Craig Pirrong's Blog, page 11

More on the Blob

As a follow up to yesterday’s post. Upon consideration you can characterize the differences between Tyler Cowen and I as a dispute over which margins The Blob would adjust if cut down to size.

Cowen believes that the important margin would be the amount of “customer service.” That is, fewer regulators means fewer people to help guide the regulated through the regulatory labyrinth.

I believe that there would be other margins. Fewer rules, or less complicated ones–that is, a less gnarly labyrinth. And crucially, fewer regulators to obstruct and harass (rather than facilitate) companies endeavoring to do wealth-enhancing things.

Along these lines, the recent book by Supreme Court Justice Neil Gorsuch–Over Ruled: The Human Toll of Too Much Law–comes down firmly on the obstruct/harass side of the argument:

In one such story, an agent from the U.S. Department of Agriculture informed a young magician, Marty Hahne, that he needed a license for using his rabbit in the act he had just performed at a local library. Hahne subsequently learned he also needed an evacuation plan for the animal in case of a hurricane or some other disaster. This requirement originated in a federal statute, the Animal Welfare Act, which regulates the treatment of dogs, cats, rabbits, and other animals for research, teaching, testing, and exhibition. Congressional lawmakers called on the USDA to apply the law to such venues as “carnivals, circuses, and zoos.” USDA regulators interpreted those exhibitions to include magic shows.

There are other stories.

Of course, argument by anecdote (or parable) has its problems, most notably how representative the anecdotes/parables are. But the kinds of things Gorsuch describes cast serious doubt on the “we’re from the government and here to help you” theory, and support the alternative view that the real story is “we’re from the government and here to make your life miserable.”

In which case, cutting down the number of those with power to make you miserable has to be a good thing, even if from time to time they actually do help you.

How Tyler Cowen Learned to Stop Worrying and Love the Blob

Tyler Cowen is high variance. He can be very insightful, or annoying AF. His recent piece in Bloomberg on downsizing the Federal bureaucracy is in the AF category. (In the interest of balance I will cite to an insightful piece below).

The impetus for the article is Elon Musk’s statement that he would be willing to serve on a Department of Government Efficiency that would be tasked with cutting down the bureaucracy’s head count. Cowen refers to the fact that at Twitter Musk cut head count by 80 percent with no loss in output (and thus causing a 5-fold increase in productivity) and says it can’t be done with the bureaucracy.

Why? Sayeth Cowen:

Businesses need to make plans, and they frequently consult with regulatory agencies as to what might be permissible. The Food and Drug Administration needs to approve new drug offerings. The Federal Aviation Administration needs to approve new airline routes. The Federal Communications Commission needs to approve new versions of mobile phones. The Federal Trade Commission and Department of Justice need to give green lights for significant mergers. The Federal Deposit Insurance Corp. needs to approve plans for winding down failed banks. And so on.

There are so many problems with this argument. Where to begin?

Well, for one thing Musk’s Twitter experience demonstrates that even private business can have many zero marginal product (and indeed, zero average product) workers. But somehow the Federal bureaucracy doesn’t? It couldn’t be made more efficient by cutting the dead wood? Of which there is obviously a lot? Given that Cowen often writes about zero marginal product workers, it is rather remarkable that he implicitly argues that government workers are overwhelmingly positive marginal/average producers, especially given the extremely low power incentives and lack of accountability for poor performance that they are subject to.

In other words, identify the people who are actually performing the “customer service” to which Cowen refers, and get rid of the rest. Of whom there are likely a lot.

Moreover, these “customer service” functions represent only a fraction of what bureaucrats do. A good deal of it is administrative overhead which could be reduced if head counts and budgets are cut.

Another big part of it is writing rules and interpreting rules that were promulgated previously.

The number of pages of new rules added to the Federal Register is a common metric of increased regulatory burden. It is these rules (and their implementation, which I discuss below) that generate the deadweight costs of regulation. Fewer bureaucrats, fewer rules, greater economic efficiency. Without hitting “customer service,” and indeed, reducing the need/demand for customer service, since most of what Cowen describes as the essential function of the bureaucracy is helping business navigate a labyrinth of rules. Less bureaucrats, fewer rules, simpler labyrinth, less need for customer service (and the bodies necessary to perform it).

I would also argue that this customer service is chimerical, and is in fact a form of rent extraction that reduces wealth. That is, in supposedly “helping” business, bureaucrats’ produce bads, not goods.

I view regulation through the lends of property rights economics. Regulation is essentially an incomplete contract. Congress creates a really incomplete contract, bureaucrats craft regulations that make them somewhat more complete, but still wildly incomplete.

The allocation of residual control rights (rights not specified in the incomplete contract, or specified but non-verifiable) is vital in incomplete contracts. It is this allocation that affects incentives by affecting bargaining power. In regulation, it is the regulators who have the residual control rights. The “customer service” that Cowen describes involves negotiations with regulators who have residual control rights. They can say no to what you are asking for, or can add conditions, etc., etc., etc.

Property rights economics states that residual control rights (which in the literature basically involves control rights of access to assets) affect investment incentives because those with the rights have bargaining power. It is efficient to put bargaining power (and hence residual control rights) in the hands of those who can make non-contractible, value enhancing investments.

This is one reason why regulation, when viewed as an incomplete contract with a particular allocation of residual rights, is so likely to be highly inefficient: businesses, not government bureaucrats, are the ones who can make non-contractible, value enhancing investments but they don’t have the bargaining power. This is ass-backwards.

How do regulators use their bargaining power? To extract rents, which is what anyone with bargaining power does. Rents that do not incentivize wealth producing investments. They can’t receive these rents in monetary form (you can’t even take a regulator to lunch and pay for it). So they collect them in the form of justifying their existence, getting bigger budgets and staffs, empire building, implementing ideological objectives, ego and envy (feeling powerful by sticking it to those who make a lot more money), and creating obstacles so that they can sell themselves to the private sector as expert in working around.

(Again note the synergy between rule writing and bargaining with the regulated over implementation of the rules).

My experience with CFTC regulation, and in particular my short-lived experience as a consultant to the CFTC Inspector General, gives me an understanding of how this process works. One of the things I’ve written about over decades is the thicket of interpretations, no action letters, advisories, etc., that grew up in the aftermath of the passage of each major revision to the Commodity Exchange Act. The project I was working on with the IG was to document how extensive this practice has been, and how much the CFTC has relied on it.

The process by which this thicket is created is exactly the process that Cowen describes. “Consulting with regulatory agencies to see what might be permissible.” In essence, negotiation between the regulators and the regulated, with the bargaining power–and the ability to extract rents–resting in the hands of the regulators. (I do understand that sometimes information asymmetries give bargaining power to the regulated. My experience decades ago looking into the 1988 S&L bailouts showed me how this can work).

So, what would happen if the number of regulatory personnel was reduced? Cowen thinks it would reduce the output of successful negotiations, and that businesses would be stymied in the absence of such.

But is that really the case? For one thing, the zero MP/AP issue discussed above means that a reduced head count does not imply a reduction in output (the number of successful negotiations). But even overlooking that, if one views a major effect of these negotiations as rent extraction, reallocating bargaining power away from bureaucrats can improve efficiency.

Regulators with less capacity to negotiate have less bargaining power: the ability to string things along (which is easier when you have more bandwidth) enhances that power. Furthermore, more regulators typically means more fiefdoms within the bureaucracy that have a place at the bargaining table, hence more negotiations, more complicated negotiations (since more bureaucrats have effective veto power), and greater power to extract rents. The potential for multiple marginalization problems grows. (Think of when every local lord could extract tolls from those traveling a road that ran across their lands).

The real difference between Cowen’s view and mine seems to be that he believes that increasing the number of bureaucrats increases the output of wealth enhancing negotiations, whereas i believe that it likely increases the amount of wealth reducing rent extraction that occurs due to bureaucrats’ bargaining power.

A customer service model vs. an extortion racket model, if you will. Help with navigating through complex and confusing regulations (complex and confusing due to their incompleteness) vs. using that complexity and confusion to hold up wealth producers.

Starkly different views with starkly different implications. Cowen may not be all wrong, but his rosy “I’m from the government and here to help you” view clashes with the economics of bureaucracy, and certainly my personal experience with it.

So I say hack away. That’s the only way to find out which parts of the bureaucracy enhance wealth and which don’t. Hire back the ones that do and force those that don’t find an honest living.

Which is pretty much what Musk did at Twitter.

As promised, in the interest of balance, I recommend Cowen’s takedown of the insane idea to tax unrealized capital gains (and the companion piece by his co-blogger Alex Tabarrok).

A Battle of Economic Nitwits–Aren’t We Blessed

So the presidential race is set. God help us.

The “Democratic” Party, which never ceases to tell us its dedication to “saving ‘our’ democracy [sic]” selected the voteless wonder, Kamala Harris after unceremoniously defenestrating Joe Biden. Donald Trump steamrolled everyone in the Republican primaries, and literally dodged a bullet, to run against her. So November, here we come.

Harris has been, shall we say, coy in her policy proposals. Not only voteless, she’s been interview-less since she was anointed. She has given one economic policy speech which even media partisans (but I repeat myself) found pathetic.

On the right, the speech gave rise to accusations that Harris is a socialist, or indeed a Marxist/communist. I disagree.

Her father, from whom she is obviously estranged, is indeed a hardcore Marxist. But one who has engaged in serious thought and scholarship–as much as I disagree with it. Harris, on the other had, has a lazy, California left perspective devoid of any evidence of serious thought beyond “what can I say to advance my political ambitions and get money from leftist donors.”

The element of her policy speech that triggered the cries of “commie” was a lazy, hazy proposal to implement a federal ban on “price gouging” for groceries. Though to illustrate how thoughtless her embrace of this proposal is, she didn’t say “price gouging”–she said “price gauging,” whatever that is.

Critics called this a price control policy. If only. It’s nothing as comprehensive as the 1971 Nixon Wage and Price Control disaster. It’s more along the lines of Gerald Ford’s WIN–Whip Inflation Now–buttons, mere rhetorical gas.

The proposal is clearly the result of a poll and focus group-driven process. People are pissed about high prices. The prices they are most pissed about are for food and groceries. But it is absurd to think of setting the price of the over 30,000 items that most supermarkets carry, and many people are sympathetic to the idea that corporations cause high prices, so Harris proposes to delegate to some part of the federal blob–probably the FTC–to go after stores that price gouge, although that term is not defined.

How this would work in practice, given the fact that there are over 45,000 supermarkets, again each carrying over 30,000 items, is hard to figure out. Any attempt by the FTC to enforce would be completely arbitrary. The antithesis of a rule of law, which for all its economic defects, a legislated system of price controls would have in its favor.

But this policy proposal is purely political grandstanding and I am sure Harris has no plans actually to follow through on it. She has to pretend to do something about inflation. And she expects you to pretend along with her.

The most disturbing part of the proposal is the theory of inflation underlying it. “Corporate greed.” Which apparently follows some sort of Markov regime switching process, with corporations being ungreedy during some periods, like the Great Moderation, and then randomly switching to greed mode in, oh about January, 2021. Such a mentality bodes ill for coherent anti-inflation policies.

Other elements of Harris’ speech were similarly poll-driven, counterproductive pablum. Housing prices are too damn high! So give people money to buy houses! Which, of course will drive up housing prices, meaning that the main beneficiaries will not be the target (“first time homebuyers”) but current homeowners. Harris did say some things about reducing restrictions that inhibit supply, but these are local matters that the federal government can do little about.

The housing fetish is also disturbing because it represents a reversion to the kinds of policies that brought on the Great Financial Crisis.

Relatedly, she criticized the purchases of large numbers of homes by Black Rock and the like. This is also a popular theme, on both left and alt-right. But as I wrote some years ago, this criticism fails to answer the fundamental question of why this phenomenon is happening. I continue to maintain that it is almost certainly the result of post-GFC changes to the banking and mortgage credit markets that were designed to prevent a recurrence of the proliferation of mortgage credit that was at the epicenter of the GFC, policies that raised financing costs to individuals more than to the Black Rocks of the world. Meaning that to counter this trend it would be necessary to unwind those changes and party like it’s 2005.

Harris has also apparently embraced some of the worst Biden/Democrat policy proposals, notably raising the capital gains tax and imposing taxes on unrealized gains for some wealthy individuals. Capital taxes are horribly inefficient, and actually fall predominately on labor: higher capital taxes, less capital, less productive labor, lower wages.

The unrealized gains tax is truly demented, a nightmare to implement, a recipe for gaming (with highly distortive effects on capital allocation), a godsend to tax accountants, and likely unconstitutional. Other than that, it’s great.

Given her track record it takes little imagination to understand that if elected hers would a policy of economic Californication. What a disaster that would be.

Not that Donald Trump gladdens this economist’s heart. For the most part, he is as economically clueless as Harris. The main difference, and this is not a good thing, is that he holds his cracked views with conviction.

On taxes you could say he is OK, except that these views are completely at odds with his insouciance on spending. Trump got the spending ball rolling that triggered the inflation that took off when Biden took office: Biden supersized what Trump had started. He has shown no signs of getting spending under control, and on entitlements in particular, has been a stalwart defender of the (unsustainable) status quo.

Trump’s views on tariffs–in particular his stupid belief that the incidence of a tax falls completely on the party upon whom it is levied–are embarrassing.

Trump’s only advantage over Harris–and it is not an immaterial one–is that he is averse to regulation and wants to roll back the federal bureaucracy (though good luck with that) whereas Cali Kamala loves the blob. Trump’s regulatory policies were pretty good (as Casey Mulligan has documented): Harris’ would be a disaster.

For me, that’s the tiebreaker in this battle of economic nitwits. Yay.

All meaning that the next 70 days will be devoid of any coherent debate on economic matters. Instead, the campaign will be the political equivalent of non-stop “yo mama” schoolyard rhetoric. Which will actually be more entertaining than watching these two talk economics, although each would probably be equally depressing.

Root Causes For Me, Not For Thee, You Yobs

I don’t have a dog in this particular fight, but since (a) the UK often plays the Ghost of Christmas Future to the US, and (b) the UK ruling class-most notably the current PM, Keir Starmer-has felt free to pontificate on similar events in the US, it’s fair game for me to comment on the unrest (riots) that rocked the UK recently.

The proximate cause for the riots was the murder spree by the Welsh-born child of Rwandan immigrants, who knifed to death three young girls and badly wounded eight other individuals at a Taylor Swift-themed yoga party. In part due to the refusal of the UK police to identify the assailant, rumors soon spread (including on social media) that the murderer was a Muslim immigrant, leading in the first instance to violence against mosques, etc.

The ruling class immediately jumped on the mistaken beliefs about the perpetrator to condemn the rioters as ignorant racists, which in their minds fully justified a crushing response by the state.

This narrow interpretation of the cause of the riots that spread far beyond the site of the original crime (Sunderland) was unsurprisingly opportunistic and self-serving. It permitted the complete decontextualization of the riots in a way that denied a priori any legitimate justification and thereby rationalized the unleashing of a “standing army” (Starmer’s words) against these rioters–measures that were conspicuously absent in other violent civil disturbances–hence the bitter complaints about “two-tier policing.”

The brutal slayings in Sunderland were merely the last grain of sand dropped on a pile of grievances that has been accumulating for literally decades. The allegedly unreasoned and indiscriminate reaction to this single grain was just an example of the non-linearity inherent in such situations. In emergent orders–social orders particularly–a single event can set off a massive reaction that seems disproportionate and unrelated to it. This is often true in revolutions. A single event unleashes massive latent forces that have been building for extended periods. This is why authoritarian governments are so hell bent on suppressing any dissent no matter how seemingly minor. Small sparks can ignite social explosions.

The mountain of grievances clearly related to a single factor: mass immigration into the UK, and especially mass immigration from some of the most misgoverned and dysfunctional parts of the world with radically different cultures from the native inhabitants. In this environment, a mass murder by an individual only peripherally related to the underlying source of grievance could spark massive unrest. Further, given the recent history of the UK (consider, for example the bombing of the Ariane Grande concert in Manchester, or other mass stabbings that have occurred in the UK in recent years e.g., on a bridge in London in 2017) it is not at all surprising that many people would leap to the conclusion that a Muslim was the perpetrator in Sunderland.

The grievances have built inexorably precisely because any dissent from the ruling class view has been ruthlessly targeted and suppressed. When voice is denied, again and again, it will inevitably come to the point that the aggrieved will substitute violent deeds for words.

But it is exactly these things that the British ruling class cannot admit, and is in fact at great pains to deny precisely because of its direct culpability for mass immigration, its malign effects, and the identity of those who have borne the economic, cultural, and psychic damage. It therefore has to deny vehemently the underlying cause and place full blame on the evil of the rioters.

British classism is also on full, ugly display here. Indeed, it is worse than its historical antecedents (e.g., in the Victorian era) because there is not even the palliative of condescending paternalism: it is merely vicious hatred, disdain, and disgust.

The sick irony is that those who refuse to look honestly at “root causes” here (in no small part because they are the root cause) routinely invoke “root causes” to excuse, rationalize, and justify other social dysfunctions–including rioting far more destructive and violent than that that has occurred in the UK recently. Starmer represents a perfect example. He delivered sick-making remarks about the George Floyd rioting that explained them, and hence excused them, as the understandable consequence of systemic racism. The British ruling class has been similarly disposed to excuse and rationalize Muslim violence as the product of legitimate grievance.

Root causes for me, but not for thee, you yobs. Your root causes are totally illegitimate.

Like J6 in the US, alas, the riots are worse than a crime–they are a blunder. They have given the increasingly authoritarian British state the justification to engage in mass jailing of its political dissidents. Further, given the inevitable role of social media in disseminating information and opinion about the riots and the causes, the riots have provided a justification for the state to increase its power to control and censor it. Indeed, the head of London Metropolitan Police has even threatened those expressing their wrongthink outside of the UK with arrest and extradition.

Wouldn’t that be fun.

Thus, this backlash against egregious mis-government has redounded to the benefit of that dysfunctional government and the class that rules it.

Which demonstrates the fundamental dilemma of the mis-governed. How can one resist malign authority without strengthening it, like sowing dragon’s teeth? I don’t have an answer, except to say that direct confrontation has exactly this effect.

The US faces very similar issues–hence the Ghost of Christmas Future metaphor. However, I doubt it will play out here similarly to the way it has in the UK. The reason is quite simple. The white working and under classes are still present in numbers in UK cities where they are tooth and jowl with the immigrants. That is not the case in the US: white flight occurred long ago. So a UK-style white riot is not in prospect here.

The Clash-White Riot

Urban white rioting is a staple of the Oi genre, which is uniquely British. There’s nothing like it in the US.

The underlying conditions that have sparked rioting in the UK are therefore not present in the US. But the severe discontent about mass immigration is, as is the ruling class’s determination to crush any opposition to it. So something will likely happen here, but it will be different. How exactly, I can’t say.

Surprise, Surprise, Surprise. The Second Battle of Kursk.

Ukraine has shocked Russia–and to some extent the world–with a bold incursion into the Kursk Oblast of Russia proper. The Ukrainians have penetrated many kilometers into Russia, captured numerous prisoners, devastated several convoys of troops dispatched to stem the Ukrainian attack, and stirred up enough confusion to cause several Russian friendly fire episodes.

The Ukrainians adopted the Wee Willie Keeler strategy–hit ’em where they ain’t. This contrasts with the Russian strategy: hit ’em where they are; with your face; repeatedly. (Last year’s abortive Ukrainian counteroffensive was an example of them hitting ’em where they were. Apparently they’ve learned better).

The Ukrainian attack (of indeterminate strength, due to rather effective operational security) penetrated a stretch of the Russian border manned with neglected border troops (many of whom were underfed and who had not bathed for extended periods) and Chechen TikTok warriors. They advanced quickly, seized important roads, crossroads, and settlements. They have also sent out raiding parties to hit and run many kilometers in advance of the positions that they have secured and are preparing to hold.

Of course this surprising and humiliating development has led to bitter recriminations and searches for scapegoats in Russia. The FSB claims that it warned Gerasimov and the Russian general staff of a Ukrainian buildup on the latter’s side of the border, but Gerasimov et al ignored their warnings.

Historically, almost every major military surprise was preceded by warnings and substantial intelligence that in retrospect foretold what occurred. It’s all in the interpretation of that information by the decision makers in advance that matters.

Soon after the Russian offensive aimed at Kharkiv bogged down, the Ukrainians and the YouTube and Telegram channels that are often conduits for Ukrainian information operations warned that Russia was amassing forces in the Kursk region for a potential attack on the Sumy Oblast in Ukraine. It is uncertain whether such a buildup was actually taking place, but in many respects that is irrelevant. If Gerasimov et al took the Ukrainian warnings at face value they would have interpreted the Ukrainian concentration in Sumy as a preemptive defensive response rather than the harbinger of an invasion. Indeed, they would have considered this good news.

It would be particularly amusing if Russia had been running an influence operation threatening the opening of a new front in Sumy in order to draw Ukrainian troops to the area and away from where Russia really wanted to attack. In that case, Gerasimov would have rubbed his hands in glee at when the FSB delivered news of the Ukrainian move: “Our plan is working!!!”

It may be that Ukraine had initially moved troops north based on a belief of Russian action in Sumy, learned that it was at most a feint and that there were really no serious Russian forces in the area, and decided to flip the board and use the troops moved for defensive purposes for an offensive into a vacuum.

In other words, who psyched out whom here is not clear. It is quite possible that the Russians psyched themselves out in a too clever by half attempt to psych out the Ukrainians. Note that Gerasimov’s pre-war reputation for genius was based on his alleged mastery of such deception operations. (Remember the “Little Green Men”?)

Regardless, Russia is clearly on the back foot here and scrambling to recover.

The Ukrainian operational objectives are unclear, are probably multifaceted, and likely will adjust depending on how the battle goes. One objective could be to disrupt Russian logistics further by interdicting a rail line that supplies the main Russian advances further south: Ukraine has been waging a steady drone and missile campaign against Russian logistics (including notably at air bases) and the Kursk incursion would fit into that broader campaign. Another natural one would be to cause a diversion of Russian forces from Donetsk and Luhansk. Delivering a political embarrassment to Putin would be another worthy goal.

How much further will Ukraine go? I doubt very far. Expanding the breakthrough would require many more forces and create severe logistical strains for the Ukrainians themselves. How long will they stay? That depends on the Russian response and how Ukraine deals with it.

It seems that initially that the Russian reaction is helter skelter, sending random collections of units (sometimes stray platoons) forward piecemeal. This has exposed them to being defeated in details by fires (drones and artillery), often while strung out on the road. If the Russians continue to do this, the Ukrainians can stay a rather long time: if they come on the same old style, the Ukrainians will meet them in the same old style.

The smarter thing for the Russians to do would be to amass forces carefully and systematically relatively far back from the Ukrainian front line, and then attack simultaneously on multiple axes. But the Russians haven’t shown the ability to do anything smart so far. Nor have they demonstrated the ability to engage in operational maneuvers with multiple units over a broad front: their recent offensive batterings in Donetsk and Luhansk have been almost exclusively piecemeal attacks of platoon sized units on the same, single axis, day after day. Moreover, the humiliation of this incursion and Putin’s frustration strongly push the Russians to a frantic, extemporized response. And if the Russians do the smart, it will take some considerable time, which the Ukrainians can draw out with continued attacks on logistics.

So either way, I expect Ukraine to be camping out in Kursk well into the autumn.

One other amusing aspect of this episode is the Russian hysterical demands that the international community condemn this violation of sacred Russian territorial sovereignty. “MOM! NO FAIR! UKRAINE HIT ME BACK!”

Cry me a river, Vova. Have have fun in the Second Battle of Kursk. I don’t think it will turn out as well for you as the first one did for Stalin.

Left and Lefter; Woke and Woker

Like Trump, Kamala Harris chose a VP candidate who does not broaden the ticket, but for a different reason. Trump chose someone who he believed would secure his legacy. Harris chose someone from the same ideological wing of her party because there is no other ideological wing of her party. And if there is some black swan out there who isn’t hard left, the party would by no means countenance his or her selection.

So we get Tweedle-left and Tweedle-Woke.

The only question is who is to the left of whom and who is more woke than whom. (Not that you will ever hear the phrase “far left” in a media that says “far right” so often they must have Tourettes). It’s probably a push. The main difference is that whereas Harris has been a senator whose only job was to pose, flap her jaws, and cackle and who as VP who has been a cipher even by the do nothing standards of that position, Walz has been the chief executive of a not small state who has had the power to put his woke vision into action.

I will spare you the litany of all his greatest hits and just focus on a few of the most egregious.

He was likely the most oppressive, authoritarian governor during Covid. He set up a snitch line for neighbors to tattle on those violating his sacrosanct lockdown diktats.

He also played Nero during the George Floyd riots of 2020, letting Minneapolis burn rather than call in the National Guard (his service in which he brags about constantly and evidently dishonestly). Then he preened about it. (He does that a lot).

I guess he was better than his wife, who went full Colonel Kilgore and said that she loved the smell of tires burning in the morning.

Of course there’s all the LGBT stuff–Minnesota is arguably the most radical state in the country in this regard, Walz declaring it a “sanctuary state” for troubled, confused, and/or mentally ill children who can’t get sexually mutilated in their own states.

And immigration, natch.

A walking–waddling, actually–nightmare.

Of course, he is being packaged as an aw-shucks, folksy man of the Midwestern soil. We should not be surprised that a big fan of drag shows is dragging as a homespun Minnesota nice guy, rather than what he actually is.

In our all Orwell, all the time world, the Harris-Walz campaign is supposedly all about “freedom.” As near as I can figure, that means the freedom to abort and have the government give you shit.

You know, American freedoms!

Your results may vary. First 10 Amendments not included.

That last is not hyperbole. Walz has said: “There’s no guarantee to free speech on misinformation or hate speech, & especially around our democracy.”

Harris has also vowed to confiscate guns by executive order. Walz has said he wants to ban guns he carried in war. Because he didn’t carry any guns in war. Which I’m actually all behind, because he never actually carried a gun in war.

In the past it was common to hear “there’s not a dime’s worth of difference between the candidates.” You can’t say that now. We have a populist loose cannon vs. a ticket consisting of two people who if they aren’t literally communists, they could sure get a job playing them on TV.

Why Are Oil Traders Investing Their Cash Flow Gusher Into Refineries?

One subject I’ve taught about in my commodity trading classes for over a decade is asset ownership by commodity trading firms. As my white paper for Trafigura shows, there is considerable diversity among commodity traders’ asset ownership. Some are “asset heavy” while others are “asset light.”

Historically the big oil traders–Vitol, Trafigura, Gunvor, Mercuria–have been in the asset light category. (Glencore transitioned to an asset heavy mining entity with a supersized trading arm before the white paper was published–more on that below). Recently, however, they have gone on something of an asset acquisition binge, buying refineries in particular, as this recent Bloomberg piece describes. Which raises the question: why?

The standard consultant story is that assets have optionality. This is a superficial and incomplete answer. First, the fact that an asset has optionality says nothing about who is best positioned to own the asset and exercise the options. In the case of a refinery, is it better for an integrated oil company to own it? An independent refiner? A commodity trader? Any of these can exercise the options. Which gets the most option value?

Second, it is often possible to acquire the right to exercise optionality via contract rather than ownership. A ship (tanker or bulk carrier) is the best example of this. Ships have extensive optionality in terms of route, timing, and sometimes cargo. Time chartering a ship gives the charterer the ability to tell it where to go when and carrying what: ownership isn’t necessary to exercise these options. Off-take agreements from a mine or well also confer rights to exercise options (e.g., whom to sell the output to) without requiring the purchase of the mine or well.

Transactions cost economics is one analytical tool to apply to these issues. That’s what I used to analyze contracting and ownership patterns in the ocean shipping industry oh-so-many years ago. The Trafigura white paper applies this to commodity trader ownership generally.

With respect to commodity traders as optimal owners of assets with optionality I’ve been playing around with a formal model, the intuition for which is fairly straightforward. Physical commodity traders operate in bilateral markets rather than centralized ones. Prices and values are not transparent. Traders are essentially price entrepreneurs who search for and discover cheap supplies and high value buyers. Their intimate market knowledge of profitable trade opportunities may allow them to exercise real options, like the real options inherent in a refinery (especially regarding choice of crude input and the product slate), more efficiently than someone with poorer information.

But that still doesn’t fully answer the ownership question. The trader could obtain the optionality through a tolling agreement, for example. (These are not unknown in the oil business. I recall that when JPMorgan was in the commodities business, it had tolling agreements with refiners).

Further, why is it more efficient for a trader to buy the refiner, rather than the refiner to buy or build trading expertise? BP and Shell in particular are renowned for their trading expertise, and even a laggard–Exxon–has moved into trading.

Since this is also a relatively new development, one must also ask “why now?” (And to its credit, the Bloomberg article does just that). Has traders’ comparative information advantage increased recently? That’s a hard proposition to test, but I am skeptical.

As Bloomberg points out, this buying spree comes in the wake of boom years in commodity trading, and the big traders are awash in cash. (As the billions in bonus payments to traders shows). This is most likely the proximate cause of the acquisitions.

What this says about the efficiency/optimality of the acquisitions is unclear. I can tell two stories with opposite conclusions.

The first story is that this is a classic free cash flow problem. Companies with cash burning a hole in their pockets are prone to blowing it on unprofitable investments, including acquisitions. This was a driver behind the leveraged buyout boom in the 80s: leveraging up gives cash to stockholders and precommits the company to use cash flows to service debt rather than fritter it away in bad investments. In the oil industry, this was T. Boone Pickens’ game. (Academic research has shown that in the 80s E&P companies’ well drilling was a negative NPV activity).

If this is the driver behind commodity trader refinery acquisitions, it would imply that these purchases are inefficient. (I note that some earlier trader ventures into refining, like Gunvor’s, turned out badly).

The other story is that trader firm ownership structures, adopted for value maximizing reasons, constrained their ability to invest in physical assets like refineries. The major independent oil traders are private firms. One of the downsides of private ownership is that a private firm cannot tap public equity markets to fund acquisition of durable assets. Relatedly, it may constrain the ability to secure long term debt to finance long term assets. As a consequence, long term assets (like refineries) must be funded with retained earnings. In this case, even if traders can exercise real options more efficiently than an oil major or independent refiner, the higher capital costs inherent in their ownership structures makes it uneconomical for them to acquire refineries.

Arguably the main reason for Glencore’s transition to a publicly traded firm was that its decision to go asset heavy into mining was incompatible with private ownership. It needed to rely on the capital markets to fund this new strategy.

Against this cost of private ownership (limited diversification is another) is the benefit: a better alignment of the interests of managers and owners, because the managers are the owners and the owners are the managers. One reason this structure has clearly had survival value in commodity trading is that many of the other risks–especially commodity price risks–can be transferred via derivatives markets rather than the equity markets.

The cash flow gusher of the last few years loosens the constraint imposed by ownership structure. Thus, in this story, traders can have their cake and eat it too. They can remain private, and reap the benefits of better incentives, but can invest in fixed assets that were previously unaffordable. In this story, the positive cash flow and balance sheet shock enhances efficiency rather than reduces it (as in the free cash flow story).

Which story is correct? I have no strong opinion, but I will say that the governance benefits of private ownership do mitigate the free cash flow problem. So I guess I would lean towards “efficient.”

One must also recognize that it takes two to tango. These transactions have a seller too, of course. Meaning that “why are traders buying?” is not the only question: “why are oil companies selling?” is also important.

About a decade ago traders acquired downstream marketing operations, especially in developing markets like Africa, from oil companies. In that case, the development of liquid markets for refined products reduced the transactions cost benefits of ownership by the oil companies: the development of these markets mitigated the bilateral monopoly problems that occurred in relatively small downstream markets served by local refineries. That reduced the benefits of ownership for the oil companies, creating gains from trade by selling to the traders.

Perhaps something similar is going on today in refining, especially for relatively “simple” (“non-complex“) refineries in Europe and Asia. When I have a chance, I will look into the complexity index for the refineries the traders have acquired. With the entry of substantial high-complexity refinery capacity in the Middle East and elsewhere, I would not be surprised if a major driver behind these transactions is that refiners want to shed their less complex operations because they have a comparative advantage in operating bigger, more expensive, and more complex refineries.

Which, ironically, have more optionality: complexity translates directly into optionality.

In sum, the trader refinery acquisition boomlet is an interesting development. It raises intriguing economic questions that I have just sketched out here. Could be interesting fodder for an aspiring researcher–like my Université de Genève students (hint hint, nudge nudge).

Schrödinger’s Presidency

Last night Joe Biden mumbled a speech that allegedly explained his decision not to seek the Democratic Party nomination for president. He explained nothing. Indeed, it was farcically nonsensical.

He claimed that (a) he is one of the greatest presidents ever, with remarkable accomplishments, and (b) “the best way forward” for the nation was for him not to run–and thereby not continue his great leadership.

There was no explanation of how he got from (a) to (b). It was like the speech was written by the Underpants Gnomes of South Park: 1. Be a great president. 2. ???? 3. Don’t run for a second term.

The speech really sounded like him making the case for a second term that should have been met with cries of “Four More Years!” But no: he’s outta here.

Square that circle for me.

For her part, Stupide Jean-Pierre asserted that Biden’s decision had nothing–NOTHING–to do with his health. He’s hale and hearty and fit to be president not just for a half year, but four and a half years.

So what is it then? Inquiring minds want to know. (That would necessarily exclude the media, of course).

We therefore have a Schrödinger’s presidency. He is too dead to stand for a second term, but too alive to leave office before the end of his first.

That quantum uncertainty is extremely convenient for the Democratic Party, which engineered this entire fiasco: indeed it is their creation. Biden’s obvious decrepitude means that they had to get rid of him as a candidate, but having him leave office now would create extreme political difficulties.

Going the 25th Amendment route would lead to Congressional hearings–which would result in awkward questions regarding how long he has been non compos mentis and who knew it when and the machinations behind his defenestration. Resignation would put Kamala Harris in the presidency, and require the naming of a vice president–which would also entail Congressional hearings. Not having a VP would also mean that Kamala could not break ties in any legislation that the Democrats try to ram through before a possible, and indeed likely, defeat in November.

It is beyond obvious that the real reason for Biden’s involuntary exit is that the Democratic Party “elite” (most prominently Barack Obama) and its donors deemed Biden unelectable. Meaning that they decided to disenfranchise its primary electorate, and indeed, to rubbish the entire primary system to return to the pre-1968 party boss system.

In the name of “our” democracy, dontcha know. (Just who this “our” encompasses is an interesting question. Democrats always utter the phrase in a very proprietary way).

Well, truth be told they had already rubbished the primary system in 2020 and especially in 2024, when the Party rigged the system so that Biden would face no real primary opposition. (Recall that several states actually canceled their Democratic primaries).

But Biden’s increasingly impossible to conceal mental incapacity blew that clever scheme to smithereens. So the same consiglieri (and especially the capo di tutti capi, Obama) who brought upon themselves-and the nation-that fiasco have again decided to smother even the possibility of competition for the nomination and install their preferred candidate-Kamala.

Selection, Not Election: The Sequel. (Could actually be Part IV. The nomination process was rigged in 2016 and 2020 (just ask Bernie), and obviously twice in 2024. There hasn’t been a truly competitive, election-driven nominating process in the Democratic Party since 2008).

Perhaps there is reason for optimism. Since their Plan A was an epic failure, why should their Plan B (which is just a variant of A) work any better?

One of my interlocutors on X said that this all reminded him of The Death of Stalin. There are some parallels, but it reminds me more of the ouster of Khrushchev: a coup mounted by the party to remove its leader who had become inconvenient.

Either way, it’s all very, very Soviet.

And by the way: does a coup count as insurrection, or nah?

And speaking of Soviet, the airbrushing of Kamala’s past and the rewriting of history that began the second she was anointed would make a 1930s Soviet propagandist blush. The sick part is that one could argue that the Soviet apparatchik knew that the consequences of not doing so were the gulag or death: the U.S. media is doing it because they want to. They are again using Orwell as a playbook not a warning: “He who controls the past controls the future.”

The past few weeks have been the most shameful in American history. But I believe that the weeks to come will put them in the shade.

The Battle of 22 July, 160 Years On

To commemorate the 160th anniversary of what I consider to be the most remarkable feat of arms in the Civil War I am reposting my 2010 post on the battle. I also wrote an extended and heavily illustrated thread on X:

160 years ago today was fought one of the most fascinating battles of the Civil War. It is known by many names. The Battle of Atlanta. The Battle of July 22nd. Hood's Second Sortie. An extended thread follows. Extended because the complexity of the battled requires it.

— streetwiseprof (@streetwiseprof) July 22, 2024

The Battle of Atlanta was the quintessential soldier’s battle. At the end of the X thread I quote Joseph Johnston’s statement that there had been no such army as Sherman’s since Caesar’s. The Army of the Tennessee’s repulse of attacks from front flank and rear does bear some similarities to some of Caesar’s most desperate battles, notably Alesia.

The difference was that (at least by Caesar’s telling) his personal leadership was instrumental in winning: on 22 July 1864 Sherman had nothing to do with it, McPherson was killed at the outset, and with the exception of Black Jack Logan making an inspirational appearance on his black charger and directing some forces to counterattack, generals had little to do with it. It was the colonels, regimental field officers, company officers, and especially the soldiers who responded to the daunting tactical challenges.

The same was true of the Confederates. Leadership above the brigade level exerted no control on the battle.

On both sides, veterans steeled by two-and-one-half years of combat knew how to fight, and on their own hook. They proved it 160 years ago today.

J.D. Vance–All the Right Enemies

J. D. Vance has been nominated as the Republican candidate for Vice President. I wrote about Vance, and his book Hillbilly Elegy, about 3.5 years ago. The end of the piece talks about the venom directed at Vance and those he wrote about when the movie version of the book came out:

In sum, Hillbilly Elegy is a Rorschach Test. Show it to me, and it evokes the attributes and deep flaws and great struggles of my family–struggles that made it possible for me to have an unbelievable blessed life that has been able to grab the boundless opportunities America offers. Show it to the coastal “elite” and it triggers all they hate about America, and many who live in it.

Streetwiseprofessor.com

That disdain and vituperation has been turned up to 11 since Trump announced him as his VP choice. It’s fair to say that VDS–Vance Derangement Syndrome–has spread faster than the Spanish Flu on the left.

It’s hard to choose the most insane of the criticisms, but I think this gem from some MSNBC lunatic (but I repeat myself) is a heavy favorite:

MSNBC’s Alex Wagner accused Republican vice presidential nominee JD Vance of dropping an “easter egg of white nationalism” by mentioning that he hoped to be buried in his family’s plot in Kentucky during his speech at the Republican National Convention Wednesday night:

MSN

It’s easy to understand why Trump chose Vance. Trump wants to be an impactful president. He wants to leave a lasting legacy. A MAGA legacy. Of all national political figures, Vance is most closely aligned with Trump ideologically. He is young. There is no one more fit to make MAGA a historical era, rather than a transient phase tied to a particular personality.

And perhaps it is this that is driving the left even more insane than usual about a decision (choice of a vice president) that is seldom of great and lasting importance.

Trump wisely rejected all of the traditional criteria for choosing a VP, specifically ideological, geographical, and identity balancing. Picking a say Nicky Haley as VP would have ensured that Trump’s impact would be evanescent (except on the mental health of the left). Historically such decision making has worked out badly–G. H. W. Bush being perhaps the best example.

As for Vance, he truly does tick all of the Jacksonian boxes identified by Walter Russell Mead in his famous article of decades ago. Most notable is his belief in the primacy of what Mead called the American “folk community” (something that was a big part of his acceptance speech) as opposed to newcomers and foreigners. This is precisely the thing that the progressive left considers a barbarous atavism, especially considering those whom Vance considers to be the bedrock of the folk community. Hint: they don’t live in Brooklyn, NY. (Some in Brooklyn, MI maybe).

Relatedly, no globalist he. With that comes a foreign policy vision starkly at odds with the Uniparty consensus that harkens back to Republicans of an earlier era, like Henry Cabot Lodge and (fellow Ohioan) Robert Taft, and indeed to George Washington with his aversion to foreign entanglements. He is an anti-Wilsonian–and hence an anti-Bushian and anti-neocon, which is why people likely Lindsey Graham looked so glum when Vance spoke in Milwaukee. And keep Vladamir Zelensky away from sharp objects.

This mission to protect the folk community also leads him to favor trade protectionism, also something of a throwback to historical Republican policy–the Republicans were the protectionist party, and the Democrats the free traders, through the 19th and early 20th centuries. He is also well-disposed to various forms of industrial policy and minimum wages and has said nice things about antitrust loon Lina Khan.

Another Jacksonian trait is his intense hostility to the political establishment, the economic elite (corporations now, the Bank of the US in Jackson’s day), and the federal bureaucracy.

I share many of Vance’s views, and so I heartily support his candidacy–especially when considering the alternatives. Where I part ways is on economic policy (which is true of Jacksonianism generally). Protectionism for the purpose of supporting domestic industry is highly inefficient: one could have a debate about the merits of substituting tariffs for other forms of taxation that also have distortionary effects (e.g., capital taxation) but the flaws of protecting dying industries are beyond dispute. Minimum wages are another disaster. If the current experience in California’s fast food industry isn’t convincing enough, he’s not capable of being convinced on this.

Various forms of industrial policy, which in the end come down to picking winners and losers, propping up the winners with subsidies and protection and entry barriers, are also disasters in waiting that have no chance of achieving their stated objectives and which inevitably wreak huge collateral damage.

The best way to rejuvenate American industries is to lift the appalling regulatory burden that has been heaped on them for decades–a process that has reached a frenzied level under Biden. Here Vance’s antipathy to the bureaucracy could be the spur to meaningful action.

In brief–slash away at existing policies and regulations: don’t add new ones. That would help the American folk community immensely.

Of course, all policy views are aspirational. Given that Jacksonians are hardly a major presence in Congress, the media, or the bureaucracy, the ability of Trump and Vance to realize their aspirations is doubtful, at best. But at least it will help to have the executive pushing in the right direction and against the DC consensus, rather than pushing it forward with all its might (as with the current administration).

I had been hoping that Trump would choose Vance, and did so fully aware of my areas of disagreement. On the biggest issues–the overawing power of the federal government and its abuse thereof, immigration, and a more restrained, non-globalist, non-Wilsonian foreign policy–Vance is on the right side. Where he’s not, I can live with.

But precisely because of where he stands on those big issues, he has achieved Derangement Syndrome Status faster than perhaps faster than anyone in history. Considering those he has deranged, that’s the biggest endorsement of all. He has all the right enemies. May he destroy them–he has already driven them mad.