Gas Tax Folly, the Endless Circle

John McCain is at least consistent, in his notion that we should get relief from the federal gas tax for a few months and just add it to the tab. Hillary Clinton thinks we should have it and pay with an excess profits tax. If for no other reason, I think I'd support Barack Obama for calling this the folly that it is.

We are not in this situation because of greed. Everyone is greedy and always has been, yet five years ago, petroleum fetched about a third of what it does now. The change has been supply and demand, notably the rapid rise of Chinese consumption.

What we need is not a drop in the tax, but a $1 increase. The intent would be to deliberately reduce U.S. demand, which would lead to lower prices for the product. The net effect would be less than $1 for Americans. In the longer term, we could reduce demand by advancing our technology, and we should but we can't do this overnight.

Any demagogic proposal to cut the tax this summer, when supply pressure is already likely to be at its worst, should be denounced. Obama wins this one.

American Generosity Courtesy of China

The Bush Administration has proposed an increase in the level of food assistance provided by the United States. We should all feel proud of this latest example of American generosity.

Except, of course, that we're not paying for it. If George W. Bush had said to the American people, "There are folks starving all around the world. I want each of you to dig into your pockets and come up with $2 to help them," he would have received about almost nothing. If he had asked Congress to institute a new tax that would generate $770 million to cover the aid, he would have been denounced by his own party.

Instead, it's another appropriation with no funding, which means more public debt. Just doing back of an envelope work, it's looking like half a trillion annually to cover the never-ending rise in the monthly cost of Iraq/Afghanistan, the economic stimulus, and slowing revenues due to the recession.

I remember when half a trillion would have been serious money, enough to get people talking, political candidates posturing, and headlines blaring. Not anymore.

Less Good News than Meets the Eye

Wall Street is delighted that the April jobs report shows fewer jobs lost than anticipated and fewer than previous months. On closer inspection, though, we see the usual pattern of earlier months being adjusted downward. The revised figures show more than a quarter million jobs lost in the first four months of the year. There's a good chance that April will be worse than 20,000 when the dust settles in another 60 days.

Worse than that is that the nearly neutral effect of April was achieved by offsetting huge loses in manufacturing and construction with gains in services and government. Generally, a service job is probably worth half one of the first two, so from an economic standpoint, this wasn't neutral at all.

And government jobs are rising. One wonders how this could be. Except for the feds, who simply print whatever amount of money they need, governments are limited roughly by tax receipts, which are falling short of expectations. Apparently they haven't yet adjusted payrolls but it's just a matter of time.

Here in Oregon, the process will be distressing. The annual budget cycle for most less-than-statewide units is intense in May. The figures everyone is using assumes that whatever money has been coming from the state, which is most important for schools and community colleges, will stay at the level promised a year ago. A new state tax projection should be coming out within a few days. When it shows another sharp decline, a lot of those budgets, and hence hiring expectations, are going to need revisions.

The Miley Cyrus Crisis

I would make some superior comments about the stench of hypocrisy, but it doesn't even rise to that level. This is just froth. Miley Cyrus, aka Hannah Montana, has showed that at 15, she has the beginnings of a woman's body and this has shocked the world. A large number of people think she should apologize for the photos Annie Leibovitz took for Vanity Fair.

Miley and her family are retroactively upset. Disney is wildly upset. Parents are furious. Bill O'Reilly is incensed.

And from all of this ...

Vanity Fair will sell more magazines. Annie Leibovitz will get higher fees. Disney will not cancel the show and will continue to reap huge profits. Parents will say nothing to their daughters, or they'd need to explain why showing less skin than is evident on any day at the beach is cause for alarm. The daughters will remain fans because either (a) they don't understand, or (b) they do. An increased number of teenage boys will become fans. Bill O'Reilly will return his attention to Rev. Wright.

And if this turns out to be the wildest moment that a girl who has been earning millions of dollars in the entertainment industry indulges in before she turns 16, then Billy Ray deserves Father of the Year. Nobody needs to apologize to Annie, who has seen all this before.

Stimulus? More like gasoline compensation

The United States consumes about 150 billion gallons of gasoline per year. Prices are higher by about $1 in the last year. That means that the entire benefit of the federal "stimulus" payments to American taxpayers will be enough to offset the increase in gas costs.

If the increase went to American producers, then it would at least recycle to some degree, but all the increase is due to the rise in oil prices. More than half of that now goes to foreigners.

What little stays home is going to large oil companies. Do you think that transferring billions of dollars of federal government money to them will offset the catastrophe in housing? I doubt it.

Education spending priorities

The SMART program in Oregon, which uses volunteers to assist students with reading, is being cut. The paid coordinators, numbering about 200, are getting axed in order to save about a million dollars. This despite the fact that taking part in SMART boosts a child's chance of passing the state reading standards by about 60%.

Put this in perspective. Statewide, public spending on K-12 education runs about $4 billion a year. Some 200 coordinators, costing $8 to $11/hour, make SMART happen, along with other private sector contributions. Why are the schools letting this happen?

First, I suppose, because the coordinators would be unionized and with benefits, vacations, etc. would cost twice as much as now. More importantly, volunteers are never embraced by the public schools because they constitute such a danger to the chief argument for high teacher pay. Which is that public teachers are highly educated in their specialties and are consequently much better at teaching.

I'm not questioning that some academic specialties, such as teaching calculus and physics in high school, can't be replaced by ordinary volunteers. Nor do I doubt that there are dedicated and effective teachers who are worth everything they're paid and more. I do doubt that the ownership of a masters degree in education has much to do with it, or even more than a tiny amount of "teach ed" classes for undergrads.

An intelligently organized system of education will use all the assets available to the maximum possible, in order to get the best results for the money. There may be times when you need specialists. On the other hand, without much apparent effect, we taxpayers employ specialists in bi-lingual education to attempt to bring Hispanic children up to fluency in English.

The low-cost alternative is to locate the Hispanic children at age five and figuratively plunk them down in sandboxes with a greater number of English-speaking five-year-olds for a few months. Not only are five-year-olds more effective at this than highly educated adults, they will do it for free. All we need to do is build the sandboxes and employ some adult to keep little Johnny from hitting Maria with his shovel.

The great myth is that the optimum strategy is to employ the most skilled possible people to perform every function, even if you then cannot do enough. This was the issue when I ran for the Lane Community College Board (three times, unsuccessfully). It has not been resolved there either.

The China/Zimbabwe crisis

Some people are taking the isssue of Chinese ship carrying arms to Zimbabwe as posing a problem for China. I doubt it. It should pose an ethical problem for the United States, but I also doubt that it will be recognized as such.

The idea is supposed to be that the Chinese will be discomfited by the prospect of supplying arms to Mugabe after his regime has effectively been voted out of power. This ignores the simple fact that China has never had a problem dealing with Mugabe because there is nothing that Mugabe does to Zimbabweans that the Chinese government doesn't do to its own citizens. In spades. There isn't really even a pretense of democracy in China, so why should they be upset that Mugabe indulges in the pretense and then abrogates it.

This should be a problem for the United States. China is a world power today because we have decided to buy everything they can manufacture, which is most everything we consume. They have no political ethics that we would recognize. Thugs like Mugabe will stay in power because of our obsession with having our consumers goods at the least apparent cost. The situation would be a wakeup call. I'm not holding my breath.

Suffering under Rhodesian colonialism

An AP story describes Mugabe's initial reputation for reconciliation, mentioning that he had offered concessions to whites in 1980. It also states that black africans had suffered under white rule for decades before that.

What exactly does that mean? Prior to white colonists, the population was 710,000. It then grew above 10 million. Life expectancy rose. Literacy, previously zero, became fairly high. Intertribal wars vanished.

Without any question, the whites did not see any likelihood that they could or should turn over the management or ownership of the large farms they had created, and which had produced the excess food that made the population growth possible, to blacks. The general opinion of the outside world at the time of Mugabe's guerrila war was that the whites were just narrow bigots.

Black majority rule has been in place for almost 30 years. Life expectancy is plummeting, and certainly not just due to AIDS. Education is declining. Unemployment is 80%. Inflation is in six figures. Exercising your democratic rights can cost you your life. The seized white farms, formerly productive, are now running at subsistence level or less.

Exactly what did Ian Smith get wrong?

Iraq isn't Germany

Once again, I read in the newspaper this morning that there are parallels between Germany in 1945 and Iraq now. Would that this were so. But isn't.

Starting at the top, George W. Bush isn't a reincarnation of FDR and Bremner was not Marshall. This was managed badly. But it must be remembered that the project was sold to the American people on two premises. First, that Saddam had WMD of which he must be deprived. Second, that the process would be brief and relatively inexpensive.

It would simply have been impossible to go into Iraq with the public knowing that they were looking at a trillion dollar cost stretching over a decade. It was a few tens of millions and we would be out of there in a matter of months. After WW II, we knew what we had to do in Germany, which was to make sure that we didn't do it again. The Germans were thoroughly beaten and knew it. They and everyone else accepted that they had started the war and however the Allies dealt with them, they had no moral cause for complaint.

The Iraqis could be, and generally were, grateful for the overthrow of Saddam, but they then wanted to run their own affairs. By our standards, they would have done so badly, but if ensuring that people have functioning democracies is an imperative, why haven't we invaded Burma or Zimbabwe?

When we leave Iraq, which can't be a moment too soon, we will leave a mess. Whenever we leave, and it's not likely to get any better. The world is full of messes. True, we exacerbated this one, but it's time to cut our losses.

The Zimbabwe Civil War

The odds are increasing that Zimbabwe will descend into civil war as Mugabe has figured out that his neighbors won't do anything about him. He'll play the anti-colonial card to the end. That will continue to work with his core supporters, who don't understand economic reality at all, but the millions who will starve may develop a working hypothesis that Mugabe is the root cause.

At some point, a large number of blacks will form a working partnership with the white farmers. We will then see whether the Western democracies, which were so keen on booting out Ian Smith and "liberating" the country thirty years ago, will have the stomach to stay with him this time. I'm guessing they won't.

Whither Zimbabwe

A hundred years ago, the population of what is now Zimbabwe was perhaps 6% of what it is now. It was possible to feed and house the former population with the attitudes toward social and economic organization that then prevailed. However, the current population is unsustainable without white farmers.

Life expectancy has fallen by about a quarter century since Robert Mugabe "liberated" his countrymen from the oppression of white people. Nevertheless, total population continues to rise. There is simply no way to sustain the population without persuading some of the diaspora to return, but instead, the regime is intent on driving away the few who remain.

Death, as someone once said, is nature's way of telling you to slow down. It's also nature's way of balancing resources and requirements in a population. I doubt that Mugabe's new cleansed Zimbabwe will be able to feed more than three or four million, and with food suddenly no longer in surplus worldwide, it would take an act of serious altruism for donor nations to make up the difference.

The future of Zimbabwe is death on an unprecedented scale. There's little to be done to prevent it. The politics of race in Africa is such that those who have some influence, such as the rulers of South Africa, will not act because to do would be to admit that Robert Mugabe did not produce an improvement in the lives of black Africans and that maybe Ian Smith was not evil.

Instead, they will prevaricate while many, eventually millions of, Zimbabweans die. I wish I could feel more empathy, but when a people collectively commit suicide with their eyes wide open, I figure it's their choice. Not a wise choice, but not one that we are required to overturn.

Gluttony is an Economic Sin, too

I've never been quite sure why the church views gluttony as a sin. Makes you unhealthy and unattractive, but it seems mostly a personal failing. On the other hand, it might be viewed as a sign when the consequence of one person's gluttony is his neighbor's hunger.

We may be moving away from that into a new era, where gluttony is an economic sin as well. We've known for a long time that the American eating habits could not be sustained worldwide without some incredible, and probably physically impossible, increase in food production. This was not a problem as long as the rest of the world was sufficiently poor that they couldn't compete economically for the foodstuffs.

Unfortunately for Americans, the rest of the world is getting rapidly more prosperous and they are developing a taste for more, better, and less efficient (e.g. meat) diets. In addition, there have been some droughts and stuff, but mostly it's demand rather than supply.

If Americans had a lot of self-discipline, this would be an opportunity. We could cut down on our excess consumption of calories and increase our exports, thereby paying for the manufactured goods we love and don't manufacture anymore. More likely, we'll continue to overeat and drive up the cost of our food.

It's time to put food and energy back into the "core" inflation rate. There were taken out, years ago, in order to have a number that changed less month-to-month, but this only works if the fluctuations in food and energy average out. They aren't doing this. Oil going from $30 to $115 is not a fluctuation, it's a sea change.

Has the Surge Worked?

It seems clear to Paul Greenberg that it's working. Has restored his faith, it has. Glory be!

What we seem to have actually proved is that with virtually every available American serviceman on the ground there, we can hold down the death squads. We've been able to reduce suicide bombers.

Meanwhile, with oil revenues estimated at up to $57 billion for 2008, Iraq has become one of the most corrupt countries on the planet and one of the least able to translate its wealth into meeting the needs of its citizens. Perhaps more effective than Nigeria, but definitely near the bottom. I'm a bit of a cynic. I think some of the political good will now being seen, what little there is, results from politicians recognizing that there is so much money that they can divide it up among themselves and all get rich. It will be necessary to provide some cover story for the masses, who will not do as well, but that's always possible, as George Orwell told us decades ago.

However, I'm dubious that the factions will ever trust one another enough that the U.S. can leave. The kleptocracy probably appreciates that degree of stability that having the U.S. Army constantly around the corner provides. For the U.S. taxpayer, the situation is pretty grim. It will get much worse if McCain wins in November.

Long ago, I figured the worst case for Iraq was 500 billion. How naive I was! We are now in a situation where the armed factions will agree not plunder the country rather than massacre one another if we kick in a quarter trillion a year forever. A trillion dollars is still a lot of money.

Elliott Waves -- The Delphic Oracle Approach to Investing

I am amused by the interest in Elliott Waves, particularly with respect to foreign exchange rates. The adherents of this nonsense are enamored with the possibility of discovering trends through systematic waves in charts of essentially anything. The arguments against are the same as rational people use in many circumstances. For example,

1) If true, this analysis would be self-defeating once discovered. If everybody could make money following the pattern, everybody would anticipate the pattern, destroying the pattern.

2) If true, then the practitioners would not be blogging about it. They would be sitting on the beach in the Bahamas, soaking up the sun. The exchange rate between the Euro and the US Dollar (known as EURUSD to the cognoscenti) has jumped so much in six months that anyone who could use Elliott Waves to predict the trend would now be rich. Many of these people appear not to be rich.

3) If true, there would be no reason, discarding the possibility of altruism, for anyone to spread the word for peanuts. You would not have people selling books or DVDs for $19.95, for Elliott Waves any more than making money from home for a small price, available at the address on your TV screen.

4) Correlation is not causation. It's a common error to try to fit a straight line through a graph of two variables and then discover a causal relationship. It is less often done with respect to wavy patterns, because they are so much more difficult to quantify. But mathematicians know that you can approximate any regular pattern with a series based on sine waves. If you allow enough slop, you can do this with a modest number of them.

History examines the past and offers explanations. It's interesting, but won't make you rich. Science examines the past through experiments and predicts future behavior. The Elliott Wave folks think they have science, but they just have history. Maybe not bunk, but close.

Oregonians are Math Challenged

It's not difficult. If you need a certain amount of money every year, which equals what you expect the long term average to be, then you can't discard the surplus in those years that exceed the average, because mathematically, there will be years below the average.

We didn't see it coming with PERS, and consequently told public employees when we had good years that they could keep the excess for their pensions and that the taxpayers would make it up during the bad years, i.e. when earnings dipped below 8%. The legislature passed the rules in the early 1990's when the money was relatively small and apparently just didn't work out the consequences.

Neither have they figured out the implications of having an almost entirely income-tax based general fund and no serious reserves. In the previous recession, the state was flushing out its treasury with "kicker" checks just as the projections for tax revenues were going south. We ended up with some schools becoming the butt of Doonesbury jokes.

Here we are again. We've sent out record kicker checks in the fall and now in winter, the handwriting on the wall is becoming evident again. The first decline in the revenue forecast was under $200 million. It was, however, enough to essentially eliminate the unappropriated amount in the state's ending fund balances. There are still some reserves, but those will be mostly wiped out with the next estimate.

This may just be the Republicans' blunt tool to achieve control of total government spending, but since it is likely to seriously impact schools, community colleges, universities, highways, and law enforcement, you'd think they would devise something more targeted.

Where is John Maynard Keynes when we need him?

The prevailing political view on economics up until 1932 was that discipline and hard work would cure all that might ail us. After Roosevelt came to power, he changed his mind and adopted the Keynesian view that the economy needs discipline in good times and largesse during recessions and depressions.

We have a new theory, as wacky as the earlier views, which is that profligacy is the key to prosperity. We are now on the verge of recession and the politicians are simply recommending more hair of the dog that bit us. We're here because we didn't want to consider either that running a war would involve some domestic sacrifices, or that running out of petroleum would require us to change out consumption patterns. The consequence is that we are caught unprepared by oil at $105/barrel and the fact that foreigners regard U.S. debt as increasingly problematic.

We need to raise, not lower taxes, and spend the money where needed. We need to invest in infrastructure to employ some of those who were formerly building too many too large houses. We need to invest in research to develop energy-saving technologies. We need to hire bands of shiftless teenagers to accost people at Interstate rest stops and offer to check their tire pressure.

We do not need to write checks to people who are frightened for their futures. Those people, and by May that's going to be most people, will just put the money in the bank or use it to pay down credit cards. There will be a large transfer of debt from the private sector to the public, but there will be no surge in spending. Keynes advocated spending by government, not transfer to individuals who might not spend. This is nuts.

Fortunately there are political minor leagues

It's unfortunate that Obama has lost an advisor who may have had good intentions and perhaps talents, but just wasn't ready for the discipline of actual power. It's bad enough for him that she was unable to curb her tongue during the campaign. How much worse would it have been if she'd stayed out of sight until January and then somehow became a high government official!

Maybe there is a benefit from long campaigns, because it exposes both the candidate and a lot of potential advisors to a lot of inconsequential scrutiny. Whether some Obama campaigner said something indiscreet to a Canadian official is a tempest in a teacup now. Rather like the Eugene Emeralds losing a baseball game. Not a big deal in itself and it serves to weed out those who don't have what it takes.

I'm actually not that distressed to see Obama ditch Samantha Powers since she seems to come from the "moral obligation to fix the world" school of international relations. That's what got us into Iraq and Afghanistan. We don't need to do it again in Darfur.

I accept the idea that bad outcomes are often inevitable and it isn't admirable to spend time and treasure vainly attempting to delay that fact. The people of Afghanistan are not going to have happy lives because there are 25 million of them, squatting in the middle of a stinking desert, with no export product to speak of apart from heroin. Iraqis might, since they have wealth, if we left them alone but it can't be forced on them.

Instead, we have intervened. A half decade later, they are less happy, we are less safe, and we're a trillion dollars poorer (including deferred costs). Knowing this, there are those who want us to save Darfur, militarily since there are no other options. Just goes to show that a fancy university education isn't always enough.

The Archbishop of Canterubury and Sharia Law

He has shown that the only thing less relevant in Britain than the monarchy is the C of E. Apparently, he said in an interview that the incorporation of some aspects of sharia law into the laws of Britain was "inevitable." I assume he was just trying to be tolerant. At some point you need to stop being tolerant, particularly if you're the head of a Christian church, in a country where the development of laws unlike sharia over the past eight centuries has led to a system that guarantees the rights of minorities, against the majority and against troglodyte elements of their own minority. I think the man is simply daft, and since that evidently doesn't disqualify him from heading his church, it reflects on them as well.

Will the federal economic stimulus work? Ask Oregon.

The feds are planning a huge rebate plan to stimulate the economy. Before counting on it to restore growth, they should consider Oregon's experience. Due to its unique "kicker" program, through which Oregon rebates to taxpayers everything above its estimated revenues whenever that excess is more than 2% for the biennium, the Oregon economy was stimulated late in 2007 by the infusion of some $1.1 billion from the state treasury. In early 2008, we should be seeing the results.

In fact, when the governor first noticed that there was some potential for declining state revenues two weeks ago, he figured it would be in the "low tens of millions" for the biennium. One of the Republican leaders in the state legislature, where Republican support for the kicker is institutionalized, knew why:

Senate Republican Leader Ted Ferrioli of John Day said the $1 billion in “kicker” rebate checks sent out by Oregon late last year probably served as stimulus to the regional economy, offsetting some of the downturn hitting other states.

Two weeks later, the actual revenue forecast that the governor had been hinting at was released and, behold, rather than low tens of millions, it was $183 million. The cash vanished into the pockets of taxpayers with hardly a ripple on the overall economy.

This is roughly what Keynes would have predicted. His point was that when people get nervous, they stop spending. They don't become significantly less nervous when they are given modest amounts of money, so they won't change their spending habits much. If you want stimulus, have the government borrow and spend.

Pretty much nobody is Keynesian these days, although a few claim to be. One economist remarked that ""From an economic stimulus perspective, it will have the short-term effect of increasing spending and there will be the Keynesian multiplier effect." But this isn't a Keynesian multiplier, which results from increased government spending. It's just a multiplier.

The Bush theory has been to never stimulate with spending, only tax reduction. Democrats like the idea of spending, but they ignore the other half of Keynes' strategy, which was to cut back spending when times were good. At the bottom, this is a strategy to make economic gains by consuming without working for the money. It plays well in an election year, but it's lousy economics.

Oregon Budget Crisis -- 2008 meets 2002

Tom Potiowsky, the official Oregon state economist whose "Chinese water torture" method of estimating the declining state revenues six years ago were a staple feature of that crisis, is at it again. Tom is probably a good husband and kind to animals, but his inability to see the big picture meant that the legislature didn't grasp the magnitude of the previous crisis until it was upon them, and that the low-ball estimate of revenues led to a great flushing out of the state's coffers last fall (due to Oregon's kicker law, for those of you from out-of-state). Just as the country was starting to head downhill.

Oregon's economist is required to make public estimates of revenues every couple months or so. As the housing crisis was unfolding, Tom figured late last year that the effect on Oregon would be essentially nothing, despite the large role that forest products plays in the state economy. Now he's estimating that the state will take in $183 million (1.2%)less than expected between now and the end of the biennium on June 30, 2009.

State tax revenues in Oregon are overwhelmingly dependent on income taxes, which in turn are quite volatile. Property taxes are quite stable, sales taxes fairly stable, but income taxes depend on growth in a more leveraged fashion. The current estimate seems in line with the national consensus drop in estimates of GDP. Since income tax receipts are going to be much more volatile than that, this projection is probably still optimistic.

Here's my prediction. In six months, the estimate will be for a 3% fall in the 2007-2009 biennium. There will be some modest belt-tightening but tax receipts had a good head of steam at the outset and the shortfall will be manageable in this biennium.

I don't know when the estimate for 2009-2011 will be first released, but I'm going to guess it will be 5% below what the legislature had pencilled in at the end of the last session. The state's reserves, having been rebuilt modestly since the last recession, will have been wiped out by the shortfall in 2007-2009, and the legislature will again have the job of making serious cuts in services.

Of course, I'm the same guy who said the Republicans would have a contested convention in Minneapolis. I haven't given up hope, but it's a lot less likely than it was two weeks ago. So maybe I'm wrong again.