Category: Economics

It seems as though every issue of the local papers have a story on corruption. It is a problem, there’s no doubt about that. The reporters always end their piece with a lament that the government is not doing enough to combat corruption. They clamor for new laws to break the back of the corruption here. Maybe new laws need to be passed, but not the ones that they are thinking of.

The result of too many laws being passed to “protect us” can be seen in the US. Many people (myself included) do not like the amount of influence that large corporations, people with money, and special interest groups have with lawmakers and the resulting laws that favor them. But what to do? Many people want laws aimed at corporations and special interest groups in order to prevent this from happening. The problem with that approach is that as long as lawmakers are going to make laws that affect special interest groups, the groups will have the incentive to influence the lawmakers. This isn’t always a money thing either, often times it is votes that the highly motivated groups promise the politician and lawmakers will always respond to that.

The underlying assumption is that these problems come up because there are evil, greedy people in the government. I do think that’s part of it, but it is not the driving force. People need to understand that government is a human institution and it is naive to think that it will work in the way that we think it should or that it will always do what is in the public’s best interest. Humans respond to incentives, and politicians have a set of incentives that are similar to everyone else’s in some ways, but very different in others. One set of incentives that they have is to be reelected. This causes them to do many things that cause problems for many many people. Things like farm subsidies, price controls, “anti-rich” regulations, and maybe most noticeably deficit spending are examples of them doing what they need to do to get reelected at everyone’s expense. It is the incentive structure that we have now that makes lawmakers so responsive to special interests and very few lawmakers are able to resist those temptations. Term limits are an ideal way to try to combat this, if they are not worried about being reelected, they have a much better chance of not responding to those incentives to be reelected.

Corruption has a similar cause. It is the incentives to be corrupt that are the main problems. Evil people will be evil most of the time, but if regular people are tempted to be evil, only a certain number will be able to resist. There are many possible incentives to be corrupt (it may be the easiest way to get money, it may be the only stable way to live comfortably, it may be the only way to succeed in that country) and those are what need to be addressed if you want to make a dent in the corruption problem. In a country like this, there is also the additional problem that the ability to be corrupt is a strong incentive to join the government! If new laws are going to be passed in order to combat these problems, they will inevitably need to be ones that limit the power of government. The trick is to create the incentives to get those laws passed. Political economy is dicy, and it has the pronounced effect of making one very cynical about the political process in general…

I’m salivating over these books. I have been waiting for a collection like this, and it looks like a great one…

Well, I think I was right about the corn subsidies screwing things up. The latest copy of the Yemen Observer has a representative of some trade group defending the rise in wheat prices. He mentions that the EU, Russia, and Australia had lower than expected harvests, but he says that the corn subsidies caused a decline in the US production of wheat. I know this isn’t “proof,” but I think that it shows corroboration of my theory. The representative expects the market to correct itself early next year, but until then, we’re going to have to live with higher wheat prices…

In addition to wheat, the cost of propane has gone up as well. It has almost doubled in the past month. Once again, people are blaming “greedy” distributers. I’ll have to do some digging, but I’m willing to bet that it is the same forces at work here as there is in the wheat market. The op-ed in the paper says that the government should subsidize the price of propane, through Ramadan if not indefinitely. The current price is the equivalent of $3.50 a tank. I’m guessing that it is already subsidized. So the problem is either that distributers are colluding and driving the price up artificially, or maybe, just maybe there is enough increased demand during ramadan that the gas is now worth more and this is the actual market clearing price.

Another interesting thought is that the government gave all government employees an extra month’s salary as a bonus for ramadan. If you add money to the money supply, you devalue it, it’s the same thing as inflation. I didn’t think that this would make much of a difference, but many people that have jobs here have them through the government. Maybe there was more money injected into the system than I thought? One other thing that could have happened is that businesses could have raised their prices because they knew that there would be more money circulating in the system. This is a well know macro economic issue, businesses will raise prices as they think their cliental can pay more. We don’t see this too much in the US anymore, but it still takes place in places where the governments announce across the board pay raises. Usually, the government is trying to combat the effects of inflation by paying people more in order to afford things. Of course the combination of adding more money to the supply and the news that there will be more money circulating just drives prices up again. It’s a vicious circle…

The Millennium Challenge Corporation has granted the Yemeni government 20.6 million dollars in order to fight corruption. Ummm, that sounds a little dubious. If the government is misusing funds, why would you give them more money? There’s even the promise of more funds in the future. The Yemeni ambassador to the US said, “The decision is a recognition of Yemen’s achievements in the regard, and it is an important step towards preparing Yemen for full membership of the program whereby the country will receive even more support annually.” Wow, talk about bad incentives. Many economists (and political commentators in those countries) blame the dependance on foreign aid on the inability of the country to improve. There is undoubtedly more to this story, the papers here give just the most superficial treatment to stories, but it still sounds worrying to me.

Increases in the price of wheat are really putting the pinch on a lot of people here in Yemen. I just read an article that talks about Jordan feeling the pinch as well. Everyone knows that the price of wheat world wide has gone up, but both of these countries claim that the prices are rising faster than the world wide price. I’ve talked about wheat prices in Yemen here, here, and here. I’m sure that the problems plaguing Jordan are similar to the ones in Yemen. My question is, “Why is the price of wheat going up world wide?” Well, you might throw back at me, either demand has increased or supply has dropped. Yes, yes of course (that did pop into your mind, right?) but I’m wondering about the mechanism. The prices have risen by 30% or so, I can’t imagine that demand has risen that much, that fast. I’m leaning more towards the supply side. The traditional culprit of wheat shortages has always been bad crops due to weather, pestilence, locusts, or something. That could have happened, but I haven’t heard of any widespread problems like that. I have no evidence right now (I’m away from the internet and my friend Google right now) but I am eyeing some government interference as a likely problem. No, I am not a broken record, I just sound that way… The new subsidies for corn ethanol have really screwed up the corn markets, and we may be seeing it’s effects on the wheat market as well. Here’s my theory, the subsidies given to corn growers made corn a much more attractive crop to plant, so more people planted corn instead of wheat. And voila! much less wheat gets produced.

The hell of it is that if it weren’t for another subsidy (or more correctly, price control) we could make better ethanol cheaper from sugar. The problem is that the sugar lobby has managed to keep the price of sugar artificially high for the last 30 years or so. I do believe that only two families control all of the sugar production in the US… The government has kept the price of sugar at about twice what it should be for the last 30 years, in other words, we have been forced to pay twice as much for sugar and it has gone directly into the pockets of a couple of families. “That’s not a big deal, I hardly buy any sugar at all,” actually, you buy quite a bit, mostly in the foods that you buy. Sugar is used in many, many prepared foods, and all of them cost more because of the price controls. Now, not only is our food more expensive, but the price control is making us pursue a worse alternative for ethanol. Aren’t subsidies and price controls great?

If anyone has any information and/or links about my wheat scarcity due to corn subsidies theory, I’d love to see them, maybe especially if I’m wrong…

.. but you know, I did. Here as a matter of fact. It turns out that prices of wheat have continued to rise despite the fact that the government has fixed the price. Not only that, but the government, who is selling wheat for well below the going rate, has run out of it in some areas. The places that have not have very long lines for the wheat. The upshot? Dealers are charging, and getting a much higher price, sometimes twice the government’s price… Surprise surprise. You mean that prices can’t be arbitrarily set without consequences?

But wait, there’s hope! The cabinet has amended a law and now allows foreign companies to import food directly into Yemen! This goes along with another change that they made 3 or 4 months ago allowing a company not owned by a Yemeni to operate within Yemen. Imagine! This is huge, and while it won’t help Yemen this Ramadan, it surely will next time around. Of course there are people that caution that the foreign companies will monopolize the food market and may be put local companies out of business. We’ll ignore their probable monetary interest and lack of evidence from around the world (concerning the negative impact of a foreign monopoly) and point out the obvious. If all the local companies did was to collude and artificially inflate the prices to consumers, why would you want to protect them? The editor of the Yemen Times said as much in their op-ed, it’s good to see some common sense starting to spread. 2 months ago, you never heard of anyone talking about free trade, and now the promise of it has arrived, Hamdillila!

People sometimes ask me why my blog has the tone it does. This poster is why. This is a Greek communist election poster from the latest election. There’s good news and bad news… The good news is that the communist party only got around 5% of the vote. The bad news is that the socialist party got around 35% of the vote.

Was no one paying attention to what happened in the Soviet Union? Hell, hasn’t anyone paid attention to what has happened in Greece? This current government is the first non socialist government they’ve had since going to elections. That’s 40 something years of awful economic policy. Guess what? greece is the poorest country in the EU and has some of the worst economic fundamentals as well.

People all over the world want to turn to socialism (and communism) when things are not good. They have to understand that socialism will never eliminate “unfairness,” poverty, or lead to improvements in the standard of living. Socialist governments will make all of those things worse. Every economic theory makes that point and history has born them out. I will continue to trumpet the virtues of capitalism and rule of law in this blog until I no longer worry about seeing signs like this one anywhere in the world.

Of course I’m talking about the science behind it, not the effects… Steve Mcentyre over at climate audit (www.climateaudit.org) has finally been given the source code that Steve Hanson used for determining temperature time series that are used by many, many climate scientists. Despite the fact that Hanson works for the GISS (a division of NASA) and that his numbers were being used to shape policy around the globe, he was reluctant to release his methods. I won’t get into what kind of shoddy science that is, but I have to give my 2 cents about his attitude. He has repeatedly said that climate science should be left to the professionals. that amateurs are more likely to be steered by agendas and not by science. Well, OK, I can see some of that argument, but the trouble is that most of his “science” isn’t climate based at all, it is statistical. He wasn’t just making theories based on the data, he was creating the data as well. After Steve reverse engineered some of his methods and showed how Hanson needed to correct figures, Hanson had little choice but to release his code.

By all accounts, it is a statistical nightmare. What Hanson was doing was using several sets of data and combining them, “adjusting” assumed biases in the measurements, and glossing over site irregularities all the time admitting that he was not a statistician. Folks, there are some serious problems with this, if he had only taken his own advice! He should have had statistical professionals go over his numbers and then he could use that data to theorize on what it means.

Some of the code is over twenty years old! It has routines for writing output data, REWINDING THE TAPE, and then using that output as an input for the next calculation. Fortran anyone? Anyway, there are some things in there that even I could see would cause problems. Converting from floating point calculations to integer in Fortran leads to some wild rounding errors, “correcting” obviously flawed measurements instead of throwing them out, and his method of calculating running averages is…. interesting. A recent study (also on climate audit) showed that only 1/3 of the measurement stations actually met with the standards that ensure accurate readings. There’s a lot of things wrong, and this is the most often used set of numbers for determining if the planet is warming up. Keep in mind that most theories about CO2 driven global warming expect around a .7 increase due to man’s CO2 contribution. SOme of the things that have been uncovered in Hanson’s code show that he may have overestimated the warming by .2-.4 degrees! I highly recommend the site, the guys really know their statistics and they are doing a great job of trying to get less biased data to work with for climate change.

This is from a comment on a blog discussing Hugo Chavez. He is talking about socialists in particular and leftists in general… “Never will they recognize that in a system where rule is by force rather than law, the people most effective at using force are certain to rule.” It’s a good post overall, you can read it here.