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Wednesday, December 19, 2007

New Fuel Efficiency Standards Passes

The new law means the corporate average fuel efficiency standard to be 35mpg by 2020. I personally think that sets our sights too low to be honest, but it is a start. This will help the environment and it will send a signal to automakers that huge Hummers and consumer pickup trucks the size of semi trailers are not the way our economy needs to go. But it's not just about the environment and congestion - higher fuel efficiency reduces shoeleather costs (the costs of having to continually stop to pump gas to fill your tank). Incidentally, carbon taxes may not necessary reduce such shoeleather costs since taxes don't necessarily translate to better fuel efficiency.

Further, these new standards are a direct incentive to not only look at alternative fuels, but to look at alternative technologies and cutting edge technologies WITHIN the existing fuel-using automotive industry. It may be carbon-based energy makes the most sense now and into the future - at least now there is a greater spark toward conservation.

Of course, as the article mentions, at least in the short-run, we can expect these standards (as they are implemented) will cause fuel prices to rise as the cost to producers rises. This is no different (though perhaps to a lesser degree thankfully) than what would happen with carbon taxes or cap-and-trade, but 1. it is politically feasible and reasonable, and 2. the consumer pays none of the cost psychologically speaking (which counts for something - even though some of this cost will surely pass down to them, they won't necessarily link the higher cost to the fuel standard change).

Finally, I like it because for the first time in decades this is something real and tangible that is being done - not just talk and hype. Time will tell if this legislation is worthwhile or not (I obviously think it is), but thank goodness somebody had the balls to pull the trigger on something real.

Friday, December 14, 2007

Economics of Climate Change: A Different Approach, or Much Ado About Nothing?

Frank Ackerman, Director of Research and Policy at the Global Development and the Environmental Institute at Tufts, has this new paper out published via the Post-Autistic Economic Review. He argues for a solution beyond market mechanism solutions, pigovian taxes etc. to climate change (Pigovian taxes, Cap and Trade etc). He also provides a very easy-to-follow critique of neoclassical economic models' application to climate change solutions:

Neoclassical economic models are too static to be able to deal with Climate Change -
static pareto optimality is not sufficient as a solution.

Costs of climate change cannot easily be monetized, and probabilities of climate change are unknown, making hard mathematical optimal calculations impossible.

Standard fixed-rate discounting of time preference is unrealistic.

...But for all that, he, like may in the Post-Autistic circle, offers up no real alternatives. His most concrete solution is this:

"There is no formula for optimal public decision-making; instead, a deliberative process of discussion is required....
In short, an entirely different conversation about public goods and priorities is needed, one that respects the importance of the underlying values - and one that includes, but is not always dominated by, the best available information about costs. It is a conversation which, sadly enough, Americans have been able to have in recent years only about national security, protection against terrorism, and military spending. The empirical content of that conversation has remained controversial; recall the search for Iraq’s alleged weapons of mass destruction. Unfortunately, while confidence in the public sector and its unquestioned responsibility for our collective welfare is alive and well in decisions about the military, it has wasted away in civilian life. "

I'm all about "conversation," but I'm not hippie enough to think that the world is going to join hands, share a few daisies, sing kumbaya, and then have a deep long-lasting discussion about climate change. What we need is a. to really determine if our environmental situation is really that serious and in what ways (there is still a healthy debate, despite what Al Gore thinks), and b. (if it is that serious) start trying out real solutions - try modifications to CAFE, try cap and trade (US style), try pigovian taxes, or a combination of these or others. Who cares about the theory. If it/they don't work either financially or otherwise, scrap it and move on to the next attempt/policy.

If we are really standing at the edge of a cliff, why are we still "talking" about this. We don't need any more sound bites and things that sound philosophical but are really just cop-outs.

Wednesday, December 12, 2007

Fed Action

I don't think the 'new' Fed under Bernanke has made any huge mistakes, and I think Bernanke is continuing, as Greenspan has said in interviews, in much the same way his predecessor might under the circumstances. But this recent rate cut move I find interesting. The Fed cut interest rates by 1/4% (25 basis points), which they had to know was lower than what the market was hoping for. Stocks plummeted. But then the Fed made the unusual call of very strongly saying that more rate cuts are to follow - ie - don't worry stock market, we are here to help. Consequently, stocks soared today (or this morning at least). Either the Fed should have been quicker with their statement, or they should have said nothing at all. Instead, they only added to the stock market's volatility.

An interesting point: why is it that stock investors didn't already THINK that rates were going to be cut more in the future. If they DID think that prior to the Fed's announcement, we would have expected that expectation to already be accounted for in stock prices - hence we would not have expected the surge today. But the surge happened, and ceteris paribus, that must imply that the meat of the announcement was a welcome surprise. All this makes me think that stock investors are really just as much concerned about inflation - or more to the point, they think the Fed is really concerned about it....

Saturday, December 8, 2007

On Mankiw's silly paper

Mankiw's paper on the taxation of height espouses the idea that, if we reject such a notion, then why are we bothering with models of efficient forms of taxation and the like.... The NY Times recently points out what they believe the paper's logical flaw.

Credit Mankiw for posting the critique. The mistake the NYT thinks Mankiw makes is, to quote: "that if you can draw a silly inference from an approach, then that discredits a model.”

Mankiw responds by saying, 'well what's the point of having theories then.'
He says further, "
It seems to me that if you are going to reject a logical inference from a model, you have to explain why. That is not so easy for a height tax, which is precisely the point of the paper."

I disagree wholly with Mankiw, as do many others. It seems patently obvious why people reject height taxation over other forms of taxation. And the fact that Mankiw doesn't see this shows just how disjointed his belief in the power of economics is with reality.

On this, I make two points: First, economic theory does illuminate, but it doesn't illuminate COMPLETELY. If all policy makers listened ONLY to their economic advisors, this world would be in the shitter faster than you could blink. We would be in this no-holds-bars free-market soup of robots (sorry, economicus's). People would suffer, but dang-nabit we'd have a more optimal size of the pie (GDP). I've mentioned before that economists that push economics as a more powerful voice than other fields are not doing anyone a favor. That is why I believe in a greater separation of economics and politics. Economics should be used as a piece to the puzzle, but when it is used for more than that, we are all in trouble.

Second, more to the point of height taxation, it is obviously ridiculous because taxation is in and of itself NOT just an economic idea. Taxation certainly affects the economics of the taxed area, but taxation also directly effects the psychology and sociology of the masses. When we tax on income, people think that (while they may not like the level of taxation) that is valid because that is a fairly direct way of redistributing resources from the haves, and giving it to the havenots. It's not efficient, but it is an easier psychological pill to swallow. THAT is the trade off. Mankiw loves to talk about trade offs within economics, yet he simultaneously ignores trade offs between the disciplines. Taxing height hearkens, psychologically, to some sort of fascist mentality. People don't think, "well, height is correlated to income, so I guess it's ok." They think: "I am being discriminated against based on an innate trait. My government is fascist. "

So the NY Times I think is partially right, but they were sloppy in their analysis - they too failed to focus on the bigger picture of what exactly taxing height means. One can summarily reject Mankiw's ridiculous height tax, AND still support economic theory of taxation by simply understanding that economic theory is meant to illuminate a part of the picture. But the best policy is one that has a million flashlights shining on it. Otherwise.....

Monday, December 3, 2007

Short Break and I'm Back - More Fun with Carbon!

Becker/Posner has a great new blog post about the problems with cap and trade carbon offset systems. The reason I point this out over the zillion other econ people jumping on the carbon-gabbing bandwagon (myself included) is because the entire post talks about 3 negatives of carbon offsetting via voluntary cap-and-trade - and the negatives are ENTIRELY psychological.

From their blog (in red):

1 The first is that it creates the impression that modest reductions in the rate of annual increases in carbon emissions make a meaningful contribution to the fight against global warming.

2. Second, the movement encourages the belief that anyone who reduces his carbon "footprint" (that is, the emissions of carbon dioxide that he causes) to zero has done his bit to combat global warming.

3. Third, and most serious, the carbon-offset movement, combined with well-publicized projects by Google and other companies to reduce carbon emissions, creates the false impression that global warming can be tamed by voluntary efforts, just as cleaning up after dogs has been achieved by voluntary efforts, without need for legal compulsion.

...all psychological arguments against cap and trade. I wonder, if we think about carbon taxes as an alternative, do these same negatives dissapear? I would argue the first two don't. The truth is, the higher the tax, the less feasible it will be. Even if one assumes a tax passes government muster, there is only so much offset a tax increase can do. Trying to do more (ie beyond what is feasible) would incite riots and protests, of this I am sure. Second, inherant in the first two arguments is the idea that people THINK they know or THINK they can guesstimate accurately how much of a carbon footprint they leave. This is offbase to say the least, as Posner points out. If one person can't get it right, what makes us think our government can?

Nevertheless, the third argument is clearly a net postive for the tax-lover crowd. A tax is not voluntary, it's mandatory. It has some teeth. The problem is, as I mentioned, if the government were to impose too high of a tax, that could create its own problems in the form of civil unrest, or if the "efficient" tax is miscalculated (and it would be), it could also do more harm than good.....

Tuesday, November 13, 2007

Becker and Taxes

Becker wants to tax the really rich.

...I'll check his post again tomorrow to make sure it's real and not some figment of my imagination ;).

Tuesday, November 6, 2007

Mankiw Confused about Health Care

Mankiw's new post is about his views on Health Care Reform..........................

I take issue with his following statement (he answers some questions from somebody):

Q: Do you think the pundits of the left are similarly confused?

A: Some are, but others have an altogether different motive. Observing dissatisfaction with the U.S. healthcare system, they are using reform as a Trojan Horse to push for more redistribution of income. Almost all sweeping health reform proposals involve higher taxes on the rich to provide benefits for those farther down the economic ladder. The redistribution, rather than health reform, is sometimes the main objective.

To judge whether my conjecture is correct, ask your favorite pundit of the left the following: What health reform would you favor if the reform were required to be distribution-neutral? That is, you can change the rules of the health system but you cannot change the distribution of economic resources between rich and poor. My guess is that your favorite pundit would either object to the question or answer by retreating to more modest reforms. If so, this suggests that calls for sweeping reform are mainly motivated by the desire for increased redistribution.

I think Mankiw grossly mis-characterizes some peoples' motivations for Health Care. It is true that many that want sweeping reform would call on a larger burden to be shared by the wealthy. And yes, that would by definition result in a redistribution away from the rich toward the poor. But that does NOT mean that that is the reason unto itself. It simply makes sense. Rich people can pay for health care far easier than can the poor. Health care is not like buying beer - most everyone needs decent health care to live a decent life nowadays. One can do without beer. If there was a debate about "Beer Care" and someone suggested taxing the rich to ensure that everyone had adequate amounts of beer available on a weekly basis, I can see many people not being for paying for that by taking an inordinate amount of wealth from the rich. But since we are talking about Health Care, and Health Care is a vital necessity to some, I can see how it could makes sense to make those that can pay the most with the least negative consequences do so.

So, Mankiw has the cause and effect all wrong. He thinks people want Health Care Reform in order to cause a more progressive distribution. In fact, people want to use a more progressive distribution to pay for Health Care Reform by taking money from those who can do with out a marginal amount the easiest.

I don't necessarily agree with all Health Care reforms put form by those on the left, but I think I understand their points of view better than Mankiw does. I personally can see how it could be considered ok to 'force' those whom society / God or whomever had blessed with a rich and healthy life to help pay for those less fortunate souls that were not blessed that way. Is that a bit anti-market? Sure is. Is it efficient in the narrow-minded text book sense - probably not. But to suggest that people that legitimately care about the health of US citizens are only doing so for redistribution motives, is, I think, out-of-touch.

Mankiw is not the devil. But he is certainly one-track-minded on this point.

Thursday, November 1, 2007

A Looming Recession?

Here are some headlines from my newsline feeds on my google homepage:
"Foreclosures jump 30 percent"
"Stocks plunge amid surging oil"
"Chrysler to cut up to 12,000 jobs"
"Rash of Reports Exposes Vulnerable Economy"

And then there is this seeming counterpoint from some IU economists...:

Not being versed in the specific econometric modelling used for such forecasts, I can only use my best educated guess as to where the economy for the US (and Indiana) is headed. But given the plethora of negatives that have happened this year, and given the fact that hardly anyone expects that to turn around soon, AND given that the Fed can only go so far in loosening the money supply without risking inflation given rising energy prices etc, I don't know if I would be as optimistic as the IU economists. The economy HAS been resilient to date, but let's not be fooled by that whole "New Economy" schtick. Resiliency has its limits.

Monday, October 29, 2007

You are such a capitalist!

"You are such a capitalist." Depending on emphasis, the phrase can mean:

You are a pig who doesn't care about human beings and only cares about the bottom-dollar and making a profit.


I'm pleasently surprised you recognize the fact that, in many cases, capitalism increases efficiency and lowers costs and matches needs/wants to payment. Capitalism insures that businesses stay in business long enough to make many lives better off, as opposed to what would happen if they started giving hand-outs to a select few.

Here's the thing. When used in every-day conversation with friends or loved-ones, "Capitalism" almost ALWAYS means the former - ie, it has a very negative connotation. Why? Because economists have not explained benefits well enough? Or maybe because the negatives of capitalism are more visible?

BUT, economists and people with an econ background may often mean the latter more positive meaning of capitalism.

SO, now imagine you get a gathering of three veterinarian friends (one who may be your significant other) and one economist -- and the vets explain why it annoys them to no end how many clients expect free pet services and actually get upset when the vets don't cut huge deals for them and their sick pet. They exclaim that they charge whatever is necessary to make the pets better off. Now imagine, that the economist responds (because he/she has to relate the situation to what they know), "You are such a capitalist."

... FYI, if you are in a gathering of non-economists, don't use the word "capitalism." No matter your inflection, no matter your tone --- sparks will fly.

Friday, October 19, 2007

Mankiw and comments

I was over at Mankiw's Place today (blog) and realized that he has permanently disabled his comments section for all posts. His reasoning:

This is really sad to me. While I certainly understand his reasons, I always found commenting and reading others' comments on his blog to be not only fun, but extremely enlightening. I've learned a lot from his blog. And, as a former active poster and reader of his blog, I found the vast majority of comments to be civil (if a little heated at times). Since the comments are a big draw for me (to get a variety of opinions on Mankiw's topics/take) I doubt that I will continue to visit his blog as often. I also doubt I will learn as much. But given that, I should say thanks to Mankiw for all the fun, while it lasted - and for a while, providing an indirect dialogue with such an intelligent economist. The opportunity is rare, and has just gotten sadly rarer.

Wednesday, October 17, 2007

Long Lines for Spaghetti

Sorry it's been over a week since my last post....I haven't found any interesting econ news lately. Three Americans won the Econ Nobel on Monday (blah blah blah;) )

Anyway, me and some friends from work heard about Spaghetti factory (whose spaghetti dishes are usually about $7 a pop) was celebrating its 25th anniversary of being in Indianapolis. So, my friends invited me to go out and enjoy the "special price" spaghetti of $2 a plate. That is a significant reduction. I thought there would be a line since I know a thing or two about supply and demand, but I was not expecting a line that was over 2 blocks long to basically pay $5 less for a plate of a food that I can make at home in 10 minutes for about $2.

One of my friends went to the front of the line while the rest of us stayed behind to inquire how long the line was going to take. He talked to some people at the front who had already been there for 40 minutes and were just about to enter the stand in ANOTHER Line (to be seated). So now this got me thinking.... how worthless do these people value their time? Or, is there some added benefit to be gained by the "experience." I'm sure there is something to the latter - and I'd like to think that hundreds of peoples' value of time isn't so cheap.

But I don't know. I know my time ain't THAT cheap. So I convinced my friends to ditch the line after about 15 minutes of barely moving to go eat at a nearby restaurant featuring happy hour prices ----$1.95 for a huge cheeseburger and seasoned fries. I think I made a good choice.

Friday, October 5, 2007

Music Piracy Consequences

Scenario 1. Go to Best Buy. Steal 2 or 3 CD's then go home and copy the songs to your computer to distribute to all your friends and family as Christmas gifts. If Best Buy somehow finds out you have stolen their stuff, you may have to pay them a nominal amount. Stealing a few CDs is typically thought of as a minor offense - many unruly teens do it all the time (not that I have first hand knowledge myself).


Scenario 2. Go on Kazaa or some file-sharing program. Download a couple dozen songs and let the program run so many people can download your illegal copies at will.
And then you pay $222,000.

It seems scenario 2 is a clear violation of fitting the punishment to the crime. It seems obvious the price differential here must be due to the fact that, using a computer program, each illegal transaction is traceable which adds to the "cost" of her illegalities. Whereas, with scenario 1, you just got a slap on the wrist for the initial crime itself and unless a family member(s) complained to RIAA about your gift, that would be it.

In fact, one could argue, in scenario 2, she is actually paying part of the cost for the initial illegal uploader's burden of guilt, in addition to the burden of guilt cost of those who willingly downloaded those songs from her. .... Not that the cost the court imposed was market-determined (it wasn't - point is maybe that's the problem) - but it seems as if the entire burden of guilt was placed on this young lady whose life is now likely really $&%*ed up all for downloading some music.

IE, the judgment fails to take into account the supply chain of illegal activity that led to her illegalities, and it fails to take into account the consumer chain of illegal activities that ensued by other song stealing individuals who subsequently downloaded her acquired songs.

And even IF all the true cost of the illegal transactions were taken into account, I still have a hard time believing that would equate to the sum demanded of this woman.

UPDATE: It would appear I'm not the only one with an econ background to share this view.

Thursday, October 4, 2007

Free Trade in Question

Great discussion about free trade at Mankiw's blog. Great comments about how free trade arguments are often one-sided from mainstream economists.

An example from a commenter:

"You can't assume that because the gross amounts of wealth generated by "free trade" are vast that it's improving the lives of ordinary Americans, unless you want to make an elementary logical fallacy on the order of "Because the team is great every member on the team is great." You need to provide *additional evidence* to make that claim, but it's precisely the DETAILS that murder the claims of the free trade proponents and makes them, quite frankly, candidates for remedial classes in critical thinking."

Tuesday, October 2, 2007

Surtax Now to Support the War to End the War

I am a proponent of the idea of adding a surtax to fund the war in Iraq as proposed recently by House Democrats.

And described by CNN:
"The measure -- sponsored by Obey, Rep. Jack Murtha, D-Pennsylvania, and Jim McGovern, D-Massachusetts -- would require low- and middle-income taxpayers to add 2 percent to their tax bill, while higher-income taxpayers would add 12 to 15 percent, Obey said."

1. It is our generation's responsibility, so our generation should pay for it. Why is it our responsibility? Because the people chose to elect George Bush (collectively) twice (ok, maybe once, but we can hardly tax the Supreme Court or ONLY those that voted for Bush now can we).

2. I like the progressive nature of the bill. The rich should bare the burden of the surtax and the responsibility for the war since they had the biggest voice to try and prevent it, or at least make sure mistakes were minimized in operating it. Instead they blindly followed conventional wisdom at the time. Secondly, the rich still have more sway than the poor, so the tax would act as a huge incentive for the rich to finally speak up.

3. Provided the taxes were collected a year in advance, there should be no timing issue. Further, the tax acts as a 'sensible' (relatively) cap on spending for the war, as any additional funds required above that generated by the tax would have to be taken by reducing spending elsewhere or appropriating other funds to the war - which can be limited by congress.

This seems a better alternative morally, and in some sense economically as it likely would reduce uncertainty in terms of war spending. (Though obviously, as standard econ theory dictates, the net economic effect would be a substantial negative in the short-run). The gains in the long-run are debatable and I obviously side with camp that says this is a beneficial policy for the long-run.

This idea, really, is a logical extension to the idea of Pigovian taxation. The whole point of taxing something is that the tax acts as a disincentive to the thing that is taxed - particularly a thing that has large negative harm that may not be realized or internalized by a large majority of the population. So tax these people to help account for the total costs of the war - costs that are real and likely not fully realized yet - costs that our children will surely bare - costs of ignorance, greed, or short-sightedness. Hopefully the price mechanism would do its job, and people would start to really look at the true costs/benefits of the war.

But then again, like some other taxes (like a carbon tax on gasoline), this is likely just as politically unfeasible.

RSS Feed

Someone asked if I do an RSS feed for this blog. I do (apparently). Scroll all the way to the bottom to get the link to it. Also, there is a link to ATOM feed for those that use that.

FYI, I have no idea what I just said ;O)

UPDATE 5/6/07: I moved the RSS link up to the top on the right-hand side with all the other links.

Thursday, September 27, 2007

Econ PhD Beats "Efficient" Market

Time to finally toss the efficient market hypothesis? A Yale (sorry Mankiw, Harvard really ISN'T best at everything) econ PhD has consistently beat the market in terms of rate of return.

"He's made an average 16% annual return over 21 years..."


Someone should have taught me THAT brand of economics.

Religious Zealotry, Evil, and Barriers to Economic Growth

Archbishop Francisco Chimoio , who is head of the Mozambique Catholic Church, recently said the following:

"I know of two countries in Europe who are making condoms with (the) virus on purpose, they want to finish with African people as part of their program to colonize the continent. If we are not careful we will finish in one century."

“People must choose what they want between death and I propose to them that (abstinence) is the best way to fight HIV/AIDS.”

(From Reuters)

Of course, the Bishop failed to cite which European countries were supposedly doing this. He also failed to clarify how different condom companies are able to collude to systematically kill off the very population to which part of their revenues are dependent. And of course, the Bishop failed to cite what amazing new technology these companies employ to allow for HIV/AIDS to remain active and alive airborne and outside bodily fluids.

The HIV/AIDS epidemic in Africa is one of the largest barriers to economic growth that that continent faces. Using ones religious viewpoints to spread such 'fear' of using protection is not just disgraceful, it is evil and extremely harmful. It is evil because this Bishop is indirectly a murderer for spreading obvious lies that will kill countless more Africans. It is harmful (beyond the human element) because of the countless more deaths and lower standards of living caused by the indirect effect on economic growth.

Monday, September 24, 2007

Volatile Gas

I try to answer Mike Moffatt's post regarding the volatility of gas consumption (and hence revenue from taxes) compared to other goods. It appears gas is quite volatile esp. when you look at the mid/late 70s shock period.

I use BEA NIPA table data from their set called "Table 2.3.5. Personal Consumption Expenditures by Major Type of Product" to compute % change. The data is nominal.

I tend to agree with Mike though that this may not be that important in the long run since gas tax revenues are so relatively small. But could it be an issue year-to-year in certain circumstances? I think it could. Thoughts?

There are only 2 things that can cause this relative volatility: volatile changes in quantity consumed, or volatile changes in prices. Since the former is unlikely given the inelasticity of demand, the latter likely makes up most of the volatility. This makes sense theoretically since prices are dependent on behavior of cartels, and supply-chains that are tied to highly volatile conditions (like weather etc)

UPDATE 9/25: Mike correctly points out to me that my above graph doesn't really directly address the question of volatility of revenue of a gas tax since the above is likely mostly price volatility. Since a gas tax, unlike a typical sales tax, is a tax on a set quantity (40C per gallon) as opposed to a % of sales, a more appropriate graph would show the volatility of just quantities, not price changes.

In an attempt to do this, I use BEA's quantity index comparing the same items. Notice gas quantity is not really much more or less volatile than other goods (actually household goods is quite a bit more volatile swinging up and down from slightly negative growth from the previous year to as much as 15% growth). Though the point made above still holds; it is subject to huge spikes (supply shocks etc):

Friday, September 21, 2007

Becker on Rules vs. Discretion in Monetary Policy

Gary Becker provides a one-sided argument in favor of fixed rules governing monetary policy. He doesn't actually mention what rule he is exactly in favor of (inflation targeting, GDP growth targeting, factoring in unemployment...). He just says some rule is better than no rule, and while is arguments in favor of a rule-based monetary system make sense, he fails to mention any of its drawbacks.

Monetary rules are implicitly track long-run targets based on some aspect of NAIRU or whathaveyou. Of course, monetary policy is our government's chief way of tweaking the economy to alter business cycles (speeding up the economy to prevent a bad recession, or slowing it down to prevent runaway inflation). Take that away and all you are left with is politics (government spending and taxes) to tweak the economy. And THAT is a scary thought. Beyond that, taking away a monetary policymaker's discretion to change money supply / set interest rates, takes away the 'fudge' factor and assumes that we can set accurate rules - which may in fact not be the case.

But one would expect a Chicago school economist to be in favor of rules for precisely the above reasons. There is a certain unnatural comfort some economists find in the grand supposedly 'intuitive' assumptions and math models required to use such rules in the real world as opposed to relying on human behavior. There is a comfort in believeing that there are no big short-run market problems.

Sometimes what is comfortable is illusion.

Having said all that, I found Richard Posner's response to Becker a bit more even-handed and thoughtful:

"On the broader issue of rules versus discretion, I doubt that generalization is possible. Rules have great virtues, but they are limited because they are necessarily based on information possessed by the rulemaker when the rule was made. No rulemaker is omniscient. After the rule is promulgated, unforeseen circumstances are likely to arise to which the rule will be maladapted. The inflexibility of rules has to be traded off against the benefits in simplicity, clarity, and ease of compliance and application that rules confer. The tradeoff will not always favor rules."

Monday, September 17, 2007

Mankiw's Manifesto (II)

My response to Mankiws latest gas tax manifesto:

CAFE still isn't perfect, but as the reports on my blog discuss, the revisions to the program help rectify most of the SUV substitution issues. There are many issues that I don't like about the gas tax idea, but one thing I like about CAFE when compared to it is that increasing CAFE stanadards every few years FORCES gradual technological improvement and gas use reduction over time.

A gas tax, as an incentive only, does not force anything. There has been some evidence that car companies are increasingly collaborating and using oligopoly status to create lasting partnerships - both domestically and across borders. And given that for the vast majority of the US geography, consumer substitutes to vehicular transportation and commuting is low, vehicle producers have a good degree of market power and do not have to change its vehicle makeup much at all in response to a gas tax and changes in demand. Partially because, the cost of getting over the instituional hurdles and adopting cleaner technology far exceeds any marginal profit loss of keeping the same technology and makeup. So much of any potential profit loss can be mitigated by passing the buck to consumers, who largely have little choice in the matter. Marginal changes in supply makeup and fuel efficiency will surely occur due to demand changes for gasoline and fuel efficient transporation - but these are likely to be slight (given a politically feasible gas hike dollar value) and likely to effect different sets of the population drastically differently (see other comments). Some of the benefit of those small effects, again, are mitigated by the oligopoly power of the OIL industry.

Beyond that, sometimes, real change doesn't happen unless someone is there to push and prod. It's like a 30 year old who won't leave their parents' house. You can offer to help pay a portion of their rent of an apartment, ...or you can just say, "Hey, you are 30 years old, get out my next month or else I will kick you out." ...The son might not have ever been aware of what existed out in the world if the parents had not forced his eyes open.

Friday, September 14, 2007

Odd Results, interesting discussion

hat tip Mankiw for the post of a study that says a $1 increase in gas prices will likley lead to a 15% reduction in obesity.
The study seems solid to me, though I'm certainly not the foremost expert on any of it.
And yet, I just can't buy the results. It doesn't pass the sniff test. Mike Moffatt agrees.

One thing - the author uses data from a decade and more ago. A paper (see the right side of my blog) on gas price elasticity says that there is evidence in a dramatic decrease in the elasticity of gasoline demand. Obviously the author's results would be sensitive to elasticity changes. ....

Either way, there is a Great discussion about it on Mankiw's blog though. The author even makes a cameo!

Monday, September 10, 2007's naive view of Capitalism

Ben O'Neil has today posted a blog on the perfectness of Capitalism. While I think Capitalism a more realistic model than Socialism, I do not share his utopic view of it.

He correctly asserts:
"Indeed, there has been a recent resurgence of academic critiques and self-help literature lamenting excessive "materialism" and "consumerism," much of which lays the blame squarely at the feet of free-market capitalism and its lifeblood, money, " and then spends a very long blog post trying to debunk this statement. Let's go through it point by point.

Mises Point 1:
"the analysis of inalienable nonmaterial goods [personal achievement, relationships, broad knkowlege...] is well within the province of economics and does not present any particular problem for economic analysis.... Of course, there are none who desire only alienable goods and hence none who act in this absurd manner. Rather, we rationally weigh alienable and inalienable goods against one another, according to our particular preferences and with a view to achieving the greatest possible happiness over the course of our lives." [ie, the decision between inalienable and alienable goods is an economic one]

I 100% agree with the above statement, but fail to see how it at all addresses the concerns that Capitalism leads to an onverly consumeristic society. Few would disagree that Economics can concern itself with such topics. Few would disagree that people face tradeoffs with regards to inalienable goods (purusing relationships etc) just as much as alienable goods. The point is that the system itself - its very framework - by its very definition - forces people to consume and consume some more, and accumulate more and more wealth- less for real happiness and more for status and social norm and the need to feel superior (the best competitor in a competing world).

To its credit, does note that retort. response:
"... the level of social status derived from wealth and the satisfaction derived from this social status are themselves subject to diminishing marginal does not matter why we gain satisfaction from material goods."

The problem with the above idea of diminishing returns is, while true, it does not paint a full picture. I may be a guy who wants a Ferrari solely for status, so I buy one. My value of a second high-end luxury/sports car is diminished. Fine. But maybe now I see that my neighbor Tim just bought a Lamborghini, in addition to a Ferrari he just bought last year. Well now I feel really small. I have to have one too lest I be laughed at behind my neighbors' backs. I have strut my wealth for all to see....

In this sense, Capitalism is a big form of overcompensation. might disagree on the reason:
"But in truth, this behavior is nothing more than a manifestation of diminishing marginal returns. The highly wealthy person desires these more opulent goods only because his desire for basic accommodation and other more fundamental goods is already satisfied."

Again, technically correct. Again, missing the big picture. When you combine the need for status maintainence and social norms with the above mention of diminsihing returns, you realize that at some point returns must hit a constraint. At some point, using just the idea of diminishing personal returns, you would ordinarily decide not to buy your 21st car. But you do anyway - money, status, norms ---they are all powerful motivators in and of themselves and can often cloud what might otherwise be our wants, absent capitalism.

This is not to say such consumption is irrational. I think makes good points about that - afterall, status etc can be thought of as part of ones utility too. The point is that the Capitalist model causes consumption and materialism over and above what might occur in an identical society without such motivations. In other words, these concepts work together - they are not incompatible. And, Capitalism - ie a community-wide system of markets - in and of itself can create motivations that distort wants. To deny this without seeing the full picture is naive.

Mises might respond by saying, "so what. Economics does not care about 'why' people do what they do."

I would respond: "That's the problem. Because it is often the 'why' that matters most."

Having said all this, the positives of capitalism far outweigh the negative. And many of the negatives can be tempered with personal restraint, government assistance, and a sense of community.

Thursday, September 6, 2007

Toucha Toucha Toucha Touch Me, I wanna feel dirty!

So, I just bought the new (as of yesterday) iPod Touch.

It is basically a thinner iPhone minus the "Phone" and (worthless) camara part, plus 8GB.

I think that is ideal.

I was on some Mac blogs and many are complaining about the fact that the iPod Touch is 'only' 16 GB, so why would anyone want it. Well, I want it because that is 8GB MORE than the iPhone, for the exact same price (now), and it is sleeker, AND I don't have to deal with AT&T (I hated this service when it was Cingular and I refuse to go back), AND I don't have to pay a minimum of $55 a month for two years (which is $20 more than I pay currenly - which amounts to a waste of almost $500 over the contract) for no added value over my current phone service.

That sounds like a pretty substantial deal to me.

I think most of the compaliners on the Mac boards are those with currently large-capacity ipods. They don't want to downsize. But that isn't the part of the market the iTouch is for. If you want a music powerhouse, and you absolutely need 7,000 songs at your fingertips, buy/keep the big traditional iPod. I for one don't even personally like 7,000 different songs.

But then, that's just how my utility rolls.

Wednesday, September 5, 2007

blog worth

This site claims to tell you aproximately how much money your blog is valued at. They base pretty much their entire analysis on the fact that AOL paid $25 million for a portal site that hosted/linked etc to hundreds of other blogs. From that sale, and using link data, they determine aprox values of each individual blog. The applet above applies that to other sites as well. There are a whole host of assumption that make this a flawed way to determine market value. Below are a few, though feel free to come up with your own:

1. Uh, the values aren't determined by individual markets
2. It assumes the value of the blog conglomerate can be linearly disaggregated (think opposite of the sum of parts - it's alot like saying the value of an individual link is just some proportionate value of Google Corporation's search engine, and we KNOW the reverse ain't true!)
3. My blog sure as hell doesn't have a value of $4,000+. If someone offered me $100 to stop blogging tomorrow and give them my URL, I would gladly do it (and then start up a new one under a different name).

Tuesday, September 4, 2007

Tax Incentives Debate

Two titans of the Indiana blogosphere butt heads over tax abatements. I'll reserve my opinions on this specific issue.

Jen said...
As much as you'd like to make this about me (which I know amuses your trolls) or about partisan politics, Gary, I think you'll find pretty widespread support across party lines for these types of incentives.After all, who got the Circle Centre ball rolling?Who brags all the time about bringing Honda here -- with incentives?The "wingnuts and fringies" comment was directed at the Scott Schneiders and Jim Bradfords of the world, who think it ought to be enough just to cross your fingers and wish real hard that businesses would locate here.They've got other options, and we have to be competitive. That means trading off a little money on the table for long-term investment.If a business fails to meet its incentive requirements, it doesn't get the incentive. And TIF district money goes back into developing the district itself. (If you'll recall, the City clawed back quite a bit of money when United backed out of its commitment at the airport several years ago.)Also, you conveniently overlooked the fact that Eschbacher's article clearly states that abatements and TIF districts don't cost as much as fully exempted property, such as churches and non-profits.If this isn't even the largest part of the problem, why are you so obsessed with it?Or is it just that we're within 90 days of an election, and you're doing your best to shore up another losing candidate with blind allegiance and weak arguments?
8:53 AM EST

Advance Indiana said...
The incentive game has gotten completely out of hand. When tax abatements were first conceived, they were reserved for special circumstances. Today, they are handed out as a matter of course. Virtually every business on the canal received a tax abatement. Office buildings are receiving tax abatements, a Jimmy John's sub shop gets a tax abatement as does a Gold's Gym. Every hotel built in the downtown area is given a tax abatement. Aren't we already subsidizing those hotels by building a huge convention center, Conseco Fieldhouse and the Colts Stadium at taxpayer's expenses? And the fact is that government does not reclaim those incentives when the business fails to live up to the promises. Do you think the city plans to take back anything from Lilly because it's been reducing its workforce in the city instead of expanding it as promised? This really is a constitutional issue. If our courts enforced the equal protection clause in the area of taxation as it should, these types of benefits would not be possible because they would be declared unconstitutional. They simply breed mistrust and animosity among taxpayers towards their government. Government arbitrarily picks winner and losers. Every time a business is given another tax break, everyone who didn't get that tax break has to pay more money to the government. Indianapolis is losing businesses at a faster rate than it can hand out incentives to new businesses. And as for those NFPs, the city shares in the blame. It has actually gone out of its way to lure NFPs to the city.

Friday, August 31, 2007

Stephen Dubner Acts Like a Jerk

In a recent blog posting on the popular "Freakonomics" website (which I say for fear Dubner might humiliate me on his blog too), Stephen Dubner decides to call out Karl Smith. Beyond the fact that its slighly childish and egotistical to spend an entire post DEFENDING your blog popularity - I personally felt Mr. Dubner violated an unspoken blogging ethic - don't pick on the little people. Here is my response to Mr. Dubner:

"I'm gonna go ahead and assume that Dubner doesn't follow econ blogs enough to know that Karl Smith is quite active in the econ blog community (from what I've seen) and is a regular and thoughtful contributor to Mankiw's site, as well as hosting his own blog.

In any case I thought your post was more attacking than necessary - and I think you assume (perhaps falsely) that Karl Smith meant his statement to be falacious. Perhaps he just made a mistake? Oh wait - that NEVER happens at the NY Times! Sure....

Beyond that, you have a modicum of fame (rightfully so, "Freakonomics" was a well-written book), but with that fame comes the responsibility that you don't pick on lesser known people unless they do or say something really disparaging. Otherwise, you come off as a jerk (which you did to me). Implying that Karl is attempting to spread conspiracy theories or that he states "mistruths" (or, "Lie" to us non-journalists), is just wrong of you.

PS - note that it doesn't work the other way around - which is why I can call you out all I want, Mr. Famous Guy. "

After I posted my response I realized that Karl Smith had already noticed Dubner's post and responded to defend himself:

"Woah . . .
I didn’t know I was starting all of that. Yes, my real name is Karl Smith and you may remember that Steven linked to me as a “Strong Defender” of his work.
At the time I noticed that I also got a link from a Spanish blog that simply repeated the post and what looked liked others from freakonomics. It may not have even been Spanish by the way, that was just what it seemed at the moment. I didn’t spend anytime there.
I attempted to qualify my statement with the term “believe” but perhaps that was not strong enough. In no way was I attempting to start a conspiracy theory against the blog. I think its a great blog and I used the book as the only text book in my Intro to Economics class despite my regular appearance at Greg’s site.
If anyone has been “dissing” your blog based on my comment then I apologize.
— Posted by Karl Smith"

---Good for you Karl. Though I think you were far too easy on him.....

Wednesday, August 29, 2007


For all the solemn things we learned in the Katrina aftermath, we also learned a less profound thing - that supply and demand is a powerful force. Everyone talked about escalating gas prices post-Katrina throughout the US. But almost no one mentioned the fact that, in New Orleans, gas prices did NOT start rising for 6 weeks or more after Katrina - largely due to the decrease in demand due to the deaths and displacement to other parts of the country:
Notice the increased New Orleans volatility as well....

SAT scores in Indiana fall!!! (by six points)

The news in my state is going crazy (2) over the fact that SAT score average fell from 1493 to 1487 for this graduating class. I'm gonna go off on a limb here and say that a drop of .4% (.00402) is likely statistically insignifcant folks.

In fact, "Wayne Camara, vice president for research and analysis at the College Board, described the declines from 2006 to 2007 as statistically insignificant."

So, yes, the fact that Indiana lags behind the nation and is not closing that gap is a big issue, but a year-to-year change of such a small magnitude is not necessarily anything special. In fact, if SAT scores consistently rose every year without fail, assuming no major policy changes from year X to year X+1, that would tend to indicate that the class in year X+1 are always somewhat smarter than the class in year X, which of course is ridiculous - that should be pretty random year-to-year.

Hence, we would expect, holding policy and other shocks constant, SAT scores to go up and down and fluctuate ever so slightly over a number of years. And as policy changes, or tastes for education increase, etc, or real income rises.... we would hope to expect a gradual rise over the long-run ... somewhat akin to economic growth with recessions and booms (though not as dramatic). But the limits to SAT scores are much greater than for economic growth.

IE, we can't expect the average to keep climbing indefinately until it gets to a perfect score - that would be a waste of resources that could be devoted to healthcare, or defense or consumer spending other than education.

UPDATED to include total SAT score as opposed to just the reading portion.

Tuesday, August 28, 2007

I agree - mostly on State Economic Development.

Since I work in economic development, I see the costs and benefits of it up-close - and I think I can see this more clearly than most having training in economics.

I agree that it isn't the greatest possible solution. I further agree that there exists a prisoner's dilemma that largely is the reason that many State's pursue economic development and incentives. What I disagree about is that I don't necessarily think there is a better solution - ie, ED is a 2nd best option given that states face the prisoner's dillemma. The only other option is the feds stepping in to make such incentives illegal. And that ain't happening anytime soon (Cuno v. Daimler Chrysler anyone?)

I don't believe providing incentives to firms is a net negative - I do think it is useful, especially in the real world of market frictions and imperfect information. Further, while I am certain that governments overestimate the number of jobs created that wouldn't have already have been created abscent the incentive, I also think there is good reason to believe incentives do create jobs - if not for the sole reason of reducing startup costs and making the transition of an expansion or new site go smoother. So, while incentives may be a bit inefficient - they are likely a useful form of reduced taxation given the nature of the constraints faced by the government.

How much to replace property taxes?

Indiana estimates that property taxes could be eliminated altogether by:

"increase the state sales tax from 6 percent to 13.2 percent
the state income tax from 3.4 percent to 9 percent to eliminate property taxes.

To replace property tax revenue using a 50-50 split, the state sales tax would have to be raised to 9.5 percent and the state income tax to 6 percent, Powers said."

I don't know if those numbers sound accurate or not. I have not read the legislative report (nor can I find it at the moment)

Either way, a point raised by this is that if such an increase drastically increases the disparity in terms of types of taxes levied between Indiana and neighboring States, that could really distort markets and firms' decisions, etc. Really, a Fair Tax-like proposal needs to be implemented at the national level before the incentive for States to enact similar measures can really materialize.

At most, as I've advocated in a previous post, a good mix of income and sales tax hikes combined with the elimination of property taxes (combined still with a complete reorg of local governemnt and how schools etc are funded) may (or may not) seem to be the best bet since then the disparity in terms of sales and income tax is lessened, and property taxes (deemed to be unfair) are still eliminated.

Of course...I'm still waiting for those pesky numbers...


Saturday, August 25, 2007

This endless game of whack-a-mole

It's like I'm 11 again and playing whack-a-mole at a roller skating rink. When we aren't going round in circles, we are playing the game.....

This is from - so you know it's fair and balanced ;)

"3. MYTH: The U.S. is playing “whack-a-mole” in Iraq.

  • FACT: U.S. and Iraqi forces are conducting offensive operations against terrorists while simultaneously providing security in neighborhoods with joint security stations and patrols.
  • FACT: General Petraeus’s counterinsurgency strategy is a population-centric one that is different from what has been done before. The concept is for U.S. troops to work with Iraqi forces and secure safe havens, then maintain that security by staying in neighborhoods and building trust with the locals.
  • FACT: The primary reason for the “surge” in troops was to give U.S. and Iraqi forces the ability and flexibility to conduct such offensive operations in and outside of Baghdad without having to shift troops out of so many areas where they were needed for security. This is why commanders held off on many of them until the brigades were in place – to avoid the problems of past offensives."
And this is from the associated press - and it lists a number of statistics which OF COURSE must not be nearly as accurate as republican politicians....

How is this related to economics? Because if we continue as we are in Iraq, there won't be much of an economy left to speak of.

Friday, August 24, 2007

Union Power at its worst---est

This morning, the entire city of Indianapolis had its public transporation (bus system) shut down during the morning rush hour due to a dispute the Union has(d) with management.

Was the dispute about low wages, or poor working conditions?


It was about having to wear proper badge identification on the job.

(Granted, management's action was pretty ridiculous as well... maybe I should have 'headed' this post "City Bureacracy at its worst---est")

Give me a frickin' break.

Why did I move back to Indy again???

Tuesday, August 21, 2007


Big hat tip and thanks to Mike Moffatt (whose blog is deservedly in the top 30 of all econ blogs on the net) for mentioning my blog. Subsequently, "Reviving Economics" was included in the rankings and pulls in a respectable #99. Thanks also to economist Aaron Schiff for starting the ranking.

I think 99 is pretty good since this blog has only been in existence for less than a year now. It's good to know also that I'm not just writing this for myself and that at least one person actually reads my blog occasionally ;).

Union Power at its Worst

I just read a news report that Indiana ranks #2 in foreclosure inventory rate. The article makes mention that since Indiana is heavy in manufacturing, and manufacturing jobs have been hit hard the last 5 years, this has added to home losses. I think that’s obvious but it’s not just about that.

Union power in the manufacturing industry in Indiana, especially in the automotive manufacturing sector, is extreme and is beyond what I think even the most liberal economists would say is a ‘good’ kind of union power. Over the last number of decades, UAW and other major unions have pushed up the wages and retirement benefits of workers so high that it was only a matter of time before the sector imploded – and started killing jobs.

Delphi Automotive is a great example of this. In the last 2 years, they have tried to take steps to cut their labor costs from the ridiculous rates of $30 some-odd dollars an hour for an assembly line worker.

For a more concrete example, Bloomberg cites:
"...for example, the $25 hourly rate, plus benefits, paid to union workers who trim grass around its buildings. Delphi's union contract... bars hiring an outside lawn-cutting service. "

I work at a nice desk job and I don’t make near what low/mid skilled union auto labor employees do.

So, the foreclosure rates can be explained more by the fact that these low educated workers were paid a huge premium, and they took that premium to buy big houses, often with no money down and often at a variable interest rate. So, when their employers imploded they were left with this huge house, ballooning interest rates, large monthly payments, and no steady income (anymore).

Monday, August 20, 2007

Online Textbook vs. College Bookstore

It's back to school time, which has had me thinking of a puzzle to which I just don't know the answer. In hopes of help, I emailed my blog-friend Mike Fladdigan of "Mikeroeconomics":

"Mike, Hope all is well. I have been wondering about something that i was hoping you could do a post on, or maybe point me to a good paper about.... I don't understand why the price differential is so massive between so many bookstore texts and (those very same) texts that can be bought online on or or, etc. For example, a coworker of mine saw that her micro econ text bundle (including study guide etc) would have cost $140 if she had bought it at the bookstore. She found the exact same thing (slightly used) for well under $40. New books were also quite affordable. Assuming that students don't really care about the condition of their texts (which I think is a reasonable assumption), the only thing I can think of why the market hasn't tended to draw this gap closer is issues of assymetric information or misunderstanding about the non-pecuniary transaction 'costs' involved with text purchasing online....."

He responded thusly:

"I have concluded that students buy textbooks from the campus store because of1) asymmetrical info 2) they ignore opportunity costs 3) the value the book more now and heavily discount the future 4) instructors change the elasticity of demand by "demanding" that students start reading now 5) students have different values for money at different times depending upon how they "earned" the money 6) think that they can resell the book and actually rent the book at the same price as price 7) want to build a professional library and paying so much for a book will make them value the book more...."

The more I think about it, I wonder how much a professor's propensity to bundle his/her text with supplemental items that maybe can not be found easily online is to blame for why still so many students buy their text at the college bookstore - and thus for why the price differential stays so large. But I don't think that is everything.

Thoughts anyone?

Thursday, August 16, 2007

My Thoughts on Peak Oil

Mike Moffatt continues to try and hammer some sense into the doomsayers that are predicting sharp oil production declines in the next couple decades due to limits on resources. His points are excellent:

1.If the peak is just around the corner and exceedingly high prices ($200 dollars a barrel? $300? $400?) are coming our way, then why are the prices for oil futures and oil call options so low?

2. Are you buying oil futures or oil call options? If not, why not?

3. Why did peak oil supporters in the 1970s tell us that the oil supply would run out in the 1980s and 1990s? Why were they wrong then? Why are you right now? What's changed?

Nevertheless, I do think Peak Oilers and economists can find some middle-ground. The general idea of Peak Oil is after all not that controversial (for most people) – at some point oil production must reach a peak and start declining due to limits on how much oil there is left on Earth. Short of technology one day being able to replicate oil and its energy chemically, or of Earth’s population finding oil on Mars etc, peak oil WILL occur.

I also think the Peak Oilers are correct when they say that this, unless anticipated, can cause some catastrophic events. Economists are quick to point out that as resources decline, the price of oil will rise to increase the incentive for alternative energy. The problem is that alternative energy doesn’t just appear at our doorstep, and the change from an oil-driven economy to some other energy-driven economy doesn’t just happen overnight. There could be decades of hardships both for businesses and for consumers who currently rely on oil and its outputs. I wonder if some pro gas-taxers may tend to overlook this point (For the record, I don’t think Mike is one of those) for the same reason they overlook any potential hardships caused by a gas tax. As I’ve said before, oil and gas are not like other commodities such as bubblegum and shrinkwrap: I don’t drive a stick of gum to work….

The point is that it is likely worthwhile to start the transition now, well before the peak happens than to be reactionary to the price mechanism. This is something the pro gas-taxers are right on – they want to deal with this now and they have a plan (which is more than I can say for the doomsayers who just want to spout off about the end of the world as we know it).

I view hardline cornocopian economists, whose only answer is to “let technology solve any perceived ‘constraint’ on resources,” as incredibly na├»ve. Technology can help ‘extend the date’ for resource depletion, that’s for sure. But the idea that economic growth can create a condition of nearly limitless natural resources is illogical by definition of a limited natural resources (again, barring some Star Trek-like ability to replicate things at will).

Having said all that, I don't think anyone is suggesting that the world will eventually 'run out' of oil. It will approach a limit near zero [as prices keep rising] (I believe that is what the original Hubbert curve looks like). In that sense though, "useable" oil will probably reach zero as the price will eventually reach a point where few if any would either need to buy oil, or could afford to if they did. This will likely take a LOT longer than Peak Oilers might think though, since, as our economy substitutes away from oil to other infrastructures etc, the demand for oil (the curve) will fall, tempering any rise in prices. By that time, oil would likely (hopefully) have little to no use anyway.

This actually illustrates my earlier point - if supply falls exponentially before people's overall demand (curve) falls as well due to changing infrastructure and tastes - hardships will be great, prices will be high, until the transition ends. (There are I think plenty of institutional and political reasons to think that demand would not be able to keep up with supply). If, however, we start slowly reducing our demand on oil NOW we can get ahead of the game BEFORE the supply starts dwindling.

Wednesday, August 15, 2007

"Reintroducing Macroeconomics": A Review

As promised, here is my review of Steven Cohn's book: "Reintroducting Macroeconomics, A Critical Approach."

So that you my reader can understand any biases I may have, I offer up a brief background of my thinking as a student of Economics:

As an undergrad, the textbooks for my classes were largely Classical-Keynesian Synthesis in nature, while most of my professors had a very obvious laissez-faire, classical, bent to them. I remember noting to myself early on that there appeared to be a direct correlation to how much math was used in the class to how 'classical' the professor seemed. As it was my game theory professor was the most hardline: every sentence he spoke had the word "rational" in it - and whenever he said the word "irrational" his lips would curl and nostrils would tighten as if he were smelling a skunk.

Here is a quote from my professor, as best as I can recall, from the very first econ class I ever took:

"Economics is about how selfish individuals make decisions under conditions of scarcity. Selfishness is not a bad thing - being selfish makes everyone better off..."

Even in those days I can remember thinking that my professors all had severe bias issues and whenever 'gains from trade' or perfect markets etc. were discussed I remember spending hours and hours later at home trying to rationalize what I had learned with reality. By the time I graduated, I had chosen a personal middle-ground - not quite classical and not quite Keynesian (at the time, those were the only choices I thought I had). When debating with friends though I would always defend the classical position - because it was the one that I knew the best - it was the one I paid to learn - so I felt in defending it, I was defending my decision to learn Economics.

In grad school, most of my macro classes were from a New Classical bent, with real business cycles and dynamic theory based on intergenerational models of perfectly rational agents. Assumptions were just that - and were never discussed. My grad schooling taught me alot about econometrics, simulation economics, and in-depth classical thought, but it also only served to justify my growing opinion that Economics is a growing failure as an authentic science.

Over the last few years I have drifted more and more away from classical ideas taught me throughout my economics education. I still believe much can be learned from neoclassical economics, but ever since that first undergrad class, I've found true scientific rigor to be lacking. Economics classes always seemed like a secret society of conservatives - an indoctrination built on assumptions more than on inquiry and open debate. Certain other fields never seemed any better (the political science department was filled with die-hard liberals that never bothered to see the other side as well), but I had always hoped that Economics would grow to be more holist: to include thoughts of politics, psychology, sociology, etc. But it seems to have grown more and more sheltered since I started my schooling.

As my longing for more holist ideas have grown, so has my thirst to learn more of these ideas. As such, I've been paying closer attention to thoughts espoused by the post-autistics, the post-keynesians, and the behavioral economists.... I purchased Steven Cohn's book so that my students might not have to deal with the same internal struggle I dealt with regarding economic thought. With that, here is my short review:

As an introductory textbook (which is what it espouses to be - either as a supplement to a mainstream book, or as a book for independent study), it fails. First, the book spends too much time denigrating mainstream texts, and not enough time being mainstream's alternative. As such, the text mentions how market failures or group-think can prevent nice long-run market outcomes, or how AD-AS models are often inadequate, but it spends little time presenting a coherant and detailed counterargument. Instead it presents a hodgepodge of arguments from different divisions of heterodox economics: Marxism, feminism, post-keynesian, institutionalist.... Ordinarily that would be good (afterall the whole point of the book is to present economics more holistically), but the problem is, due to space constraints, it makes the book's arguments seem weak, the feeling of being 'all over the place, and more argumentative. Perhaps a more narrow focus on a handful of macrotopics would have been better....

Another dissapointing feature are the endnotes. Chapters end with pages and pages of endnotes(footnotes) - often time more interesting than the text itself. This again is an obvious example of how the author wrote too broadly and felt the need to condense his thought on many topics. I hate endnotes - especially when they belong in the body of the text.

The final reason this fails as a textbook is the lack of visual interest - there are only a couple graphs and they are poor quality. The book is written in book/novel format and would and should be an instant turnoff to most introductory undergrads.

Having said that, some more interested and thoughtful students will find this book insightful. It does a great job of singling out mainstream assumptions and showing how those assumptions can and often fail - and (as mentioned, too briefly) discusses the results of how the macroeconomy differs as those assumptions fail.

Also, the author picks up on what I feel is the major problem with mainstream texts - the tendency to "note but ignore" issues with their assumptions, and markets. In the end, the point of the book works, and that point is that mainstream economics fails to offer a truly holist attitude to economics, and it fails to have an open dialogue with its students, preferring to offer a skewed picture of the world for the sake of simplicity. I view this, however, as a hastily put-together, though useful, working document of heterodoxy. Hopefully one day a more appealing text will arrive on scene.

Tuesday, August 14, 2007

Stock Market Ups and Downs

Mises Institute has an interesting blog on last week's stock market volatility and dump.

My only concern is that the title of the blog is "The one question you must never ask an economist." However, I don't believe he ever lets the reader in on the question he has in mind.

So I thought I'd offer up my own suggestion:

"How do your assumptions affect the results and forecasts of your model?"

Most economists (IMOP) would likely respond one of two ways:

1. "they wouldn't change a thing - they are just simplifying assumptions."
(if an economist answers thusly you can be sure he/she hasn't given the question much
thought outside of their own box)

2. "What assumptions - this is how things work"
(if an economist answers thusly, you should be scared for your life since the person is obviously posessed by their mathematical formulae and are liable to go all John Nash on you at any moment)

Monday, August 13, 2007

Thursday, August 9, 2007

Bush disses gas tax hike idea

Bush apparently is no pigovian in terms of the gas tax idea....
Granted the idea wouldn't have been revenue neutral (but still, assuming people place good value on bridge safety - it's in a sense giving back to the people...).

Wednesday, August 8, 2007

US releases Economics Education Report Card

The study conducted by the US. Dept. of Education is the first ever National Assessment of Educational Progress - and is a measure of national knowledge of economics by 12th graders in the US. I saw the Fed Reserve Chair from Minneapolis comment on the results...his assessment is rosier than mine. He says the fact that 42% of the sample were 'proficient' in economics is a "good base." I tend to look at the glass being half empty on this - there's a lot of room for improvement.

About 79% of students scored at the "basic" level - having a rudementary knowlege of some econ concepts. I don't think that is too bad, but again, still a lot of room for growth.

One of the more interesting findings is that males tend to only slightly outperform females in econ. I would expect that to be true given the more mathematical/logical nature of the way econ is often taught. But it's surprising to me how close the genders performed. I would have thought the gap to be much higher. I do think it is meaningful that the gap widens at the higher levels of proficiency - and I would expect this is a foreshadow of college results - as more math is applied to econ in advanced levels, males should tend to increasingly dominate.

The basic "scores" are as follows (discussing micro, macro, and international econ topics):
Market Economy
72% described a benefit and a risk of leaving a full-time job to further one’s education
52% identified how commercial banks use money deposited into customers’ checking accounts
46% interpreted a supply and demand graph to determine the effect of establishing a price control
36% used marginal analysis to determine how a business could maximize its profits
National Economy
60% identified factors that lead to an increase in the national debt
36% identified the federal government’s primary source of revenue
33% explained the effect of an increase in real interest rates on consumers’ borrowing
11% analyzed how a change in the unemployment rate affects income, spending, and production
International Economy
63% determined the impact of a decrease in oil production on oil-importing countries
51% determined a result of removing trade barriers between two countries
40% determined why industries can successfully lobby for tariff protection
32% identified how investment in education can impact economic growth

Download the whole report here.

Are there significant externalities to marijuana smoking?

I comment on this at Mike Moffat's blog (

I think it's pretty obvious that there are some negative and positive externalities...the question is, which is dominant, and is that dominance substantial? I'd love to hear your thoughts on that....

In general though, Mike is right - people who don't support the carbon tax should either help contribute to a solution to our environmental issues, dependency on gas (to live basically), etc...or, just keep silent. Saying the pigou club is wrong without offering an alternative to our current policies (which doesn't appear to be working) is not particularly useful.

This also though points to a general problem with Pigovian taxation (despite its benefits to efficiency) and that is, we almost never know what the social costs or benefits are to an externality - and often our studies can be biased one way or the other, or grossly miscalculating the benefits or cost...this makes using pigovian taxation tricky.

If you under-tax - you may be adding little benefit to reducing a negative externality at the expense of a higher tax that may or may not be passed back to consumers.

If you over-tax, you are likely doing more harm than good.

Monday, August 6, 2007

Book Review Pending

I am currently reading Steven Cohn's: "Reintroducing Macroeconomics: A Critical Approach."

The book is a heterodox economic critique of mainstream macro thought that is taught in today's classes. I hope to use the book along with Mankiw's mainstream text to help with a point-counterpoint way of teaching this fall.

I can imagine that will be difficult as I tried somewhat last year to broaden the discussion beyond the mainstream (to include some post-keynesinan ideas, contributions of psychology, ran some class experiments...) to some success, but also some confusion by the students.

I still don't know how best to broaden the scope while simultaneously cover all the necessary mainstream topics for the common final exam. It may be impossible; I don't know. Anybody with any thoughts please let me know. Look for my review of Cohn's book in a week or two.

Thursday, August 2, 2007

Another example of economics stumbling over itself

As a follow-up to my most recent post, I came across this which talks about when it is rational to vote in elections. This is just something I came across, and I'm sure there are others. This has been a hot topic in economics and game theory for more than a decade now.

In fact, I remember one of my econ profs during my undergrad days talking about this talking and talking about how he was completely dumbfounded by the idea that people voted - he just didn't understand why they would. Afterall, "rational" people think at the margin, and voting is hardly an excercise where one vote counts for much.

And I remember thinking at the time, "uhh, what's so hard to understand? Do economists really think people really go to vote JUST for the purpose of hoping to help enact X legislation or install Y governor? How ridiculous.

People of course vote for numerous reasons including: something to do, feelings of patriotism, feelings of community, an excuse to take off work and not feel guilty... ie, the additional costs of transport, lost wage, and/or time are exceeded by the benefits of all the mentioned items plus I'm sure others. Of course voters are rational --- just not confined to the small space that some economists want to put them in. This is just a typical case of an economist's assumption (that a person votes only for reason X) being, well, just plain silly. But notice feelings of community etc are not things easily modeled by math, hence the reason economists tend to ignore that and the like.

Wednesday, August 1, 2007

Why Can't We All Just Get Along (and learn from each other)

To show the inappropriateness of accusing an entire social science of poor science while ignoring your own science’s shortcomings (…without sin cast the first stone…), I would like to sarcasstically point out the following:

Would a psychologist reduce human market behavior to marginal cost and benefit? Would a psychologist reduce most research to rigid mathematical models while avoiding social situational issues? Would a psychologist look down from their Ivory Tower and bemoan economists as being inferior and less rigourous in their analysis?

Maybe, maybe not...but economists don't seem to have problem doing the same to psychology.

My question - Why can't an economist be more like a psychologist? Why can't economists be more like that.

Tuesday, July 31, 2007

IN government just not getting it....

The situation now in Indiana (or at least Indianapolis) has become one of those rare instances in which the general populace actually agrees with mainstream economists on something (which is something I myself am increasingly rarely doing these days). Protest after protest of people have urged their local and State officials to repeal property taxes in favor of a modest increased income tax and a real progressivity-adjusted increase in the sales tax.

Property taxes are outdated and an inefficient and unfair form of taxation in that it has a tax base that is 'based' on one asset - which just so happens to be the most important asset an individual can have. It is inefficient because it distorts investment decisions and unfair because it hinders people on fixed incomes. But in Indiana, it's not really taxation itself that people don't like (provided its used wisely), and indeed, most people could care less about what kinds of taxes are efficient or not. The reason people are upset in Indiana is due to the poor transition of the property tax calculation and the fact that residences are paying more for relatively few local and State services.

It used to be that property tax was calculated as cost-depreciation. Now (as of a couple years ago), property taxes are based on market assessment of the area of the property. What this has done is it has caused large % increases in property taxes for homeowners in high-value areas, as well as homeowners with older homes (which are often owned by the poor). Combine this with the fact that there are so few market transactions of corporate real property, that commercial and industrial taxes have remained flat - pushing an even greater burden to residences (oh, and the inventory tax was abolished last year which aided that change even more).

But I digress from my main point. It is exciting that people are demanding such a substantial change (which unfortunately in Indiana would require a constitutional amendment). But then, that seems to be hoosiers' MO: wanting to do what is right for the long-term. The problem is that is also hoosiers' MO to hate change. As such, the State is constantly in this catch-22 where people know what they should do, but seldom end up actually doing it. What people want is simple: more efficient government (read CHEAPER) and a repeal of property taxation

This unfortunate dichotomy is explained best by today's recent plan to 'fix' the property tax problem issued by the State's GOP. Here is their plan:

*Taking $100 million of the state's surplus to fund an additional
property tax credit for all homesteads

* Changing the rebate checks, passed by this year's legislature, to

* Extending the filing deadline for homestead credits for this year's
tax bills to Sept. 30 or 45 days before a county issues its final tax
bill to be paid this year, whichever is later;

* Letting local government decide how best to target the $300 million
in property tax relief the legislature approved this year instead of
giving all homeowners those rebate checks

...All short-term fixes. Delving into the State surplus, changing rebates to credits, etc. are all small fixes or to the current issue (and at worst is just passing the buck) but they don't respond to hoosiers' concerns about the philosophy of taxation in general. People want a quick fix, but they also are demanding real change so that their hard-earned property isn't taxed to the point where people can barely afford to live.

That concern is not being met by either party. Democratic House Speaker Bauer, in addition to much of the above GOP solution, wants the State to start financing local child welfare costs for those counties that use local income taxes to replace property taxation to a small degree. But that is just shifting cost from one bureucracy to another - and, secondly, income taxation is not nearly as 'productive' (or fair in my opinion) as sales taxation. In any case, neither plans get at the psychological and sociological issue that different forms of taxation can effect. Taxing a house IS different than taxing a wage or taxing general consumption. It is targetting at its worst. And few legislators seem to get it.

Tuesday, July 24, 2007

Not econmics, but not politics either - just funny

I didn't watch the Democratic YOUTUBE debate last night (I was too busy reading Harry Potter), but, in reading the transcript, I almost fell off my chair... This was the opening segment:

"ANDERSON COOPER, CNN host: Our first question tonight is Zach Kempf in Provo, Utah.

QUESTION: What's up? I'm running out of tape; I have to hurry.
So my question is: We have a bunch of leaders who can't seem to do their job. And we pick people based on the issues they that they represent, but then they get in power and they don't do anything about it anyway. You're going to spend this whole night talking about your views on issues, but the issues don't matter if when you get in power nothing's going to get done.
We have a Congress and a president with, like, a 30 percent approval rating, so clearly we don't think they're doing a good job. What's going to make you any more effectual, beyond all the platitudes and the stuff we're used to hearing? I mean, be honest with us. How are you going to be any different?

COOPER: Senator Dodd, you've been in Congress more than 30 years. Can you honestly say you're any different?

SEN. CHRISTOPHER DODD: Well, I think so.
First of all, thank you for inviting us here in The Citadel. It's great to be here at this wonderful college, university.
Certainly, I think it's a very important question one ought to be asking because, while hope and confidence and optimism are clearly very important, I think experience matters a great deal -- the experience people bring to their candidacy, the ideas, the bold ideas that they've championed over the years, whether or not they were successful in advancing those ideas and able to bring people together.
I'm very proud of the fact that, over my 26 years in the Senate, I've authored landmark legislation, the Family and Medical Leave Act, child care legislation, reform of financial institutions.
In every case, those are new ideas, bold ideas, that I campaigned on and then were able to achieve in the United States Senate by bringing Republicans as well as Democrats together around those issues.
That's what's missing, more than anything else, I think, right now, is the ability to bring people together to get the job done."

Just because you say something is a "new idea," doens't make it one. I love platitudes ;)

Tuesday, July 17, 2007

Payroll vs. VAT (consumption) tax

There is an excellent discussion going on over at Mankiw's place regarding the relative effects of payroll vs. consumption taxes on tradeoffs like labor/leisure, spend/save, etc. Some of the comments are particularly thoughtful and in-depth.

Thursday, July 12, 2007

Property Taxes skyrocket in Indiana - time for a Fair Tax

I just got my property tax bill last week. It jumped 70%. That is pretty typical for most that live in my county - though some unfortunate souls just a couple miles south of me saw their taxes rise by 200% or more! Now the people are up in arms.

I have said it before and I'll say it again, we need to get rid of hyper-inefficient forms of taxation like that of property, corporate income, and payroll taxes. We need to support the more efficient tax on lifetime wealth - that is - the sales tax. Why disincentivize someone to own a home? Why disincentivize a company to purchase a new factory or certain types of equipment? Why should corporations have to pay taxes, and then have their owners turn around and pay taxes? Why should people be burdened with form after form after deduction after exemption, etc.... What can we do to ease the US's obsession with consumption? What can we do to increase overall investment and reduce interest rates in the US? What can improve our trade balance without threatening countries like China? What......what..........what other than a sales tax, a FAIR TAX.

It's time for Indiana to support the Fair Tax, and it's time to urge our immediate neighbors and our country to support it as well.

We don't need worthless short terms fixes like Mayor Bart Peterson just espoused - a 'fix' that will have us paying more than we bargained for NEXT year, and years after that. We need a real solution and we need to start getting real.

To prove to you that I'm not biased about this, you should just know that if Fair Taxation were adopted in Indiana and the US, I would be out of a job (albeit temporarily) since my work deals with tax credits. And tax credits are great, and can be useful, but the best incentive you can give a company is tax transparency, and a corporate income tax rate of 0%.

In the long-run, a sales tax that replaces other taxes (and yet maintains progressiveness via a rebate) is more efficient, lowers the tax burdens of most all groups of people and corporations, and is transparent and easy to follow.

In the short-run, why not at least offset some of the property tax jump with a small county-run sales tax. Of course, this kind of thing has been talked about before in Marion County - but sloppier minds always prevail sadly.

In the very short-run (this year, ie now) there are no easy answers - but I think at least a pause, a breath, and a proper reassessment are in order.

No wonder China is least-cost producer in so many areas...

...they use cardboard as an input to food....


UPDATE 07/19/07:
CNN is reporting that this story was a hoax. I guess that's a relief.

Wednesday, June 27, 2007

Iran's Gasoline Conundrum

Iran is one of the world's largest sources/exporter of oil, and yet, doesn't have the capacity to refine its own oil to make domestic gasoline. That is funny.

Iranians are getting fed up with the domestic policy of gasoline rationing

Monday, June 25, 2007

Sub-Prime Morgages - Becker/Posner

Becker and Posner discuss Sub-Prime housing markets.

...And I try to argue against the Chicago-school-as-usual line of thinking they offer up:

"However, intentional misleading presentations to families who were clearly unqualified to take on home ownership was not the norm but rather were exceptions."

How do we know that? And, what are defining "norm" as? 20% of cases? 50%? A large majority???

The foreclosure rates keep rising and rising - ie - we haven't even seen how extensive this problem is yet. We just know that it is bad now, and getting worse.

Also, you lump 'congress' into one entity that presumably wants to prevent poor people from home ownership. I don't think I've heard that from anyone - all I've heard is talk about putting some restrictions on the blatant smoothtalking and in some cases all out lying that obviously has been happening --- whether they be 'exceptional' or not.