Friday, May 28, 2010

This explains a lot

From a recent Mark Steyn rant:
According to a Fox News poll earlier this year, 65 per cent of Americans understand that the government gets its money from taxpayers, but 24 per cent think the government has “plenty of its own money without using taxpayer dollars.”

Saturday, May 22, 2010

Green jobs

From Investor's Business Daily:

The professor, Gabriel Calzada Alvarez of Juan Carlos University in Madrid, produced a 41-page study last year on the European experiment of going full bore on the conservation front. He found that "the Spanish/EU-style 'green jobs' agenda now being promoted in the U.S. in fact destroys jobs."
For every green job created by the Spanish government, Alvarez found that 2.2 jobs were destroyed elsewhere in the economy because resources were directed politically and not rationally, as in a market economy.

Alvarez's findings, of course, were rejected by the environmental left, which tried to smear him as a stooge of the oil industry.
But inconveniently for the eco-conscious, his results have been backed up by Carlo Stagnaro and Luciano Lavecchia, a couple of researchers from the Italian think tank Istituto Bruno Leoni.

And from Pajamas Media, a translation of the article in a Spanish newspaper that is the source of the story:
The president of the United States, Barack Obama, doesn’t seem to have chosen the right model to copy for his “green economy,” Spain. After the government of José Luís Rodríguez Zapatero demonized a study of different experts about the fatal economic consequences of renewable energies, an internal document from the Spanish cabinet that it is even more negative has just been leaked.
The numbers in the long run are even scarier. The government itself says that the alternative energies sector will receive 126 billion euros in the next 25 years. Just an example: The owners of solar plants make 12 times more than what they pay for the energy coming from fossil fuel combustion. The majority are subsidies charged to the consumer.
The conclusion is that with the economy at the point of bankruptcy, it is not possible to keep injecting money in such a costly sector. And the government seems to realize this now.

Image that--government policy forcing a move to costly and inefficient methods of production does not make a nation more prosperous but less prosperous. Who would have ever suspected it? Certainly not the politicians. 

Even the New York Times recognizes that the welfare state is unsustainable

Europe is beginning to realize that it has built a Ponzi scheme, and the New York Times, of all places, is reporting it.
The reaction so far to government efforts to cut spending has been pessimism and anger, with an understanding that the current system is unsustainable.
Changes have now become urgent. Europe’s population is aging quickly as birthrates decline. Unemployment has risen as traditional industries have shifted to Asia. And the region lacks competitiveness in world markets.
According to the European Commission, by 2050 the percentage of Europeans older than 65 will nearly double. In the 1950s there were seven workers for every retiree in advanced economies. By 2050, the ratio in the European Union will drop to 1.3 to 1.
“The easy days are over for countries like Greece, Portugal and Spain, but for us, too,” said Laurent Cohen-Tanugi, a French lawyer who did a study of Europe in the global economy for the French government. “A lot of Europeans would not like the issue cast in these terms, but that is the storm we’re facing. We can no longer afford the old social model, and there is a real need for structural reform.”
Jean-Claude Meunier is 68, a retired French Navy official and headhunter, who plays bridge to “train my memory and avoid Alzheimer’s.” His main worry is pension. “For years, our political leaders acted with very little courage,” he said. “Pensions represent the failure of the leaders and the failure of the system.”
In Athens, Mr. Iordanidis, the graduate who makes 800 euros a month in a bookstore, said he saw one possible upside. “It could be a chance to overhaul the whole rancid system,” he said, “and create a state that actually works.” 

Monday, May 17, 2010

Meritocracy and feedback

Ross Douthat suggests a pessimistic feedback loop, that complex systems tend to become increasingly complex because they cause ever increasing problems:
This is the perverse logic of meritocracy. Once a system grows sufficiently complex, it doesn’t matter how badly our best and brightest foul things up. Every crisis increases their authority, because they seem to be the only ones who understand the system well enough to fix it.
But their fixes tend to make the system even more complex and centralized, and more vulnerable to the next national-security surprise, the next natural disaster, the next economic crisis. Which is why, despite all the populist backlash and all the promises from Washington, this isn’t the end of the “too big to fail” era. It’s the beginning. 

Found on the Econlog.

Friday, May 14, 2010

What economists do not know

Reuters reports on "Obama Counters Republican critics on jobs agenda":
Republicans say Obama's policies have failed to dent unemployment, a political sore spot for the president that has helped drag down his approval rating to 50 percent or lower.

Obama's $787 billion stimulus package approved last year by the Democratic-controlled Congress was largely rejected by Republicans. However, many independent economists have said the measures helped avert an even deeper recession.

Recalling the stimulus fight, Obama said he refused at the time to give in to "partisan posturing."
Why did the reporter throw in the sentence that I have highlighted? Why not put in this sentence: "However, many independent economists have said that the measure did little or nothing to fight the recession"? Economists are divided on the effect of the so-called stimulus package, with some believing that it helped and others believing that it did nothing or even made the recession worse. The only information this sentence contains is that the reporter believes the president and the Democrats are the good guys in this dispute and the Republicans are the bad guys.

Economists do not and cannot know what would have happened if the stimulus package had not been passed. Economists are not using current events to test their theories, but are using their theories to interpret current events. Those economists who believe that the stimulus measure helped hold that belief because their theory tells them that fiscal policy works. Hence, they conclude that without the stimulus the economy would have done worse. However, there are other economists who believe that fiscal policy is either ineffective or unpredictable in its effects, and they see no reason to believe that the economy would have done worse without the stimulus package.

Because economists cannot re-run history several times to see what would have happened with various policies, macroeconomics has long been an area of considerable disagreement among economists. However, the field is not totally without progress. Occasionally the results of policies are so dramatic that a theory loses plausibility. For example, the unemployment and inflation results of the 1970s killed the idea that there is a stable Phillips Curve. Sometimes examination of data from many years shapes what is plausible. For example, no one still believes that fiscal policy multipliers are anywhere near what the economists of the "New Economics" thought they were in the 1950s and 1960s. Even the Obama administration's economists were using government spending multipliers that were under two.

On a non-economic note, when has this president ever refused to give in to partisan posturing? Campaigning is the one thing he does really well.

Wednesday, May 12, 2010

the welfare state as the modern gold standard?

Robert Samuelson looks at the 1930s and wonders if today's welfare state may not be equivalent to yesterday's gold standard, a policy that no one dares question but also one that can only lead to disaster:
But there is another more sobering reading of the Great Depression. It is that painful and once unthinkable changes are made only under the pressure of acute crisis. One reason that central banks were so passive is that they clung to the gold standard: Relaxing credit policies too dramatically to rescue banks might lead to a loss of gold; people would demand metal to replace paper money. Gold was abandoned in various countries only after it seemed untenable. Similarly, the post-World War I debt problem wasn't "solved" until repayment was impossible. As for Britain's place as global leader, the United States assumed that role only in World War II.
Against that backdrop, today's unresolved problems -- over the welfare state, leadership in the global economy -- become more ominous. They suggest that major adjustments won't be made until they're compelled by some sort of crisis. This possibility defines the present economic drama. Will the recovery encourage conscious changes? Or is recovery providing a false sense of security? The stakes are, of course, enormous, because -- as everyone knows -- the economic suffering of the Great Depression transformed many countries' politics for the worse and led to World War II.

Saturday, May 8, 2010

OPM or other people's money

Margaret Thatcher once said, "...Socialist governments traditionally do make a financial mess. They always run out of other people's money." Her statement has been paraphrased as, "The trouble with Socialism is that eventually you run out of other people's money."

In the past week we have watched what happened as Greece ran out of other people's money because not enough lenders will extend credit. Greece almost certainly will not be the last European country to be in this situation.

It is also worth noting that another name for systems that run out of other people's money is "Ponzi Scheme." Ponzi schemes are often very popular in their early stages and people who get caught in them are very resistant to any warnings that what seems to be too good to be true usually is. Too few people realize that the social welfare systems of the West are Ponzi schemes that depend on ever-increasing population growth. They are not sustainable with the low fertility rates of the industrialized world. Everyone who looks at the data recognizes this, but no politician dares to act on it.

Thursday, May 6, 2010

Clueless in Washington?

The Washington Post recently added a blogger to cover the Right. It was widely remarked on conservative blogs at the time that the blogger was not a conservative, but a liberal. However, it seems that the editors at the Washington post may not have realized that.
Smith notes that some of the Post's editors are still clueless:
Some at the paper took Weigel for a true conservative counter-balance to Klein’s wonky, but fairly reliable, liberalism, two people familiar with his hiring said. Merida, in a web chat last month, was asked, “Will you (or Chris Cillizza) be adding more conservative/Republican voices to better balance what is now your predominately liberal/Democratic leaning coverage?”
He responded that “we recently have added to our staff the well-regarded Dave Weigel, who writes the new ‘Right Now’ blog,” before mentioning conservative columnists Kathleen Parker and Charles Krauthammer.
And some in the media wonder why they are losing audience and credibilty.

Monday, May 3, 2010

Wisdom in and of crowds

A few days ago I stumbled on a current events quiz at (I forget what blog or news site had the link.) I wondered how my students would do on it, and then I realized that I could use it for an experiment, to see if there really is wisdom of crowds.

I gave the quiz to three different classes. The first class got nine of the twelve correct, and only one student of 17 claimed to have a better score. My next class was a disappointment because as a group they only got five correct. They were reluctant to tell me how they did individually. The last class got eight correct, and three of 14 said they did better than that and seven said they did worse. The wisdom of crowds seems to depend on wisdom in crowds.

One question that all three classes missed was, "During the entire year of 2009, do you happen to know if there were more fatalities in Afghanistan or Iraq?" By an almost 2-to-1 margin they chose Iraq. The coverage of the wars by the press may explain this result. It publicized every casualty in Iraq while Bush was president but became silent after the surge led to military success. The press seems to have lost all interest in body counts now that Obama is president. The news no longer starts with the cumulative death totals, as it often did during the Bush years.

I cannot explain why almost none of them knew that Harry Reid was the majority leader of the Senate.

The one question that they all correctly answered was "Do you happen to know who Stephen Colbert is?" It may be true that Comedy Central is the major source of news for the young.

Sunday, May 2, 2010

The Greek tragedy

At The American Interest, Walter Russell Mead reflects on the situation in Greece and the difficulties limitations that culture imposes on a country's development:
The Greeks are a highly cultured people; the most popular slogan at the rallies was “The Croesuses should pay.”  Croesus was, of course, the extremely wealthy king of Lydia whose story appears in Herodotus.  The point of the protesters is that the rich should pay the costs of the economic crisis not the ‘blameless’ ordinary people whose only sin is to have voted for generations of demagogic politicians who promised to give them the moon and pay for it with other people’s money.
Greece is one of those countries like Argentina where conspiracy theories are widely seen as important intellectual breakthroughs.  As in Egypt and Russia, in Greece only a fool believes anything that authorities say; it must all be deconstructed to reveal the plots within.
In many parts of the world it is easy to spot a vicious cycle at work.  Because a country or a culture missed the visit of either or both of the two modernization good fairies (geography and culture) it starts out handicapped in the race to master capitalism and control their own destiny.  As a result, they fall behind, and lose power and control to other, faster rivals.  Capitalism becomes ever less popular, ever more associated in the public mind with a world system felt to be wrong and unfair.  Those feelings of alienation make it steadily harder for the country to adopt and follow the policies that could reverse the cycle and bring it success.  And so it goes.
Read the whole thing.  

Update: Riots with protesters killing innocent bystanders.

Saturday, May 1, 2010

Perceptions and incentives

Economists believe that incentives matter, but does the New York Times? When the paper recently ran a sensationalist article on child abuse and the Catholic Church, it did not think it worth mentioning that a major source for the article, an attorney, had been party to 1500 lawsuits against the Catholic Church. When the paper was challenged on their report, the editors doubled down and said the background of the source did not affect the story, that the issue was a red herring. My guess is that people would have reacted very differently to the story if it had given the background of its source, and that the people involved at the Times understand that. Because their source benefits when the Church gets bad publicity, he has an incentive to present only information and spin that puts the Church in a bad light.

Economists believe that people respond to incentives. The media seem to believe that perceptions are more important than reality. Both can be right.