Relevant and even prescient commentary on news, politics and the economy.

The Rule of Capture and Legalized Theft

by cactus

The Rule of Capture and Legalized Theft

The rule of capture states that a resource belongs to the entity that, well, captured it, regardless of where that resource originated. In the US, it tends to apply to oil and natural gas development.

What the rule of capture implies is that if you and I are neighbors, and there’s an oil deposit underneath both our properties, if I stick a drill on my property, anything I suck out of there belongs to me. But oil (and natural gas and water) all move around, and when I extract stuff from under my property, it creates a vacuum, so that stuff that used to be under your property flows under mine. Put another way, when I extract oil or gas, some of what I’m extracting was originally under your property. Put yet another way, when I extract oil or gas, some of what I’m extracting was your property.

It gets worse… oil and gas producers typically engage in “fraccing” (hydraulic fracturing). That is, they pump a mixture of water, sand, and some noxious liquids under ground at high pressure to break the seams in which gas or oil are trapped in order to facilitate the flow of oil and gas. And that includes facilitating the flow of oil and gas from under your property to under theirs. If you’re wondering how noxious the liquids that are used for this arem a story I was following earlier this year involves a herd of cows that collapsed and died after the cows drank some fluid that spilled from a drilling operation. I imagine it would take a lot more of that liquid to kill a cow than a fourth grader.

OK… now let’s change the story a bit…. if I dig a deep and wide enough hole at the edge of our properties, stuff from your property will fall into mine. If the hole is deep and wide enough, and your house is sufficiently close to the property line, I may be able to get an awful lot of your worldly belongings to fall into a pit inside my property. Now, its pretty clear that if I pull such a stunt off, the law won’t look kindly upon me.

The same is true if we’re talking about gold deposits under ground. Assuming neither of us has sold our mineral rights, we both own whatever gold could be found under our properties. Of course, if I dug out all the gold under my property, and then proceeded to dig a big enough hole (underground) along the edge of our properties, I might just manage to get some of the gold under your property to end up under mine. But while I am no attorney, I suspect the law would not look kindly upon me if I did that.

So what is the difference? Before you think about it too much, or I provide my answer, let me hasten to add – this is not a “commons” issue. The commons are just that, the commons. They belong to everyone – that is not true of your house, or minerals underground in your land.

Now, my guess is the difference is that oil and gas flow more easily than, say, gold underground or a home above-ground. But all that means is that its harder to tell if oil or gas coming out of my pump originated under your property and hence was originally yours. As I see it, this rule countenances theft because it is difficult for anyone to spot the transition from when a specific activity doesn’t involve taking someone else’s property to when that same activity does involve seizing someone else’s property. I think its a really bad reason to forcibly assign one person’s property rights to another. I would have thought the shoe should be on the other foot, and the driller should be the one required to prove that a) they haven’t taken oil or gas that was originally under someone else’s property much less b) pumped noxious stuff under someone else’s property at high pressure. Its not impossible to do… it just requires putting an impermeable barrier between the two properties that extends deeper than oil or gas deposit. Costly? Well, yes. But the alternative to doing so is essentially theft by omission which would never be tolerated as an excuse in any other milieu.

At least, I hope it won’t be tolerated when applied to something other than oil and gas. In a world in which Goldman, Welfare, Queen & Sachs plays such a prominent role, I worry about what will happen when the folks on Wall Street learn about this and decide to start drilling around my 401-k.

Your thoughts?
by cactus

Comments (0) | |

Government Site to Check

Mish sends us to “Track the Money,”’s breakdown of where funds have been sent and spent.

He’s not happy, but I suspect he’s suffering the Jared Bernstein Problem: only looking at one side of the equation.

But—and this is the key “but”—the reason it is right to do that is that ARRA money has two-way flow. It supports jobs and production, both priming the pump and moving production forward. This works if (1) the cost is minimal and (2) the production will be saleable (avoid the “double-dip”). Which implies (1) domestic interest rates must remain near zero and either (2a) U.S. consumer demand for domestic goods must increase or (2b) the U.S. dollar must depreciate, making our goods more desired abroad.

All of the above is reasonable and conceivable, even if it does imply the stock market may be overvalued.

And if the recent reports are true, the biggest effect of the stimulus has been in stabilizing education, which reaps long-term benefits, as conservative economist Ed Glaeser noted last month.

But that’s the stimulus. The bailout money, well, that’s another question. And another post.

Tags: , , , , , Comments (0) | |

A Difference in National Priorities

AIG is bankrupt, but Manchester United still wears their logo.

However, when Dutch bank DSB Bank NV filed bankruptcy, Stephen Colbert had to step in to sponsor U.S. Speedskating?

Maybe the Dutch understand Sports Economics and the Americans don’t?*

*J.C. Bradbury, Dennis Coates, Skip Sauer, to name just three, would dissent from the last statement. But they might believe the Dutch pay better attention.

Tags: , Comments (0) | |

Ultra Amateurish Thoughts on “Optimal Fiscal Policy in a Liquidity Trap (Ultra-Wonkish)”

Paul Krugman argued that optimal fiscal policy in a liquidity trap targets unemployment equal to the non accelerating inflation rate of unemployment (NAIRU). He uses a model with Ricardian equivalence. This means that the public debt does not affect consumption.

When he wrote his post, I said I thought his conclusion depended on this assumption. My thought was that deficit spending which keeps unemployment equal to the NAIRU will imply high public debt after the economy is out of the liquidity trap. In the real world, such public debt creates the illusion of wealth which causes higher consumption than people would choose if they were deluded. This is a cost of high public debt. I guessed that it meant that one should accept higher than NAIRU unemployment.

Formally it is possible to achieve NAIRU unemployment without deficit spending. Increased public spending financed by increased taxes stimulates the economy. In Krugman’s model with Ricardian equivalence a balanced budget spending increase stimulates just as much as deficit financed public spending. In the real world somewhat less for dollar of public spending, but the NAIRU can still be achieved. Of course in the real world it is very hard to raise taxes.

So my argument becomes “assuming you can’t raise taxes and can only adjust public spending, is it optimal to set the unemployment rate equal to the NAIRU?”
I have a new answer. First assume that there is public spending which can be rescheduled without any inefficiency. That is it doesn’t matter at all if we do it now or do it later. In theory some spending on building infrastructure or on maintenance of infrastructure could be like this.

With that strong assumption, the optimal unemployment rate during a liquidity trap is the NAIRU even if Ricardian equivalence doesn’t hold.
The reason is that the duration of the liquidity trap is endogenous. OK a liquidity trap occurs when the nominal interest rate which gives unemployment at the NAIR is negative. Imagine an exogenous shock which will cause a liquidity trap lasting for say 2 years. Krugman says raise public spending during those 2 years so the unemployment rate is NAI. The spend normally. This is fine if taxes can be raised or if the resulting debt is sustainable and there is Ricardian equivalence.
Assuming taxes are fixed such a policy would require spending cuts after 2 years.
That does not imply unemployment higher than the NAIRU after 2 years. Lets say in the third year, the optimal interest rate would be 1% for normal public spending. Cutting spending so that the NAIRU interest rate is 0% is consistent with NAI unemployment. The period of zero interest rates can be extended until the extra debt built up during the 2 years of low demand is paid off.

It is not necessary to accept unemployment over the NAUIRU in order to deal with deficits even if tax increases are absolutely impossible.

It is necessary to time public spending for purely macroeconomic reasons, so this conclusion depends on the assumption that changing the spending schedule is costless.

Comments (0) | |

Vague Thoughts on The Theory of the Firm, the Business Cycle and Kurt Vonnegut

Robert Waldmann

Don’t say you weren’t warned. I am trying to understand the effects of the switch from mechanically controlled machine tools to electronically controlled machine tools and then to digitally controlled machine tools. I don’t really know much about machine tools, but, then again, I don’t know much about firms or the business cycle either. My thoughts after the jump.

update: spelling checked

I warn again, don’t trust any claims of fact in this post.

The reference to Kurt Vonnegut is a reference to “player piano” a dystopian vision of mass unemployment due to industrial robots. It seems that Mr Vonnegut never checked how many people are actually employed in manufacturing, since he asserted that there would be massive unemployment even if people demanded services from other people. So I am not going to predict massive unemployment.

I am partly stimulated by the Nobel Memorial Prize committee which gave the prize to Oliver Williamson for new contributions to the old theory of the firm — that is for trying to figure out the optimal amount of vertical integration. In very brief Williamson argued that vertical integration is efficient when intermediate goods are made with inflexible capital.

IIRC They key example is stamps for bashing metal which shape metal into one form. He noted that arms length market transactions don’t work in this case. Once the parts supplier has sunk money into the specific capital, the final goods manufacture can pay a price equal to marginal cost giving it 0 return on the sunk cost. Thus only a fool will sink money in capital which produces a good for only one possible customer without any guarantees. A long term contract promising to by a fixed amount of the part for a fixed price can make the transaction possible. Similarly things work out fine if the parts are made by the same firm which makes the final product, since the firm has no incentive to take advantage of itself.

(a bit of jargon here. To pay marginal cost to a supplier who has paid a fix cost of building specialized capital is called “to seize the quasi-rent produced by the capital.” I will strikestick with “take advantage of” below.)

Note the example depends on the inflexibility of capital. Once it applied to grinding and assembling as well as stamping. That is, I am changing the subject to equipment which grinds, assembles, welds etc. The specific example of metal stamps still works, but many other productive processes have evolved in a way that protects a parts supplier from ruthless bargaining by their customer, the final goods producer.

Once upon a time, machines which ground and welded and so forth were controlled by the hands of skilled artisans. Also parts were put together by human hands. Then it was noted that a machine could do that on its own with its active bits (drill bits for example) guided by metal guides, by oddly shaped metal parts through which other metal parts slid or by oddly shaped gears.

This made it possible to substitute pieces of metal for people and the pieces of metal demanded no wages. The problem is that the machine could do only one thing. To make the mechanically controlled machine tool do something else, new metal parts had to be designed and made and the mechanically controlled machine tool and to be disassembled and reassembled. This process is called “re-tooling”.

Then technology shifted to analog electronically controlled machine tools (as described by Kurt Vonnegut). The movements were controlled by electronic signals read off a magnetic tape. The machine tool could be, in effect, retooled by leading it through the new motions once. I don’t know how this was done, but I assume that a manual control (like a joystick or something) was plugged in and the tape recorder was set to record. Then someone could try to make the machine tool perform a new task and keep trying and recording over the tape till the controller did it well (via the joystick). Probably frustrating, but quicker than designing, casting disassembling and reassembling.

Then they went digital. Now the motions are described with equations and the new instructions are typed on a keyboard. No one with skilled hands was needed (I mean the equations could be typed in by hunt and peck if necessary). The tragic irrelevance of the artisan in the digital age was made by David Noble (who was allegedly denied tenure at MIT, because he noted that technology is not everyone’s friend).

This made manufacturing much more flexible. This reduced the optimal degree of vertical integration. If suppliers just have to reprogram their machine tools when their current customer tries to take advantage of them, then they don’t neeed to be a long term contracts nor is efficiency enhanced if they merge with their customer.

Why low and behold, large firms are outsourcing more and more in the age of digitally operated machine tools. I’m sure Prof. Williamson has noted this fact which supports his analysis.

I am interested in something else — the business cycle. I think that increased flexibility helps us understand the late great moderation (near absence of the business cycle form 1982 through 2007), the reduction in temporary layoff unemployment, the unprecedented current average duration of unemployment, and the joblessness of recent recoveries.

The point is that it used to be that a rule of manufacturing is that when demand is slack one shuts down and retools. Producing new products and improving efficiency required a fairly long period without production — the period during which the machine tools were disassembled. Relatively few people were employed disassembling, and reassembling the mechanically controlled machine tools. Thus temporary layoffs were a necessary part of innovation. Given that, firms decided to schedule them at a time when demand was slack. If all firms have the same policy, recessions can happen due to a sunspot. In practice they had something to do with monetary policy and/or oil shocks, but the instability of the system made frequent severe recessions possible.

If it takes minutes not weeks or months to digitally retool, then there is no technological need for temporary layoffs. It might be better to deal with slack demand by cutting prices rather than production. Sometimes firms will choose to shut down a factory permanently, but they will have less reason to shut it down for weeks or months but not forever.

In fact, there has been a massive reduction in temporary layoff unemployment, and, in particular, in temporary layoff unemployment during recessions. This implies weaker recoveries — permanently laid off workers need to find new jobs and expanding firms need to find workers. In particular, this implies a less rapid increase in employment in recoveries. Finally it obviously implies longer average spells of unemployment for the same unemployment rate.

Many stylized facts about the changes in the business cycle can be explained by increased flexibility of capital, including, in particular, digitally operated machine tools.

Tags: , , , , , , Comments (0) | |

HR676: Serious policy? or Simple political posturing?

by Bruce Webb

A lot of progressives insist that there is a simple golden-bullet solution to the health care crisis. All we need to do is substitute the 30 page HR676 Single Payer/Medicare For All bill for the 1990 page HR3962. Which led me to ask “How can you possibly supply code language to overhaul the U.S. health care system in 30 pages?” Well you don’t, HR676 is in bluntest terms a political joke. I provide a lengthy breakdown in this post at the Bruce Web HR676: Political Fools’ Gold and in the interest of space provide a severely abbreviated version here.

Provisions of the bill:
Universal coverage for all residents including undocumented workers. (Sec 101)
No out of pocket expenses for anyone. (Sec 102 (c) )
Benefits include unlimited medical, dental, vision, perscription drugs, substance abuse treatment, long term care all at no direct cost to the end user. (Sec 102 (a) )
For profit medicine made illegal. Including dentistry, optometric services, pharmacies, out patient or in patient care. (Sec 103)
Investor owned medical facilities to be converted to non-profit status within one year with the government paying for “”reasonable financial losses incurred as a result of the conversion from for-profit to non-profit status. ” (Sec 103)
Private insurance for any benefit covered in the bill made illegal. (Sec 104)
Providers must either be salaried or paid on a set national schedule regardless of geographic variations. (Sec 202)
Costs will be covered by unspecified income taxes on the upper 5%, a “modest” payroll tax, and some tax on stock and bond transactions. (Sec 211)
All costs for construction and renovation of medical facilities to be paid for by the government (Sec 202)
Indian Health Service to be eliminated after five years. (Sec 401)
VA Hospital system potentially to be eliminated after ten years. (Sec 401)

It is pretty common for commenters on the Left to say that no one is proposing a government takeover of medical care on the model of the British National Health System. And they are right. This proposal goes far beyond that. There is not a single hysteric charge by the Limbaugh/Beck/Bachmann crowd that would not be supported by the text of this bill. With one exception, it doesn’t actually provide for death panels. But in every other respect this is a proposal for a communist-style health care system.

Think that is too strong? Well check out the bill as it is presented by its biggest supporter Physicians for a National Health Program.

Let me add my urging to theirs: Read the Text of H.R.676

Don’t let anyone tell you that this is just a case of opening Medicare to everybody, this is a root and branch transformation of the entire medical delivery system. Under this bill Perle Vision Centers and “your neighborhood Walgreens” become illegal operations. As it does any group owned clinic including in all likelihood your dentist. I mean who could afford to finance establishment of a new medical facility out of pocket with no outside investors?

The answer to the question in the title of my post? Blatant posturing for effect. No serious person would put forth a policy that at one and the same time provides unlimited free medical care for illegal immigrants and phases out a dedicated health care system for disabled veterans. Christ the campaign ads write themselves.

Tags: , Comments (0) | |

This is What a Giant Vampire Squid Looks Like

Via Greg Mitchell’s Twitter feed, lying isn’t just for the IB branch any more:

Goldman declined for three years to confirm their suspicions that it had bought their mortgages from a subprime lender, even after they wrote to Goldman’s then-Chief Executive Henry Paulson — later U.S. Treasury secretary — in 2003.

Unable to identify a lender, the couple could neither capitalize on a mortgage hardship provision that would allow them to defer some payments, nor on a state law enabling them to offset their debt against separate, investment-related claims against Goldman.

This one has something of a happy ending:

In July, the Beckers won a David-and-Goliath struggle when Goldman subsidiary MTGLQ Investors dropped its bid to seize their house. By then, the college-educated couple had been reduced to shopping for canned goods at flea markets and selling used ceramic glass.

But it required a judge who is more sane than Gretchen Morgenson of the NYT, and therefore knew to ignore false equivalencies:

“In bankruptcy court, they tried to portray us as incompetent or deadbeats,” said Celia Fabos-Becker, blinking back tears as she sat with her husband in their living room, with boxes of mortgage-related documents surrounding them….

As the months dragged on, Fabos-Becker finally found a filing with the Securities and Exchange Commission confirming that Goldman had bought the mortgages. Then, when a lawyer for MTGLQ showed up at a June 2007 court hearing on the stock battle, U.S. District Judge William Alsup of the Northern District of California demanded to know the firm’s relationship to Goldman, telling the attorney that he hates “spin.”

The lawyer acknowledged that MTGLQ was a Goldman affiliate.

That was an understatement. MTGLQ, a limited partnership, is a wholly owned subsidiary of Goldman that’s housed at the company’s headquarters at 85 Broad Street in New York, public records show.

In July, after U.S. Bankruptcy Judge Roger Efremsky of the Northern District of California threatened to impose “significant sanctions” if the firm failed to complete a promised settlement with the Beckers, Goldman dropped its claims for $626,000, far more than the couple’s original $356,000 in mortgages and $70,000 in missed payments. The firm gave the Beckers a new, 30-year mortgage at 5 percent interest.

If anyone in ObamaNation wonders why the voters hate the bailouts, go read the whole thing.

Tags: , , , Comments (0) | |

Are exporters in Asia real-ly losing their competitive edges?

by Rebecca

Central banks across Asia are concerned and actively engaged in some kind of currency manipulation – direct intervention, quasi-capital controls, and/or public speech (I will refer to this later, but RGE published a great article to the fact) – as investors flock to global capital markets seeking the “risk-on” trade. Central banks are attempting to stem the sometimes sharp currency appreciation, however, real exchange rates remain competitive.

Over the last three months, the $USD has dropped 3.6% against the Singapore dollar, 4% against the Malaysian ringgit, 6.1% against Indonesian rupiah, 1.9% against the Thai baht, 3.6% against Indian Rupee, 6.8% against the Korean won, and 1.8% against the Taiwan dollar.

The chart illustrates the trend in key Asian (not including China, whose exchange rate is explicitly pegged at 6.83 since July 2008) nominal exchange rates (measured in local currency units per $USD) – appreciating , which has Asian export industries worried. Central banks are intervening (in some cases through direct $USD purchase), where further intervention is a near certainty as many of these countries see export growth as the impetus to recovery. As such, and according to RGE last week, Asian central bankers are faced with a dilemma:

Despite a flood of portfolio investments into many of the region’s asset markets since early 2009, Asia still needs foreign capital to stimulate investment and finance its current accounts. Therefore, facing a sluggish export recovery and a pegged Chinese renminbi, most countries have opted to contain currency appreciation via verbal and actual interventions to avoid losing competitiveness. Intervention in the foreign exchange market has led to record reserve growth of over US$70 billion in Q3 alone in emerging Asia ex-China. Although most Asian countries are expected to keep intervening amid some currency appreciation, several countries may impose restrictions on foreign currency transactions. Given buoyant equity markets, attractive carry trades and the U.S. dollar weakness, policy measures will not contain the impact of capital inflows on Asian currencies, meaning that some appreciation from the least trade-dependent countries is to be expected. Taiwan is the country where capital controls or new restrictions are most likely to be implemented.

True, Asian nominal exchange rates are appreciating (sharply in some cases); but what one needs to consider is the real effective exchange rate. Actually, real effective exchange rates (taking also into account relative prices) remain rather competitive. In fact, only Indonesia and South Korea are experiencing any substantial real appreciation, and South Korea’s coming off of a very low base.

The chart above illustrates the real exchange rate: the nominal exchange rate defined in units of home currency per unit of foreign currency * (foreign price level)/(home price level). A movement up indicates a real appreciation of the local currency against the country’s trading partners.

Real exchange rates in Malaysia, Thailand, Taiwan, and India fell in the latest monthly data point; and furthermore, some are seeing the downward trend intact. Indonesian policymakers are worried – the sharp appreciation of its currency is growing the real exchange rate quickly.

It’s a complicated policy world out there – a hodgepodge of monetary stimulus, capital controls, and fiscal deficits. Something’s gotta give; and my bet’s that it will not be the currency. Direct intervention and further capital controls are on the way in Asia in spite of the need for foreign-sponsored domestic investment.

Rebecca Wilder

Tags: , , Comments (0) | |