Subsidies distort prices

Here is a  news report that the Quebec government is giving a $58 million subsidy to an asbestos mine in that province.

I am opposed to this subsidy because I believe subsidies should be given to consumers rather than producers.

Subsidies given to producers distort prices and encourage us to make poor purchasing decisions.

The article says there are “predictions that worldwide demand for asbestos would increase — especially in India — while the supply would drop.”  If this is correct then prices would go up and the mine would be able to reopen without subsidies.

Subsidies should be given to consumers in the form of a guaranteed income scheme or a negative income tax,


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The wisdom of a declining European fertility rate

The current issue of The Economist reports with some alarm that the European fertility rate is declining with the economic crisis.  It may be that young people have more wisdom than those who want the population to continue increasing.

Back in October of 2010 the World Wildlife Fund issued its Living Planet Report.

This report claims our ecological footprint exceeds the earths biocapacity by 50 percent and that by 2030 we will need two earths to support sustainable life on the planet.

Even if this report is exaggerated over population has to be a serious concern.  The more we increase the population the more resources will be consumed and the sooner there will be a major ecological and economic collapse.

The challenge is to rearrange our economic activity so that everyone can have comfortable life without the need for continued economic growth.

Population is a difficult and sensitive issue.  An interesting discussion of population limits is found in Raymond Firth’s book We the Tikopia.  Some excerpts from the chapter on population are on this  weblog.


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Banking union and rearranging the deck chairs

One of the ways being proposed to deal with the European part of the economic crisis is  centralized banking supervision.  More on that in this article in this week’s Economist.

The question here is would a banking union solve the problem.

Back when Russia was trying central planning and having problems, some people figured the solution was decentralized central planning.  Banking union  sounds like the reverse thinking. It also sounds like rearranging the deck chairs.

If the basic problems is the people or institutions or governments to whom the banks have loaned money are unable to repay those debts then centralization will not work because it will do nothing to reduce or repay the debt.

I think the financial side of the current economic crisis is rooted in the way we create money.  For more on this please see the essay on this  weblog titled “LETS go to market: Dealing with the economic crisis.”


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The deceptive wealth of nations

This weeks Economist has an article about a report from the United Nations on calculating the wealth of nations.

At least this report recognizes that natural resources are as important as  infrastructure and human capital  but are they all of equal importance?

The article says “A country can lose $100 billion-worth of pastureland, gain $100 billion-worth of skills and be no worse off than before.”

The problem with this statement is that if a country loses $ 100-billion worth of pastureland it probably will not be able produce as much food as before and some of its people may starve regardless of how many skills they have acquired.  The same applies to energy and mineral resources.

Another concern is that the value of natural resources is based on current prices which are based on current supply and demand.  Current prices may not take into account stocks and future shortages.

I have a problem with the idea that economic activity produces wealth.  What economic activity really does is to use up our resource base and is actually decreasing out wealth.  Infrastructure and skills allow us to use up resources more quickly.

While this report is valuable in that it focuses attention on the components of wealth it may be deceptive.  If natural resources are more important than infrastructure and human capital, it is telling us we are doing well when we are not.


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The cooperative solution

Another proposal for solving  the economic crisis is to organize the world into cooperatives.

I have a small soft spot for cooperatives in that once upon a time I worked as a journalist for credit unions on the Canadian prairies and I have on a shelf in my study a “Certificate of merit” awarded to my grandfather by one of those credit unions.

My difficulty with cooperatives as a solution to the economic crisis is that we are all in the same ship.  The type of organization – private ownership, government ownership or cooperative – may make a difference in relationships but the overall prosperity is more dependent upon the resources available.

As a journalist I met a number of old timers who told stories about running their affairs from somebody’s kitchen table.  Some of them were agonizing over having to merge into larger units and thus become more like banks.

Theirs was quite a different attitude from a local credit union teller who told me they would lock the doors at quitting time no matter how many members/customers were lined up at the door.


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Agricultural pollution

This week’s Economist has an article on agricultural nutrient pollution in the Mississippi River.

The economics way to deal with agricultural pollution presents us with a dilemma.   The changes required are so radical the screaming from those affected would generate enough hot air to destroy the world from global warming.

I believe the price of any item should include the full costs of producing the item.  This way we can make purchasing decisions according to our own values.  This applies to food as well as everything else.

Therefore the costs of agricultural pollution should be paid by the producers and passed on to consumers.

In some cases it may be difficult to calculate the costs of pollution but we could start by eliminating all subsidies which would probably reduce a lot of pollution.  In any case subsidies should be given to consumers rather than producers.

If we had to pay the full costs of producing food, there would probably be some major changes in our eating habits to healthier foods and more home gardens.

Creating money (quantitative easing) to solve the 1930s problem

It appears that some policy makers are determined to relive the 1930s but this time to get it right.

In the early 1930s the U.S. fed was restricting the amount of money in the economy.  In hindsight we can see that this was the wrong policy.  What was needed was to expand the money supply so people could get on with using the resources which at that time were so abundant. Once more money was created the people went on to fight a major war and then followed up with an unprecedented period of prosperity.

With this in mind central bankers today are trying to create more money with quantitative easing and we are hearing calls to prepare for an alien invasion.

But circumstances are different this time.  We have used up the most easily available of our energy and mineral resources.  Those that are left require a lot of work to extract and this is probably behind our current economic problems.

Rather than trying to create more money and return to economic growth we should be trying to rearrange our economy so that we can cope with negative growth with a minimum of human suffering.



Rio+20, green economics, sustainable growth

One of the major news events of this week is a festival of hot air known as Rio+20 or Rio+20 United Nations sustainable development conference.  I predict the major legacy of this event will be a contribution to global warming.

I think this conference will be a statement of blind faith that economic growth can continue if we call it green or sustainable – and change the faces of the decision makers.  I cannot share that faith.

The discussions will appear to center on the question: Is the goal  to harness economic forces in service to the environment or to harness the environment in service to powerful economic interests?  However a more basic question will probably be who gets to make decisions the “powerful economic interests” or environmental activists.

However if the activists were to get into a position of power they would probably find their decisions being  based on debts that had to be repaid and special interests that had to be protected.

It may be that continued economic growth is not going to happen, in which case these arguments are not relevant.

Individual choice for calories and water.

Here are two approaches to trying to influence people’s behavior for health or environmental reasons.

The first is a move to require some restaurants to state on menus the calories in each item.

This is in keeping with the perfect competition approach.  Give consumers as much information as possible and let them make their own decisions according to their values.

If a person wants to eat a high calorie meal they should have the right to do so.  The important thing is that they are able to know what they are doing and that they should be prepared to take the consequences whatever they are.

The second concerns a move to ban bottled water.  It is good to see that the colleges mentioned have so for resisted calls for an outright ban and are trying to provide alternatives.

Once again consumers should have the option to make their own decisions according to their values and circumstances.

Perhaps we could  deal with this by requiring water bottlers to include on the label a statement something like: “Some people are concerned about the environmental impact of water sold in plastic bottles.  In many cases tap water is at least as pure as bottled water.”

Unfortunately there are too many people who think they should have to right to force their version of the truth onto everyone.

Keynes, Hayek. full employment equilibrium

I’ve been reading the book Keynes Hayek: The clash that defined modern economics by Nicholas Wapshott and published in 2011

The following quote is from page 44.

Keynes believed that man had been placed in charge of his own destiny, while Hayek, with some reluctance, believed that man was destined by the natural  laws of economics as he was obliged to live by all other natural laws..  Thus the two men came to represent two alternative views of life and government, Keynes adopting an optimistic view  that life need not be as hard as it was if only those in positions of power made the right decisions, and Hayek subscribing to the pessimistic notion that there were strict limits placed on human endeavor and that attempts to alter the laws of nature, however, well intended, were bound to lead at best to unintended consequences.

My problem with Keynes view is that people in positions of power make decisions first according to what will get them reelected or help them to stay in power and then to repay their debts to those who helped them get into power.  These are not necessarily the “right decisions.”

On the other side, there are some economic activities which are best done collectively and I think we have a collective responsibility to see that everyone has the opportunity to live at the general standard of everyone else.

Another concept which concerned these guys was full employment equilibrium.

I’m not sure equilibrium is compatible with the dynamic  economy we have been experiencing with its mostly ups and sometimes down.  Nor am I convinced that full employment is possible or desirable with the high levels of technology we apply to our production of goods and services.

I’ve now got to page 110 and I have been having some difficulty getting caught up in some of the details of the debate between these two men.  For one thing, the world is quite a different place to what it was in the 1930s.

Probably the book will be going back to the library soon.

Are evironmental and economic problems interconnected?

I always thought we lived in a highly interconnected world but when it comes to environmental problems and economics few people appear to make a connection.

For example, the fifth Global Environment Outlook (GEO-5) report from The U.N. Environment Programme.  It was released two weeks before a big environmental conference in Brazil.

This report identifies the key drivers behind climate change as population growth and urbanization, fossil fuel-based energy consumption and globalization.

It seems to me that all of these will have a steadily increasing negative impact on our economy.  It could well be that they are behind the current economic crisis.

However, the report says the annual economic damage from climate change is estimated at 1-2 percent of world GDP by 2100, if temperatures increase by 2.5 degrees Celsius.

I fear this report is overly optimistic and unless we get some more realistic assessments we will not change our behaviors in time to prevent a major catastrophe.

How expert are the experts?

Following is a quote from the Buttonwood columnist is this week’s Economist.

“In his book “Expert Political Judgment”, Philip Tetlock shows that political forecasters are worse than crude algorithms at predicting events. The more prominent the expert (ie, the more they were quoted by the news media), the worse their records tended to be. There is also an inverse relationship between the confidence of the individual forecaster and the accuracy of their predictions.”

I wonder if these statements apply to economists as well as political experts.

(The author of this comment has a web log on economics at

Economics and environment in Rwanda and for us.

I believe there is a basic conflict between the way our economy is organized and the need to protect the environment.

An interesting perspective is given in this article about the conflict in Rwanda.  Here the resources needed to maintain the poor people are rather basic – firewood and wetlands.  It may be that environmental degradation is more of a short-term concern than it is for us in industrial countries.

For us the short-term concern is to keep our jobs and maintain a standard of living.  For most of us most of the time short-term priorities win over long-term priorities.

The solution to this economic and environment  conflict is the deal with over population and to reorganize our economy.  One way we could rearrange our economy is suggested in my essay “LETS go to market: dealing with the economic crisis” which is here.

Treating young adults as children and healthy eating

When I first saw this column I thought it was about our right to make our own decisions about what we eat.  But at a closer look  it was about treating young adults as children.

The column was criticizing conservatives for supporting some high school students who objected to restricted choice of menu items in their school cafeteria thanks to some nutrition guidelines for foods sold in schools.

It bugs me that some people consider others to be children until they are 16, 17 or even 18 years old.

“Remember, though, that students are still students for a reason — they aren’t adults,” says the author of the column.

A year ago while on a cruise through the Panama canal my wife and I did an excursion to a native village  in Panama.  On the way out we were told that generally by the time the girls were 14 years old they had two babies.

I don’t want my granddaughters to have children at that age but I do think that once people reach puberty  we should recognize they are no longer children.

The other issue in this column is that there are always people who want to tell others how to live their lives and they come from all parts of the political spectrum.

Some people have trouble letting others make their own mistakes and taking the consequences.  The most important things in life we have to learn for ourselves.

Probably the best way to prevent health problems is education about what makes for a healthy lifestyle.  However, it is easy to know what to do or not to do but not always so easy to practice what we know.  Most of us do things that contribute to our own demise.

Economics, consumption and well-being

“… there is no doubt that consumption is statistically the key driver for the Western economies.”

In surfing the internet I found this comment here.

Consumption is also something of a motherhood issue.  But if one reads anthropology one realizes consumption does not have to be so important.

Yes, we need material things for our survival and enjoyment of life and some of us have a need to make things.  However, we don’t need to overdo it.

We might be better of if we could organize our economy so that our well-being, both individually and collectively, were not dependent upon the manufacture and purchase of lots of material things.

There are lots of other things we could be doing most of which would give us more satisfaction.

Economics and the U.S. presidential candidates

The Lexington columnist in this week’s Economist tries to analyze the two U.S. presidential candidates in terms of their understanding and support for “capitalism and the free-enterprise system”.

I feel uncomfortable with terms such as “capitalism and the free-enterprise system” because I think they are meaningless words used to hide from us the reality of how our economy works.

Our economic organization is one in which governments pass legislation and regulations which work to restrict competition. Subsidies, tariffs, licensing, copyright and patents all work to limit competition and thus to increase profits.

Romney has certainly benefited from this aspect of government activity and as president would support if not expand it. I don’t now how Obama became a part of the one percent but there is no indication he would not continue to support it.

It appears both men are equally strong supporters of our current economic system whatever name one attaches to it.


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