Interesting Economic Fact – Oil Sources for America

Interesting Economic Fact – Oil Sources for America

The USA used approximately 19.1 million barrels of oil a day in 2011, importing around 9.5 million barrels of oil daily. The top ten countries importing oil into the USA (millions of barrels) were:

Canada                  2.2

Saudi Arabia       1.2

Mexico                  1.1

Venezuela            0.9

Nigeria                  0.8

Iraq                       0.5

Colombia            0.4

Angola                 0.3

Russia                   0.2

Brazil                    0.2

Reference: DOE & CIA

These ten countries accounted for more than 80% of 9.5 million barrels of oil imported into the United States every day. Please note that none of these countries are hostile to America. However, oil, like money, is fungible.

What does the fact that oil is fungible mean? Fungi-ability (newly coined word) means that because these relatively friendly nations are exporting their excess oil to the United States, other industrial nations like Japan, China and nearly all the countries in the European Community must import their daily oil from countries much less friendly to the United States like Iran and Yemen.

Therefore, it can be reasonably argued that because of the huge demand that the US creates for global oil, the United States really is, at least secondarily, with oil money, helping fund terrorists that attack America and American interests. Perhaps if the United States were able to stop importing oil and instead use domestic oil exclusively, the terrorists would not have sufficient money available to attack America.

Adding together the known oil in ANWR in Alaska, plus known continental shelf oil deposits just off the coasts of America and including the Rocky Mountain shale oil deposits totals approximately 2 trillion barrels equivalent of recoverable oil. If we Americans chose to recover oil from these three sources alone, assuming a 20-million-oil-barrel-usage-run-rate per day, then America could be self-sufficient in petroleum for at least 274 years!

Two important questions must be considered:

1) Could this oil be recovered in an environmentally-sensitive fashion?

Yes, relatively easily.

2) Does the necessary political will exist to recover this domestioc oil?

No, it does not.

How to make the economy go zoooom in the night. Part 1 of 2

Practical Economics:  

How to make the economy go zoooom in the night.

The main determinants of long-term economic prosperity and growth are explained.

Part 1 of 2

ECONOMIC PROSPERITY

A major factor involved in the growth and prosperity of a nation today is whether or not the culture within that nation encourages and rewards the acquisition of knowledge. By knowledge I mean a broad definition including manufacturing skills, technical know-how, an ability to learn by doing, all combined with leading-edge information gained from intense investigation.

A useful example of this is the knowledge that the human genome project provided the world, for instance.

Over a decade has passed since scientists successfully mapped the entire human genome in 2001, yet the incredible benefits flowing already throughout the world today are likely just a minor trickle compared to the major benefits yet to be enjoyed tomorrow from that tremendous effort. Every day brings new genes being analyzed as possible culprits causing this or that affliction, afflictions once thought to be and once accepted as a normal part of the human condition.

My contention is that if the educational framework within a country allows sufficient positive incentive (read: economic profit) to acquire knowledge such as research and development skills and technological know-how, then a country can vastly improve the human capital side of production.

Therefore, this kind of knowledge acquisition can enhance the added value of the labor factor many, many times, wonderfully magnifying standards of living in that country.

EDUCATION IN CHINA & JAPAN

The economy that has grown the fastest over the past 30 years has been China. The Chinese economy is now the 2nd largest in the world. To be sure, market forces have been unleashed in China, but economic freedom is an after-effect and only a partial explanation, not the underlying cause of Chinese economic prosperity, I think.

Perhaps a better fitting explanation is that education is highly prized in China and has been for at least 2000 years. The pursuit of knowledge is perceived to be a high value to most of the citizens of China. And millions of Chinese have become well-to-do during the last three decades.

Centuries ago, long before America was even an idea, China was selecting provincial governors and filling related political positions based on who finished first on nation-wide tests that required memorizing entire books over a period of 15 or more years. Admittedly, the Chinese emperors may have had ulterior motives championing their citizens’ education as their brightest students became part of the political bureaucracy instead of potential revolutionaries bringing down the empire. 🙂

In his book As The Future Catches You, Juan Enriquez, once the director of the Life Science Project at Harvard University, identifies the global economy as rapidly becoming a knowledge economy. He suggests that the determining factor for economic well-being in the 21st century will be how well a nation can apply their citizens’ collective knowledge to their country’s cumulative goods and services output.

Japan, the former 2nd largest economy in the world, recently exceeded by China, with 10 times more people, excels at applying knowledge to their Gross Domestic Product (GDP) and has grown robustly for most of the last 60 years.

PURSUING KNOWLEDGE

In other words, in order for a country to gain and sustain economic prosperity for the long-term, that nation’s citizens must recognize the pursuit and acquisition of knowledge to be a real value. Therefore, that nation’s culture must perceive gaining and learning new information and new skills as a benefit worth the cost.

Unfortunately, the pursuit of knowledge that makes real differences to a nation’s economic well-being is neither short-term, nor painless. In fact, a real difference may take a decade or two or more to show up. Since most politicians’ planning horizon is much shorter (the next election), anyone hoping for political help is likely to be disappointed. Geoff Colvin, in the most recent Fortune magazine (4/9/12, p53) points out that neither Barack Obama nor Mitt Romney offer relevant education solutions to the issues outlined herein.

If politicians cannot help, then who or what can help? The Harvard economists Goldin and Katz argue in their book The Race Between Education and Technology, that the American economy continually demands higher-level skills from workers.

If we assume SAT scores to be a reasonable approximation for knowledge acquisition, then Americans should be unhappy. Looking broadly at the SAT scores of American High School graduates who go on to college from 1970 to 2010, one notes that the SAT scores in Reading and Math have largely decreased over this period. This decrease means American technological companies need to go abroad to find workers with advanced skills or go without.

My contention is that instead of being overly concerned with short-term economic happenings, Americans will have a greater impact on long-term future economic health by focusing on the acquisition of real knowledge among our nation’s citizens.

This means that as painful as many American children may find acquiring math and science mastery during their K-12 years, it turns out that math and science capability have proven to be the main building blocks for technological development over the last 50 years throughout the world. Technological development lowers the economic cost of production inputs while raising the number of units being produced. This is the classic definition of economic productivity. Economic productivity IS the driver of long-term economic prosperity.

CONCLUSION

May I pass on one telling example from Juan Enriquez’ book? In 1985, Mexicans were granted 35 patents from the US Patent Office while South Koreans received 50 or close to the same number. Just thirteen years later, in 1998 the US patent office granted South Koreans 3,362 patents while granting 77 patents to Mexicans. The impact of this significant difference is astounding. The real economic growth rate of South Korea from 1990 to 1998 was eight times larger than Mexico’s.

People are not born able to create patent-able discoveries or processes. Why was South Korea able to outpace Mexico in economic growth so dramatically? Education is emphasized culturally in South Korea much more than it is in Mexico, just as education and the pursuit of knowledge is emphasized in many Asian countries today.

The dramatic emphasis on K-12 education in some countries, including a mastery of basic math and science directly results in faster technological development. The long-term economic benefits stemming from hands-on technological development are almost too numerous to grasp.  

Consider the smart phone, the Kindle and the iPad and the dramatic profitable growth of the companies Amazon, Apple and Google during the past decade, for example. Truly amazing, I think. One might wonder whether math and science mastery during K-12 education can be over-emphasized. 

 Part 2 of 2 of Practical Economics will discuss and analyze the tax and regulatory environment related to gain and sustain long-term economic prosperity. 

The Main Causes of the Housing Crisis and the Financial Meltdown

Previous student question:
For years, I have always believed that some of the government regulation in place has not worked well and has distorted the economy and the financial market.

I also feel the problem of the current weak economy and the on-going housing troubles includes regulatory inadequacy. Is there no regulation in place when it comes to the mortgage industry? If there is, then why did the banking regulators in 2008 look the other way when mortgages were given to people who were unable to afford the loan or unable to understand the fine print? 

My response:

The politicians in charge of executing the banking regulations and in charge of the banking regulators were doing three things that interfered with their ability to enforce a reasonable rule-of-law. One does not find much mention of these activities in the left-leaning, economically-challenged mainstream media. Did you know that a significant number of new mortgages issued during the few years prior to the housing collapse were indirectly sponsored by the government?

1) Those same politicians were accepting political contributions (conflict-of-interest?) from the very mortgage-holding organizations, Fannie Mae and Freddie Mac, two Government-Sponsored Enterprises or GSEs, those politicians were supposed to be regulating. If one checks the facts and follows the money, they will notice that the prominent politicians Chris Dodd (Chairman of the Senate Banking Committee 2007- 2011), Barney Frank (Chairman of the House Financial Services Committee 2007 – 2011), and Barack Obama (Member of the Senate sub-committee on Federal Financial Management 2004 – 2008) were among large recipients of these monies in the mid-2000s.

2) Those same politicians were also insisting that American banks comply with banking laws that used skin color or last names or geographical locations as the criteria for banks to loan mortgage money instead of insisting banks ascertain whether or not these types of new clients were likely to be able to repay the mortgage loan.

3) You are correct that these politicians were looking the other way because they were worrying about whether they were pandering well enough (the real reason for passing ethnic-group membership banking laws) to earn re-election exactly when the voices of many were urging immediate action, because they could clearly see that Fannie Mae and Freddie Mac were near collapse. Do we need new and better banking regulations? Perhaps we do. Do we need better enforcement of the reasonable banking regulations already in place? Of course we do.

Consequences

Passing new, tough legislation can be spun by a politician to show that the politician is doing something about an obvious problem. On the other hand, simple enforcement of reasonable regulations is not sexy, nor is it helpful to extracting maximum political contributions from those entities being regulated. (See numbers 1 and 2 above.)

The three political activities enumerated above contributed mightily to the financial crisis that we Americans are still mired in. Oh yes, there is always “greed” or the normal capitalistic draw of profit to be made (Adam Smith call this draw, “self-interest”), but that incentive is mostly a constant, while what I cited above is what I see as the primary reasons causing the housing and financial crisis. The notion of profit to be made did not change much and is what it always should be in a capitalistic society.

Making more profit is only a secondary cause of the current housing and financial crisis. But please notice who is mostly blamed — the secondary contributor, i.e., the banks seeking profit, when the primary culprits (greedy politicians) are let off the hook by the left-leaning, economically-challenged mainstream media.

 

The Wonder of The Free Market – 3

The Wonder of The Free Market – 3

Question from MBA Candidate  (student) – “But can citizens and the free market really fix themselves? A comment from the website of the Department of Justice (2011) states that the competitive process, which is found within free markets, only works when competitors set prices honestly and independently.”

I guess I’m partial because I work for a state agency, but they do have their benefits. True, when the government steps in, their intervention never seems to be truly successful, but we as humans are imperfect, therefore an imperfect market exists; when there are such practices as price-fixing and bid-rigging, then that tells me there are flaws everywhere.

References:
(2011) Price fixing, bid rigging and market allocation schemes.  Retrieved from http://www.justice.gov/atr/public/guidelines/211578.htm

PJU Response:

Basically, you are pointing out illegal ways that some people try to manipulate price, and just like you, I agree this illegal behavior calls for government action. But it does NOT call for government price intervention, rather 1) either putting people in jail or 2) heavily fining them for violating the rules of the game or 3) otherwise removing them from the marketplace. Just like you, I want and the free market needs, in fact demands, regular and reasonable enforcement of a reasonable rule-of-law that fosters competition.

A different take from the DOJ website might be that free markets only work when government enforcement reasonably and regularly enforces a reasonable rule-of-law such that competitors firms feel free to set honest and independent prices.  A meaningful motto might be: Government price intervention – never! Government refereeing, of course!

However, perhaps you might read this DOJ comment more carefully. First of all, the only way free markets really work is that almost all firms are price-takers, not price-makers or price-setters. This observation does not include monopolies, which are almost all heavily regulated by local, state-wide or regional government regulatory bodies, like corporation commissions. Or cartels like OPEC, which manipulate supply, therefore manipulate price, and which entities are outside of the reach of US law enforcement.

Yes, I agree that someone in the firm sets a price for the firm’s product or service, then the consumers in the marketplace either buy the product or service, on not. But these type of ‘price-setters’ are really only gauging the market and mechanically setting a price at what they think the market will bear.

Take bread, for instance. If your grocery store started charging eight dollars a loaf for bread you could buy bread loaves at a dozen other nearby places for four dollars a loaf, how much of the eight dollar loaves would you buy? None, right? Why?

Because the free market, without government intervention, sets the price, based on supply and demand interaction and either your firm follows, or your firm might reap zero revenues. This is true with almost any product or service, as long as there is a free market. This price mechanism is called the “invisible hand” and is the hallmark of free markets.

Collectively, imperfect human beings DO NOT create imperfect markets very often, if the government wisely referees. Unless they are not truly free markets, of course, which is what happens when the government intervenes!!!

 

Will America or China dominate the 21st Century?

Will America or China dominate the 21st Century?

China’s per capita GDP today is close to $4,000, about 20 times more than in the 1970s, moving that country’s overall GDP directly behind America’s.[i] Teng Hsiaop’ing, Mao’s pragmatic successor, pushed wide open the spout of market forces flooding economic growth across China. Will China’s economy inevitably surpass America’s?

Teng Hsiaoping’s motto, “Socialism, with Chinese characteristics”[ii], granted a market economy to China, providing ordinary Chinese incentive to become wealthy. If you check the encyclopedia to see what the typical entrepreneurial risk-taker looks like, you see the picture of a regular Chinese citizen. But will economic freedom, without meaningful political freedom, be enough to sustain China in the future?

Milton Friedman states that “economic freedom [is a] necessary condition for political freedom” and that the relationship is “not unilateral”.[iii] Friedman insists on a bilateral relationship between economic freedom and political freedom. Therefore, until China provides its citizens political freedom, the seemingly boundless Chinese economic growth will someday screech to a halt, a prediction Gordon Chang made years ago.[iv]

Political freedom means government does at least these three things:

1) holds regular free elections,

2) enforces a reasonable rule-of-law, and

3) protects individual rights, including property rights.

Yet contrary to nurturing political freedom, the government of China has not seriously enforced trademarks and copyrights[v] and regularly turns political dissenters into political prisoners.[vi] Chinese governmental actions today are not expanding political freedom among Chinese citizens, nor are free elections an option yet.

Does the current authoritarian regime in Beijing represent the natural state of government Chinese citizens prefer? Ancient, influential Chinese philosophers like Laozi and Mencius both advised that the best government stays distant and doesn’t micromanage, definitely NOT the current nanny-state approach.[vii]

The bloody “Arab Spring” in progress substantiates George W. Bush’s once decried declaration that every human heart desires freedom and liberty[viii], as authoritarian and totalitarian regimes across the Middle East are challenged by ordinary citizens. Is China different?

The short answer is … no. Recently, Walter Russell Mead opined that the 21st

Century will belong to America. “… Pundits keep telling us it is … a time of America decline. … Crippled by debt at home, hammered by the aftermath of a financial crisis, bloodied by long wars in the Middle East, the American Atlas can no longer hold up the sky. … Geopolitically, the doomsayers tell us China will challenge America’s leadership throughout the world.” [ix]

Tellingly, Mead proclaims that America, NOT China, is best positioned to respond to the unpredictable, fast-paced technological challenges facing the world during the 21st century. As Milton Friedman might argue, the virtuous cycle of economic freedom begetting political freedom will allow Americans to prosper mightily in the future.

Contributing to China’s boom are infrastructure and construction projects presently underway. Less obvious, but accompanying, is the existing process of capital allocation in China. In America, private markets allocate capital based on the marketplace evaluating feasible projects, whereas the autocrats in Beijing, employing the best principles of crony capitalism, usually make that decision.

Plus, 30 years of unintentional technology transfers[x] and a recurring reluctance by China to enforce intellectual copyrights and trade secrets[xi], has unwittingly caused the West to contribute significantly to China’s macroeconomic growth the last three decades. Yet China’s booming economy has not produced greater political freedom for the Chinese citizen, once a hoped-for consequence of economic growth.[xii] Moreover, in 2010, America imported $365 billion of goods from China, about 8% of China’s GDP, and 2011 imports are running 15% ahead of 2010’s.[xiii]

Today finds many billions of dollars of uncollectable state-owned enterprise debt on Chinese banks’ balance sheets.[xiv] Instead of “creative destruction”[xv] going on in China, we have speculative buildings built, torn down, then different buildings built on the same property, one sure way to boost GDP figures.[xvi]

Milton Friedman points out “economic growth has become [an] … excuse for widening government intervention in economic affairs.”[xvii] History tells us government picking marketplace winners and losers causes economic stagnation over time, not robust economic growth.

Americans for 235 years have risen to meet all the challenges that have come our way.  As long as both political and economic freedoms remain honored here, America will stay on top.

 Footnotes:

1 http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29

2 http://en.wikipedia.org/wiki/Deng_Xiaoping

3 Capitalism and Freedom by Milton Friedman, 1962, p4 & p10.

4 The Coming Collapse of China by Gordon Chang, 2001.

5 Fraud Magazine, January/February 2011, Volume 26, p32, “Countering Corruption in Intellectual Property Cases.

6 See Liu Xiaobo and Ai Weiwei, adfinitum. Wall Street Journal, June 23, 2011, “The House Prisons of Beijing.”

7 Wall Street Journal, July, 6, 2011 The Ancient Roots of Chinese Liberalism http://professional.wsj.com/article/SB10001424052702304760604576427931129537282.html?mod=WSJ_newsreel_opinion&mg=reno-wsj

8 http://www.memorable-quotes.com/george+w++bush,a1934.html

9 http://pienpolitics.com/?m=20110702

10 http://www.creditwritedowns.com/2011/07/local-chinese-government-property-speculation.html; http://www.telegraph.co.uk/finance/china-business/7972070/Chinas-rising-bank-debt-could-leave-nation-exposed.html

11 http://www.investopedia.com/terms/c/creativedestruction.asp

12 Talk by Clark Dewaal given c. 2007 in Mesa, AZ. Dewaal was a former BYU Professor who spoke fluent Mandarin and served as a banker in China during the 1980s and 1990s.

13 http://www.sciencedirect.com/science/article/pii/S0305750X04000208

14 Fraud Magazine, January/February 2011, Volume 26, p32, “Countering Corruption in Intellectual Property Cases.

15 UOP ECO 360 Lecture 1 by Paul Updike, 2001.

16 http://www.census.gov/foreign-trade/balance/c5700.html

17 Capitalism and Freedom by Milton Friedman, 1962, p37

Milton Friedman Freedom Essay July, 15, 2011, by Paul J. Updike

 

Theory or Practice, Which Matters?

Theory or Practice, Which Matters?
STUDENT QUESTION:  I do understand that there is something special you get from experience that you cannot get from a book or class, but with classes having more hands on approaches can you think of something specific experience can give a person that pure education cannot?

MY RESPONSE: That’s an easy question. If one looks at the textbook, they will find that the textbook writer, a highly educated Ivy League Professor, David Colander, talks about economic theories as if they are all created approximately equal, except Keynesian Theory, which theory he really likes. Colander has probably forgotten more about various economic theories than most regular people have learned. And in my opinion, he is one of the best textbook writers I have ever read.

But here is the difference. I have found myself in the trenches with companies actually executing according to a  forecast that did not fit reality. When one is in the middle of a turbulent stream paddling for dear life, one does not worry about whether a theory may or may not apply, but whether you are paddling hard enough. When death and destruction try to muscle into your space, then you adapt to reality in ways that theory never prepared for or even contemplated.

Keynesian Economic Theory
Let’s apply this to reality. In the last 75 years the main concepts of Keynesian Economic Theory have been applied over and over again in the American economy starting with the Great Depression. Politicians who enjoy spending taxpayer’s money really like that Keynesian Economic Theory justifies big government and more or less unlimited  government spending. Yet an honest analysis of the last 75 years shows that Keynesian Theory does not work as advertised, has never worked in America, and therefore, to my small mind, will not work.

The latest example is the $800 billion stimulus bill advocated by President Obama which made it through Congress in early 2009. We were assured by the theory experts that passing the bill and thus applying economic theory would cause the unemployment rate to rapidly fall. Surprise, government spending did not work the way we were promised. Yet one prominent economist, Paul Krugman, (another highly-educated Ivy League Professor) called for a do-over, and said the reason it  did not work was that the package was too small and needed to be twice as large!

But who looks at history? No other economic theory justifies government spending like Keynesian Economic Theory and tenured professors in academia do not worry about their jobs or whether the theories work in reality, just that those theories work on paper. You know, econometrics, elegant curves, regression analysis,  and all that. And Keynesian Theory works quite well on paper.

It is just weird human behavior that we need to adjust, because IT IS NOT cooperating! So the next generation of students will learn Keynesian theory too, I suppose, and the madness continues!

Static Scoring versus Dynamic Scoring
That reminds me of another economic reality. If you want to increase economic activity, then lower tax rates. 100% of my students get that. But the government politicians refuse to study history and do not believe that an increase in economic activity is quickly followed by more government revenues, at lower tax rates. Four times out of four, (it has only been tried in America four times over the last 90 years) or 100% of the time, government revenues have grown with lower tax rates.

Works like a charm in practice, but not on paper. Why does it not work on paper? It is that pesky human behavior again, always changing by adjusting to new tax rates. This is because when we use paper, we use “static” scoring, but with lower tax rates, human behavior changes, so to capture this we must use “dynamic” scoring, which is lots harder and which thing the CBO (Congressional Budget Office) refuses to do.

Bottom line is that though there often is a wide gap between theory and practice, especially as regards economic theory, but unless one is motivated by results, one does not have to be concerned by whether the theory actually works in reality.