, and in which it is our present business to consider them, denote the rules, not of action in general, but of human action of conduct: that is, the precepts by which man, the noblest of all sublunary beings, a creature endowed with both reason and freewill, is commanded to make use of those faculties in the general regulation of behavior.

Original text via Posner Memorial Collection (CMU). Audio-recording at Librivox.

Detroit needs a bankruptcy

2008-10-28T16:00:00.000-07:00

In an attempt to bribe Michigan voters, both parties supported some government aid for the auto companies. Finally, a $25 billion package was approved. This is the last thing the auto companies need.

The U.S. auto companies are encumbered with costly union agreements and a complex dealer network. They cannot walk away from these obligations as long as they are regular, functioning companies. The U.S. auto industry needs a bankruptcy to clean house. If they are not viable, let them shut down. Let some of their assets disappear, let some of their employees move to other industries, let other car companies buy some of their factories and employ some of their people.

Ronald Reagan was stupid enough to bail Chrysler out many years ago; now, the government has repeated the mistake.

Now, GM wants to buy Chrysler but doesn't have the money. They say the cash they're getting from the government is not enough for such a purchase. So, GM is lobbying for the government to help them buy Chrysler. Sigh.

Over-feeding

2008-10-26T16:11:00.000-07:00

I prefer the RSS subscriptions over the book-marks/favorite. While the list of feeds acts like a list of favorites, RSS also alerts you if there is something new on any of the favorites.

Still, I'd become over-fed. With 240 feeds in my list, it's impractical to stay on top of everything that's new; and it is not of value anyway. So, I recently reorganized my list, separating out feeds that I want to check out at my leisure. Another category is feeds of interest that I can simply ignore if I've got other things going on.

A while ago, I wrote a little program to merge OPML files (lists of feeds) from friends, into my own list. Recently, I used the same program to reorganize my list, because Google Reader does not offer a nice drag/drop interface. Check it out if you want a simple OPML-merging tool.

Thou Shalt not Lie

2008-10-22T21:08:00.000-07:00

Michigan's "Proposal 2" that will allow some stem-cell research. I've noticed "No on 2" lawn-signs at some catholic churchs and schools. Both sides are running TV ads.

Strikingly, the religious side has not organized their ad-campaign around their moral argument. Instead, it's full of blatant lies and smears. The thrust of their campaign is that the state will spend tax-dolalrs on this research. This is completely untrue, except in the sense that the state probably spends tax-dollars on various types of research. Why the lies? I assume the Christians know they have their own votes wrapped up; so the campaign is aimed at the independent voter.

Today, I read about the Christians in Colorado doing the same thing on a proposition there.

I suppose it is good news that the Christians think they need to lie and evade in order to get their way. I suppose it also makes them more vulnerable to attack.

Social Security's Trust Fund

2008-10-18T08:00:00.000-07:00

The Social Security's Trust Fund is a fiction. Basic problem: it is not a fund in the first place.

Joe Sixpack (or is it Joe Plumber?) might create a "home down-payment fund". He does this by putting aside some money and not spending it. The bank is his "lock-box". Imagine that he did something else: he loaned the money to himself and treated the IOUs written to himself as if they were a fund! For all his protestations that he owes money to himself, we would have to tell him that he has spent it, and the fund is fiction. The same with social security.

So, it really irritates me when newspapers who ought to know better, gloss over this, and pretend that this fiction is real. For instance, this New York Times story says:

If no changes are made, the Social Security trust fund is projected to deplete its reserves in 2041 and will begin paying out more than it collects in benefits even sooner, starting in 2017.

Both these dates are bogus. Firstly, there is no fund. Secondly, Social Security has already reached the point where collections are much neared payout levels than "fund" accounting would show. That second fiction is maintained through another ruse: over the original IOUs that Joe Sixpack wrote to himself, each year he write brand new IOUs to pay himself interest! The New York Times adds this fictional interest to the fictional inflows, to calculate a total collection that is significantly larger than it really is.

Summary: The first step toward reforming social-security is to be honest about what it is, and not to use terms like "fund" and "interest" that only obfuscate.

Appendix: Detailed numbers:

The Social Security administration (see page 2 on this PDF), shows the following for 2007:

"Fund" Income $ 772 billion
Outflows $ 624 billion
Surplus = $ 158 billion

However, about $95 billion of the inflows were fictional "interest" on the fictional "fund". Subtract that, and one gets an inflow of about $677 billion and the surplus comes down to $53 billion. (Aside: Out of these non-government receipts, $18 billion comes from "taxation of benefits". This is money that is taken from retirees who had the wsdom to get rich enough not to depend totally on social security.)

Gathering Storm Clouds

2008-10-14T18:14:00.000-07:00

If Obama is President, with a Democratic house, what economic damage would be added to our woes? I think such a government would focus on changes that do not increase the deficit too much. Within that theme, there are lots of bad possibilites:

Social security: Obama wants to raise the tax. This will fund the system, which recently slipped into deficit. On paper, this will also show the so-called "fund" increasing, thus appearing to push social security problems further into the future. With the recent stock-market collapse, alternatives like privatization would be laughed at. So, politically, there's a good chance this will pass. Also, the Dems might claim this is friendly to retirees. Florida is going to be important in 2012.

Unions: Democrats have been trying to push through a "card-check" system that would make it much easier for unions to move into companies like Walmart. In addition, there may be some subtle moves toward protectionism. These would likely be selective, seeking to protect unions in Ohio and perhaps in Michigan. With the dollar already low, U.S. exports are looking more attractive around the world; chance are the government will make some small protectionist moves and claim that the growing exports are their doing! Instead of restrictions on imports, expect hidden subsidies for U.S. companies -- something that will not be too cut-and-dried if other countries protest to the WTO. Expect things like the recent $25 billion guarantee to auto-companies.

Carbon Cap and Trade: Some scheme seems almost certain, since both candidates are pushing for it. The government might try to combine this with giving special offsetting favors to industries in Ohio (and maybe Michigan). Carbon caps can be structured to give existing companies a monopoly advantage. So, expect ertain businesses and unions, to be supporting the environmentalists.

Health Care: The government is going to try to push something through. They probably won't mess with the current employer-sponsored scheme for a while, but we can expect at least some tax on businesses that do not provide health-care. Perhaps they might come up with some rules that raise costs on places like Walmart, by claiming that Walmart let's the government subsidize their health-care costs. I don't think Obama will push to take over private insurance. The country is not ready, and he won;t want those costs on the budget in his first term.

Summary: Those are the most obvious moves that I could think of. The theme will be: important changes, but nothing that requires a tough political fight; only things where today's left-tilting electorate has been well-prepared.

I figure one might as well prepare one's activism and one's portfolio for these things today!

Public Retirement Deficit -- another $700 billion?

2008-10-10T17:43:00.000-07:00

Once the housing-related crisis is history, what other un-budgeted government payouts loom ahead? The big ones are Social Security and Medicare; but people know about those. One that is not as much on the radar is the shortfall in state government pension funds.

According to a PEW study "Promises with a Price" , "states’ retiree ... benefits ... due over the next [three] decades that can be conservatively estimated at $2.73 trillion. That includes about $2.35 trillion for a wide range of employee pensions, including those for teachers, and an additional $381 billion for retiree health care and other non-pension benefits for state employees only, excluding those for teachers and a handful of other groups. ... ... To their credit, states have socked away enough to cover about 85 percent of the pension bill. But there is very little put aside for non-pension benefits. All told, states face about $731 billion in unfunded bills coming due. "

Assumed Rate of Return: One major assumption is: how much will pension funds earn on their investments. Today, the plans assume a return of a little over 8% p.a. This is far from conservative for a pension-fund. As Berkshire's Charlie Munger's remarked (Wesco shareholder's meeting, 2008) pension funds rather take on more risk, than admit they cannot make 8% over the long term, which would mean an adjustment (requirement for new "top-up" funding) today.

A news-story about San Deigo shows some of the short-sightedness that goes on. The city was assuming an 8% return. Obviously this means that some years will be higher and others will be lower. The wise folk who run the city decided that in any year that they make more than the average 8%, they would use the "surplus" to re-calculate a more generous retirement package!
Similarly, during the late 1990's, when the stock-market boomed, some states skipped their funding, declaring a pension-funding "holiday".

If the recession we're currently in, and the government's shenanigans that promise big structural impediments to the markets, leads to a 6%-7% stock-market growth over the next decade or two (some would say I'm being optimistic), pension fund deficits will be significantly higher than $360 billion.

Assumed COLA: It appears that public pensions do get cost-of-living adjustments (COLA). Fortunately (for the government budgets) these seem to be decided by ad-hoc union bargaining, rather than by a strict formula linked to CPI. Nevertheless, if inflation ratchets up in the 2010's, we can expect calls for more COLA, and a higher bill.

Summary: $360 billion pension shortfall, and $370 billion) retiree health-care shortfall. If the stock-markets grows more slowly, the pension shortfall could be higher. If inflation grows faster, both the pension and healthcare shortfalls could be higher. A trillion might be a nice, round, conservative figure.