Economics


Chemotherapy is a process I term ‘differential death’. Powerful poisons are administered to the body in hope that cancer cells are killed off either preferentially or at a higher rate than healthy body cells, albeit with the understanding that a certain amount of healthy cells will die during the process. Chemotherapy works only when there exists some finite difference between the growth of the cancer and growth of healthy cells that can be exploited.

In the following arguments, I assert some premises which I believe are supported by observation. One of these premises is that the Government of the United States includes some people who are very intelligent and very clever, despite the obvious inanity of the politicians. Pare away the first layer of politicians, the Congress, the executive branch, and their support ,and there are groups of people who have a very detailed and complete understanding of the various processes occurring in the world. There are also ‘think tanks’ whose stock in trade are ideas, plans and processes, most of which are vetted very thoroughly.


In the recent economic turmoil, the Federal Open Market Committee (The ‘Fed’) made certain statements, raised interest rates multiple times, and even manipulated the acquisition of Bear Sterns. It opened its discount window, once only available to regulated entities such as banks, to unregulated financial firms. While this was hailed as good in the first few instances, as the rates were lowered again and again, voices began to be heard suggesting that the Fed’s monetary policy was in error. In the aftermath of Bear Sterns, more and more editorials in the Wall Street Journal began to address the ‘moral hazard’ of making such liquidity available; the ‘moral hazard’ of Congresional action on bailouts of mortgage companies who made questionable loans; and the decline of the dollar worldwide. Since food commodities and oil are predominately denominated in dollars, the result of the weak dollar has been a run up of commodity prices. The restrictions on investment resulting from the ‘mortgage crises’ generated large amounts of liquidity that would have gone into SIVs and CMOs, but instead went into commodity speculation, exacerbating already high commodity prices.

Yet the ‘Fed’ does nothing. The White House talks about the global significance of a ‘strong dollar’ yet does nothing. The Treasury Secretary makes strong dollar statements one day and recants them the next. What is going on here? These are, in fact, some of the previously mentioned intelligent and clever people. If the news commentators, abjuring their fascination with Amy Winehouse, or other pop-tart-du-jour, can see and comment on the effects of a weak dollar, then it should be blindingly obvious to even politicians.

These events did not occur in a global vacuum. Let’s look at a few of the boundary conditions. China is a developing economy whose growth is poised at double digits. China’s labor markets provide US companies with a means of inexpensive labor for manufacturing. As a result, China sells an enormous amount of goods to the US. While China’s trade balance sheet is balanced insofar as imports and exports, the balance in trade with the US greatly favors exports. Further China is “The Middle Kingdom”, whose negotiation policy is “You give me this, and I’ll take that”. Repatriating profits from a business venture in China is tantamount to impossible. The only way to successfully do so is to create a Chinese corporation with a Chinese national, route the profits to this new corporation and purchase something from a party in which you, the original company, have an interest. Chinese economic development officials are literally dumbfounded at the concept that you, as a businessman, would not want to leave your money in China. China is about dominance and about regaining their (largely hypothetical) position as the Middle Kingdom: the number one military, industrial and political entity of the world.

The US buys goods from China. In return, China obtains a large amount of US currency. Money which is stationary is useless, so China uses this source of funds to invest in various opportunities including those in the US, buying US Treasuries. China also invests in other financial instruments which are dollar denominated. China is also gowing, and uses a significant amount of energy resources. This creates a huge demand for oil and other ‘portable’ sources of energy. Finally, China has a political system which favors central control which makes its responses a tad arthritic.


Economic inequity has been a casus beli for as long as man has existed. So if one were to fight a war with a major power, how would one go about it? Iraq is not a major power. Success in the war in Iraq under whatever one wants to characterize as success, can be obtained through force of arms. Similar arguments can be forwarded for most of the medium sized countries, but the real question is how does one wage war on a China, or a Russia. Even smaller countries such as Venezuela and Iran, due to their economic coupling, cannot be warred upon by force of arms. This is especially true for those countries with their own capable militaries and those with strategic nuclear weapons.

To successfully challenge China, Russia, Iran or Venezuela, they must remain unaware that the war is even being fought.

The United States is by far the most dynamic economy of the world. In its normal course of business, hundreds of companies are created and destroyed each year, with novel companies rising to the top of the capitalization structure in fields which didn’t exist even as much as five years ago. Companies providing basic commodities adapt or are driven under by the competition. A 20% bear market drop in the Dow represents the GDP of almost half of the rest of the world. The markets have legacy sayings — Wall Street sneezes and the rest of the world gets the flu.

So if, by analogy we view the United States as the body and the influence of China as malignant cells, how can we wage war to eliminate this influence. Strangely enough, depressing the value of the dollar is one very astute way. The results of this particular brand of chemotherapy is already showing results. Yes, it’s painful, and yes we are losing our hair, but as a result of the rise in commodity prices, business in China is becoming unprofitable. Even Wall-Mart is reconsidering its manufacturing operations there. Manufacturers, faced with shipping costs that are three to four times the production cost in China, have to sell at markups to cover these costs. It becomes cheaper to manufacturer the products here in the United States. Factories which were moth-balled are being re-opened. It is estimated that the current shipping and energy costs amount to an 9% tarrif on Chinese goods.

The rise of dollar denominated oil has forced China to finally raise its subsidized fuel price to its population by 18%. This has an immediate adverse effect on economic growth which is propelled by both energy and capital. And the Chinese citizens who worked their way to the middle class only to find their manufacturing jobs eliminated, become a burden and place demands for a support net on the government. More money flows into social security and less into the military. And the present value of the investments China has placed in US Treasuries and financial institutions is dwindling. The capital investments they do have are decreasing in value both due to inflation and exchange rates. China has recently allows its currency to increase with respect to the dollar in response to this. This only further makes its products less competitive. So as long as the US can withstand the pain of the chemotherapy, China’s influence will lessen.

While the main force of this attack I believe is China, a more subtle attack is being waged on Saudi Arabia and Russia. This attack consists of inflating the incomes of these countries beyond their ability to control. Saudi institutions like KAUST reflect the belief that money can buy prominence in research and technology, as well as stability and respect. Enormous sums are being spent in developing universities with the belief that a religiously restrictive and closed society can become host to a modern research institution. What both Saudi Arabia and Russia don’t understand is that the wealth and power of the United States is not in its things but in its attitudes, freedoms and optimism. When the price of oil falls, as it must, programs in these countries dependent on this cash flow will cease to function. Chavez in Venezuela is spending his oil revenue on vote buying social programs and doing little to build his country’s infrastructure. When the revenue is no longer there to support the programs, they too will cause more problems for Chavez than the United States ever did.

So as long as we can take the pain and adjust a little, we can limit the influence of the cancer. After all, hair can grow back. America needs to see to the aspects of our society that allow this to work — that is creativity, flexibility, inexhaustible energy and freedom.

Pity poor George W. Bush. Already under fire from some quarters for his decision to attend the Olympic Games in Beijing, he drew more fire for keeping his harshest words for China out of his speeches in Beijing, and more fire still for being in Beijing and “out of the loop” for the sudden Russian invasion of Georgia. For many, just more proof that W is a bumbling fool.

But in reference to both China and Russia, it’s really Bush’s foes who are foolish, and W who really understands what is needed. Whether we like it or not, the world is currently geopolitically divided into four power blocks: the United States, Russia, China, and everyone else. The European Union and Japan can compete economically (though each is less of a competitor than either seems to realize) but lack any credible military power projection. The rest of the world may have armies, but has neither the economic might nor the infrastructure to really project them. Like it or hate it, at the present time the US really only has two rivals for hegemony: Russia and China.

And since 1972, the United States has conducted a long, slow, steady dance which has slowly but steadily transformed the People’s Republic of China from an insular, xenophobic rival into an engaged, cosmopolitan economic partner. The PRC remains an autocratic state run by a cabal which can be brutal but which, increasingly, hides its iron fist in a velvet glove. Most importantly, the PRC’s leadership has adopted a nearly explicit bargain with its people: in return for your obedience we will deliver you prosperity. This means that the PRC has little choice but to grant a growing class of wealthy capitalists and prosperous businessmen increasing freedom of action. While these classes may be largely apolitical, they will make increasing demands for their own personal, economic, and social freedom. And the Chinese will have to either deliver or watch the prosperity they need vanish.

Sadly, since 1992, Russia has taken an opposite course: clawing its way out of Communist tyranny only to fall into the worst excesses of kleptocracy and crony capitalism. As China has been building economic freedom, Russia has been reducing it—limiting wealth and influence to a tiny class of criminal overlords and political cronies. And while the Chinese leaders increasingly choose to conceal their true power, Vladimir Putin has been steadily accumulating the trappings and practice of the Czars of old. And now, at long last, he has taken up the favorite Czarist pastime: gobbling up vulnerable neighbors on the most transparent of pretenses.

Unfortunately, much as we might like to, we simply can’t afford to meet such Russian aggression openly on the battlefield. Any large direct confrontation between American and Russian forces must result in either many, many Russian soldiers killed by American weapons or vice-versa. And that means that in any such confrontation, the specter of nuclear retaliation cannot be avoided. No matter how unlikely, the very thought of nuclear escalation must give us pause, especially against someone with Putin’s sociopathic patterns. Yet we cannot allow Russia to simply crush sovereign nations without limit or reprisal.

So the Administration’s strategy of avoiding rattling the saber in favor of threatening credible economic and political reprisals makes sense. As does the Administration’s willingness to allow the Russians to save face after what was, after all, a profoundly stupid move by the Georgians. And a move done in clear opposition to the consistent advice and counsel of the United States. No matter what provocations Russia engaged in—and the evidence is building that they all but directed separatist attacks—Georgia’s overwhelming military response targeting Russian “peacekeepers” directly was the worst possible response. And one which greatly limited American ability to back the Georgians.

But, as long as Russian aggression can be contained by a strong and unified stance by the US and its allies, then in the long run, Russia is the less important concern. Drunk with oil profits, and headed by a burgeoning Napolean, Russia is an important short-term threat. But it is also an aging nation with a declining population, crumbling infrastructure, and rampant corruption. In the long run, it is energetic China, with its huge population, exploding economy, and tremendous optimism which will be the great rival or the great partner of the United States. Bush can’t afford to ignore or underestimate Russia, but he knows that China deserves the greater attention.

The greater attention, and the greater respect. China remains a nation with oppressive laws, cavalier treatment of certain basic human rights, and problematic limits to the rule of law with respect to senior government and military officials. But it has also made almost unbelievable strides in a very short time. Beijing in 1988 was not a place many Westerners, much less many businessmen, would have chosen to live in. Beijing in 1998 had seen vast improvement, but still had much to do. The Beijing of 2008 has become a vibrant place of commerce, prosperity, and genuine cosmopolitan life. The limits on personal freedom remain, but have become largely unimportant for daily life: more Singapore than Communist China. Serious problems remain, but the urban centers of China of today are far more similar to those of Korea or Japan than most would have predicted even a decade ago.

So W was right when he expressed his strategy to Bob Costas in a brief, but frank interview. To influence China we must remain engaged with China. And to remain engaged with China, we must show clearly that we respect China and her recent accomplishments. To be sure, we must continue to use that relationship to urge reform and liberty, but we don’t have to slap the Chinese in the face during their big moment. Instead, we can do exactly what W did: call clear attention to the problems but keep the greater focus on the positive changes in China and the decades-old Sino-American relationship that has helped to produce them.

Cars are manly. That is, they used to be. Some of them still are. Minivans never were. Because men stopped doing manly things like strip mining, offshore drilling, and refinery construction, gas is expensive. Because gas is expensive, cars are becoming girly and nancy-boys with girly cars (Prius, Smart Car, anything hybrid, and anything that has to slow down to go over a speed bump) are clogging to road. People out here are starting to claim that hybrid drivers should get to park in handicapped spaces. I readily concur that any many driving a hybrid qualifies as being handicapped.

Suffering through the high energy costs brought about by unmanliness does raise a quandry for real men — how to not pay your beer money to the gas man (or worse, to tax-lustful politicians). Especially when buying a new car (for when the Lotus is back in the garage for the winter) this is a question that will weigh on the mind (a space that should only be full of its rightful contents — sports, explosions, etc.)

The two least manly results of car buying are 1) to by an unmanly car (see aforementioned list) and 2) to get ripped off by paying too much for -any- car. The big selling push lately has been towards hybrid cars for their vaunted mpg ratings. As we’ve covered here before with proper hard numbers analysis, the overall money-in-your-pocket savings is questionable, since putting two engines in a car is costly (and heavy). Plus, you get the added shame of ending up with a hybrid.

In what seems friggin’ obvious, but ends up being pretty useful (as all true manly innovations are), a dude recently started making noise about it being easier to tell how much cash you’re saving by looking at your car’s gallons-per-mile rating instead of the mpg. Figure out how many gallons it takes to drive 1 mile (or 100, or 1000). You’ll start seeing the real difference, instead of the crap that the weasley car dealer is trying to push on you.

“The reality that few people appreciate is that improving fuel efficiency from 10 to 20 mpg is actually a more significant savings than improving from 25 to 50 mpg for the same distance of driving,” Larrick said. (See table below.)

(ScienceDaily)

Miles Per Gallon Gallons Consumed per 100 Miles Driven Gallons Consumed per 10,000 Miles Driven
10 10.00 1,000
15 6.67 667
20 5.00 500
25 4.00 400
30 3.33 333
35 2.86 286
40 2.50 250
45 2.22 222
50 2.00 200

(table also from ScienceDaily)

Since real men aren’t afraid of math (as evidence, see any post on this blog, cause math is friggin’ manly), this is just a chart of a function that is O(1/x). The same delta to x at a lower range of x values will have a greater effect than that delta at a higher range of x values. It’s a case of diminishing returns. Save the money you would spend on a hybrid car and spend it on a car with decent mileage, and comfort for you and your crew. The extra mileage increase from 30-35 mpg just isn’t going to pay you back.

Naturally, this is as naturally obvious to any real man as throwing a spiral or grilling steaks. But as a public service to any real men who may have been too distracted by the overall girliness of the world lately to allow his manly intelligence to reach this conclusion, I thought it bore repeating. (hat tip Darren at RightOnTheLeftCoast.)

I included a graph to help you explain this to people who struggle with numbers if there aren’t enough pictures (eco-women, unmanly men, congresscritters, etc).

Don’t be taken in and buy a hybrid. It bears repeating. Real men only need one engine, unless they’re driving the space shuttle. The only acceptable hybrid is a steak/bacon hybrid. That cannot be stated too often. Steakcon.

As gas prices hover somewhere between $3.65 and $4.50 (depending upon where you are and what you buy), and all manner of schemes, plans, and programs are discussed for reacting to that, there’s a simple question:

To Drill or Not to Drill?
 

There’s no question that America has substantial untapped oil reserves: in Alaska, off the shore, under the Great Plains. And new technologies may make recovering even more of this affordable, even at sub-$100/barrel prices. At $125/barrel and above, we’ve definitely got more oil we could be extracting.

But of course, that comes with a price: damage to the environment and treating the symptoms without addressing the disease. Like a junkie facing withdrawal who simply scores more of his chosen poison, we’d simply be feeding our addition, not dealing with it.

So, to drill or not to drill? That’s the question for you all.

Oh, that and the obvious follow-up: whether we drill or not, what else do we do? If you’re pro-drilling, you’ve still got to face that we’re just delaying things. If you’re anti-drilling, you’ve still got to face that spiraling fuel prices lead to poverty and even death for real live people.

So, either way, what do we do after deciding to drill, or not to drill?

As I was walking my dog this morning, I walked past a day care center. Every morning I have to dodge cars making rapid blind turns into this establishment. It is located across a field from a local fire station. This morning, as I walked past, the fire alarm went off. Now this is a loud abrasive buzzing accompanied by several bright xenon strobes flashing. Day care operators dutifully herded their charges out the west doors onto the playground and across the field you could watch the firemen don their heavy rubberized coats and climb into their trucks. Let’s stipulate that there was a large amount of ‘optical and aural input’ available.

Yet as I watched (after dodging their turns), several moms exited the cars and led their children INTO the building. Into the loud buzzing, strobe flashing, entrance, which was in plain view of the playground where most of the children were gathered. Into a probable burning building. And not just one parent, either, but several—one after another, as I watched.

I was contemplating the stupidity and total recklessness of this behavior as the fire trucks arrived. One mom even walked her child around the fire truck and into the building. Now it was true that there were no visible flames, and no smoke that I could see, however, a prudent person usually allows the fire inspector/fire chief to make the determination that the building is, in fact, not on fire. Fires are tricky things.

Bursting through my consideration of the intellectual capacity of people who apparently try to set the record for the minimum time to detatch a young child from their busy and highly scheduled life, came the glint of an understanding. Americans are addicted to convenience , and investigating the possibility that your child might not be safe in a potentially burning building would be —well, inconvenient. Moms, after all, have to get to work on time, and bosses are so inconsiderate about leeway for tardiness for such things as making sure your children are safe. Best get the child to the caregiver where she can handle the situation.

Americans tolerate high gas prices. We are a mobile society. Good public transportation is available at a fractional ( and subsidized) cost of owning a car. But, you know, it’s so … inconvenient. The bus only comes around every 20 minutes, and the trips are at least 40 minutes long with those inconvenient stops to pick up other people.

Most supermarkets have a fresh food section. Raw broccoli stacked on iced shelves has given way to microwavable bags of cut broccoli. Fresh fruit and vegetables, and raw ingredients such as flour, and fresh meat comprise perhaps 15% of the store’s floor area. The rest is given over to bagged food, frozen prepared meals, sliced and prepared meats (even the fresh meat section has pre-marinated chickens, stuffed fish, peppered filets), and cans and cans of highly processed food. All very convenient.

Internet sex sites? Very convenient — avoids the problems of building a relationship. Everything you dated to find out is strewn out in explicit detail.

Americans are the most productive people in the world. The gross state product of even a medium state exceeds that of say Russia. Americans can do this because they are absolved of the inconveniences of preparing foods, riding transportation to work, having romantic relationships with people in the real world, or even exhibiting concern about the safety of their children.

The 9/11 attack in New York irritated people because it was highly inconvenient —for Mayor Guillani, — disrupting the nicely flowing pattern of lives with inconvenient items such as falling concrete, flames, choking dust and mounds of debris, not to mention having to consider that “someone doesn’t like America’ which doesn’t fit in to the convenient conceptual framework established by the media, Madison Avenue and the barrage of stimuli that directs your drinking, buying, selling, eating and sleeping habits.

Fortunately, we had a convenient resource available—the US Military, which we could send out to tidy up all of this nasty inconvenience in the form of radical Taliban governments and genocidal Baathist dictators. But sadly we had forgotten how inconvenient some of these things—like obtaining democracy—could be. We actually have to make sacrifices.

Fortunately, for most of us, this war on inconvenience, is not itself a source of inconvenience. Aside from the annoying increases in the cost of gasoline, and the continual barrage of combat KIA statistics in the media, our lives haven’t changed much. The sacrifices made are limited — scarcely a fraction of those who are killed by our use of the convenient automobile.

In World War II, we fought another war on inconvenience. In the 1940’s however, we weren’t so productive, and as a result, fighting that war required us to substantially alter our lifestyles. We allowed, even pushed, women into the work force; voluntarily limited our consumption of meat, sugar, rope, and a plethora of other materials, all rationed in the effort to support the military; and accepted a significant curtailment of our rights. And as a result of this, everyone was affected by the war. Everyone had a stake in the outcome.

With our productivity level today, in order to subject the population to the 1940’s level of sacrifice and commitment, we would have to broaden the war on inconvenience to significantly stress our economy. To ensure that every child toting mom at the daycare understood that the United States was making a committment to democracy and freedom, one that would curtail her addiction to convenience, we would have to simultaneously declare war on Iran, Syria, Russia, Nigeria, Venezuela and Somalia while rendering assistance to Darfur, Kosovo, the rest of the Balkans, with the occasional side trip to Sumatra to provide earthquake and tsunami relief.

Hmmmm.

A member of my family has a jaw related problem where the little pads behind the mandible bone are displaced upwards causing mal-occlusion of the teeth, popping, and some significant pain. Unfortunately this is classified as TMJ which is not covered by either dental or medical insurance. (I never have figured why this particular body part is unique.) It tums out that there is a surgeon in Florida who fixes this by taking a bit of belly fat and transplants it behind the bone where it transforms into new cartiledge relieving the problem. Success rate is 100%. Cost is $50,000 not counting travel and lodging for the week in Florida. (Remember—not covered by insurance.)

Anyway, diagnosing this problem leads me to my latest rant. In order to identify that TMJ was indeed was the culprit, a MRI was used. Imaging my surprise when when I got a bill for $1890.00. ( They didn’t have my insurance information and somehow this procedure slipped through a crack in the authorization process—I guess discovering that the problem is TMJ related IS covered—at least once.)

After giving them the revised insurance information, the new bill was about $200.00. Fascinated, I delved into the explanations of benefits—that fine printed gobbly-gook that insurance companies send to you that makes very little, if any, sense. The original $1890 was discounted by $920 since this was part of the agreement with the insurance company. 80% of the balance was then covered leaving me with a portion of the deductable and the 20% to pay.

I asked about the $920 discount. If I paid cash for the entire original amount minus the discount, the hospital could receive their money 6-9 months earlier (this is Illinois and our Governor is balancing the budget by not paying the State’s obligations.) No. Not allowed. If you actually pay for the procedure you have to pay the full $1890.

So why the hell does a MRI cost $1890 in the first place. The reason stated is that the machines cost over $3,000,000 and they have to recover the cost. Well, the hospital cost $48,7000,000 and the cost isn’t allocated over the 295 beds in one night. A night in the hospital isn’t $165,000. A MRI system should remain serviceable for at least 10 years.

Unfortunately hospitals are all about competition. The replacement cycle for a MRI seems to be about 18 months. They want the entire cost of the equipment fully amortized in that period, so they can buy a new one to keep patients from going to “that other hospital”. That, and the fact that the State is entitled to “most favored rate” in clauses in State insurance contracts, insure that paying cash will always be more expensive than going through the insurance paperwork mill. The system is definitely broken!

Imagine if the Government, seeing as how they are so hot to get into health care, funded the acquisition of MRI machines for hospitals. The logic would run somewhat along the lines— the [insert your favorite agency] will purchase an MRI machine for the hospital, but will assume a 12 year service life. You are eligible for a new machine only after 12 years. Hospitals could of course pony up the $3 million for a new machine if they wanted, but with the cost borne by the Government (read taxpayer), the other hospitals in the program would be able to offer MRI scans for around $50-$100. This would cover the electricity and the skilled operator labor.

One benefit of this would be that they would be used more (further reducing the allocation of recurring costs and making them cheaper still) and serious diseases would be identified earlier reducing heath care costs. This strikes me as a more reasonable Government intrusion into health care than doling out benefits in accordance with the folks that brought you the IRS in all its simplicity.

Some units actually do MRI for a business. These businesses amortize over 10-15 years and sell MRIs for a fraction of the cost hospitals do. True, government subsidies to hospitals might drive these small busines owners out of business, but that should be icing on the Congressional cake.

Maybe if we start chipping away at the stupid stuff in healthcare insurance, we can actually make it better without becoming Sweden or Canada.

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