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.

:

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?

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.

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.

The story behind the Keynes-Hayek rap video

Here

Greece

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.

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 boston.com (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.