Category Archives: Economics

Non-Mutual

“Non Mutual” was the accusation when The Prisoner was pilloried for not having enough community spirit. Mutual funds are being accused of being non-mutual by Ross Miller in his paper that decomposes an actively managed mutual fund into an active market neutral part and a passive part that looks just like an index. What he finds is that expense ratios on the active part look like about 7% if you consider most funds only have about 10% of their portfolio actively managed and that means the 1% vs. the .3% annual fees for managed vs. index fund has to be attributed just to the managed portion. This is great for hedge funds that if their fund is going up 10% a year only charge 2% fees + 20% of the 10% profits or 4% altogether. That’s quite a bit less than the comparable active mutual fund.

This is make quite a stir in financial circles.

Ascendant Dragon

China is in the news these days for buying up Unocal, Maytag and IBM PC. If you check out the latest CIA world factbook you can see that China’s purchasing power is more than half of US with the second largest economy. If you project out the growth rates (9.1% and 4.4%) you can see China catching up to the US in 2015 when we both have $19 trillion economies (maybe $23 trillion adding in inflation).

Year China($B) US($B)
2004 7262  11750
2005 7923  12267
2006 8644  12807
2007 9430  13370
2008 10289 13959
2009 11225 14573
2010 12246 15214
2011 13361 15883
2012 14577 16582
2013 15903 17312
2014 17350 18074
2015 18929 18869

China will continue to grow its economy faster than US because its per capita income is still quite low ($5600 vs $40000 in 2004 est) and will still be less than 1/3 of US per capita income in 2015.

My favorite implication is for space policy. A China committed to space nostalgia (e.g., Moon landings) might get the US to devote thought to rationalizing commercial space policy. Mike Griffin started in this direction.

Adopting Landing Slot Auctions

There is a good, but incomplete proposal for landing slot auctions at Chicago O’Hare at AW&ST, June 6, p.31. (Subscription required)

It includes the following:

  • Rolling auctions annually for 5 year rights
  • Forced reauction so that every airline must participate
  • Peak time pricing
  • Same price regardless of plane size

One thing that is not decided is “who should get the increased revenues that [the Justice Dept.’s] regime would likely generate or what should be done with them.”

My proposal is that the money go to the current rights holder for existing rights and the airport for new rights. That includes the auction winners. I.e., the rights would be resold and the former owner would get the proceeds. This gives the airport the right incentive to make improvements that allow more landings. It also turns the rights into capital assets. We might see better stewardship of them.

We might also see less screaming from existing rights holders because if they get the money, they are no worse off than under the current system. (Unless they were going to go bankrupt and stiff their creditors.)

Don’t Quota Me

Chinese apparel have been slapped with a quota. Quotas are worse than tariffs, but first here’s a little background.

The rash of China bashing is well-timed to keep the Chinese buying dollars according to Yuan Answers? (WSJ, 6/10, subscription required). A triangular trade where US sends dollars and st0ck and title deeds overseas to the rich savers of the world and imports lots of stuff in one way shipping containers from China is not a bad thing. In fact, it can be sustained indefinitely with the US capital st0ck continuing to grow. It is a testament to how our laws are not quite as bad as everyone else’s.

In economics we talk about how tariffs and quotas both imply a “deadweight social loss”. When prices are artificially raised via a tariff, the customer prices rise and the supplier prices fall. The quantity sold also falls. It is this last part that is the first component of deadweight loss. By reducing the quantity sold, profitable trades without the tariff become unprofitable because they are not profitable enough to beat the “spread” between the supplier and customer prices induced by the tariff. All this is Economics 101.

A quota has an additional element beyond this kind of loss. In a quota, the supply price rises too. That means that any supplier who can produce at the new higher price will try to fulfill their quota. Thus suppliers who would have cut back production under a tariff will continue to produce to fulfill their quota. Everyone is cut back pro-rata (or according to some formula, e.g., 7.5% more than last year even if growth would otherwise be 500%) and not according to who is the most efficient. Coase might say that quota shares could be traded, but this entails higher transactions expense than the decentralized trade that occurs with a competitive market price.

The additional inefficiency is happily born by international suppliers who receive a major benefit when a quota is imposed–higher prices. So the quota is a collusive bargain between the Government, the domestic suppliers and the foreign suppliers to raise prices on the consumers at the cost to the economy of two kinds of deadweight social loss. Diffuse harm, concentrated benefit. Can one file a class action law suit against an industry association that lobbies for selfish policy?

Don’t Quota Me

Chinese apparel have been slapped with a quota. Quotas are worse than tariffs, but first here’s a little background.

The rash of China bashing is well-timed to keep the Chinese buying dollars according to Yuan Answers? (WSJ, 6/10, subscription required). A triangular trade where US sends dollars and st0ck and title deeds overseas to the rich savers of the world and imports lots of stuff in one way shipping containers from China is not a bad thing. In fact, it can be sustained indefinitely with the US capital st0ck continuing to grow. It is a testament to how our laws are not quite as bad as everyone else’s.

In economics we talk about how tariffs and quotas both imply a “deadweight social loss”. When prices are artificially raised via a tariff, the customer prices rise and the supplier prices fall. The quantity sold also falls. It is this last part that is the first component of deadweight loss. By reducing the quantity sold, profitable trades without the tariff become unprofitable because they are not profitable enough to beat the “spread” between the supplier and customer prices induced by the tariff. All this is Economics 101.

A quota has an additional element beyond this kind of loss. In a quota, the supply price rises too. That means that any supplier who can produce at the new higher price will try to fulfill their quota. Thus suppliers who would have cut back production under a tariff will continue to produce to fulfill their quota. Everyone is cut back pro-rata (or according to some formula, e.g., 7.5% more than last year even if growth would otherwise be 500%) and not according to who is the most efficient. Coase might say that quota shares could be traded, but this entails higher transactions expense than the decentralized trade that occurs with a competitive market price.

The additional inefficiency is happily born by international suppliers who receive a major benefit when a quota is imposed–higher prices. So the quota is a collusive bargain between the Government, the domestic suppliers and the foreign suppliers to raise prices on the consumers at the cost to the economy of two kinds of deadweight social loss. Diffuse harm, concentrated benefit. Can one file a class action law suit against an industry association that lobbies for selfish policy?

Don’t Quota Me

Chinese apparel have been slapped with a quota. Quotas are worse than tariffs, but first here’s a little background.

The rash of China bashing is well-timed to keep the Chinese buying dollars according to Yuan Answers? (WSJ, 6/10, subscription required). A triangular trade where US sends dollars and st0ck and title deeds overseas to the rich savers of the world and imports lots of stuff in one way shipping containers from China is not a bad thing. In fact, it can be sustained indefinitely with the US capital st0ck continuing to grow. It is a testament to how our laws are not quite as bad as everyone else’s.

In economics we talk about how tariffs and quotas both imply a “deadweight social loss”. When prices are artificially raised via a tariff, the customer prices rise and the supplier prices fall. The quantity sold also falls. It is this last part that is the first component of deadweight loss. By reducing the quantity sold, profitable trades without the tariff become unprofitable because they are not profitable enough to beat the “spread” between the supplier and customer prices induced by the tariff. All this is Economics 101.

A quota has an additional element beyond this kind of loss. In a quota, the supply price rises too. That means that any supplier who can produce at the new higher price will try to fulfill their quota. Thus suppliers who would have cut back production under a tariff will continue to produce to fulfill their quota. Everyone is cut back pro-rata (or according to some formula, e.g., 7.5% more than last year even if growth would otherwise be 500%) and not according to who is the most efficient. Coase might say that quota shares could be traded, but this entails higher transactions expense than the decentralized trade that occurs with a competitive market price.

The additional inefficiency is happily born by international suppliers who receive a major benefit when a quota is imposed–higher prices. So the quota is a collusive bargain between the Government, the domestic suppliers and the foreign suppliers to raise prices on the consumers at the cost to the economy of two kinds of deadweight social loss. Diffuse harm, concentrated benefit. Can one file a class action law suit against an industry association that lobbies for selfish policy?

Auction H-1B Visas

The limit for H-1B visas is 65,000 this year and next down from 195,000 in 2001-2003 according to US Citizenship and Immigration Services. Since foreign technical service personnel are literally worth their weight in gold, this is detrimental to the US economy. The London fix on gold (according to WSJ–subscription required) was $418.25 per troy ounce Friday. Each troy ounce is 31.1 grams or so. The average weight of a US adult is 177.3 lbs according to CDC. That much gold can be bought for $1.08 million. A technical services worker costs about $47,000/year according to the Federal Reserve of St. Louis. If the relative prices stay the same, 23 years of work will net $1.08 million. Technical services are likely to become more valuable compared to gold over time.

In the New York Times today, John Tierney talks about Julian Simon’s research showing that war has become less lethal over the years as a leading cause of death and the trend has continued. Simon was also a big believer in the value of human capital as am I.

His argument in The Ultimate Resource 2 showed that while more births cost more at first (not counting the joy of parenthood), they resulted in more economic growth when they grew up. There is no delay associated with H-1B visas. The import of human capital will immediately speed US growth. These people were already raised overseas and represent a pure boon to the US economy.

There are individual losers, of course. US technical service workers earn less if people are imported from overseas. But protectionism always results in lower aggregate GDP than free trade. There ought to be a way to compensate US technical service workers for the wage loss they will suffer while still allowing the increase in foreign workers and have a win-win or at least a win/small loss.

My proposal is to have US citizens classify themselves into categories according to proof of training. Then the citizens can get some cash from the proceeds of an H-1 B visa auction if people are being imported in their classification. I also propose that the application process be a short form and that the only reason to reject a form would be the auction price and falsification. That is, any reason to immigrate would be fine as long as the auction price was right. The penalty for falsification would only be to make sure the auction proceeds went to the right people.

I would prefer that they just open the floodgates to a million or more immigrants per year with no evidence of need required. Just set the price so that the benefit of the marginal immigrant exceeds the cost. If Simon did the analysis, we would probably end up subsidizing immigration instead of discouraging it. We should continue to refine our tax code, regulations and improve our environment so the US is the most excellent place to live.

Losing Reserve

I am reading The Ultimate Resource 2 by Julian L. Simon (Princeton, 1996). He makes the point that commodities prices tend to decline over the course of the last couple of hundred years compared to the cost of human labor. The average US wage in 1999 dollars is growing at about 2.1% per year geometric mean from 1900-1999. The real interest rate has been about 1% (in the UK anyway).

This means that if technology were constant and reserves were constant, the real price of a commodity would rise 1%. Otherwise, it would make sense to mine as much oil as possible and put the money in the bank, or leave the oil in the ground and wait for the price to rise.

In fact from 1860-2000 the price of kerosene (see figure 5) has dropped about a factor of 6. If you look at the service kerosene was providing (lighting), it has dropped a factor of 40 from