By Evelyn Black, on August 29th, 2008
On August 26, the Federal Deposit Insurance Corporation increased the number of banks it considers in danger of failure from 90 to 117 and responded indirectly to concerns about its ability to insure money on deposit at retail banking institutions. The FDIC is considering increasing the fee it charges retail banks to insure their deposits to 14 cents for every 100 dollars of insured deposit money this October. A serious fight from the banking industry is expected since banks are already struggling to survive. The fee increase could not come at a worse time for them, and yet without functional FDIC deposit insurance, bank runs become all too likely all over again.
In the immediate aftermath of the recent failure of IndyMac Bank in California, FDIC officials were all over the media assuring a skittish public that the situation was well in hand and that the number of banks on the troubled list is actually lower than it was in the 1990s. What was not said, possibly because it defeated the whole point of going on TV to reassure the public, was that the size and scope of the banks currently facing failure is far beyond anything the FDIC has had to face since the Depression.
IndyMac was the third largest bank failure in history, and it is but one of a large number of major regional banks that are currently struggling to stay above water. Earnings at banks and thrifts declined a whopping 86% from April to June and are currently down to $4.96 billion from $36.8 billion only a year earlier. At the same time, the credit crisis appears to be spreading to lending products that were not really of concern only six months to a year ago. Credit cards, auto loans, and other types of retail consumer debt are beginning to go into default a higher and higher rates, and already institutions are experiencing a rapid increase in late payments.
Small business credit lines, which insure the smooth operation of daily life in many cities, are already getting much tighter as underwriting departments react to a steady drop in the value of business capital due to the housing crisis. While it is true that more homes sold this July than expected, the drop in housing values for June was the largest on record. Many of those sales were “short sales” on foreclosures.
As home prices continue to plummet, both personal and small business customers have fewer and fewer options for securing needed credit. Already many homeowners are “upside down” on their mortgages; that is, they own more on their homes than their homes are currently worth. When this happens to customers who have home equity lines at retail banks, the lines are frozen and credit is no longer available.
Sadly, many customers are tapping their unsecured credit cards to fill the gap and are consequently having a harder and harder time managing those payments now too. The high cost of gasoline and the rise in foreclosures has also resulted in an increase in voluntary defaults on auto loans. Banks don’t really want or need a wave of people calling in to “give back” their SUVs right now since, with gasoline still closer to $4 a gallon than $3, those vehicles are incredibly hard to sell at any price.
Many analysts fear a second huge waive of defaults on credit cards, HELOCs, and auto loans that will hit banks harder than they can stand to be hit right now. The FDIC currently provides up to $100,000 per customer in insurance for checking and savings accounts and up to $200,000 for married couples, per financial institution. However, much of that promise depends on the FDIC never having to actually deliver on that promise in a truly huge way.
Even in the wake of the single IndyMac failure, some multinational banks were refusing to cash checks issued by the FDIC on IndyMac acccounts, putting extensive holds on the deposited items or refusing them altogether, hoping to shuffle these customers off to another bank before anything went to court. It’s hard to imagine the chaos that might be caused by multiple simultaneous bank failures, so we don’t see a lot of open discussion about that possibility.
That lack of discussion doesn’t mean the possibility isn’t out there, it just means the topic of simultaneous multiple bank failures has become “the elephant in the living room.” Banks, federal regulators, and some customers see the danger quite clearly, but no one knows quite what to do about it. Add to that the concern about not causing panic and you have a truly uncomfortable situation for all concerned.
The financial crisis that has gripped the U.S. since last November as the subprime loan mess began to hit full force has been like that all along: a series of choices between difficult options both of which might have major negative consequences. For example, when the Fed cut the interest rate for the funds banks lend each other daily from from 5.25% to 2% over the course of less than a year, it probably saved credit markets from freezing up completely. On the other hand, it almost certainly fueled inflation, which is now at record levels.
If the FDIC draws undue attention to itself by increasing the fee it charges retail banks to insure their customers’ deposits, it will almost surely provoke the very reaction it wants to avoid: runs on the most troubled banks. If the FDIC does not increase this fee, it risks having inadequate resources to actually provide the money for the insured deposits should more banks fail. That’s a devil versus the deep blue sea sort of decision, and right now, there’s really no avoiding it.
The year 2009 promises to be as difficult, if not more difficult, for retail banks and the Federal Reserve as the year 2008 was. At the bottom of the whole mess is a lot of American consumer debt, a huge tremendous amount of debt, much of it probably bad debt, that no one is quite sure how to manage. The economy can’t recover without spending, people can’t spend without credit, and banks really can’t afford to extend any more credit given the current economic conditions.
That’s a recipe for disaster (for the banks at least), but in the long run, if it provokes a broader discussion of debt and the American consumer lifestyle, it might not be such a bad thing. This mess didn’t create itself: a lot of bad decisions at the level of individual people and banks themselves got us into this. I don’t think we can really get out of it without a long, hard discussion of those bad decisions and how to avoid them in the American’s economic future.
In the meantime, if you still have unsecured credit available to you, you may want to pay it down or off as soon as possible. Already major banks are slashing credit limits even on good customers in anticipation of further problems. If you have $5000 charged on a card with a $10,000 limit and your limit is reduced suddenly to $5100, your credit score instantly plummets, making it harder for you to get a mortgage or conventional secured loan.
All of which puts the banks into one of those lose/lose situations too: reduce unsecured lending and banks reduce credit card losses but also credit card profits, right at a time when profit is dropping like an SUV off a Minneapolis bridge.
One last thought: if you’re losing your house, now might not be the best time to sleep under a bridge either.
By B.P.T., on August 29th, 2008
When the economy is in a slump, for the vast majority of the population, discretionary income is often cut, leaving people to spend for necessities rather than luxuries. Save an elite few, art is generally considered a luxury or perhaps an investment rather than a daily need. But for those who make their living creating and selling art, a shaky economic environment can have a surprising range of effects. Further, artists, including visual and musical artists, are exploring and expanding new venues to sell their creations, bypassing the traditional routes along the way.
What is perhaps ironic is that higher end artists and galleries have less trouble selling in today’s limping economy than those who attempt to sell at lower prices. There is a high end niche market that is relatively unaffected by varying market conditions. A recent article in the Boston Globe quotes Barbara Krakow, a long time high end gallery owner, who discusses the fact that some galleries are seemingly unaffected by outside economic forces. She tells the Globe, “There’s a pocket in the art world not affected by what’s going on economically at all.” She should know – her clients buy her artists’ work at prices that reach upwards of $150,000.
Discretionary Spending: Alive and Well?
The Art Newspaper has focused on information along the same vein. A recent article by Brooke S. Mason reports on art market shifts and quotes gallery owner David Maupin as saying, “I have far more people I can call for a $75,000 to $100,000 work than the lower-priced artists.” He also says the category of younger (and less-expensively priced) artists’ sales has dropped by half in the past few months. The art journal Big, Red, and Shiny published a recent interview with gallery owner Joseph Carroll in which he discusses the current economy and its effects. He points to the recent Francis Bacon triptych, which sold at Sotheby’s for an astounding $86 million. Carroll sums the situation up nicely saying, “I don’t think the art market is independent of the larger economy but they don’t appear to be synchronized at the moment. At a certain level, like the recent auctions show, the market is independent of the general economy. At the lower end, I would say they are more closely linked.”
But what about those younger, emerging artists? This younger generation of artists and dealers has found alternatives to sell their creations besides the traditional, sometimes stuffy, brick-and-mortar galleries. Between increasing commercial rents in traditionally established art markets like Boston, Santa Fe and New York and increasing rents for residential areas, these regions are getting tougher for up-and-coming artists to thrive.
Many artists and gallery owners have turned to alternative routes to sell their work. Art fairs have become quite popular, and the art fair “circuit” extends around the country. While the travel and setup can become expensive, the overhead can be considerably less than a traditional gallery. And artists often don’t have to travel far afield to attend multiple art fairs. Some cities hold several fairs per year, or even per month, and fairs have become popular worldwide. A number of websites are dedicated to maintaining art fair listings both large and small, including www.artfairsinternational.com, www.festivalnet.com and www.artfairsourcebook.com. These are not local hack events either. These events are generally juried, well-publicized affairs attended by large numbers of people.
Online Galleries
In addition to art fairs, the biggest change to hit the art scene over the past decade or two is the proliferation of art sales on the Internet. Gallery owners and artists alike can show their art to buyers around the world with very little overhead costs and can easily ship worldwide. Whether selling through online auctions or sales websites, art can be shown and purchased at the click of a mouse, and the World Wide Web has changed the art sales landscape, much the same way the MySpace phenomenon has changed the indie music business. Even that mammoth of art dealers, Sotheby’s, offers previews of art online so potential buyers can get a good look at the art before attending a live auction.
One other perhaps less well-known option for struggling artists is to attend an MFA program at a university. Because most public and private donations for artists go to institutions and not individual artists, a Master of Fine Arts program can be a place artists can study, create and build a reputation. Of course, like anyone who chooses additional higher education, there is always the issue of cost to live and attend school, but scholarships and other grants can help pave the way, and the long term benefits hopefully outweigh current costs.
The art world is perhaps one of the most intriguing pockets of an economy not affected by outside forces. While high end collectors and investors (and the artists they patronize) are seemingly unaffected by the more pedestrian issues of high gas prices and rising food costs, emerging artists and the galleries that support them around the country are getting crunched by increasing rents and fewer buyers in their category. Whether this bifurcation of the art world persists as the economy continues to struggle remains to be seen, but for art enthusiasts, it will certainly be interesting.
By G.L.C., on August 29th, 2008
On August 25, the U.S and Australian regulators agreed to allow brokers and exchanges to do business in each county while being regulated only by the their home country. This could start as early as January. For the United States Securities and Exchange Commission (SEC), this is seen as a step towards its goal of globalizing investing. This is the SEC’s first mutual recognition agreement with an overseas regulator as part of its campaign to become more international and improve the competitiveness of U.S. markets. The SEC is also in discussion with Canada and other countries to develop a process to discuss mutual recognition. The SEC and the Australian Securities and Investment Commission (SIC) have also agreed to increase cooperation on cross border enforcement and approved an agreement to step up cross border supervision of financial firms.
If this agreement is approved, it would be a first for the U.S. U.S. brokers and exchanges can seek relief from existing restrictions on doing business with institutional investors in Australia. Australian brokers and exchanges can seek the same relief on doing business with U.S. institutional clients. The exemption from dual-regulation would not be automatic and would still be subject to conditions from each country’s authorities. Previously, cross-border operators needed regulatory compliance with both the SEC and the SIC. Each country will retain jurisdiction to pursue violations of their respective anti-fraud laws and regulations.
An application for relief by an Australian broker or exchange will be subject to a public comment period and will not become final without a vote of approval by the five member SEC. It is expected that the procedure for U.S. brokers and exchanges seeking relief in Australia would be similar.
Retail investors in the U.S will be able to access the Australian market directly through the U.S. brokers and enjoy U.S. regulatory protection.
The lowering of the barriers is expected to benefit the two countries by increasing cross border capital flows and reducing transaction costs. The agreement will also enhance cross border law enforcement cooperation, facilitate regulatory coordination, and increase investor access to well regulated capital markets.
Critics point out that such an agreement is deregulatory and passes on the burden of protecting the U.S. investors to other countries that don’t answer to the U.S. The government must look at the breakdowns that led to the current credit crunch before opening up the market. There is also serious concern about allowing individual investors direct access to non-U.S. market through foreign brokers. It would preempt oversight from state laws and other regulatory vehicles.
Wall Street trade groups such as Securities Industry and Financial Markets Association have welcomed the agreement. Hopefully, this is the first of many such agreements that compare regulatory regimes and reduce barriers to investment for firms and individuals in the participating countries. The agreement is being hailed as a groundbreaking effort that will expand access to overseas markets without sacrificing investor protections.
By James Ratcliff, on August 28th, 2008
“Eat your vegetables,” my mother told me when I was growing up in America in the 1950s. “Children are starving in Europe.”
My mother’s postwar economic geography sounds comically antiquated today; she could never have foreseen a world in which the euro is stronger than the U.S. dollar. But in another sense she was half a century ahead of her time; her quaint tactics were designed not only to encourage me to finish a meal but—at least in part, I think—to teach me that the destinies of all people on earth are somehow connected.
Although economic geography has undergone changes my mother never would have imagined, one thing remains unchanged: the key to reducing poverty around the world is to build a sense of community at the global level.
When I was a child, of course, I could find no connection between my uneaten vegetables and hungry people in a faraway land. I knew that cleaning my plate had nothing to do with anyone else’s stomach—not directly, at least. But what I didn’t know then—and what my mother must have known all along—is that, when coupled with the necessary resources, a desire to make a difference is a powerful tool for change.
The most ambitious twentieth-century attempt at changing the world—the United Nations—is generally perceived as having failed to improve political, economic and social conditions around the world. Time after time, the UN has failed to prevent genocide, famine and widespread repression of political freedom. If global collaboration is the key to solving the world’s most pressing problems, then in view of the UN’s dismal performance, do we still have a reason to hope?
The World Development Report has been published annually for the last 30 years by the World Bank. The 2008 Report focused on the key role of agriculture as an instrument for development and poverty reduction. All 191 UN member nations have committed to the Millennium Development Goals (MDGs). Goal 1 is to eradicate extreme hunger and poverty.
The nations of the world and the World Bank have thus reached an unusual and perhaps unprecedented consensus; everyone agrees that the key to reducing poverty in the poorest areas of the world is to target more aid money for agricultural development. But as Time recently reported, “This year the U.S. will give more than $800 million to Ethiopia: $460 million for food, $350 million for HIV/AIDS treatment—and just $7 million for agricultural development.”
Spending the bulk of our available resources to treat chronic ills and recurring crises is like treating a cancer patient with band-aids: the deep causes of the patient’s condition go untreated as long as we must respond to one crisis after another, even though we think we know what the root of the problem is and where our money really needs to go.
According to the 2008 World Development Report, 2.1 billion people live on less than $2 a day; 880 million live on less than $1 a day. Agricultural development isn’t a magic bullet; disease, lack of education, social inequality and political corruption are huge obstacles. But since three of every four poor people in the developing world live in rural areas, targeted investment in agriculture promises to pay the most immediate social and economic dividends.
World Development Goal 1 is to cut worldwide poverty and hunger in half by 2015. Even though the G8 leaders have pledged to increase African aid to $50 billion a year by 2010, “Sub-Saharan Africa is at the greatest risk of not achieving the Goals and is struggling to progress on almost every dimension of poverty, including hunger, lack of education, and prevalent disease,” says the UN.
Our Heavy Responsibility
It’s hard to picture a scenario in which the affluent nations of the world will be willing to spend even more money to achieve the MDGs. “You will always have the poor with you,” Jesus told his followers two millennia ago. Although 21st-century economic geography suggests that Jesus was an astute economist, he also exhorted his followers to aid the poor to the best of their ability.
Microsoft chairman Bill Gates believes that creative capitalism is the best way to reduce grinding poverty in developing nations. In theory, Gates’ proposed “system innovation” would produce a kind of planetary trickle-down effect by stimulating consumption in affluent economies.
But as long as we live on a planet with limited resources, unrestrained consumerism in wealthy nations can only produce the opposite effect. On a global scale—and in a closed system—an increase in consumption in affluent nations is more likely to bring about a decrease in consumption in the poorest areas of the world.
Wouldn’t it make more economic sense to consume less in rich economies in order to provide more to the world’s poor? As Vic George pointed out two decades ago in Wealth, Poverty and Starvation, “From a rational perspective this would be a desirable trend because most people in affluent countries consume far too much for their own physical and mental health.”
In Development as Freedom, Amartya Sen, winner of the 1998 Nobel Prize in Economic Science, wrote, “With adequate social opportunities, individuals can effectively shape their own destiny and help each other.”
Sen has argued that human capability influences rapid change far more than human capital. In view of Sen’s findings, Nicholas Negroponte’s One Laptop per Child Foundation is one of the most exciting ideas in the global marketplace. There are two reasons why it can work:
1. It stimulates direct targeted investment in the world’s poor.
2. It aims to unleash human capability.
The Mande people of West Africa have a sophisticated belief system. Although primarily an Islamic people, Mande cosmogony hardly sounds foreign to anyone who is familiar with the Old Testament book of Genesis. “When the Everlasting addressed man, He taught him the law by which all the elements of the cosmos were formed and continue to exist. He made man the Guardian and Governor of His universe and charged him with supervision of the maintenance of universal Harmony. That is why being man is a heavy responsibility.”
Our food consumption, to cite one of the most blatant examples of universal disharmony, is out of control. At the beginning of the new millennium, the percentage of obese Americans had skyrocketed to 65%.
“We’ll be cutting down on fast food, sweets and other unnecessary calories,” my mother would have said if she were raising children in 2008 instead of 1958. “We’ll eat better and save more. Let’s see how many laptops we can buy for kids in Africa.” Then she might have added, “We’ll all be healthier and happier for it.”
Teaching children about man’s heavy responsibility is the best education we can give them. Can smarter consumption in affluent countries be channeled into exponentially greater levels of targeted investment in the world’s poorest economies?
It couldn’t hurt to give it a try—we’ve tried everything else. Who knows? We might all be healthier and happier for it.
By G.L.C., on August 28th, 2008
The Sarbanes-Oxley Act came into force in 2002 and introduced major changes to the regulation of financial practice and corporate governance following scandals like the collapse of Enron. It is mandatory and all organizations – large and small – must comply. It has raised the bar for public companies, and failure to comply can result in harsh penalties. A key to compliance with this law is to implement an accounting system that offers an extensive audit trail, including extensive drill-down and drill around capabilities.
Critics have argued that the Act has damaged American competitiveness and made it less attractive for foreign companies to list in the American markets, driving initial public offerings abroad. It has also been criticized for increasing the cost for American companies without any significant benefit.
A recent study by Andrew Karolyi & Rene Stulz, both professors at Ohio State University, and Craig Doidge of the University of Toronto concludes that the facts do not support the criticism that the Act has damaged American competitiveness and made it less attractive for foreign companies to list in the American markets. The Securities and Exchange Commission (SEC) in 2007 made it easier for foreign companies to leave the United States. Until 2007, it was very difficult for a company, whether foreign or domestic, to abandon its SEC registration – a company, once it lists in the American market, could drop its listing but still had to comply with the United States disclosure requirements and accounting rules.
When a foreign company lists its shares in the American market, it benefits through lower cost of capital. Their shares trade for higher price than do those of similar companies not listed here because investors have more faith in companies that comply with American disclosure rules and reconcile their books to United States accounting standards.
According to the study, the companies that did so after the SEC made it easier for them to leave the United States in 2007 did not leave the United States because of the Act but because their slow growth and poor market performance had affected their ability to attract American capital. The market did not react as if it was a good thing for shareholders when their companies got out from under the American regulation. In a few cases, the share prices fell when the foreign company leaving the United States had good market prospects.
The costs of complying with the Section 404 of the Act requiring audits of corporate internal controls have scared executive in the United States and abroad. A study by the law firm Foley & Lardner released in 2007 concludes that the cost of complying with the Act has fallen, but most of the cost savings are because of internal efficiencies at companies. Increases in audit and legal fees and a need to pay corporate directors more have added to the hefty cost of compliance.
While the Act has not damaged American competitiveness, the cost of compliance is something which is having a negative impact on American businesses.
By R. C. Anderson, on August 27th, 2008
Energy concerns top many American’s list of what worries them most. With gas prices at over $4 per gallon in many places, food prices soaring and the debate regarding food-based biofuels raging, it may seem difficult to see a way past the energy conundrum we find ourselves in. The answer to increasing America’s independence from oil pirates overseas may be found in the most abundant resource on earth: water. Until now, many have merely dreamed of engines that could split the hydrogen and oxygen atoms of water to create energy and release nothing but water back into the environment. Published in the August 22 issue of Science, Matthew Kanan and Daniel Nocera of the Massachusetts Institute of Technology address a new and efficient way to transform the dreams of engineers everywhere into a new and attainable reality1.
Energy can come from many sources. Fossil fuels are the most abundant and the most readily recognized by everyone. Unfortunately, they are also seen as a direct cause of pollution and several environmentally problematic consequences. Ethanol, from corn and sugarcane, is becoming an increasingly popular alternative2. However, many worry that we will convert too much agricultural land and crops to strictly energy-producing acreage. This is especially true since some already see conflicts between our food resources and a world where many are starving. Biodiesel is another alternative growing in popularity. Although more energy is obtained with this method than with corn ethanol, gasoline must still be used, and biodiesel uses the same ingredients needed to produce vegetable oil for cooking. Due to the prevalence of vegetable oil in our diet, only a small destabilization in supply can create a large increase in cost, making it too expensive to use for fuel2.
Problems such as these have led many scientists to strive for a way to use water as a fuel source. Water is abundant, environmentally friendly and a premium source of the hydrogen used to create hydrogen gas. Until recently, the only way to accomplish these goals was to use catalysts, which split the atoms of water molecules at an increased rate, though these were only active with ruthless chemicals and the very expensive platinum metal. Nocera and his colleagues, however, have finally found a catalyst which will allow water molecules to separate under environmentally-friendly conditions using cobalt and phosphorous which are both plentiful and inexpensive3. Although adjustments must be made before this technology can begin replacing current fuel sources, the future use and cost of this type of energy production could have a steep inverse relationship.
Ultimately, scientists would like to see a combination between solar power and splitting of the water molecule. If catalysts such as the one created by Nocera can be made for large-scale use, it could be possible to use seawater for the process3. This could circumvent the need to use fresh water or desalinize ocean water which could save money and allow the first ocean-based energy plants to be funded and erected sooner. Add to this, the possibility of using solar energy to drive the reaction and the overall cost of such a project could continue to decrease over time. This predicts, however, that the cost of alternative fuels will decrease as research increases. The expense will be forced to decrease if alternative methods are to be used since, in 2000, prices for wind and solar energy were two and 21 times as much coal, respectively5.
Even with this new method of separating the hydrogen and oxygen atoms in water, the amount of water necessary to fully replace fossil fuels is extreme. According to Nocera, it would require 1015, or 10,000 trillion, moles of water per year1. Fossil fuels provide the bulk of our energy at 95% which equaled 170 million barrels of oil per day in 20004. It is thought that oil from known deposits will continue to last for 42 years, natural gas 60 years and coal for over 200 years2. With these numbers, research such as Nocera’s is vital for a comfortable future.
Scientists aren’t the only ones to show concern over our current dependence on depleting resources. Congressman Tim Holden who is Chairman on the House Agriculture Subcommittee on Conservation, Credit, Energy, and Research has been noted as saying that “our energy demands are at a critical point6.” Congressman Frank Lucas went on to say, “Expansion of traditional forms of energy, such as oil, coal, and natural gas must be pursued alongside development of alternative and renewable sources6.”
In a written statement to the Subcommittee, Jetta Wong, a senior policy associate with the Environmental and Energy Study Institute, noted that in 2007 transportation in the U.S. was “96% dependent on petroleum and consumed 70% of total U.S. petroleum demand7.” More importantly, 60% of this was imported. Making oil more expensive are the subsidies given to oil companies. Over the last 32 years, they have received more than $130 billion. This does nothing if not push alternative fuels more forcefully. It has even pushed the government, which on December 19, 2007, approved the Energy Independence and Security Act. The act called for “36 billion gallons of renewable fuel” in only 14 years. From this, 21 billion gallons is required to be biofuel based7.
As views shift away from reliance on foreign oil and other polluting fuel sources, research into alternative fuels is bound to grow. While many of the alternative fuels may not be able to replace fossil fuels singly, a combination of hydrogen power, wind, solar and perhaps even food-based resources might show enough efficiency and promise in the future to relieve the existing pressure on non-renewable energy sources.
1 – Kanan, Matthew and Daniel Nocera. In Situ Formation of an Oxygen-Evolving Catalyst in Neutral
Water Containing Phosphate and Co2+. Science 321 (5892), 1072-1075. August 22, 2008.
2 – Somerville, Chris. Primer: Biofuels. Current Biology 17 R115-R119. February 20, 2007.
3 – Service, Robert. New Catalyst Marks Major Step in the March Toward Hydrogen Fuel.
Science 321 (5889), 620. August 1, 2008.
4 – International Energy Annual 2001 Edition (EIA, U.S. Department of Energy, Washington, DC, 2003).
5 – Commission of the European Communities, Green Paper Towards a European Strategy for the Security of Energy Supply. Commission of the European Communities, Brussels, 2000.
6 – Subcommittee Reviews Electricity Reliability in Rural Areas. News from the House Agriculture Committee. U.S. House of Representatives Committee on Agriculture, July 30, 2008.
7 – Written Testimony by Ms. Jetta Wong of the Environmental and Energy Study Institute to the U.S. House of Representatives Committee on Agriculture, Subcommittee on Conservation, Credit, Energy, and Research. July 24, 2008.
By Bhagwad Jal Park, on August 27th, 2008
I don’t count myself as a visionary, but there is a specter looming over mankind’s collective head, and I’m not sure if I can see how we can avoid it.
In my opinion, creating good artificial intelligence is just a matter of time. Already researchers have created a robot that uses a rat’s brain, and the future consists of computers that can think just as we do. The field of robotics is also growing rapidly, and powered by a human brain, we can have robots that walk, talk, and comprehensively pass the “Turing Test”.
Now I’m going to make the following assumptions:
- A time will come when a robot’s capabilities will outstrip those of humans.
- Robots will steadily become more and more affordable.
It’s important to understand that I’m not suggesting that robots will take over the human race. Surely we are not so stupid as to allow that possibility. We can always ensure laws like the “Three Laws of Robotics” are in place before allowing the robots any sort of autonomy. I’m still firmly insisting that the robots will not be “Conscious” and cannot have a will of their own. At least not in this article.
Image Credit: Vaguely Artistic
The first thing that will happen, given the above assumptions, is that corporations will lay off their employees and use robots instead. The forte of humans lies in their capacity for judgment. All other repetitive work can be delegated to simpler machines. But once robots can replicate that as well, the need for humans vanishes. Robots are preferable to humans because
- You do not have to pay them a salary. Only their running and repairing costs.
- I’m assuming that the knowledge of one robot can be easily transferred onto another thereby obviating the need for the lengthy training that humans need.
- Easier to manage, no ego hassles, etc.
So the first results of artificial intelligence will be massive layoffs. The corporations will do this because market forces will pressure them into doing so. However, when more and more companies lay off their workers and replace them with robots, who will have the money to buy their products or services when everyone has lost their jobs?
It’s like the Prisonner’s Dillemma. Each company will be forced to do the rational thing by hiring robots, but collectively they doom the economy to destruction. End of first stage.
Act two. As robots get cheaper and cheaper, everyone will find a way to own their personal robot. This robot will be like Jeeves on steroids. It will do all the chores, cut your hair, and mend your clothes. I’m also assuming that it will have the sum total of all human knowledge in it’s head and infinite dexterity in it’s fingers. Given this, it will probably make clothes for you, grow your food, and take care of every other small convenience that you would normally have paid for. This is very important because you must remember that no one has money or a job thanks to the logic in Act 1.
 Image Credit: potarou
To complete the loop, robots will be able to power themselves by building their personal dynamo or some such device.
So the stable outcome will be:
- Everyone will own a robot.
- Occupations like tailors, lawyers, accountants, and even doctors will disappear.
- People can just sit at home and let their robots take care of them.
In my opinion, certain services that robots cannot supply like amusement park rides and movies will still be provided for by corporations, but they will be free! What’s the point of charging money? They will anyway be run by robots, and what will people do with money? No need to buy anything as robots will provide everything for us.
I’m fairly sure I’m not getting the complete picture here. I get the nagging feeling that I’m missing out on some other consequence that I can’t yet put my finger on.
What do you think?
By G.L.C., on August 27th, 2008
Many companies have used tax shelters known as Lease In Lease Out (LILO) and Sale In Lease Out (SILO) to claim deductions. A string of recent court decisions are being seen as a major victory for the Internal Revenue Service in its fight to outlaw the use of such tax shelter. The IRS designated LILOs as “listed transactions” back in 2000 and SILOs in 2005.
In BB&T vs. United States of America, the Court held that to have a tax deduction for lease or interest expense, you must actually incur them. And to incur them, you must have a genuine lease and genuine indebtedness.
In AWG Leasing Trust vs. United States of America , a federal district court denied tax benefits to a U.S. partnership related to its alleged purchase of a German waste-to-energy facility as an abusive SILO transaction.
In Fifth Third Bancorp of W. Ohio vs. United States of America, a federal district court jury, applying the economic substance doctrine, denied tax benefits related to a bank’s leasing arrangement for passenger rail cars as an abusive LILO transaction.
LILO involved corporate leasing of infrastructure on paper only while SILO involved corporate sale on paper only. In both tax shelters, the infrastructure is leased back to the owners. LILO and SILO as tax shelters have been under scrutiny from lawmakers. In 2003, the Treasury and Senate Finance Committee held an investigation on these tax shelters.
The IRS has over the years been using various incentives to entice users of tax shelters to come forward. With the tax shelters becoming more sophisticated, the IRS had to spend time to figure out who is buying what and leasing what.
According to the IRS many companies including large banks had bought more than thousands of tax shelter to improperly defer taxes and bolster their balance sheets. Bolstered by this recent ruling, the IRS is now offering a chance to such companies a chance to settle. The settlement has five main features:
- The taxpayer must agree to concede 80 percent of any claimed interest expense deduction, amortized transaction costs, and head lease rent expense for each tax year through 2007
- The IRS agrees to disregard 80 percent of any reported taxable rental income with respect to SILO or LILO transactions for each tax year through 2007
- The taxpayer must agree to report in 2008, 80 percent of the original issue discount (OID) connected with the SILO or LILO transactions for each tax year through 2007
- The taxpayer must exercise best efforts to terminate its SILO or LILO transactions on or before December 31, 2008
- The taxpayer must agree to recognize as ordinary income any termination gain, whether realized under an actual or deemed termination.
Companies that do not accept this offer could end up fighting a loosing battle. With three court decisions in its favor, the IRS is having a strong hand.
By J.D. Seagraves, on August 26th, 2008
Death, taxes and government ownership of roads: all inevitabilities, right? Well, not according to Dr. Walter Block, professor of economics at Loyola University in New Orleans and senior fellow at the free-market Mises Institute. Dr. Block, whose most famous work, Defending the Undefendable, not only made a case for drug legalization but also argued that black-market drug dealers are “heroic,” will be publishing a new book later this year dedicated entirely to the privatization of streets and roads.
Milton Friedman: “Road Socialist”
Block was converted from socialism to laissez-faire capitalism by a personal acquaintance with none other than Ayn Rand. Later, he met the “anarcho-capitalist” libertarian philosopher and Austrian economist extraordinaire Murray Rothbard, who converted Block from Rand’s preference for an ultra-limited government to “Rothbardian” hard-line individualist anarchism. But this conversion to an unpopular faith didn’t stop Block from becoming widely recognized as a great free-market economist. To the contrary, Block’s prolific work won the respect of his peers, and in fact, the forward to Defending the Undefendable was written by Nobel Laureate Friedrich von Hayek.
Roads have long been a pet issue for Block. Years ago, in a debate with the legendary Milton Friedman, Block called Friedman a “road socialist.” Friedman, who like Hayek was a Nobel prize winner in economics, resented the remark at first—and then he admitted it was true—he was a road socialist.
When even Milton Friedman, a heralded defender of the free market, considers socialization of a good or service to be wise, then that must be the case, right? Other supposed laissez-faire capitalists, such as George Mason University professor of Law and Economics Gordon Tullock and Cato Institute adjunct scholar Richard Epstein, also oppose the privatization of roads. But Block stands by his support for a free market in transportation because, in his view, it’s a matter of life and death.
1.2 Million: The Thirty-Year Government-Road Death Toll
Walter Block says that 40,000 people die each year on U.S. government roads, and that death rate has remained relatively stable since the 1970s. If roads were privately owned and operated, Block estimates that the annual death toll would be more like 10,000. Over a thirty year period, as many as 900,000 lives could be saved.
But why would privately owned roads be so much safer? There are a variety of reasons. For one, the government’s monopoly on roads leaves consumers with few alternatives. If roads were privately owned and operated by numerous road entrepreneurs, consumers would choose the safest ones. What’s more, private road owners could be held legally accountable for deaths on their watch—the government is immune from such liability.
“Pass the Socialist Salt”
The needless deaths caused by government roads are the strongest moral argument for road privatization but by no means the only one. Lew Rockwell—proprietor of the Internet’s most widely read libertarian Web site, LewRockwell.com, and founder of the Mises Institute—says that salt poured on roads to deal with ice causes millions of dollars in damages to cars. In extremely rare instances, according to Rockwell, government salt spreading has even killed people when the bottoms of their cars gave out due to corrosion caused by the “socialist salt.”
Walter Block points out that salt might in fact be the best way to deal with ice. Or maybe sand is better. A third and more costly—but not necessarily less cost-effective—method for dealing with ice is burying underground heating elements to melt it away. Block says he’s not a road entrepreneur, so he doesn’t know the best way of dealing with ice. But as an economist, Block says he does know that “competition brings about a better product.” Various private road companies competing for business would discover the best solution.
Answering the Objections
Walter Block presents answers for every possible argument against privatizing roads. Private roads would have to be built without eminent domain (government land seizure for public use), which to Block, an ardent defender of private-property rights, is not an obstacle but yet another element of their appeal. Still, he says this presents no real problem.
“What if a person or company owns ‘all’ of the land between here and Boston?”
That could never realistically happen. And even if it did, why would they not want to make money by leasing or selling some of their land to the road company, perhaps for a share of the profit?
“What if a crazy hold-out just won’t sell?”
No problem. Private roads can go around any hold outs. Or, if necessary, they could go over or under. And besides—there are plenty of roads that have already been built. There’s no sound argument against privatizing existing roads.
Walter Block knows a thing or two about government inefficiency—and he would even if he weren’t one of the foremost scholars of Austrian economics. After all, he is a resident of New Orleans, and like everyone from the Big Easy, he saw government mismanagement firsthand with Hurricane Katrina.
The proponents of “road socialism” should consider the following: the same people who run FEMA are also in charge of America’s roads. Is it a surprise that 40,000 people a year die on those roads? Would the free market really do worse? It seems unlikely.
By J.D. Seagraves, on August 26th, 2008
One of the surest signs that we’re in a recession is the abundance of “We’re Hiring” signs at low-end service-sector places of employment. You’ve probably seen them around your town: fast food restaurants, video stores, retailers looking for new managers, etc.
How can this be? In a recession, shouldn’t businesses be laying people off?
On first glance, you might think that Burger King, for example, is hiring because people who formerly patronized restaurants like Bennigan’s and Steak & Ale – both of which have gone bankrupt in this tight economy – are now eating more fast food to save money. There’s some truth to this, but what about the people who were eating at BK and Mickey D’s all along? They’re foregoing the luxury of eating out altogether, so the net result for fast-food chains is a loss. That’s why on August 11, UBS cut McDonald’s stock rating from a “buy” to “neutral,” sending shares plummeting.
Similarly, perhaps the local video store is getting more business from some customers who are foregoing weekly trips to the cineplex. But they’re losing just as much (if not more) business as their traditional customers cut back on their discretionary spending.
This is all part of a “spending shift” in which people take a half-step down the socioeconomic ladder. The places where the middle class once shopped are now patronized by the affluent; where the poor once shopped are patronized by the middle class; and the poor, etc. The net effect is still a loss, though, as everyone cuts back and tightens their belts. Some businesses fail altogether, which leads to the more important shift: the employment shift.
When higher-end businesses lay people off or close down, waves of highly skilled and educated workers become free agents within the labor force. This gives companies like McDonald’s, Burger King, and Blockbuster a chance to upgrade their personnel.
In a tight labor market, low-end businesses have to take what they can get – often workers with bad attitudes and no ambition. But, as the supply of workers begins to greatly exceed the supply of jobs, these employers can be choosier, and they can replace their worst workers with people who have solid work histories and are desperate for work.
Now this employment shift can only happen after we’ve been in recession for a while – which we have, so the laid-off workers have given up hope of finding “good jobs” – and if the recession is expected to continue for quite some time. After all, replacing even a poor worker is costly, and oftentimes low-end employers don’t want to hire “overqualified” workers for fears that they’ll find more suitable employment after the employer has invested time and money in training them. That so many service-sector businesses are looking for “managers” does not bode well for the near future of the U.S. economy.
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