Sunday, November 20, 2011

Best multiple-choice question ever

I wish I had found this question while I was still teaching:
If you choose an answer to this question at random, what is the chance you will be correct?
a) 25%
b) 50%
c) 60%
d) 25%

(Found via Greg Mankiw's blog, which does not have comments. The source he found it on had over 700 comments Some suggested the question would be even better if the answer to c were 0%.)

Friday, November 18, 2011

Faith in financial markets

Someone lost faith that the rule of law still holds in financial markets:
Everything changed just a few short weeks ago. A firm, led by a crony of the Obama regime, stole all of the non-margined cash held by customers of his firm. Let’s not sugar-coat this or make this crime seem “complex” and “abstract” by drowning ourselves in six-dollar words and uber-technical jargon. Jon Corzine STOLE the customer cash at MF Global. Knowing Jon Corzine, and knowing the abject lawlessness and contempt for humanity of the Marxist Obama regime and its cronies, this is not really a surprise. What was a surprise was the reaction of the exchanges and regulators. Their reaction has been to take a bad situation and make it orders of magnitude worse. Specifically, they froze customers out of their accounts WHILE THE MARKETS CONTINUED TO TRADE, refusing to even allow them to liquidate. This is unfathomable. The risk exposure precedent that has been set is completely intolerable and has destroyed the entire industry paradigm. No informed person can continue to engage these markets, and no moral person can continue to broker or facilitate customer engagement in what is now a massive game of Russian Roulette.
Addendum: A lot of people think that greed is the key to capitalism. It is not--greed is a constant that exists in all economic systems. The key to capitalism is trust, and the conditions under which it is wise to trust others are difficult to develop and easy to destroy. Trust of strangers does not exist in many societies, and as the result their ability to use markets is limited. The rule of law with well-defined property rights is a key to generating the trust needed for a market society because it reduces risk.

Wednesday, November 9, 2011

Occupy Schumpeter

Reading about the various Occupy demonstrations around the country, I keep thinking of this quotation by Joseph Schumpeter from his Capitalism, Socialism, and Democracy:
"Electric lighting is no great boon to anyone who has money enough to buy a sufficient number of candles and to pay servants to attend them. It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to a rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort." p 67.
It is quite possible that none of the Occupy people have read Joseph Schumpeter though they all enjoy the fruits of capitalism.  Few probably have any idea who he was.

Tuesday, November 8, 2011

A stop-action music video

There is no economics in the lyrics of the this video, but there certainly are some in its production. It is was produced frame by frame with stop-action animation with jelly beans and a real person and took, according to the credits, 1357 hours to create.  I suspect that the 1357 hours was the time only for the creating of the stop-action part, not for the planning. I had not previously heard of the singer, Kina Grannis, but she has been using the Internet rather than a record label to develop her audience, and this video, which had over a million views in its first three days, certainly will help grow it. Her production team also released a video on youtube explaining how they made the video, which increases one's awe at the final product.

If the cost of an hour was $100, which is probably unreasonably low given the number of people involved in the project, the cost of producing the video would have been $136,000 for a three-and-a-half minute video that is available free. I suspect the cost was several times that, and the artist is not a big name. How do you justify that kind of effort and expenditure on a project like this? On the other hand, seeing the result, the risk was probably worth it and it may be one of the smartest investment of time and money of any music video.

(Found on Cafe Hayek.)

Monday, November 7, 2011

A view of CRA from 2004

Laurence Meyer provides an insightful look at the functioning of the Federal Reserve from 1996 until 2002 in his book, A Term at the Fed: An Insider's View. He was nominated by the President Clinton to the Board of Governors of the Fed, and in recounting his nomination, tells about the call he received from Joe Stiglitz (pp 14-15):
Joe ended our conversation by telling me that he didn't want to pressure me on any issues on behalf of the Clinton administration, but he did want me to know that the administration was strongly in favor of CRA.
Meyer did not know what CRA was, but Stiglitz handled the situation with diplomacy and sent him the information he needed. Meyer then tells the reader about it:
CRA stands for Community Reinvestment Act. It was passed by Congress in 1977 to remind banks that they are obligated to meet the needs of their communities, with special emphasis on meeting the needs of people in low- and moderate-income neighborhoods. Democrats love CRA because it demonstrates how the government can provide better opportunities for lower-income families. Republicans hate CRA because it represents interference by government in the operation of businesses (in this case banks.)
Meyer says that he became the Board expert on CRA and its chief cheerleader.

His book was written published in 2004, several years before the bursting of the housing bubble. One wonders how he would have written about the CRA episode if he were writing the book today.

Wednesday, November 2, 2011

Left and right

Recently The New Republic reviewed a book that had the thesis that "conservatism is always and everywhere a resentful attack on those who seek to make the world more fair." The reviewer quotes the book as saying, “Conservatism has been a forward movement of restless and relentless change, partial to risk taking and ideological adventurism, militant in posture and populist in its bearings, friendly to upstarts and insurgents, outsiders and newcomers alike.” Despite this, "all conservatives are reactionary."

The reviewer ultimately dismisses the thesis of the book and its claim that there are no real differences between the social conservatives and the libertarians, the Randians and the evangelicals. I suspect that the book tells us much less about conservatives than about the author. Conservatives simply do not worry about income and wealth inequality in the same way that the Left does. There are at least three reasons for this. First, income inequality, which is the focus of the left, is only one dimension of inequality and rarely the most important. Some people are healthy some are not, some people have loving parents and some people have abusive parents, some people have exceptional athletic, artistic, or intellectual ability and others have little ability. Even if it were possible to totally eliminate income inequality, the other forms of inequality would remain and they are more important than income inequality. Second, inequality seems more important if you view the world statically. The right tends imagine the world as dynamic and does not worry about inequality if there is mobility. They worry about immobility more than inequality. Finally, those on the right suspect that attempts to reduce inequality derived from market outcomes tends to increase inequality derived from the political process, and they fear that form of inequality more because it comes with coercion that is missing from market-derived inequality.  The gap between Bill Gates and the average citizen is much less than the gap between President Obama and the ordinary citizen.

Rather than seeing the differences between left and right as founded on differences in how each side views inequality, an alternative and in my view a far more insightful way is to consider how they view the marginal costs and benefits of more government. Aristotle argued that virtue was in the middle--either too much or too little of something could be bad. Economists get to the same idea with the concept of diminishing returns. The cost of most things not only rises as we get more of it, but the rate of rise increases. Though the benefit of most things rises as we get more, the rate of rise decreases. Without this idea economists would have a hard time discussing profit-maximizing for business or utility-maximizing for a consumers.

The figure below applies this idea to government. Not everyone would agree that this diagram is appropriate. An anarchist, for example, would have the cost of even a little government as greater than the benefit of even a little--there would be no intersection of the lines. But the vast majority of people would find this diagram captures at least a simplistic view of the matter.

People who believe that the amount of government is too small usually argue that much private spending is pointless or wasteful, while there are important collective goods that are not being produced. It was this argument in several books that made John Kenneth Galbraith famous. For people with his position, the country is currently to the left of the intersection. On the graph the labels for socialists and liberals are placed to indicate where these groups believe the county to be. They believe an expansion of government brings more benefit than it adds to costs.

Libertarians and most other conservatives believe that the country is to the right of the intersection. Even if some amount of government is essential in a modern economy, more government may not be better. If the size of the government were cut, there would be a reduction of benefits from government activity. However, if the funds needed for this government activity were left in the private sector, they would be used for more important things than they are used for by the government.

Some on the right go even further, however, They argue that the government has become so big that additional government activity does not have small benefit but it is harmful. Some of those who identify as supporters of the Tea Party movement seem to believe this, and their label indicates where they think the country is.

This approach is a simplification because the government does many things, and both those on the left and right may argue that in some areas the government does too much while in other areas it does too little. Nonetheless, it captures an essential difference between conservatives and liberals. Conservatives have more trust in market processes than in political processes and worry that the scope of government is too large. Liberals have more faith in political processes than in market processes and worry that the scope of the market is too large.