Category Archives: Economics

Business, Economics, Political Commentary

Just For The Record

18 Comments

I made a crack in comments the other day that the market was tanking in anticipation of an Obama election. Some may have taken it seriously, but it was a joke.

I do think that markets react to potential election outcomes in general, but in this case, I suspect that there are much deeper issues going on, and given that John McCain has shown himself to be (as he has confessed in the past) as clueless on the economy and economics as Barack Obama, there’s probably not much street preference one way or the other. The folks in the pits are probably not even thinking about the election at this point.

While I’m not a conservative, I sure wish that there was at least one in the race, in terms of the economy.

Economics, Media Criticism, Political Commentary

About Time

4 Comments

UCLA economists have calculated how long FDR extended the Great Depression. Seven years.

Roosevelt’s role in lifting the nation out of the Great Depression has been so revered that Time magazine readers cited it in 1999 when naming him the 20th century’s second-most influential figure.

“This is exciting and valuable research,” said Robert E. Lucas Jr., the 1995 Nobel Laureate in economics, and the John Dewey Distinguished Service Professor of Economics at the University of Chicago. “The prevention and cure of depressions is a central mission of macroeconomics, and if we can’t understand what happened in the 1930s, how can we be sure it won’t happen again?”

…”The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes,” Cole said. “Ironically, our work shows that the recovery would have been very rapid had the government not intervened.”

Remember this the next time someone talks about a new “New Deal.” The myth of Roosevelt is akin with the current idiotic nonsense being promulgated by Democrats that the financial crisis was a result of “deregulation.”

[Update about 9 AM EDT]

Sebastian Mallaby has a nice corrective to the “deregulation” nonsense:

The key financiers in this game were not the mortgage lenders, the ratings agencies or the investment banks that created those now infamous mortgage securities. In different ways, these players were all peddling financial snake oil, but as Columbia University’s Charles Calomiris observes, there will always be snake-oil salesmen. Rather, the key financiers were the ones who bought the toxic mortgage products. If they hadn’t been willing to buy snake oil, nobody would have been peddling it.

Who were the purchasers? They were by no means unregulated. U.S. investment banks, regulated by the Securities and Exchange Commission, bought piles of toxic waste. U.S. commercial banks, regulated by several agencies, including the Fed, also devoured large quantities. European banks, which faced a different and supposedly more up-to-date supervisory scheme, turn out to have been just as rash. By contrast, lightly regulated hedge funds resisted buying toxic waste for the most part — though they are now vulnerable to the broader credit crunch because they operate with borrowed money.

If that doesn’t convince you that deregulation is the wrong scapegoat, consider this: The appetite for toxic mortgages was fueled by Fannie Mae and Freddie Mac, the super-regulated housing finance companies. Calomiris calculates that Fannie and Freddie bought more than a third of the $3 trillion in junk mortgages created during the bubble and that they did so because heavy government oversight obliged them to push money toward marginal home purchasers. There’s a vigorous argument about whether Calomiris’s number is too high. But everyone concedes that Fannie and Freddie poured fuel on the fire to the tune of hundreds of billions of dollars.

As he points out, it’s important to understand the actual cause, because if we misdiagnose the disease, we’re likely to come up with nostrums that make it worse, just as FDR’s “brain trust” did. And that’s exactly the path we’re on with Obama. McCain may make similar mistakes, but with him, at least it’s not a sure thing.

[Mid-morning update]

Glenn Reynolds has some thoughts on the upcoming speculative bubble in regulation. I agree that we need to design the system to be much more fault tolerant.

Economics, Space

Space Power Beaming Concept Proof

1 Comment

On p.38 of this presentation, there’s a breakdown of the contributions to the cost of Space Solar Power (SSP). Not surprisingly, the installation is more than half of the cost and another 20% is manufacturing cost of the solar array.

If we extract out the solar generation from SSP and instead of an antenna, have a passive microwave reflector, we can potentially get the cost of the reflector down to less than $1 billion. Let’s say it’s a flat spinning <8 gram per square meter perforated mylar single-mission heavy payload to GEO straw man. If we spend $1 billion on a ground-based microwave antenna and another $1 billion on a rectenna, we have a 1 GW system that can function as transmission for a 40-year straight-line cost of 1.5 cents/kwh which is about 30% of the cost of SSP per watt with the viable scale of capital needed much smaller. (If you need a VC return, the price must be closer to ten cents per kwh.) The reflector would not be at capacity so additional transmission can be achieved for 2/3 of that. 1 GW beaming for $3 billion would be a pretty satisfying proof of concept. There's plenty of power on the ground to beam to space that's cheap so the proof of concept can be economically viable at this scale. At Hawaii's buy price of more than $0.30/kwh and New Mexico's sell price of less than $0.10/kwh it would pay for itself pretty fast. Space power beaming would therefore be shown to be economically viable without the space generation and thus be valuable as a proof of concept for transmission alone.

Business, Economics, Political Commentary

What Went Wrong

8 Comments

Tom Sowell explains, as only he can:

Fannie Mae and Freddie Mac do not deserve to be bailed out, but neither do workers, families and businesses deserve to be put through the economic wringer by a collapse of credit markets, such as occurred during the Great Depression of the 1930s.

Neither do the voters deserve to be deceived on the eve of an election by the idea this is a failure of free markets that should be replaced by political micro-managing.

Nothing about this makes me more angry than the continued lies by the collectivists that this was a failure of the free market.

Business, Economics, Political Commentary

The “Obama Effect”

7 Comments

I think that this isn’t going to be an isolated case:

My husband’s business is a canary in the coalmine. When tax policies are favorable to business, he hires more guys, buys more goods, etc. When he is taxed more heavily, he fires people, doesn’t buy anything new, etc. Well, duh. So, at the mere thought of a President Obama, he has paid off his debt, canceled new spending, and jotted a list of whom to “let go.”

The first of the guys will get the news tomorrow. And these are not minimum-wage earners. These are “rich” guys, making between $200,000 and $250,000 a year.

My husband will make sure that we’re okay, money-wise, but he won’t give himself a paycheck that will just be sent to Washington. He’ll make sure that he’s not in “rich guy” tax territory. So, he will not spend his money, not show a profit, and scale his workforce down to the bare minimum.

Multiply this scenario across the country and you’ll see the Obama effect: unemployment, recession, etc. No business owner will vote for this man, but many a “middle-class worker” will vote himself out of a job. Sad the Republican can’t articulate this.

Unfortunately, the Republicans nominated the wrong candidate for that. Maybe the vice-presidential nominee can.

Business, Economics, Media Criticism, Political Commentary

Here’s The Kind Of Ad Campaign

2 Comments

…that John McCain should have kicked off on Friday by properly responding to Senator Obama’s lies and demagoguery on the financial crisis. It’s exactly what Fred Thompson would have done, but I fear that out of a misplaced sense of collegiality, McCain won’t do it.

The problem is, that in his heart, McCain doesn’t really believe in free markets, any more than his opponents do. He has an emotional stake in “honor” and “service” over profit, and it makes it tough for him (as Glenn said) to go for the jugular against the corrupt rent seekers and collectivists in Washington, of both parties. Instead, he placidly and pallidly aims for the capillary.

He really needs to read this. As he notes, the problem isn’t capitalism. It’s politicians.

Business, Economics, Political Commentary, Space

More Cost-Plus Contracting Thoughts

19 Comments

In comments at the previous post on this subject, Karl Hallowell comments:

It’s not government’s job to suck up risk for a contractor. As I see it, if contractors really were giving their best cost estimates, then they’re regularly overestimate prices not consistently underestimate them.

The other commenters who seem to think that designing a brand new UAV, or the first successful hit to kill missile (SRHIT/ERINT/PAC-3, not the dead end HOE), or an autonomous helicopter (all things I’ve been heavily involved with) is something that can and should be done on a fixed-price contract (after all, one bridge is like any other, right?) . . . it can maybe be done, but only if you’re willing to let system development take a lot longer.

I don’t know who posted this, but it’s unrealistic.

Let’s give an example of how the real world works in salvaging ships on the high seas:

Salvage work has long been viewed as a form of legal piracy. The insurers of a disabled ship with valuable cargo will offer from 10 to 70 percent of the value of the ship and its cargo to anyone who can save it. If the salvage effort fails, they don’t pay a dime. It’s a risky business: As ships have gotten bigger and cargo more valuable, the expertise and resources required to mount a salvage effort have steadily increased. When a job went bad in 2004, Titan ended up with little more than the ship’s bell as a souvenir. Around the company’s headquarters in Fort Lauderdale, Florida, it’s known as the $11.6 million bell.

Exactly the scenario where it is claimed that fixed price contracts can’t work. Huge risk, lots of uncertainty, time pressure. A similar example is oil well firefighters. As I see it, there’s almost no circumstances when government needs to help the contractor with risk. The money, paid when the job is done right, does that. If it’s not enough, then nobody takes the contract. Simple as that.

Yes. The reason that cost-plus contracts are preferred by government is that government, by its nature, has an aversion to profit. It’s the same sort of economic ignorance that drives things like idiotic “anti-gouging” laws, and it results in the same false economy for the citizens and taxpayers.

The problem isn’t that companies are unwilling to bid fixed price on high-tech ventures. The problem is that, in order to do so, they have to build enough profit into the bid to make it worth the risk. But the government views any profit over the standard one in cost-plus contracts (generally less than ten percent) as “obscene,” and to allow a company to make more profit than that from a taxpayer-funded project is a “ripoff.” So instead, they cap the profit, and reimburse costs, while also having to put into place an onerous oversight process, in terms of cost accounting and periodic customer reviews, that dramatically increases cost to the taxpayer, probably far beyond what they would be if they simply let it out fixed price and ignored the profit. I would argue that instead of the current model of cost-plus, lowest bidder, an acceptance of bid based on the technical merits of the proposal, history and quality of the bidding team, even if the bid cost is higher, will ultimately result in lower costs to the government (and taxpayer).

As I understand it, this is the battle that XCOR (hardly a risk-averse company, at least from a business standpoint) has been waging with NASA for years. XCOR wants to bid fixed price, and accept the risk (and the profits if they can hit their internal cost targets), while NASA wants them to be a cost-plus contractor, with all of the attendant increases in costs, and changes in corporate culture implied by that status.

This is the debate that will have to occur if John McCain wants to make any headway in his stated desire Friday night to get rid of cost-plus contracts. Unfortunately, he’s not in a very good philosophical position to argue his case, because he’s one of those economic simpletons in Washington who think that making money is ignoble, and that profits are evil, particularly when they’re so high as to be “obscene.”

Business, Economics, Political Commentary

Gas Lines

15 Comments

I keep hearing about shortages and lines in the south. The last time we had gas lines on any major scale was in the seventies, when oil prices were kept artificially low by federal fiat. Is that what’s happening here? Are the “anti-gouging” laws keeping prices too low, and discouraging new supply? For instance, if you can’t get any more for it in North Carolina than you can in Ohio, where’s the incentive to spend the money to ship it in from there?

Can anyone in the areas where the lines are tell me?