THAT ELDRICH DAY OF ECOMOMIC MAYHEM THIS WAY COMES...NOT ELECTION DAY, HALLOWEEN!

Below is a reprint of a personal favorite of the Author's from October of 2008.

[AUTHOR'S NOTE: Where but in the Desert of the Real could the Dismal Science of Economics combine with the Hollowing Heart of Evil that Hosts that Most Horrific of Harvest Festivals?]

HALLOWEEN ECONOMICS 201

Halloween 2007 is a fading memory, unlike the candy left in dishes and the decorations that are still to be removed from offices and homes in all corners of the nation.

Halloween Economics 101 goes something like this. “Halloween Scares Up Business”. This story in the Lawrence Kansas World-Journal informs us that Halloween is a retail mainstay in the American Economy.

Candy and costume sales peak. Decorations of all sorts fly, crawl or lumber down retail aisles. And alcohol sales rise with the ubiquitous Halloween parties.

And except for some Christian fundamentalists, everybody loves Halloween. Everybody, it appears, but some economists. The truth is, Halloween challenges some economic truths right down to their skeletal essence.

Halloween, like its less macabre cousin, Christmas, is economically “inefficient”. And it reveals that the economic uber-man, the foot soldier and general of microeconomics, the flesh and bones that manipulate the invisible hand, the “Rational Economic Actor”, is as peckish as a poltergeist.

PUTRID PROSE AND CLICHÉ ALERT. IF YOU WEREN’T SCARED OFF ALREADY.

Kevin Hassett is an economist at the conservative American Enterprise Institute. Likely a fine fellow most of the time, while in his economist trance, Hassett is both Great Pumpkin smasher and the Grinch’s meaner brother.

Hassett’s howlings start like this:

Holidays are a time when Americans kick back and engage in activities that make no economic sense whatsoever. Of all the terrors lurking in the streets and alleys across the U.S. tomorrow night, the economics of Halloween may be the most horrific.

EVILLY INEFFICENT IS THE HALLOWEEN HOLIDAY.

Economists haven't adopted the vainglorious practice of physicists and applied numbers to their laws, but if they did, the first law of economics would be that lump-sum transfers are more economically efficient than in-kind transfers. If you are going to give a gift to somebody, you should just give them the money. They will be a better judge of the best way to spend it.

This is chapter and verse of microeconomic theory. Individual actors, in best possession of their perception of needs and wants, and being best able to value goods and services to maximize the utility of their choices, make the most rational and efficient economic decisions.

‘Twas ever thus.

NIGHT OF THE LIVING DEAD-WEIGHT LOSS.

Hassett continues:

This is no laughing matter. The scale of the problem is immense. The National Confectioners Association estimates that 2005 Halloween sales were $2.1 billion, easily making Halloween the biggest candy season. This year, sales will certainly be higher.

What percentage of those sales end up providing candy that individuals don't really like? If my own careful scientific study of Halloween bags is any guide, perhaps about 75 percent.

It's not the dead that concern me about Halloween. And it is not the impact of all that sugar on the weight of our kids. No, it's the dead-weight loss, or pointless lost utility of the entire enterprise. That likely has a dollar value that exceeds $1.5 billion annually. American citizens squander more than a billion and a half dollars a year on an economically inefficient holiday.

BRAIN DEAD YET?

Here’s the bat’s-eve view: Hassett, in the quote above, describes Halloween as an enterprise. In other words, think of Halloween as a gigantic wealth transfer mechanism. Preening and wretchedly wistful adults transfer many millions of dollars (in bite-sized increments) to marauding and mooching children.

But the kids would rather have money, computer gaming gift certificates, or text-messaging credits. As they say in the Mafia and on the middle-school playground, “cash makes no enemies.”

A PHANTASMIGORIC FIX OR A FUTILE FANTASY??

Hassett proposes an economic solution, a pumkintudious “patch”, if you will.

Many schools prohibit children from taking Halloween candy onto the premises. That is exactly the wrong policy. Schools should encourage all children to bring their entire haul to school, and allow them a lengthy period to trade candies among themselves. That way, the Take 5s and the 100 Grand bars will find their way to individuals who cherish them.

And if that doesn’t work, he raises the foreboding specter of the brutish hand of the ghouls of government.

A final measure would be to take on inefficient candy-giving at the source. As a conservative, I usually oppose heavy-handed regulation, but in this case, the stakes are too high. Perhaps confectioners should be required to only sell their Halloween candy in bags that mix many different types. That way, when families put the candy out for the trick-or-treaters, bowls will be filled with a wide variety of different types of candy, and each new child will be able to pick the confection that suits his or her fancy.

HMM. FEDERAL FIAT PROMOTING GREATER CHOICE AND MORE EFFICIENT ECONOMIC EXCHANGES? SOMEWHERE IN THERE COULD BE A HORRIBLY HEALTHY HEALTHCARE FINANCING SOLUTION.

WE APPEAR TO HAVE TOO MUCH TIME TODAY IN THE DESERT OF THE REAL!

Repost from 9.20.2008. How Soon We Forget How Low it Got, and How it Got There.

THOUGHTS AT THE TIME OF THE MARKET MELTDOWN

All week the Author has been asking the question: "What crashed the financial markets so fast. "Through which gate did the Vandals enter?”

The financial decline has been festering for a long time. Real estate reeling, mortgages in meltdown. Liquidity lacking. But what changed so quickly and so ominously?

Or what, as the New York Times article “Congressional Leaders Stunned by Warnings,“ spooked the Senators speechless?

From the NYT article of today (9.20.2008):

It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.

Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.

“When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.

As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

TO QUOTE FRED WILLIARD, “WHA’ HAPPENED?”

John Mauldin publishes several investment newsletters. In September 19th’s Newsletter entitled “Betting on Financial Armageddon”, Mauldin swings the spotlight onto the padlocked commercial paper market. (Commercial paper is a short-term unsecured promissory note that large institutions use to borrow and lend cash to other institutions.)

Want to see in graph form how bad it got and what spooked Paulson, Bernanke and company to act so quickly? Look at these graphs from my friends at Casey Research. 30day commercial paper went to 5% from 3% a week ago. The market was literally freezing. And the amount of paper issued is in free fall. Commercial paper is the life blood of the financial and business world. Without it commerce will soon grind to a halt.

Two charts posted above this article demonstrate the precipitous decline in the commercial paper market.

The Congressional leaders quoted in the New York Times above make similar reference to a strangling credit market:

Although Mr. Schumer, Mr. Dodd and other participants declined to repeat precisely what they were told by Mr. Bernanke and Mr. Paulson, they said the two men described the financial system as effectively bound in a knot that was being pulled tighter and tighter by the day.

“You have the credit lines in America, which are the lifeblood of the economy, frozen.” Mr. Schumer said. “That hasn’t happened before. It’s a brave new world. You are in uncharted territory, but the one thing you do know is you can’t leave them frozen or the economy will just head south at a rapid rate.”

GOLDEN PARACHUTING INTO THE ABYSS

Currently, and over the next few days, the Congress and the outgoing administration will be negotiating over the terms of a financial “rescue” plan that has an undetermined chance of indeterminate success over an undefined time frame.

As the damage appears and the plan develops, the Author will continue to post, analyze, and prognosticate.

WE HOPED THAT IT WOULD NOT HAVE COME TO THIS IN THE DESERT OF THE REAL!