This phrase has become all-to-familiar post-financial crisis with bankers receiving government bailouts and allowed to continue their abhorrent bonus structures and other practices unchecked.
But, if you think about it, this problem is pervasive in our modern economy, even absent government intervention.
Textbook economics assumes perfect competition. Students are often told, "well, nothing is ever truly perfectly competitive, but capitalism tends towards that." It's often stated as a truism, even though evidence suggests that our real-life capitalism whether due to some combination of economics of scale, cronyism, information and power asymmetries, etc actually tends toward oligopoly. Oligopolies have some significant degree of price manipulating power and can actually take losses for years and still not be forced to exit a market. In oligopolistic economies, price is usually not the factor that businesses in an industry compete on. Rather, they usually compete over product differentiation and advertising in general. (A nice example here)
The point is, if an industry or even just an individual firm in that industry is hit by a significant loss (negative profit, say due to a financial crisis, or whatever), oligopolistic firms need not cut their prices in the face of low demand - they can simply cheapen their product, or tack on hidden fees, etc (all the while marketing the fact that their products are new and improved and inexpensive). The result is that the losses that should at least partially be born by the industry, are actually largely passed on to the masses (the consumers) who are duped (via asymmetric information). IE, losses are socialized. In the opposite case, due to their market power inherent in their structure, during 'good times', oligopolies can reap huge private profits.
A more obvious way in which losses are socialized is that poor decisions (and by poor, I mean fraudulent in most cases) by the institutional management in a firm creates costs, but those costs are often passed on not via punishments to the bad decision maker but to the employees in the form of pink slips. Employment in financial and insurance services has fallen 7% from its peak in 2006 - about 400,000 employees.
Friday, July 20, 2012
Tuesday, July 17, 2012
Bernanke: Misguided, Egomaniac or Weakling?
He's definitely got to be one of the three.
Bernanke the misguided:
Maybe he truly believes the words that come out of his mouth in these hearing - that the Fed is 'ready to act' as if it has anything it can do at all. What we've learned is that interest rates matter very little in these kinds of deep financial recessions, and even if they did, the Fed has already pushed even certain mid/long-term rates to record lows. Is it possible that Bernanke wants to believe that he can help and truly is just misguided. Perhaps, but I think the probability that he could be duped this easily is low.
Bernanke with the big ego:
Maybe he's fully aware that the Fed's actions are likely to do little to stimulate the economy but he wants to come off to Congress and the American people as someone with a lot of power. He wants to continue living in a fantasy where everyone hangs on the Fed chair's every word as if at this point it really means anything. I don't know the man personally, but again, I have a hard time seeing Bernanke being Mankiw-like in this way.
Bernanke the weakling:
At this stage in the history of economic policy, Bernanke has had opportunities to really take it congress, to really express what I must imagine is his and certainly the average Joe's frustration with the deadlock, vitriol, and general dysfunction that defines our legislative branch. He could talk about how the fiscal dangers are not of 'running out of money' but of failure of the public sector to invest in our future or to help the private sector rebound - leaving employment and with it tax revenues fairly stagnant. But instead he talks in low tones about 'fiscal cliffs' - he suggests no innovative legislative actions beyond maintaining the status quo (not letting tax cuts expire, and not reducing government-driven demand beyond current levels). In other words, Bernanke the weakling knows the only potential solution, if there is one, lies with the legislative and executive branches, but he is too scared to push the point. This sounds like an academic economist - someone who is good at numbers but not good at message. Could this be the real Bernanke legacy?
Bernanke's response:
I don't know if it's his 'job', but it seems like the right thing to do for the country.
Bernanke the misguided:
Maybe he truly believes the words that come out of his mouth in these hearing - that the Fed is 'ready to act' as if it has anything it can do at all. What we've learned is that interest rates matter very little in these kinds of deep financial recessions, and even if they did, the Fed has already pushed even certain mid/long-term rates to record lows. Is it possible that Bernanke wants to believe that he can help and truly is just misguided. Perhaps, but I think the probability that he could be duped this easily is low.
Bernanke with the big ego:
Maybe he's fully aware that the Fed's actions are likely to do little to stimulate the economy but he wants to come off to Congress and the American people as someone with a lot of power. He wants to continue living in a fantasy where everyone hangs on the Fed chair's every word as if at this point it really means anything. I don't know the man personally, but again, I have a hard time seeing Bernanke being Mankiw-like in this way.
Bernanke the weakling:
At this stage in the history of economic policy, Bernanke has had opportunities to really take it congress, to really express what I must imagine is his and certainly the average Joe's frustration with the deadlock, vitriol, and general dysfunction that defines our legislative branch. He could talk about how the fiscal dangers are not of 'running out of money' but of failure of the public sector to invest in our future or to help the private sector rebound - leaving employment and with it tax revenues fairly stagnant. But instead he talks in low tones about 'fiscal cliffs' - he suggests no innovative legislative actions beyond maintaining the status quo (not letting tax cuts expire, and not reducing government-driven demand beyond current levels). In other words, Bernanke the weakling knows the only potential solution, if there is one, lies with the legislative and executive branches, but he is too scared to push the point. This sounds like an academic economist - someone who is good at numbers but not good at message. Could this be the real Bernanke legacy?
Bernanke's response:
I've been assigned to focus on maximum employment and price stability, not to hold threats over Congress’ head. Congress is in charge here, not the Federal Reserve.
I don't know if it's his 'job', but it seems like the right thing to do for the country.
Thursday, July 12, 2012
Our Legal System Supports our Crony Capitalism
What's wrong with this picture:
One the one hand we have individual citizens who steal things or money from other individual citizens. Laws vary from state to state, but here in Indiana for example, theft can get you anywhere between 6 months to 8 years in prison depending on what was stolen and how much of it was stolen etc. The average American will earn about $1.6 million over their lifetime, and so an individual thief may essentially lose up to 10% of their total lifetime earnings due to loss of income in jail (assuming the average person lives to be about 78 years old).
Now take not a person, but a large bank. A bank that has 'stolen' millions of dollars through fraudulent and just outright deceitful practices. This action just isn't one theft like someone stealing a painting or a car: it literally ruins entire families: hundreds or thousands of families across the nation. Yet, this bank, because of the power granted to them in our supposedly capitalist system, means they get a slap on the wrist of $175M. A bank like Wells Fargo has aprox. $80 Billion in gross income in one year. Therefore, Wells Fargo's slap on the wrist equates to about 0.2% of it's annual income. But wait, that not a good comparison to what Wells Fargo can earn and finance over its life. If we assumed Wells Fargo's 'life' was 78 years (just like a typical American), Wells Fargo's lifetime earnings would be over $6 Trillion, which makes $175M look like toilet paper. And Wells can earn exactly the same amount of money at age 78 as at age 20, because unlike individual people, banks never age and never have to worry about things like healthcare, social security, etc.
Let's recap. One person loses years of their livelihood and a signification chunk of lifetime earnings and all the family support that could have been provided during that time, all for stealing something as mundane as a car.
One bank, loses less than 1/5 of 1% of it's annual earnings for destroying hundreds or thousands of families across the nation.
Think about that.
One the one hand we have individual citizens who steal things or money from other individual citizens. Laws vary from state to state, but here in Indiana for example, theft can get you anywhere between 6 months to 8 years in prison depending on what was stolen and how much of it was stolen etc. The average American will earn about $1.6 million over their lifetime, and so an individual thief may essentially lose up to 10% of their total lifetime earnings due to loss of income in jail (assuming the average person lives to be about 78 years old).
Now take not a person, but a large bank. A bank that has 'stolen' millions of dollars through fraudulent and just outright deceitful practices. This action just isn't one theft like someone stealing a painting or a car: it literally ruins entire families: hundreds or thousands of families across the nation. Yet, this bank, because of the power granted to them in our supposedly capitalist system, means they get a slap on the wrist of $175M. A bank like Wells Fargo has aprox. $80 Billion in gross income in one year. Therefore, Wells Fargo's slap on the wrist equates to about 0.2% of it's annual income. But wait, that not a good comparison to what Wells Fargo can earn and finance over its life. If we assumed Wells Fargo's 'life' was 78 years (just like a typical American), Wells Fargo's lifetime earnings would be over $6 Trillion, which makes $175M look like toilet paper. And Wells can earn exactly the same amount of money at age 78 as at age 20, because unlike individual people, banks never age and never have to worry about things like healthcare, social security, etc.
Let's recap. One person loses years of their livelihood and a signification chunk of lifetime earnings and all the family support that could have been provided during that time, all for stealing something as mundane as a car.
One bank, loses less than 1/5 of 1% of it's annual earnings for destroying hundreds or thousands of families across the nation.
Think about that.
Friday, July 6, 2012
Thursday, June 28, 2012
Affordable Care Act Decision - My Opinion
The Supreme Court this morning published its final opinion on the matter of the Affordable Healthcare Act (ObamaCare) and the decision effectively finds the individual mandate is upheld, while the ability to withhold Medicare funds from States based on their unwillingness to accept the federal government's broadening of Medicare is unconstitutional. So this is a win-lose for Obama by the numbers, but a win-win in terms of the most important thing (individual mandate) being upheld, and that the Court did not find the entire Act unconstitutional just because part of it was ruled so.
I spent some time today reading both the majority opinion (written by Chief Justice Roberts) and the dissent (from the usual conservative Justices).
Recall the individual mandate says basically you either buy healthcare or you pay a 'penalty'. This will be enforced beginning in 2014.
The main argument with respect to the individual mandate from the majority opinion is that the Act is unconstitutional from the argument of commerce clause of the Constitution. Basically, the argument is that a lack of behavior (failure to buy health insurance) or the potentiality of eventual behavior does not constitute 'commerce' and therefore may not be relegated to the federal government.
However, they find the individual mandate is, overall constitutional because the federal government had argued that the mandate is, in essence, a kind of tax, and therefore is within the feds purview. In his argument, Chief Justice Roberts points out that the mandate, even though the President and Democrats in congress went to great length to not call it as such, is still a tax in practice as it is a revenue generating scheme that will be administered by the IRS should certain individuals choose not to buy health insurance.
The dissent argues that the majority is wrong in calling the mandate a tax, because Congress and the President clearly intended it to be a penalty, and in their view, never before has the court ruled something simultaneously both a "penalty" and a "tax."
I spent some time today reading both the majority opinion (written by Chief Justice Roberts) and the dissent (from the usual conservative Justices).
Recall the individual mandate says basically you either buy healthcare or you pay a 'penalty'. This will be enforced beginning in 2014.
The main argument with respect to the individual mandate from the majority opinion is that the Act is unconstitutional from the argument of commerce clause of the Constitution. Basically, the argument is that a lack of behavior (failure to buy health insurance) or the potentiality of eventual behavior does not constitute 'commerce' and therefore may not be relegated to the federal government.
However, they find the individual mandate is, overall constitutional because the federal government had argued that the mandate is, in essence, a kind of tax, and therefore is within the feds purview. In his argument, Chief Justice Roberts points out that the mandate, even though the President and Democrats in congress went to great length to not call it as such, is still a tax in practice as it is a revenue generating scheme that will be administered by the IRS should certain individuals choose not to buy health insurance.
The dissent argues that the majority is wrong in calling the mandate a tax, because Congress and the President clearly intended it to be a penalty, and in their view, never before has the court ruled something simultaneously both a "penalty" and a "tax."
“‘[A] tax is an enforced contribution to provide forthe support of government; a penalty . . . is an exaction imposed by statute as punishment for an unlawful act.’”But, the Act itself never makes not buying healthcare 'illegal' so it doesn't fit the dissenter's position well. From the majority:
While the individual mandate clearly aims to induce the purchase of health insurance, it need not be read to declare that failing to doso is unlawful. Neither the Act nor any other law attaches negative legal consequences to not buying health insurance, beyond requiring a payment to the IRS.I would slightly modify the definition of 'penalty' (to give the dissenters the benefit of the doubt) to suggest that rather than 'punishment for an unlawful act' it is really just an attempt, in aggregate, to 'modify behavior in some manner.' But even given this, in my view, the dissent's position is weak. Per the definition there is nothing to say that a tax cannot be both a revenue generator and a device used to change behavior. From an economist's perspective, these kinds of 'taxes' abound: taxes on cigarettes, taxes on CO2 emissions, etc.... are all money that is taken from the private sector, added to the public sector as 'revenue' and with the additional goal of changing behavior (using a stick to do so). And this is an argument that the majority makes persuasively. From the majority:
None of this is to say that the payment is not intended to affect individual conduct. Although the payment will raise considerable revenue, it is plainly designed to expand health insurance coverage. But taxes that seek to influence conduct are nothing new. Some of our earliest federal taxes sought to deter the purchase of imported manufactured goods in order to foster the growth of domestic industry.In any case, this case seems to point out the very sketchy legal line between what is a "tax" and what is a "penalty." From the dissenters:
In a few cases, this Court has held that a “tax” imposed upon private conduct was so onerous as to be in effect a penalty. But we have never held—never—that a penalty imposed for violation of the law was so trivial as to be in effect a tax.To me, it is interesting that Obama and the Democrats could have avoided this whole problem had they been straight with the American people and called this what it is: a tax. And to most laymen, a tax is always a penalty. It's a penalty for the aggregate private populace not voluntarily contributing to the public welfare. In some economic circles, all taxes could be considered nothing but a kind of penalty (ie., their purpose is only as a penalty or something to modify behavior such as saving and spending decisions, not to raise revenue). This can be true because the government need not tax to spend so long as it, in a broad way, has it's finger on the trigger of the printing press. In this sense, the distinction between a 'penalty' and a 'tax' is somewhat nonsensical.
Wednesday, June 27, 2012
Patent Laws Are Destroying Competition
In economics textbooks, students are usually taught by assuming a particular good sold at market is identical in all respects to its competitors. Of course in the real world, that is not the case - hence why there is no such thing as perfect competition. Goods are sold in different ways, in different locations, under different brands, with different materials and qualities, etc.
Patent law, which was created to protect intellectual property seems to have morphed over the decades as our society seems to have become more corporatist than capitalist to be less about protecting true intellectual property and more about stifling competition.
Take this recent Apple lawsuit against Samsung for allegedly violating some IPad patents. Now I'll admit they look the same on the outside - they are both black and rectangular with a glass front. Last I checked black was not a patentable color, nor was the shape of a rectangle nor was the fact that the front needs to be glass to see the screen. Having seen both products, while they cursorily look similar, they have different OS's, different feels, different button locations, etc. It's not as if Samsung took the exact IPad mold and stamped "Samsung" on it instead of "Apple."
But this kind of litigation happens all the time, and happens more and more. It stifles competition, erodes product-brand diversity in the market, and keeps prices higher than they otherwise should be for consumers - all to protect the corporate interest of a company like Apple which is flush with cash and simply does not need such protection.
If we want to get back to being a society with an economic system based on competition rather than corporate power, we need to revise our archaic patent laws to defer towards competition, not protectionism.
Patent law, which was created to protect intellectual property seems to have morphed over the decades as our society seems to have become more corporatist than capitalist to be less about protecting true intellectual property and more about stifling competition.
Take this recent Apple lawsuit against Samsung for allegedly violating some IPad patents. Now I'll admit they look the same on the outside - they are both black and rectangular with a glass front. Last I checked black was not a patentable color, nor was the shape of a rectangle nor was the fact that the front needs to be glass to see the screen. Having seen both products, while they cursorily look similar, they have different OS's, different feels, different button locations, etc. It's not as if Samsung took the exact IPad mold and stamped "Samsung" on it instead of "Apple."
But this kind of litigation happens all the time, and happens more and more. It stifles competition, erodes product-brand diversity in the market, and keeps prices higher than they otherwise should be for consumers - all to protect the corporate interest of a company like Apple which is flush with cash and simply does not need such protection.
If we want to get back to being a society with an economic system based on competition rather than corporate power, we need to revise our archaic patent laws to defer towards competition, not protectionism.
Tuesday, June 19, 2012
Subscribe to:
Posts (Atom)