Business & Economics: July 2003 Archives
Why not link to another story you've all probably read already? Economist Tyler Cowen at the Volokh Conspiracy briefly explores the potential costs and benefits of establishing a market for betting on when terrorists will strike. Basically, Tyler thinks that the main danger of such a market would be an excess of accurate information that might lead to panic.
Tyler is quickly becoming one of my favorite Conspirators, and he has written some excellent posts on macroeconomics as well.
Update:
More by Glenn Reynolds of course. I try not to read Instapundit until I'm done with all my other sites, because otherwise I'll have a hard time thinking of something to write about that hasn't already been done.
In the comments section of my "A Brief Defense of Suburbia" post, Jody writes several times and mentions his fear/certainty that a continuously expanding suburbia will lead to the "depletion" of natural resources and available land. However, his concept of depletion is an economic myth that's used by various dooms-dayers to manipulate the masses.
The following explanation can be applied to almost any non-renewable resource, such as land, oil, or diamonds. (Renewable resources, such as trees and animals, will obviously never be depleted. Yes, animals can become extinct, but that's not because they're "used up".) I am not an economist, but I play one on TV. If you'll note the title of this blog, I'm not a master of anything, but the following views on depletion are economic and logical fact.
The myth of depletion is simple to state: if we don't force people to reduce their consumption of resource X, eventually all the X will be gone. This is false. It is true that if there is a finite supply of X that it can eventually be consumed, but it is not true that it is necessary to force people to reduce consumption in order to prevent depletion.
Consider oil. As the readily available supply of oil dwindles, the price of oil will start to increase due to free-market principles of supply and demand. This increase in price will have many effects.
1) People will use less oil, because it's more expensive. Thus the mere increase in price will reduce consumption all by itself, without any need for government coercion.
2) Suppliers will start hoarding. As prices rise, suppliers will observe that their oil will be more valuable in the future than it is today, and so they will begin to hoard their supply for the future (with each supplier making the determination of when to hold and when to sell based on their own costs). If too many start withholding, then others will start to sell as the price gets even higher. There is no need for cooperation between suppliers (and in fact cooperation cartels are always bad in free markets). Suppliers will act to ensure that they are able to reap the benefits of future scarcity, and thus there will always be some supply remaining to be had at some price.
3) New sources will become economically viable. There's lots of oil everywhere, but most of it is too hard to get to and isn't worth pumping. For example, there's far more oil under the ocean than there is under the dry land -- unfortunately, except for the parts of the ocean right near shore it's very expensive to utilize. However, as prices rise, sources of oil that aren't worth drilling now will suddenly become profitable, thereby increasing the available supply.
These three factors together will ensure that humanity will never "run out" of oil, or any other non-renewable resource. What about land? Good question. Apparently, there's more than 70 sextillion stars out there, I'll bet some of them have some nice real estate. Maybe even oil!
I'm not sure what the purpose of the Business Cycle Dating Committee of the National Bureau of Economic Research is; apparently, they're the guys responsible for telling us when recessions begin and end, but not until more than a year after the fact. That's like turning on the TV and getting yesterday's weather report. Yippie. Anyway, they've decided that the 2001 recession began in March and ended in November; that's what I remember reading last year, as well. (How can I get this job? Someone please hook me up.)
Bill Hobbs notes that the timeframe makes it obvious that it wasn't "Bush's Recession" as the Democrats are fond of saying; even though it started near the end of Clinton's term, it wasn't his fault either.
The 90s boom, the 2001 recession, and the subsequent recovery are all more tightly linked to market cycles and world events than to the policies of either Clinton or Bush. It's arguable that Reagan's policies from the 80s overheated the economy and led to the 90s and the recession, but neither recent president can really be credited (or blamed) for any of it.
In America, we love to pin everything on whoever is President at the moment, but the fact of the matter is that the President really doesn't have much power over the economy. Even Congressional actions tend to have effects that are delayed by several years. As I mentioned in my previous post about a political opinion poll, the economy is the #1 issue for voters leading up to the 2004 election; of the areas mentioned in the poll, the economy is also the one area where the President may have the least actual power.
EconoPundit is competing in this week's New Blog Showcase over at Truth Laid Bear. Steve's submission notes that since FDR's administration the Democrats have built their constituency through what is (essentially) a nefarious form of bribery -- they buy our votes with our own money. They take $1 from our pockets, waste 50 cents, and spend the other 50 cents on inefficient nonsense that we wouldn't buy for ourselves if we had the choice. Oh, right, and then they tell us it's "free".
The more money the government has, the more power it has. As I've noted in the past, the solution to government corruption isn't so-called campaign finance reform; power corrupts, and the only way to reduce the corruption within the federal government is to reduce its power.
I almost missed a rather large news item today: Microsoft is going to stop granting its employees stock options and instead begin giving them actual stock. As a result, the company will also expense these stock grants against their income, drastically cutting their profit on paper. If you're not aware, companies that give employees stock options generally don't subtract the value of those options from their income when determining expenses; a company that pays its workers partially with stock options rather than cash can eliminate huge costs from their budgets, boosting profits artificially. Essentially, using stock options to pay employees is tantamount to a giant pyramid scheme.
Bill Parish has been all over Microsoft for using this tactic, and wrote in 1999:
The fundamental problem is that Microsoft is incurring massive losses and only by accounting illusions are they able to show a profit. Specifically, Microsoft is granting excessive amounts of stock options that are allowing the company to understate its costs. You might ask yourself, what would happen to Microsoft's stock price if the public suddenly realized that they lost $10 billion in 1999 rather than earning the reported $7.8 billion? If 80 percent of its stock value or roughly $400 billion is the result of a pyramid scheme, one might also ask what kind of effect this could have on the retirement system. It is also important to note that this is a relatively new situation that did not occur before 1995. Microsoft has always been a highly valued stock and that might have been justified prior to 1995.Sounds kinda prescient, doesn't it? Now that Microsoft is going to (supposedly) stop these financial shenanigans -- and even pay a dividend -- what's going to become of the company? Bill Parish has claimed that Microsoft would be losing money rather than showing a profit if it wasn't paying salaries with options, but it's clear that the company's managers don't expect that to be the case now that the policy is changing.This situation is not about stock valuation, product quality or whether or not Microsoft has monopoly power in its markets. Nor is it part of a pro or anti-Microsoft movement. This situation is instead a shining example of financial fraud and corruption enabled by bad government policy. If not quickly and aggressively addressed, we will all be losers as credibility in our financial markets is destroyed.
All of this comes in the wake of President Bush's dividend tax cut, so perhaps Microsoft is on the leading edge of the new optimal equilibrium that will take shape under this tax structure.
