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Sunday, December 19, 2010

Dream Turns into a Nightmare

Obama's Dream Act would have been a good one - and something that makes sense economically to provide an incentive for the youngest and smartest of the immigrants to this country to want to remain in this country and aid in its growth.  Instead, Republicans wanted to remain ideologues and politicians as is their norm.

Thursday, December 16, 2010

More on Deirdre McCloskey and thinking about economics (without equations)

I've taken to reading her book, "How to be Human *Though an Economist."
It's amazing, and I find myself agreeing with much of her sentiment.  In the book she offers up a letter she wrote to a graduate student that was quickly becoming disillusioned with the profession.   McCloskey's basic answer is to 'buck up and bare it, and then when you graduate, change the profession.'

I've been thinking on this.  Given the economics (mainstream) profession is in complete disarray and destined for futility in its general form, which sadly I think it is, how can we change this - how can we alter its future?

The fact that there might not be an answer scares me.  The fact that there might not be an answer is why I haven't and don't intend to pursue a Phd. in Economics.  McCloskey doesn't have the answer - she has the hope, but not the answer.

let's say I, or some disillusioned grad student, make it through Phd dissertations etc. and become a full-time faculty-tenure-track economist.  That is not the answer.  Because now, with few exception, my bosses are 'let's run this equation to fix the world despite not knowing what the world is about'-style economists.   The vast majority of schools around the world, and particularly in the US have this problem.  Coupled with academia's 'boy's club' way of being able to publish research - this does not lend itself to true, useful, meaningful, what McCloskey would call "ethical" scientific analysis.

So, the individual person can't change the profession - the barriers to change are too great.  The institutions themselves are unlikely to change.  Why?  One, again since its all one big boy's club, it's best to not rock the boat.  But more importantly, economics has become largely invaded by ideologues who form opinions first and then conduct analysis regardless of the real world.  Part of that ideology is to 'support' the business class no matter the theory.  It's a simple equation really.  unethical, pandering economic analysis today + money and other non-pecuniary support from the business elite = unethical, pandering economic analysis tomorrow.

So, you may ask if individual students, professors and institutions can't change economics, perhaps the business community can?  But why?  Quid pro quo Clarisse.

Who then, what then, is left?

The government?  Doubtful.  The lay-person?  Hardly.

I fear my friends we are in a catch-22.  I can't see the light.  More importantly, I can't see a WAY to find the light.

I invite your opinions - and if you are of the opinion that the mainstream economics profession is on sound solid ground - then I'm afraid you are delusional.

Tuesday, December 14, 2010

Amen Deirdre McCloskey

Interview from "National Review"
"In college you got the claim that Greed is Good, and anyway people are Max U sociopaths, regardless of what all the scientific evidence gathered on the point says to the contrary. I would advise them, of course, to read my book How to Be Human*: *Though an Economist, which is advice to young economists about maintaining morale and integrity — and getting the scientific task done while retaining common sense. Beyond that, Educate thyself. Read widely, having acquired somewhere a deep knowledge of an economics of some sort. We have enough amoral idiot savants in the study of the economy. We need some fully educated humans. We need a humanomics, not more freakonomics."

Excess Demand for Money

I've been thinking about this debate (also here).  First, I should point out that I'm somewhat sympathetic to the Austrian idea of mis-allocation (or re-calculation as these guys put it) in business cycles.  I think they overdo their hypothesis, but that discussion is for a different time, because also overdone is the idea that recessions are largely monetary (or due mostly to an excess demand for money).  I don't buy that as the whole story either.

For one thing, the mainstream concept of 'money' has to me always been a rather dubious and near-pointless definition in an age where credit is king.  To be more succinct, we don't have a demand for money problem, we have a demand for credit problem.  It's not that people are demanding too much money relative to production, they are demanding too little credit.  We need only look at the Fed's stats to see this. 
Interest rates didn't rise because people started demanding more money - that's always been an incorrect causal relationship with mainstream theory.  Interest rate spreads started rising due to the financial crisis and uncertainties therein of future profits and sustainability.  Those increasing spreads together with the uncertainty etc. meant that people were demanding lesser and lesser loans on credit.   Demand for money is nothing more than a by-product and a symptom of the need for 'flight to safety.'  Obviously, in a major financial crisis, it makes sense to flock to the dollar and to 'money'.

And, when I say "...too little credit..." I don't want to imply that that is a bad thing.  From a certain perspective, and certainly from an Austrian one, it is necessary for credit to drop in order for this resetting to happen.  In other words, it is the very fact that we had too much credit (an over-indulgence) that was a significant cause of the problem in the first place so it is only natural that the economy tighten credit now to shore up balance sheets, payoff past debts, etc.

Until economists leave their nice conventional notions of 'money demand' behind, we will never really get down to the real causes and fixes for these types of issues.

Monday, December 6, 2010

On Inquality and economic growth - relationship

Most mainstream econ texts try to draw clear lines between what it purports economics should be about - economic growth, and what economics should not be about - equality/inequality.  They pretend inequality should be and can be analyzed separately as if either it is not important (or as important as efficiency and growth), or not objective enough for a science so grounded in logic and mathematics to study.

Prof. Mankiw (and his lines of textbooks) claims no different.  
...All this except the fact that numerous recent studies show that while too much inequality can lead to low economic growth, too much economic growth can lead to unsustainable (or unpalatable inequality).

So long as mainstream economics continues down this path of trying to separate efficiency from equity; so long as economics refuses to see the inter-relationships between political and social economy and 'economics',  it will continue to leave mainstream economics in its present state -  a neutered science with limited applicability to reality.

Wednesday, December 1, 2010

On overconsumption

Karl Smith of "Modeled behavior" opines that the theory of 'overconsumption' doesn't make sense.

This 'theory' (I am reluctant to say this is a very formal theory) says that  a society that has a period of high spending relative to saving and/or production falters will often have to 'pay' for their habits by a succeeding period of low employment and economic well-being.

I might agree with Karl at least by saying that this so-called theory is an over-simplification.  But, I disagree with him that the idea in general has no basis in logic, or even economics.  

Basic mainstream economics teaches that there are tradeoffs.  Specifically, in the macro sense, there is a tradeoff between consumption today or consumption tomorrow, or stated another way, consumption today and saving/investment today.  That of course is by itself an over-simplification but none-the-less has basis in truth.   For a given level of resources, the more you use in consumption today - especially that financed by expectations of future production as opposed to actual real wealth, the worse off you may be tomorrow. 

From a pluralist / heterodox perspective, the fact is we spent the better part of a decade (or more) borrowing on credit (from banks and from foreigners) in order to spend beyond our level of sustainable production.   This, in conjunction with the Fed's accommodation of this, inevitably and logically, led to a bust and recession.   Smith makes it seem like people have the choice to work more today in order to make up for their over-consumption of the past.  But that is the absurd logical fallacy.  If employees had that choice, we wouldn't be in the situation we are in.  The point is that recessions aren't about present choices, they are about paying for past choices.   We'd like to work but we can't because our employers and their financial supporters are in debt and in a climate of uncertainty and can't afford to hire us.  We can't afford this unemployment because we ourselves are in debt from our luxurious expenses on credit.  Where does Mr. Smith think that debt came from? 

Monday, November 29, 2010

Wage Freezes for All?

Today Obama announced a largely symbolic gesture to freeze federal employee pay for 2 years.  That's all fine and good, but I've been thinking about this as a potential broader policy too, particularly in relation to some post-Keyensian economists who are calling for dramatic 'employment' tool(s).  They are in favor of a tool that basically negates the need to try and effect unemployment indirectly with interest rates and spending, and replacing it with a tool whereby the government would hire droves of people during recessions (kind of like a 'New Deal' instrument).  I've mentioned before I'm not in favor of such an idea in large part because it sounds needlessly bureaucratic, full of moral hazard, and could theoretically permanently increase the size of government to a dramatic and largely inefficient level.

However, what if the instrument were not employment levels but the actual wage levels - private wages - the government could control temporarily.   It wouldn't be bureaucratic since the government could pronounce say that, until such time X, Y, Z (sufficient employment/GDP growth has been attained), job-earned wages (including bonuses) are to be kept frozen across the board for EVERYONE.   This in effect would be a way around the New-Keynesian 'sticky wage / sticky price' problem.   According to classical theory if wages were allowed to freely adjust in recessions, employment would not fall as hard.   Economists point out that wages often don't fall downward (or even stagnate - many keep growing) due to union contracts, social pressure/norms, maintaining a sense of morale, etc.   But what if the government had all the power to set wages during extreme downturns?  That would take the stigma off of private employers.

It wouldn't be without issues: timing would still be important.  Rules vs. discretion would be as well.  I would imagine such a program wouldn't work (politically or otherwise) if it was left to discretion, but if certain rules were enacted as law, it might stand a chance.   What the rule is is best left to economists more mathematically inclined that myself.  I suspect tying it positively to some level of inflation would be useful such that the real wage keeps a level of stability.  Unions wouldn't be particularly happy about governments temporarily over-riding their contracts, etc.  But, I think some of them would come around when they saw that the alternative was significant unemployment.   Perhaps the biggest issue is the same big issue with all forms of fiscal/government-mandated stimulus - it all starts with politics, not economics.  That is to say, economics cannot be separated from its political cousin in the real world.  Devising a program rule that would withstand changes in political climate or parties should be paramount - but how one would go about doing that is a bit beyond me at this point....

At best, it could ease unemployment in recessions - create a more direct target for unemployment.  At worst, it could provide evidence for or against the very underpinnings of New Keynesian economics.

Monday, November 1, 2010

Top Reasons Not to Vote

I'm tired of get out the vote campaigns that pretend that they care about things like 'involvment', 'patriotism', or 'civic duty.'  Let's face it, when people say, "don't forget to vote tomorrow," what they usually mean to say is, "don't forget to vote for the party I support tomorrow."   So, what seems like a selfless, nation-enhancing act, is really nothing than self-interested politics.

There are two time-honored and indisputable legitimate reasons NOT to vote:

1.  You are ignorant about issues and/or candidates

If you don't know what or for whom you are voting beyond their name and their party, then you need to ask yourself why you are voting in the first place.  Are you just voting for a party that you think serves your interests?   That isn't always a safe bet particularly in today's environment where there's a lot of variance on certain key issues even within each party (blue-dog vs. liberal, neocon moralist vs. tea party vs. Rockefellarian).  Even worse, if you don't know anything about the issues, or if all your information is from mainstream media (be in liberally biased MSNBC or conservatively biased Fox News ....) ....then you likely are doing the country a dis-service by voting.  Not just that, but you are doing yourself a disservice.

2.  You are disenchanted with the political climate or discourse

If you are of the opinion that by in large (particularly at the Federal level, though not necessarily at the State level always...) that politics and the political climate has become dirty, corrupt, loud, or unintelligent, and if third parties are almost surely losers, then why vote for the establishment?   You can elect someone whose views are more in line with yours, but if the politics of the day preclude their goals from being realistically attainable, then what is the point in voting?

So, if you know who and what you are voting for and you are ok with one or both of the two main political machines, then by all means vote.  If not, then don't.  It's ok.  It's not your civic duty to vote.  It's your civic duty to be true to yourself.  Why take the time, gas, effort to stand in line to have a statistical probability of effecting an election equal to winning the lottery for something you either don't know enough about, or don't feel will be effectual in moving our country forward.

Tuesday, October 26, 2010

We Need More Trade Barriers with China

...and we need it now.

I've said it before, and I'll continue saying it.   And, I may be only econ person to do so, but damnit, the only way to fight this kind of stuff is to impose a penatly - and the best kind of penalty is a sharp tax on these kinds of goods coming from China.  Will it be perfect; will perfectly harmless goods be taxed?  No, and probably respectively.  But doing this is a sure way send a signal to China that these kinds of industry practices will not be tolerated.  We should demand this behavior stop, along with its trade currency manipulation.  Until their manipulation stops, we should continue to enforce our trade restrictions.   That's the only sure way to double exports or whatever absurd thing Obama thinks he's going to do without a real plan to do it.  At least this is a plan, and not some edict on high with no teeth.

Because the US is such a large nation in terms of the degree of importation of Chinese goods and exports on the world market, it has some power in the market.  Nevertheless, there would be some amount of dead-weight loss, which I suggest might be more than offset by the benefits mentioned in paragraph one.  In addition, by taxing these 'bad' goods, we essentially are correcting a negative externalities imposed by Chinese producers/government on American consumers.   Despite that benefit, consumers would be hurt by higher priced Chinese imports after the tariff policy is enacted.  However, the government would be taking in a presumably good chunk of change in taxes which it could then turn around and provide a progressive tax rebate annually until and unless China improves its aforementioned problems.

Friday, October 15, 2010

On the absurdity of some mainstream economic research

And now I introduce to you the most ground breaking research of our time:

... Come On People!  Really?  You are going to use 'equilibrium' and 'optimization' analysis on the behavioral/cultural act of cutting someone genitals off?   Welcome to the absurdity of which many (not all) in mainstream economics peddle.   Start off with 20 different assumptions about rationality, equilibriums, stable preferences, etc., and this is the kind of quackery the 'science' gives you.

Let me tell you, only an economist so brainwashed in the mathematics of 'rational' economics can say something like:
In this paper, we model FGC [female genital cutting] as a pre-marital investment. We show how the rat-race nature of the marriage market may result in inefficiently high equilibrium levels of FGC [female genital cutting].

Tuesday, October 12, 2010

Keynes: Disconnect b/w capital and labor markets

"The fact that an unforeseen change only exercises its full effect on employment over a period of time is important in certain contexts;-in particular it plays a part in the analysis of the trade cycle (on lines such as I followed in my Treatise on Month). But it does not in any way affect the significance of the theory of the multiplier as set forth in this chapter; nor render it inapplicable as an indicator of the total benefit to employment to be expected from an expansion in the capital-goods industries. Moreover, except in conditions where the consumption industries are already working almost at capacity so that an expansion of output requires an expansion of plant and not merely the more intensive employment of the existing plant, there is no reason to suppose that more than a brief interval of time need elapse before employment in the consumption industries is advancing pars passu with employment in the cap ital-goods industries with the multiplier operating near its normal figure." -J. M. Keynes, General Theory 

Keynes is basically saying (in the round-about way he does) that his Keynesian multiplier effect on spending should be highly correlated to the amount of labor employment created due to the increased spending.  IE, he assumes that his spending will lead to income multiplied which will increase the buildup of capital and GDP/output  and employment  of labor, quickly, not just capital spending alone... and not after too long of a time.   But our government's most recent 'experiment' in Keynesian economics calls into question the ability for simple Keynesian spending to quickly increase labor employment.   Unemployment has hovered at 9.6% for the last number of months despite increases in spending.  This is not a huge surprise as unemployment tends to linger for a long time after spending rebounds, but the lag is a problem for which Keynes assumes to not exist. 

If employment is the important variable for a Keynesian, why focus on spending?  Why not focus on employment multipliers?  Or as some post-Keynesians might advocate, why not have the government buffer employment more directly?  (I have mentioned reasons I think the latter is a bad idea)  Keynes' error was in assuming the majority of private industry would hire workers line-to-line with capital.  This simply isn't true.  The structure of our economy is that there are often large deviances between industry.  Further, it is also likely that a firm's first response will be to milk productivity out of existing workers as opposed to taking the hiring risk.  

Sunday, October 3, 2010

A thought for today

This just came to me:

(mainstream) Economics may be the only social science where when human behavior doesn't fit the model, humanity is blamed for the failure to conform to it rather than the model being required to explain the behavior.

Why is that?

Wednesday, September 29, 2010

On Global Domination

So I recently purchased "Civilization 5" the computer game (and popular series) which pits different civilizations in conquest (military, cultural, technological, economic, etc).  I used to play Civ 2 when I was a kid and loved it - was really quite good at it.  Civ 5 is more difficult, not because it's more difficult to conquer people or because it's difficult to advance new technologies - it's difficult because Civ 5 introduces a radical and in my view wholly unrealistic viewpoint of military conquest.

One of the ways you can win Civ games is to amass large armies (at the expense of culture, technology, etc) and try to take over other civilizations.  I like doing that - it's good for pent up aggression.   Who cares if you are the first civilization to reach space - that's not winning - I want to kick butt for the glory!

But here's the problem in the new game: every time you conquer a city, the 'happiness' level, not just of that city, but of your entire civilization permanently drops (until you spend game-decades building 'happiness' generating things like theaters, Colosseum, etc.).  Meanwhile, your production drops and your growth slows across the board.   You can't build things but you have a big army so you might think you could keep conquering and amassing more people and happiness that way, but the problem is, the more cities you conquer and the more population you add, the less happy your people are, the less you produce, and the less your population grows!

A couple comments from a gaming blog summarizes the problem:

A game where it's better to burn a city to the ground and slaughter the hundreds of thousands of inhabitants so you can replace it with your own settler just doesn't feel very Civ-like to me. It's one of my main complaints about the change to global unhappiness - I can see the citizens of THAT city being unhappy, rioting, refusing to work, etc... but why is it that just because I took over a city, everyone in my empire simultaneously decides to stop having kids?
KevinC is online now  Reply With Quote
Old 09-27-2010, 02:18 PM  #2978

Ironically you can't replace it with your own settler, that's the whole point. You can't actually HAVE anymore people. It's like immigration reform run amok. It's Finland saying "there are too many people for us to govern!" and then slaughtering everyone in Sweden and Russia to the last man, because it's The Only Way.
This doesn't make sense. Typically, the cities you are able to conquer are the cities that are weaker from a technology / economic standpoint. So, you would think that by liberating them from their squalor they might eventually be happy. But ok, maybe it takes a while for them to warm up to you, but that shouldn't affect your entire civilization's unhappiness and production. When Rome conquered the Greeks, sure the people in the Greek region were upset for a time, but they eventually assimilated - and certainly Rome wasn't "unhappy" that they just won new land, new economic resources, glory, etc.
Military conquest has costs and benefits - the costs are obviously the cost of the conquest itself (life and resources) and the temporary localized unrest it creates as well as long-run diplomacy with other countries. But the benefits are new and unique resources, new land, new opportunity and new knowledge. Civ 5 captures all the costs PLUS some costs that are completely unrealistic described above- which means you can't reap the full benefits.

Monday, September 20, 2010

The Recession is Over!

Or is it?   NBER announced today that our recession ended in June 2009.

NBER panelist and the author of the macro text I use in class had this to say:
"At least half of them excoriate us for saying that the recession is over, But we are only saying that things started to get better in June 2009, not that times are good."

My question to Robert Hall would be, "What are these things you speak of?"  If you mean corporate profits and overall GDP, yes.  If you mean base wage levels, benefits, raises, or employment, then I would further ask:

"Can I have some of the dope you are smoking?"

I am one of those that thinks we need to examine how we 'call' recessions and expansions.  Or perhaps we should just stop using the terms altogether.  Just call it like it is: GDP is growing and benefiting some, unemployment is still very high and not really budging and it is hurting others....

The Federal Reserve Bank of Richmond sees huge benefits in maintaining the status quo:
"Recession dates are useful because they combine
a great deal of information into a single variable
reflecting an informed judgment that the economy,
broadly defined, was contracting at a certain point
in time." 

For me, the aggregation of such data points, which by themselves are just aggregates of other disaggregated data, means you lose sight of what's really going on.  You end up not making an informed judgement on the economy, but rather you lose sight of reality - such are the problems with the assumption of aggregation in macroeconomics.

Sunday, September 19, 2010

What Should Have Been Done

My last post was rather bleak.  It paints a picture of our economy that is structurally problematic.  But that doesn't mean government has tools to reduce the structural unemployment problem.  

Monetary policy won't do. Monetary policy has done much to help stabilize the financial sector but it will do nothing substantial to reduce our structural unemployment issues.  

The fiscal stimulus was poorly designed - it's been too bureaucratic, slow, bloated, and not targeted to the problem at hand.  Demand stimulus old-Keyenesian style throws a lot of money at various sectors in the economy that have been previously known to add employment with the increased spending.   As such, much of the stimulus was aimed at a hodge-podge of things: infrastructure, health care, education, tax cuts, unemployment benefits, etc.   IE-the goal was to increase spending and not employment - with the idea that the employment would follow.  And I admit, at the time, I even bought in to this old line a little - I was hopeful.  I was also a sucker.  I'm not anymore. Surely, the stimulus helped a little, but to me the negatives of waste outweigh the nominal employment retention benefits. 

What we should have done with that money is spent the bulk of it on one thing: retooling the workforce.  We should have spent billions on new teachers, temporary work transition programs, partnered with our academic institutions and funded them new monies to create new transitional jobs programs.   That not only would reduce our structural unemployment problem - by speeding up the retooling of our workforce, but it would also invest in the skills of Americans - benefiting the long-run private sector.   Ironically, we instead threw billions out the window while our States' budgets faltered.  As State budgets fail, so do education institutions that receive State funding.

Saturday, September 18, 2010

The trouble of unemployment

In my intro macro class, I teach about unemployment and of course I teach using the severely limited tools of AD-AS model and Keynesian cross etc.... Such models would have students believe that reducing our current cyclical unemployment now at 9.6% is just a factor of 2 things that need to happen:

 *Allowing for inventories to properly readjust and for spending to get back to 'equilibrium' with production.
 *Allowing for prices and wages to properly readjust to allow for supply and demand to get back to 'equilibrium' with respect to 'full' employment of resources

Now, such insights are useful.  We in fact did need to have an inventory realignment (as well as a financial-sector realignment).   And indeed, the state of our financial sector and of our production levels have bounced back to a significant degree.  The second insight regarding prices and wages have taken hold as well.  Prices have stagnated for many quarters, as have wages.

So the question is, why hasn't employment bounced back?  Theory would have us all believe that producers would bounce back as input costs are low and as the economy improves and they would regain hiring.  There are a few flaws in the real world however that make this not a very useful observation:

1.  Producers don't make decisions largely based on present conditions, but rather they make decisions based on future conditions (of profits, of interest, of prices, etc).

2.  Not all recessions are the same:  many of our recent recessions did not require significant shifts in the makeup of our industries.  This recession has meant a complete retooling of our industries (our manufacturing is becoming 'greener', our financial industry is re-making itself, etc).  This retooling means significant increases in structural unemployment which necessarily means we will maintain this rate of unemployment for a significantly long period of time.

Further, this recession has been met with conflicting answers:  the private sector's answer has been to become more conservative, to do more with less, to increase productivity of the average worker while maintaining less workers.  The public sector's answer (our government) has been to spend, and spend some more, in hopes to rejuvenate the economy Keynesian style.   Whenever the public and private sectors act in such diametrically opposed ways, it breeds uncertainty.  Add to this the government's schizophrenic message: let's spend money, but let's cut the deficit, let's create huge housing subsidies, and then let's take it away, let's extend unemployment, let's not extend unemployment.... Uncertainty means perceptions of the future (see point 1 above) will vary widely and all of that contributes to our present situation, where one month things look good (in the labor market and in the housing market) and the next it looks bleak.  Of course, none of this added uncertainty is good for the economy in the short or the long-run.

This brings me to my point(S):
1.  Textbook macro teachings regarding the relationship b/w spending-employment-production should be taken with a grain of salt by students (and teachers that don't point out the numerous assumptions in the models are doing the world a huge dis-service).

2.  The Obama administration has been a huge failure if for the only reason that it has lacked clear decisive message and vision.  I agreed with aspects of the stimulus, but much of it has been a huge failure both in terms of message and in terms of results for reasons I've discussed before.   The administration has helped breed uncertainty which is the last thing we need right now.  (Note:  that's  not to say Republicans would have been any better - they don't really even have any message of their own it seems).  I should caveat this point by saying that I don't think there's  much the government can do about this recession anyway given the structural nature of it, but the fact that he thought he could apply (poorly) old-school Keynesian methods and call it "change" and expect huge results is appalling to me.   I'm just as tired as the next guy of the old Keynesian response of throwing money at problems and hoping it sticks.   It never works.

3.  I don't expect the unemployment rate to budge, now, or much at all even next year.  I suspect we now have a structural unemployment problem that could last years (ie., I suspect our new 'full' employment rate is probably above 7% now).

Monday, September 6, 2010

Obama: The Wizard of Oz President

Obama passed his ARRA stimulus at a tune of nearly $800 billion.   Unemployment skyrocketed beyond most predictions to 10% - where it has roughly hovered now for months.   Now, Obama - on a downward PR spiral, has decided to tell America to close their eyes, click their heels and repeat, "there's no place like hope, there's no place like hope."   Oh, and, take $50 billion and call me in the morning.  

...So let me get this straight, $900 billion didn't do the trick, but an extra $50 billion will make us prosperous again?  Surely our 'academic' President doesn't believe his own nonsense.  He probably figures it's something he can tack on in time for the November elections... and if things do start turning around in the employment department, it's one more thing he can point to....   I can't nevertheless help but feel a little 'talked down' to.  

Can this President do anything right?  Why did I vote for this ninny.  Bush was a complete idiot but at least he had conviction and a decisive goal - Obama just makes a wish upon a star (and by star I mean the US Treasury) and 'hopes' for the best.   I hope that in 2012 the American voters say to him:  "there's no place like home... and that is where we are sending you."

Wednesday, August 11, 2010

A Stupid Question

Where does the Laffer Curve bend?

My answer: Who gives a care.

The Laffer curve (or blob as I often call it in my econ class) is a dead concept (and has been for years).  There is no magic number.

Let's think about this logically.  A person has the first choice:  "should I work or should I not?"  Given that most people enjoy being productive and given that living costs money and given that people like living, then the answer in the vast majority of cases will be "yes."

Great, so the decision to work is independent of a change in income but rather is a function of wanting SOME income at all versus none.

Ok, so the next decision is, if tax rates skyrocket to really high levels, will I purposely seek to work less or at a lower paying job to get a lower tax rate?  On this question, the conservative assumption has always been yes.  But this is certainly far from obvious in my mind.  If I make a million bucks a year, unless I'm taxed 100% at that level, I'm not going to start flipping hamburgers at McDonalds for $10 an hour.   There is something to be said for the intrinsic satisfaction of utilizing ones skill set to the fullest.   Might I seek to work less hours?  Maybe, but for many Americans the decision to work less hours is not an option at that high level of pay.   You may be a CFO and go to the executive of your company and say, "I'd like to work 10 hours less a week".  And he'll say:  "K bye!  Don't let the door hit your ass on the way out."  Because guess what, there's always that OTHER person who's willing to take $800K instead of $1 million take home pay for the chance to work at that level full-time - especially in this market.

Monday, July 26, 2010

Credit Card "Miles" Scam

We've all gotten them in the mail from various credit card companies -  letters that read something to the effect of:
"Hey, you are so special that we are going to rip you off by misleading you into getting a card with a balloon interest rate of 10-20% by redefining the word 'mile'."  ... Or something like that.

In fact, I just got one in the mail this week:
I got a nice shiny letter with a statement in big bold letters saying: ..."earn 1.25 miles for every $1 you spend on any purchase...."

Really?  Well then you read the fine print (which may be too small for you read) written on this giant small-print fold-out brochure, tucked neatly away on panel 3 of 8, which says, "the number of miles you need for travel varies, and depends on the cost... simply multiply your travel purchases by 100...."

Oh...ok.  So, I want to go on an 800 mile trip that costs me $200.  I have earned 800 miles, but wait, we can't use the normal definition of a mile, we have to use this credit-card-created definition of 'mile' which is ticket cost multiplied by 100.  So I have earned 800 miles, but need 20,000 miles to travel 800 miles.  Sure, yeah, that makes sense.

Just to be clear, if you wanted to buy a $10 flight across town (just for a silly example) you'd need to have 1,000 fake miles saved up - which means you'd need to have spent $800 on the credit card just for that.  Call it what you will - fake miles, 'points', whatever... but they are not real miles and therefore it should be illegal to use that term in such a way as to mislead the public.

Of course most of us know this scam, but it is just an example of a simple marketing ploy designed to get quick-judgement people, teenagers, and senior citizens signed up for a credit deal that could ruin their lives.  Yeah, that's all.   The fact that every major credit card company does it should bother you.  Doing away with this nonsense is something that should have been part of the credit card reform bill that passed congress last year.

Wednesday, July 21, 2010

Neo-Chartalism, Part III

A question to MMT'ers.

Let's ignore the issue of insolvency, inflation, hyperinflation...all that jazz from Krugman/Wray....
My question is:

In this brave new world where the government spends, numbers are added to a bank account and that spending provides income to the under-capacity private sector to indirectly create some jobs [X], or, contrarily, let's assume the idea of a 'full employment' government guaranteed wage/job at $8 an hour or whatever is provided during a moderate recession to maintain employment - that income is provided by the government (labor spending) to hire that worker to do some job X.

Point is: deficits don't 'matter' (given underemployment) because inflation, stability, politics, perception, credit rating... aren't a concern (which I disagree with to a degree from my last post - but this isn't about that). ...

So the question is: what is "some job [X]?"  And, why do you suspect, in aggregate, that X people that would be otherwise underemployed / unemployed are better off working in a government created job (indirectly or directly) as opposed to some alternative?  I suppose my concern here has a bit of an Austrian tinge to it along the lines of inter-temporal missalocation of capital (and I'll extend that to include labor).  Why assume that the government won't create dynamic inefficiencies?

What happens to these jobs when the recession ends?  Who determines what these jobs are?  Would these jobs create unfair externalities on other private industries?  What about the capital investment created to support the public jobs?  Could these things and the ability to speculate on them create a different kind of government led bubble?  Surely some capital stock would already exist (the under-utilized stock) but certainly not all of it, and that which does exist would need significant retooling - capital purchased from private suppliers.  I recognize that Minsky (who I'll admit I was unaware he was a proponent of this) viewed this as not a real problem provided the employment would be in labor-intensive service type public jobs.  Though, to me, this 'program' just seems riddled with issues.   Though, I'd love your feedback MMT'ers.

But then let us assume that, beyond that question, the employment itself creates a perverse incentive to expect to just work a low-paying, low-skill public works job every recession as opposed to doing what people SHOULD be doing during recessions (re-tooling, continuing education, increasing skill sets, chasing dreams...)  Is that not problematic?

I thought that part of the heterodox tradition was not to blindly say, "it's the spending, stupid" but to anticipate outside the box economic concerns.  I see no real answers in your literature to these concerns.  I understand, from a paper provided to me that Minsky thought that it was 'unfair' to have workers tool to their jobs, rather, particularly in hard times, jobs should tailor to workers - but this strikes me as being a bit one-sided.  Is there not room for development and aid of the worker?   Maybe it's the heterodox in me, but this almost seems to take it to the opposite extreme from Austrianism.   I find that typically, the best policies are those incorporating ideas from numerous fields of thought - which typically means a meeting in the shades of gray.

I await your responses...cordially please....calling me 'sophomoric' is hardly a response.

Tuesday, July 20, 2010

Neo-Chartalism, Part II

I respond to the back-and-forth between Paul Krugman and MMT proponents (Wray, Galbraith).

I will put this caveat up front:  I may not 'get' MMT...despite reading numerous papers, blogs, etc. on the subject.  I don't see this as my failure.  I see this as the proponent's of MMT's failure.  They only ever respond with vague notions - never anything substantial.  This is a challenge.  Try convincing me.  Because if you can't convince me, you sure as hell won't convince mainstream economics, or this country. 

Krugman and Wrary back and forth: HERE

Garth Brazelton July 20 at 1:36pm - my general discussion with an MMT proponent
Still not convincing. No economist denies the obvious that technically the government faces no legal or operational constraint to money creation- or I should say bank reserves so as not to contradict circuitism. Krugman makes a valid argument that the government does however face choice of default or risk hyperinflation. Wray counters that by either putting his faith in politicians (which never makes for good policy) or then denying the problem outright by pointing to automatic stabilizers. I would say his latter argument is more assumption laden than anything I've ever read in any mainstream text. Who is to say the stabilizer would offset the spending over time? If taxes do need to be raised because spending occurs past so-called full employment (which is defined as what by MMTers), who is taxed and for how long? And politicians will do this for economic reasons only? I don't think so. MMT is the challenger - it has the burden of proof here.... So far I don't see remotely resembling a useful or reasonable argument to justify it's existence as a "theory.". It keeps saying that everyone else thinks the government is operationally constrained. No one is saying that. I at least am saying they are "effectively" constrained due to the reality that there are costs associated with deficits (including country credit ratings and foreign perception which seems to be often ignored by MMTers), which MMTers seem to just shrug off.
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Now, my thoughts...
So very clearly, Wray does not agree with me that defaults matter / are a policy concern. Wray is suggesting governments would 'rationally' fight against hyperinflation - that assumes a lot about the abilities and intellect of politicians, which I for one, am not going to go there. As Zimbabwe attests (and I know quite a bit about Zimbabwe), hyperinflation can develop faster than most politicians can draft 800 page pieces of legislation - let alone passing it.

Countries can go bankrupt. If we reach the point where our currency is worth less than the stuff we use to wipe our asses with, then we will become Zimbabwe. That may not be government bankruptcy, but that is private sector bankruptcy as corruption, cronism, milita activity along with the inevitable call for price controls, net capital outflow (flight) ensues. Worse case scenario but it's possible - and MMT (chartalism) is all about telling people that all this stuff is 'impossible.' Once the government is over-thrown (like Zimbabwe almost was) ...well...there's your governmental default... there's your restart button.

Even if it doesn't reach that extreme, the fluctuations in exchange rates, price levels, tax levels, the level of uncertainty that all that would create (something 'true' followers of Keynes and Minsky should appreciate) would surely become serious problems. I don't prefer deflationary risk to inflationary risk - I recognize the pitfalls of both - frankly, in this recession, I don't see risk of either to any huge degree right now. If prices started declining dramatically in the broad economy I'd be concerned, but they are not. I agree Ricardian equivalence (so called) is perhaps the most idiotic idea ever to come out of economics - but it doesn't follow that we should be creating inflation expectations by actually creating inflation risk via spending.

In the end, DUH, the government is monopolizer of our currency. That doesn't mean anything special - and no real economist is saying otherwise. It's pretty clear the Chartalists have this obsession with talking about how the government is not operationally constrained and about absolutes (very much counter to the post-Keynesian tradition which I find interesting). They seem to ignore that we, and the government are all politically, economically, and realistically constrained. In the end, I don't want to put all that power in the hands of politicians. I'm no monetarist, but they are correct in their critique of fiscal policy in this regard.

I remember when post-Keynesianism used to stand for realism and challenging assumptions. It was about promoting certain regulations and private market behaviors to fix the inherent problems in the private sector of a capitalist society - not about liberal spending. Government can do good work, and some spending is important which I've talked about here before (infrastructure, promoting a new direction in terms of energy) but to base a whole monetary (really, a fiscal) movement around amorphous 'spending' is contrary to common sense. Chartalism is not seemingly based in reality and is riddled with assumptions - They have created this Bolshovikian "reality" in their own minds - that our politicians can save the day and smooth out the business cycles - that deficits don't matter because we are going to create this automatic employment mechanism - a philosophy not wholly different from the 1960's Keynesians. If this is the new post-Keynesianism, count me out.

Thursday, July 8, 2010

Re-reviewing Chartalism / Neo-Chartalism

At request, I am re-reviewing this hot-button post-Keynesian topic. There seems to still be a debate within the post-Keynesian world about whether chartalism (of which I am still very skeptical) is in competition with or in conjuction with circuitism (of which I believe).

I am therefore revisiting chartalism - re-reading things I've read, and reading new stuff. I have to say I still have concerns about chartalism - about it's seeming tendency to ignore inflation, about the seeming assumption of a foreign exchange market in equilibrium, about its assumption that the demand for money is a function of the need to pay taxes as opposed to cancel bank obligations, etc. Basically, I have concerns like this and of those as outlined by Febrero here.

I note that Bill Mitchell, a current proponent and leader in the chartalism area, seems to answer the 'inflation' critique I mention above by pointing out that apparently with chartalism the fiscal authority (government) would need to create a base wage / full employment mechanism in order to control inflation - this as opposed to the current classical thinking of having monetary authority controlling inflation. I have to say that that this is a novel idea to me, and I'm considering buying his book to read up on his thoughts. And who knows, maybe it will help alay some of my concerns about chartalism. I have to say, so far, I'm less than impressed with the movements seeming inability to adequately and coherently answer these critiques. ...I'm continually pointed to this person's blog, or this person's unpublished (or sometimes published) paper. But none of it seems very cohesive.

Monday, June 28, 2010

I am calling it: we are in a depression

Kudos to someone who usually I don't agree with for calling this a year and a half ago, but I feel comfortable, now half-way through 2010 declaring that we are in a depression.

Economists have no quantitative definition of depression (which is ironic given that mainstream econ is nothing but a series of mathematical definitions and assumptions). Some say it's only when GDP fall by double-digit percent points, others have other definitions, still others have no real definitions - stating that the 1930s were the one and only 'depression'.

I would personally like someone to come up with the 'richter scale' for recessions...or at least the terrorist color grid: Code yellow, code orange, code red - defined by unemployment, underemployment, under-capacity, bank reserve hoarding...some combination thereof.

But, absent this, I would like to offer the following definition:

A DEPRESSION is "where unemployment or GDP growth is under typically defined 'full' levels for a period of time that exceeds the norm of the generation."

For my generation, the average economic recession lasts less than a year. This recession has gone on for 2.5 years SO FAR - with no turnaround yet projected for employment for months to come yet. Hence, we are in a depression. Maybe you are thinking, 'well duh.' If so, good for you. You shouldn't need someone like me pointing out the obvious to you.

Sunday, June 20, 2010

BP Debacle: Relearning a Lesson from Karl Marx

Karl Marx's dream of capitalism dying off to be replaced by a more utopian existence never really happened, and never will happen, largely because for all it's faults, capitalism works.

That being said, the BP oil spew can teach us of the primary lesson that Karl Marx taught which still holds true - labor has been and will always be exploited to some degree under capitalism.

Now, we can differ in opinion on exactly how/what is being exploited by the capitalist (business) on the laborer (the average Joe), but this exploitation can explain why some people are expressing reservation about talking down or financially hurting BP, despite their obvious failures. The reasons often provided often come down to just one thing: 'Americans work for BP, we are dependent upon them and other oil companies to live.' I like to imagine that Marx might be able to translate were he alive:

Capital is dead labor, which, vampire-like, lives only by sucking living labor, and lives the more, the more labor it sucks.
-Karl Marx, "Das Kapital", 1867

Wednesday, June 9, 2010

Liberals flunk mainstream econ? Or conservatives don't look outside the theoretical box?

Zogby released stats showing that liberals / Democrats have a huge lack of economic understanding compared to their more conservative counterparts. Daniel Klein recently wrote a WSJ op-ed about this which my friend asked me to comment on. My comments are as follows:

I disagree with Mr Klein, and appears my point of disagreement is largely with his statement,
To be sure, none of the eight questions specifically challenge the political sensibilities of conservatives and libertarians. Still, not all of the eight questions are tied directly to left-wing concerns about inequality and redistribution. In particular, the questions about mandatory licensing, the standard of living, the definition of monopoly, and free trade do not specifically challenge leftist sensibilities.

Having just glossed over the full Zogby questionnaire, I would still offer that perhaps these questions do more at highlighting philosophical / political differences than economic intelligence. I suspect that many liberals felt their core identity would be threatened if they didn't answer in ways that were sympathetic to their core beliefs. It is a strongly known psychological fact that when our basic beliefs are threatened, so are our identities. For example, one of the questions was "Third world workers working for American companies overseas are being exploited, agree or disagree...?" Liberals of course would agree statistically compared to conservatives - to do otherwise would suggest an attack on their identities, whether they were technically correct or not from an economic point of view. The issue is NO issue should ever be looked at STRICTLY from a mainstream economic point of view - which is precisely why this study is hogwash. To say liberals don't understand economics is an assumption. One could just as easily say, based on the data, that liberals don't see answers as being black-and-white or defined by just one method of study.

Other questions like, "minimum wage laws raise unemployment, agree or disagree?" is just as problematic, if not just for the fact that many economists (some even in the mainstream) have done studies suggesting that unemployment rates are negligibly or not affected or in some cases enhanced in the long-run with minimum wage standards. Mainstream economic theory says "agree," but it's not a fully testable hypothesis since unemployment and wage levels are not set in an experiment that mimics real life. Obviously liberals, who believe that there should be minimum standards of earnings would "disagree." And as I mentioned in the above paragraph, they might disagree regardless of whether or not they are technically wrong or right because they might view the issue of wage rates as affecting things other than unemployment - like creating a better life for workers that might otherwise be below the poverty level. It's a matter of framing, and of looking beyond textbook economics.

My final issue with the study and the op-ed I can explain by talking about another question that was asked: "Overall, the standard of living is higher today than it was 30 years ago, agree or disagree?" Mainstream economics of course shows that it has - unequivocally...based on the following assumptions: (1) that standard of living is defined as income per capita growth, (2) that income is defined by GDP, (3) that GDP is solely and sufficiently representative of income, and therefore standard of living, and on, and on ....

I teach in my class that many heterodox (outside the mainstream) economists have come up with other tools, besides GDP per capita growth to measure standard of living. One has to take into account resource depletion, externalities, inequality, number of work vs. leisure hours....

So do liberals lack a solid economic education? Or do they just see things other than the bottom dollar as being important? The flip-side question is, are conservatives too ideological/theoretically driven? Do they think outside the box?

In the end, this study doesn't really highlight which group knows more about economics, it highlights how ideologically one-sided and shallow the current state of mainstream economics is.

Friday, May 21, 2010

Why the Tea Party will Fail

The tea party will fail, and I submit as evidence, Mr. Rand Paul, the recent winner in KY's GOP primary election. He is backed by the Tea Party and its supporters.

Recently, just after his election win, Mr. Paul went on the Rachel Maddow show and Rachel played some (typical) 'gotcha' journalism and caught him in a loop of trying to explain his positions on discrimination policies, particularly those applied to private companies, and institutions.

Maddow: Do you think that a private business has a right to say that 'We don't serve black people?'

Paul: I'm not in favor of any discrimination of any form. I would never belong to any club that excluded anybody for race. We still do have private clubs in America that can discriminate based on race.

But I think what's important in this debate is not getting into any specific "gotcha" on this, but asking the question 'What about freedom of speech?' Should we limit speech from people we find abhorrent. Should we limit racists from speaking. I don't want to be associated with those people, but I also don't want to limit their speech in any way in the sense that we tolerate boorish and uncivilized behavior because that's one of the things that freedom requires is that we allow people to be boorish and uncivilized, but that doesn't mean we approve of it...

Of course some in the media and on the left have said, due to these statements, that Paul would try to get rid of the Civil Rights Act, or that he's some sort of racist. All that is ridiculous. Frankly, everyone should have expected Paul to say something like that. Because he's something much more scary than a racist: he's an extremist Libertarian (albeit in Republican clothes).

Rand, like many extremist Libertarians are ideologically and narrowly driven in their beliefs. They believe that government should be severely curtailed or abolished altogether, especially as it pertains to private industry and homes (taxes should be cut to next to nothing, subsidies should be eliminated, regulations on behavior, including hiring practices, should be limited to none). It also means condemning any government 'hand-slapping' when private industry does things that are bad for the public (because to an ideologue of this bent, that simply isn't possible). I hope this ideology sounds familiar to you, because it lines up very nicely with the Tea Party's stated beliefs and goals.

And so this brings me to my point. There are reasons that the Rand Paul's of the world, when they speak, don't stay in power long or are not elected in the first place - it's because they are extremists with no room for shades of gray. They believe in abstract principles and make the leap of faith that when practiced, these principles will make sense - without ever really developing any real plans. So, the Tea Party will die as well - because it is based on the same black-and-white extremist philosophy. People are voting for these candidates now because they are scared. Many tea partiers are backing people because they are scared, not because they necessarily agree or even understand the reality behind the Tea Party's principles.
Once the fear dies off, so too will the Tea Party --- along with the Libertarian extremists they support.

What does this have to do with economics? Well I've mentioned myriad times on this blog the connection between mainstream economic thinking and 'black-and-white' textbook ideology. The problem is the same - the reality of our economic system is in sharp contrast to this ideology. But is it fear that keeps the extremist side of mainstream economics alive? No, it's the power and the confusion I believe. They wrap themselves in a cocoon of dazzling math lights, distracting the students until their message simply becomes so convoluted or confusing or assumption-laden, that many just proclaim, well, that must just be 'how things are'. Then from this refusal to think beyond the dazzling light display, comes the power, accumulated over decades. We won't change the system by attacking the power. We will only change the system by exposing the ideology, and breaking the dazzling light display.

Monday, May 10, 2010

Downside of European Monetary Union?

When the US is in financial crisis, our Fed, for better or worse, can flood with system with money (either in the form of loan, or just out-and-out money supply cash. And that's exactly what it did in 2008 and 2009, and it did so fairly quickly, and consistently over the months.

The European Central Bank, because it has no real central governing body, and because it represents multiple distinct European countries, takes what seems like forever to initiate emergency monetary policy - causing increased uncertainty and market volatility in the process (the US stock market plunged hundred of points last week on concern for Europe, and then rose by as much today as Europe, with the help of the IMF, finally proposed a bailout package for Greece, Spain and other fiscally irresponsible countries in the Euro Zone.

Tuesday, April 27, 2010

Defining Sin

Followers of my blog with recognize that I'm a fan of some sin taxes (smoking is a no-brainer example), but enacting this dynamic pigovian taxes do have downsides. The biggest downside is, how do we define "sin?"

If I sneak over to your house while you are at work, shoot your dog in the face, and leave it on your porch for you to find when you get home, that is "sin" by most all accounts.

If I put a little extra salt on my french fries and eat it or serve it to others, is that sin? If it is sin, what does that sin cost? Surely if I know salt will kill myself or others in the future, and I knowing feed it to myself, then I am acting in a sado-masochistic fashion - I'm slowly killing myself or others, and damn it feels (tastes) so good.

But, do we know salt will cause harm to us in the future? If so, how much?

People can point to statistics and say salt is a factor in high blood pressure and heart disease. Others may point to statistics showing that, globally, that is not always the case. In the case of salt, many of the producers of salt-laden product have come to an agreement to voluntarily reduce their usage of salt in their products. In many ways, this is a much more palatable way of reducing 'sin' when compared to a forced taxation. But, I've come to learn that large corporations usually don't do something on purpose to hurt their bottom line - so one has to wonder if this is a temporary PR move that can enable companies to get on-board the 'health' train. I hope it isn't - if not it's a huge plus for Bloomberg and I give him kudos for getting around having to tax the salt out of peoples' mouths.

Tuesday, April 20, 2010

The Contract From America Will Destroy Us All

I originally posted this on facebook, but I think it makes sense to put this on the blog as well:

First, read the contract here:
Second, thank the flying spaghetti monster that they aren't in power (yet)

Here is my point by point critique, which I normally wouldn't do, but since it was requested:

1. Protect the Constitution
Yeah, sounds great, until you read the fine print - which would require congress to prove (to who?) that their legislation is allowed by Constitution. Last I checked, most everything Congress does is Constitutional, and if it's not, they are brought before the Supreme court. I assume this point stems from the health care bill - which is completely Constitutional and the vast majority of legal scholars agree. So, this is a ridiculous red herring for the fact that tea partiers, who tend to be old white guys, just hate the health care bill.

2. Reject Cap and Trade
I actually agree with this - I'm against Cap and Trade because I'm suspicious of it's ability to be geographically or socioeconomically equitable. But, I disagree with the subtext which says we should reject ANY legislation that is 'regulation that would increase unemployment, raise consumer prices....' Frankly, I think we need (at some point in time) some legislation that could do just that. This point has the same problem also that the first one does - who decides what regulation is "bad" and "good?" Sarah Palin? Count me out, bro.

3. Demand a Balanced Budget
OOOOh how original. First of all, Obama AGREES that we need to re-institute PAYGO. I like that generally, but again, the subtext is the kicker: a "2/3 majority vote for a tax hike?" Seems kinda random. What about a tax CUT? What about changes in tax code to maintain progressivity over time? What about spending to increase public infrastructure and tech improvements that the private market fails to do? I don't like GM bailouts, and I agree much of our spending is out of proportion, but I'm not prepared to be so absolutist and black and white like the tea party crazies.

4. Enact Fundamental Tax reform
HAHAHA. This one is easy. It's conservative code for a flat tax. I thought Forbes was dead, but I guess not. Limiting the tax code to be the same length as the Constitution??? Not even worth a comment.

5. Limited Government and Fiscal Responsibility (or as I like to call it, "Repubicans in disguise")
Every President that has been in office since I've been alive has done some version of this so-called blue ribbon task force, including Clinton and Obama - so I don't really see the point or value added here.

6. End runaway government spending
Not really seeing the difference between this and "5" above... they all start to run together. There's some merit, nevertheless, in limiting government spending to changes in inflation and population growth, from an economics perspective, but again, it seems like a 'hand-tying' kind of legislation which, if it were in place at the start of the financial crisis, would likely have crippled our economy.

7. "I hate health care"
Yeah, yeah, we get it. Too f-ing bad. You lost, get over it. I had to bare the damn Iraq war which I was against when it popular... I never said it was unconstitutional (immoral, maybe)

8. All of the above energy policy
I agree. This is what Obama campaigned on, and what he is doing. So what's your point?

9. Stop the pork
I agree with this - and I bet Obama would agree.

10. Stop the tax hikes
Wow, just wow. Only the tea party crazies can contradict themselves in their own contract. See point "5" above.

Monday, April 19, 2010

The movement is starting to churn!

I doubt that Mr. Macdonald saw my 'call to arms' post from a couple weeks back, but that makes his post all the more fascinating.

Sunday, April 4, 2010

Michael Burry Asks How Greenspan and other Economists Could have Missed the BOat

I'll tell you how:
Greenspan and many economists didn't realize they were neck-deep in water.

Were Burry and the handful of non-mainstream economists and business gurus that called the crisis a bunch of "lucky coin flippers?" I don't think so.

What they were were realists - not held down by textbook models of overly-applied math and unrealistic theories of finance and money.

Monday, March 29, 2010

Mmmm, this cocaine is delicious

If the study of rat-behavior in the presence of fatty foods can translate to humans, it suggests that pigovian sin taxes will not be enough to stop the growing obesity problem in the US. If over-eating can be like becoming addicted to cocaine, and humans increasingly tolerate pain (in the stomach and in the wallet) in order to satisfy their addiction(s), then the motivation to reduce consumption in the presence of higher prices/taxes will be inadequate by itself as a long-term strategy. After-all, coke-heads pay a hefty premium for their habit without blinking an eye.

So why isn't cocaine so prevelent? Well for one, banning a substance, while it does lead to black market activity, does work. Does this mean we should ban all fatty foods? No, I'm not suggesting that (in fact, if you were to take my peanut butter away I'd probably injure you). But perhaps there is a middle-ground? Perhaps the FDA should be given power to enforce stricter regulations of food content. Perhaps, dare I say, we need to change the way we reward children in the developing years. When I was a kid, after my mom's divorce, I had a bad habit of kicking the shit out of my cousins for no apparent reason. So, my mom took me to a behavioral psychologist who decided all my problems could be solved if she rewarded my good behavior with a McDonald's 'Happy Meal' each time. ... I don't think I need to spell out all the problems with that for you. Heck, even the way we market implies fat=happy. And why shouldn't companies market it that way... fat and sugar = big bucks to companies that rely on addictive eating behavior for their profits.

The government regulates how we safely drive our cars (seat-belts), how we safely go to work (not at age 10), how we safely drink our alcohol (again, not age 10), but the government does not yet regulate how we safely eat. Some major cities (New York) already have bans on trans fats. But obviously regulations can be problematic because they interfere with individual choice - exactly what fats are 'bad'? Where is the line?

But there are other more outside-the-box ways the government can get involved. The government could provide subsidies for 'buddy' programs. Some of us spend hundreds of dollars a year on gym coaches (think Biggest Loser), but completely ignored is that the real problem is not in the gym - it's in the home. People don't (just) need fitness experts, they need eating experts. The government could subsidize payment to dietitians etc. to basically become home nurses / 'buddies' in a family's fight to change their eating and food shopping beliefs and habits.

I'm no diet expert, but this is my two cents. I'd love to hear yours.

Saturday, March 27, 2010

Reviving Economics - Call to Arms

David Brooks (IMOP correctly) states that the state of (mainstream) economics is at a crossroads, and simply cannot continue along its current path without some major upheaval in thought and methodology.

Mainstream economist and textbook author Greg Mankiw disagrees (of course), and absurdly implies that mainstream economists were, for years before the crisis, paying attention wholeheartedly to financial structural problems. I'm sure there were a handful of mainstream economists dipping their toes in the water, but I know of no mainstream economist who put forth any real ideas - all the real ideas were coming from heterodox schools (for DECADES)which mainstream economics not so subtly abhorred and continues (amazingly) to shun (because its gains mean the very revolution David Brooks talks about). And I find it laughable that he invoke behavioral economics as if there is the great hand-holding relationship between behavioral economists and the mainstream. It's true that behavioral economics is gaining (and has received) some acceptance at the micro level - but there is still the undercurrent within the mainstream that behavioral econ is just a nice "add on" to mainstream models - which defeats the point.

There's a reason that the vast majority of economists and academics that predicted the impending doom were from heterodox fields - it's because textbook economics - arguably led and embodied by Greg Mankiw - is, by itself, a failure. I acknowledge the usefulness of much of what can be found in such textbooks - I still use a mainstream text to teach - but the old textbooks do need to be thrown away (or at least heavily supplemented). I threw away Mankiw's two years ago because there are other authors that aren't so dismissive of the need for the field to change.

David Brooks is spot on when he says:
"The moral and social yearnings of fully realized human beings are not reducible to universal laws and cannot be studied like physics."

And I'll let people in on a secret - students agree. I teach a mix of mainstream and heterodox concepts from a pluralist perspective - and I'm seeing the light bulbs go on in students' minds - the next generation, whether people like Mankiw like it or not, will change the field. Mankiw will have a legacy of supporting the stagnation of economics - via his short-sighted best-selling economics textbooks. But I for one will be proud that, albeit in a very small way, I supported the dialog of change that will help revive economics.

Friday, March 26, 2010

American Enterprise Institute is Bad Research

Nothing about AEI is non-partisan. They are group-think conservative Republicans. The end. Everyone of course already knows this, so I don't understand why serious academics even consider working for such a scientifically bankrupt and biased institution.

Thursday, March 18, 2010

Just To Make Sure My Fellow Hoosiers Understand ...

This brings two thoughts to mind

1. The utter inability for State economic forecasters to be conservative enough to match the reality of our recession (they have been way off estimates of tax revenue for 17 consecutive months). Failure to accurately forecast means spending cuts can't easily be reasoned over time but instead must be spur of the moment "oh crap we need to cut something or else" afterthoughts.

2. The spending restraint has been necessary. Indiana has a huge surplus largely from efficiency gains made to government and of course from the lease of the Indiana toll road. According to the budget forecasts (which are rosier than they should be as it is), without cuts made to education, State agencies etc. (again, it would have been nice if these forecasts were more accurate to allow less hasty decisions), our surplus would have quickly turned to deficit within months.

We still run this huge risk - even given current cuts. If and as revenue forecasts continue to be further off than we expect, we can expect more 'spontaneous' cuts. It is either that or lose our edge in the Midwest as the only State in the vicinity to not be in dire budget straights (relatively speaking). Risking that status, means not just risking the positive perception by businesses outside our State, but it risks the State premium credit rating as a whole.

Short of the Feds coming in and providing no-string-attached funds to States, there is no easy solution. But even if the Feds accommodated that. Does California deserve the same amount of funds per capita that Indiana does? Does an unruly child who throws tantrums when things don't go his way deserve ice cream as much as a more thoughtful child that recognizes the strength that a clam intellect can provide? IMOP, the Feds shouldn't be the spoiling parents for every State. Much in the same way that overly-simplistic Keynesian spending by the government can sometimes be for the benefit of the private sector's bad apple industries and interests over others, so does the same go for funding that the Feds spend on States.

Monday, March 15, 2010

Mankiw Doesn't Fully Understand Pigovian Taxation

I hate to pick on Prof. Mankiw some more, but last week he lambasted the 'liberal' NPR, which happens to be my favorite news source, radio station - it is just all around awesome. So, now he gets what's coming to him.

My issue is that he keeps saying 'sin taxes' are not Pigovian. I've disagreed on this point, and I disagree continually. A basic definition of a Pigovian tax is: a tax levied on a particular behavior in the market that is generating negative externalities. The idea is the tax re-aligns the real social cost with the benefits of the activity. Mankiw distorts this defintion and implies that negative externalities can only occur as an action by one group negatively affects another. Of course, this is ridiculous because behavioral studies show that, in reality, people do not always behave in a manner that is temporally beneficial. IE., people are short-sighted. So, a sin tax is not just the State imposing morals, it is helping people help their (future) selves. Just because there aren't always bystanders for eating bad foods for example, doesn't mean there is no externality. The externality is there - it's not external of self at that time, it's external of self OVER time. It's correcting behavior that, if a person had complete foresight and 20/20 clarity of the totality of their life, one likely would do less of. ...And this is ignoring the very real argument that many 'sins' DO have real negative external consequences at a given point in time - consequences on family and relationships that, while often non-pecuniary, cannot be ignored.

Mainstream economics has had a history of ignore the implications of time and behavior - and Mankiw promotes this problem. One can legitimately argue whether these tax systems should be imposed, but regardless of how you define it, it's a system that by necessity is a market intervention that involves some amount of judgement absent the ability to EVER fully measure the degree of negative externality.

Thursday, March 4, 2010

Reflections on a Past Self

This is from one of my early blog posts, back in January 2007:

I've been picking on Mankiw lately. Nothing should be read into that. He's undoubtedly at least 56% smarter than me, and he is one of the greatest economists of our time in my opinion. I consider myself a New Keynesian so I rever him in many ways. Besides, he's got the best econ blog on the web - so I have to post about him all the time - even though we often disagree. Besides, I love his text book(s).

It's amazing how much I have changed over the last 3 or 4 years. I don't think Mankiw is one of the 'greatest economists of our time.' I definitely don't consider myself New Keynesian anymore (I blame my schooling for indoctrinating that into me). And I certainly don't think Mankiw has one of best blogs on the web either - especially since he stopped allowing comments. And, above all, his textbooks are the most generic, least explanitive, most indoctrinating books on the market - yuck, yuck, yuck. Not to be overly critical, but I mean really... I know his texts are popular, but they are just not very good - pretty and popular, but not good.

Great Post Quoting Karl Marx on the Unique Importance of Money

Kudos to Brad DeLong for bringing this to the forefront.

Cyclicality of Labor Productivity

Most economists teach productivity is, obviously a key factor in long-run growth. But also, many teach that (as much data shows across time and across regions) that productivity has tended to be pro-cyclical - that it rises during boom times and falls during bad times. This obviously is not the case this time around.

Many less 'classical'-leaning economists claim that cyclicality of labor productity is not that simple - that it depends on what kind of economic cycle we are talking about. Supply shocks could potentially induce pro-cyclical productivity (one theory is that of 'labor hoarding'), but demand shocks like the one we are currently experiencing should, by their very nature of layoffs and cut hours, cause counter-cyclical behavior as those left with jobs are forced to do twice as much work in a given day (as the article notes).

So, I'm left with wondering again, what's the purpose of aggregation in macroeconomics if it leaves you with misleading results during times when analysis could really could use a little bit of realism.

Tuesday, March 2, 2010

Chartalism - Causality and Necessity is Problematic

(S – I) = (G – T) + (X – M)

So total private savings (S) is equal to private investment (I) plus the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents. That has to hold as a matter of accounting. It is not my opinion.

Thus, when an external deficit (X – M < 0) and public surplus (G - T < 0) coincide, there must be a private deficit. While private spending can persist for a time under these conditions using the net savings of the external sector, the private sector becomes increasingly indebted in the process.

I've continued my skepticism on Chartalism's basic arguments. First, I don't think, as many of them claim, that mainstream economists are ignoring an accounting identity. I am not particularly mainstream, but I think Chartalists are over-selling their argument. I agree with the above accounting equation. What concerns I have are two fold:

1. That the causality does not necessarily have to be government deficits CAUSING a net savings. An accounting identity is just that - it is not a model of causality. THe identity leaves open numerous and simultaneous causation runs. Net savings could fund deficits, a capital account surplus could fund net investment....

2. I disagree with the above statement, "...private spending can persist for a time under these conditions using the net savings of the external sector, (but) the private sector becomes increasingly indebted in this process."
How is this supposed indebtedness a given? If we are running a current account deficit, and by definition a capital account surplus, foreigners are providing us part of their savings to fund our negative net savings and government debt. What is it about this that is unsustainable for as long as our currency and economy is strong?

I agree with the typical post-Keynesian argument that debts financed from abroad can lead to bubbles in some cases, but not necessarily this Chartalist subgroup. I don't see how this means the solution is for government debt (deficit spending) to replace foreign funding to pay for investment spending. Further, I don't see how encouraging further private savings (less consumption) would be somehow less attractive than running large government deficits.

I get that the government is the monopolist of money and therefore has no offsetting liabilities for money assets in aggregate. I don't get how it necessarily follows, given the above, that the government should just spend and spend and spend, and print and print and print.

I'm still open to dialogue on this, but I have to say, the inability of chartalists to present a cohesive argument is not appealing. (And I've read up a LOT on this subject).

Monday, February 22, 2010

Confused by Obama's Re-Package of health care bill

First, Obama promised to bridge the gap of coopertation b/w Republicans and Democrats, but instead of compromise, and instead of coming up with his own plan (which I've said before he should have done from the beginning - it's called leadership) he decided to tweak the existing Senate bill and, in a completely stupefying move, INCREASED the cost of the bill by $200 billion - with the overall price tag in excess of $1 trillion.

Given that the public and most Republicans' beef with the House and Senate bills were largely their price tag and bloat, one would have thought that Obama might have been willing to compromise on the cost.

He has consistently said that any healthcare reform must be built around lowering costs, improving quality and coverage, and protecting consumer choices. He could have done all three simply by creating a government regulated private exchange and allowing trade of plans across State-lines, promoting HSA's, and focusing on reducing the driver's of costs (like by pigou taxing fatty foods etc.) as opposed to easing the symptoms (via large entitlements and subsidies). Would that have covered everyone or reduced costs by as much as possible? Perhaps not. But it would have satisfied all his conditions at minimal cost to the government (taxpayers).

This was Obama's (second) opportunity to show leadership on health care, and he failed, again.