Bank regulations

Incentives work. Even perverse ones.

More Greece

"Those officials in Brussels have no idea what they are unleashing."

Best multiple-choice question ever

I wish I had found this question while I was still teaching:

If you choose an answer to this question at random, what is the chance you will be correct?

a) 25%
b) 50%
c) 60%
d) 25%

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

Faith in financial markets

Someone lost faith that the rule of law still holds in financial markets:

Everything changed just a few short weeks ago. A firm, led by a crony of the Obama regime, stole all of the non-margined cash held by customers of his firm. Let’s not sugar-coat this or make this crime seem “complex” and “abstract” by drowning ourselves in six-dollar words and uber-technical jargon. Jon Corzine STOLE the customer cash at MF Global. Knowing Jon Corzine, and knowing the abject lawlessness and contempt for humanity of the Marxist Obama regime and its cronies, this is not really a surprise. What was a surprise was the reaction of the exchanges and regulators. Their reaction has been to take a bad situation and make it orders of magnitude worse. Specifically, they froze customers out of their accounts WHILE THE MARKETS CONTINUED TO TRADE, refusing to even allow them to liquidate. This is unfathomable. The risk exposure precedent that has been set is completely intolerable and has destroyed the entire industry paradigm. No informed person can continue to engage these markets, and no moral person can continue to broker or facilitate customer engagement in what is now a massive game of Russian Roulette.

Addendum: A lot of people think that greed is the key to capitalism. It is not--greed is a constant that exists in all economic systems. The key to capitalism is trust, and the conditions under which it is wise to trust others are difficult to develop and easy to destroy. Trust of strangers does not exist in many societies, and as the result their ability to use markets is limited. The rule of law with well-defined property rights is a key to generating the trust needed for a market society because it reduces risk.

Occupy Schumpeter

Reading about the various Occupy demonstrations around the country, I keep thinking of this quotation by Joseph Schumpeter from his Capitalism, Socialism, and Democracy:

"Electric lighting is no great boon to anyone who has money enough to buy a sufficient number of candles and to pay servants to attend them. It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to a rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort." p 67.

It is quite possible that none of the Occupy people have read Joseph Schumpeter though they all enjoy the fruits of capitalism.  Few probably have any idea who he was.

A stop-action music video

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

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

(Found on Cafe Hayek.)

A view of CRA from 2004

Laurence Meyer provides an insightful look at the functioning of the Federal Reserve from 1996 until 2002 in his book, A Term at the Fed: An Insider's View. He was nominated by the President Clinton to the Board of Governors of the Fed, and in recounting his nomination, tells about the call he received from Joe Stiglitz (pp 14-15):

Joe ended our conversation by telling me that he didn't want to pressure me on any issues on behalf of the Clinton administration, but he did want me to know that the administration was strongly in favor of CRA.

Meyer did not know what CRA was, but Stiglitz handled the situation with diplomacy and sent him the information he needed. Meyer then tells the reader about it:

CRA stands for Community Reinvestment Act. It was passed by Congress in 1977 to remind banks that they are obligated to meet the needs of their communities, with special emphasis on meeting the needs of people in low- and moderate-income neighborhoods. Democrats love CRA because it demonstrates how the government can provide better opportunities for lower-income families. Republicans hate CRA because it represents interference by government in the operation of businesses (in this case banks.)

Meyer says that he became the Board expert on CRA and its chief cheerleader.

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

Left and right

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

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

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

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

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

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

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

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

A real life Gordon Gekko

"This was a nasty, vindictive man who laid off workers en masse, bragged about stealing ideas from competitors, belittled his employees with screaming tirades laced with oaths and imprecations, overburdened them with heinous work schedules, cheated his best friends and oldest colleagues when it came time to distribute shares, outsourced everything he could to Chinese factories that employ child labor under dangerous conditions, practiced a cruel Darwinian meritocracy that disdained diversity, lied constantly out of pure habit, sicced the government on his chief business rival, possessed a “Nietzschean attitude that ordinary rules didn’t apply to him”, and even denied paternity of his firstborn child. Then he took credit for the work he practically whipped out of people while posing as a benevolent sage."

Who was this real-life Gordon Gekko? For the answer, see here.

Payday loans for rich people?

When I saw this ad for J.D. Wentworth a few days ago, my instantaneous reaction was, "Payday loans for rich people." That certainly is not the reaction that the people who made the ad wanted. An important reason for choosing opera as a way of getting their message out is that opera is considered high-class, and they want to be the association of high-class opera to color people's views of their company.

The service they are offering is the same service as payday loans--to restructure payments. People who use payday loans need money now but do not get paid until later. The same is true of the people whom J.D. Wentworth is targeting, though the payments are over a much longer period of time and are much bigger. Their appeal is to people who have structured payments over time, the sort of payments that lotteries, annuities, and some legal settlements give. If you have a certain income stream of $2000 per month and you want to cash it in, firms like J.G. Wentworth are there to help you out.

Are they socially useful? The argument that they are is the same argument that payday loans are socially useful. If people are rational, we should trust that they know what is best for themselves. J.D. Wentworth has testimonials on its website emphasizing how useful it can be to restructure payments. The argument that they are not socially useful is that many people think only short-term and will do things for immediate gratification even though the long-run consequences are disastrous. This position would argue that J.D. Wentworth is preying on those who have self-control problems or are compulsive spenders.

(They have a somewhat different ad that still has the music but a different setting.)

Another Hazard

Another Merle Hazard song and video, this one about too big to fail.


An annotated version, much longer, is here.

Two entertaining videos about Hayek

A couple more fun economics videos:


The second has better production values.

Nobel Prize

The Nobel Prize in Economics was awarded to Thomas Sargent and Christopher Sims. Here is Sargent last year commenting on the 2009 stimulus package"

In early 2009, President Obama’s economic advisers seem to have understated the substantial professional uncertainty and disagreement about the wisdom of implementing a large fiscal stimulus. In early 2009, I recall President Obama as having said that while there was ample disagreement among economists about the appropriate monetary policy and regulatory responses to the financial crisis, there was widespread agreement in favor of a big fiscal stimulus among the vast majority of informed economists. His advisers surely knew that was not an accurate description of the full range of professional opinion. President Obama should have been told that there are respectable reasons for doubting that fiscal stimulus packages promote prosperity, and that there are serious economic researchers who remain unconvinced.

update: Another quote, from a graduation address:

“Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.”

Jobless recoveries

From the Bureau of labor Statistics:

(Click on the graph to see the whole thing.)

The recovery after the 2001 recession has been called the "Jobless Recovery," but job growth then was no worse than what we have seen after the 2007-9 recession.

A double dip prediction

The Economic Cycle Research Institute says we are heading for a new recession:

Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off.
....
Why should ECRI’s recession call be heeded? Perhaps because, as The Economist has noted, we’ve correctly called three recessions without any false alarms in-between.
....
A new recession isn’t simply a statistical event. It’s a vicious cycle that, once started, must run its course.
....
It’s important to understand that recession doesn’t mean a bad economy – we’ve had that for years now. It means an economy that keeps worsening, because it’s locked into a vicious cycle. It means that the jobless rate, already above 9%, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar. 

A GDP song

Found from a link at Division of Labor.

Regime uncertainty

Donald Boudreaux contrasts two theories of depression, the Keynesian and one from Robert Higgs:

Perhaps ironically, one of the most powerful challenges to any Keynesian diagnosis of economic ailments also focuses on inadequate investment spending, but from a wholly different perspective. That challenge is today most closely associated with the economist Robert Higgs.

Higgs' careful look at the data on the Great Depression and World War II convinced him that (1) a U.S. economy producing genuine prosperity wasn't restored until 1946, and (2) investors hunkered down, especially from 1935-40, because New Deal regulations -- along with President Franklin Roosevelt's increasingly vocal hostility to enterprise and successful risk-takers -- created too much uncertainty about how government would treat profits and wealth accumulation.

The "regime uncertainty" -- described by Higgs as "a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns" -- unleashed by actual and threatened New Deal interventions made private innovation and entrepreneurial effort simply too unattractive. So private investment spending largely ground to a halt during FDR's reign.

Read more: Regime uncertainty - Pittsburgh Tribune-Review http://www.pittsburghlive.com/x/pittsburghtrib/opinion/columnists/boudreaux/s_757981.html#ixzz1Z4O9XdPA

Higg's view is shared by Amity Shlaes in her The Forgotten Man: A New History of the Great Depression.

Both are essentially arguing that the focus should not be on the demand side, as both Keynesians and monetarists have argued, but on the supply side. To understand the reason that recovery was so slow in the Great Depression, and by extension the reason we see so little recovery now, look not to the theories of macroeconomics, but to some of the literature on economic growth and development that argues that secure property rights and an impartial legal system are keys to economic growth.

The price of sex

From "Cheap Dates" in the New York Post:

“Every sex act is part of a ‘pricing’ of sex for subsequent relationships,” Regnerus said. “If sex has been very easy to get for a particular young man for many years and over the course of multiple relationships, what would eventually prompt him to pay a lot for it in the future -- that is, committing to marry?”
....
So, what can women do to return the balance of sexual power in their favor? Stop putting out, experts say. If women collectively decided to cross their legs, the price of sex would soar and women would regain control of the market. Like a whoopie cartel.
....
“Let’s be realistic: It’s not going to happen here,” Regnerus says. “Women don’t really need men and marriage -- economically, socially, and culturally -- like they once did. What I hear in interviews with women is plenty of complaining about men or about the dating scene, but their annoyance is seldom directed at other women.”

There is a prisoner's dilemma problem involved--what looks good to the individual may not be good for the group. Plus it is arguable that the end effect of the women's liberation movement of the 1960s and 70s may have been to make many women worse off, not better.

Less than .9

How low can fertility rates fall? This is from The China Post in Taiwan reporting that many married couples abort their first pregnancy for financial reasons:

Statistics compiled by the Ministry of the Interior (MOI) showed that Taiwan's total fertility rate stood at a low of 0.895 in 2010, far lower than the level of 2.1 needed to maintain a stable population structure. This constituted a warning signal for the island's declining population.

The experiences of Taiwan and Japan suggest that China, having reduced its fertility rate, will not be able to increase it even when it abandons its one-child policy.

The McGurk Effect

Found on Carpe Diem:

Barack Obama and affirmative action

I recently stumbled on this quotation in a letter that Barack Obama wrote when he was at Harvard:

I must say, however, that as someone who has undoubtedly benefited from affirmative action programs during my academic career, and as someone who may have benefited from the Law Review's affirmative action policy when I was selected to join the Review last year, I have not personally felt stigmatized either within the broader law school community or as a staff member of the Review.

Three things jumped out at me.

1) Opponents of affirmative action see three possible harms from affirmative action. The most obviously harmed are those who would otherwise get positions that go to the affirmative-action candidates. These people are usually white or Asian. Second are those minority members who could attain the positions without affirmative action. They are the ones that may suffer from being stigmatized. Third are those who get positions from affirmative action but are not really qualified. They are usually helped but can be harmed if they are put into situations in which they are not competitive; the claim is that they might prosper and do better in the long run in a less competitive situation. Since Obama has identified himself as being in the third group, he should not be claiming that he was immune from the harm that is posited to those in the second group.

2) This admission undercuts the often-heard argument that Obama's Ivy League credentials and his position at the Law Review are proof of superior intellect.

3) Obama may be the greatest success story of affirmative action because without affirmative action Obama would not have had the Ivy League credentials that were essential for his election as president.  If Obama is an excellent president, then his presidency validates of the wisdom of affirmative action. I have not seen this argument made proponents of affirmative action, perhaps because of point two above.

Samuelson on Social Security

 From Jonathan Last:

The first person I’ve found drawing the parallel is economist Paul A. Samuelson. In the November 13, 1967 Newsweek Samuelson defended Social Security by pointing out that it was linked to population growth and that “A growing nation is the greatest Ponzi scheme ever devised. And that is a fact, not a paradox.” (I found this quote in Phillip Longman’s excellent essay “Missing Children,” in the latest issue of the journal The Family in America. I can’t find the original Newsweek cite to provide full context, but Longman says that Samuelson was defending Social Security and I’m happy to trust him because Phillip Longman is stone-cold awesome.)

This view is really not that surprising. Laurence Kotlikoff writes in Jimmy Stewart Is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking:

For its part, economics places no moral stigma on the words: "Ponzi scheme." Indeed, there is a significant economics literature concerned with the question of whether Ponzi schemes--chain letters--are preferred investments for everyone. (p. 61)

Kotlikoff goes on to say that if population or productivity is growing faster than the rate of interest, social Ponzi schemes work well. However, when population growth and productivity slow or come to halt, the programs will run into trouble.

(Kotlifkoff's proposal for reforming the financial sector is to abolish limited liability for any financial institution that uses leverage.)

update: A fuller version of the Samuelson quote is here.

Update 2: More on people recognizing that Social Security is structured in the same way a Ponzi scheme is.

Signaling with degrees

If I were still teaching economics, I might use this article from Inside Higher Ed. It considers the possibility that higher ed is nothing more than signaling. Most examples that use economic concepts are esoteric to college students who have very limited experiences. But the question of whether going to college is a good decision or not is something that they can relate to.

External economies

Forbes discovers external economies: Why Amazon Can't Make A Kindle In the USA

(I recall reading the same about shoe manufacturing. It is almost impossible to make shoes in the US because all the support industries are gone. And it is the same reason that Silicon Valley was so productive--the large concentration of similar industries drove down costs for all of them.)

Memories

Do you remember the good old days:

The rapid improvement in the public's mood is without precedent in modern history. Last week's Washington Post poll found that 50 percent of Americans think things are generally going in the right direction, up from only 8 percent in early October. That's the quickest change in optimism since the question was first asked by The Post in 1980. Views of President Obama, in turn, were impossibly high: Ninety percent called him willing to listen to different views, and better than 70 percent called him a strong leader, honest and trustworthy, and understanding of people's problems.

And that was before happiness started busting out all over yesterday.

A ranting Brit

A bit of an impressive rant from England:

Now we know why they don’t call themselves ‘police forces’ any more. But they aren’t ‘services’ either, for they certainly don’t serve us or do what we want them to do, preferring to arrest us for defending ourselves. The criminals, who are cunning without being intelligent, all know this.

Read more: http://www.dailymail.co.uk/news/article-2025695/UK-riots-Police-water-cannon-plastic-bullets-After-50-years-lavish-welfare-state-earth-What-abject-failure-says-Peter-Hitchens.html#ixzz1V6Erdk8v

Rising to the top

From the MailOnline: Narcissists rise to the top because people mistake their confidence and authority for leadership qualities.  This helps explain a lot about the world around us.

2½ years. What?

I cannot find the original quote, but if he said it, it is a major gaffe:

Last night Obama was in New York for a fund-raiser. At that event he elaborated on the "you deserve better" theme: "What was remarkable was to see outside of Washington the enthusiasm, the energy, the hopefulness, the decency of the American people. And what I said to them is you deserve better. You deserve better than you've been getting out of Washington over the last 2½ months--for that matter, for the last 2½ years."

How smart is the president?

From Bret Stephens at the Wall Street Journal:

I don't buy it. I just think the president isn't very bright.

Socrates taught that wisdom begins in the recognition of how little we know. Mr. Obama is perpetually intent on telling us how much he knows. Aristotle wrote that the type of intelligence most needed in politics is prudence, which in turn requires experience. Mr. Obama came to office with no experience. Plutarch warned that flattery "makes itself an obstacle and pestilence to great houses and great affairs." Today's White House, more so than any in memory, is stuffed with flatterers.

Is this past week the time in which the median voters have started to acknowledge that the emperor has no clothes?

Some employment statistics

The Bureau of Labor Statistics (BLS) released the July unemployment rate this morning. The headline was that the rate dropped from 9.2% to 9.1%.

Some digging into the data shows that since 1948, the oldest data BLS has, there have been 45 months in which the unemployment rate has been 9% or higher. One occurred in the first Nixon administration, 19 occurred during the first Reagan administration, and 25 (or 55% of the total) occurred during the 31 months of the Obama administration.

The Obama administration looks better if we look at months in which the unemployment rate was 8% or higher. Nixon/Ford had 12 months, Reagan had 27, and Obama 30.

Both Nixon and Reagan won second terms. At this point in the Nixon administration the unemployment rate was 8.6% and it fell to 7.6% in September of election year, which would have been the last data available before the election. For Reagan the numbers were 9.4% to 7.3%.

Looking at the unemployment rate, the current situation seems much like what happened in the 1980s, though perhaps not as severe. However, a difference between now and then is that in the last few years we have had a large drop in the labor force. People have stopped looking for jobs and no longer are counted as unemployed. Looking at the employment data rather than the unemployment rate shows that the current downturn was much more severe than the two downturns in the 1970s and 1980s.

Employment peaked in January 1974 and then declined by 3.37% over the next 17 months. It took another 14 months to surpass the January 1984 peak.

Employment peaked in February, 1980 and declined by 3.82% over the next 36 months. However, it took only ten months from there to surpass the February, 1980 peak.

In our most recent downturn, employment peaked in March of 2007 and declined by 7.42% over the next 32 months. Nineteen months later we still have not reached the previous employment peak--we have regained only 22% of the jobs lost. The current downturn is almost twice as severe as the very serious downturn in the early 1980s based on the employment data.

(All numbers based on data from the BLS website.)

The Philippines

Every once in a while I check quantcast.com to see what they have to say about my website. I was puzzled by what I saw this week (Click on the graph to see it all):

The brown part of the graph shows visits from the Philippines, and in June my site was getting as many visits from the Philippines as it was from the U.S. I have do not know why, though I suspect that some course there was using the site for class assignments.

Usage of the site reflects what happens at school. Use is heavy from Monday through Friday and drops off dramatically on Saturday and Sunday. Visits are lower in the summer than they are during the school year. Christmas and Thanksgiving vacations are evident, though not shown on this graph. Visits for the first semester have been higher than visits for the second semester.

The most recent report says that 157584 websites sites have bigger U.S. audiences.

High praise not deserved

I occasionally review books, and sometimes they come with endorsements from famous economists. Most of the time those endorsements are deserved, but every once in a while a book that is mediocre at best, or something that never should have been published at worst, arrives with a dusk jacket full of glowing words of praise from well-known economists. I am reading on such a book now. Obviously none of the big-name economists who recommended it had read it--the target audience of the book was not professional economists. So why did they endorse it? Do they not worry that actions like this might reduce their credibility? Or is credibility of economists based only on research ability, so that a string of poorly-advised endorsements does not harm?

I suspect that the reason that this book got the undeserved praise is that the endorsers either know the author or want to be nice to the publisher. One thing that bothers me about this is that it tilts the playing field toward those who already have arrived and makes it more difficult for talented but unconnected authors to break through. I have read excellent books by little-known authors--not a lot, but they do exist. I have also read a number of forgettable books by authors with reputations.

Procyclical policy?

The regulatory authorities lowered capital requirements during the boom and now want to raise them during the bust. A reaction:

Bove points out that the proposal, which he dubs absurd, would “effectively take U.S. banks out of the financial system for an extended period. It would have a similar impact on the economy as the Fed’s two reserve ratio increases in 1937 which plunged the United States back into depression.”

The king of ranters

Nobody writes rants like Mark Steyn.

The Treasury crowed that Fiat had agreed to pay a whopping $560 million for the government's Chrysler shares.Wow! 560 million smackeroos! If you laid them out end to end, they're equivalent to what the federal government borrows every three hours. That's some windfall! In the time it takes to fly Obama to Toledo to boast about it, he'd already blown through the Italians' check.

A small bit of a longer piece that no single excerpt can do justice to. Read the whole thing. As someone who occasionally writes rants, I am awed at the skill of Mark Steyn.

The scary thing is he is probably right about the three hours.

Shlaes the supply sider

Amity Shlaes has explored the Great Depression from the supply side, arguing that government distortion of markets and hostility towards business is key to explaining why the Depression was as deep and as long as it was. In this, she is quite different from Friedman and Schwartz, who had a demand-side explanation. I wonder if Milton Friedman would have altered his telling of the story if he had seen what Shlaes and others have written.

Her most recent article is here. She argues to understand what is wrong with today's economic policy is the same thing that was wrong with economic policy in the 1930s. Her book, The Forgotten Man: A New History of the Great Depression is essential reading for anyone interested in the Great Depression.

Taylor reviews Reckless Endangerment

In the Washington Post John Taylor reviews a new book that argues that business-government connections led to the financial meltdown of 2008:

In a series of clearly written narratives with many names, dates and figures, they show that government officials took actions that benefited well-connected individuals, who in turn helped the government officials. This mutual support system thwarted good economic policies and encouraged reckless ones. It thereby brought on the crisis, sending the economy into a tailspin.

One economist who has argued that housing policy had nothing to do with the crisis is Joseph Stiglitz. However, Stiglitz was one of those who gave us those housing policies, so he is not an unbiased voice.

Update: Walter Russell Mead also likes the book.

Mead on Obama

From Walter Russell Mead, more devastating because Mead actually wants to like Obama:

Three times he has gone up against Netanyahu; three times he has ingloriously failed.  This last defeat — Netanyahu’s deadly, devastating speech to Congress in which he eviscerated President Obama’s foreign policy to prolonged and repeated standing ovations by members of both parties — may have been the single most stunning and effective public rebuke to an American President a foreign leader has ever delivered.

The government and the financial panic

The theme that the financial panic of 2008 and the recession that accompanied it were caused by a lack or regulation or by deregulation is common, especially on the Left. The counterargument is that the financial panic was the direct result of government regulation and policy, especially in the housing market. Joseph Lawler makes the case in The American Spectator:

[T]he financial crisis was not caused by weak or ineffective regulation. On the contrary, the financial crisis of 2008 was caused by government housing policies -- sponsored and promoted by many of the same people who framed and ultimately enacted the DFA.

Because his argument puts the blame on the government and not on the private sector, it has been attacked. He responds here.

The stimulus and jobs

From Greg Mankiw's blog, a summary of a paper trying to determine the effects of the 2009 Obama stimulus bill:

Our benchmark results suggest that the ARRA created/saved approximately 450 thousand state and local government jobs and destroyed/forestalled roughly one million private sector jobs.

On the predictable consequences of rent control

Here.

China's birth dearth

Is the fertility rate in China only 1.3?

To keep a society sustainable, the birth rate needs to be kept around at 2.3 children per female inhabitant. But all the objective surveys, including that of the 2000 census and the 1% sampling survey of 2001, show that since the mid-1990’s the birth rate in China has been stuck around 1.3.
....
China is set to repeat Japan’s economic recession experience of the 1990s. The difference is Japan became rich before growing old, while China is growing old before even getting rich.

 Demography remains the great untold story.

What if...

What if supermarkets were like public schools.

Attacking the multiplier

Veronique de Rugy summarizes  research that finds very low spending multipliers.

Keynes vs Hayek 2

The sequel to the best economics video ever.

Debt

This means something, but I am not sure what:

Last June, for the first time in history, Americans owed more on their student loans, a record $833 billion, than on their credit cards, $826.5 billion. The amount owed on student loans increases at a rate of about $2,853.88 per second, meaning we're on track for total student debt to cross the $1 trillion mark sometime this year.

 Some people have argued that that the next bubble to pop will be a higher-education bubble. The cost of education has risen so that it is no longer a good investment for most students--they will never recover the costs of going to college with higher wages. Maybe. I know that I saw a lot of students who did not belong in college when I was teaching. And I recall top administrators who saw nothing wrong with raising tuition and fees by 5%-10% each year.

When something is not sustainable, it will eventually stop.

Teenage unemployment

Teenage unemployment is about 25%. A comment relayed by Instapundit suggests that lack of final demand may not be the main reason:

Since getting hired almost a year ago, they have worked him as much as possible. He averages close to, but not quite at, 40 hours a week. The reason being, most kids they hire don’t show up when they scheduled, don’t work when they are there, and they mouth off to the management. And at 10 months or so, he has seen dozens of new people come and go.

A lot of young people are not worth $7.00+ per hour, and if they are not, they will not be hired, or if hired, they will not be retained.  The minimum wage is a very cruel law.

(Black teenage unemployment is 42%.)

The little old man who invented hunger

From a look at Cuba today:

While they applaud revolutionary mottos, young people call Marx “the little old man who invented hunger.”

Nothing is more devastating to a bad idea than to put it into practice.

Read more: http://www.miamiherald.com/2011/04/17/2169612/cuban-communists-headed-for-oblivion.html#ixzz1Jt4dCmqB

Greece Portugal and the USA

From CNBC:

The US is going down a similar road as that taken by Greece and Portugal with regard to its budget decisions, John E. Silvia, chief economist at Wells Fargo, said on Wednesday.

"To me—being in Europe for a few days—the plot in Greece and Portugal sounds an awful lot like the same plot that's going on in the United States. But the characters have different names," he said.

I coauthored a paper many years ago with a John Silvia. The paper was about economic education. I wonder if he is the the John Silvia who is now with Wells Fargo.

Kotlikoff on debt

Lawrence Kotlikoff worries about when the debt-to-GDP ratio hits the critical level:

CBO’s baseline budget updates suggest the date for reaching what Carmen Reinhart, Kenneth Rogoff and other prominent economists believe is a critical insolvency threshold -- a 90 percent ratio of federal debt held by the public to gross domestic product -- has moved four years closer, in just nine months!

****

Actually, 2017 is optimistic. Uncle Sam’s creditors will soon start charging exorbitant interest rates -- like those Greece, Ireland and Portugal now face. The market’s concern with those countries’ bonds is outright default, which is unlikely in the U.S. What is likely is rising inflation as the Federal Reserve continues to print vast quantities of money to help pay the Treasury’s bills.
I generally don’t give investment advice, but Bill Gross, co-founder of PIMCO and manager of the world’s largest bond mutual fund, has it right. It’s time to dump all but your very short-term U.S. Treasuries and other dollar-denominated bonds. A safer alternative is Treasury inflation protected securities, or TIPS.

Kotlikoff makes Greg Mankiw look like a giddy optimist.

Is anyone really this stupid?

I get a lot of Nigerian scam letters, some of them well done and some not very well done. This one is in the not well-done category. Are there really people who would send money after getting this?

United Nations Assisted Program
Directorate of International Payment
United Nations Liaison Office - Africa

To The Attention Of Beneficiary,

This email is to notify you about the release of your outstanding payment which is truly $2.500,000.00 Million Dollars The Federal Government scheduled a time frame to settle all foreign debts which includes Contract/Inheritance/Lottery (Sponsored by Microsoft and Shell Petrolum Lottery) and other international loans. News had it that over the past, numerous individual(s) who happen to be impostors (claiming to beindividuals, banks and organizations) are claiming to release numerous sums of fund via numerous ways.

You have two options to receive your payment which is either a Pin Based ATM card or Certified Cashier’s Check. You are advised to select one out of the two options on how you wish to receive your $2.500, 000.00 Million Dollars through ATM card or Check which will be shipped via Ups Express Shipping Courier Company and would get to you within 2 to 3 working days at most.

DO NOT SEND MONEY TO ANYONE UNTIL YOU READ THIS MASSAGE:

The actual fees for shipping your ATM Card/ Check is $125.99 Dollars but because Ups Express Shipping Courier have temporarily discontinued the C.O.D which gives you the chance to pay when package is delivered for international shipping as stated on their

We had to sign a contract with them for bulk shipping which makes the fees reduce from the actual $125.99 Dollars to $98.99 Dollars nothing more and no hidden fees of any sort! You are advised to contact the dispatching officer responsible for the shipping of your Check or ATM Card with the following information for shipping of your payment through Check or ATM Card.

Contact: Mathew Benson

United Nation Dispatching Officer

E-Mail: ( deleted )


Phone Number : deleted

Make Sure you provide him with the following information:

1,Your full Name.
2,Your Address where your payment will be dispatch to you:.
3,Home/Cell Phone:.
4,Preferred Payment Method (Check or ATM):

The dispatching officer will provide you with instructions on how you are to make the payment of $98.99 Dollars only for the shipping of your ATM Card or Cashier’s Check. Remember that you are not paying any fees extra no matter what. Once again note that the actual Ups Express Shipping Courier Retail Price is: $125.99 Dollars Your Price (Because of our contract signed): $98.99 Dollars ($27.00 Dollars Savings!)

Respectfully,

Dr. Gee Pascal
UN Envoy (African Region)

The next financial meltdown

Paul Singer, one of the few who foresaw the sub-prime mortgage meltdown, argues that as the result of Dodd-Frank, the financial system is now more fragile and in danger of runaway destabilizing feedback.
He also see the possibility of serious inflation.

With an out-of-control federal deficit, I think inflation is inevitable. There is no other way to deal with the debt than to inflate it away. The only questions are when and how much. Now if I could just figure out how to insure against it.

Responding to incentives

People respond to taxes, specifically a tax on Internet activity:

"In the meantime, CouponCabin is actively exploring moving to Indiana. It's a shame we have to consider leaving our longtime home in Illinois, but we will do what is best for our business."

Confounding variables

Iowahawk has a couple of pieces that explain the importance of taking confounding variables into account, here and here.

Ignore Sarah Palin Week

This is an Ignore Sarah Palin Week:

That's right -- February 27-March 5 is officially, "Ignore Sarah Palin Week."   For just one week, signers of this petition pledge to do the following:

• Change the channel if she comes on TV
• Surf to another page if she pops up on the web
• Turn to another article if she appears in a newspaper, magazine, comic book, etc.

Questions: If you really are ignoring Sarah Palin, why would you go to a web page devoted to Sarah Palin?  Doesn't signing the petition violate point two of the pledge? If you really want to ignore her, wouldn't it be better to just ignore her?

Sarah Palin is frequently in the news because the Left is obsessed with her--they scrutinize everything she says and does. That kind of scrutiny might make sense for an important public official (though Obama does not get it), but it does not for a private citizen.

Where to cut?

Michael Gerson on the continuing struggle with state and federal finances:

The cost of maintaining government structures is making it impossible to maintain government functions. To fund commitments made to the providers of services, services must be cut. So piles of money go to government pensions and benefits instead of roads, education or mental health services. This is one of the primary reasons the public resists tax increases. A tax increase used to provide an actual public service might have a shot at support. But a tax increase to prop up a system that consumes endless resources while cutting services is a harder sell.
 ....
But events in Madison are also a preview of the federal debt debate. On the continuum of pain, Obama has targeted home heating oil subsidies for the poor and Teach for America. House Republicans' reductions have been broader but included foreign aid and low-income housing. Few protesters have emerged to scream and chant. But these cuts are distractions from the problem of unsustainable entitlement obligations to the middle class and the wealthy, which threaten to eventually consume the other functions of the federal government. Structural change is required - reforming benefits to reduce costs while focusing benefits on those in the greatest need. 

What are they doing in Illinois? Cutting state funding to drug and alcohol abuse programs. Druggies do not demonstrate, state union workers do.

Why we should not be in Afghanistan

Said Musa

Radical-in-chief

From Stanley Kutz, author of Radical-in-Chief:

We are destined for still more polarization. Neither side can pull back, because the financial crunch is going to have to be resolved one way or another. We either scale back government and the power of public employee unions, or we move toward a structurally higher tax burden and a permanently enlarged welfare state. The very nature of the American system is now at stake. The emerging populist movements on both the right and left recognize this, and so cannot turn back from further confrontation.

Two years at the University of Wisconsin-Madison during the peak of student protests exposed me to the radical Left, so what Kutz is saying about Obama is no surprise to me. People without that exposure have a hard time understanding what Obama is because he is outside of their range of experience.

The essence of Obama

From Powerline:

Obama's game is transparent, isn't it? He is playing a game of chicken. He puts forward a series of proposals that he knows are more or less insane; but he also believes that Republicans will come to his rescue. They, not being wholly irresponsible, will come up with plans to reform entitlements--like, for example, the Ryan Roadmap. Ultimately, some combination of those plans will be implemented because the alternative is the collapse, not just of the government of the United States, but of the country itself. But Obama thinks the GOP's reforms will be unpopular, and he will be able to demagogue them, thus having his cake and eating it too. Is that leadership? Of course not. But it is the very essence of Barack Obama.

Regulatory capture

Headline at the Washington Examiner: Wall Street lobbyists to GOP: Hands off Dodd-Frank

Adverse selection and college teaching

From Inside Higher Education:

If the potential employer makes an offer to a candidate and that candidate is in fact a gifted teacher, the home institution will make a counter offer. If the candidate is in fact a poor or average teacher, the home institution will not make a counter offer and the potential employer is likely to hire a poor or average teacher. This leads to what economists call “adverse selection” for job offers to potential teachers. Since the prospective employer knows it is likely to hire a poor or average teacher rather than an exceptional teacher, it does not make offers designed to attract exceptional teachers, and the market for exceptional teachers does not exist. Clearly, this problem is made worse by tenure, since tenure greatly increases the cost of making a bad hiring decision. In short, the “market for superior teaching” has unraveled due to insufficient information about teaching quality.

Mayor Daley and freedom of speech

Mayor Daley did not care much for freedom of speech.

What is a website worth?

Quantcast.com ranks Huffington Post as the 27th most visited website with 30.5 million monthly U.S. visitors and 39.5 million monthly global visitors. AOL is buying it for $315 million. Quantcast.com currently ranks ingrimayne.com, which contains the on-line Cybereconomics textbook, as the the 49,853rd most visited website with 30.9 thousand monthly U.S. vistors and 57.3 thousand global visitors. Both are Quantified, which means that more visits get recorded by Quantcast than would get recorded for sites that is not Quantified. Based on these numbers, ingrimayne.com is roughly 1000 times smaller than Huffington Post. Is it worth 0.1% of what Huffington Post is worth? Anyone willing to make such an offer will find a very receptive audience.

Update: AOL collects $250 million dollars each year from people who do not understand that it is free, but keep paying for it:

A friend of mine has an AOL e-mail address, so I called her and gently asked if she is still paying the AOL subscription fee.

“Well, yes, I like the service, and everybody already has my AOL address,” she said.

I tried explaining that all this is free, but I’m sure she was skeptical. How can something that’s valuable now be free?

AOL’s paid subscriptions are declining each year, down from about 8 million five years ago. Folks are getting the message, but not a certain group that basically doesn’t care to understand how the Internet works.

Death panels

James Taranto argues that Sarah Palin got it right with the term "death panels:"

Palin put the term "death panel" in quotes to indicate that she was using it figuratively. She was not lying but doing just the opposite: conveying a fundamental truth about ObamaCare. Proponents were describing it as a sort of fiscal perpetual-motion machine: We're going to give free insurance to tens of millions of people and reduce the deficit! As a matter of simple arithmetic, the only way to do that is by drastically curtailing medical benefits.

Palin is a tremendously talented politician with the ability to take complex ideas and put them in terms that ordinary people can understand. She did it in this case, highlighting the fact that the government would inevitably ration health care as it does in every country that has nationalized it.

Some on the Left keep wondering why this private citizen remains in the news. Taranto has an answer:

Palin got the truth out with the help of journalists determined to bolster the deceptions at the heart of ObamaCare. She was instrumental in winning the political argument that looks increasingly likely to render ObamaCare's legislative victory a Pyrrhic one. Sarah Palin outsmarted the formerly mainstream media simply by being blunt and honest. That is why they burn with a mindless rage against her.

However, I think we will hear less from her and she will be less newsworthy in the next year. She can offer only rhetorical opposition to Obama and the Democrats. With a majority in the House of Representatives, Republicans in congress can now offer real opposition to Obama and the Democrats, and that opposition will be more important and more newsworthy. She could play the role as leader of the loyal opposition when the Republicans in Washington were powerless, but now that they have some power, the leadership will pass to them.

Egypt, wheat, and China

Spengler has an unusual take on the trouble in Egypt--China is the cause because they are getting rich.

It wasn't the financial crisis that undermined dysfunctional Arab states, but Asian prosperity. The Arab poor have been priced out of world markets. There is no solution to Egypt's problems within the horizon of popular expectations. Whether the regime survives or a new one replaces it, the outcome will be a disaster of, well, biblical proportions. 

What is wrong with Greece?

Greece is plagued with regulations that were designed to protect special interests, according to this article in the New York Times. The result is an economy that discourages entrepreneurship.

The Greek economy is riddled with distortions — the number of trucking licenses has remained unchanged in Greece since 1971, for example, and the country is among the world’s leaders in lawyers per capita. It has one lawyer for every 250 people, compared with about one for 272 in the United States.

Is the ratio of lawyers to population a rough measure of the amount of rent-seeking a society has?

Ah, the academic life

It is videos like this that make me wonder if I should have stayed.

See more funny videos and funny pictures at CollegeHumor.

Why the slow recovery?

From John Taylor in the Wall Street Journal:

Yet the unemployment rate is still over 9%—double what it was before the recession—and it's been stuck above 9% for 20 consecutive months. Why the extraordinarily high and prolonged unemployment? My research shows that discretionary government interventions—deviations from sound economic principles and policies—have been largely responsible. 

The Paul Krugmans of economics will not like hearing that.

Screening or human capital?

An article in the Lafayette Journal and Courier says that some employers do not want to hire people who have been unemployed for more than a year.

There is a stigma that long-term jobless people have been sitting around and don't really want to work. There is the perception that they won't take a lower-paying job -- and if they do, they will bolt as soon as they find a higher-paying one.
On top of that, some companies have explicitly barred the unemployed from certain job openings, outright telling them in job ads that they need not apply.

 ....
But the company is far from alone in wanting workers who already are gainfully employed, said Patrice Waidner, board chairwoman of the Indianapolis chapter of Business & Professional Exchange, a networking organization that helps unemployed professionals."Companies are saying, 'I will take the person who was just working or is currently working,' " she said. "It is extremely difficult to get back into the job market."

Does a person lose job skills as a result of being unemployed for a long time? Or does long-term unemployment tend to be a marker for people who are less reliable and dependable than average? The article does not tell us much, but then the reporter probably does recognize that these are interesting questions.

PDS

James Taranto takes a stab at trying to explain the irrational hatred that Sarah Palin brings out in some people. He says that the deepest wells of this hatred are with women.

A couple excerpts:

To a woman who has internalized this point of view, Sarah Palin's opposition to abortion rights is a personal affront, and a deep one. It doesn't help that Palin lives by her beliefs. To the contrary, it intensifies the offense.

Liberal men put down Palin as a cheap way to score points with the women in their lives, or they use her as an outlet for more-general misogynistic impulses that would otherwise be socially unacceptable to express.

Update: Another attempt, at neo-neocon, with a long and mostly serious string of comments. My summary of the thread--some people perceive Palin as uppity and they do not care for uppity women.

The level of Palin hate is a most interesting phenomenon, one that cries out for an explanation. It tells us something about human nature, but I am not sure what.

Another great google graph

Found at the The Busniess Insider, another great Google graph.

People respond to incentives

Steven Landsburg begins his book Armchair Economist with the statement, "Most of economics can be summarized in four words: 'People respond to incentives.' The rest is commentary."

That seems a rather different beginning than that given in most introductory textbooks, which stresses that economics is about scarcity and choice. However, on closer examination, Landsburg's statement may tell us more and at the same time incorporate the insights of the scarcity-choice definition.

When economists talk about incentives, they are thinking that people respond to costs and benefits. When the cost of something rises, people use or do less of it, while when the benefit of something rises, people use or do more of it. Rational people should not act if the benefit of acting is less than the cost, and they should act if the benefit of acting is greater than the cost.

A benefit is something that makes a person better off. How do we decide if something makes a person better off? Economists take an Aristotelian approach on this question. They assume that people have goals, though unlike Aristotle, they do not spend much time trying to evaluate whether those goals are desirable or not. Actions that move a person closer to achieving their goals are benefits.

Notice that it is the individual who decides what his or her goals are, not some authority. Economics assumes that people know what is best for themselves, that is, that people should be allowed to choose for themselves what their goals are. This is not an assumption that everyone makes. In addition, by assuming that people are goal-seeking, we are also implicitly making the assumption that people are self-interested. You might think that someone could decide that their goal was to do whatever was best for humanity, and they might. But the limits to our knowledge and ability to process information make this a goal beyond the capability of anyone to actually put into practice.

What about costs? The cost of anything is what you have to give up to get it. Often this is measured in money. When we say that something costs $5.00, that means that when you spend $5.00 to get the item, you cannot use that $5.00 to purchase some other item. Often cost includes time. If to get an item one must pay $5.00 plus wait fifteen minutes, the cost of the item includes both money and time.

Why is there any cost at all? In a world without cost, we would not need to give up anything, and there would be no need to make choices. In a world without choice, there would be no incentives. This world without incentives is the world of abundance, a world without scarcity. And this insight brings us back to the traditional definition of economics, which is that it is the study of how people make choices in a world of scarcity.

On the need for civil discourse

We have grappled with many social problems in the past--we had a War on Drugs and a War on Poverty, we fight crime and pollution, we battle illiteracy and teen pregnancy, and we target a whole variety of social problems. Now we have too much incendiary political language and we need to combat this problem in the same way we have attacked other social evils. We must annihilate incendiary languages, obliterate violent metaphors, and crush and extirpate inflammatory speech. It may be a tough contest--there is no magic bullet solution--but victory is possible only if we take on the challenge.

Chinese mothers

Shannon Love responds to the article in the Wall Street Journal about the superiority of Chinese mothers by pointing out the importance of teamwork.

Those who criticize team sports for instilling a competitive spirit usually miss the cooperation that they also teach.