The Conservative religion of bell-shaped curves and supply side economics

What is it with the right wing and bell-shaped curves? Is it merely another manifestation of the right's tendency to oversimplify, turn gray into black and white, and make the data conveniently fit the theory?

Supply side economics is largely based on a parabolic curve drawn on a napkin in 1974 by one Arthur Laffer.

The first Laffer curve wasn't based on data, but on Laffer's theory that he says was based on the work of John Maynard Keynes. And I should point out that Laffer's curve, rather than having asymptotic ends, that is, approaching, but never intersecting the x axis, goes precisely to zero on the y-axis at the points where Laffer says it should. Here's a picture of the Laffer curve:














And here's a picture from GraphJam that is equally valid, in my opinion:


more music charts

The original Laffer curve theory was that if marginal tax rates get too high on the richest people, then those rich folks are discouraged from investing or starting a new business that would trickle down all kinds of jobs and benefits on the rest of us schmucks.

(However, to make the data fit the current economic crapfest, Laffer now says that the high tax rates on the rich encourage them to hoard income to avoid taxes.)

OK, now I will admit that this is no more scientific than my analysis of Wal-Mart receipts yesterday, but if you type "laffer curve" into Google, you get a number of suggested searches, both for and against the curve's validity.

Evidence in favor of the validity of the Laffer curve (and "in favor of" was interpreted very broadly: the other search terms were "evidence" and "proof") includes 51,900 search results.

Evidence against the validity of the curve included 74,530 results.

I really hate to admit that a Republican was correct about something, but Bush 41 (George H.W. Bush) early on called supply side economics "voodoo economics." The rest of the GOP never let him forget it, particularly after he raised the top tax rate from 28% to 31% in 1990.

I don't hate bell-shaped curves. I don't even hate the Laffer curve. I think there is something to an argument that a government can't just raise taxes again and again and again without eventually it having a negative effect. But - unlike today's right wing - I also don't think you can increase the U.S. budget deficit to stratospheric levels and have it not matter.

The Laffer curve has, over the past 35 years or so, taken on a near messianic quality with the right, to the point that

1) Republicans are no longer questioned on the validity of supply side economics, even though 25 years ago, many mainstream Republicans rejected it outright.

2) Any Republican who dares question the validity of supply side economics risks being drummed out of the GOP unless they repent publicly and strongly (see Bush 41 and Bob Dole circa 1982) and

3) It is now forbidden for anyone to question the right on rising income inequality in America without being immediately and with great hostility being accused of "class warfare."

I have little doubt that generations from now, our descendents will correctly claim that we were deluding ourselves when we pushed all that debt and deficit spending onto their shoulders.

Wal-Mart receipts and China's purchasing managers' index

For a variety of work-related reasons, I ended up shopping for groceries at Wal-Mart at 2:30 this morning, an experience that was entirely new for me. Have you ever had one of those times when you weren't just out of food, but you were out of ingredients as well? Yeah, that was me.

I was able to do some scientifically rigorous research while I was there, because I found two receipts on the ground and I was curious what other people were buying.

According to purchasing.com, and backed up by those two receipts, an indicator called the purchasing managers' index, or PMI, calculated by the China federation of Logistics and Purchasing fell from 44.6 in October to 38.8 in November. That was the steepest decline since the index was created in 2004.

The PMI is a 100-point scale based on a survey of 700 factories across China, and if it's below 50, it means the manufacturing sector is contracting.

On Monday, China also lifted price controls on food that were enacted earlier this year to control inflation. Inflation is sort of the least of their worries now. Retailers in the U.S. are trying mightily to burn through the inventory that's been piling up since September before ordering more stuff. The idea is to reduce inventory by cutting prices sharply, and in the process, putting away a little cash.

My (totally scientific) hunch is that Americans are doing much the same thing. According to the two receipts I found, Shopper A purchased 34 items, for a total of $126.35. They purchased two relatively expensive items: FIFTHELEM BD for $18.96 and TROPTHUN BD for $29.96. I don't know what these are, but I suspect they are fancy DVDs or games of some sort.

Everything else on Shopper A's list was little items like taco shells, red beans, and lots and lots of Chef Boyardee items. I'm thinking they should have tossed in a bottle of Mylanta, too, but that's just me.

Shopper B, on the other hand, purchased 35 items for $70.75. Everything on the list was food, with two exceptions: 4OZ CANDLE for $2.00 and another 4OZ CANDLE for $2.00.

However, at the bottom of Shopper B's list are two voided entries: the two 4OZ CANDLEs. In other words, Shopper B almost bought a couple of inexpensive things that they probably picked up on impulse, but they had a change of heart at the last minute and didn't buy them.

My conclusions are as follows: 1) Shoppers are cutting way back on impulse buys these days; 2) Inexpensive canned and boxed foods are popular; and 3) If either Shopper A or Shopper B is someone I know who plans to get me a Christmas present, I hope it's Shopper A, because Shopper B is an even bigger cheapskate than I am.

Alrighty, then. Somebody needs to tell Paul Krugman just who next year's Nobel prizewinner in economics is. Ahem.

Saddam wanted to price oil in euros back in 2002

Did you know that? I didn't. The U.S. put paid to that idea pretty quickly back in 2003 by invading Iraq. But the sentiment for pricing oil in euros rather than dollars is a murmur that has continued.

Why would countries like Saudi Arabia and Iraq want oil to be priced in euros rather than dollars? Simple mathematics. As oil prices climbed over the past few years, that oil was sold in dollars. If the dollar fell in value against the euro - that is, if fewer euros bought more dollars - then oil exporters would lose money as soon as they tried to trade those dollars for euros.

Now, maybe you're saying, "So what? Nobody is forced to keep currency reserves in dollars. Why should it ultimately matter whether oil is priced in dollars or euros?"

Here's why: The type of currency you save isn't as important as they type of currency in which you trade. Naturally, the U.S. trades in dollars. If you're not the U.S., and the most damaging currency devaluation would be a fall of your currency versus the dollar, then you're probably going to stash quite a few dollars away. That way, if your currency is devalued, you can buy a bunch of your own currency with dollars, propping up your own currency.

Also, if your currency falls against the dollar, a sudden devaluation against the dollar would make oil (and a bunch of other commodities priced in dollars) that much more expensive for you.

Suppose that Iraq and a bunch of other oil exporters started pricing their oil in euros. Rich countries would start moving their reserves into currencies other than the dollar, causing dollars to lose their importance on the world market.

If that happened, and you were in a poor country, you're screwed. The reason is, poor countries often trade in dollars, and their international debts are calculated in dollars, per the International Monetary Fund. In other words, repaying debts in dollars is a way for poor countries to protect their own currencies from devaluation. If rich countries started trading and stashing euros, and if your debt was then calculated in euros, you would have that much more debt.

If you really want to challenge your brain, click here and look at a bunch of pre-euro data on oil in both dollars and West German marks. There's quite a bit of what-iffing in that data that's pretty interesting.

Now that oil prices have fallen dramatically from their peaks last summer, the clamor for pricing oil in euros has quieted. OPEC didn't count on the entire world's economy going to hell in a handbasket. Now that it has, OPEC is concentrating on production levels and trying to cover their collective asses as world demand for crude oil plummets.

Because oil exporters use an estimated cost per barrel to forecast their spending, a big drop in the price per barrel means that much less money (whatever the currency) to spend as a country.

As of today, dollars are slightly stronger against the euro and the British pound. However, the dollar has fallen slightly against the Japanese yen and against the Swiss franc. The Dow Jones Industrial average is down this morning, on news that China has had to cut production of all the unnecessary plastic things that Americans used to buy so much of.