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Thoughts on Brexit

hko in Israel

by Henry Oliner

Many Americans have become familiar with basic economic concepts because it affects them so regularly, but our understanding usually stops at our shore. The Brexit vote has us scratching our head to comprehend something we hardly knew was an issue a few days ago. Before 9/11 we knew who Muslims were but a few weeks later were reading and trying to comprehend the difference between Sunnis and Shiites. Taliban and Al Qaeda were soon correctable on our spell checks.

The economists and the financial community will absorb, comment and predict for the coming months but here are a few observations and thoughts.

The polling was very wrong.  This appears to becoming common. This is because the media that governs so much of the polling is far too monolithic and dismissive.  This is the price they pay for their lack of intellectual diversity. This may explain why even the betting services were so wrong.  When so much of the coverage is one sided it affects even the odds makers.

The British national mood appears to be very similar to the mood in America that begat the Trump and Bernie Sanders campaign.  They are increasingly at odds with the leaders.  The critical issue may be the dual related fears of immigration and national security, but this is also representative of a lack of respect between the governing elite and the great unwashed and will influence other issues.

We have always had elites and commoners, but there was a sense that in spite of their credentials and power that they shared common goals and values.  The attraction to Trump in spite of his elitist wealth is that he at least espouses concerns that the middle class also share.

The elites serve an important purpose; not just to exercise the technical skills to execute policy for the administrative state, but to adhere to principles that protect the long term interests of the people and their culture. The danger of the populist trend is the severing of commitments to principles to serve pragmatic ends. Problems created by the intelligent cannot by default  be solved by the ignorant. A Populist movement that can restore or progress  important values and principles can accomplish great ends, but  such movements are hard to control.  Witness the difference between the American and the French Revolution.

For the libertarian intellectuals Brexit was a rejection of centralization and bureaucratization from Brussels, but we like to see a cause that reflects our preferred view and narrative. I see another sign of the exhaustion of Progressivism.

Our own United States is an American form of the European Union with distinctive and important differences. It is governed by a clear constitution which every state adopts and respects, and it covers a common culture and language even if you often have to press ‘1’ for English.

Critics of the vote may express alarm at the seeming increase in nationalistic fervor, but Charles Cooke at National Review expressed an important distinction between patriotism and nationalism (The Brexit Vote Was Just the Beginning):

George Orwell contended that the difference between patriotism and nationalism was that patriotism involved “devotion to a particular place and a particular way of life, which one believes to be the best in the world but has no wish to force on other people,” while nationalism “is inseparable from the desire for power.” By this definition at least, Britain’s decision to extricate itself from the EU was patriotic, not nationalistic. Indeed, if there is any group within the debate that seeks to impose “a particular way of life . . . on other people,” it is the one that wants ever-closer integration into Europe, and, eventually, a federal super-state.

While we debate where this will ultimately lead this vote signals an important shift.  The Brexit vote has released a possibility that was inconceivable until last week.  Now we consider who will be next and whether the European Union can survive.

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Every Business Is a Social Science Experiment

Kevin_Williamson (1)

from Kevin Williams at National Review,Why does this gas station pay so well?

When I mentioned my surprise at what it pays to work at a gas station in Bastrop, I got two reactions, both predictable. One was from a purported conservative who sniffed that this pay scale was absurd for such low-skilled work, and that that was why a gallon of gas at Buc-ee’s cost a dime more than it did across the street. (For the record, this was not true of the Buc-ee’s in Bastrop.) And so I found myself having to accommodate the shock of a so-called conservative who has trouble mentally processing the fact that in a free market, consumers can choose between lots of price points offering different levels of service and amenities. (Given how purchasing decisions are actually made, I think they’re on to a pretty solid strategy here: A single man traveling alone may go to the funky service station across the street to save 80 cents — Hello, Dad! — but a man traveling with a wife and children is going to stop at the place that is famous for having the cleanest bathrooms in the business, even if it costs him an extra buck-and-a-half for a tank of high-test. Or he’s never going to hear the end of it.) There’s a reason that we have first class, business class, steerage, and Spirit Airlines: Some people are willing to pay more for better, and some people hate themselves and don’t care if their flight from Vegas to Houston runs a few hours late or never actually even takes off.

The left-wing response to Buc-eenomics is just as predictable and just as dumb: If Buc-ee’s can afford to pay gas-station attendants $17 an hour, then why can’t we mandate a $15-an-hour federal minimum wage? Put another way: If it’s a good idea for one specific business in one specific market at one specific time, why not everywhere? You get the same thing with Walmart vs. Costco: They’re superficially similar businesses, so how come the mean meanies in Arkansas can’t pay like the nice, nice men from Washington State do? The answer, of course, is that every situation is different, and every business is a social-science experiment, trying out different approaches to solving social problems, which is what entrepreneurs and successful firms actually do. If it weren’t for the self-interest of big, nasty corporations, it wouldn’t be a question of clean bathrooms vs. less clean ones: You’d be out there on the side of the road watering Mrs. Johnson’s beloved bluebonnets.

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Employment and Capital

A business makes a capital investment for two reasons: one is to expand production to meet rising consumer demand, and another is to increase efficiency or reduce cost.  The first reason is common during a growing economy and such investment can lead to increased employment.

Reducing costs is often ‘code’ for reducing labor. The cost of the equipment is weighed against the cost of labor. The higher the cost of labor and the lower the cost of equipment the greater is the incentive to replace labor with capital.

The cost of labor includes not just the wages and benefits but other friction costs ranging from compliance regulations, legal liability, unions, and administrative costs.

If a $50,000 a year employee can be replaced with a $500,000 capital investment, then this investment delivers a 10% return.  In an investment climate ruled by very low interest rates a 10% return can be alluring.  At the same time that low interest rates reduce the cap rate it also reduces the cost of the capital acquisition.

Such stimulation of capital investment is the stated intention of a low interest rate policy, but the combination of the low interest rates with high labor friction costs and a slow growth economy means that it will have less of an impact on employment and wages.

Anecdotally I still hear that employers are both reluctant to expand and that they have a very difficult time finding motivated quality workers, especially in the trades. Some fear another recession around the corner and others seek to avoid the higher friction costs associated with new hires, sometime referring to the ACA penalties.

Higher employment regulatory friction costs, and slow economic growth are offsetting the potential benefit to employment and wages from lower interest rates.

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Uber Challenges the Regulatory State

Uber A

Uber reduces DUIs, traffic fatalities, and accidents. The drivers are safer because it is cashless and the entire trip is tracked online. And they carry more insurance than the cabs. They are more available and better serve their customers. By all means lets harass and regulate them in the name of public safety.

Such new business models are a challenge to the regulatory state, and expose them as more interested in their power and their special interests than the public’s safety and welfare.

From Jared Meyer at National Review, Why Americans Love the Sharing Economy

 The paper looked at 150 cities and countries from 2010 through 2013 and found that “for each additional year of operation, Uber’s continued presence is associated with a 16.6 percent decline in vehicular fatalities.” This is in addition to the 18 percent decline in fatal nighttime crashes after Uber entered a new market. For DUIs, Uber’s introduction led to a one-time 33 percent decline that was followed by an annual average decline of 51 percent in the following years.

The survey results are also supported by other data. Uber’s entry into Seattle was associated with a 10 percent decrease in drunk-driving arrests. Controlling for outside factors, after UberX launched in cities across California, monthly alcohol-related crashes decreased by 6.5 percent among drivers under 30 (amounting to 59 fewer crashes per month). This decline was not observed in California markets without UberX. When drunk driving decreases, it benefits all motorists, not just ride-sharing passengers.

People often forget that driving a taxi is dangerous because its business model is conducive to crime and violence. For one thing, taxi trips are anonymous. Drivers also carry cash. The average cash fare for New York City taxi trips in 2014 was around $12. With a typical driver shift of 9.5 hours and around 45 percent of trips paid for in cash, it is safe to assume that, on average, taxi drivers are carrying at least $100 in cash, which makes them attractive targets for robberies. This is one reason why the homicide rate for taxi drivers is 20 times higher than the U.S. civilian average and more than double the rate for police officers.

These dangers are corrected with ride-sharing. The identities of passengers and drivers are both verified, and safety is reinforced through the feedback system. Ride-sharing companies also track both parties’ locations throughout the trip. Additionally, no cash ever changes hands, since all payments are taken care of electronically.

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Work and Poverty

The left is unable or unwilling to articulate any limitation of the welfare state and unable or unwilling to acknowledge the social costs of long term dependency.

Moves to push the recipients to work must recognize and correct the policy hurdles placed on the providers of jobs, and the tax disincentives on those on on the bottom rungs.  When your net after tax income equals the costs of the benefits you lose you face an effective tax rate of 100%.  A strong pro-growth economic policy would make great progress on many economic and social problems.

from the editors of National Review, A Better Way:

Some of what’s in Ryan’s proposal will be familiar from earlier efforts, including time limits on the receipt of food stamps and housing subsidies for adults who are able to work. The vast majority (about three-fourths) of able-bodied adults without dependents who are receiving welfare benefits do not work; the larger body of welfare recipients, those with dependents (who are exempted from TANF work requirements), work at low rates, too. The great necessity is moving these dependents toward work, and the reasoning here is straightforward: The poverty rate for people with full-time jobs is 2.7 percent; for those with part-time jobs, it is 17.5 percent; for those with no jobs, it is 32.3 percent. Two-thirds of the Americans in poverty do not work at all, and a quarter of them work only part-time.