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The Rest Of The Story

Finally, a coherent explanation of the causes that led to the Soviet Union's seemingly sudden collapse.

The timeline of the collapse of the Soviet Union can be traced to September 13, 1985. On this date, Sheikh Ahmed Zaki Yamani, the minister of oil of Saudi Arabia, declared that the monarchy had decided to alter its oil policy radically. The Saudis stopped protecting oil prices, and Saudi Arabia quickly regained its share in the world market. During the next six months, oil production in Saudi Arabia increased fourfold, while oil prices collapsed by approximately the same amount in real terms.

As a result, the Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive. The Soviet leadership was confronted with a difficult decision on how to adjust. There were three options--or a combination of three options--available to the Soviet leadership.

First, dissolve the Eastern European empire and effectively stop barter trade in oil and gas with the Socialist bloc countries, and start charging hard currency for the hydrocarbons. This choice, however, involved convincing the Soviet leadership in 1985 to negate completely the results of World War II. In reality, the leader who proposed this idea at the CPSU Central Committee meeting at that time risked losing his position as general secretary.

Second, drastically reduce Soviet food imports by $20 billion, the amount the Soviet Union lost when oil prices collapsed. But in practical terms, this option meant the introduction of food rationing at rates similar to those used during World War II. The Soviet leadership understood the consequences: the Soviet system would not survive for even one month. This idea was never seriously discussed.

Third, implement radical cuts in the military-industrial complex. With this option, however, the Soviet leadership risked serious conflict with regional and industrial elites, since a large number of Soviet cities depended solely on the military-industrial complex. This choice was also never seriously considered.

Unable to realize any of the above solutions, the Soviet leadership decided to adopt a policy of effectively disregarding the problem in hopes that it would somehow wither away. Instead of implementing actual reforms, the Soviet Union started to borrow money from abroad while its international credit rating was still strong. It borrowed heavily from 1985 to 1988, but in 1989 the Soviet economy stalled completely.

Read the whole thing.  It turns out that Gorbachev was really not the marvelous and far-thinking leader he's often portrayed as in the West.  His country was broke and about to starve; about all that can be said for him is that he didn't pull a Kim Jong-Il and allow that to happen.

If This Works, Then It's True -- Markets Can Solve Everything

Once frowned upon and even illegal, ticket scalping reselling has become a big -- and legal even in New York -- business. Today's article in the Buffalo News brings up one interesting aspect of reselling, it may boost season ticket sales.

Both the Bills and Sabres consider their season-ticket sales the lifeblood of their existence. The vast resale market, with the click of a few computer keys, can make that season ticket more valuable, as long as there’s a demand for tickets.

“If you’re a season-ticket holder, your investment is worth a little bit more, because you can sell your tickets [at a profit],” Teal said.

Those increased season ticket sales and easy access to ticket resellers via the Internet will have another effect.  They'll allow the the local teams to raise season ticket prices higher than they might have once dared as they struggle to stay profitable in what have become "big city" games.   Local fans will be more likely to pay those high prices because of the opportunity to "hedge" the cost by selling off a few games (or all of them for that matter.)

A lot of people won't like it (I can picture Donn Esmonde's outraged column in my mind now), but wouldn't it be ironic if, in Buffalo of all places, a free market in tickets ended up saving our sports teams and not the Governor shoveling out our taxes?

Beware The Study

One shibboleth deeply-held by big-government new urbanists is that rail rapid transit improves property values and spurs development.  A professor of urban planning at UB has conducted a study, and shazam, he concludes its true here, too.

Houses located within a half-mile radius of Buffalo's light rail stations are assessed to be valued between $1,300 and $3,000 more than houses not within walking distance to a station, according to University at Buffalo study.

   The study, "Impact of Proximity to Light Rail Rapid Transit on Station-area Property Values in Buffalo, New York" by Daniel Hess, assistant professor of urban and regional planning in the UB School of Architecture, found property values were increased in neighborhoods close to stations at the UB South Campus, LaSalle Street, Amherst Street, Humboldt Avenue-Sisters Hospital, Delavan Avenue-Canisus, Allen Street-Buffalo-Niagara Medical Campus and Fountain Plaza.

Now, it might just be that these are some of central Buffalo's nicest neighborhoods to begin with.  You'll notice that the area around the Utica Street station doesn't figure in the list, for example.  I've seen no evidence after living here for 15 years that Buffalo's middle class gives a damn about being near public transport.  They don't use it.

I have a feeling this study will be widely-cited in the future.  Local light-rail proponents have been looking for some economic figures to justify expanding the system.  But if they do, think back and ask yourself this.  20 years ago we dug up Main Street to build the subway and nearly destroyed it in the process.  If, after all that time, housing values nearby are a measly $1,000 to $3,000 more than those 1/2 mile away -- was it really a good use of our money?

[UPDATE:] Just for the record, I'm a public transport fan, I just realize that it can become an expensive showtoy if allowed to.  Now that the weather's nice I take the Elmwood bus to work in Tonawanda just about every day.  But even though that bus travels through some of Buffalo's wealthiest and supposedly most socially-conscious neighborhoods,  I'm here to tell you that I'm one of two or three passengers in office clothes.

As it travels up Elmwood, there's perhaps one person at each stop -- usually a schoolkid.  There are more at the intersections (Utica, Delevan, etc.) where the east-west buses cross. Ridership is overwhelmingly minority and obviously not so well-to-do.  It seems that even with gas well over $3/gallon, those most likely to advocate transit expansion don't use it themselves.  How odd.

Cut Corporate Taxes

A lot of Americans believe that our industries need to  be protected against unfair foreign competition.  It's not fair, they claim, that low Chinese labor costs, for example, shut down American plants.  But labor costs aren't the only problem we've got as Fred Thompson appears to understand.

Here he is on CNBC's Kudlow & Company yesterday:

Mr. THOMPSON: We have, you know—if you include state taxes—the highest corporate tax rate in the world. That makes us less competitive. All those things have to be looked at. And all those—especially as far as the corporate tax rate is concerned, need to be clearly reduced, I think.

KUDLOW: Yeah, it's an interesting point. There's been a bunch of news articles. Europe, believe it or not--I mean, old Europe, believe it or not is engaging in low tax-cutting competition. And...

Mr. THOMPSON: It's ironic that when western Europe starts going lower than you, you need to be concerned about it.

Democrats in particular are pretty convinced that limiting foreign trade is the way to go.  They beat the drum of low Chinese currency exchange rates and even lower Chinese wages.  Of course, they all know that our corporate taxes are an even bigger cause of the problem, but they just can't give up that revenue.

Why else be in Congress if you can't dish out other people's money?

Plastics!

When we think of oil, we imagine cars, trucks and jet planes guzzling the stuff.  But, of course, oil is used in the production of a lot of consumer goods, and it's on that point that Tyler Cowen suggests that China's newfound love of the stuff may not hurt us as much as we think.

If you've been to the mall lately, you've probably noticed that China is making scads of plastic. As the world's second-largest plastic producer, it is furiously turning oil and petrochemicals into everything from lobster souvenirs to sneaker soles. By embedding oil in products, China is, in effect, importing oil on behalf of U.S. consumers -- as much as 1 million barrels per day.

While China's demand for energy is driving up oil prices worldwide, its cheap goods are having the opposite effect on the cost of living in the United States. A recent analysis by the U.N. World Economic and Social Survey suggests that Chinese pressure on oil imports may have raised U.S. inflation by 0.23 percent from 2001 to 2005, but cheap imports of Chinese goods decreased U.S. inflation over that same period by 0.28 percent. For the moment, the net winners are U.S. consumers.

What goes up must come down?

Buffalo News: The Poor Should Pay Wal-Mart's Health Care Costs

That's as accurate a headline as the one in today's paper, Wal-Mart lets public foot the bill.  Reporter Phil Fairbanks borrows the latest union tactic to damage the retailer by claiming that it's a business's responsibility to pay its employees' health care costs.

By Wal-Mart’s own admission, more than half of its workers either go without health insurance or get it through another source.

And of those, about 1 in 5 receives benefits from Medicaid, Medicare, the military or other state programs funded by taxpayers.

How Wal-Mart’s health care policies affect Western New York and the rest of the state is difficult to quantify, although one labor-backed group says New York State taxpayers pay $61 million a year to finance health care for Wal-Mart employees.

Fairbanks could just as easily have praised Wal-Mart for the hundreds of thousands of jobs it's supplied to  poor people who might otherwise receive not only government health care but food stamps and welfare, too.  I wonder what the savings to the taxpayer are there? 

His argument is phony.  Employers are no more duty-bound to pay for their employees' health care costs than they are to buy their gasoline, their food or their housing.  Those are all individual responsibilities and where they're not, it's only because politicians have passed laws to make the rest of us pay.  Wal-Mart had nothing to do with it.

If Wal-Mart were to pay for every employee's health insurance, it would have to raise its prices to cover the cost.  The "savings" to the taxpayer would just be transferred to its customers.  Its business would drop, too.  Wal-Mart is successful because it's cheap, and losing that edge would mean fewer jobs for the very least qualified (and thus poorest) employees forcing them back onto the welfare rolls. 

The silliness of this fake outrage is illustrated by the fact that the poor make up a very large portion of Wal-Mart's customer base, and they're the ones would end up footing most of the bill for those other poor people's insurance. Doesn't really make much sense, does it?  It's easy to get the impression that these people don't really think anything through.

Of course they'll insist that those insurance payments would come out of the company's [no doubt, exhorbitant] profits, but that's just smoke. If Wal-Mart's profits drop then its shareholders will sell their stock and look for better investments.  The share price would drop and seriously hurt the company's chances for future growth.  It would be in real trouble then -- which is what I suspect has been the goal of its critics all along.

 

 

Free Trade Could Get Freer

If this happens, Buffalo would benefit.

The Canadian dollar will reach parity with the U.S. currency by the end of 2007 with the help of high commodity prices, ongoing merger-related interest and higher interest rates, CIBC World Markets said on Friday.

CIBC said the Canadian dollar, which was last at par with the U.S. dollar in November 1976, will maintain parity with the greenback into at least the first quarter of 2008.

A high Canadian dollar would reconnect Buffalo with its "western" suburbs adding millions to our economy.  Even with the two currencies at par, Canadians stand to benefit from shopping here and partying here because -- believe it or not -- our sales taxes are lower.  We get more business and they still save money.

Everybody wins.  Ain't trade great?

Fixing The Economy Isn't A Mystery

This op-ed was probably passed over once the majority of Buffalo's readers had reached the second paragraph.  He's absolutely right -- but it's not a popular message for some reason.

A recent editorial in The Buffalo News spoke of restoring the upstate economy. It quite correctly places the responsibility with Albany. Albany broke it. It should fix it.

The trouble is, it can’t be fixed. Not unless Albany stops concocting government programs to fix things, and starts doing what really needs to be done.

Economic growth requires a low cost environment. Period. End of story.

Buffalo has to compete with cities in the rest of the country and everyone agrees on that point.  But for some mysterious-to-me reason, the people who run and influence Buffalo have decided that we should compete on the basis of urban amenities: parks, architecture, culture, etc.. 

If we want to create life in upstate communities, we have to give people a reason to stay, and that means a tax environment that encourages small business growth, starting with the income tax.

Not surprisingly, states with average or below-average income tax rates have above-average rates of job creation.

Virtually all of the people around here who promote high taxes and government programs to spur the economy know nothing about business.  This local elite is generally composed of lawyers, career politicians and academics.  Their understanding of economics is colored by pseudo-Marxist theory that downplays profit in favor of planning and meeting social goals.   

In their view, tax cuts are give-aways to business.

Unfortunately, Governor Spitzer is in their camp.  His very first budget included a $1/2 billion increase in corporate taxes.   If he came out tomorrow and announced a $500 million state program to promote upstate economic development, we'd just break even, but he'd be widely praised for his attention to our problems.  Of course, nothing would change and he'd raise taxes the following year to spend that money on economic development, too.

Suck money out of the state and inject it back in.  Feign surprise when nothing changes.  Rinse, lather, repeat.  We've been doing that for 50 years now.  You might begin to think someone would figure out it doesn't work.

Out Of Character -- But Welcome

Well, knock me down, Albany has voted to let ticket resellers and scalpers operate in a free market.

A measure ending current price caps on how much scalpers and brokers can charge on tickets to sports and entertainment events is moving toward final approval by state lawmakers and Gov. Eliot L. Spitzer.

Now, maybe we can work on liberating the rest of the economy.

Gasoline Price Blame

While it tickles my heart to see a Bush and a Clinton receive the blame for something, I believe Doug Turner still has it wrong when it comes to high gasoline prices.

Between 1991 and 2000, Democrat Clinton and Republican Bush OK’d 2,600 mergers in all segments of the American petroleum industry.

Clinton and Bush left us with predictably sky-high pump prices and massive oil company profits. Now, five companies control more than 55 percent of gasoline sales, giving them massive regional clout on wholesale prices.

Have you seen the price of oil lately (gasoline is refined from oil)?  It closed at almost $65/barrel today.  That price is determined by millions of investors and there's next to nothing that the oil companies can do to influence it. 

They're not quite the global force they were in the seventies.  70% of the world's oil supply is now controlled by the producing nations and not by the oil companies.   That's why we even have to listen to the likes of Russia, the Arab countries and Venezuela.   They can certainly affect oil prices and thus gasoline's by curtailing production.

Since the gasoline supply crunch in the 1970s, gasoline consumption doubled but no refineries have been built by any of these new “oiligarchs.”

This is probably the most irritating of the Democrats' complaints.  Environmental regulations imposed in the seventies are why we don't have any new refineries, not a lack of desire to build them.  They're almost impossible to get approved and no one wants one in his backyard anyway.  At the moment a little ethanol plant proposed for Buffalo is being fought with lawsuits.  Can you imagine the local reaction if Exxon wanted to build an oil refinery here?

But that's not to say that we're trying to operate on the same refining capacity we had in the seventies. That capacity was fine right into the nineties -- in fact there was excess capacity back then.  But as gasoline usage has increased, the oil companies have spent billions upgrading those facilities and expanding their capacity.

In fact, we probably wouldn't even be having this debate over high gasoline prices if it weren't for another helpful environmental regulation, the one that specifies 20 separate regional blends of gasoline.   This beauty splits up the American gasoline market to the point that excess gasoline in Buffalo, for example, can't be rerouted to St. Louis in case of a shortage there.

To make things even worse, those 20 blends are further separated into winter and summer varieties.   

Summer-blend gas isn't new. It was first sold in 1995, as required by the Clean Air Act's 1990 amendments, and the current, even cleaner, concoction was phased in for the summer of 2000. Since then, there have been sharp spikes in fuel prices every spring as summer blends get rolled out. This is not so much because it's expensive to make the gas—the added cost per gallon is only 1 or 2 cents—but because refineries generally try to sell every last bit of winter fuel before mixing in the slightly more expensive summer batch. Sometimes they draw down the stock too far, creating shortages before the first deliveries of summer blend enter the supply chain.

So refiners have to perform the delicate balancing act of predicting how much winter blend will be required through March while assuring at the same time that it's all gone on April 1st.  During that process they also have to shut down the refinery and retool it for the summer blend.   Throw in an increase in gasoline demand this year and $3.19 gas is what you get.

George H.W. Bush and Bill Clinton may both have made mistakes during their careers (both, oddly enough, having to do with lips), but causing gas prices to rise wasn't one of them.  Environmental regulations have a cost.  If we think gas prices are too high, then we should work to get rid of the superfluous ones.  And those who believe that only high gas prices will save the earth should just shut up while they're ahead.