Tuesday, March 31, 2009

The case was never better put…

Jeffery Miron… Prof of Economics at Harvard writes…. (thanks to Greg Mankiw)

CAMBRIDGE, Massachusetts (CNN) -- Over the past two years, drug violence in Mexico has become a fixture of the daily news. Some of this violence pits drug cartels against one another; some involves confrontations between law enforcement and traffickers.

Recent estimates suggest thousands have lost their lives in this "war on drugs."

The U.S. and Mexican responses to this violence have been predictable: more troops and police, greater border controls and expanded enforcement of every kind. Escalation is the wrong response, however; drug prohibition is the cause of the violence.

Prohibition creates violence because it drives the drug market underground. This means buyers and sellers cannot resolve their disputes with lawsuits, arbitration or advertising, so they resort to violence instead.

Violence was common in the alcohol industry when it was banned during Prohibition, but not before or after.

Violence is the norm in illicit gambling markets but not in legal ones. Violence is routine when prostitution is banned but not when it's permitted. Violence results from policies that create black markets, not from the characteristics of the good or activity in question.

The only way to reduce violence, therefore, is to legalize drugs. Fortuitously, legalization is the right policy for a slew of other reasons.

Prohibition of drugs corrupts politicians and law enforcement by putting police, prosecutors, judges and politicians in the position to threaten the profits of an illicit trade. This is why bribery, threats and kidnapping are common for prohibited industries but rare otherwise. Mexico's recent history illustrates this dramatically.

Prohibition erodes protections against unreasonable search and seizure because neither party to a drug transaction has an incentive to report the activity to the police. Thus, enforcement requires intrusive tactics such as warrantless searches or undercover buys. The victimless nature of this so-called crime also encourages police to engage in racial profiling.

Prohibition has disastrous implications for national security. By eradicating coca plants in Colombia or poppy fields in Afghanistan, prohibition breeds resentment of the United States. By enriching those who produce and supply drugs, prohibition supports terrorists who sell protection services to drug traffickers.

Prohibition harms the public health. Patients suffering from cancer, glaucoma and other conditions cannot use marijuana under the laws of most states or the federal government despite abundant evidence of its efficacy. Terminally ill patients cannot always get adequate pain medication because doctors may fear prosecution by the Drug Enforcement Administration.

Drug users face restrictions on clean syringes that cause them to share contaminated needles, thereby spreading HIV, hepatitis and other blood-borne diseases.

Prohibitions breed disrespect for the law because despite draconian penalties and extensive enforcement, huge numbers of people still violate prohibition. This means those who break the law, and those who do not, learn that obeying laws is for suckers.

Prohibition is a drain on the public purse. Federal, state and local governments spend roughly $44 billion per year to enforce drug prohibition. These same governments forego roughly $33 billion per year in tax revenue they could collect from legalized drugs, assuming these were taxed at rates similar to those on alcohol and tobacco. Under prohibition, these revenues accrue to traffickers as increased profits.

The right policy, therefore, is to legalize drugs while using regulation and taxation to dampen irresponsible behavior related to drug use, such as driving under the influence. This makes more sense than prohibition because it avoids creation of a black market. This approach also allows those who believe they benefit from drug use to do so, as long as they do not harm others. iReport.com: Do you think it's time to legalize marijuana?

Legalization is desirable for all drugs, not just marijuana. The health risks of marijuana are lower than those of many other drugs, but that is not the crucial issue. Much of the traffic from Mexico or Colombia is for cocaine, heroin and other drugs, while marijuana production is increasingly domestic. Legalizing only marijuana would therefore fail to achieve many benefits of broader legalization.

It is impossible to reconcile respect for individual liberty with drug prohibition. The U.S. has been at the forefront of this puritanical policy for almost a century, with disastrous consequences at home and abroad.

The U.S. repealed Prohibition of alcohol at the height of the Great Depression, in part because of increasing violence and in part because of diminishing tax revenues. Similar concerns apply today, and Attorney General Eric Holder's recent announcement that the Drug Enforcement Administration will not raid medical marijuana distributors in California suggests an openness in the Obama administration to rethinking current practice.

Perhaps history will repeat itself, and the U.S. will abandon one of its most disastrous policy experiments.

Monday, March 30, 2009

Capitalism isn’t working and neither is gravity

It seems that in spite of the numerous warnings from scientists, greed and ego keep overcoming gravity. You may think gravity involves immutable forces you have zero control over. But no.

Many people are cheating. Some fly. Some have plastic surgery. Some wear bras. There seems no end. What they all have in common is the fact that theft and selfish egos lead them all to cheat.

This is of course a problem for the rest of society. Why should we waste precious resources like wire for bras, scholarships for plastic surgeons and taxpayer investments in pilots of national airlines all because we refuse to accept that gravity, like capitalism and trade are simply not working.

Best we choose something else - like weightlessness. Easily enough done. A flash of the legislative pen. Bit of mild consultation with weightlessness deniers club and… Done.

Much the same as legislating against capitalism and stopping climates changing by law really. All that is required is ego and theft.

Simply a matter of pushing hard and bearing down.

Saturday, March 28, 2009

Now You See It Now You Don’t

Some information here from the Economist March 7th - the remainder from my now 28 year old Ph.D studies and pondering.

A slightly obscure realm of physics is concerned with what seems to be as much a question of philosophy as of physics - the issue of the interaction between matter and anti matter.
Physicist Lucien Hardy asserted that when a particle meets its anti particle the pair explode in a burst of energy leaving nothing. His formulation did however leave open the possibility that the particles might collide and survive if they were unseen.

What nonsense is this? The "seen unseen" issue arises from the work of Bohr and Heisenburg in the 1920s showing that the very act of observing altered what was being observed and thus whatever "was" before it was seen could never be observed. More practically the act of observing plus all the apparatus being used to observe alters what is being observed - that apparatus includes the theories brought to the "seeing".

This then - starts to look a bit more exciting and relevant. If the thought apparatus brought to the observation process is in fact defining in some (unspecified) part what is being observed then we ought to be careful what we think.

The Economist reports however that two independent groups of physicists have demonstrated that things do indeed "exist" even when not seen (bad luck for the question "is a man wrong even when he says something in a dark wood and no woman can hear him"- at least for males).

The two teams - one from Japan and one from Canada - probed "reality" without disturbing it by using what is, in effect, an analogue model. Polarisation of photons (which are the particles making up light) involves behaviour which follows exactly the behaviour of the particles in Hardy's paradox.

The trick was to NOT gather all the information (shades of the non barking dog in the Sign of Four - again) in any one experiment and thus not "observe" in any one experiment. Data were then pooled so that the sum of the partial information allowed confirmation of collision and survival but only when not seen.

What might this mean for us lesser mortals trying to explain and describe social, economic and cultural behaviour. Well it admits the possibility, may even prove, that such phenomena exist but - the catch is they cannot be observed without altering them. So objectivity is both possible and impossible all at the same time.

The claim that objectivity is not possible is far from new but has been made before primarily as a matter of assertion and disciplinary defensiveness. These results suggest a more robust explanation is possible - and yes, theory and one's epistemological apparatus matter very, very much.

Wednesday, March 25, 2009

That mother tongue

Reading some (more) Jeremy Clarkson recently I was struck by the number of "modern" expressions which are to be found and discussed in his writing which are to be found in New Zealand verbiage.

Two examples are the term "whatever" and the use of "reflexive pronouns - the awful "and a drink for yourself, sir?"  I hasten to add that Clarkson criticises the latter, heavily, while bemoaning the fact that he is a bit old to use the former credibly.

Why have these expressions found their way into the New Zealand vernacular? Oddly, various other English linguistic habits have not - or at least to no great degree. We have not, for example, taken up Cockney rhyming slang with any great conviction - and where we have we generally don't know why. Even more strangely there is no consistency to what moves and what doesn't.

Australia has for instance not only taken on the rhyming slang notion (the Bengal lancer – cancer, accessible only via the Australian accent)  but has developed its own form. My favourite example was their terming (N.Z.) cricketer Mark Greatbatch, "Scones" - apparently from the notion of "a great batch of scones".

So language travels inconsistently as to form and content. Quite why I am unsure... a bad case of whatever – or to use another imbecilic abuse which is popular “random”.

The cost of picking exports – or imports

Many in NZ have been brought up with the notion that exports are per se good, the more of the them we produce the better off we are and imports are not… in fact they are bad news.

Notice then… that the two countries presently looking like suffering the most in the current environment are Germany and Japan – the two countries which rely most in the world on exports. In simple terms their customers are not buying – and won’t until their incomes rise again.

Most economists have long said that there is nothing inherently good or bad about exports or imports – what is good is to deploy your comparative advantage – doing what you do best – which for most involves imports in some areas and exports in others and changes.

Policies favouring one at the expense of the other are equally misguided.

Monday, March 23, 2009

Trust me I’m a trustee

At last someone has fingered the trustee regulatory structure. Company registrar Neville Harris in his report on finance company failures notes the lack of appropriate resource and the lateness of moves by trustees in pursuing their obligations.

I hear on radio the Chair of the Trustee Companies Assoc claim that finance companies didn’t supply enough information or misled trustees. He omitted to note that they have a statutory right to demand what they like when they like.

Ironically it is easy to mount an argument that says that the Companies Office – not a regulator at all – has been more effective than any of the regulatory apparatus – simply by doing a competent job. It is that office which has pursued miscreants and prosecuted where necessary.

All of which shows that competent prosecution of existing law on disclosure, reporting and complying with the legislation is far more use than exotic regulatory fantasies such as the trustee regime.

Sunday, March 22, 2009

Super profit for two super markets… YR

Recession or the threat thereof certainly highlights the state of economic knowledge amongst the populace at large and nowhere more so than with “bargain hunting enthusiasts” and those with a “conspiracy bent”.

We are apparently – and as reported on the nations state run TV channel – under threat of continued and systematic “rip off” from the country’s corporate grocers – the supermarkets…. one chain of which is organised in that hallowed and much vaunted N.Z. favourite of governance “the coo operative” a beast designed to be sharing and caring.

We are reliably informed that the twin evils of the Foodstuffs chain and Progressive Enterprises have (alone in the world and history to date – so this is some achievement) figured a way to snare enormous profits (3.8% is their net profit claim ) on a systematic basis from the hapless consumer by charging far too much for what they sell.

Alternatives apparently are simply not to be found.  That famous institution the “farmers market” is oh so much cheaper. Quite why the supermarket is so full then is beyond me. How they make even 3.8% is a mystery really – and if making all this money in supermarkets is merely a matter of raising prices at will, why are the prices as low as they are?

Frustrating and annoying is this nonsense we are peddled in the form of documentaries is we have to acknowledge too that when our regulator the Commerce Commission also cowers before the twin demons of a co operative of grocers and a diversified Australasian conglomerate that has for decades struggled to beat its cost of capital it may be little wonder that a few super shoppers figure they live in a world of rising prices, no competition and even fewer choices.

We await their opening night of course…

Those who feel retail margins are “obscene” should take a look at these actual margins – all before tax. They are an investors nightmare and a consumers delight.

Thursday, March 19, 2009

Not everyone thinks bond buying is a good sport – especially if Govt is the buyer

When the NZ dollar soars it’s usually not because NZ has done something wildly wonderful – it’s usually because someone else has done something stupid.

Today the US govt announced plans to buy a vast quantity of bonds and to pump vast sums into the Fred ad Fannie – and the kiwi took off as all hands sold Uncle Sam.

Difficult to avoid seeing this as a market verdict on policy – and one having the advantage of not being a pundit guessing game – its a for real score….

Tuesday, March 17, 2009

Selective geography and the media

I have unsurprisingly been bleating, from my home in Dunedin, about the number of people in the provinces who seem to think that “all NZ” will be paying for Auckland’s roads (that metropolitan area accounting for a third of the population and about 40% of NZ’s GDP) while failing to see that a great swathe of tax payer provided provincial service – health, education and welfare is paid for by the taxpayers of Akarana.

It was pointed out to me that this “we all have to pay for Auckland’s roads and it’s unfair” was the only story the media seemed capable of running on the issue – the well known ability to look no further than one’s nose – so what are people supposed to think.

Irony then then that I hear Christchurch Mayor Bob Parker and a West Coast  Mayor pointing out, on radio, that the fairness argument is flawed and common good across a variety of sectors is important.  I suppose eventually non journalists can actually get the journalists in the right space.

Sunday, March 15, 2009

Beware the OCR

Bernard Hickey writing in today’s Herald makes useful points about the apparent continued willingness of NZ bond investors to demand relatively low premia for risky investments.

One reason this is inclined to happen is that Government debt instruments and the oft quoted OCR have, at this point in the economy’s journey through recession almost nothing to do with risk and everything to do with currently favoured monetary policy. An OCR of 3% may represent the Governor's view of what rate will get people spending – but that is far from the same thing as a view on risk.

The credit default swap rates – in the markets where such instruments exist – tell a different story. In the EU for example where the equivalent of the OCR is hovering around the 1% – 2% mark CDS rates for Italian government bonds are around 2% or so higher while in the rather more robust Germany the rates are a more modest 0.9% higher (5 year bonds) – so much for European unity.

In assessing risk then – it pays to look beyond the posted price where those prices reflect monetary policy stances.

Tuesday, March 10, 2009

So who recycles the jobless?

Today the Ministry for the Environment announced that some 86 jobs are to be scrapped – some of them as a result of scaling back the Ministry's recycling programme.

Prof Don Boudreaux (Economics - George Mason University) notes that…..

No moral issue turns on recycling per se. It might well be immoral to waste things, but contrary to popular misconception, failure to recycle is not wasteful. Real waste happens when someone recycles for the sake of recycling—that is, recycles without weighing its costs and benefits. If it is immoral to waste, then it is immoral to recycle when the benefits of doing so are less than the costs of doing so, because such recycling is wasteful.

His is one of numerous conclusions about this activity. How much morality is involved in employing people to work on “recycling” programmes which seek to promote the unprofitable – then scrap the jobs when a recession (inevitably) drives the costs of continuing to employ to levels so uncomfortable that the fetish for recycling can no longer be defended?? 

Government Responsibilities

One salient point  made by NZ Prime Minister John Key in his recent interview with the WSJ was that governments everywhere had a responsibility to be realistic about their limitations in dealing with recessionary conditions. This is both important and unpopular with politicians.

He noted that N.Z. and especially government policies had little influence on the global economy. That is true for most if not all economies.

The worst of government intervention is the empty promise, the hopes thrown out then dashed – examples abound – in investor protection regulation, in consumer protection schemes and in occupational licensing.

Realism with a belief in how much can be achieved with the right incentives and positive action by individuals supported by strong government ground rules is a preferred path.

Monitor then the extent, if any, to which Key’s point is taken up by other leaders…

Monday, March 9, 2009

A measured view that would work…

This is a heartening effort from the PM…. hopefully people understand and get behind the sense in it….


John Key and the Wall St Journal

More wisdom from history….

Observing that fear mongering and fix it rhetoric are exactly the means by which not to repair the trust which has broken down in the financial sector, Professor Bruce Yandal (of bootleggers and Baptists fame) finished a recent piece with this:

We are in a time where silence would be golden. This is a time to clear the path and leave it alone. This novel idea was popularized in the 1750s by Vincent de Gournay, according to Wikipedia. It was Gournay who said “laissez faire et laissez passer,” or let it alone and let it pass.

We could do worse than follow the advice…..

Saturday, March 7, 2009

Fast feedback on regulatory failure

One feature of improved communication via blog and internet is the speeding home of roosting chickens. Nowhere more so than with the failed finance company Mascot proving in virtually an instant the risks of governments trying to “save” investors, government’s trying to “guess” what is and isn’t risky, the risk of policy making on the run, the risk of following the Bledisloe Cup opponents into policy and how easily government interventions can generate perverse incentives.

Brian Gaynor – not a regular favourite of mine – does a great job in pointing out some of the problems  and combined with troubles about the scheme I have, we should note:

  • the scheme is designed to run for two years. Any board of directors suspecting a problem in month 23 faces strong incentives to call in the receivers. It may even be their fiduciary obligation to do that.
  • why would trustees even bother any more? Depositors will get their money back anyway and no one is going to sue them. Their position is as idiotic as this ill conceived notion has ever had it.
  • It’s a great time for raising short term capital. With bank deposit rates low why wouldn’t you buy what is in effect a call option priced at zero. You get the upside, the taxpayer pays any downside.

And all that is before we address the effect on the incentives relating to what those raising capital actually do with it – all we can be sure of there is that it will be put to more risky uses than it would without a guarantee.

The mistake in all of this would be to think that by  “making” the Treasury “do a better job” of applying the criteria or doing “more” due diligence these problems can be “fixed”.

The problem to be addressed is the need to understand and accept that:

  1. no one and no institution can reduce risk to zero.
  2. amongst arrangements to manage risk the worst choices are:
  • regulatory interventions which simply shift costs from depositor to taxpayer, and
  • government created quangos such as the trustee tangle where no one apart from depositors loses their shirt for incompetence.

Happily it is a very short time since this farce began…. it may be a short time until it ends.

Thursday, March 5, 2009

Startling collapse - manufacturing

The Economist reports some startling numbers on the collapse of manufacturing which has followed (though is far from exclusively caused by) the credit crunch:

  • German machine tool manufactures 40% lower than a year ago
  • 9,000 Chinese toy exporters closed through insolvency
  • cars assembled in U.S. 60,000 fewer than a year ago
  • U.S. annualised industrial production down 13.8%
  • U.K. annualised industrial production down  16.4%

The best software security going…

The following from Techrepublic’s Znet distribution is a brilliant example of how the supply side is kept honest and innovative:

After two straight years of taking dead aim at Macbooks and Windows-powered machines, hackers at this year’s CanSecWest conference will have shiny new targets:  Web browsers and mobile phones.

According to CanSecWest organisers, there will be two separate Pwn2Own competitions this year — one pitting hackers against IE8, Firefox 3 and Safari and another targeting Google Android, Apple iPhone, Nokia Symbian and Windows Mobile.

[ SEE: 10 questions for MacBook hacker Dino Dai Zovi ]

On the browser side, the IE vs Firefox battle is sure to grab headlines although I’m not quite sure why Opera or Google’s Chrome was not included in the target list.

The rules of engagement are not yet available but it’s a safe bet that a successful attacker would have to exploit a zero-day vulnerability to gain full access to the target computer.

CanSecWest organizers plan to Sony VAIO P running Windows 7 as the platform for the contest.  The successful hacker gets to keep the machine.

[ SEE: Google Android vulnerable to drive-by browser exploit ]

The second contest — against mobile phone platforms — will be another closely watched affair.  Hackers have already successfully infiltrated the iPhone and Android platforms and there are known security problems in Symbian and Windows Mobile so we’re likely to see a lot of attention paid to this contest.

In 2007, New York-based security researcher Dino Dai Zovi teamed up with Shane Macaulay tohijack a MacBook Pro via a flaw in Apple’s QuickTime software.    A year later, hacker Charlie Miller needed just two minutes to exploit a Safari bug to win that contest.

Alex Sotirov also partnered with Macaulay in 2008 to exploit an Adobe Flash vulnerability on a Windows Vista box.  (Thanks to NonZealot for the correction).

It’s great to have all these brains working for me!!!

Tuesday, March 3, 2009

Depend on Govt to sit on Fannie

Excerpt from an NYT article today……  (pointer from MR see right)

“There is a commitment to restructure these companies, and we are going to want to retain a hand in the things that matter, like affordable housing and making sure that the housing economy doesn’t become a threat to the entire economy again,” said Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee. “Some of what these companies did will be returned to the private sector, and some of it is going to remain with a public entity.”

Republican lawmakers — many of whom believe the federal government should not be involved in the mortgage business at all — have signalled they will try to end the government’s involvement with Fannie and Freddie, even as they acknowledge that effort is likely to fail.

And lawmakers of all stripes are quietly voicing worries that government involvement in the mortgage industry could lead to the very problems that caused the current crisis.

“When you use mortgage companies for political purposes, such as helping low-income borrowers or expanding homeownership, you make bad economic decisions,” said Mr. Garrett, the Republican congressman. “And bad economic decisions are why we’re in this trouble right now.”

Analysts say that one reason Fannie Mae and Freddie Mac were privatized in the first place was to prevent political whims from dominating the mortgage marketplace. “

These two examples of half pregnancy have to be amongst the biggest rent seeking scams ever perpetrated.

Are there any ringing sounds yet?

With last nights sell off in US stocks (-4.7%) the trailing 52 week P|E ratio for the S&P 500 is 9.86 against its long run average of around 15. The Dow is in similar territory.

Does this mean the bottom is near or has been touched? No one knows and no one rings a bell. The NZ 52 week trailing P|E is 12.75 offering contrary evidence – it may not be there tonight of course.

Two standard deviations covers the present levels in all of these markets so there may be room for further south…… what is clear though is that this level of re pricing is likely to offer long term buyers something to think about.

Monday, March 2, 2009

Understandable but misguided

Wisdom from David Brooks, Op ed NYT

The political history of the 20th century is the history of social-engineering projects executed by well-intentioned people that began well and ended badly. There were big errors like communism, but also lesser ones, like a Vietnam War designed by the best and the brightest, urban renewal efforts that decimated neighborhoods, welfare policies that had the unintended effect of weakening families and development programs that left a string of white elephant projects across the world.

Sunday, March 1, 2009

The guessing game….

Growth forecasts used to put out the new Obama administration budget, followed by the consensus forecast of a panel of "Blue Chip" private forecasters (Source Greg Mankiw – follow his blog to the right.).

                        Obama        Private
2009:                 -1.2%           -1.9%
2010:                +3.2%           +2.1%
2011:                +4.0%           +2.9%
2012:                +4.6%           +2.9%
2013:                +4.2%           +2.8%

Accumulating the difference, Team Obama projects about 6 percent higher GDP in 2013 than private forecasters.