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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.

Sunday, February 21, 2010

Australia is Getting it's (Yellow) tail kicked by the recession

The story is simple.
The boom days of the 2000's world economy were a boon for the wine industry, and no country relished in the success more than Australia, who took the concept of mass production and applied it to an industry that had historically ignored the average consumer in favor of vino savants.

But then the recession hit, and just like everything else, the wine industry came crashing down. And, according to a report by the Winemakers' Federation of Australia, and highlighted in the recent edition of "Wine Spectator" Magazine, due to reduced demand from the recession, there is now a huge excess of wines worldwide, and in Australia this excess is extravagant: the quantity supply of Australian wines now exceed quantity demand by 20%. There is a surplus of wine inventories equivalent to Australia's entire sales to the UK (100 million cases). The surplus is pushing wine prices lower - lower than even the Australians think is sustainable in terms of brand value.

Unless the Australians are willing to let prices plunge even further (which it doesn't seem like they do), the solution, from an economics viewpoint is to either put the grape-resources toward more efficient production (ie. cut the supply of wine), or they need to stimulate untapped demand. I personally don't see the demand solution as being workable - Australian wines are already heavily marketed. The supply solution is workable but would be a painful and messy transition. I think the Australians need to accept the factual irony that the value of their brand IS that it is low-value. They should embrace price reductions even further and allow the market to work itself out. They cannot sustain these unprofitable relative high price-points.

Thursday, February 4, 2010

A Teaching Dilemma

I will be teaching the intro macro chapter on monetary policy and the role of the Fed in a few weeks. For the 4 years or so I've been teaching I've always had concerns about the best way to teach 'the money' chapter because, frankly, most all of the 'money' chapters I've seen in many intro texts (Mankiw, Case, Hall, etc) really could be torn from the book's binding and probably the students would be better off.

I hate how the 'money' chapter discusses the role and makeup of the Fed while ignoring its history (why we have it, etc.) and comparing to how other economies in the past and present model their financial systems.

I hate how the 'money' chapter just nonchalantly shrugs off any discussion of endogeneity of money by saying explicitly, "it doesn't matter because either way the Fed is who influences interest rates." Of course the laughable absurdity of that statement hits me on so many levels since that statement implies something as true that is not at all always true in dynamic time-space, it implies aggregation of interest rates into 'the interest rate' is just a simplifying assumption, it implies that money demand is lesser or just not important - and it implies that the forms that money demand takes (as a positive force for growth or as a negative force that creates boom/bust cycles and instability) are unnecessary to know. Finally it implies 'money' as defined by circulated currency and demand deposits is the only thing that matters - any notion of credit demand or money created through credit demand is ignored. In sum, these chapters absurdly perpetuate the fallacy of composition and the idea that aggregation and simplification are wholly beneficial to learning and understanding our financial system.

Basically, the 'money' chapter can be said to teach a misleading (and now outdated) view of the role of the Fed, combined with the completely ridiculous and fallacious ideas of what is important about our financial system. The only thing students seem to take away from this chapter is that what's important is the ability for the Fed to create money via our fractional reserves system.

So now my dilemma. Over the last few years I've tried to teach from the text, and supplement with some basic concepts of uncertainty and its effect on money demand and our financial institutions. I've supplemented some basic Austrian ideas of how the Fed may be dynamically perpetuating mal-investments.

But I'm sick of saying one thing and having my text book say and focus on something completely different. Should I just ignore the chapter completely and risk my students missing a question or so on the Departmental final, should I present my concerns to Sr. professors, or should I just keep doing what I'm doing? It's getting to the point where I not only feel its a detriment to the students, but I literally feel ashamed when I teach the 'money' chapter. Does it have to be this way?