The Efficiencies of Markets vs. Governments

Companies with profit motives move cautiously. They don't 'build and and hope consumers will come.'

If business managers in various commodities markets had requested capital two years ago to meet longer run demand with increased capacity in the short run, but not planned to make money for two-three years, it's unlikely their projects would have been funded.

The oil industry stopped providing large amounts of excess refining capacity years ago, because it depressed profits. Lee Raymond is responsible for bringing higher, more consistent refining profitability to ExxonMobil by his more closely aligning refining capacity with demand growth.

But the recent economic events in Asia, and the corresponding rise in living standards there, took him, and many other businessmen, by surprise.


Hey, they're capitalists and consumers after all! Who knew? So as their incomes have increased, and they have amassed more wealth, they are eating better and buying/driving cars. Just like Americans and Europeans.

Would some plodding inter-governmental task force have gotten this one right? Avoided food price inflation and supply shortages?


Doubtful.


The good news is, markets, via profit-driven suppliers and demand inelasticities, will solve this disequilibrium pretty darn fast.

Demand and supply mismatches in grains could be resolved within 18 months, or a little more than one growing season. Poultry and beef will take a bit longer, with the meat supply, now being slaughtered as margins narrow, will probably expand in 3-5 years.

Energy has been responding to higher price signals for two years, and will continue to do so until, suddenly, oil and natural gas supplies will outpace demand, and prices will plummet.

If we let them.

Of course, if the US Congress or a new President begin to tamper with natural economic cycles and price signals, expect more pain and longer timeframes during which to wait for producers to develop more capacity for a suddenly more-demanding world.

Food Riots, Commodities, Global Warming & Liberal Gaffes

It all began with hurricane Katrina in the late summer of 2005.

Remember? Gasoline price spiked as refineries and distribution systems were affected. Convinced that the government must 'do something,' people expressed outrage upon learning that so much of our country's energy supply entry points and distribution systems were located in or near the Gulf of Mexico.

The knee-jerk reaction was for President Bush to call for more use of ethanol, followed by predictable legislation making imports more expensive and rewarding Iowa corn farmers.

From the sidelines, many liberal pundits cheered that the Republican administration had finally 'gotten it,' and global warming was finally on the national agenda in a big way.

How the worm has turned!

A few weeks ago, on March 24th, the Wall Street Journal carried a front page article entitled "New Limits to Growth Are Reviving Malthusian Fears."

Shortly thereafter, the US was castigated at an international meeting for amoral behavior, i.e., burning corn-ethanol for fuel while people in third- and second-world countries died in food riots.

This week, Costco and Sam's Club have taken steps to curb the hoarding of bulk rice at their stores.

The Journal featured a story today concerning mid-market casual dinner house chains going bankrupt amidst "Carteresque" inflation in their inputs- meat, milk, grains- which they cannot pass along with substantially crimping customer visits.

Be it ancient Egypt, Rome, or Britain, with its famous "Corn Laws," corn has been at the center of food supplies from time immemorial. Its provision and price can trigger riots, bring down governments, and cripple nations.

So, let's step back and see where we are now.

Thanks to a boneheaded, panic reaction to the inflationary effects of rising gasoline prices in late 2005, corn-based ethanol sent food prices soaring in the past two years.

For a negligible effect on oil and gasoline prices, which has been overcome anyway now, and dubious effects on climate change, as I noted here and here, the Greenies have landed us all in a food commodity shortage, food-based inflation, and worries about sufficient supply of food in the years ahead.

Nice job, guys.

Really, you have to love environmentalists for the cluelessness and woolly-headed notions. By single-mindedly focusing on one bugaboo- global warming- which, if it is truly even occurring at the rate they allege, is not yet proven to be anything more than a natural earth cycle, they have managed to send the world's economies into panic as food is used for fuel, some fuel is judged as 'bad,' and nuclear power is still shunned.

If this crew wanted us returning to caves and burning animal dung for fuel, they seem to be on the right track, don't they?

But, back to reality.

In the midst of the very real issues of rising food commodity prices, mismatches of supply and demand, for both foodstuffs and energy commodities, what is the solution?

Well, considering our latest governmental fiat involving corn-based ethanol helped to trigger this current mess, if you think the solution is more governmental tampering and legislation, think again.

No, the obvious solution is markets. Just let markets work.

I heard just this morning on CNBC that there are several tens of millions of acres of US farmland being paid, by taxpayers, to lay fallow. Crops can be grown to meet demand, signaled by higher commodity prices, within two years.

Energy resources take more time than that, but new refineries have been abuilding in India for a few years now.

As Julian Simon noted, and I discussed in this post on my companion business blog, higher commodity prices are the necessary signal to suppliers that brings forth more supply.

Any attempts to control prices, or limit demand, creates distortions which frustrate the emergence of new supply. Price caps prevent new supplies from coming onto the market at a loss, and demand curbs similarly create either black markets, or an understandable crimp in supply, to support prices.

If we would just look at history, and trust to people's own profit motives and technology, we'll be fine.

And in about five years, farmers will bemoan the fall in the prices of commodities like corn, wheat and meat. Energy prices will soften. And producers will all be pining for the salad days of the late 2000s.

More Doubts About Global Warming

Friday's Wall Street Journal printed an editorial by Patrick Michaels, a professor of environmental sciences at UVA, and a senior fellow at the Cato Institute, entitled "Our Climate Numbers Are a Big Old Mess."

Essentially, Michaels convincingly argues that the UN' Intergovernmental Panel on Climate Change (IPCC) has been restating climate data fast and furiously, the better to provide further, more dramatic appearance of a recent global warming trend.

As Michaels writes in the editorial,

"The earth's paltry warming trend, 0.31 degrees Fahrenheit per decade since the mid-1970s, isn't enough to scare people into poverty. And even that 0.31 degree figure is suspect.
For years, records from surface thermometers showed a global warming trend beginning in the late 1970s. But temperatures sensed by satellites and weather balloons displayed no concurrent warming.

These records have been revised a number of times, and I examined the two major revisions of these three records. They are the surface record from the United Nations' Intergovernmental Panel on Climate Change (IPCC), the satellite-sensed temperatures originally published by University of Alabama's John Christy, and the weather-balloon records originally published by James Angell of the U.S. Commerce Department.

The two revisions of the IPCC surface record each successively lowered temperatures in the 1950s and the 1960s. The result? Obviously more warming – from largely the same data."

So we see the beginning of a trend at the IPCC- scrub, restate and selectively omit prior data in order to result in one-way temperature change estimates. Always higher.

Michaels continues,

"The balloon temperatures got a similar treatment. While these originally showed no warming since the late 1970s, inclusion of all the data beginning in 1958 resulted in a slight warming trend. In 2003, some tropical balloon data, largely from poor countries, were removed because their records seemed to vary too much from year to year. This change also resulted in an increased warming trend. Another check for quality control in 2005 created further warming, doubling the initial overall rate.

Then it was discovered that our orbiting satellites have a few faults. The sensors don't last very long and are continually being supplanted by replacement orbiters. The instruments are calibrated against each other, so if one is off, so is the whole record. Frank Wentz, a consulting atmospheric scientist from California, discovered that the satellites also drift a bit in their orbits, which induces additional bias in their readings. The net result? A warming trend appears where before there was none.

There have been six major revisions in the warming figures in recent years, all in the same direction. So it's like flipping a coin six times and getting tails each time. The chance of that occurring is 0.016, or less than one in 50. That doesn't mean that these revisions are all hooey, but the probability that they would all go in one direction on the merits is pretty darned small."

Michaels' last point is pretty compelling. The chance that all corrections to a data series, ex post, would be in one direction, is pretty unlikely. This begs the question that more than random 'restatements' are occurring. There's almost certainly an agenda to get those temperatures rising faster in recent years.

Upon looking into the actual conditions of some of the sources of the alleged 'errors' found by the IPCC, Michaels writes,

"The removal of weather-balloon data because poor nations don't do a good job of minding their weather instruments deserves more investigation, which is precisely what University of Guelph economist Ross McKitrick and I did. Last year we published our results in the Journal of Geophysical Research, showing that "non-climatic" effects in land-surface temperatures – GDP per capita, among other things – exert a significant influence on the data. For example, weather stations are supposed to be a standard white color. If they darken from lack of maintenance, temperatures read higher than they actually are. After adjusting for such effects, as much as half of the warming in the U.N.'s land-based record vanishes. Because about 70% of earth's surface is water, this could mean a reduction of as much as 15% in the global warming trend.

Another interesting thing happens to the U.N.'s data when it's adjusted for the non-climatic factors. The frequency of very warm months is lowered, to the point at which it matches the satellite data, which show fewer very hot months. That's a pretty good sign that there are fundamental problems with the surface temperature history. At any rate, our findings have not been incorporated into the IPCC's history, and they probably never will be."

So Michaels reports that, when actual conditions of the data sources are investigated, and adjustments made, much of the putative warming trends in restated data simple vanish. But you won't be seeing those results in further IPCC publications.

However, perhaps the most ludicrous finding by Michaels comes at the close of his piece. He writes of the alleged warming of Greenland,

"The fear of a sudden loss of ice from Greenland also makes a lot of news. A year ago, radio and television were ablaze with the discovery of "Warming Island," a piece of land thought to be part of Greenland. But when the ice receded in the last few years, it turned out that there was open water. Hence Warming Island, which some said hadn't been uncovered for thousands of years. CNN, ABC and the BBC made field trips to the island.

Warming Island has a very distinctive shape, and it lies off of Carlsbad Fjord, in eastern Greenland. My colleague Chip Knappenberger found an inconvenient book, "Arctic Riviera," published in 1957 (near the end of the previous warm period) by aerial photographer Ernst Hofer. Hofer did reconnaissance for expeditions and was surprised by how pleasant the summers had become. There's a map in his book: It shows Warming Island.

The mechanism for the Greenland disaster is that summer warming creates rivers, called moulins, that descend into the ice cap, lubricating a rapid collapse and raising sea levels by 20 feet in the next 90 years. In Al Gore's book, "An Inconvenient Truth," there's a wonderful picture of a moulin on page 193, with the text stating "These photographs from Greenland illustrate some of the dramatic changes now happening on the ice there."

Really? There's a photograph in the journal "Arctic," published in 1953 by R.H. Katz, captioned "River disappearing in 40-foot deep gorge," on Greenland's Adolf Hoels Glacier. It's all there in the open literature, but apparently that's too inconvenient to bring up. Greenland didn't shed its ice then. There was no acceleration of the rise in sea level."

So we see that our modern media, with little appreciation for history, is mistaking natural climate cycles, and their effects on, for instance, Greenland, with allegedly heretofore unexperienced effects of recent warming.

Michaels' final story is about the discovery of ancient trees in the Arctic tundra, noting,

"Back then, the forest extended all the way to the Arctic Ocean, which is now completely surrounded by tundra. If it was warmer for such a long period, why didn't Greenland shed its ice?"

He concludes his editorial with these sentiments,

"This prompts the ultimate question: Why is the news on global warming always bad? Perhaps because there's little incentive to look at things the other way. If you do, you're liable to be pilloried by your colleagues. If global warming isn't such a threat, who needs all that funding? Who needs the army of policy wonks crawling around the world with bold plans to stop climate change?

But as we face the threat of massive energy taxes – raised by perceptions of increasing rates of warming and the sudden loss of Greenland's ice – we should be talking about reality."

Once again, we see human behavior at work in the global warming issue. But not spewing more carbon. Rather, altering data to insure that the many politically-correct people now being lavishly paid to study 'global warming' and its effects continue to have employment- no matter what the truth of the matter.

Obama's Lies About Taxes

Friday's Wall Street Journal featured a lead editorial entitled "Obama's Tax Evasion."

In it, the author noted Obama's deceptive statements about his plans for tax policy, should he become President. Describing Obama's responses to ABC debate moderator Charie Gibson's persistent questioning, as the candidate evaded giving clear answers, the article noted,

"We thought the debate was one of the best yet, precisely because it probed the evasive rhetoric we've heard from both Democratic candidates throughout the campaign. Nowhere was this more apparent than during the exchanges between Mr. Gibson and Mr. Obama over taxes.

Time and again, the rookie Senator has said he would not raise taxes on middle-class earners, whom he describes as people with annual income lower than between $200,000 and $250,000. On Wednesday night, he repeated the vow. "I not only have pledged not to raise their taxes," said the Senator, "I've been the first candidate in this race to specifically say I would cut their taxes."

But Mr. Obama has also said he's open to raising – indeed, nearly doubling to 28% – the current top capital gains tax rate of 15%, which would in fact be a tax hike on some 100 million Americans who own stock, including millions of people who fit Mr. Obama's definition of middle class.

Mr. Gibson dared to point out this inconsistency, which regularly goes unmentioned in Mr. Obama's fawning press coverage. But Mr. Gibson also probed a little deeper, asking the candidate why he wants to increase the capital gains tax when history shows that a higher rate brings in less revenue.

"Bill Clinton in 1997 signed legislation that dropped the capital gains tax to 20%," said Mr. Gibson. "And George Bush has taken it down to 15%. And in each instance, when the rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28%, the revenues went down. So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?"

Mr. Obama answered by citing rich hedge fund managers. Raising the capital gains tax is necessary, he said, "to make sure . . . that our tax system is fair and that we are able to finance health care for Americans who currently don't have it and that we're able to invest in our infrastructure and invest in our schools. And you can't do that for free."

But Mr. Gibson had noted that higher rates yield less revenue. So the news anchor tried again: "But history shows that when you drop the capital gains tax, the revenues go up?" Mr. Obama responded that this "might happen or it might not. It depends on what's happening on Wall Street and how business is going." And then he went on a riff about John McCain and the housing market.

As the nearby chart shows, when the tax rate has risen over the past half century, capital gains realizations have fallen and along with them tax revenue. The most recent such episode was in the early 1990s, when Mr. Obama was old enough to be paying attention. That's one reason Jack Kennedy proposed cutting the capital gains rate. And it's one reason Bill Clinton went along with a rate cut to 20% from 28% in 1997.

Either the young Illinois Senator is ignorant of this revenue data, or he doesn't really care because he's a true income redistributionist who prefers high tax rates as a matter of ideological dogma regardless of the revenue consequences. Neither one is a recommendation for President.

For her part, Hillary Clinton said that she, too, was open to hiking the capital gains tax rate, just not by as much as her rival. "I wouldn't raise it above the 20% if I raised it at all," she said. Of course, she too promised during Wednesday's debate not to raise "a single tax on middle-class Americans, people making less than $250,000 a year."

Both candidates would have voters believe that taxes on investment income only affect the rich. But that's not what Internal Revenue Service returns show. The reality is that the Clinton and Obama rate increases would hit millions of Americans who make well under $200,000. In 2005, 47% of all tax returns reporting capital gains were from households with incomes below $50,000, and 79% came from households with incomes below $100,000.

By the way, a higher capital gains tax rate isn't the only middle-class tax increase that Mr. Obama is proposing. He also wants to lift the cap on wages subject to the payroll tax. That cap was $97,500 in 2007 and is $102,000 this year. "Those are a heck of a lot of people between $97,000 and $200[,000] and $250,000," said Mr. Gibson. "If you raise the payroll taxes, that's going to raise taxes on them." Ignoring the no-tax pledge he had made five minutes earlier, Mr. Obama explained that such a tax increase was nevertheless necessary.

In other words he dodged the question, as he so often does with impunity. But thanks to Mr. Gibson's persistence, for 90 minutes Wednesday night Mr. Obama didn't get away with it. The voters learned a lot about Mr. Obama, who needs to learn a lot more about taxes and revenue."

If you needed to see more evidence of Obama's lies in the service of his campaign, this exchange should be sufficient. He can't even answer truthfully that, yes, he does indeed intend to raise taxes on middle-income Americans. It's as if no Democrat will admit what has been obvious for at least a decade- everyone in the middle class, union members included, now are equity market participants via retirement/pension plans.

No, in Obama's world, the only people who invest in equities are 'rich hedge fund managers.'

Can we say, 'out of touch with reality?'

ABC's Dynamite Pennsylvania Democratic Debate Moderators

A funny thing happened last week in the Pennsylvania Democratic Presidential debate.

From various sources, we have learned the fundamental difference between liberals and conservatives.

Let me explain.

On the day following the debate, many liberal columnists, video media pundits and assorted other liberal spokespersons decried ABC's Charlie Gibson and George Stephanopoulos for wasting the candidates' and viewers' time with an hour of needless questions concerning character-related issues. Even Frank Luntz, the former conservative campaign manager, now independent pollster working with CNBC, gave an unsolicited, on-air castigation of the moderators, as he provided focus group results which confirmed that undecided liberal/Democrats found the initial questions to be unwanted and unimportant.

Even my own personal ex poste, anecdotal research confirmed the larger media findings. One liberal acquaintance in particular, a native of the Keystone state, when I asked if he watched the debate, replied,

'I watched it on Jon Stewart's show. The first hour was a real waste of time with pointless questions. It took them until the second hour to get to the real issues- what the candidates will do about the economy, healthcare, etc.'

If you step back and consider this ironic little experiment, you see a really bright line dividing liberal/Democrats and conservative/Republicans. It is this.

Conservatives believe that a President's character is of supreme importance. We never know what challenge will become the one which any given President must face as his or her primary issue. And, in our system of governance, no matter what a candidate tells you s/he will do upon occupying the Oval Office, those plans are moot unless a majority of Congress agrees.

Recall Jimmy Carter's impotence in the face of a Congress controlled by members of his own party. Or Bill Clinton having to function as such a centrist that, to this day, I have liberal acquaintances who maintain that Slick Willie was a functioning Republican while in office, and the best Republican President the Democrats ever elected.

Even our current President couldn't get his landmark, much-needed Social Security reform past a Congress controlled by his own party.

So, when the liberals catcalled over the moderators' insistence on questioning Obama about his relationships with people like his minister, Jeremiah Wright, or violent former Weatherman Bill Ayers, they were, in reality, providing us with a clear view of what they feel is important in a President.

Liberals don't care about character, they primarily care about the new programs and spending with which a Presidential candidate claims s/he will 'fix' some problem. The issue may be healthcare, or trade, which admittedly require active work to provide better solutions than America may have today.

But many liberals eagerly await Obama's or Hillary's "solution" to our alleged current economic 'crisis.' Rather than acknowledge reality, which is that economies such as ours go through cycles which cannot be 'tamed,' both the candidates, and their ardent acolytes believe that some sort of executive action will magically solve any economic ills our very large, vibrant and complex economy may experience.

For liberals, it's all about more government intervention, more programs to 'fix' anything you might not like, and, then, which rich people will pay for the solutions by paying higher taxes.

Conservatives, on the other hand, tend to want a President whose character they trust, to some degree, because they know that, between Congress and fate, what a President actually spends his/her term doing may well be very different than the agenda s/he had coming into office.

Thus, we see that, while Gibson and Stephanopoulos probed the very genuine, legitimate and valid topics which they chose for that first hour, the bulk of the voters in the primary for which the debate was held had nearly zero interest in these matters. Liberals just don't care about character, because their view of the world focuses on large governmental programs and spending to fix whatever they don't like about their personal situation.

Jimmy Carter's Passport

Just when you thought Jimmah Carter had gone as far as he could to embarrass our country and the office he once held, he surprises you with a new low.

Not content to be hoodwinked by rigged elections in South America, Carter's latest gaffe is to meet with the leaders of the Palestinian terrorist organization Hamas.

The Israeli government was so angry that their Prime Minister refused Carter even the courtesy of a cursory meeting while he was in the Mideast.

To compound his idiotic behavior, Carter 'clarified' his understanding of different governmental systems with this gem,

"In a democracy, I realize you don't need to talk to the top leader to know how the country feels. When I go to a dictatorship, I only have to talk to one person and that's the dictator, because he speaks for all the people."

Has this guy lost his mind? As Bret Stephens pointed out in his Wall Street Journal editorial on Carter's verbal and other gaffes, he has it exactly backwards.

In a democracy, the elected leader does represent all of the people. In a dictatorship, the leader represents only his own opinion, while muting his subjects at gunpoint. Very much like, say, Venezuela's Chavez.

It's no wonder there is a bipartisan Congressional call to revoke Jimmy's passport.

And no wonder why Carter's own party neglects to invite him to any of their conventions anymore. His term in office and, now, his actions afterward, clearly earn him the dubious distinction of the most embarrassing President in living memory. Even worse than Slick Willy, which is saying a lot!

Let's hope this is one action Congress does accomplish this session.