Profit Margins, the WSJ Editorial Page, and Marxism

I saw two interesting posts this morning, one by Matthew Yglesias on Slate, talking about how the past four years have him feeling more Marxist, and the other from the bonddad blog, about how the stock market is not divorced from reality, and that high stock prices and all-time-high profits reflect reality — a reality in which wages are being squeezed.  Also of note is Tom Friedman’s recent op-ed on the “401k World,” which Yglesias mentions, which is a very deterministic piece about how technology, etc., has made us much more individualistic and responsible for ourselves.

It does not take a genius to see the connections here.  But first let me explain my own views, as I have here in the past and also in blog comments on others’ sites over the years.  I have no ideological dog in any fight.  Taxes are neither inherently bad nor good.  Regulation is neither inherently bad nor good.  I respect the idea that when we take from the rich in redistribution schemes we create inefficiency, waste, and bad incentives.  I respect the idea that we must help the poor, and that the the private sector and religious organizations are not capable of shouldering that burden alone.  I am a creature of circumstance.  The questions I care about are: is this regulation worth the cost?  What is a level of redistribution we must maintain in order to maintain social stability? 

The WSJ Editorial page is not interested in such questions.  It is ideological.  Cutting taxes is always good.  Reducing regulations is always good.  The poor deserve it.  The rich deserve their wealth.  Extremely simple.  Marxism is also very simplistic.  Sharing is good. Equality is good.  The wealthy are evil.  

My response to the WSJ Editorial page, and to the high profit margins and lowered wages of which bonddad speaks, is different from Matthew’s.  My response is to note his response as a shift in the cycle of ideology.  

To explain that.  In my view, based on my comments above, there is a utilitarian or pragmatic rationale for helping the poor, which has an historical basis.  As far as I can tell, pretty much all Marxist/Communist and otherwise populist revolutions of which I am aware started when inequality was sky high, and when the rich did not give a hoot about the poor, and either blamed them for their problems or expected them to grit their teeth and bear it.  The most famous expression of this is of course, “Let them eat cake.”  But it’s not just France.  Lenin arose in response to a deeply unequal and cruel Czarist system.  Cuba before Fidel Castro was, famously, a society of haves and have-nots.  Venezuela before Chavez, the same.  

People with the WSJ Editorial viewpoint either do not understand this, or they do not care.  They want to push the envelope as far as possible in their ideological direction, they want to maximize their present happiness, wealth, and efficiency.  To the extent they worry about any of this, they think things will “work out.”  

And they are right!  That is where Yglesias comes in.  The response when the WSJ ideas get too powerful is contained in our wonderfully non-rigid Democratic system:  when life gets too bad, people start switching sides.  People who didn’t previously care become desperate and start caring.  I stand above and watch with interest, and to me, Yglesias is a sign.  Yglesias thinks one view is more correct now.  That is not true. The evils of Marxism are the same as they always were.  But the evils of unfettered capitalism remain the the same as they always were, and they presently have the upper hand to some extent.  The difference between this country and Czarist Russia, in other words, is in our flexible political system, in which all have a voice.  

This is not the first time this has happened.  The Right bemoans FDR and has been engaged for the last ten years in re-writing the history of the Great Depression.  But they can’t write Eugene Debs out of the early Twentieth Century.  They can’t write the Communist Party in America out.  The reality is, this “bridge too far” in one direction has already happened at least once in this country, from about 1910-1934.  FDR was not a radical.  He was a popularly elected conduit by which enough of the evils of socialism (it is called “social” security for a reason, people) were mixed into our capitalist system that we did not elect Eugene Debs President or annex ourselves to the Soviet Union.

Can it happen again?  I happen to think it already is.  ”Obamacare” itself is part of a push back against policies dating back to the Eighties.  Yglesias signals that shift has not ended.  Occupy Wall Street.  Elizabeth Warren.  Daily Kos.  The re-creation of MSNBC in response to Foxnews.

One can have three possible responses to all of this.  First, one can be or remain ideological like the WSJ Editorial page is, and continue to fight for ever less redistribution and regulation, no matter the circumstances.  Alternatively, one can go in the other direction, as Occupy Wall Street did, and as Yglesias signals is his inclination, and fight basically for pure socialism.  Or, third, one can view this all as a cycle of the ascendance and fall of Leftist and Rightist ideas, a cycle that we have the luxury of having because the founders designed a system flexible enough to protect both the WSJ Editorial page and the Marxists from their own inflexibility, certainty, and short-sightedness.

You know where I fall.  They sadly did not design our system well enough that people like me could just keep us on a relatively moderate path at all times.  So we must content ourselves with these cycles.   

Folks, there is virtually no such thing as a bad idea.  All horrid things in this world represent good ideas taken to their extremes.  This happens because people have a very hard time with uncertainty.  They therefore do not realize that somewhere on the slippery slope is the best place to be.  It is a fact I hope more will keep in mind as others continue in their respective ideological arms races.

Your Hybrid is a CO2 Polluter And You Should Offset Instead

I recently had an exchange on Twitter that prompted me to convert a series of tweets I have been making into an honest-to-goodness post.  It has been awhile.  

The crux of the matter is this: if our real motivation in making “greener” car purchases is to reduce our carbon footprint, hybrids do a relatively bad job.  You are probably better off simply keeping your “dirty” pure gasoline vehicle, and voluntarily paying a company like Terrapass for carbon offsets.  These offsets cost about $5.95 per 1,000 pounds of CO2 emissions, and are pretty well verified.  What hybrids are really about is convincing people they are doing more good for the world than they really are.  And there is an argument that because the purchase of one removes the psychological incentive to offset CO2 emissions, they may actually be harmful from a global warming perspective. 

So what’s the math?  

Well, let’s take a Toyota Highlander.  The hybrid starts at about $40,000.  At that same link you can see that the SE starts at $34,400 and the Limited starts at $37,800.  The base hybrid has features other than the hybrid power-train that put it in between those two models.  For example, it does not have the smartkey system, three-zone climate control, or 8-way power driver’s seat with lumbar support, which the non-hybrid Limited has.  So basically, Toyota has set the features/pricing up to make a direct comparison either to the SE or the Limited difficult.  That’s probably not an accident.  But let’s split the baby and say the hybrid is roughly equivalent to an upgraded SE valued at maybe $37,000.  That’s a $3,000 price difference from the hybrid, yo.  

Here is what you could buy with that $3,000.  First, it costs about $105 per year to offset the 2WD non-hybrid Highlander’s emissions per year, as you can calculate here.  So assuming you paid for all of your offsets today, you could offset $3,000/$105 = 25.57 YEARS of CO2 emissions with the amount you are paying extra for the hybrid version.  Or you could offset the entire lifespan of your SE/Limited-mix Highlander and the entire lifespan of your family’s second car.

And keep in mind that when you buy the hybrid you are offsetting NO CO2, zero, and, wait for it, you are only getting a bump up from 18/24 city/highway mileage to 28/28.  28 mpg.  To offset the hybrid highlander’s CO2 for an equivalent 25.57 years would cost you an additional $2,300 or so.

People.  I realize you’re going to save money on gas, too, but at 28 mpg, not much, and if your motivation is to cut CO2 emissions, DON’T BUY A HYBRID.  Get an offset.

You can do this math all day.  EVs are even worse.  Let’s just assume the lithium batteries do not exacerbate environmental problems.  The Chevrolet Volt retails for about $39,145.  Let’s be generous little devils and just assume you can cut the price to $32,000 using tax subsidies.  (So we’re talking about your cost, though keep in mind that everyone else is implicitly paying for the $7,000 extra, to GM, that paragon of virtue, and that this remainder could also be used to pay for CO2 offsets instead, but is not being so-used, by the government.)  

For that you get a small car that only seats four people and does not come standard with leather seats.  Let’s assume you drive it only in EV mode.  

Well, a similar Chevrolet Cruze Eco is actually both longer and taller than a Volt, and seats five because it doesn’t have a massive battery pack in it.  The automatic Eco version gets 42 mpg on the highway and retails for $20,875.  I’m going to use that price, though I have in front of my face a newspaper advertising a brand new one on sale for $15,999 after a $3,786 dealer discount and $1,000 factory rebate.  

So that list price on the Cruze Eco alone is about $11,000 less than the SUBSIDIZED version of the Volt.  Assuming you drive 12,000 miles per year, the Cruze Eco costs about $75/year to offset.  By getting the Cruze Eco instead of the Volt, you could use the difference in money to offset…ONE HUNDRED AND FORTY SIX YEARS of the Cruze Eco’s CO2 emissions.  And keep in mind that after you have bought that Volt, you are doing nothing to offset all of the CO2 emissions from any coal or natural gas power plants that it is drawing juice from.

Similar math applies to all hybrids and EVs.

Now I’m not saying never buy a hybrid.  My family owns a Prius, which my wife uses on a very long commute.  But we also own a giant 8-person SUV, as to which we pay $110/year to offset all of its CO2 emissions.  Is my SUV worse than your Volt for which you pay zero to offset any of your power plant’s CO2 emissions?  I don’t think so.

The point of this post is to get people to think differently about the economics of getting rid of CO2.  There are a lot of companies out there that do offsets, and there will be more in the future.  I think Terrapass is pretty reputable.  

Allow me to anticipate some criticisms:

Yes, I get that some people are motivated by reducing dependence on foreign oil and/or not supporting fracking.  But buy a hybrid and you are still supporting foreign oil though, and at 28 mpg, in a Highlander Hybrid you are supporting it quite heavily.  And in most states in a Volt you are supporting a significant amount of coal power plant emissions, which is not healthy.

Don’t think the Cruze Eco is a good comp for the Volt?  Why?  Same size.  Many similar features and in a Cruze Eco you can actually maybe seat five, which is impossible in a Volt.  A standard Volt doesn’t come with leather either.  Step away from the Eco and the Cruze LTZ has similar economics and comes with leather and lots of other goodies.  The fact is that companies have done a great job of selling hybrids as luxury cars.  Thus, people who drive them can still feel like they have some of the prestige of driving a BMW or a Cadillac.  Scarlett Johansson and other stars famously started being driven in a Prius and other hybrids to the Oscars around 2005 or so.  Which is typical of the marketing and perception of hybrids as high-end.  

But the performance is just not remotely comparable overall to a luxury vehicle.  And the standard features are just not remotely equivalent either.  It’s a bit of a scam, friends.  It is green-washing.  Buy a hybrid and people will think you are a good person and give you business, have sex with you, seat you at a better table, etc., etc.  Though it’s better than a non-offset, non-hybrid to be sure.  They’ll think you’re actually rich and COULD buy a BMW 7-series, but you just choose to be virtuous person.  People won’t think that if you drive a Chevy Cruze Eco and pay $80/year to offset, bub!  So accordingly people drive the hybrid.  It’s perception.

I also get that you are saving money on gas by buying the hybrid.  But do you know what?  Not MUCH more than by buying a Cruze Eco getting 42 mpg on the highway.  Not MUCH more if you are still (maybe) getting 28 mpg in a Highlander Hybrid.  And again, the point is that if we really care about the environment and global warming, the appropriate question is not what your gas costs are (though you can also incorporate that into the total economics), it is what is your remaining carbon footprint?

What Goes Up Must Come Down!

Read of the day (not even a contest) was from James Montier of GMO, entitled “What Goes Up Must Come Down!”

Two key takeaways:

1)  Government deficits are driving the bus on profit margins presently; and

2) “Corporate investment may increase slightly from today’s levels, but to really surge would require a strong economic recovery and the return of Keynes’s infamous animal spirits.”

That recall is the whole game in general as to the economic outlook moving into 2013 and 2014.

Paul Krugman is Smart

I thought I’d start out by talking a little about Paul Krugman.  He has a reputation for his NYT Op-Ed persona, but he’s really a shockingly smart economist.  Unsurprising, since he won a Nobel Prize.

Here he is on Japan’s liquidity trap…in 1998.

Why would a central bank try to impose massive deflation? But the maximum rate of deflation need not be large, or even positive! Suppose that the required real rate of interest is negative; then the economy “needs” inflation, and an attempt by the central bank to achieve price stability will lead to a zero nominal interest rate, and excess cash holdings.

Full article here.

Interestingly, it seems that Ben Bernanke studied at Paul Krugman’s feet, or at least drank from the same trough.  They’re both Princeton men, after all.  Because of Fed actions, short-term real yields have been negative for quite some time, as of this posting.  Lately we have been hovering around negative 1% on the 5-year.

Here is a constantly updating link.

One wonders what that link will look like in five years.

The answer to that depends upon what you think the future of the United States is, ten years or twenty years out.  Why might liquidity traps occur?  Says Krugman:

In the model of sections 1-3, a liquidity trap will arise only if future productive capacity is actually lower than current capacity. Before loosening that constraint, we can ask why one might expect Japan’s future capacity to be relatively low compared with today’s. And the obvious answer is demography: Japan’s combination of declining birth rate and lack of immigration apparently means a shrinking rather than growing labor force over the next several decades. In the absence of productivity growth, potential output, say, 15 or 20 years out - y* in the model - could actually be below current capacity.

Ouch.