Reasonable economic concepts contradict the bail-out the free-trading pirate ship approach

Apparently what we have now in the United States, is a free-trading government's money being used to 'bail out' organizations that have lost money, on the grounds that such is necessary in order to save the economy.

What comes to mind--pirates on ships, employed to transfer products that could have been made a mile from the point of sale thousands of miles to the point of sale, attempting to save their ships which are leaking the fuel required for propulsion, by pouring more fuel into the engines that have developed leaking holes, as opposed to patching up the leaking holes in the engines.

Several real or potential problems with the current government approach come to mind.

Investors can lose money without any loss being incurred to the economy as a whole; investors can lose money as a result simply of realism being restored to a situation featuring overvalued assets.

Such types of losses do not involve money disappearing into a black hole in space and do not warrant hysterical over-reaction as if the money had indeed vanished into thin air.

Investors can lose their money with the result that the money they once had falls into the hands of other persons in the economy. In such cases, the argument that money should of course be obtained indirectly from the taxpayers through govt borrowing and govt printing of money, to use on 'Economic Recovery' govt spending programs, as if the money had somehow vanished into some kind of black-hole, does not hold water--because the money has not vanished from the economy, but, rather, has changed hands.

If the money has simply changed hands, one has to wonder: if the goal is to restore lending, borrowing, sales, and purchases to a high level would'nt the economically and governmentally efficient thing to do be to encourage and motivate those who now have the money to use it in ways that promote lending, borrowing, sales, and purchases?

I now (off-the-bat, see the useful CNN piece at http://money.cnn.com/news/specials/storysupplement/bailout_scorecard/ ) estimate that about a third of the 2.6 trillion dollars the US has spent so far since 2007 on unusual 'Economic Recovery Programs', about 900 billion dollars, has been spent 'bailing out' institutions that directly or indirectly lost money by providing mortages to persons who could not repay the mortgages.

In simple terms, they bought houses from house-builders, allowed persons to live in the houses and gradually pay them back the value of the house plus interest; then the persons living in the houses were unable to make the payments.

Thus we ended up with not the money disappearing into a black hole in space, but rather with the homebuilders having the money, and the investors having the houses, which via application of their famous imaginative-investor abilities, they can use to make money with after they kick out those who were unable to keep up with the mortgage payments.

One has to ask why this should result in a crisis atmosphere, as if the money disappeared into a black hole in space, requiring massive govt intervention to bail out the investors who lost money.

Given that govt expenditures are famed for being susceptible to corruption, it is incomprehensible that the govt should spend money restoring the fortunes of the investors who lost money betting on mortgage-backed-securities (polite language, 'hard-to-sell securities', much more common impolite term, 'toxic securities'), without being careful with regards to possible collusion between the investors and the homebuilders.

Various scenarios come to mind in which there is no actual loss to the economy, when overvalued assets become valued at a realistic level.

For example: investors mistakenly bet that some company will fail, but it does not; investors foolishly bet some company will succeed but it fails; investors bet that some commodity will rise in value but it falls in value; investors bet some commodity will fall in value but it rises in value; investors believe some loan will be repaid but it is not; investors believe insuring risks for others will pay off but lose the gamble; persons insured think they have insurance but lo and behold the insuring party cannot make good on its promises.

These situations can result in reduced consumer confidence and reduced investor confidence, resulting in macro-economic weakness. However, it is irrational to assume that consumer overconfidence and investor overconfidence is of course a good thing or that 'bailing out' those whose overvalued investments have become realistically valued is the optimum approach to restore health to the economy.

Tough-love conservative types used to opine that foolish men who build their houses in an improper place, lose their houses, and then find themselves without the insurance they thought they had experiencing loss and suffering, whereas those who wisely choose the location of the house they build experiencing joy, is just a natural part of life and promotes the general economic health.

Consumer overconfidence does not promote the investments and savings that are needed to produce economic growth. Consumers cutting back on spending may mean reduced sales and incomes for some people for some time; but it also means increased incomes for those involved in new added production via the use of the money that is saved.

The free-trade hyper-enthusiasts have been repeating the no-pain no-gain bodybuilding mantra (in part addressed to the gullible mentally inactive ignorant types who worship their own biceps): "free trade will cause painful adjustments, retraining of the work force, but in the end everything will be better".

Yet somehow they forget this mantra when it comes to domestic trade--a philosophical inconsistency similar to the inconsistency wherein by way of some kind of magic trade that crosses a national border is far superior to trade that does not.

When overconfident persons build up organizations featuring unrealistically high valuation of assets, and then their dreams come crashing down to earth and the overvalued assets become realistically valued--govt responding to this by intervening to restore the value of the overvalued assets to an unrealistically high level, could end up at best having no positive impact.

Such government intervention encourages overconfident or fraudulent persons to build up organizations whose assets are overvalued, because they are confident that when the assets become valued at a realistic level as opposed to overvalued, The government will step in to restore the value of the assets to a realistic level.

One has to wonder, what will happen when persons have become used to being overconfident because they think Uncle Sam will bail them out, and then lo and behold Uncle Sam cannot bail them out because nobody will loan money to Uncle Sam and Uncle Sam's money-printing-press has so to speak run out of ink? Conservatives historically have enjoyed pointing out how dependence on government leads to bad habits.

Thus you have (overconfident?) persons spending their time energy and money in complicated schemes designed to produce, or that unintentionally produce, overvalued assets which are then restored to their normal level when the assets come down to a realistic value; if the stakes are high enough the persons involved in such could be persons of superior competence.

Problem is, persons of superior competence putting their time and energy into such fraudulent or overconfident schemes is a waste compared to other ways in which the time and energy of especially competent persons can be used.

What you end up with is a transfer of resources from (humble, not overconfident?) persons who make real actual contributions to the economy by working in organizations whose assets IN REALITY rise from a low value to a high value, to (overconfident?) persons who do not in reality add to the economy through their production of assets that are unrealistically overvalued. This discourages and penalizes those who make actual contributions to the economy by way of participation in organizations whose assets increase in real actual value.

Efficient allocation of resources, involves money being put into activities that produce actual additions to the economy and thus reward the prduent investors. Efficient allocation of resources, does not involve, overconfident investors putting money into fruitless activities that produce no addition to the economy and thus also losses for investors.
Bailing out foolish investors combined with taxing wise investors, does not promote efficient allocation of resources.

Even if bailouts improve things to some extent, one has to ask, what would be the result if the trillions of dollars were used in other different ways? If you could get ten times better results using the trillions in other different ways, the fact that the bailouts accomplish a little, is meaningless.

Money spent on 'Economic Recovery' that is spent on activities which promote the replacement of imports with domestic production, can be expected to improve the US economic situation. Money that is spent on 'Economic Recovery' that does not promote import replacement can be expected to at best cause no harm.

This declared without malice for our friends in foreign lands; perhaps one day we will be friends in some world in which friendships are not disrupted by national economic policy controversies.

When every nation takes care of itself, and has a strong national economy going, you have the basis for lasting international trade pathways that improve the health of the world's economy.

Some nations can produce certain goods and services at relatively high costs of production. Other nations produce certain goods and services at relatively low costs of production. The world's economy is optimized when a given good or service is produced not just in the nations where such are produced most cheaply, but rather, in the nations where they are produced cheaply and ALSO in the nations where they are produced expensively.

When the goods and services in question are produced in both types of nations, the world's overall possession of goods and services exceeds the world's possession of goods and services when goods and services are produces only in the nations where they are most cheaply produced.

Whereas with the current momentum in the direction of producing goods and services only in the nations where such are most cheaply produced, there is a high level of unemployment and underemployment in the world, featuring persons not involved in productive activity, when the goods and services are produced in both nations where such are expensive to produce and ALSO in nations where such are inexpensive to produce, there is employment, persons involved in productive activity.

A prosperous, employed world is in a better position to achieve flourishing international trade compared to a poor unemployed world, because the prosperous and productive can buy and sell whereas the poor and undproductive cannot.

The hyper-enthusiasm re international trade involves the inefficiency of goods that could have been made a mile from the point of sale being produced thousands of miles away from the point of sale and then transported.

The fact that a strong imagination can invent situations where the restriction of trade becomes absurd and harmful to all parties involved, does not disprove these points.

When trade involving goods and services that do not need to be internationally traded is de-emphasized, the result is a beneficial emphasis on trade in goods and services which is necessary.

I do not mean to be excessively harsh with unfortunate persons who have lost money due to investments. There should be a safety net allowing for such persons to have the basics of life at a level similar to those who get SSI and SDI because of some disability.


@2009 David Virgil Hobbs

Alternatives to the 1.0 trillion bridge-building type national economic stimulus envisaged by the current US Administration

I have read on the internet plenty of verbose essays displaying elite vocabulary, which focus on how the US government is now being wise in that it has learned the lesson of the US economic depression of the 1930s, which is that in the 1930s insufficient money liquidity was released into the economy in response to the depression. The essayists seem to fail to understand that doing what should have been done but was not done back in the 1930s, will not necessarily be the correct alternative now in 2009. Back in the 1930s, the US had not for years suffered from enormous trade and budget deficits as is the case today.

In my humble opinion (IMHO) as of now, this idea of borrowing/creating-money to spend a few trillion on public-works type stimulus programs resembles: trying to keep a tank from leaking water through a hole by stirring the water or borrowing water to throw in the tank; to me it resembles attempting to heal someone who has overdosed on heroin by giving him more heroin. The US has gotten to the economically weak position it is in today through government borrowing from foreigners, government creating money, government continuing huge trade and budget deficits. So, how can more of such be expected to fix thr problem? All one can reasonably expect from more of such, is that the problems will temporarily be ameliorated and then return to face a nation that is no longer able to escape by borrowing and creating money, a nation much less able to cope with its problems than it was when the previous borrow and print money without dealing with trade problems so-called solution was enacted.

The Ford Edge is an SUV automobile assembled in Canada using 95% parts made in US/Canada (http://www.turbo-owners.com/forum/990-post1.html). The "Chery A1 1.3" is a car made in China that Chrysler is planning on importing into the US ( http://www.bloomberg.com/apps/news?pid=20601087&sid=a31D4ERXhCBk&refer=home ).

At Edmunds, the 5 cars most similar to the ford edge, were (2008) Mitsubishi Outlander, Toyota Rav4, Saturn Vue, Ford Edge, Lincoln Mkx; these ranged in price from 22.6k dollars, to 35.8k dollars, with ford edge at 25.7k; the average, $26.5k ( http://www.edmunds.com/finder/segment.hatchback.html;f=%2Busein%3Anew?cat=Hatchback&reFacet=vehiclecategory%3AHatchback&p=cvehicledata%23%23-1%23%23-1%7E%7Ef66%7C%7C48617463686261636b%7E%7Enf77%7C%7C436f6d70616374#resort=price_desc&search=open.eq..amp.p.eq.cvehicledata%23%23-1%23%23-1%7E%7Ef66%7C%7C48617463686261636b%7E%7Ef77%7C%7C436f6d70616374%7E%7Ef22%7C%7C4d616e75616c%7E%7Ef20%7C%7C46726f6e742d776865656c206472697665%7E%7Ef83%7C%7C4c657373207468616e20323030204850%7E%7Ef66%7C%7C436172%7E%7Ef78%7C%7C3464722048617463686261636b%7E%7Ef21%7C%7C342063796c696e646572%7E%7Ef82%7C%7C3235202d203435204d5047%7E%7Enf55%7C%7C32303038
).

At edmunds, six cars are shown to most closely resemble the Chery A1 1.3, these are the (2008) Chevrolet Aveo, Nissan Versa, Honda Fit, Scion Xd, Toyota Matrix, and Saturn Astra;
they range in price from $10.2k to $15.9k, the average price if these cars is,
#13.9k (http://www.edmunds.com/finder/segment.hatchback.html;f=%2Busein%3Anew?cat=Hatchback&reFacet=vehiclecategory%3AHatchback&p=cvehicledata%23%23-1%23%23-1%7E%7Ef66%7C%7C48617463686261636b%7E%7Enf77%7C%7C436f6d70616374#resort=price_desc&search=open.eq..amp.p.eq.cvehicledata%23%23-1%23%23-1%7E%7Ef66%7C%7C48617463686261636b%7E%7Ef77%7C%7C436f6d70616374%7E%7Ef22%7C%7C4d616e75616c%7E%7Ef20%7C%7C46726f6e742d776865656c206472697665%7E%7Ef83%7C%7C4c657373207468616e20323030204850%7E%7Ef66%7C%7C436172%7E%7Ef78%7C%7C3464722048617463686261636b%7E%7Ef21%7C%7C342063796c696e646572%7E%7Ef82%7C%7C3235202d203435204d5047%7E%7Enf55%7C%7C32303038
)

Thus, the Ford Edge type car is at approx $26.5k on average, and the Chery A1 1.3 type car is at $13.9k. The Chery A1 1.3 is expected to sell in the US for 10k after the safety additions needed for the US market (http://www.leftlanenews.com/chryslerchery-to-be-10000.html
). The Chery A1 1.3 is according to my estimates,expected to sell for 72 percent of the price of the average car in its class. The cars of the Ford Edge type are 1.91 times the price of the cars of the Chery A1 type. Thus one could estimate that if the 'Great Wall in China' company produced a car of the Dodge Edge type, this car would cost 1.91 times $10k which is, $19.1k. Compare that to the Dodge Edge at $25.7k. This means that cars assembled in Canada using Canada/US parts like the Dodge Edge could be estimated to cost 1.35 times as much, 35% more than, cars assembled in China and imported into the US, which are made using (reasonable estimate) mostly Chinese parts and the cheapest parts that can be found outside of China.

Now lets look at the US balance of trade. In 2007 looking at US trade in goods (not services), the US exported 1.1 trillion dollars worth of goods and imported 2.0 trillion dollars worth of goods (http://www.census.gov/foreign-trade/statistics/highlights/annual.html ).

Having looked at the difference between the price of the Chery A1 and the Ford Edge we can estimate (in a very man-hours per estimate efficient manner) that for every 0.1 trillion in imports that the US replaced with domestic production, the price of what the replaced imports would go up by up to 35%, by up to 0.135 trillion dollars. So replacing 1 trillion in imports with domestic production would increase the price of the things that used to be imported but now are not by 0.35 trillion, and replacing all 2.0 trillion dollars worth of our imports, would increase the cost of what we are buying by 0.7 trillion dollars.

Decreasing imports would also result in a decrease in exports, since there would be retaliation for US tariffs, and since foreigners would have less money derived from sales to the US, to use to buy from the US (balancing this, with the replacement of imports with domestic production, the US residents would have more to spend on goods exported by US exporters).

In 1999, goods imports rounded off to 1.0 trillion whereas in 2007 they were 2.0 trillion. In 1999 goods exports were 0.7 trillion, in 2007 goods exports were 1.1 trillion (http://www.census.gov/foreign-trade/statistics/historical/gands.txt ). This not counting historical inflation indicates that a 1.0 trillion decrease in imports would lead to a 0.4 trillion reduction in exports. So a simple man-hours per estimate efficient mathematical estimate based on history: if the US decreased its imports from 2.0 trillion to 1.0 trillion, its exports would fall from 1.1 trillion to 0.7 trillion.

Thus simple-mindedly speaking, ignoring the fact that shifting production from foreign nations to the US would result in increased US demand for things the US exports, replacing 1.0 trillion in exports with domestic production would increase prices by 0.35 trillion, and decrease exports by 0.4 trillion, and the cost of this would be a total of 0.4 trillion plus 0.35 trillion which is 0.75 trillion.

Thus hyper-pessimistically and hyper-simplistically speaking, a shift of production from foreign areas to the US would cost the US 0.75 trillion dollars in increased prices and reduced exports. This 0.75 trillion cost, would purchase for the US, the many advantages of domestic production-- spending power for US residents, sales for outfits that sell to US residents, wages and employment for US residents who work for outfits that sell to US residents.

The hypothetical 0.75 trillion price-tag, could be paid for simply via losses for exporters and increased prices for consumers; I adjudge that such would be a better policy compared to borrowing 1.0 trillion or printing up 1.0 trillion and spending it on bridge-building type public works etc economic stimulus to create a few million public works jobs. The govt could use 0.75 trillion in stimuli spending to compensate the consumers for their high prices and the exporters for their lost sales. I estimate this also would be better than the 1.0 trillion public works borrow and print-money stimulus package.

Getting a little less simple-minded and pessimistic, assuming that the 0.4 trillion dollar decrease in exports caused by the 1.0 trillion reduction in imports was compensated for by the increased demand for what used to be exported to the world but can now be sold domestically, the cost of reducing imports by 1.0 trillion would come to only 0.35 trillion dollars in increased prices paid for what used to be imported, and the benefits of replacing imports with domestic production would be as previously described. The 0.35 trillion in increased prices to produce all the positive results of the shift to domestic production would, IMHO as of now, again be superior to the 1.0 trillion ridge-building public-works type jobs stimuli spending envisaged by the incoming US Obama administration.

At the level of simple-mindedness used in the preceding paragraph, would it be worth it to be paying 35% more for manufactured things that are now imported, if this produced advantages such as: not having to borrow/create-money to spend 1.0 trillion on a public-works stimulus program, a well-funded government, a high level in terms of profits, wages, employment, sales, security for the future? Hard to see how the answer could be "no".

If the price of shifting 1.0 trillion dollars of consumption from foreign production to domestic production is looked on as just 0.35 trillion in increased prices, the 0.35 trillion dollars could be paid out to the consumers hit by increased prices, and the overall cost-benefit of this approach would I estimate as of now, be superior to the 1.0 trillion dollars bridge-building type public works stimuli idea.

Getting to a higher level of complexity, the picture looks even more definite, in terms of the superiority of replacing imports with domestic production compared to the 1 trillion dollar public works bridge-building type jobs stimuli program, when you take into account that a chain reaction is produced, there are multiplier effects, as domestic resident A uses dollar X to buy from domestic resident B who uses dollar X to buy from domestic resident C and so forth.

Depending on whether you belong to this or that special interest group you might prefer this or that level of complexity/pessimism re the alternative of replacing imports with domestic production, but all levels of complexity/pessimism IMHO as of now show such to be superior to a 1 trillion dollar public works bridge-building jobs stimulus type program.

Taking into account that in Washington DC these days for almost inexplicable reasons subsidies are kosher but tariffs are not, I estimate (an estimate based on just a few total man-hours of study, mine alone) that the US could reduce its imports by 1 trillion dollars simply by using 0.35 trillion to subsidize domestic production that has been displaced by imports, thus enabling domestic production to sell for 26% less than what they are selling at now (mathexactically speaking, from 1.35 to 1.0 is a decrease of 26%). This also as of now I estimate would be superior to the 1.0 trillion bridge-building type econ stimulus program. Such could be combined with payments used to help exporters adjust from exports to domestic sales.

In the US there is a special focus on the oil import aspect of imports of goods. This has been estimated as at 0.3 trillion in 2007 (http://www.reuters.com/article/pressRelease/idUS236508+07-Mar-2008+BW20080307 ). Note that even at such a high level this is only about 30% of total import of goods. I do not now have much of an idea re how much more the US residents would have to pay if the 0.3 trillion in oil were to be replaced with domestic sources of energy, Working from the figure of 35% higher for domestic production derived from comparing the made in China Chery A1 compact car to the made in USA/Canada Ford Edge car, you could estimate that the US would be looking at 0.35 times 0.3 trillion = 0.1 trillion dollars in increased expenditure if the 0.3 trillion dollrs in imported oil were to be replaced with domestic energy production. Even if you assumed that replacing imported oil with domestic production would double the price of the energy used, the added cost would be only 0.3 trillion dollars. As of now I estimate that 0.3 trillion funded through consumers facing increased energy costs due to domestic energy production replacing foreign energy production, or through government compensating consumers for domestic energy costs being greater than imported energy costs, or through government subsidizing domestic energy producers so that they can sell the energy at half the price they would have to sell it at without the subsidy, would excel 1.0 trillion spent on bridge-building type public works programs.

The Great Wall company that produces the Chery A1 should be allowed to produce the chery A1s it wants to sell in the USA, in the USA. Also it should be allowed to import into the USA, Chery A1s that have paid a tariff to so to speak compensate for the difference between wages in China and wages in the US. Off the bat it seems that the Great Wall company should be allowed to import Chery A1s into the US if they pay a tariff, which would effectively increase the price of their car by 35%. If they choose to build their Chery A1 in the USA, all that should be required is that they pay the workers at least the minimum wage.

If the US and China both became strong economies, with lots of people having spending power, they would have a basis for lucrative and lasting trade with each other that would make their economies even stronger, the increased strength being based on a solid foundation.

Unnecessary transportation over tens of thousands of miles of goods, due simply to wage differentials, is an inefficiency, which conflicts and competes with efficiencies such as necessary transportation of goods over tens of thousands of miles which would occur even if wages at point of export and point of sale were exactly the same. This assertion takes into account, that if production occurred in the high wage nation instead of the low wage nation, the workers paid wages would spend and invest their money so that there would be no net loss to the national or world economy compared to what would be the case if workers in the lower paid nation were the producers instead.

When a nation replaces imports with more expensive domestic production, this frees up the goods that used to be imported to be used by other nations instead; and it forces the price of the goods that used to be imported downwards. Such can be beneficial for nations which are relatively speaking unable to replace imports with domestic production.

I realize that those who export to the US could be annoyed by ideas I have set forth here. I hope that persons of all nations are able to make use of economic wisdom similar the wisdom(?) in this blog-post to build up their national and regional economies. As of now I estimate that if the various nations of the world took steps so that they were all on guard against excess of imports, this would lead to a world in which the various nations were able to produce lasting demand for imports from each other, which would be a world that would be superior economically socially, culturally, and spiritually compared to the free-trade-obsessed world of today. When every nation is doing its best to productively harness its own natural and human resources, in aggregate this leads to a richer world.


@2009 David Virgil Hobbs