Economists forecasting

Likely government budget cuts and the prospect for messy political fights over fiscal policy will weigh on the U.S. economy this year and hold growth to a tepid 2.4 percent, according to a survey of forecasters published on Monday.

The National Association for Business Economics said that more than 95 percent of the 49 economists who participated in its latest quarterly survey believe fiscal policy actions or concerns would slice into gross domestic product.

 

These are the first two paragraphs of a news item on the Huffington Post last night.

I’m having some difficulty with this forecast for the following reasons.

Forty-nine people make a very small and insignificant sample.  Any economist should know that.

business_peopleJust because somebody thinks something will happen doesn’t mean it will happen.

Just because somebody wants something to happen doesn’t mean it will happen.

Just because somebody believes something will happen doesn’t mean it will happen.

If these guys don’t say what their employers want to hear they will probably become unemployed.

Economists in general have not recently had a good track record with their predictions.

In a previous reincarnation I was a charter member of the skeptics association.

In this case a poll of ordinary people who are experiencing the realities of the economic crisis might be more accurate.

Trading freely or controlled

Free trade is a controversial topic which won’t go away.  The Canadian government is currently negotiating with the European Union and the United States is thinking about it.  Some Canadians are still debating the North American Free Trade Agreement.

ShippingFree trade is attractive because the law of comparative advantage tells us that two countries will be better off and have improved production efficiencies if they specialize and trade.  Also we can  observe that countries which have tried free trade have done very well.

The difficulty is that introducing free trade means some people may have to change their occupations or even spend the rest of their lives unemployed.  This wouldn’t be so serious if we would arrange our economy so that life didn’t depend upon having a job.  It would also be nice if the improved efficiencies were to result in more leisure time.

The term “free trade agreement” is something of an oxymoron.  It is really a negotiated, controlled trade agreement.  There is nothing free about it.

If a country really wants to benefit from free trade it should do it unilaterally.  Just remove all restrictions on imports and don’t worry if other countries don’t reciprocate.  If they don’ want the benefits of free trade, that is up to them.

High deposit interest rates – a warning sign

When shopping most of us want to get the most we can for our money and that applies to the interest on our savings accounts.

However, a word of warning.  Sometimes when financial intermediaries are having problems they try to hang on by offering a higher interest rate on deposits.  This attracts more deposits which may help in the short-term but   reduces their margin between the cost of deposits and what they can charge for loans.  This only  adds  to their problems.

money_back_stickerThere have been cases of financial institutions doing this but it wasn’t enough to save them.  Some people who thought they were being smart, including some municipal treasurers, have been caught.  While some deposits are covered by deposit insurance it is probably better to stay away from troubled banks.  These days the interest rates being paid on savings are so low that most of us are probably just as well off to go with safety rather than returns.

This note was prompted by this article about some Canadians who are looking for the best returns on their savings.  I don’t want to say that every firm offering a higher interest rate is in trouble, but it can be a warning sign.  At least ask questions.

Regulating the cruise industry

Last week’s floating stool ship has put a little focus on the cruise ship industry and brought forth some suggestions the industry requires more regulation.

It appears that by cruising between international ports the industry has avoided coming under the jurisdiction of any one government.  It also appears to be a highly competitive industry and one that is prospering.  Maybe there is a lesson here about competition and government interference.

johnny_automatic_ocean_linerI have a theory that at the request of business governments pass laws to restrict competition in the belief that there will be greater profits if there is less competition.  Then to control the excesses of monopoly they introduce regulations.    If this is correct an industry in which competition is not restricted has no need for regulations.

It seems to me the cruise ship industry is regulated by its customers.  It is highly competitive and depends very much on returning customers.  These guys have to look after their customers.  If there develops a perception that the Carnival Triumph passengers are not being treated fairly or that ships are not being properly maintained,  the whole industry will probably pay for it.

Employees may not be in such a strong position.  Wages tend to be a function of supply and demand and the cruise companies draw their unskilled employees from the world market.  The companies benefit from world over population.  So  do the passengers whose fare would be quite a bit higher if the ships had to pay all their employees North American wages.  Employees also benefit from higher wages than they would get at home.

We have to note that a lot of companies in North America (and their customers) also benefit from the low wages that go with high unemployment.

One way to deal with the exploitation of labor would be some sort of guaranteed annual income which would make it a little less necessary for workers to accept poor pay or working conditions.

Saving for retirment

For Canadians the month of February is the silly savings season and it appears our concerns and insecurities about the future are showing up partly as a reluctance to save for retirement.  March 1 is deadline for putting money into Registered Retirement Savings Plans in which money is exempt from income tax.  Tax is charged when the money is withdrawn at which time one expects to have a lower income and thus pay a lower rate of tax.

I think it is a silly idea but many people will do anything to avoid paying taxes.  Some people have even  borrowed money in order to put it into an RRSP.  This plan is a  subsidy to the financial industry in that the federal government is giving up tax income to pay for marketing for the industry.

This year it appears fewer Canadians are going to take full advantage of this tax benefit.  Some are trying to balance their retirement with paying down a heavy debt load or with a need to help their children with education or to look after aging parents.

An online poll has found that Canadians were planning to save almost $10,000 this year, but 66 per cent say they’re tucking the money away for vacations, luxury items and entertainment.

the_family It could be some Canadians are becoming skeptical about the ability of the financial industry to look after our money in the long term.  Whatever the reason many  are worried about retirement.

I am one of the skeptics because there are two threats to savings.  One is that inflation could wipe out the value of savings and the other is that businesses  and governments in which savings have been placed may go bankrupt and be unable to repay the money.

Given the current economic outlook the best investment is a market garden.

The evils of patents and copyrights

Two economists at the St. Louis Federal Reserve have called for the abolition of the American patent system, a proposal I endorse 100 per cent.   I would include copyright.

Their argument is that the patent system retards innovation.  My argument is that patents and copyright restrict competition which increases inequality.

“The historical and international evidence suggests that while weak patent systems may mildly increase innovation with limited side effects, strong patent systems retard innovation with many negative side effects,” Boldrin and Levine wrote. “More generally, the initial eruption of innovations leading to the creation of a new industry—from chemicals to cars, from radio and television to personal computers and investment banking—is seldom, if ever, born out of patent protection and is instead the fruit of a competitive environment.”

 

In order to have a competitive market there should be no restrictions on entry to that market.  The purpose  of patents is to give the patent holder protection from competition.

zeimusu_Sri_Yantra secondGenius is 90 per cent plagiarism.

If the British had strongly enforced patent protection, we would not have had the industrial revolution.  If the Elizabethans had copyright, we would not have Shakespeare.  If the Romans had copyright, we would not have the Bible.  If we didn’t have patents and copyright we would have a more equal society with even more useful gadgets and medical research would focus and serious diseases rather than the diseases of us rich people.

Why stimulus is not working

At least since Keynes conventional economic wisdom has been that the cure for an economic depression is government stimulus spending – even if it means increasing the government debt.  Recently, some people, especially  those who will lose their savings from inflation or if debt has to be written off, have been fighting plans for stimulus spending.

There are other reasons to be leery of stimulus spending.  It isn’t working and it could bring forward an even more serious economic collapse.

To explain this we have to go to the blackboard of an economics classroom where the professor draws an x-shaped graph.  One line represents the financial side of the economy and the other line represents the physical aspect.  The problem is that we measure the physical side in financial terms and tend to forget this distinction as soon as we get away from the blackboard.

polettix_stone_age_wheel_1For stimulus to work there has to be adequate energy and mineral resources to support the increased economic activity.  When Roosevelt implemented the New Deal and when we undertook the Second World War there were still loads of resources.  Now we have used up the most easily accessible energy and minerals.   What’s left requires a lot more work and energy to extract.  Putting more energy into extracting resources is taking away from the standard of living most of us want.

The other problem with stimulus spending is that it will use up even more of the existing resources and make the economic crisis even worse.

If stimulus is going to make things worse, what do we do?  After all people are suffering from the crisis. I think the answer is to drop our commitment to economic growth and the consumer society.  The economic task should be to see that everyone has adequate food, shelter. clothing,  hobbies and entertainment.  It is important to be able to communicate but I’m not certain it is necessary for everyone to have a micro cell phone.

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