Sunday, February 28, 2010

Steyn on Greece

Mark Steyn has written one of those columns that only Mark Steyn can write, pointing out why Greece is in trouble and asking why Obama and the Democrats want us to follow their example:
What’s happening in the developed world today isn’t so very hard to understand: The 20th-century Bismarckian welfare state has run out of people to stick it to. In America, the feckless, insatiable boobs in Washington, Sacramento, Albany, and elsewhere are screwing over our kids and grandkids. In Europe, they’ve reached the next stage in social-democratic evolution: There are no kids or grandkids to screw over.
So you can’t borrow against the future because, in the most basic sense, you don’t have one. Greeks in the public sector retire at 58, which sounds great. But, when ten grandparents have four grandchildren, who pays for you to spend the last third of your adult life loafing around?
We hard-hearted small-government guys are often damned as selfish types who care nothing for the general welfare. But, as the Greek protests make plain, nothing makes an individual more selfish than the socially equitable communitarianism of big government: Once a chap’s enjoying the fruits of government health care, government-paid vacation, government-funded early retirement, and all the rest, he couldn’t give a hoot about the general societal interest; he’s got his, and to hell with everyone else. People’s sense of entitlement endures long after the entitlement has ceased to make sense.
The problem is there are never enough of “the rich” to fund the entitlement state, because in the end it disincentivizes everything from wealth creation to self-reliance to the basic survival instinct, as represented by the fertility rate. 

The Welfare State is a giant Ponzi scheme and it only stays afloat as long as people have plenty of children. The authors of the welfare state probably never considered the possibility of demographic decline, just as those who gave us the housing bubble never considered the possibility that housing prices could decline. And as in the housing bust in the U.S., where bailouts of irresponsible financial institutions did not solve the underlying problems, bailing out entitlement states merely postpones the inevitable.

Tuesday, February 23, 2010

Greece on the skids?

In the Washington Post Robert Samuelson ponders the fate of Greece, and wonders if it is the canary in the mineshaft:
What's happening in Greece speaks to two larger issues affecting hundreds of millions of people everywhere: the future of the welfare state and the fate of Europe's single currency -- the euro.
The threat to the euro bloc ultimately stems from an overcommitted welfare state. Greece's situation is so difficult because a low birth rate and rapidly graying population automatically increase old-age assistance even as the government tries to cut its spending. At issue is the viability of its present welfare state.
Almost every advanced country -- the United States, Britain, Germany, Italy, France, Japan, Belgium and others -- faces some combination of huge budget deficits, high debts, aging populations and political paralysis. It's an unstable mix. Present deficits may aid economic recovery, but the persistence of those deficits threatens long-term prosperity. The same unpleasant choices confronting Greece await most wealthy nations, even if they pretend otherwise.

Monday, February 22, 2010

Barro on the spending multiplier

From his piece in the Wall Street Journal:
I estimate a spending multiplier of around 0.4 within the same year and about 0.6 over two years. Thus, if the government spends an extra $300 billion in each of 2009 and 2010, GDP would be higher than otherwise by $120 billion in 2009 and $180 billion in 2010.
When one factors in the typical relationship between tax rates and tax revenue, the multiplier is around minus 1.1. Hence, an increase in taxes by $300 billion lowers GDP the next year by about $330 billion.
Few economists think that the velocity of money is stable enough to predict with any accuracy what would happen if the money stock increased by10%. Why should the multiplier be any more predictable?

Update: More here and here.

Sunday, February 21, 2010


From Instapundit:
YOUNG VOTERS WANT SPIRITUALITY, BUT NOT NECESSARILY RELIGION. Well, that’s because religion often tells you to do things you don’t want to do, or to refrain from doing things you want to do, while spirituality is usually more . . . flexible.

Wednesday, February 17, 2010

Taxes in New Jersey

People respond to incentives:
Several years ago, he recalled, one of his clients stood to make $60 million from stock options in a company that was being acquired by another. Before he cashed out, however, the client put his home up for sale, moved to Las Vegas, and “never stepped foot back in New Jersey again,” Hydock said.
“He avoided paying about $6 million in taxes,” he said. “He passed away two years later and also saved a huge estate tax, so he probably saved $7 million.”
The above quotation is from an article at, looking at studies showing that the high tax rates in New Jersey are encouraging wealthy people and people with high incomes to move.

Uncertainty and investment

From the campaignspot blog at National Review, a letter from a reader
During the Q&A session, I felt compelled to ask the obvious question:  Did he believe that the healthcare reform and related tax proposals, the proposed cap and trade legislation and the consequent increase in energy costs, the expiration of the Bush tax cuts, the agitation for higher taxes on the wealthy, the proposal to increase corporate tax rates, the proposal  to increase capital gains taxes, the trial floating of ideas such as a national VAT and removal of the earnings cap on FICA, the more robust regulatory bureaucracy . . . did he believe any of these uncertainties were depressing hiring?
He stated yes, without a doubt and proceeded to relay a conversation he had with a local chemical company regarding their 2010 capital expenditure budget.  When asked what the company intended to invest in 2010, the response was ‘nothing,’ not due to a paucity of good opportunities, but because it was impossible for the company to calculate a rate of return given all the uncertainty over cost of labor, energy prices, regulatory mandates and the like.

Sunday, February 14, 2010

Is fairness a social construct?

Economists have used the ultimatum game to discuss fairness. In this game one player splits a sum of money and the other player either accepts or rejects the split. If the second party rejects the split, neither party gets anything. Many people in the role of the second player will reject splits that they consider unfair to punish the first player even though they suffer a loss as a result.

Joseph Henrich in "Does Culture Matter in Economic Behavior? Ultimatum Game Bargaining Among the Machiguenga of the Peruvian Amazon" (American Economic Review, Sept 2000 pp 973-979; pdf here) found that a pre-industrial group in the Amazon basin did not play the game in the same way most groups in the U.S. play the game.
Machiguenga proposers seem to possess little or no sense of obligation to provide an equal share to responders, and responders had little or no expectation of receiving an equal share nor any desire to punish unequal divisions. The modal offer of 15 percent seemed quite “fair” to most Machiguenga.
This evidence generates at least three important questions: (1) Where do people get their rules, expectations, or notions of fairness from? (2) Why do these rules, expectations, and notions seem to vary among groups of people? and (3) How much can these varying rules, expectations, and notions affect real economic behavior? (p 978)
This result raises the question of whether fairness is socially constructed. If it is, why should we pay attention to it?

Friday, February 12, 2010

A double dose of Bush?

Peggy Noonan in the Wall Street Journal:
But there's something else that has led Mr. Obama to his falling poll numbers. When FDR followed the disaster that was Herbert Hoover, he took a new and different path. The government would now hold a new place in the daily American reality. When Ronald Reagan followed the disaster that was Jimmy Carter, he took a new and different path. The federal government would be pushed back from its intrusions on Americans. But when Barack Obama took over after the disaster that was George W. Bush, he did not, in terms of the most pressing domestic issue after unemployment, take a new and different path. He spent, just like Mr. Bush, only even more. It was as if he were saying, "You think Bush broke the bank? I'll show you what a broken bank looks like." This isn't a departure, it's a doubling down.
(I am not sure that FDR actually did take a much different path than Hoover, but at least he made the public think he was taking a different path. Hoover was an interventionist who had great faith in the ability of government to make the world better, and so was Roosevelt.)

Noonan seems to be suggesting that Obama will not be seeking re-election in 2012. Will others pick up that idea and start asking whether Obama will run in 2012, as so many are asking if Palin will run in 2012?

Who is best for the super rich?

A blog on Vanity Fair reports that Obama is losing his support among the super rich. A lot of people do not realize that he had so much support among those of great wealth in the first place.
By working his charm and displaying certain touches of upper-class refinement, Obama persuaded the super rich to embrace his liberal vision for America.
The conventional wisdom is that the super rich are Republican because that is in their economic interest. After all, the Democrats want tax the rich in order to redistribute income.

However, what the rich want even more than increased wealth is security in their relative standing, and they do not get that from free markets. Free markets promote social mobility, allowing poor people to rise and rich people to fall. A system more favorable to the already-rich is crony capitalism. Moreover, a tax system that features high marginal income tax rates may also be in the interests of the very rich because it can reduce social mobility. High marginal tax rates on income make it more difficult for new people to rise to great wealth, but because the tax is on income and not wealth, it does not threaten the economic position of the already-wealthy. Crony capitalism is very popular in much of the world, and one of its charms for the elite is that it promotes a static social order.

So maybe the super rich were not the rubes that the Vanity Fair piece implicitly suggests they were. Maybe they were voting their economic interest by voting for Obama, crony capitalism, and high marginal income taxes. Why then the disillusionment? The piece is a bit unclear, but hints that the super rich are disappointed with Obama's liberalism. I think this paragraph may tell more:
And more to the point, his demeanor is that of a New England elite; he has the ease and confidence of someone who is well-to-do, and he is buttressed by a long list of friends in high places. Which explains how he initially won the allegiance of the rich so easily. It also didn’t hurt that his predecessor in the Oval Office, George W. Bush, a bona-fide member of the American aristocracy and a conservative Republican, had disappointed so many patrician believers with his problematic presidency.
It may not be the leftism but rather the incompetence of the present administration that makes it uncool to be identified with it.

Tuesday, February 9, 2010

Some buyers remorse on Wall Street

From CNBC:
“The expectation in Washington is that ‘We can kick you around, and you are still going to give us money,’ ” said a top official at a major Wall Street firm, speaking on the condition of anonymity for fear of alienating the White House. “We are not going to play that game anymore.”
Wall Street fund-raisers for the Democrats say they are feeling under attack from all sides. The president is lashing out at their “arrogance and greed.” Republican friends are saying “I told you so.” And contributors are wishing they had their money back.

Friday, February 5, 2010


About Greece, From National Review's Corner:
I asked him why he didn't hire more help, since his hotel wasn't all that small and he seemed to be going 24/7. What followed was a harangue about the cost of hiring a permanent worker in Greece, the difficulty of ever firing him if he proved worthless, and why he preferred to do everything himself rather than fill out all sorts of forms and hire unmotivated but tenured employees. Besides, he said, almost everyone was on some sort of pension, disability, or government benefit, and was unwilling to work, so his choices were either illegal immigrants or broke foreign students. Then he launched into a blast against socialism, and explained how he was forced to become an expert tax dodger, how he would barter for all the transactions he could, and why he hated the government. He finished by sighing that in Greece, the people spend their time either devising ways to get government money or scheming to avoid the tax collectors — or, preferably, both.
It has taken a while, but the future of Greece does not look promising.

Tuesday, February 2, 2010

The seeds of the next crisis?

Has the rescue of the financial system in September 2008 created the seads of the next crisis? The Inspector General for TARP released its report to Congress that suggested the basic problems remained unresolved.  The "to-big-to-fail" institutions are even bigger, the use of TARP has encouraged further risk by demonstrating that the government will bail out failures, there has been little change in the bonus culture of Wall Street, and the government has not let the housing market deflate but instead had been trying to keep housing prices up. From the report:
[E]ven if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.

Trial by ordeal

At (part of the Boston Globe?) economist Peter Leesen makes the case for trial by ordeal:

Modern observers have roundly condemned ordeals for being cruel and arbitrary. Ordeals seem to reflect everything that was wrong with the Dark Ages. They’re an icon of medieval barbarism and backwardness.
But a closer look suggests something very different: The ordeal system worked surprisingly well. It accurately determined who was guilty and who was innocent, sorting genuine criminals from those who had been wrongly accused. Stranger still, the ordeal system suggests that pervasive superstition can be good for society. Medieval legal systems leveraged citizens’ superstitious beliefs through ordeals, making it possible to secure criminal justice where it would have otherwise been impossible to do so. Some superstitions, at least, may evolve and persist for a good reason: They help us accomplish goals we couldn’t otherwise accomplish, or accomplish them more cheaply.

The system of trial by ordeal was undermined by the Church:
In the early 13th century, Pope Innocent III spearheaded a damning denunciation of ordeals on the grounds that ordeals were antithetical to Christian doctrine. His edict banned priests from further involvement with them. The Church’s condemnation of ordeals seriously undermined the superstition on which ordeals relied. If ordeals were antithetical to Christianity, how could God reveal defendants’ guilt or innocence through trials of fire and water?
 I am not surprised that an economist wrote this because behavioral economics emphasizes the placebo effect, or power of expectations to shape our perceptions the world. However, Leesen is engaging in speculation. We do not know how effective trial by ordeal was and there is no way to find out. We also do not know how effective our current criminal justice system is and there is no way to find out. What percentage of those who are found guilty are actually innocent? How many people who are guilty are never punished? No one knows. It is quite possible that trial by ordeal was a more effective system of justice than our system. And like the system of trial by ordeal, our system depends on confidence, the belief of citizens that the system works. If people lose confidence in our system, it too will become less effective.

Leesen seems to be too careless with the word "superstition." Is belief in God superstition? If we want to use the term that loosely, then there are a great many things that are superstitious, including most or all of what we believe.

Update: One the difficulty of computing the number of innocents who have been convicted, see here.

Sex education

From the Washington Post, reporting on a study of sex education:
Only about a third of sixth- and seventh-graders who completed an abstinence-focused program started having sex within the next two years, researchers found. Nearly half of the students who attended other classes, including ones that combined information about abstinence and contraception, became sexually active.
The study is the first to evaluate an abstinence program using a carefully designed approach comparing it with several alternative strategies and following subjects for an extended period of time, considered the kind of study that produces the highest level of scientific evidence.