Economics @ MindSay 
politics
On October 3, 2003, Charles T. Munger, the largest shareholder in Berkshire Hathaway after Warren Buffett, gave the Herb Kay Undergraduate Lecture to the Economics Department at the University of California, Santa Barbara after which, I have no doubt, he was soundly applauded. Unfortunately, the lessons he taught made not a single impression on the minds of the attendees.
Although he made many salient points, one was that economists pay too little attention of second and higher order effects. He said that "this defect is quite understandable, because the consequences have consequences, and the consequences of the consequences have consequences, and so on. It gets very complicated. When I was a meteorologist I found this stuff very irritating. And economics makes meteorology look like a tea party." I call this practice of ignoring higher level consequences the fallacy of ignored consequences.
It is well known, of course, that if one can select the data to be taken into consideration, almost anything can be proven, since the ability to select the data is but one iota removed from simply making the data up. This fallacy is akin to the well known statistical fallacy called confounding, for although a positive correlation can often be found between two things, it is never known whether the correlation is not an accidental result from another correlation that is not taken into account in the data selected.
All economists who advocate globalized free-trade commit this fallacy, because the only data considered are the prices of the imported products. Here is an example: Dr. Steven J. Balassi, who teaches economics (MBA and undergraduate) for several San Francisco Bay Area Institutions, wrote in a comment that "It depends on what perspective you take. If you take the U.S. perspective, jobs moving overseas are bad and good. They are bad for those losing jobs but good for the price of the product. If you take a global perspective, trade is good. If one job is lost in America but two are gained in India, that is good for humanity. It is once again good from the product price standpoint." Ignoring the poor syntax in this comment, which indicates that Dr. Balassi was himself not a superlative student of even his native language, I would maintain that the perspective of economists is always too narrow.
The price of products has meaning only in relation to other things, as for instance, the income of consumers. But considering only the price of products entirely ignores other costs of international trade, which if added to the price of products would make the claimed advantages of it ludicrous.
For instance, the BBC has just reported that hundreds of thousands of unsafe chargers, imported from China, for mobile phones, games consoles, and music devices could have made their way into the UK. Some of these chargers carry a CE safety mark which officers believe to be fake. The chargers are being sold for about £5 on the internet and about £6 in shops. Safe chargers, which have been checked properly, retail for around £15. Concerns were raised about the safety of chargers 18 months ago following the death of a seven-year old British boy who was found dead after using his game console's charger. Trading standards officers are trying to recall the chargers. The chargers also give electrical shocks to their owners, overheat, explode, and cause fires.
If the costs of cleaning up the damage from recalling and disposing of, treating those injured by, and compensating families for the deaths of their children caused by these products were added to the £5-price, what would the true cost of these imports be? But this is a minor example.
The Black Death was carried east and west along the Silk Road by traders. The introduction of smallpox into the Americas by Europeans obliterated entire Native American civilizations before they were ever even seen by Europeans. Were the imported products worth the lives of the millions who died?
The chestnut blight, which wiped out the American chestnut tree, was caused by a fungus introduced by the importation of Japanese chestnut trees. The fungus virtually eliminated the American chestnut from over 180 million acres of eastern United States forests and was a disaster for many animals that were highly adapted to live in forests dominated by this tree species. For example, ten moth species that could live only on chestnut trees became extinct. The Asian clam came to North America from China. This mussel clogs condenser tubes, raw service pipes, and fire fighting equipment and decreases the efficiency of energy generation, a major problem today. Cuban treefrogs are believed to have been introduced into Florida in cargo imported from Cuba. These frogs are attracted to the buzzing noise of electrical transformers and often short out the transformer causing localized blackouts. Dutch elm disease has severely damaged the American elm. European starlings, mute swans, and nutria demonstrated the characteristics of invasiveness long after their original introduction. The Australian paperbark tree has replaced native plants, such as sawgrass, in over 400,000 acres of south Florida. Because it has a combination of spongy outer bark and flammable leaves and litter, it increases fire frequency and intensity. Many birds and mammals adapted to the native plant community declined in abundance as paperbark spread. Aquatic plants such as the South American water hyacinth in Texas and Louisiana and marine algae such as Australian Caulerpa in the Mediterranean Sea change vast expanses of habitat by replacing formerly dominant native plants. The European parasite that causes whirling disease in fishes, introduced to rainbow trout in a hatchery in Pennsylvania, has now spread to many states and devastated the rainbow trout sport fishery in Montana and Colorado. The predatory brown tree snake, introduced in cargo from the Admiralty Islands, has eliminated ten of the eleven native bird species from the forests of Guam. The Nile perch, a voracious predator introduced to Lake Victoria as a food fish, has already extinguished over one hundred species of native cichlid fish there. The zebra mussel, accidentally brought to the United States from southern Russia, transforms aquatic habitats by filtering prodigious amounts of water (thereby lowering densities of planktonic organisms) and settling in dense masses over vast areas. At least thirty freshwater mussel species are threatened with extinction by the zebra mussel. The U.S. Fish and Wildlife Service estimates a potential economic impact of $5 billion in the Great Lakes attributed to impacts of the zebra mussel and attempts to mitigate those impacts. Zebra mussels have virtually eliminated native mussels from the Great Lakes and altered the basic food chain, threatening the availability of microscopic food for native fish. The sea lamprey reached the Great Lakes through a series of canals and, in combination with overfishing, led to the extinction of three endemic fishes. The first sailors to land on the remote Atlantic island of St. Helena in the 16th century introduced goats, which quickly extinguished over half the endemic plant species. North American gray squirrels are driving native red squirrels to extinction in Great Britain and Italy by foraging for nuts more efficiently than the native species. The Hawaiian duck is being lost to hybridization with North American mallards introduced for hunting. The rarest European duck (the white-headed duck) is threatened by hybridization with the North American ruddy duck, which was originally kept as an amenity in a British game park. The ruddy duck escaped, crossed the English Channel, and spread to Spain, the last stronghold of the white-headed duck. Ornamental fig trees, planted in the Miami area for over a century because they were sterile, requires a particular wasp to pollinate it, and the wasps were absent. About fifteen years ago, the pollinating wasps for three fig species arrived and now these fig species are reproducing. At least one has become invasive, with seedlings and saplings being found many miles from any planted figs. More cases of this phenomenon, termed "invasion meltdown," are likely to arise as more species are introduced and have the opportunity to interact with each other. And this, believe it or not, is a short list.
Approximately 68% of fish species lost in North America over the last century were caused by an invasion of exotic species. and has also caused the economy to suffer through the obstruction of industrial and municipal water pipes and the displacement or elimination of important commercial and sport fishing species. Public health is also negatively impacted. For example, in a number of coastal areas in the United States, cholera strains carried in the ballast water of some commercial trade ships contaminated numerous oyster and fin-fish populations, making them unsafe for consumption. Without the disease and predators that they contend with in their native lands, the spread of these species can be epic in proportion and the effort to control them can cost billions of dollars. Exotic species can have many negative impacts on the environment, the economy, and human health. When species are introduced into an area, they may cause increased predation and competition, disease, habitat destruction, genetic stock alterations, and even extinction. Of 26 animal species that have gone extinct since being listed under the Endangered Species Act, at least three were wholly or partly lost because of hybridization with invaders. One was a fish native to Texas, eliminated by hybridization with introduced mosquito fish. Rainbow trout introduced widely in the United States as game fish are hybridizing with five species listed under the Endangered Species Act, such as the Gila trout and Apache trout.
Almost half of the native species in America are endangered because of invasive species. The statistics are startling and more attention must be paid to the problem and devising a solution before the cost is more than we can bear. Compared to other threats to biodiversity, invasive introduced species rank second only to habitat destruction, such as forest clearing. Of all 1,880 imperiled species in the United States, 49% are endangered because of the introduction of exotic species alone or because of their impact combined with other forces. In fact, introduced species are a greater threat to native biodiversity than pollution, harvest, and disease combined. Further, through damage to agriculture, forestry, fisheries, and other human enterprises, introduced species inflict an enormous economic cost, estimated at $137 billion per year to the U.S. economy alone.
No one would suggest, of course, that international trade be abandoned, but any attempt to justify it and its increase that is based merely on nominal commodity prices is a logical absurdity, since all such attempts are based on a single, primary consequence. When the costs of the overlooked secondary, tertiary, and quaternary consequences are added to the nominal prices of imported products, the economic advantages of international trade do not look nearly as beneficial.
Of course, our economists who hew to the so called liberal/neoliberal ideology will never take these additional consequences into account. To do so would complicate their calculations far beyond their meager intellectual capacities and nail shut the coffin of their religiously held ideology. Humanity should be well aware by now of just how difficult it is to get someone to abandon his religion. Moslem hoards once attempted to convert Christians to Islam with the command, convert or die. Perhaps we need to confront our economists with a similar choice, but it would have to be, convert or we all die.
©2008 John Kozy
The people who govern America on all levels have a tendency to place the burden for solving problems on consumers. But consumers cannot solve the problems they are encouraged to solve. Some are simply unwilling to do what is required, some cannot afford to do what is required, and some who are willing and can afford to simply cannot.
I have written about this before concerning water conservation:
"You present eight suggestions for ordinary people to follow in their homes. And although each would indeed save water, the effectiveness of these solutions would depend entirely upon the number of people you could get to work together in these ways. But anyone who believes that it is possible to get enough people to cooperate in such ways to have a significant effect on the problem is a dreamer.
Yet I can think of things that can have significant effects on the problem. I have over the past many years lived in seven American states, and not once have I lived in a house that had insulated hot water pipes. As a result, one had to run the hot water two or three minutes before the water became hot enough to bathe in. And I suggest that this is happening in almost every American home. This waste could be eliminated with good building codes. But building codes require businesses to tackle the problem, and American legislators are not inclined to do that.
Here in Texas, cities are always imposing watering restrictions; yet they allow builders to put houses on unstable soil using foundations not meant for such conditions. The owners of these homes are told to keep the soil around their foundations moist year round to ameliorate foundation problems. And one city I lived in that had watering restrictions also had a recycling program that required citizens to wash any glass ware that was to be recycled."
Any water saved by the eight suggestions would be dwarfed by better building codes.
Similar problems abound concerning recycling. Many are unwilling to go to the trouble, and others simply cannot recycle. I live in a single family home with a two-car garage, but I don't have room for multiple boxes into which to separate and store recyclables. And the alley behind the house is not wide enough to accommodate recycling bins. People who live in apartments have even less room. Many elderly and urban dwellers don't drive or have vehicles into which they can load their recyclables and cart them to recycling centers. A program requiring consumers to recycle can never succeed.
But my present concern is a more serious problem—protecting our good credit. Given the explosion of identity theft, insurance companies are now selling identity theft and credit protection insurance. But identity theft and credit protection are not consumer problems; they are banker problems caused by banking practices.
Why do bankers and other businesses continue to use social security numbers as identifiers? Why aren't the identities of borrowers verified by bankers? Why do they rely on signatures on credit card receipts and loan papers when fingerprints would effective deter fraud, especially if fingerprints were accompanied with a photograph? Technology to enable both of these has been available for some time. And finally just who benefits most from so-called good credit?
A consumer with good credit does enjoy some convenience, but s/he pays a hefty price for it. Consumers who don't use credit or use it sparingly save all the money that goes to banks as interest. As a result, they can buy more, not less. And if everyone had bad credit, the bankers would either have to find other means of identifying reliable borrowers or curtail their lending. But lending is the mana of banking. No lending, no profit. Consumers with bad credit save the money that consumers who use good credit regularly send directly to banks.
So as long as bankers continue to use the practices that allow fraud to flourish, consumers will always be at risk of identity theft no matter what safeguards they engage in. Consumers cannot solve the problem, only bankers can. But the bankers will lead you to believe that they can sell you something that will protect your good credit when all they really want is more of your money. The good credit they want you to pay to protect is the credit that is good for them, not you.
©2008 John Kozy
Entertainment is America's big thing. But entertainment in America encompasses much more then mere acting, song, and dance. It includes sports, television news, advertising—in short, anything that attracts a huge number of spectators. And what has made this huge number of spectators possible is mass media, something none of the entertainers had a role in creating. It has also driven down the level of industry and honesty.
Advertising almost always violates the ninth Commandment. The use of illegal performance enhancing drugs is widespread in sports. School officials routinely allow for the altering of a student athlete's academic record so that s/he can continue to play a game. Our colleges and universities give "scholarships" to non-scholars but not to scholars. Many popular singing groups display little musical knowledge or talent. Dramatic performances depict the most immoral behavior and often even glorify it, even when it's depicted in entirely unbelievable ways. People who pass themselves off as journalists inundate us with "human interest" pieces that neither inform us of nor teach us anything. Watch CNN all day and then write down what you learned that you didn't know beforehand. What were once legitimate news programs now fill our minds with stories about criminals. Dateline NBC and 48-Hours are prime examples. Our so called "reality shows" have nothing to do with reality, and what used to be called amateur hours have now become pre-professional tryouts. Young Americans don't want to be scientists, mathematicians, or engineers; they want to be STARS even when they exhibit little talent as is amply demonstrated on American Idol and So You Think You Can Dance. Worse, the untalented vilify the judges when they are rejected. Yet hoards of spectators watch mesmerized, often after having paid a hefty fee. Yet none of this activity produces anything having utility, value in use; these activities are all parasitical. Marx thought that religion was the opium of the people. Not any more. Entertainment is. Mass media has made the country into a gigantic Roman Coliseum, where keeping the people entertained is a way of denying them the knowledge of what is being done to them. And the mayhem and murder that people watch every day is akin to the murdering of gladiators in Ancient Rome.
This devotion to entertainment has enormous cultural and economic consequences.
A culture is defined by its predominant activities. The Roman Empire, for example, is characterized by an autocratic form of government, large territorial holdings acquired by war and subjugation, and violence. Those characteristics were adopted by the subjugated peoples, especially those in Western Europe. Significantly, they were not adopted by the Scandinavians who were never subjugated by the Romans. And Western European culture, of which the United States is a part, has historically been afflicted by war and violence of gigantic proportions, not so much so Scandinavia. Given the extent of criminality in America, the huge war making machine called the military-industrial complex, the number of wars America has been involved in just since the end of the Second World War, and the vast amount of entertainment that glorifies violence, American culture is clearly characterized by Roman brutality.
But the economic consequences are huge too. Every dollar spent on weapons of war, spent trying to control criminal activity, spent on entertainment overkill, spent on any parasitic activity is a dollar not spent on providing people with the necessities of life and the luxuries that produce a good life. A professional football team, for instance, is a gigantic money machine, but it employs relatively few people in comparison to a durable goods manufacturing company. And I often wonder what America's GNP would be if all of the parasitic "goods and services" were excluded from the calculation. There is, after all, a vast difference between an economic activity that produces substantial, utilizable products and activities that do not. Although man may not live by bread alone, more bread and less play yield better lives than more play and less bread. America needs what is called "a paradigm shift." Americans need to rethink their cultural values.
©2008 John Kozy, Jr.
Businesses justify this practice by saying that the overqualified would be likely to continue seeking better jobs and would leave as soon as one was found, but this justification makes no mathematical sense. The number of higher paying jobs is considerably lower than the number of low or moderately paying jobs, so the chances of finding a better job are considerably lower for an overqualified worker than for a barely competent one. When companies are managed in ways that are dissatisfying to their employees, the chances are greater that the barely qualified will leave. And more likely than not, what cases workers to remain in the jobs they have is the degrading process of job hunting.
But this false justification is trivial in comparison to the horrendous economic and social consequences of the practice. When employees know that the overqualified are often excluded from the competition, they have no incentive to get good at their jobs, since becoming good will merely make it more difficult for them to find jobs elsewhere if the need arises. Not being good at their jobs entails that the services and products they produce will be barely acceptable. As the quality of these products and services deteriorates, they become less marketable and command lower prices. Difficult to market, lower-priced products result in lower profits. In attempts to maintain profits, one alternative businesses have used is to abandon domestic production, moving it to low-wage countries which works only so long as consumer-income is sufficient to continue to purchase the products and services. Moving production off shore doesn't work when consumer income is insufficient, because even low-priced products and services are expensive to those without sufficient income. In short, the consequence of the practice is an economic collapse, which entails severe hardship and political instability of the kind that often destroys nations, for in the long run, mediocre products and services do not sell well.
Some economists are beginning to realize that the only effective stimulus needed to counter the current economic situation is job creation. But even that won't work well if the newly created jobs rely on the barely qualified. These practices led to the near collapse of America's Big Three automakers when faced with Japanese competition, and although these American firms have made efforts to recover, none has really succeeded. Could that be because barely competent employees are still the foundation for their businesses?
©2008 John Kozy, Jr.
Here are some quotes:
"The advocates of a "gas tax holiday" are exaggerating the benefits to consumers from their proposal. If the Illinois experience is a guide, there is likely to be some reduction in the price of gas, but it would fall well short of the size of the tax reduction. In order to pay for the tax cut, the government would have to cut back on highway construction and maintenance or find some other way of plugging the shortfall in revenues to the Highway Trust Fund."
"There's another catch to the McCain and Clinton proposals. Currently, the gas tax is deposited directly into the Highway Trust Fund, which is used to pay for upgrades to roads and bridges. The American Society of Civil Engineers estimates that the three-month gas tax holiday could cost as much as $8.5 billion.
McCain has responded by pledging to fund the Highway Trust Fund out of general revenues. That, of course, means adding another $8.5 billion in federal debt, which in turn means adding as much as $383 million per year in interest payments."
"Clinton campaign spokesperson Geoff Garin said in a conference call this week that the proposal would save each driver $70. The Clinton campaign did not respond to our request to clarify how it arrived at that figure. But the non-partisan American Association of State Highway and Transportation Officials estimates that the total savings for the average American motorist works out to about $28; for a two-car household, that would be $54.
That's IF prices actually dropped 18.4 cents per gallon. However, there's every indication that they wouldn't. Here's why: According to the basic principles of supply and demand, cutting the price of an item causes people to buy more of it."
"For all the legislative prowess of McCain and Clinton, we’re doubtful that either candidate can rewrite the laws of supply and demand. That 18.4 cents per gallon won't go to consumers. Instead, the proposal will simply shift that money from government coffers to the oil companies. We're willing to grant that if the laws of economics themselves took a holiday and the price did drop that much, the amount saved might be meaningful to many motorists, particularly those who are low-income and those who drive a lot. And there would likely be all kinds of ancillary benefits involving price reductions for food and other products that have to be transported, as well as airline tickets and the like.
But we can't find any economists who think we'll actually see that drop in the price of gasoline. Others have tried and failed as well. And the Clinton campaign hasn't produced one, either."
"Another economist, Jeffrey Perloff, of UC-Berkeley, agreed that a federal tax moratorium would likely have less impact on consumer gas prices than a state moratorium. He said his models showed that a suspension of the 18.4-cent federal tax on gasoline would likely result in a temporary 9- to 12-cent reduction in the cost of a gallon of gas to the consumer, with the remainder of the reduction coming in wholesale prices."
"The Obama campaign says that's a key reason why he opposes McCain's plan: there is no mechanism to make sure that consumers, rather than oil companies, reap the benefits of the tax holiday.
So on this point — how Obama voted in 2000 — the RNC glosses over an important detail. Yes, he voted for the tax holiday the first time, but he opposed an extension of it because he said consumers weren't getting the benefit."
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