Tuesday, December 30, 2008

Bank or cracker box?

A few days ago a story hit the wires about someone who found $10000 in a box of crackers. It turned out that an elderly woman had put the money there, and then in a mix up somehow the crackers had been returned to the store and put back on the shelves. The line that struck me was this:
The Lake Forest woman, whose identity was not released, had lost faith in her bank and decided the box would be a safer place for the money.
Everyone knows that a box of crackers is a much safer place to keep money than in a bank, right?

The story reminds me of another incident, but one that did not have a happy ending. In the little town that I called home half a century ago, there was an poor old lady noted for her holiness. After we moved away, she became ill and had to go to the hospital. Her fellow parishioners thought they could do a good deed by cleaning out her tiny house and buying her a new bed, which they did. When she came home, she got very agitated when she saw what they had done. It took a while for the do-gooders to come to the conclusion that the little old lady had put her life savings in the old mattress which they had burned.

Religion and self control

An article in the New York Times yesterday says that two psychologists have reviewed eight decades of research and concluded that religion is good for self control.
The rituals that religions have been encouraging for thousands of years seem to be a kind of anaerobic workout for self-control.”
Religious people have been arguing that for a long time, but now there is some science to back it up.

Benjamin Franklin was not religious but supported organized religion because he thought it socially useful. I wonder if he also had the insight that religion contributed to self control.

Sunday, December 28, 2008

The Minneapolis Fed

Under strange and unexpected circumstances I met a VP from the Federal Reserve Bank of Minneapolis two days after Christmas, and I asked him why the Fed Bank of Minneapolis had abandoned the building it had built in the 1970s. The building had received praise for its unique architecture. The feature that attracted the most attention was its use of the principle of a suspension bridge to support the structure. Despite its striking architecture, the Fed occupied the building for less than thirty years before moving to a new facility.

He said that although the building looked great, it was not people friendly. For example, the corridors were on the outside along the windows, so there were no offices with windows except for those of the top officials. Further, the building was long and narrow (like a bridge), which did not give it a good flow for people.

There were also some serious design problems with the building. It had used asbestos as insulation for the steel beams, but the windows were not watertight. (I think the suspension bridge architecture had something to do with this.) Asbestos insulation is not supposed to get wet, but this did. So after twenty years, the Fed was faced with a choice, to build a new building or to renovate the old one. The estimated cost of each was roughly the same, but the risk of the renovation option was larger because of the possibility of serious cost overruns.

The Fed sold the building and the entire city lot for a mere $500,000. However, the appraised value of the property was negative $15 million, so the Fed did pretty well in disposing of the property.

The buyer totally renovated the building, gutting the interior down to the I-beams. The process may have bankrupted the original buyer--my source was not sure. Then the developer widened the tower so that the suspension bridge construction is no longer visible from the front of the building.

The 1970 building was designed with the assumption that checks would soon be obsolete, but they continued. The newer building was designed with the assumption that people would continue to write checks, and checks are now a rapidly declining way of making payments.

I checked the Internet to see how much of this account I could verify. I found that what Wikipedia has is consistent with it.

Friday, December 26, 2008

Economics and college presidents

My colleague Michael sent me a link to an article by an economist who is now a college president explaining how economics shapes the way he does his job. He argues that it is important to understand economic concepts such as comparative advantage, incentives, price discrimination, and sunk costs to make good decisions.

Update: I finally read the whole article with care. The part that interested me most was his discussion of price discrimination. The author writes:
Strategically, the findings suggest that more-selective institutions will be better able to price tuition and grants at relatively high levels. Less-selective colleges would be better off with a low tuition and grant strategy.
I work at a less-selective college that tries to do a high-tuition, high-grant strategy and is frustrated with the results, so his statement makes sense to me. (I once told a director of financial aid that what he was doing was what economists call price discrimination. He was horrified and denied it. I knew then that we would be having problems with admissions for a long time.)

Thursday, December 25, 2008

Fiscal stimulus skeptics

Greg Mankiw had a post a while back that quoted part of an AP story identifying him as the only skeptic of a planned massive Obama stimulus package. He then followed up with a couple of other posts. There are, of course, many more skeptics than Mankiw. Skepticism seems in order partly because the evidence is that the Keynesian multiplier is low, and even more because of public-choice considerations, some of which are discussed in a Wall Street Journal commentary. For me the highlight of this commentary was its discussion of feedback, the possibility that bad economic results lead to bad policy, leading to even worse results.

Wednesday, December 24, 2008

Something free

From my e-mail:
If any of you still need/want a TV converter box, the last day to apply for the government coupon is Dec 31 https://www.dtv2009.gov/. You can redeem it for a free box (including free shipping and no taxes) at https://secure.freetvsignal.com/viewAll.php.

Tuesday, December 23, 2008

Lucas on the Fed

Robert Lucas approves the Fed's monetary policy in The Wall Street Journal.

a creek circle

Here is a very strange natural phenomenon, a creek circle. Check out the youtube video.

Death of creative destruction?

Is entrepreneurship dying? This opinion piece in The Wall Street Journal by Michael Malone says it is being strangled with government regulation and new accounting rules.

Monday, December 22, 2008

Rent seeking

Donald Boudreaux writes about the size of government, Blagojevich, and rent seeking. His commentary is in the Christian Science Monitor, but he blogs frequently at Cafe Hayek. Speaking of which, Russell Roberts had a couple of good posts there: a good piece on the source of the housing bubble, and a link to a video from 1933 arguing that inflation was a way to cure the Depression.

A better way to write essays

" The essay you have just seen is completely meaningless and was randomly generated by the Postmodernism Generator."

I just hope my students do not find it--though it probably only works for English classes.


(Go down to the bottom and there is a link to click. If you click it, it gives you another random essay.)

I wonder if they could alter this so it would generate the sorts of comments that politicians make.)


I mentioned that I did not understand celebrity, But maybe it can be measured. A recent piece in Slate talks about the feeling of elevation that some people get from Obama, who research now shows can make some nursing mothers lactate. This article helps make sense of a lot of what I have seen recently in politics.

Sunday, December 21, 2008

Fed Balance sheet

I have not written anything about the Fed Balance sheet lately, but at least one other blogger has.

The big three

Megan McArdle writes about the auto bailout and why the big three are the disasters that they are, and also about the potential mess of the Madoff fraud.

Saturday, December 20, 2008

Bank owned

Today as I was jogging around town looking at the results of our ice storm, I saw this.
Is it fallout from the financial crisis hitting small town America?

I've been busy

I have been too busy with other matters to post here lately, or to keep up with things I should be reading, such as this and this and this. I am not sure what to think of this or of this. Plus, my Internet connection was gone for 30 hours due to an ice storm.

Meanwhile, I am working on suggestions for further reading on Cybereconomics

Monday, December 15, 2008

A nasty auction?

I found this post describing an auction site that seems to be a bit like the entrapment game.

Sunday, December 14, 2008

I missed this one

I found a story on a blog that a tiny bank in Goodland was acquired by an insurance company so it could qualify for government TARP assistance.
I had not heard anything about this before.

Here is the story from CNN. The government certainly creates strange incentives.

Friday, December 12, 2008

Biggest Ponzi scheme ever?

Today there were reports of an arrest of a legendary Wall Street trader for fraud.
"It appears that at least $15 billion of wealth, much of which was concentrated in Southern Florida and New York City, has gone to 'money heaven.''
Bernard L. Madoff is accused of running a Ponzi scheme, in which he used money of later investors to pay off earlier investors. It appears that many hedge funds had entrusted money to him. Small investors will be hurt by this only indirectly since his investors were either wealthy or were institutions. Hedge funds are an investment opportunity for the rich, not for ordinary people.

Periods of market stress are the times when fraudulent firms and schemes often come to light. It is easier to hide fraud in bull markets. Perhaps this is another element of feedback in downturns.

Update 1: Here is an AP article on the range of people affected

Stories of the panic

Steven Landsburg wrote, "Most of economics can be summed up in four words: 'People respond to incentives.' The rest is commentary."

Peter J Walliston has been doing commentary, arguing that the incentives created by the government in its attempt to use markets to pursue social aims are the source of the current financial meltdown.
...U.S. housing policies are the root cause of the current financial crisis. Other players...played a part, but they were only following the economic incentives that government policy laid out for them.
Does it matter how we interpret events such as the current financial mess? Interpretation certainly mattered in the 1930s, when the predominant story was that the Great Depression was a failure of the market. That interpretation justified a many government programs and created a generation of socialist intellectuals. After World War II when decolonization took place, that interpretation led to many of the new nations pursuing socialist policies, with disastrous results.

The story that the current financial mess is the result of deregulation, which is popular in some parts of the press, is also a story that the market failed, and it logically leads to larger government. A story that government involvement led to the current crisis has completely different implications.

A major achievement of Milton Friedman was a convincing argument that the Great Depression represented a failure of government policy. The Federal Reserve pursued a procyclical rather than a countercyclical monetary policy. Without this reinterpretation of the Great Depression, the Ronald Reagan presidency would not have been possible. Keynes was right about the power of ideas.

Thursday, December 11, 2008

Shoe repair

I have used shoe repair as an example of an inferior good, a good that people purchase less as their incomes rise. Now a recent Associated Press article, with a dateline of Highland Indiana, re-enforces my contention that shoe repair is a good example of an inferior good.
Previous economic downturns have also brought about an increase in business, he said. There was a period when Jimmy Carter was president that the store had appointments for shoes backed up for at least two weeks, Forster said.
The report ends with this observation:
The economy may not be the only reason cobblers are seeing an increase in business.

Thomas Buck of Buck's Shoes in Valparaiso speculates that it's partly because many cobblers are older and retiring and aren't being replaced, resulting in less competition.

"It's something that's dying out," he said.
Why are they not being replaced? Because if shoe repair is an inferior good, it will decline as incomes rise, and incomes have risen during the past 60 years.

Wednesday, December 10, 2008

Environmentalists who do not know much

From OK:

GREEN campaigners called police after discovering an illegal logging site in a nature reserve – only to find the culprits were a gang of beavers.

Environmentalists found 20 neatly stacked tree trunks and others marked with notches for felling at a beauty-spot in Subkowy, northern Poland.

But when officers followed a trail left by a tree which had been dragged away, they found a beaver dam right across the river, as reported by the Austrian Times.

A police spokesman said: "The campaigners are feeling pretty stupid. There's nothing more natural than a beaver."

Tuesday, December 9, 2008

Almost-zero interest rate

NPR had a piece saying that interest rate on Treasury four-week bills was zero percent. I checked the Treasury website to see what numbers they gave. They did not say zero; they said the interest rate was .01%, which is lower than the last time I mentioned interest rates.

At the end of November, the one-month T-bill rate was .02%, the three-month rate was .01%, and the two-year rate was 1%. So far in December, the lowest rate for the one month bill has been .01% on 12-04-08 and 12-08-08. The lowest rate on the three-month bill has been .02% from 12-03 until 12-05. The lowest rate on the one-year was .49% on 12-09 and on the the two year, .82% on 12-04. The three-year rate has not yet dropped below 1%, but it got to 1.02% on 12-04-08.

These rates are astonishing and astounding. I get better rates on my checking account that these short-term rates. Why don't people just hold cash? They probably do, but the large institutions cannot do that as easily. For them, the short-term treasury debt is cash. These rates speak volumes about trust and confidence.

Markets in everything

Purdue is raising money by auctioning naming rights to new species of bats and turtles. It is the gift to give to someone who has everything.

Market failure or government failure?

From a Bloomberg report:
Dec. 8 (Bloomberg) -- Illinois Governor Rod Blagojevich said the state will suspend business with Bank of America Corp. until the lender restores credit to the shuttered Republic Windows & Doors company in Chicago where workers are staging a sit-in.

Republic Windows told the bank on Oct. 16 it planned to cease manufacturing in January after losing $5.7 million during the first nine months of this year and a total of $12.7 million in 2007 and 2006, according to a Business Wire press release issued by the company. The bank last month turned down Republic’s request to issue vacation pay to its employees, the release said.
We are in the worst financial meltdown since the 1930s due not to illiquidity but insolvency. The root cause of the problems is that the banks made too many bad loans, and government encouraged them to make some of those bad loans. If I did not have contempt for politicians, it would strike me as bizarre that politicians want to force banks to make loans that are even more unsound than the loans that got us into this mess.

Update: Even before I posted this, the federal government had arrested the good governor of Illinois on numerous charges, including the charge of trying to sell the Senate seat vacated by Barack Obama. How many of the last five Illinois governors have been arrested and tried for corruption?

Illinois has a Governors State University. Maybe it should also have a Governors State Prison.

Saturday, December 6, 2008

J. P. Morgan duing the panic of 1907

I have been reading The Panic of 1907: Lessons Learned from the Market's Perfect Storm by Bruner and Carr. They published it at an opportune time because there are parallels between what happened 101 years ago and what is happening today. There are also significant differences.

They start each chapter with a quotation or two. J. P. Morgan was the central figure in stopping the panic, and one of their chapter quotes is from him:
"I do not know what to do myself, but sometime, soneone will come in with a plan that I know will work; and then I will tell them what to do."
This quotation sums up a lot of what we want in leaders. They do not have to know what to do, but they have to be willing to listen and to have the judgment to distinguish good ideas from bad ideas. And then they have to be able to get other people to act on those ideas.

Friday, December 5, 2008

The unemployment numbers

The Bureau of Labor Statistics released the unemployment report for November this morning (December 5, 2008). It is a pretty gloomy report, with just about all categories or workers and jobs showing less employment. There was, though, at least one category that showed gains; "Health care employment grew by 34,000 in November. Over the past 12 months, health care has added 369,000 jobs." The population is aging, and old people need more care.

Despite a huge reduction in the number of employed (673,000), the unemployment rate was up only a bit, from 6.5 to 6.7 percent, and despite being in what seems to be a severe recession (that may get a lot worse), the unemployment rate over the past year has risen only two percent, from 4.7 to 6.7%. Why has the rise not been more?

The civilian noninstitutional population has increased by 1.889 million over the past year. I am not sure if that is larger than average, smaller than average, or about average. However, the group "not in the labor force" has increased by 1.101 million, which means that the labor force has increased by only .788 million, which is small.

The number employed has decreased by 2.362 million from November of 2007 to November of 2008. If we add this to the .788 million, we get the increase in unemployed, which is 3.150 million. That sounds big, but it would be much larger if either the civilian noninstitutional population had increased more or if there had been fewer dropping out of the labor force.

There are a couple of potential shock absorbers that may lesson the impact of the recession on the unemployment numbers. First, higher unemployment could decrease immigration. This would show up in the noninstitutional population. Second, we can outsource unemployment just as we can outsource employment. If people spend less on toys or clothes or electronics, the impact may be felt in other countries more than it is felt here. When the U.S. catches cold, China may get pneumonia.

There are always lots of unanswered questions in these reports.

Thursday, December 4, 2008

New home construction

The first house is now under construction in the new Sunset Ridge subdivision in Rensselaer. The developers began constructing the streets and storm sewers and all the other infrastructure before the bursting of the housing bubble, and for a while there was not much activity. Late in the summer activity again picked up as they paved the roads. Still, given all the reports of how severely depressed new home construction is, I was a bit surprised to see a house under construction here. Several other planned subdivisions have gone nowhere.
My hands got very cold in just a few minutes as I was taking several pictures. I wonder how much extra people earn for being willing to work under such unpleasant conditions. It seems to me to be a good example of where the concept of compensating differentials should apply.

Harvard's Endowment

I have been wondering how the colleges with the big endowments have been doing, and in today's The Wall Street Journal, there is a bit of an answer. Harvard's endowment lost at least 22% of its value, or about $8 billion from the beginning of July to the end of October. My reaction is that that is not really all that bad given what the stock market has done.
Update: An article at the Huffington Post suggests that the true value, using mark to market, is much higher, maybe 50%

The Beige Book reminds me of the spiritual

The Federal Reserve released its eighth and final Beige Book for 2008, and it paints a gloomy picture of the national economy. The Beige Book is one of three briefing documents that the Federal Open Market Committee (FOMC) uses in its meetings for background information. (The other two are the Green Book and the Blue Book, which are prepared by the professional staff of the Federal Reserve and are not, as far as I know, available to the public.) The Beige Book (the copies that are distributed to the FOMC members have beige covers) is a summary of economic and financial conditions in the twelve Federal Reserve districts.

The December 3rd edition was bleak. I read only a bit, but credit is tight, retail sales are weak, manufacturing activity and construction are falling, and unemployment is rising. "Almost all Districts noted reductions in exports." There were few bright spots. Demand for some skilled workers remained strong, and "Minneapolis and Dallas reported growing demand for bankruptcy services." Another is that there is no upward pressure on prices. And the farmers in the Chicago district had done well on the futures markets: "Much of this year's corn and soybean harvest had already been sold ahead at profitable prices, with most of the rest going into storage instead of being sold at today's lower prices."

I was struck by the repeated references to the tight credit. Credit is not tight because of a low amount of reserves--the Fed has poured reserves into the system. The source of this tightness seems to be something new--a problem with capitalization and trust. There are plenty of reserves, but apparently because the interbank markets are not working properly (a lack of trust), banks need a lot more reserves than they need when the system is functioning properly.

Which reminds me: the Marxists were wrong when they said that economics was about materialism. Economics is in fact a spiritual study because most of what is important is not material. Trust and confidence are not material, and neither are expectations, preferences, value, liability, and ownership. They are the foundations of economics and they are as spiritual as faith, hope, and good intentions.

Tuesday, December 2, 2008

Fiscal stimulus

The National Bureau of Economic Research (NBER) has decided that a recession began in December of 2007. That date means that the fiscal stimulus of the past summer was properly timed--it occurred early in the recession--which raises the question, "If fiscal policy works the way the textbooks say it does, why have things gotten so much worse?"

The current recession seems linked to two major shocks. The primary one is the bursting of the housing bubble and the mess of bad debt left in its wake. The housing bubble itself was encouraged by lending that made sense only by assuming that housing prices would continue to rise, such as zero-percent-down loans, interest-only loans, and the array of sub-prime and near sub-prime lending. Further, large banks and financial institutions thought that they were managing risk, but most of the risk management techniques assumed that the markets would function smoothly. However, when a financial panic hits, markets never function smoothly. Things that work without problems in normal times can fail to function in abnormal times. After episodes such as the stock market crash in October, 1987 and the demise of Long Term Capital Management in 1998, one would think that people running big financial institutions and the regulatory agencies would have been very aware of that problem.

The second and secondary shock was the oil-price run-up, which has now receded.

Some commentators point to the mark-to-market rules not as a source of a financial shock but as an amplifier of the downturn. I do not fully understand their argument, but it seems to be a feedback argument similar to Irving Fisher's debt-deflation theory of depression. A decline in the value of securities causes distress in some financial institutions that have to mark down the value of assets. Because their net worth is affected, they rearrange portfolios trying to flee risk, which causes a further decline in the price of securities.

Fiscal and monetary policy were designed to offset demand shocks, which is what the Keynesian economics that emerged from the Great Depression saw as the source of almost all instability. But is the source of our present recession a demand shock, or is it something else? And if it is something else, why should we expect any stimulus package, no matter how large, to fix the problem?

Addendum: Here is marginalrevolution.com on monetary policy.

Waste water plant breeds salmon

Here is a weird story: Chinook salmon breed in a waste water treatment plant in East Chicago and have been doing it for 20 years. It is not clear how they got there, but they have to swim up a shallow stream to the drainage pipe and then 200 feet in the drainage pipe to get inside the plant.
The salmon began spawning in East Chicago after the city built a new plant and switched from using chlorine to purify the water to using banks of ultraviolet light bulbs. The open channel behind the plant that runs into the Grand Calumet was a murky brown stream with a faint chemical smell from the chlorine before the change, but turned into a natural haven afterward.

When the fish returned, so did herons, kingfishers, then foxes and a colony of beavers. Naturalists from the Shedd Aquarium in Chicago and environmental groups have identified dozens of fish species outside the plant in numbers common only to the cleanest freshwater streams: rainbow trout, crayfish and largemouth and smallmouth bass.

Saturday, November 29, 2008

The tricky issue of fairness

A few days ago there was a news report about a girl whose parents were suing to allow her to play high school baseball, which in Indiana is a male sport.
An IHSAA rule prohibits girls from trying out for baseball if their school has a softball team on the basis that the sports are comparable. But the lawsuit filed Friday in U.S. District Court in Indianapolis argues that baseball and softball aren't really the same sport, so girls should be able to try out for baseball.

The suit seeks to have the IHSAA rule thrown out based on the equal protection clause of the 14th Amendment to the Constitution and Title IX, the federal law that mandates equal educational opportunities for boys and girls.
I wonder if those who think this suit has merit would also think that a suit asking that a boy be allowed to compete on a volleyball team or that a boy be allow to compete on a softball team would have equal merit.

How bad was it?

We may or may not have hit the bottom of the bear market. If we have, it is worth asking, "How bad was it?"

There are a variety of ways of computing the decline in the stock market. There are different indexes and there are different ways of measuring the same index. Using data I could readily find on the Internet, the monster bear market was the 1929 to 1933 bear market, which saw stocks decline about 89%, Stock prices did not get back to 1929 values until the mid 1950s.

In the past hundred years there have been three other serious bear markets. In 1919-21 stocks declined 46.58%. In 1937-38 they declinded 49.10%. And in 1973-75 they declined 46.98%. (There were also two bear markets between 1900 and 1908 that were in the 45-50% range.)

Using a different series (from yahoo.com), I compute the 2007-08 decline as 46.66%. This is from the Dow Jones Index, with a peak of 14164.53 (Oct 9, 2007) and a low of 7552.29 (November 20, 2008).

So a few of the old men on Wall Street have seen a bear market equally bad as this one, but none of them have really seen anything worse. We live in interesting times.

(I consider the S&P index a much better measure of stock prices than the Dow Jones Industrials. The S&P 500 fell from 1565.15 on Oct 9, 2007 to 752.44 on Nov 20, 2008, a drop of 812.71 points, which is a 51.92% decline. [Ouch! No wonder my pension fund looks so bad.] That decline is more than 10% larger than the drop in the S&P from Jan 11, 1972 (120.24) to Dec 6, 1974 (65.01), a 45.59% drop. So based on that measure, and assuming there are no nonagenarians actively trading there, no one on Wall Street has ever seen a bear market as severe as the current one.)

See an update here.

Excellent economists

In a November 28th 2008 opinion piece, Karl Rove praised the Obama economic team, and may have really meant it. I have been impressed: Geithner, Romer, Summers, and Volcker are all-stars either academically or in economic policymaking. Plus there are other excellent economists at the next level down. The market seems also to have been impressed, as the S&P rose from its close of 752.44 on November 20 to 896.24 on November 28, a 19% gain. That gain may simply reflect a rebound from its lowest level in over eleven years, but the case can be made that it reflects what is happening in the political world.

Update 4-13-09: The Obama administration seems to have wanted to use only the Volcker brand name, not the actual Volcker product.

Thursday, November 27, 2008

In praise and damnation of freegans

I kind of like the freegans, the people who want to get everything free. I too want to get everything free. And if I cannot get it free, I like to get it without paying money for it. (There is, of course, a huge difference.) I do not seek out yard sales, but when I happen upon them, I stop and check them out. I would rather visit a Goodwill or other thrift shop than go to a shopping mall. I ride a bike so I do not have to pay for gasoline. Rummage sales are fun, and I have even done my share of dumpster diving. I appreciate the saying that one man's trash is another man's treasure.

But I do not think I could ever be a real freegan because they write such embarrassingly stupid things. They see themselves as anti-capitalist and do not seem to realize that their lifestyle depends on the abundance that capitalism creates. Freeganism could not work well in a socialist country--there is not enough wealth to allow it. Their vision of the market is one of production and accumulation (which is also the view of a lot of non-freegans). They would probably even agree with the statement, "Consumption is the sole end and purpose of all production," or the statement that "consumption and leisure, not accumulation and hard work, are what Life is really all about."

It is almost a certainty, though, that they would not recognize the sources of those quotations. The first is from Adam Smith's Wealth of Nations and is a foundation of economics. The point of production or having a job is not to produce, but to be able to consume. Work is a means to an end. The second is from the amusing book by Steven Landsburg, The Armchair Economist. In it he describes his computer game of life, a computer game to teach people about economics. He says the most important point to teach is that consumption is the goal of economic activity. Landsburg is a libertarian who thinks environmentalists are religious wackos.

Exchange is positive sum--both sides of the exchange must benefit for the exchange to take place. It is the positive-sum nature of a market society that allows it to generate wealth. In contrast, theft is at best zero-sum. What one person obtains, the other loses. Theft is one example of what economists call rent seeking. Rent seeking can also be legal--trial lawyers are the ultimate rent seekers, taking without giving anything back. How about freeganism, which also takes without giving back? If freeganism is honest (they seem to be ambivalent about shoplifting), it is positive-sum. The freegan gains but no one loses. People who understand conventional economics should have no problems with the freegan lifestyle. What people who understand conventional economics should have problems with is the attempts of some to present it as the embodiment of a profound philosophy of life. It is OK to be cheap and want to consume without paying, but do not pretend that makes you better than other people.

When I was a graduate student at the University of Wisconsin-Madison during the heyday of student radicalism, a popular slogan of protesters was that we should produce for people's needs, not for profit. Many really believed that that they were uttering something profound instead of something incoherent. I think my distaste in reading the freegan justification of what they are doing is closely related to my distaste for the campus radicals back in the late 1960s and early 1970s.

Am I being too harsh? At the bottom of the page which explains the freegan philosophy is this:
"If you lack a printer or are reading this at a library with no printers, etc, and want paper copies, send a dollar to them...."
Is that a test? If someone actually sent a dollar, would it prove the person does not deserve to be a freegan? Or is this just another example of the confused freegan thinking?

Monday, November 24, 2008

A stimulus plan?

Much of the economy is struggling, but gun sales are booming. Maybe we could save the big three auto makers by threatening to ban the purchase of cars in six months, and people will respond by buying now.

Expectations matter.

Sunday, November 23, 2008

Maybe she needs a better business model

A "unique Seattle store" is going out of business because the owner cannot pay her rent:
A shop that lets you pay what want is becoming another casualty of the sagging economy.
Being unique in this case is not be a good thing--there is a good reason successful enterprise do not let the customer set the price. Why would a reporter write that the sagging economy is the source of the problem?

Getting ready for Thanksgiving

Sarah Palin was back in the news last week because some people were horrified that she gave an interview with turkeys being slaughtered or bled (I could not tell which) in the background. The commentary seemed to divide into two camps: the horrified and those who said that if you eat meat, you should not be afraid to see how that meat gets to your plate.

In our society we have managed to separate ourselves from a lot of unpleasantness that is necessary for life. An attraction of a show like Dirty Jobs is that it reminds us of that fact. Older societies were not so far away from those facts (unless you were very rich, in which case you could say things like, "Let them eat cake"). Primitive man was uncomfortable killing animals for meat, and as a result the whole process was sanitized with religious ritual. The main point of animal sacrifice in the Bible or in the Greek epics was not to waste animals, burning them for the gods or God, but to slaughter them for human consumption.

One of the troubling things about hunting is that some hunters do not seem to be troubled by the taking of life, but rather seem to be quite delighted by it. I have no problem with people hunting for meat. But some have no interest in the meat--they hunt for sport, and I do not respect that, even if their hunting is necessary to preserve a balance given that we have eliminated natural predators (especially wolves).

One of the comments I saw (I do not remember where) was from a farmer pointing out that farming itself centered on killing. He said that nature took care of the growing, and what the farmer spent his time doing was killing the competition: the weeds, the insects, the rodents, and anything else that threatened the crop. If you think of farming in that way, then there really is no escaping animal slaughter even if one becomes a vegan. Not only plants but also animals died for your whole wheat bread, your soybean tofu, and your three-bean salad.

Update. You might think you can avoid the slaughter by going organic. I doubt it. I garden organically, but when I saw the critter in this picture, I killed it. I did not eat it, though I think it is edible. Any gardener who does not kill the insects that feed in the garden will not have much to harvest.

Friday, November 21, 2008

Interesting times

Looking at the price-to-earning ration of the S&P 500, it appears that stocks are now cheap.

On Thursday the yield on the two-year Treasury note fell below 1% and the yield on the 3-month bill was .02, as low as it was in September. The data are from a Bloomberg article.

The stock market seemed reassured with the announcement that Geithner would be the next Treasury Secretary closed up on Friday. It would be nice if Thursday was the low. Maybe it will be, but predicting is hard to do.

In late October I had a little contest in one of my classes in which students were supposed to answer four questions:

Question 1: What will be the lowest value at closing for the S&P 500 in the present market panic, which for the purposes of this contest is between September 1 and November 28? (It might have happened already, it may still be coming. You decide.)

Question 2: On what date did or will the S&P hit the low before the end of November?

Question 3. What will the S&P close at on November 28?

Question 4. Will the S&P rise or fall on November 5?

Four entered. At least two thought the lows were reached on Oct 27, 2008 at 848.92. They all thought the market would rise Nov 5. And they were all predicted a S&P value of about 1100 on Nov 28. At the time, I thought those were very reasonable predictions.

We live in interesting times.

Thursday, November 20, 2008

Starving in Zimbabwe

Angus Shaw writes for the Associated Press about starvation in Zimbabwe:

"There's nothing here. People are dying of illness and hunger. Burial parties are going out every day," said Michael Zava, a trader in Mhangura.

The hospital that serves the district is closed, and so is its small morgue, so there's no way of telling how many are dying, Zava said. Children's hair is discoloring, a sign of malnutrition. Adults are wizened and dressed in rags — they have no cash for new clothes.

Zava said he has seen villagers plucking undigested corn kernels from cow dung to wash and eat. A slaughtered goat is eaten down to everything but hooves, bones and teeth. Crickets, cicadas and beetles also can make a meal.

The food crisis began after 2000, when Mugabe launched an often violent campaign to seize white-owned farms and give them to veterans of his guerrilla war against white rule over the former British colony.

Confirmation Bias

Michael Shermer uses this anniversary of the Jonestown massacre to write about confirmation bias:
[Confirmation bias] is when we look for and find evidence to support what we already believe, and ignore or rationalize away evidence that does not. And because we are so tribal by nature, we employ confirmation bias with extra vigor when it comes to defending the groups we belong to.

Research on confirmation bias has found that when subjects are presented with evidence that contradicts their deeply held beliefs, they dismiss it as invalid, while other subjects treat the same information as valuable when it confirms what they believe.
I have written several posts that highlight confirmation bias, though with different names. See here and here. It is something we all suffer from and that we probably cannot overcome, but acknowledging it may lessen the problem.

Why McCain lost


Wednesday, November 19, 2008

xmas gifts

In an e-mail discussion of Christmas gifts, one of my sons (who must have way to much time on his hands) found the Slingshot Flying Cow With Moo Sound. It is described in this way:
They work like a slingshot and scream while flying. They are approximately 9" long and fly well over 50 feet. The harder you pull back, the further they will fly. Slingshot Cow flies with a mooing sound!

The Slingshot Flying Cow is nothing short of outrageous! The Cow can be shot long distances using his elastic arms. Put one finger in each of the hands' pockets, pull back and let go. The soft, furry Cow is funny with its big head and bulging eyes. As an added bonus, every time you shoot him, he lets out three loud mooing sounds. We don't know why he does this, he just does. If your office or home needs some seriously funny props, you'll love the Slingshot Flying Cow.

There are also slingshot frogs, chickens, pigs, ducks, and monkeys. I wonder who will be getting one this year.

Fed Balance Sheet V

It has been a while since I wrote about the Fed's balance sheet. On Nov 6 I noted that reserve balances with the Fed were an astonishing $493,633 million. Somewhat earlier, on Oct 21, I noted that the three-month T-bill rate had risen above 1%.

I expected a month ago that the situation would improve, but there is little evidence in the numbers that it has. Today, Nov 19, short-term interest rates were again extremely low. The three-month rate was a mere .07 percent, which was actually lower than the one-month rate of .09%. Still, that beats the .03% of Sept 17, 2008. People are interested only in safety and do not care about return.

Reserve balances with the Fed have increased further, to $592,144 million for the week ended Nov 13, 2008. How high will they go? I have no idea.

Meanwhile the stock market continued to sink, with the S&P 500 Index ending at 806.58, its lowest level since March 12, 2003. How low will it go? Again, I have no idea. It is an interesting time to be an economist, but not an enjoyable time to be approaching retirement.

Tuesday, November 18, 2008


I recently noticed a drop in my spam mail. Here is the reason why.

Gold coins

A column in the New York Post reports that there is increased demand for gold coins even though the bullion price of gold has not risen. Gold is an asset that becomes attractive when there is fear of inflation, so my presumption is that more people throughout the world are now worried about potential inflation. (I remember the 1970s too well to dismiss the possibility of future inflation.) The column explains the failure of gold prices to rise in this way:
"Gold should be moving up," Murphy says. "How could there be such a dichotomy between the historic high premium for coins all over the world and the low Comex price?"
His answer? "Today the public is buying gold like crazy, but the US government and the banks that hold bullion are intentionally keeping the price down."
I do not know enough about what is happening to be able to judge whether that answer makes sense or not.

Rational ignorance

Economists argue that it is usually rational to be ignorant, and that it is rarely rational to be well informed. This conclusion is simply the result of cost-benefit reasoning. There is a vast amount that a person could know, but a very limited amount of time to learn, so what we know is tiny compared to what we do not know. Further, most people will be poorly informed with regard to political matters because there is no clear benefit from knowing them.

Someone who does not like President-elect Obama has posted a video that is both funny and also an excellent example of rational ignorance. The site acknowledges that interviewing a few people is hardly evidence of anything, so it commissioned a Zogby telephone poll to ask its questions. The results showed that 57.4% could NOT correctly say which party controls congress (50/50 shot just by guessing), but only 6.2% failed to identify Palin as the one with a pregnant teenage daughter. The site is http://howobamagotelected.com/.
Update: More information about the poll is here.

Monday, November 17, 2008

Two stories of overpopulation

Indiana has had a problem with the deer overpopulation in the state parks and forests. When the deer, which no longer have natural predators here, become too numerous, they destroy the vegetation. The solution has been to close the state parks for a few days and allow hunters to kill deer.

Meanwhile areas of the west have a problem with horse overpopulation on public lands. When the horses (and burros) become too numerous, they destroy the vegetation and habitat. The solution has been to round up the horse and let people adopt them. Some that cannot be adopted become wards of the state.

Some obvious questions: Why not have a horse hunt? Does it make sense to protect horses in the wild given that they are an invasive species, not native to the habitat? Does it good policy to spend $38 million a year managing a "wild" horse population of 30-35 thousand? Why should it be illegal to butcher horses for meat? Why do we seem to demand different treatment for animal species that we view as pets?

Sunday, November 16, 2008


Here is a report from Iceland, the nation that has been most severely hit by the financial panic.

Unintended results

I am not sure where the economics are in this story from Nebraska, but I am sure there must be some. Nebraska may alter their safe-haven law that allows parents to abandon children at hospitals. More than half of the children abandoned have been teenagers.

If people find it necessary to abandon teenagers, maybe there is a serious problem that needs to be addressed. The article concludes:
"These are largely families at a point of incredible desperation," said Wayne Sensor, chief executive of Alegent Health. "They aren't bad parents or bad kids. They simply don't know what services are available out there."

We do not tolerate the intolerable

A few days ago I saw a story about a lawsuit at a nearby college (Depauw University) that had the quotation, "We cannot tolerate the intolerable." The thought struck me that what we tolerate is always limited, that everyone draws a line somewhere and will not tolerate things beyond that line. The interesting question is, "Where does one draw the line?"

The politically-correct folks like to think of themselves as tolerant and others as intolerant. That thought is an illusion that blinds them to their own intolerance. For many of them, any idea that can be labeled as racist, sexist, or homophobic becomes intolerable and no longer has to be taken seriously. Milton Friedman was one of the great intellectuals of the 20th century, but many on the left have decided they can ignore him because he once talked to Pinochet who they have decreed is intolerable, and hence Friedman is intolerable.

It is best to realize that we are all intolerant of some things. Often those who think they are the most tolerant are in fact the least tolerant.

Saturday, November 15, 2008

Testing a new camera

My old camera has become a bit unreliable, so I recently purchased a new one. The new one has more megapixels and 4x zoom instead of 2x zoom. I wanted to know what that meant in practice, so I took the test shots below. I took the first pictures with my old 3.2-megapixel camera, and the second with my new 8-megapixel camera. I have selected only the center of the picture, so this is what the camera actually captured. Clearly there is an advantage in image quality in the 8-megapixel picture.

Then I zoomed as much as each camera would zoom and retook the picture. The 2x zoom with the old camera is about the same as the non-zoomed image of the 8-megapixel camera. To see what the 4x zoom did, you have to click the second picture below to see the actual result. I am disappointed with it. Maybe with the settings I am using the camera is also doing some digital zoom, because the resulting quality is poor, though it is very big. Or maybe the results would be better on a sunny day rather than on a dark, gloomy day

Here is some information about the building in the picture. It was built with good intentions, and the Catholic Church recently canonized the founder. The goal of the school was to pull Indian boys away from their culture and teach them the culture and ways of the European Americans. Today this goal is usually condemned. We think we are wiser and smarter than our ancestors were. One wonders how much of what we are doing today with the best of intentions will be condemned by future generations.

Friday, November 14, 2008

Freegan meat

From the Rensselaer Republican newspaper of November 14, 2008 (A-10):
Road Kill
The Jasper County Sheriff's Department has a road kill list, where interested parties can sign up to be notified if a deer is killed on the highway... You must provide your name, phone number and areas you are willing to go pick up the animal carcass. A deer kill slip will be provided to recipient. There are no fees for this process. Also, the deer will not count toward the hunting limit for the year. The recipient is responsible for his or her own deer processing.
If I knew how to process a deer, my name would be on that list. The locker plants in the area charge $50 to process a deer. (Also, we just purchased a quarter of a steer, so we probably would not have room in the freezer even if I did know how to process it.)

Thursday, November 13, 2008

Nigerian scam finds a victim

The story is at http://www.katu.com/news/34292654.html
An Oregon woman was suckered for $400K by the Nigerian scam.

She wiped out her husband’s retirement account, mortgaged the house and took a lien out on the family car. Both were already paid for.

For more than two years, Spears sent tens and hundreds of thousands of dollars. Everyone she knew, including law enforcement officials, her family and bank officials, told her to stop, that it was all a scam. She persisted.

Should we feel sorry for people like this for their loss, their stupidity, or both?

(This episode and the many others like it show that when we desperately want to believe something, we will believe it.)

Beware the blogs

Our perceptions are shaped by our expectations. We believe what we want to believe and disbelieve what we do not want to believe. Hence, rumors that people want to be true can spread very quickly on the Internet and are hard to stamp out. Gullibility on the Internet wasexploited by a couple hoaxers who created a fictitious character, Martin Eisenstadt, to spread false rumors.

They say the blame lies not with them but with shoddiness in the traditional news media and especially the blogosphere.

Mr. Gorlin, 39, argued that Eisenstadt was no more of a joke than half the bloggers or political commentators on the Internet or television.

Wednesday, November 12, 2008

Change we can believe in?

I have written earlier about the tremendous joy of Obama supporters. That joy has not lifted prices in the stock markets. After a rise on the day of election, the stock market has declined on five of six days, as the closing S&P averages show:

Nov 3 966.30
Nov 4 1005.75
Nov 5 952.77
Nov 6 904.88
Nov 7 930.99
Nov 10 919.21
Nov 11 898.95
Nov 12 852.30 (preliminary)

A 15% decline, which is what these numbers show, is huge. The best case for Obama is that these results reflect the ongoing financial panic and are totally unconnected to what is happening in the political sphere. Certainly they show limits to the magic he can work. I will leave it to the reader to figure out the worst case for Obama.

Tuesday, November 11, 2008

Gas prices fall

Gasoline prices finally fell below $2.00 per gallon in Rensselaer today after many months of being above $2.00, and sometimes being over $4.00. I may have helped raise them, but I can claim no credit for their fall. (Except that I ride my bike to work, thereby lessening the demand.)
Some people worry that gasoline prices are set by a monopoly. I am unaware of any theory of monopoly that yields prices with as much volatility as we have with gasoline prices. They rarely are the same from one day to the next. In contrast, cigarette prices hardly ever change.

The war to end all wars

Happy Veterans Day. World War I was the war to end all wars, and just to make sure that people in the future would remember what the sounds of war were like, someone had the foresight to record them. Read the account and get the link to the recording here.

Monday, November 10, 2008

Arbitraging the Obama inauguration

Maybe we can put some very rough estimates on Obama joy. The government has printed 250,000 tickets for his inauguration that will be distributed through congressmen and senators a week before the inauguration. However, there are people, including legitimate ticket brokers according to CNN, already scalping those tickets and they claim that they will be able provide them. "Ticket brokers act as middlemen, selling inaugural tickets they say they purchase from Capitol Hill employees and people who get them from members of Congress." A Bloomberg article reports, "Someone paid $21,716 for a pair of tickets on EBay Inc.'s Stubhub.com, spokeswoman Vanessa Daniele said in an interview. The average price for tickets is currently $1,419, she said. "

It is unlikely that all the people who get them will value them as much as these early buyers, but if the average value is $1000, then just this bit of Obama joy would be worth at least a quarter of a billion dollars. Someone who specializes in cost-benefit analysis could probably do a lot more with these numbers than I can.

I like free. I wish I could get some free tickets. Long live arbitrage!

Back to the great depression

Discussion of the Great Depression is back in the news, and it has prompted a couple of posts at marginalrevolution.com by Alex Tabarrok. I thought the second was clever. Tabarrok notes the neo-Keynesians argue that fiscal policy was at best only mildly expansionary during Roosevelt's first two terms because higher taxes largely counteracted the effects of increased government spending. Tabarrok suggests that if we take into account the supply-side and the uncertainty effects of changing tax policy, the net effect of New Deal policy would have been contractionary. The view that the bulk of the New Deal did little to get the economy out of Depression and may have actually prolonged it is not a popular view on the Left.
Update: Here is another post at marginalrevolution.com about the Great Depression.

Moral hazard and me

On Mondays I give my class a handout with problems that we will also use on Wednesdays and Fridays. Because some students miss on Monday and others forget their handouts, I come prepared on Wednesdays and Fridays with extras. Last week when we were discussing moral hazard, I realized that my handout policy was an example of a situation that created moral hazard.

A stash of cash

One of my students sent me a link to an article about a dispute concerning found money. A contractor discovered $182,000 of Depression-era cash while remodeling a house for a friend. Their initial excitement turned into dispute as they could not agree on how to split the find. Eventually they ended in court, and the publicity brought in heirs to the person who had stashed the cash. The end result was that neither ended up with much, and that they both could have been much better off if they had been able to settle privately. It is hardly an original story line--a number of movies have been built on this theme.

The story could be used to illustrate a number of economic concepts. It illustrates why there is no predictable solution in bilateral monopoly. It is an example of transactions cost. And it shows the importance of fairness in a situation much like the ultimatum game.

Sunday, November 9, 2008

If you are so smart...

Greg Mankiw finds data that says economic graduates are almost as smart as phyics and mathematics students.

Friday, November 7, 2008

Joy to the world

I am an old realist who sometimes envies the idealism of the young. The joy of Obama supporters is much greater than the sorrow of McCain supporters, which is remarkable because behavioral economics says that the emotional impact of loss is greater than the emotional impact of gain.

If net joy (Obama joy minus McCain sorrow) could be turned into dollar amounts, would it raise GDP for the fourth quarter enough to keep the U.S. out of recession? Citizens of other countries share this joy. Is this joy currently our biggest export? Because we cannot charge for it, can we consider it part of our foreign aid? If we did, would we be the largest donor country in the world in per capita terms? On the other hand, what if there is buyer's remorse and the joy dissipates? Then would we have to deduct from future GDPs? And if the foreigners decide that the Obama presidency is not all they expected, would our foreign aid go negative? Or should we expect the joy to remain because expectations partially determine our perceptions, so that those who are heavily invested in the Obama story will approve actions by him that they would damn if done by Bush? (Isn't the expectations-perception link the reason it took Nixon to go to China?)

I have so many questions, but maybe time will answer them. (However, I am not sure that time answered my ponderings from eight years ago.)

Thursday, November 6, 2008

A letter to the Teaching Economics Group

I just replied to a thread on the teaching economics mail group (tch-econ@elon.edu).
I do not think a shortage of bank reserves is a problem right now. Check


Reserve balances with the Federal Reserve are $493,633 million. That is up somewhat from a year ago. Well, a bit more than somewhat. It is up by $484,992 million.

The Fed has started to pay interest on reserve balances. I have not followed this very closely, but it seems the Fed wants the banks to hold excess reserves because it allows them to control the Fed funds rate better.


R Schenk
I need to update my Fed Balance Sheet series. Maybe I will get to it this weekend.

The stock market has had two days of large losses. I sure hope that is not because the market is worried about the economic policies of the president elect.

A cola taste test

I am using Don Ariely's book, Predictably Irrational, in a class. We recently finished his chapter, "The Effect of Expectations, Why the Mind Gets What it Wants." In the chapter he discussed the Coke-Pepsi taste tests, so one of my students decided we should do our own taste test.

All of us were given two cups, one with Coke and the other with Sam's Cola, the Wal-Mart brand, but we did not know which was which. Three out of five said that they preferred the cup that was actually Coke, but only two of five correctly identified the Coke sample. Two of them said that there clear differences, that the Coke was smoother and the Sam's Cola was sharper. The other three did not see much difference.

Ariely presents evidence that taste tests done when people know the brand turn out very different than when people do not know the brand. Expectations do affect our perceptions. "That is what marketing is all about--providing information that will heighten someone's anticipated and real pleasure."

Not postpartisan yet

I was reading the news last night and stumbled on an article about McCain and Palin returning to life after the election on an abcnews blog. Palin was trying to be gracious in defeat:
And God bless Barack Obama and his beautiful family and the new administration coming in. It is time that we all pulled together and worked together and America’s going to reach her destiny.
Most of the comments were from Palin supporters and expressed their appreciation for her efforts. But there were also a lot of comments from Palin foes that surprised me with their ungraciousness. Here are some examples:
What a slimey greasy low life piece of trailer trash SHE turned out to be. Opportunistic, hateful, devisive, deluded.....everything that is wrong with the GOP. It's a real treat to watch the destruction of the repuglican party....and it happened from inside!

good riddance

Palin, don't let the door hit ya' where the Lord split ya', wink...wink

Maybe her plane will crash on the way back to Alaska. "YES WE CAN!"

Make sure she takes that white trash family back with her.

Great!!! now she can go back to palling around with her seperatist husband and new found right wing nut buddies in Alaska. I feel bad for Alaska. They actually got a raw deal. I suspect she will appoint herself in the senate to be Stevens replacement when she throws him under the bus.

Sarah Palin is an ignorant and a raving maniac.... I heard she had temper tantrums with her staff.. I am ashamed that she didn't stop the hateful rallies when the crowd started chanting terroist! She DOES NOT HAVE FAMILY VALUES! She is a cutthoat and a despicble human being with a shrill voice. What was McCain thinking?Go home Sarah! You are full of yourself and I can't stand her!

Palin is such airhead! Can you imagine if that retard had gotten in?

Could we be lucky enough to never hear of her again or hear that awful voice.

Now all we have to do is impeach her & then I'll be happy. Not scared of her - just annoyed that such an imbecile had the audacity to think that could wing her way into the big leagues.

Good Riddance Caribou Barbie. Maybe the French president Sarkosy will give you a ring.

Dear Sarah Palin, You are on minute 16 of your 15 minutes. Please, get on your chopper, shoot some wolves and be on your merry way.

Good riddance to the nasty old man and the little girl moron from the great backwater of Alaska.

What a mistake McCain made was evident the first time Sarah opened her mouth. She proved she was not really intelligent about the world and her use of the english language was like one would use in a bowling league. Too bad, so sad the Republican heirarchy made such a mistake with McCain.
There were quite a few comments about the inappropriateness of these kinds of comments, including these:
Seriously, fellow Obama supporters. Let's show a little more class. Yeah, she may not have been ready to be vice president. But she won't be vice president, so relax. She was gracious in defeat; let's be gracious in victory.

"We are the change we have been waiting for." I read the many ungracious and vicious comments here, and I am very afraid of the change that "we are." The press said McCain and Palin stirred up hate--but what stirred up the hate and bitterness that is so evident among the Obama supporters here?
Finally, I do not understand why ABC quotes her in this way:
"Alaska can lead this effort, and as governor I wanna be there on the forefront helping to make this nation more secure."
They do not do that to other politicians.

Sunday, November 2, 2008

Happy and Sad

A most interesting election campaign is coming to an end. If we lived in a better world, I would feel this way: I will be happy if Obama wins, but also a bit sad because McCain will not have the opportunity to be president. And I will be happy if McCain wins, but also a bit sad because Obama will not have the opportunity to be president.

Although I do not live in that world, I will have both happiness and sadness on Wednesday morning. If Obama wins, I will be sad that Obama has won but also happy that McCain lost. And if McCain wins, I will be sad that McCain has won but also happy that Obama has lost.

I will vote for the one whom I think is the lesser of evils, but I am aware I may be wrong. The best-laid plans of mice and men often go awry, and sometimes that is a good thing.


Glenn Reynolds at pajamasmedia.com/instapundit/ points to an article in The Wall Street Journal reporting that many young Japanese are reluctant to take promotions because the additional pay is not worth the additional work.

He then quotes an e-mail from a reader:
It's not just Japan. I work for one of the big 3 aerospace/defense companies at a Los Angeles area location, and though I wouldn't say it's nearly as evident as in Japan, young workers in our industry are asking the same questions. We have no hope of achieving the same standard of living as the droves of retiring Boomers and Silents, and the 2% raise differential afforded by a promotion simply isn't enough of an incentive to work 20-30% more hours a week.

If the industry paid overtime, or offered significant bonuses to rank and file employees (bonuses are only available to upper management), a lot of young engineers would respond enthusiastically. In fact, we've asked the company to do these things in recent employee forums. We'd all like to buy homes in the area and raise families here, but the older workers own all the real estate, and most of us assume that we'll give things a few years, but get out of the area once we need to settle down. It's simply too expensive to live in a metro area like L.A. Since the incentive structure doesn't offer us hope of achieving the same lifestyle as the older employees, we don't see much reason to devote our lives to these companies. As I said, the 2% differential doesn't make a whole lot of difference, so why bother with the extra stress?
Does prosperity contain within itself the seeds of its own destruction?

Friday, October 31, 2008

Why hide the records?

What happens in a market when one side of the exchange has better information than the other? For example, on eBay the sellers almost always know more about the quality of the items that they are selling than the potential buyers. You might think that buyers would be helpless in these situations, but economists have found that the forces of competition can solve or at least lessen this problem of asymmetric information.

If there are multiple sellers of similar goods, the one with the best product has an incentive to find a way to make its product stand out compared to the lesser-quality products. This "signaling" of product quality must be done in a way that is difficult to duplicate for those who do not have quality products. One widely-used method is a product warranty. Fixing a faulty product is expensive so a warranty is comparatively cheaper to offer for those who produce the best products. Hence, a warranty signals product quality.

Signaling also takes place in the labor market, and the resume is a key part of effective signaling. The employer wants to know if the applicant is reliable, responsible, creative, intelligent, etc. Past experiences are a way of demonstrating these qualities because those qualities you have greatly influence your past record. Because it is in the interest of the job seeker to provide information most helpful in obtaining a job, economists have argued that restriction on the questions that employers can ask have little effect. If, for example, it is in my interest that the interviewer know that I am married, I will volunteer that information, and my failure to volunteer it should be read as an admission that I am not married. Or if religious denomination matters, my failure to provide that information should be read as an admission that I do not have what they are looking for.

So it is interesting to see what records the presidential candidates have or have not made public. We know that both Joe Biden and John McCain had miserable college academic records. Obama attended some prestigious schools (Pepperdine and Columbia) and graduated magna cum laude from Harvard Law School. Many people assume that the magna cum laude must mean that he is very smart, but it may not. It depends on what percentage of the graduates of Harvard Law graduate with honors. It may be very high, as this post suggests:
This Boston Globe article from 2 years ago has some insightful information on grade inflation at Harvard. In June 2001, a record 91 percent of Harvard students graduated with some type of honors (summa, magna, or cum laude), which was far more than Yale (51 percent), Princeton (44 percent), and other elite universities the Globe study examined.
To get to the main point. Neither Obama nor Palin has released any college transcripts or test results. The obvious conclusion that one should draw is that those transcripts say things that are unfavorable to them. That probably does not matter much in the case of Palin because she has been tarred with the "stupid" brush, but it should give pause to those who keep insisting that Obama is some kind of near genius scholar.

Thursday, October 30, 2008

Declining businesses

I attended a school event that mixed students and alumni Wednesday evening and had a couple of interesting conversations. One was with a student who is also a postal worker. She said that the U.S. Post Office may be conducting the first-ever layoffs soon. At present they were looking for voluntary retirements, but there were no incentives so there were few takers. People figured that if they waited, a better deal would be offered. She also said that those with under six years of seniority were in danger, but by the time they got the program actually working, she might have the six years of seniority. Finally, she said that they had received a letter suggesting that one of the presidential candidates might be more likely to a governmental solution, but could not remember which candidate they were recommending. Here is the story from a source on the internet.

The other noteworthy conversation was with a recent graduate who had gone to work for a newspaper. He decide that there was little future in the newspaper business so had switched to another line of work.

Wednesday, October 29, 2008


The other day my class was looking at Dan Ariely's Predictably Irrational. He has a chapter on self control and commitment devices, and one of the students talked about his difficulties dealing with procrastination. After some discussion, we jokingly decided he should try get his situation defined as a learning disability, called Involuntary Procrastination Disorder (IPD), and as a learning disorder teachers would have to give him special consideration. I googled for "Involuntary Procrastination Disorder" and found that someone had already thought of it, and put up a youtube video. Maybe everything is already on the Internet.

Update: It might be entertaining and helpful to create an IPD support group on Facebook. I suppose I should check to see if one already exists, and how one goes about creating such a group. I will add it to my list of things that I need to get done.

Squeezing the shorts

The Financial Times reported that Volkswagen was briefly the world's most valuable company as hedge funds that had shorted the company had to buy back their short sales. Selling short is dangerous and best left to the pros, but in this case some of the pros lost a lot of money.

Tuesday, October 28, 2008

The first of many

I recently gave an assignment to my students that started out in this way:

"In the last century a person learned what was happening in the world mostly by reading newspapers and magazines. Once could get some information from radio and television, but for in-depth coverage, paper was king.

"Today paper is no longer king. It has been dethroned by the Internet. Virtually anything that appears in newspapers or magazines also appears on-line. In addition, the Internet contains a vast amount of writing, some if very insightful, that never appears in print. Much of this writing is in the blogosphere."

Today I noticed that the Christian Science Monitor would be dropping its print edition. In the next few years, a lot more will be following.

Sunday, October 26, 2008

European problems

Here is an article from the UK that says that foreign lending by European banks, which is vastly greater than similar lending by US banks, may cause further market turmoil. The banking and financial problems in the US, big as they are, may actually be smaller than the banking and financial problems in Europe.

New record in aviation

The new record is 7000 miles, nonstop. The birds lose half their body weight during the flight from Alaska to New Zealand.

Bush and the conservatives

Recently John Hawkins at rightwingnews.com wrote a review of the Bush presidency. Early on we read: "George Bush has not been all bad as a President." That faint praise is in contrast with the Left, which sees Bush as evil incarnate and can think of absolutely nothing that it likes about him. Hawkins says that Bush is a decent guy who was better than the alternative in 2004, and that we should cut him some slack on foreign policy because the world is a tough place with many challenges that anyone in the office would face.

Then he starts picking at what he does not like. In Iraq "his horrific miscalculation on the costs in blood and treasure of that whole war has been disastrous." "On the domestic front, all in all, Bush has been a nightmare." Hawkins can see no domestic policy that looks like a major positive achievement, and Bush "refused to make a serious effort to cut down on Congress' out-of-control spending." He approves the tax cuts but dismisses them as a major positive achievement because they are not permanent.

It seems that nothing could be worse than his foreign and domestic policy, but "the place where Bush really fell down was on the political side of things." "Bush inflicted calamitous amounts of completely unnecessary damage to the Republican Party with his decisions...." Hawkins says that Bush let his critics define him, and he has not effectively fought back, something any decent politician should be able to do.

With friends like this, and I suspect that this view is pretty widespread among conservatives, Bush does not need enemies. But he has even more of those.

Saturday, October 25, 2008

The Value of a College Education

This article in the Chronicle of Higher Eduction argues many people trying to get a college degree would be better off spending their time and money on something else. I can't say that my experience contradicts what the author has to say.

Friday, October 24, 2008

Climate change

I stumbled on an interesting site about Climate Change. It links to both the pro and con sides:

Wednesday, October 22, 2008

Feedback and regulation

Here is an interesting example of a feedback loop from The Atlantic, summarizing the NBER study "Regulation and Distrust" by Philippe Aghion, Yann Algan, Pierre Cahuc and Andrei Shleifer (July 3, 2008):
People living under the yoke of corrupt governments tend to want … more government regulation. It’s a vicious cycle: in trusting societies, people act civilly and expect less government interference. In distrustful societies, people act selfishly and expect tighter regulation. But more government corruption leads to less-trusting societies, and citizens will generally “prefer state control to unbridled production by uncivil firms”—even when they know their leaders are crooked.
I wonder if this could be made into part of the story of the rise and decline of nations, an alternative or a supplement to the story the Mancur Olson told.

Tuesday, October 21, 2008

The Fed Balance Sheet IV

I have not written about the Fed's balance sheet for a few weeks. It still shows that we are in extraordinary times.

The total assets for the week ending October 15 were $1,740 billion, an increase of $882,065 from the previous year. (Wow!) Holdings of U.S. government securities, which for decades have been the primary asset on the Fed's balance sheet, were only $491 billion, down $289 from a year ago. So the Fed has shifted out of U.S. government debt into non-governmental debt.

I like watching reserve balances that commercial banks hold at the Federal Reserve banks. For the week ending October 15, 2008, they were $281 billion, which is $274 billion higher than they were a year earlier. That tells me that we have a considerable way to go before conditions in the credit markets are anywhere near normal.

I would expect that with the enormous infusion of reserves into the banking system there would be growth in money-stock measures. Both M-1 and M-2 are slightly more than 6% higher from their levels a year ago (September to September), which is tiny given what has happened to bank reserves. The banks must be holding massive amounts of excess reserves. When the history of this period is written, it will be interesting to find out what has really been happening, something I cannot see from where I sit.

One sign that the extreme panic may be over is that the three-month Treasury bill rate finally rose above 1% yesterday, October 20. The data are currently here, but will eventually move.

Wednesday, October 15, 2008

Mutual fund redemptions

Investors are taking billions of dollars out of mutual funds. That would have been really smart three months ago. My guess is that it is not smart now--that it is a form of selling low and buying high. But only in the future will we know for sure. It is one of the reasons the market keeps dropping--another feedback loop.

Tuesday, October 14, 2008

Meyer, the Fed, and CRA

Laurence Meyer's A Term at the Fed does a better job of explaining what the making of monetary policy entails than any other book I know of. It certainly is far superior to Alan Greenspan's Age of Turbulance, which says almost nothing about monetary policy and maybe says a bit too much about Greenspan's fascination with celebrity and power.

At the beginning of his book, Meyer describes his appointment to the Fed. One his first hurdles was an interview with Joseph Stiglitz, then chairman of Clinton's Council of Economic advisors:

"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.

"I suspect we've all had moments when our responses to a particular situation could change our lives and careers. This seemed like one of those moments to me. I could have said: Joe I have heard of the NBA, the PTA, and CPAs, but CRA--I don't have a clue. But then, I figured I would still be a professor of economics at Washington University and an economic forecaster. ...

"Or I could have said: Joe, I am with you 100%--and figure out later what I had committed myself to. ... So I gave Joe the silent treatment. After a brief pause, Joe said good-bye, and I patted myself on the back for apparently dodging that bullet successfully. ...

"The second lesson is about Joe Stiglitz. He handled my ignorance of CRA in a very gentle and indeed constructive way....

"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.... I became the member of the Board to testify before Congress on issues related to CRA. I went around the country supporting the superb work that community groups and banks were doing in providing affordable housing for low- and moderate-income groups. "

There is no further mention of CRA, the Community Reinvestment Act, in the book. I wonder if Meyer would have given it a lot more space if he were writing today. CRA was not the immediate source of the current financial panic, and I do not think it was either a necessary or sufficient cause. Rather it served either as a few early steps on a long path to, or perhaps one of a number of tributaries to the river that flowed to the current panic. A full understanding of what led to the current panic would be incomplete without some discussion of CRA and the desire to expand home ownership.