Th-th-th-that's indoctrination!

I got this from a colleague as sort of a "ahh, simpler times" mass email. Given the people who frequent this blog, I don't think I need to comment much on it. (I only watched the first and last thirds, by the way.) Be sure to listen for the Indian music when the Ghost of Freedom Past tells Porky about the westward expansion into the unexplored wilderness.

Cultural Blinders

Yes, yes, educated people know that we all wear them, but that doesn't mean that we remember to peak around them. I was talking with someone here (the UK) about words that are different in American and British. He mentioned how funny it is that we call the devices in buildings 'elevators', when after all they go down as well as up. I responded, 'You do realize that you call them "lifts", don't you?'

He looked stunned for a second, and then said, 'Oh, we do, don't we?'

A similar item: what we consider 'breakfast food'. People have very strong ideas about this, different from culture to culture, and with little seeming basis in the character of 'good' and 'bad' breakfast foods. For instance, I've had people tell me they couldn't eat a hanmburger at breakfast -- 'too heavy' -- but will happily eat several slices of bacon and a sausage or two. They see or hear that the Irish eat plaice -- a mild whitefish -- at breakfast, and declare 'I could never have fish for breakfast' -- but hungrily devour smoked salmon, a much stronger fish, on their bagels.

Why Doesn't Clinton Have Obama Killed?

If only to assure Crash Landing's readers that we're not naive wusses on this cutting edge blog, I feel compelled to ask: Why doesn't Hillary Clinton arrange to have Obama killed? Is it that she can't?

With all of her and her husband's connections, can't they cut a deal with the Chinese government to have some dissident on death row come to an Obama rally, in exchange for favorable treatment of the guy's family back home?

So what's holding her back?

(1) It's certainly not moral qualms. If she genuinely believes she will save millions of lives around the world with her superior policies, and she clearly has no respect for abstract ethical principles, then why not sacrifice one person for the greater good?

(2) She wouldn't get hurt politically. It would be so brazen and obvious that "serious" media analysts wouldn't be speculating, "Do you think Clinton was behind the assassination?" The fact that Clinton had basically predicted it would be taken as further proof that she couldn't possibly be behind it. Her fellow Democratic politicians would suspect her, of course, but they wouldn't made a public scene with only months before the general election. Instead, they'd blame it on racist Americans who couldn't stand the thought of a black man in the White House, and use the public emotion to ensure a "deserved" Democratic win in November. Then maybe behind the scenes they'd deal with Clinton, to the extent they could. But they would probably be impressed/intimidated more than repulsed by her bold move.

(3) Maybe Clinton figures it is more prudent to wait another 4 to 8 years. If McCain wins, she's golden for the nomination in 4.

(4) My personal favorite: Suppose when you're at that level of power and intrigue, you have to get permission for a hit like that? I don't pretend to know exactly whose blessing you need, but I do know it's not the president of the United States.

The Pitfalls of Hostility

Libertarians already understand the negative consequences of aggression, and pacifists understand the negative consequences of even lawful violence against other human beings. But we can push it even further: For the average person's goals, hostility against others can be quite counterproductive, even if "justified" by some ethical standard.

For example, a lot of people are pointing out that we're now seeing Obama's "true colors" come out, and that all of his early rhetoric about a different kind of politics, was just a lie. Well, yes and no. I think it is entirely possible that Obama really would have continued to sound so fresh and different, but he (thought) he had to adopt a different stance because of the incredible tactics employed by the Clinton campaign.

By the same token, the unimaginable scope of investigations into his and his family's background, and the rumors etc. that will be employed by supporters of McCain, will embitter him and his advisers. He will be much more receptive when his aides tell him to not bargain with the dastardly Republicans on taxes or health care, because "they can't be trusted."

We can push the analysis back even further. Given how horrible presidential campaigns have become, what kind of person even contemplates running for the spot? Only someone who (a) believes he has nothing embarrassing in his past, (b) is willing to endure public humiliation and scrutiny because s/he so desperately desires power, and/or (c) genuinely believes s/he has the answers to make the world a better place, and so is willing to endure these trials.

Generally speaking, I don't want someone matching any of those traits in power. It would be better if presidents were chosen randomly.

So yes, the Republican detractors of Obama will be "correct" in much of their character attacks (though not all; I'm still waiting for the alleged video of Michelle talking about "whitey"), but it's like giving ever harsher penalties for drug dealers: You won't stamp out the problem (in this case, awful Democratic candidates), and in fact just ensure that the survivors in the new equilibrium are even worse, by your own standards.

I Am in Physical Pain After Reading This Attack on Big Oil

My buddy at IER likes to ruin my day by sending me ridiculous op eds castigating oil companies. This one is pretty good. It concludes:

Left to their own devices, Big Oil companies will take every step necessary to funnel all the wealth that Lady Luck and American taxpayers have funneled into their bank accounts. It's time now to treat every American as a fiduciary to strike a just balance between private profit and public interest.

(Actually, rereading it now for this blog post, the first sentence above doesn't even make sense. Lady Luck and American taxpayers funnel wealth into the bank accounts of Big Oil, and then Big Oil is going to funnel it again? Why do that? And suppose they wrote checks out to every American citizen. Wouldn't this ostensibly responsible move still qualify as taking "every step necessary to funnel all the wealth that Lady Luck and..."?)

More Evidence Against Cato

Maybe I'm missing something obvious, but when I go to look up past issues of the Cato Journal, it is unnecessarily difficult. Suppose you want to go find Rothbard's 1982 article on pollution. Are the past issues listed by year? No, they're listed by volume number. Like I freaking know what the volume number is. Now I have to go clicking on issues randomly and use triangulation to find it.

Where's that Razor When You Need It?

I was browsing some books at a bookshop the other day and came across one arguing how the discovery of a world governed by scientific laws refuted the proposition that there was a supernatural deity involved in any way. This struck me as funny because, basically to a man, the people discovering those laws, from about 1600 until well into the 19th century, saw the laws they were finding as testimony to the glory of God (and, as such, evidence for His existence).

There is a problem for materialist here, of course -- why should the universe be a place that supports creatures like us and is governed by laws we are capable of grasping? One of the latest materialist attempts to explain this posits that a multitude of universes of all different characters exist, and we just happen to be in a law-governed, life-supporting instance. So let me see: In place of explaining these things by means of a single, unobservable entity, we are going to explain them by billions and billions of unobservable entities!

Calling Occam, calling Occam!

The "68 million acres" claim about oil companies.

OK I didn't post this until I had had a chance to read the offending document, but yeah, it really looks like these claims (pdf) about the oil companies--and the federal lands that they have leased but are stubbornly refusing to develop--are as ignorant as they first sound.

Here IER (not me writing this time) blows them apart. This actually gets pretty funny (for these types of things) in the bullet points, so I encourage you to actually read it.

Now that I have assured myself that these accusations against evil Big Oil are patently absurd, the question becomes: Is Obama truly this ignorant of how business works, or is he making such ridiculous charges just to get elected?

I'm not sure which outcome I prefer. It's comparable to: Does George Bush actually think he's patching things up over there in the Middle East, or...?

Pub Life

I had dinner yesterday in a pub with two sinks in the gents' room. Each had two taps, one red and one blue. The odd thing was that all four put out blazing hot water. Why would anyone bother putting in two taps fed from the same pipe?

The waitress asked me, 'Would you like to try our mulled wine?'

'I'll have to think that over', I responded.

Wenglish

I just found out that there is such a dialect just yesterday -- it's basically English spoken with Welsh grammar and a sprinkling of Welsh words.

New Oil Scenario; Or, "My Bad, Tyler"

Well I've been pretty smug with my fellow economist bloggers on the oil speculation issue. But I think my sweeping pronouncements before were too strong (strident?), and that it's possible for speculators to drive up spot prices, without leading to inventory buildup and without forcing oil prices to be in contango. Rather than trying to give more general rules for what can and can't happen, let me just tell a little story, and you tell me if it sounds plausible (or even true!).

The Fed has been doing CRAZY stuff trying to resuscitate the credit and real estate markets. And yet many traditional measures of irresponsible monetary policy aren't giving off warnings. (E.g. M1 and M2, long-term bond yields, CPI, and PPI.) So, to put it simplistically, where has all this new money been going?

Let's say that the Fed really is injecting hundreds of billions, and that it hits the financial big players first. Where are they going to put it? Real estate? Stocks? Bonds? Heck no, those are all terrible investments right now in the U.S., and they're not so hot in the rest of the world either.

But commodities is pretty attractive. They will always be in demand, even during recessions; it's not like you're investing in sushi restaurants in Boise. What's really nice is that the nature of your "bet" (i.e. investment) liquidates itself fairly quickly. With a stock or bond you are (in theory) betting on a stream of events well into the future, whereas you can take a position on silver in four months and not be nearly as tied down.

OK, so suppose all these hundreds of billions are bypassing the larger economy (and hence not showing up in official aggregate statistics) and going right into commodities futures.

Perhaps (mis)led by the boost in futures prices, Saudi Arabia becomes convinced that there will be a huge surge in demand for oil in, say, the latter part of 2009. So they cut current output, in order to expand their capacity in 2009.

Because of Saudi Arabia's cut in current production, the spot price of oil shoots way up. In fact, it goes up so much that backwardation is restored in the oil yield curve. I.e., even though the sudden influx of speculators with hot Fed money has caused futures prices to double (let's say), once everyone adjusts, the new equilibrium will have a spot price that doubled too.

Now because Saudi Arabia was willing to substitute oil output so much (i.e. they had originally had so much excess capacity slated for 2009), the spot price was able to rise and mute any incipient incentive to hoard physical oil. So inventory data wouldn't show any signs of this massive Fed distortion of the oil market, and as we already showed, there could be backwardation in the oil yield curve.

==========

Well gee whiz, I've gotten into this so much that I almost convinced myself. I should probably sleep a night on this one.

In any event, I looked at my inner economist and discovered that I very well may have been too flippant with Tyler Cowen. Even if it turns out not to fit the data, the above story is certainly theoretically possible.

Dang.

More Quibbling on Economists Handling the Speculation Issue

Stefan Karlsson says in this piece that we must:

Note further that commodity speculators can take both long position and short positions. This implies that commodity speculators may not in fact be contributing to higher prices. If speculators as a group have equally large long and short positions then they will have no effect on futures prices, and if they as a group have larger short positions than long positions then their speculations will in fact lower futures prices.

Now I am only picking on him because my breakthrough finally was crystallized while reading his article; there have been plenty of apologists for capitalism making this same argument. In any event, as with the claim that the futures price is the market's "best guess" of the spot price at a future date, so too I think the economists here aren't really thinking this through.

Let's say the spot price of oil right now is $140, and the futures price for June '09 delivery is $145. (I'm not bothering to look it up; I don't know what it is.)

Now some investment bankers are partying it up with some Special Ops guys. After a few lines in the bathroom, they are buds and the Special Ops guys tell them about an "accident" that is going to occur with Iranian president Abema-dinobots in May 2009.

So those guys hop on the phone and start dumping everything they've got into June 2009 oil futures. (Maybe some hedge themselves by shorting April 09 futures. But the point is, they all go long on a TON of June 09 futures.)

I think we can all agree that this influx of new demand will boost the market-clearing price of June 2009 futures. No matter how you model everybody else, surely they won't soak up an infinite amount of demand for futures contracts at the original price; people going short will need higher and higher prices to induce them to take yet bigger short positions.

Now I suppose a response could be, "Oh, but now you're involving people besides the class of pure speculators. They would suck more contracts out of oil producers and other groups who go short for hedging purposes. Karlsson was talking just about the speculators per se."

But even if the whole market hears the news, then you would still get the same movement. Some people would think the news would result in a June 2009 spot price of, say, more than $350, while others might think that's crazy, and that oil wouldn't break $300. So the first, more bullish group goes long, while the latter, less bullish (not bearish, mind you) group goes short. When all is said and done, they could be equally balanced between long and short positions.

Anyway, I probably made this post much longer than it needed to be, since its point is rather elementary. Just because there needs to be a long and a short on every futures contract, doesn't rule out the possibility that speculators can influence spot prices.

Indeed, we want speculators to be able to move spot prices. In the scenario above, we want spot oil to shoot up, and for there to be massive contango, to get get people to start stockpiling oil like crazy over the next 12 months.

One final thing: In his defense, maybe Karlsson had the following in mind. Suppose we are at an initial equilibrium, where a futures price is determined only by traditional hedgers, such as oil companies and airlines. Now a bunch of speculators come on the scene. If their activity leads to a higher futures price, then that will cause the original hedgers (the fundamental traders) to become net short, as they "export" some of their contracts to the Nation of Speculators. But that means the Nation of Speculators must be net long.

And vice versa is true: If the Nation of Speculators ends up causing a financial-world (i.e. market) futures price to be lower than it would be without trade with the speculators, then the Nation of Hedgers will import futures contracts from them at their cheaper price, and become net long. That means the Nation of Speculators is net short.

OK I guess I will give Karlsson the benefit of the doubt, and assume this is what he had in mind.

I Feel Bryan Caplan's Pain

I have been known to criticize Bryan Caplan, and in fact I have a forthcoming mises.org hatchet job, er thoughtful critique, on him. But in this post he asked a simple question regarding the ability to profit from superior knowledge if futures markets don't go out far enough. And then Tyler Cowen gave a hand-waving appeal to authority that was a non-answer.

Arnold Kling dressed up Cowen's response, but check out the comments. JPC knocks Kling on his butt, then kicks him again when Kling tries to stand back up.

What must really be frustrating for Caplan is that these answers imply that Caplan hadn't thought of such obvious "solutions." Caplan purposefully rigged his initial scenario so that these obvious techniques wouldn't work.

I feel your pain, Bryan. The experts have been blowing me off for years too. Come join me, and together we can rule the blogosphere!

The Brains Behind the Vast Right-Wing Conspiracy

The Weekly Standard has a new piece that relies very heavily on my IER report on speculators. I wonder if they will heed my policy recommendation to reduce demand by pulling the troops out of Iraq and Afghanistan?*

* The views expressed here do not necessarily reflect those of IER staff or management.

Sorry, Honey

I'm reading a very entertaining book by Walter Gratzer called Eurekas and Euphorias. It consists of quite a few, curious or amusing, short tales from the history of science. One of my favorites is about the absent-minded physicist Sir Nevill Mott. One day Mott, who had been a professor of physics in Bristol for many years, was riding the train from London to Bristol when three things struck him at at once:

1) He no longer lived or worked in Bristol, having been appointed Cavendish Professor at Cambridge;
2) He had driven to London that day; and
3) His wife had accompanied him.

Oh, His Last Name Is Working

I kept thinking Tyler Cowen was making grammatical errors in his references to a Holbrook Working Paper, until I realized that the economist's name is Holbrook Working.

Does anyone else see the tremendous comedic possibilities? Suppose he had a son and named him Home:

============
Costello: Is Home home?

Abbot: No he's working.

Costello: I *know* he's Working. Is Working home?
============

Ahh, the misunderstandings and comedy ensue...

Booting What?

I flew on Delta from JFK to Gatwick last night, and the seat-front screens were having some difficulty. I was stunned to learn that that little screen (at least on Delta) is a (Red Hat) Linux box, as I got to watch Red Hat's re-boot sequence about a dozen times. And it was clear that my station had its own Linux copy, as I could see my seatmates version of Red Hat Linux at a different point of re-boot than mine was.

Who knew?

Study (Guide) Break

I'm working on a study guide to Mises' Human Action. I just came across the below excerpt, and remembered why a lot of people love, and a lot of people hate, Mises:

The treatment of probability has been confused by the mathematicians. (From Chapter VI, section 2.)

Trust Daddy or Act in Self-Preservation?

Well geez another milestone. My son (3.5 years old) used to love when I would throw him up in the air. (I caught him, too.) He would honestly have wanted me to do that for an hour straight. But inasmuch as my body is not nearly as honed as my mind, I would always quit after 5 minutes.

Anyway, today we were having a good time and so I thought I'd throw him up in the air to celebrate. But now, he would lock his arms around my hands, so that I basically just swung him up and then down, like we were dancing.

I am both disappointed that he no longer trusts me with his life, and proud that he is wiser.

A Clarification on My Views On Oil Prices

OK I have been going nuts over the Krugman/Cowen/Kling brouhaha. My overarching complaint is that such high-caliber economists keep talking past each other because they aren't defining terms and then being consistent. So you've got, for example, Kling proving that "speculation" about the nature of the universe always determines prices, and of course anyone who subscribes to subjectivist price theory agrees with that. But naturally that's not what Krugman and Congress are talking about.

On the other hand, it does seem a bit crazy to say that oil has shot up so much in just a year, and this is all due to "fundamentals." Is that really what I'm saying?! Three points:

(1) From mid-June 2007 to mid-June 2008, fully 15% of oil's tremendous nominal price jump can be explained by the dollar's fall against the euro. So right there I just took care of 15% of the issue.

(2) China has been growing like gangbusters. Estimates vary, but people think they are accumulating diesel so that they can turn off their coal-fired power plants a month before the Olympics (to reduce air pollution). So yes that's "building inventories" but it's not for speculative price appreciation, it's because they need to physically consume it very rapidly in the near future. The larger point is, global demand for crude oil is rising. We only rule out a "fundamentals" explanation because our way of life is fairly stationary right now, but it isn't around the world.

(3) There have been all sorts of supply disruptions and faster-than-expected declines, e.g. Nigeria and Mexico, and a lot of this stuff happened fairly recently.

In conclusion, the only real wild card in this is Saudi Arabia. If they thought oil prices were going to explode in the future, then they could be producing less now, and you might call this "speculation." That's fine. But it's NOT being driven by people dabbling in the futures markets, since there has been backwardation (higher spot than futures prices) for large portions of the runup.

OK, so it is possible that there is a "speculative bubble" in oil prices, but if so it's due to producers' misjudgments, not to institutional investors throwing money after oil.

Who's to Blame?

I continue to be annoyed and perplexed that anyone takes seriously writers like Michael Moynihan at Reason who insist that "the blame" for some event is an exclusive property of a single agent. Moynihan, in critiquing Pat Buchanan's Churchill, Hitler, and the Unnecessary War, writes:

"Beyond the absurdity of implicitly blaming Churchill for the Holocaust—because that is what he is really saying when he writes 'no war, no Holocaust'..."

I declare that what Moynihan "is really saying" when he writes this is that, if Buchanan holds Churchill responsible to any degree for the Holocaust, that he is saying Hitler had nothing to do with it. And that is utter rubbish.

Any professional in science or ancient (i.e., politically uncontentious) history who took the view that "pundits" such as Moynihan do of "blame" (i.e., cause) would be laughed out of court for such simple-mindedness. That Caesar was "to blame" for the downfall of the Roman Republic does not mean that the Gracchi brothers, and Marius, and Sulla, and Pompey, and Cato, and even "social factors," were not also to blame. That a hot spell in the Caribbean is "to blame" for a hurricane does not mean that a low pressure system sweeping in from Africa is not also "to blame." This single-source concept of blame is, I suggest, a sure sign one is dealing with a political ideologue rather than a genuine historian. It is entirely coherent to hold that Churchill had some responsibility for the Holocaust -- at the least, he could have fought to get more Jews asylum in Britain! -- while still holding that Hitler is far more to blame than Churchill.

What gross, partisan stupidity these people are willing to embrace!

Krugman 3, Free Market Economists 0

I am sorry to say that I still think Krugman is crushing all of the other econowizards on speculation and oil prices. To recap very quickly: Krugman originally said that if speculators were raising prices above the level justified by "fundamentals," then clearly there would be a surplus of oil on the spot market. This is possible, but it would require somebody to be stockpiling the oil. We don't see this in the inventory data.

OK Tyler et al. come back and say, "No, it could be that producers hoard the oil in the ground, i.e. they pump less today and plan on pumping more in the future."

Then Krugman can come back and say, "Right that's possible, but even in that case you would see futures prices higher than spot prices--i.e. contango. And yet the oil market has been in backwardation for long periods during oil's runup."

Now here is where it gets ridiculous. Tyler actually said:

[W]hen risk and liquidity premia are changing, the relationship between the spot price and futures price is obscure and difficult to interpret. In particular a futures price for oil below the spot price does not refute the speculation hypothesis or even provide much evidence against it.

On MR I posted my thoughts on this technically true, but in practice ridiculous, rhetorical move:

"If you can sell oil at $140 today, or you can short a futures contract and sell it in one year at $130, what oil producer would do that? The only liquidity or risk story you could tell is that you are afraid nominal interest rates will go negative, and that roving mobs will empty your bank but not your oil field."

One last point: The context of Tyler's remark was Arnold Kling's analysis of the "option value" of keeping oil in the ground. E.g. if spot oil is $140 while the futures price for oil next year is $130, an oil producer might still keep some barrels in the ground because of the possibility of oil jumping to $150 by next year.

That's fine. But then it's not the institutional investors who are driving the price hike! In fact, by construction in this example, the people trading futures contracts are tending to dampen the amount of oil that producers store for future sale. So sure, you could say "speculation" is causing the price hike, but that is a tautology (and in fairness Kling admits this, sort of). But that's not what Krugman--or Michael Masters--means when asking, "Are speculative investors responsible for oil doubling in a year?"

(BTW if anyone hasn't been keeping up with this stuff and wants a roadmap of the exchanges, go to Tyler link above.)

Clarification on Futures Price and Market's "Best Guess"

A few posts ago I criticized economists who either explicitly or implicitly say that the futures price for a particular date is "the market's best guess" of what the spot price will be on that date. I wrote:

You can see the difference pretty easily: We can always check whether we are in backwardation, since it is a snapshot thing between spot prices right now and "the futures price" right now. But in order to see whether oil prices decrease over time, you would actually have to wait a few months and watch.

Although the above is true, it may have misled some people as to how deep my criticism was. From reading my first post, one might have thought that I was merely saying, "The futures price right now is a different thing from what the spot price in the future will end up being."

Yes that's of course true, but that's not the extent of my point. To drive this home, I should relate that back when I was trying to get a job as a "quant" on Wall Street, I read up in the relevant literature and hung out at sites like Wilmott. At that time I thought that the futures price was the market's best guess of what the spot price would be.

When I asked if this were indeed true at Wilmott in the newbie section, it actually took a few posts for me to explain what I was asking. I.e. not only is this typical economist belief false, but experts in this stuff at first didn't even understand the claim because it was so ludicrous to them.

One guy in particular gave a really simple counterexample that blew the notion to smithereens, but I can't quite remember it. In any event, try the following if I still haven't convinced you:

What exactly do we mean by saying that a person or a group of people think the "best guess" of spot oil is (say) $145 on October 1, 2008? Would that person bet his left arm that West Texas crude would literally sell for $145 and zero cents on that day?

Of course not. We don't need to get too specific about the precise nature of it, but obviously people think there is a range of plausible oil prices on that date, with some intervals being more likely than others. For the sake of argument, let's stipulate that the person views the world as Bryan Caplan does, and so he has an actual probability distribution defined over possible spot oil prices ranging from $0 to infinity.

OK so let's suppose the expectation of this distribution is $145. Therefore, in a quite defensible sense, you could say this person would give a "best guess" of $145 as the oil price on that date.

Now does it follow that a person would be willing to buy a futures contract right now for oil with a futures price of $144? Right now, the guy's expectation of the value of this contract is $1 delivered on October 1. (Actually this is for a forward contract; let's not worry about the fact that futures are marked to market periodically.)

Well sweet, the guy can buy a futures contract at no cost right now (i.e. you don't hand over money when you go long or short on a futures contract) and have an expected gain of $1 on October 1. From a certain point of view, that's an infinite rate of return! So surely in equilibrium the futures price has to be exactly equal to the market's "best guess" of the future spot price, else arbitrage. Right?

No, because we haven't accounted for the risk. If oil drops to $44, then that futures contract imposes a loss of $100. Is it so clear cut that the guy should buy the futures contract, even when his expectation of the spot price is higher than the futures price?

So now we start to see that there is a lot more to it than typical economist stories assume. Maybe if every investor were risk neutral, then arbitrage would ensure that the futures price always equaled people's expectation of the spot price at that date. (Even here, what happens if people disagree? Then it's hard to define what "the market's best guess" even is, let alone come up with a way to ensure that it matches the futures price.)

OK I hope I've made my point. People who know more on this, please correct any dumb mistakes I've made in the above.

I Assert, You Decide

I had a quick spot on Fox Business on Wednesday. Go to this link and scroll down to find it.

(BTW, it's surprisingly difficult to know when the camera is first on you, and it's hard to maintain a big smile beforehand, with people all around the studio. So that's why I have the charisma of Al Gore in the beginning.)

Order of Praise: Toddler, Relative, CPS

This is an awful/wonderful story of a 2-year-old who survived 6 days alone in the house after his mom died.

What annoyed me in the story is how everyone gushes over the Child Protective Services worker (who called police to break into the place and find the kid). But what is the big deal? The only reason the CPS worker even knew to check the house was that a concerned relative called them. And if the kid hadn't survived by eating cat food--everyone is calling it a "miracle"--then the CPS worker's approach would've led to his death!

Does everyone get what I'm saying here? A concerned relative calls CPS and says, "Lisa has been very sick and I'm worried about Noah. Please check to make sure they're OK!"

And it takes Noah being with his deceased mother for six days before the authorities actually help him. The concerned relative didn't bother breaking into the house, probably figuring, "Well I called the authorities, what else is a citizen supposed to do?"

So rather than CPS saying, "Whoa, let's do an audit of this, and revise our protocols so that a kid doesn't have to miraculously survive on cat food for six days..." instead they heap praise on their worker for saving his life.

What about the cat food manufacturers? What about the cops that actually broke down the door (or whatever)? What about the phone company employees who kept the phone lines in working order to facilitate the relative's initial call?

Incidentally, if you think I'm being a jerk, re-read the article. The concerned relative called on June 16, and the boy was found on June 26. The autopsy hasn't occurred yet, but right now they say that the mother had been dead for up to six days. That means CPS had at least four days' notice before the mother died. So explain to me why we are congratulating CPS on this one?

One more clarification: I'm not saying that the CPS procedures ought to be revised. Obviously, no matter what the protocol, occasionally kids will die in cases like this, because you can't go breaking into people's houses whenever you get a phone call and the mother doesn't answer the door. (Maybe they went out to the grocery store, etc.) So my point isn't to condemn the CPS for the 6-day delay (though that does sound crazy to me), but rather to question why we are pointing to this as a great success story?!

Sorry to Have Been Away...

Our hosting service, Joyent, had a miassive bank of servers down for almost three days. Then, when they came back up, the last good backup they could find was from May 17! Luckily Blogger stores a copy of this blog as well, and I was able to re-publish.

In any case, do not host with Joyent, folks!

A Subtle Misconception About Futures Prices

Even many economists subscribe to the mistaken belief that the futures price at any moment represents "the market's" best guess about what the spot price will be on that future date. But this simply isn't true. If the July 30 futures price of oil is $138, that doesn't mean people in the oil business expect the spot price to be $138 on July 30. All it means is that the people going long and short in the futures contract can know that they will swap oil and money at that price. There is no corollary that their best guess is that the spot price will also be in that neighborhood.

(Actually, what I said is strictly true for a forward contract. A futures contract is marked to market periodically during its life, so that the spot and futures price really do converge at maturity. However, because their accounts will be credited or debited as spot prices move, the people exchanging the futures contract today can make their plans as if they will be exchanging oil for cash at $138 per barrel on July 30.)

Anywho, I think Arnold Kling makes this (understandable) mistake when he says:

"If oil prices are expected to decrease (backwardation)..." (From the fifth or so paragraph in this post.)

So Kling is here saying that if people in the oil market expect spot prices to fall over time, then this is the same thing as saying right now the futures price is lower than the spot price. This latter event is the definition of backwardation.

You can see the difference pretty easily: We can always check whether we are in backwardation, since it is a snapshot thing between spot prices right now and "the futures price" right now. But in order to see whether oil prices decrease over time, you would actually have to wait a few months and watch.

A Model Discussion By Krugman

I hate to say it, but I totally agreed with Paul Krugman in this piece (pdf) for econowonks when he said:

One of the problems in the debate over the role of speculation in oil prices is that hardly anyone, even among the economists, is writing down models. As a result, it’s not always clear what people are saying; and I’d argue that some of my colleagues aren’t clear on the implications of their own analysis.

I think this issue about speculators and oil prices is perfect for neoclassical models, so long as the creator is familiar with Grossman's work as collected in The Informational Role of Prices. (Incidentally, that is a wonderful book that justifies the absurdities to which formal models may be put in most cases. Another example is Lucas' model of money demand, to which I can't find a link. If you're going to do it formally, that's the way.)

Anyway, Krugman crystallizes the verbal reasoning I employed in this study, to rule out speculators from being the cause of high oil prices. Basically, the "correct" price is the one where the quantity of oil supplied by producers equals the quantity demanded by physical consumers. But if speculators come in and drive up the price, then there necessarily is a surplus of oil. The higher price encourages production and discourages consumption. Even if you think the elasticities are small, surely if oil prices are double what they "should" be (as some people just testified to Congress), then there must be a constantly growing stockpile of barrels of oil.

Krugman went beyond that argument though. He also mentions a second signature of this mechanism: Spot and futures prices would have to be in contango. This is because the process through which Goldman Sachs can induce Rex the Oil Warehouser to grow inventories, is that Goldman Sachs buys futures contracts (as an investment). This pushes up the futures price while (initially) the spot price may be unaffected. But once the futures price rises a certain amount above spot, it then becomes profitable for somebody to buy barrels at the spot price, physically store them until the futures contract matures, and then cash in the contract and the barrels. I.e. the only way the nominal rate of return in this activity can be positive, is if futures prices are higher than the spot price--actually, they have to be higher than the interest rate at the very least, because people could buy US bonds with very low risk. So to get them instead to invest in buying and storing physical barrels of oil, the implied rate of return embedded in the spot and futures price would have to be higher than the rate on Treasuries.

But, as Krugman points out, we haven't seen that either. In fact, the oil market has been in backwardation (where the spot price is higher than the futures price) for a large portion of the runup in oil prices. This is the exact opposite of what you'd see, if institutional investors were driving up oil prices by buying futures contracts.

Last point: In the original Krugman article (HT2MR, and to Pepe for tipping me off to that) intended for the lay public, Krugman strangely argues that there also wasn't a housing bubble. (At least, I think that's what he's saying. But I am hesitant to say this, since who the frick would deny that there was a housing bubble?) Anyway, for some reason Krugman is looking at rents, and since they are flat he concludes that investors weren't driving the change in house prices. (Again, I don't believe this either as I'm typing it out. But I read that Krugman paragraph several times, and it sure sounds as if he's saying there was no bubble in housing, just as there is now no bubble in oil.)

So regardless of whether I'm misunderstanding Krugman's position, I show in the IER piece linked above that we can contrast the current oil market from the housing market in the early to mid-2000s. In other words, using the hoarding approach, I don't see any buildup of oil inventories in the EIA data, but I do find a fairly strong relation between house prices and the rate of vacancy in rentals; as the Case-Shiller home price index skyrocketed, so too did the vacancy rate shoot up. This makes perfect sense: Investors are buying homes not to live in, or even rent out, but to fix up and "flip" the following year or two. If enough speculators are doing this, on average a higher fraction of the housing stock would be vacant.

I think this would have been a much easier answer than what Krugman did. If I have understood his position, then my only explanation is that (1) he foolishly believed a critic who challenged him by saying, "But the data don't show a buildup in housing!" and then (2) tried to explain why the hoarding argument doesn't apply to housing, even though it applies to oil.

Now Krugman, it does too apply to housing. And the data show it clearly. You shouldn't have believed your critic who said the data don't illustrate the hoarding argument in the housing bubble.

Two Opportunities on Murphy Books

Ilana Mercer has graciously allowed me to plug my Politically Incorrect Guide to Capitalism at her blog. If you enjoy Crash Landing but haven't yet bought my book, then I'm emailing Hans Hoppe with yet another example of a performative contradiction.

In related news, Dick Clark alerted me to this amazing arbitrage opportunity involving my earlier book, Chaos Theory: Two Essays on Market Anarchy. (For the entrepreneurially challenged--general equilibrium theorists, say--buy here and sell here.)

Don't Relax, They Still Want Another War

John Bolton thinks the Israelis might attack Iran (HT2LRC) after the election but before the inauguration. Now some people--such as the head of the IAEA--think this would turn the Middle East into a "fireball." But Bolton dismisses this wuss talk as scaremongering (not to be confused with Condoleezza Rice's talk of a "mushroom cloud" etc. regarding Saddam).

In fact, Bolton thinks that if Israel bombs Iranian nuclear facilities, the Arab world will be "pleased." Now you might think that is an erroneous prediction, but we will never know one way or the other. Bolton covers himself:

"It [the reaction] will be positive privately. I think there'll be public denunciations but no action," he said.

It occurs to me that in Bolton's worldview, if a country doesn't launch a retaliatory attack, that is equivalent to endorsement. If people aren't willing to back up their views with weapons, then those views really aren't all that important, are they?

Running Commentary on the Gospel of Luke, part 1

I am reading the gospel of Luke and thought some readers might be interested in random comments that occur to me as I go through. If you are horrified by my violation of the separation of church and libertarianism, just skip these posts. One last caveat: I am going to adopt a literalist interpretation of the Bible when I post these comments. It's not that I necessarily think every passage of the Bible should be viewed as an excerpt from a history book, but I'm no scholar in such matters and for simplicity I take the text at face value for the purposes of this commentary.

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In Lk 1:5-20, we learn the story of Zacharias the priest. The angel Gabriel tells him that his wife, though thought barren, will conceive a son who will turn many back to the Lord. In addition, the son (who shall be named John) will prepare the people for meeting the Lord. But because Zacharias questions how this can be possible, the angel tells him he will be mute until the predictions have been fulfilled.

Now what's interesting is that in Lk 1:34, Mary (Jesus' mother) basically asks Gabriel the same thing, when he informs her that she will bear a son even though she is a virgin. Yet Gabriel doesn't zip her lips, he instead gently explains to Mary that the Holy Spirit will allow this apparent miracle.

The way I look at these types of things, this apparent discrepancy serves (at least) two distinct purposes. First, there is a basic fairness about it. An older male, trained as a priest, is certainly more deserving of a rebuke than a young girl.

However, as God's actions always do, this morally correct move also had pragmatic benefits. Zacharias had to raise a very hardcore son, who would be intimately versed in Jewish law but also have the physical stamina of Rocky Balboa. Apparently, God decided to have Zacharias think about it very seriously for nine months before taking up such an important task.

In contrast, for whatever reason muteness was not appropriate to prepare Mary for bringing the son of God into the world.

One last observation: Jesus would not have had the impact that He did, were it not for the groundwork laid by John the Baptist. The Jewish people simply wouldn't have been able to process Jesus if they hadn't first been exposed to John's message.

Those French

My eight-year-old, Adam, and I were in Paris in April, looking out our hotel room window. Adam asks, "Daddy, what's that adult store over there?" pointing across the street. I respond, "Well, you know, they sell naughty movies and magazines, stuff like that."

"OK, but then why do they sell toys there, too?"

I shook my head and said, "The French... who can understand them? They eat frogs, and sell toys in adult stores..."

The Origins of Agency

Mises was, for some reason, reluctant to attribute agency to animals -- he called what animals do "quasi-action."

I've argued against this in the past; Stuart Kaufman offers a detailed defense of my position in his new book, Re-Inventing the Sacred, in which he offers a semiotic definition of agency that extends that concept to single-celled creatures. To be a semiotic interpreter is to possess agency -- it is to interpret a sign and then act upon that interpretation -- in fact, in a sense, the action is the interpretation. To act is the characteristic distinction between life and non-life.

Carlin Critiques US Foreign Policy

Anthony Gregory posted this over at LRC's blog. I thought Carlin was exaggerating when I first heard this in high school, but now that I am older (and wiser?) I think it's pretty accurate.

Bob, Usher; Usher, Bob

I visited my younger brother over the weekend who is getting a PhD in math. He introduced me to Usher. I had actually heard some of the artist's performances in the past, though I didn't know the artist's name.

It seems this musician has studied Rothbard. For example, he continually refers to "thugs in the club" in his poetry. I can only assume that this is a subtle reference to the employees of the US federal government, the biggest gang in the world.

Usher's economics acumen is clearly on display when he refers in a patronizing way to "Shorty," an obvious dig at economics professor and former Clinton Labor Secretary Robert Reich.

Bravo, Usher! I salute your keen insight as well as your gentlemanly discretion. Keep us guessing!

Should Peaceniks Root for McCain?

It occurs to me that if you want the US government to reduce its interference with the Middle East, then you might do well to root for a McCain victory, paradoxical as it sounds. I have two reasons for saying this:

(1) McCain will be much more able to take risks in the quest for peace. In contrast, any little thing Obama does, will be denounced by Rush Limbaugh et al. for its "weakness." I.e., only McCain can go to Iran.

(2) If things get really bad in the Middle East over the next 5 years, you don't want it blamed on "Democratic weakness." Just as those longing for fiscal conservatism should root for Obama--so that his excesses will be blamed on "liberal politicians" and not on the "conservative McCain"--by the same token, those longing for a humble foreign policy should root for McCain.

We already know that Obama won't really do anything fundamental with US troop strength in Iraq, etc., and so if your overriding concern is for American militarism to be discredited, then you should root for a McCain victory in November.

Murphy Twin Spin on Oil

Here is an Buffalo News op ed (that is a bit clunky in parts because of the editing process) on why oil prices are so high, and here is an IER study debunking Michael Masters' testimony about speculators causing price hikes.

Saudi Arabia to Pump More: I Told You So

Now I can't really know what motivates the players on the world oil market, but this is rather interesting. About a month ago the Saudis put the smack down on George Bush when he asked them to produce more. Now all of a sudden, the Saudis are promising to ramp up both current and future output from previously projected levels.

What changed? Well, it's entirely plausible that the sudden shift in US sentiment for OCS and ANWR drilling made OPEC's new profit-maximizing output level in the near-future a lot higher than it had previously been. This is exactly the mechanism I've been arguing about over at the Environmental Economics blog.

Carlin Dead at 71

George Carlin died yesterday.

I liked him more when I was younger--not sure if I changed or if he did--but George Carlin was a very influential comedian. (I can actually do a decent impression of him. Stay tuned for my Broadway opening. You scoff, but if Glenn Beck can do it, why not me?) Below is one my favorite routines. (If anyone can find the video for this one, let me know and I'll swap it in.) Warning: bad language.

Man the Microcosmos, Part II

Did you know that humans have about 2500 transcription-factor genes, which construct the roughly 100,000 different kinds of protein that exist in our bodies, or that the number of different possible settings of those genes, if they were simple on-off switches, is 10⁷⁵⁰, compared to the 10⁸⁰ particles in the known universe? (Source: Reinventing the Sacred, Stuart A. Kaufman.)

Two Zingers Regarding Oil Companies

OK, I realize I am not the most unbiased commenter on this, but c'mon, the recent talk about oil companies is just plain dumb. Even if the Democratic charges were true, then their policy recommendations would be terrible.

CHARGE #1: Oil prices are really high because oil companies are making outrageous profits.

RECOMMENDATION #1: The feds should levy a windfall profits tax on oil companies, and that will bring prices under control, ultimately providing relief at the pump to motorists.

This is crazy. If oil companies can set whatever price they want, in order to achieve a profit objective, then a new tax will just be passed on to consumers. Once you admit oil companies can't simply pass on a tax and make the same profits as before, then you are forced to admit that maybe right now they are not "manipulating" oil prices either.

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CHARGE #2: Oil companies already own leases on federal land on millions of acres that are not producing oil or natural gas.

RECOMMENDATION #2: The Republicans should not be allowed to allow oil companies to lease larger tracts of federal land that is currently under moratorium.

This is crazy. Why would oil companies be lobbying to acquire leases on property they didn't plan on developing? And OK suppose they are doing this (perhaps to lock out competitors). Then isn't this the best of all possible worlds for environmentalists?? The oil companies want the ability to send a portion of their profits to the federal government, and we are confident that they won't do any drilling. So why not take their money? The beaches are safe, right? You can't spill oil if you're not producing anything on the newly available federal lands.

BTW for a more complete response to CHARGE #2, see IER's piece and API's. This stuff is ridiculous. Oil companies are hated so much that the weakest of criticism sticks. Now even Republicans and WSJ pieces are saying things like, "A windfall profits tax is not likely to reduce prices much," as opposed to, "WHAT??! In what school of economic thought does raising taxes lead to lower prices?!"