MicroEconomics Wins In The End

Iron Laws of Economics Reside There

When people talk about economics, they generally refer to macroeconomics. Macroeconomics is a squishy science. Over the last several decades, economists have tried to bring rigor to it, but the variables are so random with such a significant variance that there is a lot of room to argue.

That’s how Janet Yellen can whisper in Biden’s ear that there is no recession based on how she sees it. It’s also how Alan Blinder can write editorials in the Wall Street Journal claiming that more central planning and government bureaucracy always gets it right so we need more of it.

When you wade into the field of Microeconomics the Iron Laws of Economics really really manifest themselves. Companies try to produce where marginal costs equal marginal revenue. There are learning curve effects and the more quantity produced means the prices can go lower. When constraints like price floors or ceilings enter perfectly competitive markets, they screw them up.

As my friend Jeff Minch says, “You didn’t invent sex”. The companies that claim they can skirt the iron laws of economics or that they are reinventing the rules so the rules don’t apply are getting a comeuppance.

Today, we are seeing the Iron Laws of Economics being implemented all over the economy, whether the CEO of the company wants to have them implemented or not.

Facebook is a good example. They had a great business but they didn’t invent much. Their best businesses were acquired. Rather than continue to pursue that strategy, they decided to invent something. $15B later, they have nothing to show for it.

Twitter is licking its chops. Not only is Facebook imploding but PayPal ($PYPL) went “woke” and shot itself in the foot too! I am in the process of killing my PayPal account right now. I encourage you to do the same. The people that put money in the Twitter buyout understood they were backing a person that has created stuff where guys like Zuckerberg haven’t.

Copying stuff and making it better isn’t the same as creating from nothing. It’s not nothing, there is creativity involved but as I said above, Zuckerberg’s best businesses were bought, not made in-house.

Greenpeace issued a statement, but no mea culpa, that recycling plastic doesn’t work. Any respectable microeconomist could have told you recycling plastic was a fool’s errand. Recycling metal works and glass/paper is probably close to break even depending on how you calculate the opportunity costs. The amazing thing is that the idea Greenpeace now advocates for is more harmful to people than plastic recycling.

Today, the Dallas Fed released its manufacturing index data. I want to see Yellen say how five months of negative data in a row are not a recession. The general business activity index dropped from -17.2 to -19.4. Turns out that when you have an economic policy at the top that is anti-growth, you get negative growth! Of course, Keynesians think negative growth is an antidote to inflation. They have no real-world experience. Those pesky Iron Laws of Economics are at it again.

Russia pulled out of a wheat treaty and wheat prices went parabolic. Turns out, supply shocks are worse than demand shocks. Winter is coming and temps are dropping. Because there is less natural gas out there due to the Biden administration’s policies, and the encouragement of the war in Ukraine, we have less natural gas available so prices are going up. Should this be surprising? I guess it’s just corporations raising prices for no reason to bleed the people. (That’s written tongue and cheek for any Bernie bros that read this)

The funny thing though is diesel fuel. Right now there is a lot of fear being spread on right-wing news outlets that we only have a 20-some-day supply of diesel. It’s election season and they need a scare story that hits at the confirmation bias of their voters. The problem is the story ignores supply and demand microeconomics. As my friend Professor Craig Pirrong accurately explains in the linked story, if refineries didn’t produce any diesel for the next 20 some days, we’d run out. But, they are producing diesel as fast as they can. The price system is telling them too. Higher prices attract more production! Who knew? We won’t run out of diesel. We will pay a higher price for it which will cause inflation to persist since ships and trucks that deliver goods to us run on diesel but we won’t run out.

Of course, there are a lot of underlying problems with energy markets, most of them caused by unforced errors implemented by bad government policy. Turns out that when an administration says it wants to put you out of business, you don’t invest in your business. We should be exploring and pumping more oil for sure, but we ought to be building significantly more refinery capacity and tank storage to insulate the entire market from unplanned supply shocks, like the Ukrainian War.

By the way, “price gouging” isn’t a bad thing. It’s a good thing according to the Iron Laws of Economics.

The Atlanta Fed updated its inflation chart. It’s not pretty.

Some happy talk people might point to GDP rising, but when inflation is many points ahead of GDP it doesn’t matter. If we had 8% GDP growth with this inflation rate, Americans would feel okay. We don’t. For what it’s worth, a good target for a large economy like the United States is a 3% GDP rate and a 1-2% inflation rate.

I am hearing how the “Dow has roared in October to its largest rally since the 1970s”. Uh-huh. Ignore the spin.

We have a lot of economic data this week ahead of a super-hyped election. If anything, the market was rallying in anticipation of a Republican tsunami. Today, the NYT/Siena poll showed signs of strength for Democrats but I don’t think I’d put much stock in it. Some pollster always releases a poll showing a lot of new strength for Democrats and it’s just a voter suppression tactic to try and keep Republicans home. It’s impossible to find the polls underlying assumptions in any detail unless you pay for a NYT subscription and I won’t give a hard left wing rag like that my money.

Bears were in hibernation but I think they will wake from their short cat nap soon. 3200 in the S+P is still my target.