Streetwise Professor

So the ILA strike settled yesterday–almost immediately after I posted about it. (You can thank me later).

Well, sort of settled–more like it was punted past the election (imagine that): the strike is merely suspended until January 15.

Great news! Well, not when you consider how this oh-so-politically convenient outcome was achieved: lawfare rather than the law (specifically the Taft-Hartley law).

The Biden administration threatened USMX, the consortium of carriers, terminal operators, and port authorities that negotiates with the longshoreman with an investigation of “any price gouging activity that benefits foreign ocean carriers, including those on the USMX board.”

There they go with the “price gouging” bullshit again. And using the threat of an investigation of such ill-defined conduct to dragoon the carriers, terminals, and ports to capitulate to union demands.

Presumably the administration’s brushback pitch was intended to signal to the USMX that they could not pass on the inevitably higher costs they incur as a result of any strike to customers through surcharges. Thus, the carriers would be forced to eat demurrage and the like.

It is clear whose side the administration took:

It is time for USMX to negotiate a fair contract with the longshoremen that reflects the substantial contribution they’ve been making to our economic comeback.

It is important to note that the ILA’s demands are not just about wages. The ILA also wants to prohibit automation of ports. This despite the fact that US ports are among the world’s least efficient. Actually, it’s probably because US ports are among the world’s least efficient: they are less efficient because they are far less automated.

The inefficiency of US ports and supercompetitive wages paid to longshoremen are a tax on trade, and a tax that falls broadly across the entire US economy in order to benefit an extremely small (25,000 actual workers on the docks on the East Coast) constituency. This tax is paid in the form of higher prices for imported goods and lower wages for workers: the tax reduces the derived demand for labor services by increasing the cost of complementary inputs (e.g., imported parts).

It is therefore a travesty to claim that supporting the ILA is to support labor generally. In fact, the exact opposite is the case. The ILA membership is feasting, and everybody else is paying the bill.

The potentially extortionate power of transportation union, and the impact of the exercise of this power on the nation in rail strikes in particular, is precisely why the national emergency provisions of Taft-Hartley exist. But Biden (or whoever decides for Biden) chose not to use it. He says “I don’t believe in Taft-Hartley.” Harris apparently agrees. And Trump can only blurt out: “American workers should be able to negotiate for better wages, especially since the shipping companies are mostly foreign flag vessels, including the largest consortium ONE [a Singapore-based consortium of Japanese carriers Nippon Yusen Kaisha, Mitsui O.S.K. Lines, and K Line].” A statement that illustrates yet again Trump’s dim economic understanding.

(I also note that US flag shipping has always been an also-ran. In the 19th and early-20th centuries European–especially British–carriers dominated. In recent decades Europeans (e.g., Maersk, MSC) have continued to play a primary role, and have been joined by Asian ones (Japanese, Chinese, and Taiwanese in particular.). J.P. Morgan tried to play his consolidation game to create a major US liner firm in the early-1900s but that failed miserably. )

In sum, a collection of full retards posing as friends of the working man, who are anything but.

The International Longshoreman’s Union has gone on strike at East Coast ports, from Maine to the Rio Grande. The Biden Administration supports the strike. Harris supports the strike. Trump supports the strike.

These people have apparently forgotten a crucial lesson:

Why is supporting the ILA here full retard?

Presumably they are falling over themselves to support the strike in order to curry favor with organized labor. Yes, despite its radically diminished size (as compared to the 50s and 60s) it could be a swing constituency in 2024’s election. But, this strike will screw far more union members than it will help.

There are 47,000 ILA members on strike. But far more union members–and wage workers who are not unionized–will be hurt.

Consider, for example, the Teamsters. No ships unloading, no need for trucks–and truckers–to haul the cargo to market. Ditto railway workers. And consider factory workers impacted by a cutoff of imported parts and/or by an inability of their employers to ship out what the workers produce.

The strike will reduce the derived demand for every good and input in the US–including notably the derived demand for labor of every skill level and union status.

This of course is not to mention the serious inconveniences–and in some cases real hardships–that tens of millions of Americans will suffer due to the supply change disruption caused by the strike. A disruption, I might add, that will outlast the strike itself. (Panic buying has already led to empty shelves for many staples).

In sum, the beneficiaries of this strike are vastly outnumbered by the victims, and whatever monetary gains the strikers extract, the monetary costs inflicted on others–including other union members–will vastly outstrip these gains.

Not to mention that the ILA exemplifies the worst of organized labor, and its President, Harold Daggett, personifies it. This guy is a first ballot unanimous selection for the Asshole Hall of Fame, and if he played the corrupt union boss/thug in a movie, it would be so over the top you wouldn’t believe it.

So yeah. Full retard to support this strike.

This action is just what the national emergency provisions of the Taft-Hartley Act (Section 206 of the Act, codified at 29 U.S.C. § 176) were designed for: to deal with a strike affecting “trade, commerce, transportation, transmission, or communication” that “imperil[s] the national health or safety.” ILA strikes resulted in the last two uses of this provision–by Nixon in 1971 and Bush in 2002. By going over some procedural hurdles, the President can order the workers back for an 80 day period during which they must negotiate. It should be invoked here as well.

I guarantee that invoking this measure would result in widespread popular support, just as Reagan’s actions against the air traffic controllers in 1981 did. But Biden and Harris are going full retard instead.

Trump seldom misses an opportunity to miss an opportunity, and here is an example. He could just say, as he has on many issues: “This wouldn’t have happened if I were President. I would have done the deal months ago.” He can support ordering the ILA back to work by saying he wants to protect other union workers and the American people. He can paint Daggett as the bad guy.

All low hanging fruit. But no.

Harris is obviously scared to death of appearing anti-union, although as I’ve just pointed out she could easily show that intervention would be pro-union and pro-worker. But well, we know that girl ain’t right.

Biden’s inaction–or more accurately, his deciders’ inaction–could be seen as just falling into line behind Harris. But is it?

Maybe ironically Joe is the only non-retard here. This could be part of his Sampson strategy to bring down the pillars on all those he believes shafted him. That would definitely include Harris and the Democratic establishment. But it could also include the American people who hold him in ridicule and contempt. That would be evil, perhaps–but not dumb.

Regardless, idiotic political calculations are going to inflict massive pain on ordinary Americans.

There’s a lot of ooh-ing and aah-ing and cheering over China’s recently announced (Keynesian) stimulus. All of this cheering has things exactly backwards. The stimulus won’t return China to its growth path and may not even stave off a downward spiral.

Yes, many of the cheerleaders think this is just the thing required to make China grow again. This is a category error.

Keynes and Keynesian economics are about the business cycle (the “trade cycle” in the terminology of Keynes’ time). Keynes has diddly squat to say about economic growth, and Keynesian stimulus won’t generate real long-term growth: indeed, it arguably is anti-growth (for reasons I will discuss below).

I’ve mentioned before that I took Bob Lucas’ (undergraduate!) growth course in 1981. Lucas had of course gained prominence in macroeconomics for his analyses (Keynes-debunking analyses in fact) of business cycles. The growth class marked a pivot in his research: the reason he taught the class was to provide an impetus to read up on and understand the growth literature and to structure his thinking about it. As he told the class, and as he said publicly later, when you grasp the real importance of growth–long term increases in per capita economic output–all other issues, including cycles around trend, pale in comparison

Using Keynesian logic to draw conclusions about growth qua growth is profoundly ignorant. Like I say, a category error: mistaking an epiphenomenon for the real important phenomenon.

What China has done–in a nutshell, changing reserve requirements and the like to encourage shaky banks to lend to shaky corporates and injecting state capital into the shaky banks–is a signal–a clear signal–that Xi and his economic mandarins realize that the system is on the brink of collapse. This is a daisy chain bailout (government to banks to corporates and local governments) to stave off such a collapse by moving risk onto the government’s balance sheet. And its not as if the government’s balance sheet is so amazeballs.

Massive bailouts are a sign of massive problems. So the alleged massiveness being applauded should be a sobering warning instead.

The perceived necessity for this intervention reflects a recognition that China’s growth model has failed. I would argue (and have argued for over a decade) that it was fundamentally flawed from the start. The investment/infrastructure driven model generated growth in an income accounting sense (I adds to measured GDP, so growing I leads to growing measured GDP). But a vast proportion of this investment that looked great on national income accounts was malinvestment–a huge misallocation of capital.

That capital is now, in effect, being marked to market, with the effects being recorded on bank and local government finances. Austrian business cycle theorists (including Hayek) or even Minsky have a lot more insights to provide about this than Keynes. Government interventions of various sorts (including financial repression and other measures that distorted the price of capital) led to this misallocation.

As Herb Stein said, something that can’t go on forever will stop. Massive capital misallocations cannot go on forever–the marking to market eventually comes. So the “growth” model built on these misallocations has stopped.

I said earlier that the intervention may actually be anti-growth. Here’s why. To the extent that it is an effort to extend and pretend–and it certainly looks that way–it is extending a failed model and pretending that it will actually fix it. But the failed model is inimical to real, sustainable growth. So extending it and pretending that it isn’t a failure is anti-growth. To achieve real growth the system needs purging of bad investments and a reset based on totally different–and market-based–principles.

To reprise my old analogy, more stimulants didn’t make Michael Jackson healthier. They just kept him going. But they couldn’t keep him going forever, so he stopped. Living.

I am deeply skeptical that a committed communist such as Xi or the army of ideological true believers he has put in virtually all leadership positions is capable of making the fundamental changes necessary to achieve growth. They are too invested in, and believe too fervently in, the state directed development model, and are too inveterately hostile to a privately directed one, to pivot from the one to the other. So they will continue to try to patch the leaks in the boat that got them here. That will buy some time, but only some.

Meaning that eventually, the Chinese economy will wind up on the bottom–just like its new sub that sank at the dock.

With 5 weeks and a day until the election, the vacuity of the campaigns is manifest. What is particularly disturbing is that two seismic issues–the US government’s parlous fiscal state and the broken American military–are not even mentioned, let alone addressed.

With respect to Harris, this is not surprising. Her campaign is refusing to discuss any issue whatsoever. And maybe not surprising with Trump either. He has his hobby horse issues and little time for anything else.

With respect to the US government’s finances, what is striking is that they were once a centerpiece of US political discussions and campaigns. Reagan made deficits a major part of his campaign in 1980, and did so to a somewhat lesser degree in 1984. If memory serves, budget issues were also actively discussed in the 1976 campaign: Jimmy Carter advanced “zero based budgeting” as a means of getting government spending under control. Even Clinton took budget issues seriously, if grudgingly. Remember Carville’s remark: ” I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

Now US budgetary woes are far far far worse than in 1980 or the early-1990s. But nary a peep from either candidate, or either party generally. This despite the facts that (a) inflation is a major issue, and (b) as hard as the Democrats try to deny it, the most likely cause of the inflationary spurt at in the first couple of years of the Biden administration was the huge spurt in spending. (And yes, some of this was Trump’s doing–which may be why his is silent on the issue).

The US is on an unsustainable fiscal course. The longer it remains on this course the more disastrous the grounding will be. The only real question is how the government will structure the inevitable default unless spending growth is cut dramatically: future inflation is the most likely way. The hear no-see no-speak no deficit approach of both parties will lead to catastrophe.

With respect to the military, the list of structural problems is large, but two stand out: recruiting and procurement.

Trump sometimes talks about one thing that is a source of recruiting woes: the insidious penetration of wokeness and DEI into the military. Harris will of course never talk about that, least of all to say that it is a problem. But the recruiting crisis had multiple causes, and at the very least a responsible presidential candidate would (a) recognize the problem, and (b) pledge the creation of a red team task force from outside the Pentagon to analyze the problem, identify causes, and recommend fixes.

Insofar as wokeness is concerned, a West Point graduate wrote a stinging article about how it has taken over West Point. In response, the PR flack at USMA (a full colonel no less) wrote that the critical article was “problematic.” Problematic is a verbal tic with the woke, and its use in this context adds “QED” to the critical article.

Procurement is also a dire problem, especially in the Navy. Just today it was announced that there may be a serious bad welds issue on subs and carriers built at Newport News Shipyard. But that is just the latest in a series of failures in Navy shipbuilding. Everything is late and way over budget. And some of the things that have been built in the last 20 years (LCS and Zumwalt in particular) have proved to be misguided efforts that add modestly to hull count but not to combat capability.

Trump talks about the China threat. Harris not so much (of course) but the administration does. The military’s structural problems–severe enough that it may not be exaggeration to say that it is broken–seriously jeopardize the US’s ability to counter China and indeed may be an inducement for China to be more aggressive. Serious candidates would make this an issue. But we don’t have serious candidates.

Which will lead to serious problems down the road. And not too far down the road at that. Indeed, it may be the case that whoever wins in November 2024, they will regret it, because the “winner” will reap the whirlwind that has been sown on spending, on the military, on immigration, and myriad other matters over the past decade plus.

As the nation slouches the last seven weeks to the election, the stupidity metastasizes. We are approaching a singularity of stupidity.

Trump’s latest brainwave is to impose (by executive ukase, apparently) a “temporary” cap of 10 percent on credit card interest rates:

BREAKING: Trump announces that as president, he will immediately implement a temporary 10% cap on credit card interest rates

"We can't let them make it 25% and 30%."

Credit card interest rates are at a historic high under the Kamala-Biden regime. His simple plan will alleviate… pic.twitter.com/yENoVsqv1S

— George (@BehizyTweets) September 19, 2024

Where to begin?

First consider the embrace of executive fiat to implement major policies which undermines his main substantive virtue as someone who will restrain government power.

Then remember what Milton Friedman said about “there is nothing so permanent as a temporary government policy.”

But most importantly, er, controls on interest rates are price controls. And unless I’m hallucinating I remember Trump attacking Harris’ rather lame price gouging proposals (since abandoned, apparently) as full on socialist price controls. In fact, what Trump is proposing is far more socialist than what Harris did.

Maybe he’ll say he’s not a socialist but a convert to traditional Catholicism and therefore an advocate of usury laws. But regardless, his latest foray into off-the-cuff economic policy making completely undercuts his previous rhetoric and actually provides cover for Harris to propose real price controls just as she has aped other Trump policy ideas.

This is an example of the downside of economic populism, and a not immaterial one. And like many populist economic measures it would damage those it is intended to help (or at least, to appeal to). Such restrictions would essentially result in the loss of credit and credit cards by large numbers of low and low-middle income individuals.

Trump also said he will impose (again by fiat evidently) 200 percent tariffs on Chinese EVs imported from Mexico. This appeal to the autoworker vote (especially in Michigan) would be rendered completely unnecessary if he just eliminates EV mandates as he’s promised. He is right that EVs suck, and that no one will buy them unless forced to. So eliminating the mandate will mean EV imports from China–or Mars–for that matter will pose no threat to American autoworkers.

Just look at Europe, HQ for the EV Fluffers.

No need for tariffs on Chinese EVs if you don't force people to buy EVs. https://t.co/shkboR81cw

— streetwiseprof (@streetwiseprof) September 19, 2024

I would truly love to be evenhanded here and find some Harris policy proposal to bash. But I can’t. Because she hasn’t any. Her’s is a candidacy for the times, however–a drag queen story hour by somebody pretending to be someone they are not. A mash up between Mean Girls and Miss Congeniality:

You think I exaggerate? I think not!

This speech brought to you courtesy of the Department of Redundancy Department. https://t.co/FPRk9QlnNX

— streetwiseprof (@streetwiseprof) September 19, 2024

We have to hope that Bismarck (“There is a special providence for drunkards, fools, and the United States of America) and Adam Smith (“there is a great deal of ruin in a nation”) are both right.

Of course the other major news is the second assassination attempt on Trump. (Or as the regime and its media sockpuppets insist on saying the “apparent” assassination attempt). I have to admit that I was wrong about the effects of the first attempt: it did not stop the Democrats (and their media sockpuppets) from demonizing Trump. Indeed, the latest attempt has led them to ramp up their demonization, and to add to it by blaming the assassination attempt (sorry, sorry, “apparent” assassination attempt) on Trump’s and Vance’s rhetoric.

I can’t even.

The vampiric Mario Draghi dropped a big report on how to fix the European economy. It is one of the most ridiculous things I have ever read.

It starts out with a sober summary of how screwed the European economy is, but doesn’t even attempt to diagnose why it is screwed. By failing to do so, it offers prescriptions that will screw it even more.

Draghi is blunt in his assessment at the poor relative performance of the EU economy vis a vis the US over past decades–which is doubly damning because it’s not as if the US economy has grown like gangbusters. This is (correctly) linked to low productivity growth. Draghi attributes this poor performance to underinvestment and a lack of innovation.

But these are mere symptoms. Draghi utterly fails to answer the essential questions. Such as: Why is there underinvestment? Why is innovation so clearly lacking in the EU? What is the underlying disease that is causing these symptoms?

Could it be a heavy tax burden? Huge government indebtedness? Suffocating regulation? Extremely generous welfare and retirement benefits? Climate policies that substantially increase energy costs? If not these, then what?

These questions are not even asked, let alone answered.

It is insane to offer prescriptions–which Draghi does at scale–without first diagnosing the problem. But that’s exactly what he does.

And what prescriptions they are. In brief, a massive increase in investment on the order of $900 billion per year; since the private sector is unlikely (according to Draghi) to stump up this amount, extensive government funding of it; and in addition to government funding, government direction of the investment through industrial policy.

All of which involves more begged questions. The most important of which is if an increase in investment has the huge payoffs that Draghi asserts, why won’t (and why hasn’t) the private sector gladly make (and made) it? And: why must the government direct these investments? Why doesn’t privae capital flow to where it can earn the high returns that Draghi claims exist?

Draghi recognizes that industrial policy historically has largely failed. But again, there’s a failure to ask why in a serious way. Instead, in an echo of “communism has failed everywhere because real communism has never been tried,” he advocates doing industrial policy better. Real industrial policy would involve, for example, targeting sectors, not companies.

But again: why has industrial policy almost always and everywhere been targeted at companies? Draghi doesn’t ask, so of course doesn’t answer. Public choice forces obviously turn industrial policy into rent seeking opportunities which are exploited by companies (which are economic agents) rather than “sectors” (which are not).

Draghi makes the right noises about reducing the regulatory burden in the EU. But seriously–how will a plan that if implemented grant more powers to the centralized EU bureaucracy that is responsible for the existing crushing regulatory structure in Europe magically reduce the regulatory burden? Indeed, industrial policy is all about intervening to produce outcomes that differ from those that the market would produce, and such interventions are inherently coercive, regulatory, and bureaucratic in nature.

“We’ll solve the problem of too many rules by adding more rules” never works out well.

Another illustration of the cluelessness of this plan. According to Draghi, the ~$900 B in annual investment is necessary to achieve both competitiveness and climate objectives. Er, competitiveness and climate goals are inherently antithetical. Again, Draghi fails to consider whether the climate goals, and the policies adopted to achieve them, are one of the main drags on European investment, productivity, and growth.

In essence, Draghi is plumping for Europe to adopt the Chinese economic model. Leverage out the wazoo to spur growth through massive centrally directed increases in investment.

(In the UK this is being referred to as “supply side economics,” presumably because the government will intervene heavily on the supply side through state investment. That is an utter perversion and inversion of the term, which originally meant reducing government tax and regulatory burdens so as to encourage greater supply of capital and labor inputs by private individuals and firms).

Apparently Not So Super Mario hasn’t realized that China is now well and truly shtuped and its vaunted model is predictably (and as predicted by me and a few others) proving unsustainable. Not to mention that Europe definitely cannot benefit from factors that allowed this unsustainable model to persist for as long as it did (notably a vast pool of low wage labor). Indeed, Europe has the same demographic problems that are undermining China’s future prospects.

In sum, by failing even to consider the underlying drivers of Europe’s economic malaise and advocating that Europe implement a model that is becoming more discredited with each passing day to fix it, Mario Draghi is dooming Europe to accelerated decline, rather than offering a roadmap to recovery.

Perhaps luckily for Europe Draghi’s plan was declared DOA by Germany. No country has shown enthusiasm for it. But it’s not as if they are brimming with bright ideas–Germany in particular.

Meaning that if you are discouraged by American economic prospects–cheer up! Could be worse! We could be Europe.

As a follow up to yesterday’s post. Upon consideration you can characterize the differences between Tyler Cowen and I as a dispute over which margins The Blob would adjust if cut down to size.

Cowen believes that the important margin would be the amount of “customer service.” That is, fewer regulators means fewer people to help guide the regulated through the regulatory labyrinth.

I believe that there would be other margins. Fewer rules, or less complicated ones–that is, a less gnarly labyrinth. And crucially, fewer regulators to obstruct and harass (rather than facilitate) companies endeavoring to do wealth-enhancing things.

Along these lines, the recent book by Supreme Court Justice Neil Gorsuch–Over Ruled: The Human Toll of Too Much Law–comes down firmly on the obstruct/harass side of the argument:

In one such story, an agent from the U.S. Department of Agriculture informed a young magician, Marty Hahne, that he needed a license for using his rabbit in the act he had just performed at a local library. Hahne subsequently learned he also needed an evacuation plan for the animal in case of a hurricane or some other disaster. This requirement originated in a federal statute, the Animal Welfare Act, which regulates the treatment of dogs, cats, rabbits, and other animals for research, teaching, testing, and exhibition. Congressional lawmakers called on the USDA to apply the law to such venues as “carnivals, circuses, and zoos.” USDA regulators interpreted those exhibitions to include magic shows.

There are other stories.

Of course, argument by anecdote (or parable) has its problems, most notably how representative the anecdotes/parables are. But the kinds of things Gorsuch describes cast serious doubt on the “we’re from the government and here to help you” theory, and support the alternative view that the real story is “we’re from the government and here to make your life miserable.”

In which case, cutting down the number of those with power to make you miserable has to be a good thing, even if from time to time they actually do help you.

Tyler Cowen is high variance. He can be very insightful, or annoying AF. His recent piece in Bloomberg on downsizing the Federal bureaucracy is in the AF category. (In the interest of balance I will cite to an insightful piece below).

The impetus for the article is Elon Musk’s statement that he would be willing to serve on a Department of Government Efficiency that would be tasked with cutting down the bureaucracy’s head count. Cowen refers to the fact that at Twitter Musk cut head count by 80 percent with no loss in output (and thus causing a 5-fold increase in productivity) and says it can’t be done with the bureaucracy.

Why? Sayeth Cowen:

Businesses need to make plans, and they frequently consult with regulatory agencies as to what might be permissible. The Food and Drug Administration needs to approve new drug offerings. The Federal Aviation Administration needs to approve new airline routes. The Federal Communications Commission needs to approve new versions of mobile phones. The Federal Trade Commission and Department of Justice need to give green lights for significant mergers. The Federal Deposit Insurance Corp. needs to approve plans for winding down failed banks. And so on.

There are so many problems with this argument. Where to begin?

Well, for one thing Musk’s Twitter experience demonstrates that even private business can have many zero marginal product (and indeed, zero average product) workers. But somehow the Federal bureaucracy doesn’t? It couldn’t be made more efficient by cutting the dead wood? Of which there is obviously a lot? Given that Cowen often writes about zero marginal product workers, it is rather remarkable that he implicitly argues that government workers are overwhelmingly positive marginal/average producers, especially given the extremely low power incentives and lack of accountability for poor performance that they are subject to.

In other words, identify the people who are actually performing the “customer service” to which Cowen refers, and get rid of the rest. Of whom there are likely a lot.

Moreover, these “customer service” functions represent only a fraction of what bureaucrats do. A good deal of it is administrative overhead which could be reduced if head counts and budgets are cut.

Another big part of it is writing rules and interpreting rules that were promulgated previously.

The number of pages of new rules added to the Federal Register is a common metric of increased regulatory burden. It is these rules (and their implementation, which I discuss below) that generate the deadweight costs of regulation. Fewer bureaucrats, fewer rules, greater economic efficiency. Without hitting “customer service,” and indeed, reducing the need/demand for customer service, since most of what Cowen describes as the essential function of the bureaucracy is helping business navigate a labyrinth of rules. Less bureaucrats, fewer rules, simpler labyrinth, less need for customer service (and the bodies necessary to perform it).

I would also argue that this customer service is chimerical, and is in fact a form of rent extraction that reduces wealth. That is, in supposedly “helping” business, bureaucrats’ produce bads, not goods.

I view regulation through the lends of property rights economics. Regulation is essentially an incomplete contract. Congress creates a really incomplete contract, bureaucrats craft regulations that make them somewhat more complete, but still wildly incomplete.

The allocation of residual control rights (rights not specified in the incomplete contract, or specified but non-verifiable) is vital in incomplete contracts. It is this allocation that affects incentives by affecting bargaining power. In regulation, it is the regulators who have the residual control rights. The “customer service” that Cowen describes involves negotiations with regulators who have residual control rights. They can say no to what you are asking for, or can add conditions, etc., etc., etc.

Property rights economics states that residual control rights (which in the literature basically involves control rights of access to assets) affect investment incentives because those with the rights have bargaining power. It is efficient to put bargaining power (and hence residual control rights) in the hands of those who can make non-contractible, value enhancing investments.

This is one reason why regulation, when viewed as an incomplete contract with a particular allocation of residual rights, is so likely to be highly inefficient: businesses, not government bureaucrats, are the ones who can make non-contractible, value enhancing investments but they don’t have the bargaining power. This is ass-backwards.

How do regulators use their bargaining power? To extract rents, which is what anyone with bargaining power does. Rents that do not incentivize wealth producing investments. They can’t receive these rents in monetary form (you can’t even take a regulator to lunch and pay for it). So they collect them in the form of justifying their existence, getting bigger budgets and staffs, empire building, implementing ideological objectives, ego and envy (feeling powerful by sticking it to those who make a lot more money), and creating obstacles so that they can sell themselves to the private sector as expert in working around.

(Again note the synergy between rule writing and bargaining with the regulated over implementation of the rules).

My experience with CFTC regulation, and in particular my short-lived experience as a consultant to the CFTC Inspector General, gives me an understanding of how this process works. One of the things I’ve written about over decades is the thicket of interpretations, no action letters, advisories, etc., that grew up in the aftermath of the passage of each major revision to the Commodity Exchange Act. The project I was working on with the IG was to document how extensive this practice has been, and how much the CFTC has relied on it.

The process by which this thicket is created is exactly the process that Cowen describes. “Consulting with regulatory agencies to see what might be permissible.” In essence, negotiation between the regulators and the regulated, with the bargaining power–and the ability to extract rents–resting in the hands of the regulators. (I do understand that sometimes information asymmetries give bargaining power to the regulated. My experience decades ago looking into the 1988 S&L bailouts showed me how this can work).

So, what would happen if the number of regulatory personnel was reduced? Cowen thinks it would reduce the output of successful negotiations, and that businesses would be stymied in the absence of such.

But is that really the case? For one thing, the zero MP/AP issue discussed above means that a reduced head count does not imply a reduction in output (the number of successful negotiations). But even overlooking that, if one views a major effect of these negotiations as rent extraction, reallocating bargaining power away from bureaucrats can improve efficiency.

Regulators with less capacity to negotiate have less bargaining power: the ability to string things along (which is easier when you have more bandwidth) enhances that power. Furthermore, more regulators typically means more fiefdoms within the bureaucracy that have a place at the bargaining table, hence more negotiations, more complicated negotiations (since more bureaucrats have effective veto power), and greater power to extract rents. The potential for multiple marginalization problems grows. (Think of when every local lord could extract tolls from those traveling a road that ran across their lands).

The real difference between Cowen’s view and mine seems to be that he believes that increasing the number of bureaucrats increases the output of wealth enhancing negotiations, whereas i believe that it likely increases the amount of wealth reducing rent extraction that occurs due to bureaucrats’ bargaining power.

A customer service model vs. an extortion racket model, if you will. Help with navigating through complex and confusing regulations (complex and confusing due to their incompleteness) vs. using that complexity and confusion to hold up wealth producers.

Starkly different views with starkly different implications. Cowen may not be all wrong, but his rosy “I’m from the government and here to help you” view clashes with the economics of bureaucracy, and certainly my personal experience with it.

So I say hack away. That’s the only way to find out which parts of the bureaucracy enhance wealth and which don’t. Hire back the ones that do and force those that don’t find an honest living.

Which is pretty much what Musk did at Twitter.

As promised, in the interest of balance, I recommend Cowen’s takedown of the insane idea to tax unrealized capital gains (and the companion piece by his co-blogger Alex Tabarrok).

So the presidential race is set. God help us.

The “Democratic” Party, which never ceases to tell us its dedication to “saving ‘our’ democracy [sic]” selected the voteless wonder, Kamala Harris after unceremoniously defenestrating Joe Biden. Donald Trump steamrolled everyone in the Republican primaries, and literally dodged a bullet, to run against her. So November, here we come.

Harris has been, shall we say, coy in her policy proposals. Not only voteless, she’s been interview-less since she was anointed. She has given one economic policy speech which even media partisans (but I repeat myself) found pathetic.

On the right, the speech gave rise to accusations that Harris is a socialist, or indeed a Marxist/communist. I disagree.

Her father, from whom she is obviously estranged, is indeed a hardcore Marxist. But one who has engaged in serious thought and scholarship–as much as I disagree with it. Harris, on the other had, has a lazy, California left perspective devoid of any evidence of serious thought beyond “what can I say to advance my political ambitions and get money from leftist donors.”

The element of her policy speech that triggered the cries of “commie” was a lazy, hazy proposal to implement a federal ban on “price gouging” for groceries. Though to illustrate how thoughtless her embrace of this proposal is, she didn’t say “price gouging”–she said “price gauging,” whatever that is.

Critics called this a price control policy. If only. It’s nothing as comprehensive as the 1971 Nixon Wage and Price Control disaster. It’s more along the lines of Gerald Ford’s WIN–Whip Inflation Now–buttons, mere rhetorical gas.

The proposal is clearly the result of a poll and focus group-driven process. People are pissed about high prices. The prices they are most pissed about are for food and groceries. But it is absurd to think of setting the price of the over 30,000 items that most supermarkets carry, and many people are sympathetic to the idea that corporations cause high prices, so Harris proposes to delegate to some part of the federal blob–probably the FTC–to go after stores that price gouge, although that term is not defined.

How this would work in practice, given the fact that there are over 45,000 supermarkets, again each carrying over 30,000 items, is hard to figure out. Any attempt by the FTC to enforce would be completely arbitrary. The antithesis of a rule of law, which for all its economic defects, a legislated system of price controls would have in its favor.

But this policy proposal is purely political grandstanding and I am sure Harris has no plans actually to follow through on it. She has to pretend to do something about inflation. And she expects you to pretend along with her.

The most disturbing part of the proposal is the theory of inflation underlying it. “Corporate greed.” Which apparently follows some sort of Markov regime switching process, with corporations being ungreedy during some periods, like the Great Moderation, and then randomly switching to greed mode in, oh about January, 2021. Such a mentality bodes ill for coherent anti-inflation policies.

Other elements of Harris’ speech were similarly poll-driven, counterproductive pablum. Housing prices are too damn high! So give people money to buy houses! Which, of course will drive up housing prices, meaning that the main beneficiaries will not be the target (“first time homebuyers”) but current homeowners. Harris did say some things about reducing restrictions that inhibit supply, but these are local matters that the federal government can do little about.

The housing fetish is also disturbing because it represents a reversion to the kinds of policies that brought on the Great Financial Crisis.

Relatedly, she criticized the purchases of large numbers of homes by Black Rock and the like. This is also a popular theme, on both left and alt-right. But as I wrote some years ago, this criticism fails to answer the fundamental question of why this phenomenon is happening. I continue to maintain that it is almost certainly the result of post-GFC changes to the banking and mortgage credit markets that were designed to prevent a recurrence of the proliferation of mortgage credit that was at the epicenter of the GFC, policies that raised financing costs to individuals more than to the Black Rocks of the world. Meaning that to counter this trend it would be necessary to unwind those changes and party like it’s 2005.

Harris has also apparently embraced some of the worst Biden/Democrat policy proposals, notably raising the capital gains tax and imposing taxes on unrealized gains for some wealthy individuals. Capital taxes are horribly inefficient, and actually fall predominately on labor: higher capital taxes, less capital, less productive labor, lower wages.

The unrealized gains tax is truly demented, a nightmare to implement, a recipe for gaming (with highly distortive effects on capital allocation), a godsend to tax accountants, and likely unconstitutional. Other than that, it’s great.

Given her track record it takes little imagination to understand that if elected hers would a policy of economic Californication. What a disaster that would be.

Not that Donald Trump gladdens this economist’s heart. For the most part, he is as economically clueless as Harris. The main difference, and this is not a good thing, is that he holds his cracked views with conviction.

On taxes you could say he is OK, except that these views are completely at odds with his insouciance on spending. Trump got the spending ball rolling that triggered the inflation that took off when Biden took office: Biden supersized what Trump had started. He has shown no signs of getting spending under control, and on entitlements in particular, has been a stalwart defender of the (unsustainable) status quo.

Trump’s views on tariffs–in particular his stupid belief that the incidence of a tax falls completely on the party upon whom it is levied–are embarrassing.

Trump’s only advantage over Harris–and it is not an immaterial one–is that he is averse to regulation and wants to roll back the federal bureaucracy (though good luck with that) whereas Cali Kamala loves the blob. Trump’s regulatory policies were pretty good (as Casey Mulligan has documented): Harris’ would be a disaster.

For me, that’s the tiebreaker in this battle of economic nitwits. Yay.

All meaning that the next 70 days will be devoid of any coherent debate on economic matters. Instead, the campaign will be the political equivalent of non-stop “yo mama” schoolyard rhetoric. Which will actually be more entertaining than watching these two talk economics, although each would probably be equally depressing.

One subject I’ve taught about in my commodity trading classes for over a decade is asset ownership by commodity trading firms. As my white paper for Trafigura shows, there is considerable diversity among commodity traders’ asset ownership. Some are “asset heavy” while others are “asset light.”

Historically the big oil traders–Vitol, Trafigura, Gunvor, Mercuria–have been in the asset light category. (Glencore transitioned to an asset heavy mining entity with a supersized trading arm before the white paper was published–more on that below). Recently, however, they have gone on something of an asset acquisition binge, buying refineries in particular, as this recent Bloomberg piece describes. Which raises the question: why?

The standard consultant story is that assets have optionality. This is a superficial and incomplete answer. First, the fact that an asset has optionality says nothing about who is best positioned to own the asset and exercise the options. In the case of a refinery, is it better for an integrated oil company to own it? An independent refiner? A commodity trader? Any of these can exercise the options. Which gets the most option value?

Second, it is often possible to acquire the right to exercise optionality via contract rather than ownership. A ship (tanker or bulk carrier) is the best example of this. Ships have extensive optionality in terms of route, timing, and sometimes cargo. Time chartering a ship gives the charterer the ability to tell it where to go when and carrying what: ownership isn’t necessary to exercise these options. Off-take agreements from a mine or well also confer rights to exercise options (e.g., whom to sell the output to) without requiring the purchase of the mine or well.

Transactions cost economics is one analytical tool to apply to these issues. That’s what I used to analyze contracting and ownership patterns in the ocean shipping industry oh-so-many years ago. The Trafigura white paper applies this to commodity trader ownership generally.

With respect to commodity traders as optimal owners of assets with optionality I’ve been playing around with a formal model, the intuition for which is fairly straightforward. Physical commodity traders operate in bilateral markets rather than centralized ones. Prices and values are not transparent. Traders are essentially price entrepreneurs who search for and discover cheap supplies and high value buyers. Their intimate market knowledge of profitable trade opportunities may allow them to exercise real options, like the real options inherent in a refinery (especially regarding choice of crude input and the product slate), more efficiently than someone with poorer information.

But that still doesn’t fully answer the ownership question. The trader could obtain the optionality through a tolling agreement, for example. (These are not unknown in the oil business. I recall that when JPMorgan was in the commodities business, it had tolling agreements with refiners).

Further, why is it more efficient for a trader to buy the refiner, rather than the refiner to buy or build trading expertise? BP and Shell in particular are renowned for their trading expertise, and even a laggard–Exxon–has moved into trading.

Since this is also a relatively new development, one must also ask “why now?” (And to its credit, the Bloomberg article does just that). Has traders’ comparative information advantage increased recently? That’s a hard proposition to test, but I am skeptical.

As Bloomberg points out, this buying spree comes in the wake of boom years in commodity trading, and the big traders are awash in cash. (As the billions in bonus payments to traders shows). This is most likely the proximate cause of the acquisitions.

What this says about the efficiency/optimality of the acquisitions is unclear. I can tell two stories with opposite conclusions.

The first story is that this is a classic free cash flow problem. Companies with cash burning a hole in their pockets are prone to blowing it on unprofitable investments, including acquisitions. This was a driver behind the leveraged buyout boom in the 80s: leveraging up gives cash to stockholders and precommits the company to use cash flows to service debt rather than fritter it away in bad investments. In the oil industry, this was T. Boone Pickens’ game. (Academic research has shown that in the 80s E&P companies’ well drilling was a negative NPV activity).

If this is the driver behind commodity trader refinery acquisitions, it would imply that these purchases are inefficient. (I note that some earlier trader ventures into refining, like Gunvor’s, turned out badly).

The other story is that trader firm ownership structures, adopted for value maximizing reasons, constrained their ability to invest in physical assets like refineries. The major independent oil traders are private firms. One of the downsides of private ownership is that a private firm cannot tap public equity markets to fund acquisition of durable assets. Relatedly, it may constrain the ability to secure long term debt to finance long term assets. As a consequence, long term assets (like refineries) must be funded with retained earnings. In this case, even if traders can exercise real options more efficiently than an oil major or independent refiner, the higher capital costs inherent in their ownership structures makes it uneconomical for them to acquire refineries.

Arguably the main reason for Glencore’s transition to a publicly traded firm was that its decision to go asset heavy into mining was incompatible with private ownership. It needed to rely on the capital markets to fund this new strategy.

Against this cost of private ownership (limited diversification is another) is the benefit: a better alignment of the interests of managers and owners, because the managers are the owners and the owners are the managers. One reason this structure has clearly had survival value in commodity trading is that many of the other risks–especially commodity price risks–can be transferred via derivatives markets rather than the equity markets.

The cash flow gusher of the last few years loosens the constraint imposed by ownership structure. Thus, in this story, traders can have their cake and eat it too. They can remain private, and reap the benefits of better incentives, but can invest in fixed assets that were previously unaffordable. In this story, the positive cash flow and balance sheet shock enhances efficiency rather than reduces it (as in the free cash flow story).

Which story is correct? I have no strong opinion, but I will say that the governance benefits of private ownership do mitigate the free cash flow problem. So I guess I would lean towards “efficient.”

One must also recognize that it takes two to tango. These transactions have a seller too, of course. Meaning that “why are traders buying?” is not the only question: “why are oil companies selling?” is also important.

About a decade ago traders acquired downstream marketing operations, especially in developing markets like Africa, from oil companies. In that case, the development of liquid markets for refined products reduced the transactions cost benefits of ownership by the oil companies: the development of these markets mitigated the bilateral monopoly problems that occurred in relatively small downstream markets served by local refineries. That reduced the benefits of ownership for the oil companies, creating gains from trade by selling to the traders.

Perhaps something similar is going on today in refining, especially for relatively “simple” (“non-complex“) refineries in Europe and Asia. When I have a chance, I will look into the complexity index for the refineries the traders have acquired. With the entry of substantial high-complexity refinery capacity in the Middle East and elsewhere, I would not be surprised if a major driver behind these transactions is that refiners want to shed their less complex operations because they have a comparative advantage in operating bigger, more expensive, and more complex refineries.

Which, ironically, have more optionality: complexity translates directly into optionality.

In sum, the trader refinery acquisition boomlet is an interesting development. It raises intriguing economic questions that I have just sketched out here. Could be interesting fodder for an aspiring researcher–like my Université de Genève students (hint hint, nudge nudge).