The Cost of Economic Protectionism…

Now that times are getting bad, protectionist sentiment seems to raging all over the world. Everywhere you look, there are calls to “buy American”, “buy Canadian”, and “buy local”. The economic stimulus package that recently passed in the U.S. Senate also originally contained a buy American requirement for receiving funds. Hmm…

At its core, protectionism is based on the feeling that it is better to buy goods and services produced locally rather than produced far away. The rationale is that if I spend my money locally, it’s more likely to then be spent at other local businesses, including potentially my own. Or more generally, it means preferring to employ my fellow countrymen rather than foreigners. After all, we have to protect our own first, right? Well, before you jump on the “buy American” bandwagon, just make sure you understand its costs first…

The standard of living for those of us living in the western world has dramatically improved over the last hundred years. Today we have more books, clothes, iPods, big screen TVs, and cars than our grandparents would have imagined possible. We also have bigger houses, we work shorter hours, and we often have health coverage and pensions. We, on average, have a much more comfortable standard of living than those living a hundred years ago. So how did we achieve such levels of prosperity?

1. Huge breakthroughs in manufacturing technology and materials
2. Efficient global shipping & transportation
3. Government deficits and borrowing from our children
4. Outsourcing labor to emerging economies

People like to complain about their jobs going overseas and protectionists may argue about the benefits of outsourcing, but it’s quite straightforward if you think about it.

Labor costs, just like everything else in free markets, are driven by supply and demand. If you’re offering your services at a cost of $40,000 a year, and someone else is offering the same services at a cost of $4,000 a year, what do you think is going to happen? As long as there are enough people willing to do the job for $4,000 a year, eventually no company (that wants to remain solvent) will be willing to pay $40,000 for that job anymore.

And outsourcing isn’t the only reason why the value of a job can drop. The same thing happened with automation in factories – millions of jobs were destroyed and replaced by cheaper machine labor. And the refrain was the same: machines are bad, they put people out of work – we must protect our good paying jobs.

You might call outsourcing labor to emerging economies exploitation, but then it becomes a moral debate. The fact is, if you can pay someone overseas (or build a machine) to produce goods for you at a fraction of what it would cost to produce locally, the economy will benefit because companies are able to do more with less.

The mistake protectionists make is to think that they can somehow prevent this natural revaluing of jobs; that somehow we can pretend that a job is magically still worth $40,000 a year when it’s not. In order to artificially “protect” domestic jobs you can do a couple of things. You can subsidize domestic production, or you can tax or add tariffs to foreign products. But both options reduce the society’s wealth, and thus standard of living, because it protects less efficient methods of production and puts that cost onto the society. Does anyone think it’s a good idea to tax machine-created products, or subsidize manual labor over machine labor?

Protectionism often seems more interested in protecting the effort associated with producing goods. But don’t forget, the point of the economy is not to create jobs for people; it’s to produce stuff. And the only reason to work is to have money to buy that stuff. And despite many decades of outsourcing, we don’t seem to be running out of jobs yet. People get retrained and find new jobs.

There may be legitimate political reasons to endorse protectionism, like avoiding dependence on less than friendly foreign regimes, but there aren’t good economic ones.

[Content © 2009 SorryToConfuseYou.com, All Rights Reserved.]

Artificial Government Controls…

Our public officials sometimes seem to think that more government intervention is better than less; that somehow central planning creates better results than free markets. Apparently we didn’t learn from the Soviet experience… There are probably a million different examples I could use to illustrate this point, but one specific local situation has been in the news recently.

In the city where I live, the municipal government decided 3 decades ago that it should license and regulate the taxi business. Fine, we wouldn’t want convicted felons driving taxis, right? But as part of this process, they also decided to cap the number of licenses they would issue. Hmm… Maybe someone thought having too many cabs would be a nuisance, or maybe it was the cabbies that wanted some guaranteed job security. Either way, it was a really bad decision that has led to a number of predictable and undesirable consequences:

1. Since licenses are scarce, people sell them for $100,000+, even though they’re not technically worth anything
2. Since the licenses are worth so much, the city can’t issue more without destroying some of that value and thus making the existing license holders irate
3. The service is generally mediocre because there’s no incentive to improve and no risk of competition
4. The service is slow, especially at peak times, because there’s artificially too few cabs

Wouldn’t it make sense if the city issued as many licenses as the free market demanded? Then if we needed more cabs because, say, the city grew, more people could get licenses. If we had too many cabs, some people wouldn’t be able to make a living and would find other jobs. Better yet, maybe some people would decide to drive cabs part-time. That way, they could choose only to work on the busiest nights, to make a little extra cash on the side. These part-time drivers would also be available to help increase service in situations like transit strikes, as we happen to have just survived.

But as with most situations of goofy government intervention, the free market finds a way to fill the void anyway. In the case of our local taxi service, we now have so called ‘bandit taxis’, which run completely outside of the regulations. Despite being illegal, the need is so great that drivers and passengers are still willing to take the risk. Since unlicensed cabs are obviously not the best solution, maybe city officials should take a hint, although so far they claim to be ‘perplexed’ by the situation…

[Content © 2009 SorryToConfuseYou.com, All Rights Reserved.]

Who’s Better For The Economy, Obama or McCain?

Leading up to this U.S. election, there’s been lots of talk about how to fix the economy, and which Presidential candidate would be best for the country. Sometimes, someone will come up with reasonable, unbiased analysis like Andy on the Saving to Invest blog. But more often than not, the debate will degenerate into partisan bickering.

For example, a common tactic is to compare stock market returns under Republican Presidents and Democratic presidents – as was discussed on the Carpe Diem blog. The claim there was that if you had invested money since 1929 under one party or the other, the outcome would have been:

• Democratic Presidents: $10,000 became $360,000
• Republican Presidents: $10,000 became $11,000 (or $51,000 skipping the Hoover years)

Hmm… This merits a little investigation. The first thing to wonder is why they would start the comparison in 1929, just before the great crash? It would have been nice to at least go right back to the turn of the century. Too bad. I’m starting in 1929 because Yahoo only provides data back that far.

The next thing to do is to make sure we’re comparing apples to apples. Were Republican’s Presidents in power as much as Democratic Presidents? Yes, 40 years each. Good.

How consistent were the returns? I’m not sure which markets they were analyzing, but I’ll use the Dow Jones Industrial Average.

President	Party	Years	Average % Return Per Year
Hoover	Republican	4	-35.6%
Roosevelt	Democrat	12.2	9.3%
Truman	Democrat	7.8	8.0%
Eisenhower	Republican	8	10.4%
Kennedy	Democrat	2.8	4.1%
Johnson	Democrat	5.2	5.3%
Nixon	Republican	5.5	-3.2%
Ford	Republican	2.5	8.9%
Carter	Democrat	4	-0.2%
Reagan	Republican	8	11.3%
Bush (H.W.)	Republican	4	9.7%
Clinton	Democrat	8	15.9%
Bush (W.)	Republican	8	-1.6%

When looking at these numbers, 2 outliers stand out – Hoover and Clinton. What if we compare the average % return per year without these outliers?

Party	1929 – now	1933 – now	1933 – 1993
Republican	0.4%	5.5%	7.6%
Democrat	8.4%	8.4%	6.6%

Hmm… Was Hoover (or the Republican presidents before him), directly responsible for the 1929 crash? I don’t know enough history to know. But I wouldn’t be surprised if it was just lack of economic knowledge at the time, where anyone would have made the same mistakes.

Was Clinton directly responsible for the historic bull market during his term? Not really. The bull market started back in 1980, and continued through the end of the century. Was Bush responsible for tech crash in 2001? No. If anything, we can blame Clinton for creating the tech bubble, which led to the outsized returns during his term… Can we blame Bush for the current credit crisis? Sure…

But overall, looking at the chart, there are obvious bull periods, and obvious bear periods.

Presidential Terms	Annual % Return Per Year	Years Republican	Years Democrat
1933-1937, 1945-1961, 1981-2001	13.7%	20	20
The rest	-4.1%	20	20

You can slice and dice the numbers however you want, and come up with just about whatever result you want…

Bottom line, the economy has larger business cycles, that I think have little to do with the Presidents of the day. Besides, how much policy does the President implement? He can’t pass laws, he can only veto them….

So back to the original question, who’s the best person to help the stock market? Neither, I fear.

Everyone’s trying to figure out how to avoid a recession. The problem is, recessions are a natural and necessary part of the business cycle. “Creative destruction” cleans out the deadwood and inefficiencies in the economy, and leads to prosperous periods in the future.

The 2003-2007 bull market was based on false growth created by spending money we didn’t have, in order to avoid having a mild recession. Now we’ve created an even bigger mess, and presumably an even bigger recession. Eventually we need to pay the piper.

There is no quick fix to our problems because our problem is not lack of available credit or lack of confidence – our problem is lack of reasonable expectations. Until we, as a society,  change our mind set about what is reasonable and normal, we can’t move on. We had a 20-year bull market, we had 25 years of housing price appreciation compressed into 5, and we had commodity prices triple this decade. These things are not normal. Artificially pushing up prices faster than is warranted just leads to a bubble, not sustainable growth…

[Content © 2008 SorryToConfuseYou.com, All Rights Reserved.]

Representative Democracy?

It’s an election year once again on both sides of the border in North America, and the spectacle that is our democracy is on parade again. As I get older (and apparently more crotchety), our electoral process disgusts me more and more every time I have to sit through it…

My main complaint is that our democratic / electoral / legislative processes seem horribly inefficient and wasteful given the quality of the results we receive. The problem, I think, is we’re focusing on the wrong things, like style over substance for example. Given we’re in the 21st century now, you’d think we could improve upon a process that’s been essentially unchanged for more than 100 years…

Representatives

Let’s start from the beginning. The intent of democratic government is essentially:

• “Government of the people, for the people, by the people”

In North America we implement democracy using representative government, meaning we select a local representative to run government on our behalf. Originally each representative represented 10,000+ people; it’s now 100,000+ people. How can these representatives know what their constituents want? They can’t. So a key characteristic of democratic representatives is:

• “While representatives are elected by the people to act in their interest, they retain the freedom to exercise their own judgement as how best to do so.”

In other words, I can’t possibly figure out what my constituents want, so I’ll simply explain my views, and if they elect me, then my views must be most representative of their views. In the 1800s, in the world of the horse and buggy, and no telephones, this process made sense. What other alternatives were there at the time?

But what about now? Do our representatives still need to be completely autonomous? Or could they instead be more of a conduit for our interests? Hmm…

Parties

So we’ve successfully elected representatives to represent us. But having a bunch of random people with a bunch of different views attempting to govern would be very difficult, nothing would ever get done. So long ago, candidates got together with other like-minded candidates and formed political parties to present a more unified set of views.

But slowly, over time, the importance of the individual representatives diminished and the importance of the parties increased to the point where the local representatives are now largely irrelevant, at least in Canada. For example, many people will vote for the same party every election regardless of who the local candidate is. I bet in many ridings you could elect a monkey – I know I’d vote for a monkey if it got the party I wanted elected…

Our local representatives could remain relevant if they sometimes voted against the party line, but they don’t. In Canada, voting against the party line will usually get you kicked out of the party. Constituents and conscience be damned – tow the party line or else…

So, during the election, we’re no longer voting for a representative individual, we’re voting for a representative party. Fine. This isn’t horrible. Our regional interests may not be well represented, but the federal government should, in theory, be dealing mostly with national issues anyway, right?

But at least the majority of voters will be represented by the governing party, right? Wrong. Because we have more than two major parties in Canada, and we don’t have proportional representation (which I’m not necessarily convinced is the answer to anything), the party that forms the government rarely gets more than 50% of the votes (it’s usually about 40% – 45%), even though they hold the majority of the seats. Oops…

But my main complaint about our party system is the governing party completely controls the agenda, which means the policies of the other elected parties are irrelevant. What if I like some policies from each party?

Campaigning

On to my least favorite part – the elections.

The amount of money and the number of people it takes to organize, run, and report on all the candidates’ campaigns is enormous. For example, the cost to the taxpayers for the last Canadian federal election was something like 300 million dollars. Which means it cost a million dollars per person elected. I don’t know about you, but to me, that seems like a lot of money to be spending every election. And I don’t think I want to know how much the U.S. spends…

But the worst part of the election is, it’s not about debating policy, it’s about appealing to the superficial desires and the basic instincts of the voter.  If you listen to politicians or their strategists in interviews, it’s all spin and rhetoric; same thing during the political debates. There’s no real debate, no discussion, no give and take, no listening, everything is about “talking points”.

Elections are popularity contests. It’s not about doing the “right thing”, it’s about winning. No one is ever going to admit they were wrong, or give their opponents credit because there’s no incentive to do so. The goal is to undermine your opponent as much as possible.

So in the end, the politicians treat the voters like children – and we let them! For example, if one parent offers broccoli and the other offers ice cream, what do you think the child is going to pick? The child doesn’t care what’s good for them, they want the instant gratification. So if one party offers new social programs, and the other offers to cut social programs, who do you think is going to elected? It’s not about intelligent, well thought out policy. It’s about manipulating votes – which leads to more and more targeted spending or micro tax break for very specific groups.

Governing

All the dirty campaigning and rhetoric leads to a thoroughly adversarial environment during the election. This adversarial environment carries over into legislative process, because there’s always another election eventually. The opposition will attack everything the government does, just because it was someone else’s idea. There’s very little civility or cooperation left in politics.

But if you think about a corporate boardroom or a project team, would this type of atmosphere be productive? Not likely… In fact, this type of poisonous environment would likely be extremely detrimental. Healthy debate is good, but the ability to compromise and cooperate is essential to make a team work effectively. The term “office politics” is used to describe negative, subversive behavior in the office. Yet this is what governing is about every day. Hmm…

So where does all this get us? Does it get us the best possible government? I don’t think so…

A Better Way?

Right now, there is no incentive for politicians to cooperate or be civil. Quite the opposite. They have every incentive to destroy their opponents. But all the energy spent on the rhetoric, posturing, and political theater is energy not spent on actually governing the country. So how do we take the “politics” out of politics?

I think the root of the problem is that in politics, personality and ego are attached to everything. But what if we broke this link? What if politicians didn’t pass laws? What if they simply wrote them? For example, what if we had the following system:

• Any elected representative (not just one from the governing party), or large group of citizens could propose an initiative
• All the representatives would then debate and frame the wording of the initiative, and come up with a reasonable set of choices for the voter
• The initiative couldn’t be put to voters until the all the representatives agreed on the wording and choices (with some remedy for dealing with obstructionists)
• The voters would vote, say once a quarter, through the Internet or mail, on finished initiatives, and the politician would be bound by the outcome
• Voters could reject an initiative if they weren’t happy with the list of choices provided
• Voters could recall representatives if they wanted

Since all representatives would need to approve the finished initiative, it would ensure that all points of view would be covered, and it would also require that politicians compromise in order to get their initiatives finished. Regardless of all its potential flaws, I think, at the very least, a system like this would put the emphasis back where it belongs, on policies rather than the politicians, and promote healthy debate rather than bickering.

Obviously there would be many criticisms of such a system. The most obvious ones would be:

• People aren’t interested in day-to-day goings on of government
• Laws are much too complicated for the average person to understand

But I don’t buy that people aren’t interested. The amount of media coverage of elections and government legislation is fairly high. If people didn’t care, they wouldn’t watch, and the media wouldn’t spend so much time on it. I think a substantial percentage of the population would like more input into the functioning of their government. As for the complexity of laws, I think forcing legislators to simplify our legislation would be a net benefit anyway. Our laws and our tax system, and government in general, is way too complicated already.

But would it really be possible to simplify all government legislation into bite-sized pieces? I think so. Start with the simpler social policy questions like the propositions that many U.S. states vote on already and work your way up.

Bottom line, I think our current representative democracy in Canada is seriously flawed, and could benefit from incorporating more elements of direct democracy. In some ways, the U.S. has much more input into their government than we do. For example, they have (and actually use):

• Citizen’s initiatives
• Referendums (ballot questions)
• Recall

But in the end, the problem, of course, is any changes require our elected representatives to make them, and they don’t really have much incentive to change the status quo, do they?

[Content © 2008 SorryToConfuseYou.com, All Rights Reserved.]

Canada’s New "You-Can-Still-Call-Me" List

Canada is finally getting its own “do-not-call” list this fall, and with it, the promise of a quiet evening at home, or so the theory goes… I haven’t investigated thoroughly, but the Canadian version looks very similar to the American version. So I ask, how effective are these do-not-call lists? Could they be more effective?

The biggest flaw I see is the exemption list is too long. Who do you think calls me most frequently? Everyone that’s on the exemption list, of course:

• Charities
• Political parties
• Pollsters
• Newspapers seeking subscriptions
• Businesses with whom I have an existing business relationship

These things do tend to go in waves, but I suspect that 80% of the unwanted calls I get are from groups on the exemption list. For example, many of the calls I get are from companies with whom I do business already who are trying to upgrade me, or cross-sell me one of their 462 other products and services. The banks, cable and phone companies seem to be worst for that kind of thing.

The one obvious difference from the American version is that the Canadian version has an exemption for newspapers. The newspaper lobby must be stronger in Canada than in the U.S… Why should they be allowed to sell me something, but no one else can?

In the end, I think these lists are better than nothing, but I think they could be better. For example, how about:

• A “don’t-waste-your-time-calling-me-I’m-not-going-to-talk-to-you” list, which would apply to everyone, unless you’re calling me about problems with my existing service
• Require all corporations and organizations (for profit or not) to have their name show up on call display so we can screen our calls intelligently

Just a thought. In the meantime, I’ll continue ignoring most of my phone calls…

[Image: www.freeimages.co.uk]

[Content © 2008 SorryToConfuseYou.com, All Rights Reserved.]