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Saturday, March 31, 2012

Philosophical Fencing

Krugman vs. Keen.

Of course I would love if one day Krugman and Keen would be all friendly like, but for now I'll just sit back and enjoy the show.

It's pretty much now or never for Krugman to 'see the light'.   If he doesn't now I fear he's only going to become further entrenched in the mainstream morass of faulty assumptions.  If he does, it may mean the slight (gasp!) mainstreaming of post-Keynesian theory. 

I truly don't understand how Krugman doesn't get this.  He's a smart, Nobel Prize winning economist.  The 'savings' doesn't come from some reserve pool in order to make a loan.   The loan is extended and the 'savings' is from the expected pool of future wealth.  The bank extends credit and accepts an IOU from your present self because it thinks your future self can pay for it.   If you don't understand this, you don't understand debt bubbles.  

Friday, March 30, 2012

The Mega Millions Lottery and Regret Theory

Maybe it's because of my neo-classical economics training, but I'm not like many of my coworkers, who did not have any interest in buying the Mega Millions lottery ticket when the pot was $300 million, all of a sudden couldn't wait to buy their ticket when the pot is $500 million or $640 million or whatever.  Like $300 million (even after taxes) is somehow chump change or as if expected value of the lottery isn't the same or much worse than before!  Rational economic models can't explain this kind of thing very well.  They can't largely because the models are not very realistic.  They assume static preferences and preferences based on a perfect calculation of odds into one's utility function- as if each one of us have set utility function that makes any sense!

But in the 1980s as behavioral economics was really starting to gain ground (just after Kahnman and Tversky published their idea called Prospect Theory)  To many,   expected utility maximization just wasn't sufficient to explain real behavior in decision-making.  One of the outputs from that was regret theory.  The basic tenet of regret theory is that people aren't just robotic maximizers of their own selfish satisfaction, but more-often in many cases they are regret minimizers.

Regret theory can explain this odd lottery behavior we see in many people today.  As the dollar signs skyrocket in unclaimed cash, for a given prices of a ticket the chance of a big regret (of not winning such a historic pot of money) grows significantly, so many people jump into the game to minimize the chances of their regret.

Thursday, March 29, 2012

What I really wish mainstream economists would stop doing...

I wish certain economists, like Paul Krugman, would stop failing to critically think about what arguably more realistic economists (like Steve Keen) have to say.   Krugman writes an entire article criticizing because of his  assumptions (of his models) that Keen doesn't make in his because they are not realistic (exogenous money for one vs. circuit theory).  Additionally, Krugman seems to be stuck in the dark ages using what I take to be some loanable funds argument suggesting loans are a wash in terms of aggregate demand because there is some pool of 'savings' from which loans are made.   That is a strange thing for a so called Keynesian to do, but he does.  Keen's point is that there is no such thing as some fixed amount of loanable funds.  Banks can create its own loanable funds - that's the endogeneity of credit!  That is why banks are important to model - and excluding them from a model is idiotic.

It would be helpful if Krugman actually sat down and talked to someone like Steve Keen and wrote an article based on that.

Wednesday, March 28, 2012

Global Currency Reserve

I don't understand how some liberal (read: New Keynesian) economists like Stiglitz want to, essentially, create the same conditions that Greece now faces - only on a global scale.

Let's pretend Europe is the world (I know that's hard for us Americans who are used to us being the world).  Once upon a time every nation in the world had completely separate governments with separate fiscal policies of taxing and spending.  They also each had their own banks and their own currency.   The Germans had the D. Mark, the French had the Franc, the Greek had the Drachma....  

Then one day, some big-brain economist comes down to Earth (again, Europe) and proposes that the world should adopt one currency and therefore one central bank:  Euro.   Most of the world agreed, and from that day on, those that agreed lost their sovereign control over their own currency but kept control over the taxes and spending.  Greece decided to keep spending and spend even more.  Meanwhile a recession hits which killed any tax revenues.  The result leads to huge deficits that in the past Greeks could handle by, essentially, monetizing the debt - printing new Drachmas and to pay for the shortfall (or put more round-aboutly, having the Greek bank buy up Greek debt instruments in exchange for reserve digits in a computer somewhere).  

But this isn't the past.  In this new world, there is no Drachma and there is no Greek bank.  There is one common Europe bank and the Europe bank, because it's not Greek, doesn't have to play by Greek rules.  The European bank, misguidedly, forces strict austerity measures on Greece before providing any money to help out.  This results in eventual correction at the huge expense of increased unemployment and a really pissed off (rightfully so) populace.    

Now, view the preceding in light our real world (you know, the US).   Why should all nations want to give away their sovereign currency and hope that some global bank doesn't' do the same thing to many nations in the next recession the same way the Europe Bank did to Greece?

Greece is probably already screwed, but the rest of us aren't yet.   And I happen to think Warren Mosler's idea from a year ago of essentially (and somewhat sneakily) creating a new Greek currency (but not quite) by turning Greek bonds into a form of money (means of payments for public debt - pay your taxes with a bond!) was pure genius.  

Wednesday, March 14, 2012

Wednesday, March 7, 2012

Case in Point: DOE

I recently posted about how our politics is tainting the government's ability to do innovative things for the better of society.  Nothing is a more obvious piece of evidence of this issue than the US Dept. of Energy's complete ineptitude shown right here in Indiana.  One day they say they support something and the next day they pull the plug on it with no real reason given.  It smells of politics.

If you aren't willing to swim the whole lap , don't bother putting your toe in the water.  If you are going to support an industry and use it to try to stimulate the economy and aid long-run growth, you either need to be more engaged from day one (if you are not trusting of the company's setup right at first), or you need to front the money, put some minimal requirement on it (not the existing nearly impossible ones) and get rid of the 3 years of red tape.

But again, it is possible our party politics present such sensible solutions.  Perhaps it forces inefficient setups like this.   It seems chronic whatever the reason.

Sunday, March 4, 2012

Time To Get Rid Of Political Parties?

I was at my book club recently discussing Stiglitz's "Freefall."   We were discussing page 207 and the common conservative argument that if markets fail, government can fail worse.   The section talks about 'false choices' between market and government and makes the valid point that government will always be involved in so-called 'market' transactions be it with regulations, monetary policy, etc.  

I made the point that while Stiglitz mentions it as a problem, he really doesn't expand upon the idea that our politics are broken to the point where it puts up real barriers to good policy (he actually mentions it but then after 2 sentences proceeds to ignore it).  So, we might hope to educate our children in a more pluralistic way but that education alone may not be able to make a dent where it really matters (policy making).  

The argument my group made to that point is that in the private 'market', leaders of business are often the decision makers and they have no real incentive to improve the social order, but government might - at least have the incentive to evolve toward improvement.  But again I say, we ignore the institution of our politics at our own peril.  Just like individual businesses make decision in the private economy, individual political parties make the decisions for our government - it's not even the individual politician.  They are often granted seats on important committees and other favors by the leaders of their party - provided they do what they are supposed to - which is vote a certain way, which largely is to keep the party alive, not to improve society.  

Here's a common theme.  Party A enacts a policy, and it succeeds in some areas and fails in others at correcting market failures.  Party B, to ensure it's party's survival, takes a counterpoint to Party A's position - focusing on blaming all failures on Party A.   Lost in the discussion and the media is the fact that some of the failures perhaps were or could have been worse had Party A not enacted its policy.  Party B gets elected, eliminates Party A's policy, and we are back to step 1 again. 

 This seems to be the cycle the US political machine is stuck in in modern times.  Whether it's financial reforms, health care, or just blame for the economic situation in general - lost are the real issues, replaced by party fighting and spin.  

So, even if our economics discussion become more realistic, it would seem we need to simultaneously focus on changing our politics.   Is it time to eliminate the idea of party?  What purpose do they serve in our modern times other than to provide powerful bickering and a large infrastructure to invite powerful lobbies.  Would we not be better served by each politician versus each other politician - turning our politics more local ?  This argument is not new, but it also to date has not been very convincing.  So I invite you all:  Why keep our party system as is?  Or, if you agree we need a major change, how can we go about it?

However [political parties] may now and then answer popular ends, they are likely in the course of time and things, to become potent engines, by which cunning, ambitious, and unprincipled men will be enabled to subvert the power of the people and to usurp for themselves the reins of government, destroying afterwards the very engines which have lifted them to unjust dominion.
GEORGE WASHINGTON, Farewell Address, Sep. 17, 1796