The First Offensive UN Force

A bit of history was made the other day, you may have missed it because it pertains to that Africa place everyone's heard so little about, specifically the Democratic Republic of Congo (or Congo for the rest of this post[1]). 

Conflict in eastern Congo has gone on for decades. All of Congo's neighbors have gotten involved at various points both directly and through proxies. The climax was the First and Second Congo Wars, Africa's deadliest conflict. Rwanda in particular has always been involved, partially to carry on fighting against Hutu militias that participated in the genocide. It is pretty much common knowledge that Rwanda sponsors rebel groups in eastern Congo.

Anyway, for the first time in UN peacekeeping history, a unit of 2,500 peacekeeping forces in Congo have been given an "offensive" mandate. Meaning they have been instructed to actively "neutralize" and "disarm" rebel groups. Unarmed US drones will also be deployed to assist with the fight. To assuage fears that this historic precedent is a historic precedent, the UN says the intervention force will be created "on an exceptional basis and without creating a precedent", oh politics.

In reality this is more of the UN making official what it has been trying to get away with in other conflicts. UN and French peacekeepers intervened on behalf of rebels (now the government) in Cote d'Ivoire, under the justification of protecting civilians from government forces. So now, in eastern Congo at least, its official, the UN has taken sides.

Laissez-faire and the Triangle Shirtwaist Fire

Here’s a story illustrating the need for some level of regulation on businesses. It's not about needing more or less necessarily, it's that there's an optimal level above none. 


The Triangle Shirtwaist Company (TSC) was one of the largest of nearly 500 garment factories on Manhattan in the early 1900s. It was a competitive industry, with no monopoly power. Around 70% of the workers in the garment industry in New York City were female. Most of the women were recent immigrants, or their children. They worked 7 days a week at least 11 hours a day for around $1 to $2 a day[1] minus what their employer deducted for electricity and supplies (adjusting for inflation, $1 back then was worth around $24 today). Given that 20% of the world population still lives on less than $1.25[2] a day, the wages paid, while low and for sweat-shop work, were still an initially attractive way out of poverty. 

But the women and some men of the garment shops came to believe they were paid too little given the value of their output.

Happy Anniversary!

Its been ten years since the United States launched an unprovoked invasion of Iraq. Iraq wasn't a threat to the United States or even its neighbors; so the only logical reason is George W. Bush having a personal grudge. The American people were deliberately lied to about the justification. In one such instance, according Hans Blitz (Chief UN Weapons Inspector at the time), a document alleging to show Iraqi intent to buy uranium from Niger, mentioned during a State of the Union Address, took the UN team "less than a day" to prove fake. But we all know it was bullshit; let's see what Bush spent to settle his grudge.

4,804 coalition troops were killed (of which 4,475 Americans), and over 32,000 wounded. Over 110,000 Iraqi civilians were killed (and that's low-balling it). Already over $1.6 trillion has been spent on the war. Estimates of the final bill for the United States range between $2.4 trillion to $6 trillion. And that's just in direct costs, to say nothing of the cost to families, the lost productivity and anguish from thousands dead and tens of thousands wounded, and the opportunity cost of lost benefits of anything else the money could've gone towards. The estimates are between 12.4% and 30% of where our national debt is projected to be in 10 years. Basically, people wouldn't really care so much about our debt right now had we not wasted trillions of dollars and gained nothing but dead and wounded for it. So good job America.

The Sequester, What’s its Deal?

The answer is it’s some economically damaging bullshit that won’t change our debt outlook. 

Blah blah automatic spending cuts, you get the point. Basically, it will cut around $1 trillion from government debt over the next ten years. $85 billion will be cut from the 2013 budget[1]. While those may be relatively small numbers compared to federal spending, it’s ignorant to think they are harmless. There’s a new and gathering body of evidence that shows government spending has a proportionally larger effect on the economy in times of economic weakness; cutting spending now is especially damaging to current economic growth.

Furthermore, the design of the cuts is especially inefficient. The cuts are across the board, meaning affected departments cannot pick the least effective programs to cut; they will be cut as much as the most needed programs. The cuts also treat any dollar the government uses as spending, when in fact much of what is being cut is investment. This is similar to saying you “spent” money by putting it in a retirement account. The government invests money in infrastructure, education, research, etc. which leads to future benefits. But investment will be cut the same as consumption or transfer payments, meaning the future benefits will be cut too.

Ignoring the horrible design, many have argued that the pain is worth the result. But the sequester fails to make significant cuts or change the long run trend in government debt. If current laws remain the same, federal debt will amount to $20 trillion by 2023, and will be growing by over $1 trillion a year. All the sequester does is buy a year of time through one-off cuts.

While 5% reduction in debt is still something, and we need to cut spending whether taxes are raised or not, the cuts that come in 2013 are especially damaging and foolish. The CBO and Macroeconomic Advisors (MA) project that the first year of cuts ($85 billion) will reduce economic growth by 0.6% in 2013. The CBO forecasts 750,000 less jobs by the end of 2013 than would be the case without cuts; more optimistically, MA projects the job losses, of 700,000, would take until the end of 2014 to fully occur[2]. This is for the equivalent of one month of spending by 2023. Why not push it back a year? It’d still be the same amount of spending without derailing what should otherwise be the best year of the recovery so far.

In the longer run, growth is projected to return to “normal”. My argument against that outlook is that the models they use don’t reflect dynamic factors such as the cost of poor infrastructure, or the inefficiency and inequality of an underfunded court system and other vital government functions. But leaving aside the fact that a functioning government is better for the economy than anarchy, the cuts are coming too early, and to the wrong areas of government spending. If we don’t reduce the spending growth of mandatory programs (which is primarily Medicare, Medicaid, and Social Security) then we will have gained nothing, at a high cost to the recovery. One only needs to look to Europe to see how a policy of spending cuts in a weak economy results. 

February Jobs Report

236,000 jobs were added in February, a relatively good number for the recovery. The unemployment rate went down to 7.7%, while the labor force participation rate was steady. November job growth was revised upward 23,000 to 219,000 jobs added. December job growth was revised down by 38,000 to 119,000 jobs.

Again, the job numbers show an improving labor market that has seemingly ignored the headwinds of tax increases[1] and the uncertainty of repeated deadline fiscal bargaining. While the cuts from the sequester have not yet impacted the economy, the uncertainty of them and expectations that they might happen already have. This suggests markets either didn't expect the cuts to happen or don't think they'll have much of an impact. We'll see what happens when the cuts are actually occurring.

Hugo Chávez is Dead!

Hugo Chávez died on March 5th after a two year battle with cancer. He had been president of Venezuela since 1999. It is great news. While the most likely outcome of a mandated election in 30 days of his death will be the election of his vice-president, Nicolás Maduro, Mr. Maduro lacks the charisma and loyal following of Chávez. The opposition has been making slow but steady electoral gains and is increasingly united. Either way, the new president will have to deal with the decaying façade of Chávez’s “21st Century Socialism”. 

This is Awkward

At the end of January, I posted about the BEA's 2012 fourth quarter GDP growth estimate. It was -0.1% annualized. Most of the decrease was due to cuts in government spending, and reductions in private business inventories (which is typically a sign of negative expectations). Positive contributors to GDP included nonresidential and residential fixed investment. 

The thing was, job numbers and stock market performance were suggestive of positive GDP growth. I expected that GDP growth would be revised up. It was; instead of contracting by 0.1%, the economy grew by 0.1%. It is still a bad number and still out of line with the job market performance. On the other hand inflation growth is slowing, and in urban areas has sat at 0% for a couple months now, which can indicate slowing growth.

Basically who knows.

Medical Malpractice

Here's a long post, it's about medical malpractice:

Malpractice is one of the most public and emotional issues in the topic of health care and health reform. For decades frivolous lawsuits, out of control awards, and increasing malpractice insurance costs have been blamed for increasing the cost of health care. The reality is much more complicated. The malpractice system is not a substantial factor behind health care costs or a contributor to rising health care cost. But the benefit of the system is very much in question. The malpractice system must both compensate victims and deter negligence to be effective; it struggles to do either. 

January Jobs Report

The January Jobs report came out Friday along with annual revisions to past jobs numbers. Job growth in January was 157,000, a relatively average number for the current recovery. The unemployment rate went up by 0.1% due to revisions to population and labor force estimates. The better news is the direction of the revisions to past numbers. November was revised up from 161,000 to 247,000 jobs added, a strong performance in the context of the recovery. December was revised up from 155,000 to 196,000. Generally speaking, the revisions to older months were upwards in direction. There were even a couple months of job growth above 300,000.

The graph below shows the revised numbers in white, and the previous numbers in red.




The jobs report gives further evidence in conflict with the fourth quarter contraction in GDP indicated in the BEA's preliminary estimates. As I noted in the previous post, these estimates are always revised to some degree, sometimes by over a percentage point. When looking at other indicators of economic strength, it seems very likely that GDP did in fact expand in the fourth quarter.

Wha??

According to the Bureau of Economic Analysis, the economy is, well was in the fourth quarter, contracting for the first time since 2009. It comes as quite a surprise to any non-doomsayer. The economy grew by 3.1% annualized in the third quarter, in the fourth it contracted by 0.1%. Granted, the "advance" report is revised multiple times; initially the advance report put third quarter GDP growth at 2% annualized. The fourth quarter number could be revised up, but will still be poor. 

The reported contraction was due in large part to reductions in government spending (mostly defense, which alone knocked 1.28% off growth), and in inventories. The reduction in inventories could indicate an expectation of worse growth going forward. Exports also took a hit, owing to a weak world economy.

On the other hand, the jobs data had the same middling growth during the fourth quarter, as in not indicating a worsening situation. Consumer spending and residential investment put in strong numbers as well.

It should become a bit clearer whether the good signs will be revised down or the bad signs revised up when the January jobs report and previous month revisions come out on Friday.

Graphs out of Context

Here is a graph:

This Year Should be Better

Economically, this year should be better than last; it should be the best year of the recovery so far. There are two main reasons why: the housing market and the Federal Reserve. 

The massive debt brought on by the crash is still slowly but surely being paid off. The number of homeowners who are delinquent or in foreclosure continues to drop, making housing investments less and less risky. 

Data is for the New York Fed district and not the whole county, but the general trend is the same.

Housing prices in real terms[1] and as a ratio to rental prices have dropped to pre-bubble levels. 

The average amount of time a home sits on the market before being bought has returned to average levels as well (between 4 and 5 months). Eventually simple demographics will take hold. The population of the United States continues to grow, and the number of people per household remains above average. The consultancy Macroeconomic Advisers projects that the United States will need an average of 1.6 million new houses per year over the next decade; in 2012 1 million were built. 

The Federal Reserve has been buying assets to create $40 billion of new money each month since September, and last month increased that amount to $85 billion. They have committed themselves to this level of money creation until unemployment is below 6.5%, so long as inflation remains stable. This will reduce the cost of borrowing and investing, and a bit of higher inflation would reduce the real value of debt over time and make exports more competitive. Generally speaking, it takes about six months for changes in Fed policy to have a real effect. 

So 2013 should be better than 2012, however politicians can still ruin it. 

December Jobs Report

155,000 jobs were created in December. The number is incredibly average for the disappointing recovery. The monthly average for 2012 was 152,900; the average for 2011 was 153,300. Such weak and consistent job growth puts the economy on track to recover all the jobs lost in the recession by March of 2015. But the population will be larger, so recovery to the rate of unemployment seen before the recession will take even longer.

Life in Kibera

I try to do a little more than just link to other people's writings, but this is one of the best articles I've read in a while:

Upwardly Mobile Africa: Boomtown Slum

And the correspondent undoubtedly knows a lot more on the subject than I do. The article tells the story of a day in Kibera, the largest shanty town slum in Africa. It is part of Nairobi, the capitol of Kenya. Around 1 million people live informally (i.e. as squatters), without a sign of the government, in one square mile.

The point of the article is that this is not a pit of humanity festering in poverty. It is a very poor place, but has a very entrepreneurial and growing economy. Signs of growth can be found all over, and new residents come from the country side to seek a better life. Many in Kibera have incomes above the poverty threshold (of $1.25 a day), many residents are counted among the middle class according to the World Banks threshold of $10 a day.

Before anyone gets too libertarian about it, the government can make these people better off. Their richer neighbors in Nairobi pay less for water and electricity because they don't rely on informal businesses to tap into the grid. But what can a cash-strapped government do? Formalizing the shanty town and giving property ownership to the residents would immediately boost their wealth and give the countless entrepreneurs access to capital. 

Ayn Rand

A random thought hit me today. It’s about Ayn Rand, but don’t let that stop you from reading this. Ayn Rand argued that true morality was to not care about anyone’s interest but your own. Everyone pursuing self-interest would end up maximizing their own benefit. And if everyone’s benefit is maximized, society is best off. This logic comes from the First Fundamental Theorem of Welfare Economics, which holds that “competitive equilibrium is Pareto Efficient”. Competitive equilibrium means markets are perfectly competitive (no one firm has market power), and all in equilibrium (supply equals demand, no shortages or surpluses). Pareto Efficient means that no one person can be made better off without making someone else worse off. 

There you have it, one paragraph. So if you were considering reading Atlas Shrugged, don’t worry about it. But there are a few essential requirements for the First Fundamental Theorem to work; and they can't possibly exist in the real world:

1. All markets are in equilibrium – The economist Leon Walras proved that if all but one market is in equilibrium (say, theoretically, 9 out of 10) the remaining unstudied market must also be in equilibrium. The flip side is that if any one market isn’t in equilibrium, other markets must also be in disequilibrium. Which sounds more likely?

2. No externalities/market failures/public goods – This condition can’t possibly be true in the real world. Think of pollution, without government regulation a coal power plant suffers no cost for pollution, but the wider public does. This means from the point of view of society, the power plant over-produces because its monetary cost of production is less than the true cost of production. This externality breaks the no surpluses condition of equilibrium. There are clearly market failures, asymmetry of information being a classic example. There are clearly public goods, such as education.

3. No interdependent utility – This is the condition Rand was so in to[1]. It means no one’s utility, or personal well-being, depends on anyone else’s. Parents don’t care about kids, friends don’t care about friends, etc. It clearly isn't the case.

So it’s impossible for the First Fundamental Theorem to exist in the real world, though it is a very useful model for studying economics theoretically. And it’s a shame people can’t distinguish between a thought experiment and legitimate policy. Pareto’s theories were eagerly adopted by supporters of planned economies because they can show that optimal efficiency can never be brought about by purely unregulated markets (which will not be perfectly competitive)[2].

The reason I bring this up is the last condition, no interdependent utility. Rand argued that an individual’s utility shouldn't be influenced by other individuals. She spent a lot of time on it, wrote rambling monologues on it, yelled “compromiser!” at Friedrich Hayek the only time they met. She cared that he wasn’t as much an ideologue as she was[3]. She cared about spreading her ideas, and convincing people to believe them. You could say that part of her utility depended on what other people thought and did. This of course violates the 3rd condition for the theory she espoused to be true. It simply can never exist; humans just don’t act that way.