Bitcoin is back in the news, and with each time in the news, it gets more notoriety. For the most part, this post is going to assume you know a little about it. If you want more info, you can start with this post at Wonkblog. But more or less, Bitcoin is a digital and anonymous currency with a predictable supply. In this post, I am going to analyze its short term situation and long term prospects, because I think they are very different issues.
Short Term. I am pretty convinced, along with almost everyone else, that Bitcoin is suffering from a bubble right now. It's value has been skyrocketing. This would be great if Bitcoin were an investment vehicle. But it is intended to be a currency. As long as its value increases like this, it can't function as a currency because most people are hoarding it knowing that its value is increasing faster than the cost of goods.
If it isn't a bubble and the value keeps rising, it won't be much use as a currency. If the bubble pops, that doesn't doom the currency though. If there is still value in using it as a currency, it's value may not completely go to zero with the bursting of the bubble. In other words, the bubble might pop, the investors will flee, and those that want the currency as a currency will remain. This is probably what the Bitcoin supporters really want.
Long Term. So let's say that happens - the bubble bursts and the value of the Bitcoin comes back to something more reasonable. The question then is whether it is a useful currency. The answer depends on what it would be used for.
Bitcoin has a number of unique features: the supply is predictable; it is cost-free (or friction-less); it is anonymous. Let's look at each one.
First, let's look at its cost free nature. I do think this is important, to some degree and might help it or a successor catch on. Most other ways of using money online costs money. There are banking fees and credit card fees and other transaction fees. There are no fees with Bitcoin. I think a lot of users like this.
Second - Bitcoin is anonymous. This appeals to the crypto-anarchists of the interweb, as well as anyone else looking to break the law for a price. I don't doubt that this is attractive. It is a way to buy drugs, for example. But it is the anarchism aspect that I don't understand. There are rules for society in the real world, and so there should be on the internet. So here, my problem is the philosophy, though I understand that my disagreements won't stop this from being an attractive part of the currency.
Last is the predictable supply. This aspect goes along with the gold-bug leanings (ie people that want the dollar and other currencies on the gold standard) of some on the internet. Generally, I agree with all of modern economics that the gold standard is bad policy for any country's currency. To have the most stable economy, a nation needs a national bank to regulate and change the money supply. And just look at our history - the economy was far more stable and with fewer and less severe recessions since coming off the gold standard. Even Milton Friedman agreed; in fact his thesis was that the Great Depression should be blamed on poor management of the money supply and not a lack of stimulus spending.
Having said that, if Bitcoin is not a national currency, I don't know what harm having a predictable supply will cause - at least to the economy generally. There might be more ups and downs with the value of the currency. There might be times when it is not an effective currency because of hoarding. But as long as that only affects those who choose to use it and not any national economy - ie as long as it isn't widely used enough to crash an economy - I don't really care.
That also means though that the success or failure of Bitcoin doesn't really say much about the success of currencies with limited supplies that are not controlled by a national bank. Or rather, I can see Bitcoin succeeding without it being a positive lesson for the gold standard. But I can also see it failing because of its limited supply. It can also fail for other reasons. If it fails, we'll just have to analyze why.
There is one final issue, which is related to the supply issue, and that is trust. Some people don't trust national banks or private banks. Instead, they trust this software, which is open source. I am not one of those people. I trust our national bank and I trust our private banks (mostly). We have deposit insurance, and I know that our national bank's mission is to ensure a stable economy. I also don't trust the software, mostly because like most people I don't fully understand it. But there are some who are the opposite, who understand the software but don't trust (and maybe don't understand) our banks. In which case, Bitcoin is great for them. But I think they are wrong. So long as both options are available, everyone is happy.
Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts
Sunday, April 07, 2013
Monday, June 04, 2012
Another Extreme Example
Ezra Klein linked to a post where Tyler Cowen posts the following comment from another site:
Let that sink in. Republicans are opposing Milton Friedman policies.
Too many people are trying to say the two sides are equally to blame. But this example makes it perfectly clear, contrary to the commenter, that the Republicans have gone off the reservation and won't even agree to Democrat suggestions that line up with old Republican positions - positions that used to be far to the right at the time.
It’s incredibly frustrating. The political and policy world falls into two camps:This is silliness. Actually what is happening is that the Republican v. Democrat debate was over whether to use monetary or fiscal policy (respectively). Now the debate is whether to do anything. Milton Friedman is too liberal for the Republicans, which shows how far right they have gone. While Democrats are openly calling for more monetary policy.
Those who believe no stimulus is necessary, everything is supply-side. Those who believe stimulus is necessary but only fiscal stimulus can or should supply it.
It’s like people completely forgot the existence of Milton Friedman, and decided to revert to the stupidest possible version of New Keynesianism, where interest rates are the only lever of monetary policy and the printing press is something that only functions when rates are above zero.
I feel like to both the centre left and the right, Milton Friedman is too heretical now — too right-wing for the left obviously and too left-wing for the right. Consequently, everything about monetarism has been stripped out of the public consciousness and we are left with vulgar Keynesianism and vulgar Austrianism.
We truly live in a Dark Age of economics.
Let that sink in. Republicans are opposing Milton Friedman policies.
Too many people are trying to say the two sides are equally to blame. But this example makes it perfectly clear, contrary to the commenter, that the Republicans have gone off the reservation and won't even agree to Democrat suggestions that line up with old Republican positions - positions that used to be far to the right at the time.
Saturday, April 28, 2012
The Economy: Who is to Blame?
When talking about the economy, some people like to say that a president deserves far less blame and far less credit than they actually get. This statement seems so reasonable and nonpartisan when you first hear it. Granted, Republicans often say this, and this allows them to avoid giving Clinton credit for the boom of the 1990s and avoid blaming George W. Bush for this recession. So it isn't so non-partisan.
But it is also wrong. There is a lot presidents can do about the economy. They can create conditions that lead to speedy recoveries from recessions - with the help of good policy from the federal reserve. And they can create conditions that lead to bubbles and an overleveraged a financial system.
The president has helped the economy recover but I think the president could be making it recover faster. There is no question that the stimulus helped. It just wasn't large enough (and maybe poorly targeted). But recent budget cuts at the federal, state, and local level have not helped the recovery. Federal reserve policy has been helpful, but again, they could be doing more. And President Obama could encourage them to do more.
Also, I blame presidents for aspects of the Great Recession. President Clinton and President George W. Bush supported decontrol of the banking system, allowing banks to overleverage, putting the whole system at work. It also allowed a lot of risky borrowing by homeowners and investors alike.
But there were other aspects that were outside the control of Presidents Clinton and Bush. Excessive savings by Asian countries had a role in our recent housing bubble.
Also, I don't give Clinton too much credit for the 1990s dot-com boom. Sure, his decision to balance the budget and create surpluses helped create market confidence. But really, that boom was driven by technology and efficiency improvements (and a bit of a bubble).
Mitt Romney's economic adviser, Greg Mankiw, had a good thought on evaluating presidents and their economic policy :
Mitt Romney himself takes a different approach. When there is good news about the economy, he gives Bush credit. When the recovery is faltering, he blames Obama.
I think it is clear though that a president can have a very big impact on the economy. We just need to be nuanced (Romney has inexplicably attacked Obama for nuance) and thoughtful about what a president is and is not responsible for.
But it is also wrong. There is a lot presidents can do about the economy. They can create conditions that lead to speedy recoveries from recessions - with the help of good policy from the federal reserve. And they can create conditions that lead to bubbles and an overleveraged a financial system.
The president has helped the economy recover but I think the president could be making it recover faster. There is no question that the stimulus helped. It just wasn't large enough (and maybe poorly targeted). But recent budget cuts at the federal, state, and local level have not helped the recovery. Federal reserve policy has been helpful, but again, they could be doing more. And President Obama could encourage them to do more.
Also, I blame presidents for aspects of the Great Recession. President Clinton and President George W. Bush supported decontrol of the banking system, allowing banks to overleverage, putting the whole system at work. It also allowed a lot of risky borrowing by homeowners and investors alike.
But there were other aspects that were outside the control of Presidents Clinton and Bush. Excessive savings by Asian countries had a role in our recent housing bubble.
Also, I don't give Clinton too much credit for the 1990s dot-com boom. Sure, his decision to balance the budget and create surpluses helped create market confidence. But really, that boom was driven by technology and efficiency improvements (and a bit of a bubble).
Mitt Romney's economic adviser, Greg Mankiw, had a good thought on evaluating presidents and their economic policy :
What you would not do is judge him by the outcome. Even the best physicians have patients die. And even witchdoctors can have patients recover. Randomness is a fact of life (and death). In the case of a medical doctor, the answer seems clear: Instead of looking at the outcome, you would judge him by the decisions he makes and treatments he prescribes. That is, you would examine whether he followed best practices for the circumstances he faced.I think this makes a lot of sense. Following this method, we might blame Obama if we enter a double-dip recession caused by further government austerity. But we would not blame Obama if Europe's austerity causes them to have a double-dip recession and then bring us along for the ride or if the Federal Reserve decides to implement monetary tightening.
Mitt Romney himself takes a different approach. When there is good news about the economy, he gives Bush credit. When the recovery is faltering, he blames Obama.
I think it is clear though that a president can have a very big impact on the economy. We just need to be nuanced (Romney has inexplicably attacked Obama for nuance) and thoughtful about what a president is and is not responsible for.
Saturday, February 04, 2012
Economic Recovery?
So we got some good news on the economy Friday - we added 243,000 new jobs in January. It seems from reading most economists that unless something big happens (Euro crash, really bad fed policy / government policy), this could be the start of a decent recovery. This assumes not that job growth is consistent at this level (because if it was, it would take 7 years for us to get back to pre-recession employment) but that job growth is now accelerating.
So let's assume that the recovery has started. What does this say about our economic policy arguments? Liberals - or New Keynesians - thought that much more needed to be done to move the recovery along. We called for things like large fiscal stimulus or more aggressive and open monetary policy (more aggressive than QE1 and QE2, which themselves were somewhat aggressive).
Conservatives called for nothing. They thought stimulus would / did slow the recovery and that monetary policy would lead to runaway inflation. During my more cynical moments, I thought the Republican politicians were doing this to prolong the recession and ensure Obama would face reelection with bad jobs numbers. But during my more trusting moments, I thought the conservative economists at the least did not believe in fiscal stimulus and did not agree with the fed's dual mandate. They were unconcerned with unemployment and only concerned with inflation.
Anyway, if the recession is ending, what might we have learned? I think we can mostly agree that the bank bailouts and the first stimulus prevented a deeper recession. But recovery did not depend on further stimulus or more aggressive monetary policy. At best we could say that fiscal stimulus might have sped up the recovery. Or that austerity prolonged the recession some. But the lack of further stimulus and the actual government austerity did not prevent a recovery.
Also, we didn't need to increase inflation in order to get the recovery going. Although again, maybe even more aggressive fed policy could have sped up the recovery some.
Granted, New Keynesianism doesn't say that recovery won't happen without these things. But for months we have been calling for these things with the specter of a lost decade if we don't. And if the recovery moves along, than we won't have had a lost decade.
On the other hand, the somewhat aggressive federal reserve policies did not lead to inflation. At all. And the current policies, enacted over objections of conservative members, have likely helped the recovery.
If this is all the case, what should we do in a similar future crisis? It seems we could wait it out, and in time we could recover. Although I will say there is no guarantee. Japan had a real lost decade and I don't know enough to understand the differences between them and us.
But considering all of this, I still might favor more aggressive action. Aggressive action did not hinder the recession and might have sped it up. And in the case of Japan or a situation similar to theirs, it could avoid a lost decade whereas limited action would not.
Again, this is all resting on the assumption that the recovery has in fact started and continues to ramp up and that we will be satisfied with the pace of it. We might find out that it doesn't accelerate as quickly, in which case, maybe I am being a little too hesitant towards the more aggressive policies I have called for.
So let's assume that the recovery has started. What does this say about our economic policy arguments? Liberals - or New Keynesians - thought that much more needed to be done to move the recovery along. We called for things like large fiscal stimulus or more aggressive and open monetary policy (more aggressive than QE1 and QE2, which themselves were somewhat aggressive).
Conservatives called for nothing. They thought stimulus would / did slow the recovery and that monetary policy would lead to runaway inflation. During my more cynical moments, I thought the Republican politicians were doing this to prolong the recession and ensure Obama would face reelection with bad jobs numbers. But during my more trusting moments, I thought the conservative economists at the least did not believe in fiscal stimulus and did not agree with the fed's dual mandate. They were unconcerned with unemployment and only concerned with inflation.
Anyway, if the recession is ending, what might we have learned? I think we can mostly agree that the bank bailouts and the first stimulus prevented a deeper recession. But recovery did not depend on further stimulus or more aggressive monetary policy. At best we could say that fiscal stimulus might have sped up the recovery. Or that austerity prolonged the recession some. But the lack of further stimulus and the actual government austerity did not prevent a recovery.
Also, we didn't need to increase inflation in order to get the recovery going. Although again, maybe even more aggressive fed policy could have sped up the recovery some.
Granted, New Keynesianism doesn't say that recovery won't happen without these things. But for months we have been calling for these things with the specter of a lost decade if we don't. And if the recovery moves along, than we won't have had a lost decade.
On the other hand, the somewhat aggressive federal reserve policies did not lead to inflation. At all. And the current policies, enacted over objections of conservative members, have likely helped the recovery.
If this is all the case, what should we do in a similar future crisis? It seems we could wait it out, and in time we could recover. Although I will say there is no guarantee. Japan had a real lost decade and I don't know enough to understand the differences between them and us.
But considering all of this, I still might favor more aggressive action. Aggressive action did not hinder the recession and might have sped it up. And in the case of Japan or a situation similar to theirs, it could avoid a lost decade whereas limited action would not.
Again, this is all resting on the assumption that the recovery has in fact started and continues to ramp up and that we will be satisfied with the pace of it. We might find out that it doesn't accelerate as quickly, in which case, maybe I am being a little too hesitant towards the more aggressive policies I have called for.
Thursday, December 01, 2011
On the Economy and No Lost Decade
So I've been thinking about the long term prospects for the economy - but through a political lens. As I see our economic woes (as they exist right now we have a stagnant economy - if the Eurozone collapses, we'll have a whole other set of problems), we need much more action to really get a recovery going. We need either (or both) a big stimulus or more aggressive monetary efforts including allowing changing inflation expectations until unemployment decreases.
But given our political situation, neither of those options seems likely. President Obama is not going to get much if any stimulus. And the fed is stuck doing things that would have seemed wildly aggressive five years ago but are now far too feeble with little indication that it will get bold (truth be told, the fed is still acting like it has one mandate - inflation - when it in fact has two - inflation and employment).
Worse still, with a dragging economy, Obama is unlikely in my book to be reelected (nor do I think he particularly deserves it - he decided, or at least acquiesced, to focus on balancing the budget while unemployment was still above 9 percent). And with a conservative president, we are even less likely to get any stimulus. Maybe we could get a tax cut, though with Republicans pretending to be fiscally responsible, we might not even get that. We haven't so far, as Republicans are happy to let the economy suffer if it means better electoral prospects and denying Obama any victories.
So this should mean that the economy will be stuck for the next five years (ie lost decade). What has got me thinking however is the possibility that the economy does start to really recover sometime in 2013 or 2014 even absent any intervention by then-President Romney or the federal reserve. If that happens, what does that say about liberal prognostications on the economy?
It would at least allow Republicans to say that the best medicine was to do nothing. But is that what it really means? Or does it mean that the economy will / would have eventually recover(ed) and that Republican obstructions slowed the recovery? I would assume the later, but it is difficult to prove. And it certainly decreases the urgency of liberal action. In other words, if the recovery will happen in five years without help, is it worth it / necessary to do something in year two - especially if some effects (construction programs) might take a year or two to show an effect?
Clearly I don't have any answers right now - especially since the question is hypothetical and based on Obama losing and Romney doing nothing (short of rolling back some regulations). But it is something I want to be prepared to think about.
But given our political situation, neither of those options seems likely. President Obama is not going to get much if any stimulus. And the fed is stuck doing things that would have seemed wildly aggressive five years ago but are now far too feeble with little indication that it will get bold (truth be told, the fed is still acting like it has one mandate - inflation - when it in fact has two - inflation and employment).
Worse still, with a dragging economy, Obama is unlikely in my book to be reelected (nor do I think he particularly deserves it - he decided, or at least acquiesced, to focus on balancing the budget while unemployment was still above 9 percent). And with a conservative president, we are even less likely to get any stimulus. Maybe we could get a tax cut, though with Republicans pretending to be fiscally responsible, we might not even get that. We haven't so far, as Republicans are happy to let the economy suffer if it means better electoral prospects and denying Obama any victories.
So this should mean that the economy will be stuck for the next five years (ie lost decade). What has got me thinking however is the possibility that the economy does start to really recover sometime in 2013 or 2014 even absent any intervention by then-President Romney or the federal reserve. If that happens, what does that say about liberal prognostications on the economy?
It would at least allow Republicans to say that the best medicine was to do nothing. But is that what it really means? Or does it mean that the economy will / would have eventually recover(ed) and that Republican obstructions slowed the recovery? I would assume the later, but it is difficult to prove. And it certainly decreases the urgency of liberal action. In other words, if the recovery will happen in five years without help, is it worth it / necessary to do something in year two - especially if some effects (construction programs) might take a year or two to show an effect?
Clearly I don't have any answers right now - especially since the question is hypothetical and based on Obama losing and Romney doing nothing (short of rolling back some regulations). But it is something I want to be prepared to think about.
Sunday, July 31, 2011
How About Some Fun and Thoughtful Econ?
I have been spending too much time in the ultimate of frustrating activities: hoping to convince (or more likely see someone with a wide audience convince) Republicans that cuts to programs or increases in taxes in the short term will hurt the economy at a fragile time. Unfortunately, Republicans aren't reasonable and will not bother trying to understand economics; government is bad and cuts must be made now. So as our country careens towards a lost decade, let's spend some time on a less urgent issue and in a more reasonable fashion.
Casey Mulligan - who seems to be a pretty conservative economist - has been writing a lot lately on labor supply and labor demand. His main point seems to be that labor supply can be just as important (or not meaningless?) as labor demand during a recession. In this post, he uses a comparison between summer employment and Christmas / holiday employment to show the difference between the demand and supply side. During the holidays, demand for labor increases. During the summer, supply for labor increases.
Casey Mulligan says that summer employment shows that an increase in the supply of labor can increase total labor. Now, there are a few things I don't fully understand about his charts. He says total labor increases, which I can't see for sure. But it also looks like wages decrease, which isn't a good thing. Though I guess more jobs with lower wages is better than less jobs and stagnant wages. If this is part of his point, he leaves it unsaid.
His policy prescription that follows from this data is that unemployment benefits decrease labor supply and therefore total labor. To the extent that this is true, it matters how big this affect is. By decreasing benefits, we are hurting unemployed families, especially the ones that still can't get jobs. So if the effect is marginal, than we would probably want to keep the benefits. If the effect is significant, then... well then I don't know. I don't love the idea of letting families go into poverty just to induce them to work more.
While I am probably willing to concede that labor supply is not meaningless, I still think that labor demand is the much bigger factor at this point. Business surveys suggest that lack of sales are driving the lack of hiring. So while decreasing benefits, as cold-hearted as it seems, might increase employment, I can't imagine it having a major impact. I think we need to work on the demand side to really drive down unemployment.
Casey Mulligan - who seems to be a pretty conservative economist - has been writing a lot lately on labor supply and labor demand. His main point seems to be that labor supply can be just as important (or not meaningless?) as labor demand during a recession. In this post, he uses a comparison between summer employment and Christmas / holiday employment to show the difference between the demand and supply side. During the holidays, demand for labor increases. During the summer, supply for labor increases.
Casey Mulligan says that summer employment shows that an increase in the supply of labor can increase total labor. Now, there are a few things I don't fully understand about his charts. He says total labor increases, which I can't see for sure. But it also looks like wages decrease, which isn't a good thing. Though I guess more jobs with lower wages is better than less jobs and stagnant wages. If this is part of his point, he leaves it unsaid.
His policy prescription that follows from this data is that unemployment benefits decrease labor supply and therefore total labor. To the extent that this is true, it matters how big this affect is. By decreasing benefits, we are hurting unemployed families, especially the ones that still can't get jobs. So if the effect is marginal, than we would probably want to keep the benefits. If the effect is significant, then... well then I don't know. I don't love the idea of letting families go into poverty just to induce them to work more.
While I am probably willing to concede that labor supply is not meaningless, I still think that labor demand is the much bigger factor at this point. Business surveys suggest that lack of sales are driving the lack of hiring. So while decreasing benefits, as cold-hearted as it seems, might increase employment, I can't imagine it having a major impact. I think we need to work on the demand side to really drive down unemployment.
Thursday, June 30, 2011
Economics: Too Wonkish
Okay, so I wrote a post a few days ago about how I was confident that I understood our economic condition and so knew the cure. Well, this Paul Krugman post makes me doubt that a little bit.
I don't actually remember what the IS curve is and what it means, nor do I fully understand the bond market - including how supply and demand works in that market. So maybe I need to consult my old macro-econ text book and see if I can figure it out.
Otherwise, maybe I'll need to just say that I get the basics, but beyond that, I trust Paul Krugman. Not a great place to be in, but since I am not an economist, that might be the best I can do. I'll report back for sure.
I don't actually remember what the IS curve is and what it means, nor do I fully understand the bond market - including how supply and demand works in that market. So maybe I need to consult my old macro-econ text book and see if I can figure it out.
Otherwise, maybe I'll need to just say that I get the basics, but beyond that, I trust Paul Krugman. Not a great place to be in, but since I am not an economist, that might be the best I can do. I'll report back for sure.
Tuesday, November 30, 2010
CEO Pay
A colleague and I were debating about CEO compensation. We were actually talking about the music industry and my colleague suggested that the decrease in revenues could be mitigated if the CEO took a pay cut.
My response, and I am confident that I am right about this, was that a cut in the CEO's salary would have little effect on any companies' overall profit picture. I offered him, and now I offer you dear reader, this challenge: Find me a CEO that makes in salary more than 0.1% of the companies' revenue.
In fact, I'll even give you a head start. This page on the AFL/CIO website lists CEO salaries. Once you have that, you can find the companies' revenue by searching the company name and "annual report".
I am willing to bet though that all CEO salaries will be well below the 0.1% of revenue. In fact, I looked at one random company today and found that the CEO was making 0.03% of revenue.
With salaries this low as a percentage of revenue, cuts to their salaries will not help with budget problems. If the company sees a decrease in revenue of 3%, having the CEO work for free will only cover 1% of that gap. Therefore, even that big cut will only be symbolic.
Now, that isn't to say that symbolic gestures are meaningless. I do believe that symbols can be very important. A salary that is 0.03% of revenue can still be considered obscene and a big cut can send an important message. So I am not suggesting that it shouldn't happen in a company in difficult times. I am just saying that it will do very little for the companies fiscal problems.
My response, and I am confident that I am right about this, was that a cut in the CEO's salary would have little effect on any companies' overall profit picture. I offered him, and now I offer you dear reader, this challenge: Find me a CEO that makes in salary more than 0.1% of the companies' revenue.
In fact, I'll even give you a head start. This page on the AFL/CIO website lists CEO salaries. Once you have that, you can find the companies' revenue by searching the company name and "annual report".
I am willing to bet though that all CEO salaries will be well below the 0.1% of revenue. In fact, I looked at one random company today and found that the CEO was making 0.03% of revenue.
With salaries this low as a percentage of revenue, cuts to their salaries will not help with budget problems. If the company sees a decrease in revenue of 3%, having the CEO work for free will only cover 1% of that gap. Therefore, even that big cut will only be symbolic.
Now, that isn't to say that symbolic gestures are meaningless. I do believe that symbols can be very important. A salary that is 0.03% of revenue can still be considered obscene and a big cut can send an important message. So I am not suggesting that it shouldn't happen in a company in difficult times. I am just saying that it will do very little for the companies fiscal problems.
Some Music and Some Econ 101
This weekend, I had a pleasant debate about the music industry and downloading of music for free. My overall point was that downloading music is and should be illegal and the government should work to increase enforcement. While I do think the record industry has been slow to evolve with new technology, I don't think stealing music is a good (moral or effective) way to force the industry to change.
Although I do like to recap arguments on my blog sometimes - with the intention of synthesizing my thoughts, not to get the last word - this is not the point of this post. As I was falling asleep last night thinking about the debate, I realized a way to better show a fear I have with the illegal downloading of music - through a supply and demand graph!
One of the points I made was that in the market place, consumers have the choice to show their dissatisfaction with a product by refusing to purchase it. I argued that it gives the consumer an unfair advantage in the marketplace if they can get the product without paying for it (fairness within a transaction is necessary for a well-functioning market system - I can explain further if anyone wants me to). This will drive the price down to an unsustainable level.
Here is where the economics comes in. For a given product, consumers are willing to pay a certain price to have that product as opposed to not having it. That price is shown by the original equilibrium, P1, Q1. When a consumer can choose to have the product without paying for it, or have the product and pay for it, their price is no longer the value of the product, but the value of feeling good about how they obtained the product. Clearly that price will be much less than the previous price.
What you see in this scenario is a shift in the demand curve from D1 to D2. And when the demand curve shifts back, you see a lower equilibrium price, but more importantly, a lower quantity. This means that in this scenario, prices decrease and less music is produced. And I don't think anyone wants that.
A colleague of mine theorized that getting free music mitigates - possibly completely - this shift in the demand curve. He thinks that getting free music leads the consumer to purchase new music. I think this argument is weak and an attempt at justification. Consumers are not so irrational that they spend the same amount of money for the same quantity of music whether there is the option to steal music or not. And if it mitigates but not completely, then all we are talking about is magnitude - but the direction of the effect is still the same.
I also think a musician should have the ability to choose to make that investment instead of consumers forcing that situation on them.
Anyway, enjoy the flash back to Econ 101. And feel free to challenge my model or my assumptions.
Although I do like to recap arguments on my blog sometimes - with the intention of synthesizing my thoughts, not to get the last word - this is not the point of this post. As I was falling asleep last night thinking about the debate, I realized a way to better show a fear I have with the illegal downloading of music - through a supply and demand graph!
One of the points I made was that in the market place, consumers have the choice to show their dissatisfaction with a product by refusing to purchase it. I argued that it gives the consumer an unfair advantage in the marketplace if they can get the product without paying for it (fairness within a transaction is necessary for a well-functioning market system - I can explain further if anyone wants me to). This will drive the price down to an unsustainable level.
Here is where the economics comes in. For a given product, consumers are willing to pay a certain price to have that product as opposed to not having it. That price is shown by the original equilibrium, P1, Q1. When a consumer can choose to have the product without paying for it, or have the product and pay for it, their price is no longer the value of the product, but the value of feeling good about how they obtained the product. Clearly that price will be much less than the previous price.What you see in this scenario is a shift in the demand curve from D1 to D2. And when the demand curve shifts back, you see a lower equilibrium price, but more importantly, a lower quantity. This means that in this scenario, prices decrease and less music is produced. And I don't think anyone wants that.
A colleague of mine theorized that getting free music mitigates - possibly completely - this shift in the demand curve. He thinks that getting free music leads the consumer to purchase new music. I think this argument is weak and an attempt at justification. Consumers are not so irrational that they spend the same amount of money for the same quantity of music whether there is the option to steal music or not. And if it mitigates but not completely, then all we are talking about is magnitude - but the direction of the effect is still the same.
I also think a musician should have the ability to choose to make that investment instead of consumers forcing that situation on them.
Anyway, enjoy the flash back to Econ 101. And feel free to challenge my model or my assumptions.
Wednesday, October 20, 2010
Monetary Policy
Many conservatives seem to think that monetary policy is the best way to escape recessions and prevent bubbles. At the moment however, we are limited in our monetary policy solutions since the most powerful tool - lowering short term interest rates - is not workable because those interest rates are near zero.
I wonder though if using monetary policy alone leads to situations like this. I am no economist (ignore the fact that it was one of my majors in undergrad - it wasn't a very rigorous program), but it seems that at least through the 2000s we were willing to decrease interest rates to get out of a recession but were less willing to increase interest rates to slow down a boom.*
If this is true, how often does monetary policy operate like this? It seems similar to how we actually practice Keynesian policies - where government deficit spends in recessions but does not run surpluses in boom times. They call this one-eyed Keynesian policies. Do we use one-eyed monetary policies?
Either way - it seems clear that at times - this being one of them - monetary policy is unlikely to save us. If only we have the political will to use more fiscal policy.
*Paul Krugman says that fed policy did not cause the bubble. I can't tell though if he is saying then that fed policy could not have prevented the bubble. What would have happened if the fed had increased interest rates in 2005ish? Would it at least have allowed them to lower interest rates more now to get out of the recession?
I wonder though if using monetary policy alone leads to situations like this. I am no economist (ignore the fact that it was one of my majors in undergrad - it wasn't a very rigorous program), but it seems that at least through the 2000s we were willing to decrease interest rates to get out of a recession but were less willing to increase interest rates to slow down a boom.*
If this is true, how often does monetary policy operate like this? It seems similar to how we actually practice Keynesian policies - where government deficit spends in recessions but does not run surpluses in boom times. They call this one-eyed Keynesian policies. Do we use one-eyed monetary policies?
Either way - it seems clear that at times - this being one of them - monetary policy is unlikely to save us. If only we have the political will to use more fiscal policy.
*Paul Krugman says that fed policy did not cause the bubble. I can't tell though if he is saying then that fed policy could not have prevented the bubble. What would have happened if the fed had increased interest rates in 2005ish? Would it at least have allowed them to lower interest rates more now to get out of the recession?
Saturday, September 25, 2010
But What Caused It?
A lot has been written about the financial crisis - what caused it, why was it so bad, and how do we get out. I hear that the best written explanation of the mechanics of the housing financial tools that played a part in the collapse is The Big Short by Michael Lewis (certainly Moneyball and Liar's Poker were well written). Too Big to Fail (think Game Change for the financial crisis) describes what everyone did and said as the crisis was unfolding, but is not as great at explaining the mechanics.
But for good detailed economic analysis of this recession, I have been relying mostly on Paul Krugman. His latest piece in the New York Review, co-authored with Robin Wells (the two are married) is probably the best analysis I have read about what really caused the financial crisis.
Krugman and Wells explore the four most common theories for the cause of the collapse.
- Low interest rate policy of the Federal Reserve
- Global savings glut
- Complicated financial products
- Government policy (ie Fannie Mae / Freddie Mac / CRA)
You might be surprised to hear that Krugman and wells say that the global savings glut is the primary cause of the real estate bubble and subsequent collapse. I just had an argument with one of the few conservatives I know about this, and I had come down decidedly on blaming Wall Street and complicated financial instruments. My conservative friend clearly blamed the government.
Krugman and Wells dismiss the low interest rate policy due to a real estate bubble that existed in Europe as well, where central banks were not keeping rates as low. They dismiss complicated financial products because all European real estate and American commercial real estate also had bubbles, and neither of those used these American products. And they dismiss government policy, which they have been dismissing for a long time, because Fannie and Freddie made less of the really troubled loans than other private institutions and there is no link between CRA-qualifying loans and high rates of default.
The global savings glut is explained as follows:
If I read the article right, the authors do blame financial institutions for letting a bubble take down the entire economy. Financial institutions were able to borrow much more than they could really back up through lax government rules and borrowing through repurchase agreements that were not government guaranteed, subjecting the firms to crises of confidence. Krugman and Wells say that loans like Repo agreements accounted for 60 percent of the banking system yet was largely unregulated.
If their analysis is correct, the next questions are how do we get out of the recession and how do we prevent this from happening again. Their next article in the NY Review will tell us how to get out. I need to learn more about the Wall Street reform to see if we are preventing this from happening again.
But for good detailed economic analysis of this recession, I have been relying mostly on Paul Krugman. His latest piece in the New York Review, co-authored with Robin Wells (the two are married) is probably the best analysis I have read about what really caused the financial crisis.
Krugman and Wells explore the four most common theories for the cause of the collapse.
- Low interest rate policy of the Federal Reserve
- Global savings glut
- Complicated financial products
- Government policy (ie Fannie Mae / Freddie Mac / CRA)
You might be surprised to hear that Krugman and wells say that the global savings glut is the primary cause of the real estate bubble and subsequent collapse. I just had an argument with one of the few conservatives I know about this, and I had come down decidedly on blaming Wall Street and complicated financial instruments. My conservative friend clearly blamed the government.
Krugman and Wells dismiss the low interest rate policy due to a real estate bubble that existed in Europe as well, where central banks were not keeping rates as low. They dismiss complicated financial products because all European real estate and American commercial real estate also had bubbles, and neither of those used these American products. And they dismiss government policy, which they have been dismissing for a long time, because Fannie and Freddie made less of the really troubled loans than other private institutions and there is no link between CRA-qualifying loans and high rates of default.
The global savings glut is explained as follows:
Historically, developing countries have run trade deficits with advanced countries as they buy machinery and other capital goods in order to raise their level of economic development. In the wake of the financial crisis that struck Asia in 1997–1998, this usual practice was turned on its head: developing economies in Asia and the Middle East ran large trade surpluses with advanced countries in order to accumulate large hoards of foreign assets as insurance against another financial crisis.The authors say that this savings glut lead to low long-term interest rates (different from the short-term rates controlled by the Fed) and the low rates were primarily directed into real estate.
If I read the article right, the authors do blame financial institutions for letting a bubble take down the entire economy. Financial institutions were able to borrow much more than they could really back up through lax government rules and borrowing through repurchase agreements that were not government guaranteed, subjecting the firms to crises of confidence. Krugman and Wells say that loans like Repo agreements accounted for 60 percent of the banking system yet was largely unregulated.
If their analysis is correct, the next questions are how do we get out of the recession and how do we prevent this from happening again. Their next article in the NY Review will tell us how to get out. I need to learn more about the Wall Street reform to see if we are preventing this from happening again.
Wednesday, June 02, 2010
Cuba
An old post I never published:
So I have been spending some time learning more about Castro and his Cuba lately, thanks to a NY Times Sunday Magazine article and American Experience: Fidel Castro. Basically, I wanted to know more so that I could actually judge him fairly - and understand what our policy towards Cuba is and what it should be.
Now that I have done that, I see that Castro's Cuba is a really good place to go to debate US anti-communist foreign policy. First, let's start with an analysis of Cuba under Castro. There are two components to his government. One, is the political component in which he was the sole authority and dissent was punished. Clearly, there is nothing to like about those policies.
Second is the economic component. At its most simple, I think we can look at Cuba's social services - where education and health for the poorest has increased - and economic production. There appears to be much to admire about Cuba's focus on training doctors and sending those doctors throughout the world. But their overall economy is and has been a mess. It seems clear, and economic theory predicts this, that there is a trade-off between economic growth and economic policy that is redistributionist / socialist.
What does this all mean for foreign policy? If the US truly hopes to create a world that allows basic freedoms and rights to all people, what policies should it tolerate? For governing, that decision seems a little more clear. Governments that deny participation by its people, dictatorships for example, should not be tolerated.
What about economics? Here, I don't think the answer is as clear. If socialism can be achieved through democracy, than I see no reason why it should be challenged or fought.
Basically, what I am suggesting is a foreign policy that opposes all dictatorships but supports all participatory governments. Sounds simple enough, right? But this hasn't been our policy. Instead, we have chosen to support capitalist systems over socialist / communist systems no matter what. We supported horribly repressive capitalist dictatorships in Chile, Iran (under the Shah), and Vietnam (during the war) just to name a few.
So I have been spending some time learning more about Castro and his Cuba lately, thanks to a NY Times Sunday Magazine article and American Experience: Fidel Castro. Basically, I wanted to know more so that I could actually judge him fairly - and understand what our policy towards Cuba is and what it should be.
Now that I have done that, I see that Castro's Cuba is a really good place to go to debate US anti-communist foreign policy. First, let's start with an analysis of Cuba under Castro. There are two components to his government. One, is the political component in which he was the sole authority and dissent was punished. Clearly, there is nothing to like about those policies.
Second is the economic component. At its most simple, I think we can look at Cuba's social services - where education and health for the poorest has increased - and economic production. There appears to be much to admire about Cuba's focus on training doctors and sending those doctors throughout the world. But their overall economy is and has been a mess. It seems clear, and economic theory predicts this, that there is a trade-off between economic growth and economic policy that is redistributionist / socialist.
What does this all mean for foreign policy? If the US truly hopes to create a world that allows basic freedoms and rights to all people, what policies should it tolerate? For governing, that decision seems a little more clear. Governments that deny participation by its people, dictatorships for example, should not be tolerated.
What about economics? Here, I don't think the answer is as clear. If socialism can be achieved through democracy, than I see no reason why it should be challenged or fought.
Basically, what I am suggesting is a foreign policy that opposes all dictatorships but supports all participatory governments. Sounds simple enough, right? But this hasn't been our policy. Instead, we have chosen to support capitalist systems over socialist / communist systems no matter what. We supported horribly repressive capitalist dictatorships in Chile, Iran (under the Shah), and Vietnam (during the war) just to name a few.
Saturday, May 08, 2010
Book Report: The Logic of Life
I just finished reading The Logic of Life by Tim Harford. The overall point of the book is to show that, in general, people are rational. It is a response, although a moderate one, to critics of the assumption of the rational economic actor.
For a long time, economic theory assumed that all economic actors are perfectly rational - they have full information and can accurately value their preferences. More recently, experiments have questioned that assumption. This is particularly important since the rational actor assumption is necessary to support a pure free market philosophy.
The experiments have shown that people are not always rational. People will sometimes penalize other people, even if it hurts themselves, and sometimes for irrational reasons like team affiliation. Also, people often value two equal things differently if they are presented in a different way. People are also far more charitable than a rational actor theory would expect.
Harford's book seeks to debunk some of these experiments - showing that they are the result of lab experiment conditions that are different from the real world. And he also shows many examples where people are behaving rationally even if at first glance their behavior looks irrational.
While his book does a good job of showing rational behavior, he does not actually show that the rational actor model is accurate. In fact, that is far from his goal. It is clear that what he wants to do is show readers that people do respond rationally to incentives. This is something that liberals and conservatives desperately need to be reminded of.
Liberals tend to dismiss the rational actor model outright and conclude therefore that we need government intervention. Behavior by Wall Street provides a good basis for this - as people tent to undervalue risk the farther away from a market crash we get.
Conservatives on the other hand have an oversimplified view of the rational actor, believing that without government, the rational actor makes perfect decisions and creates a free market utopia.
In truth, the underlying assumption of economics, and Harford makes this point very well, is that people do in fact respond to incentives. This is the invisible hand that Adam Smith talked about. However, when people respond to incentives, they don't always behave in the way we expect because we don't always fully understand the incentives.
A great example of this, to my mind, is the current recession. While part of the problem may have been psychological and irrational, there were also incentives that encouraged much of the worst behavior. For example, Wall Street compensation rewards quick, even if fleeting, profits instead of long term sustained growth. This can incentivize risky behavior. Also, home loan originators were able to sell their new loans quickly, giving them no reason to care if the loans would be paid off in the long term.
I do have to say, Harford's book does not actually cover the financial crisis. His examples instead include smokers and drinkers changing behavior in response to taxes and the ability to quit, or people choosing more oral sex as other forms of sex become more risky. I have taken his general theme and extended it to cover our recession and the bubble that caused it.
One example that Harford uses that I wish he spent more time on was voting. He tries to show how choosing not to vote is a rational decision. His logic, strictly applied to what I just wrote, is hard to deny when looking at someone who wants their vote to make a difference. If someone will vote only if there is a chance their vote will make a difference, then it is rational not to vote since it is extremely rare that an election is decided by one vote.
Unfortunately, Harford spends almost no time discussing why voting might be rational. He gives a few reasons, but moves on quickly. In doing so, he gives the impression that not only can choosing not to vote be rational, but that voting is irrational. I don't think that is his intention, but that is how it comes off. I think that if Harford used his incredible logic skills, and his command of statistics, he could point out many reasons that voting is rational.
I finished the book a few weeks ago, so I don't remember all of the examples and data he used. In general though it is a pretty convincing book. And the topics covered in the book (money in politics, crime, social issues, segregation) made it far more useful than Freakonomics and Super Freakonomics (more on that in another post). And it is written to be just as accessible as those books are. In other words, it is poppy, but pretty useful.
For a long time, economic theory assumed that all economic actors are perfectly rational - they have full information and can accurately value their preferences. More recently, experiments have questioned that assumption. This is particularly important since the rational actor assumption is necessary to support a pure free market philosophy.
The experiments have shown that people are not always rational. People will sometimes penalize other people, even if it hurts themselves, and sometimes for irrational reasons like team affiliation. Also, people often value two equal things differently if they are presented in a different way. People are also far more charitable than a rational actor theory would expect.
Harford's book seeks to debunk some of these experiments - showing that they are the result of lab experiment conditions that are different from the real world. And he also shows many examples where people are behaving rationally even if at first glance their behavior looks irrational.
While his book does a good job of showing rational behavior, he does not actually show that the rational actor model is accurate. In fact, that is far from his goal. It is clear that what he wants to do is show readers that people do respond rationally to incentives. This is something that liberals and conservatives desperately need to be reminded of.
Liberals tend to dismiss the rational actor model outright and conclude therefore that we need government intervention. Behavior by Wall Street provides a good basis for this - as people tent to undervalue risk the farther away from a market crash we get.
Conservatives on the other hand have an oversimplified view of the rational actor, believing that without government, the rational actor makes perfect decisions and creates a free market utopia.
In truth, the underlying assumption of economics, and Harford makes this point very well, is that people do in fact respond to incentives. This is the invisible hand that Adam Smith talked about. However, when people respond to incentives, they don't always behave in the way we expect because we don't always fully understand the incentives.
A great example of this, to my mind, is the current recession. While part of the problem may have been psychological and irrational, there were also incentives that encouraged much of the worst behavior. For example, Wall Street compensation rewards quick, even if fleeting, profits instead of long term sustained growth. This can incentivize risky behavior. Also, home loan originators were able to sell their new loans quickly, giving them no reason to care if the loans would be paid off in the long term.
I do have to say, Harford's book does not actually cover the financial crisis. His examples instead include smokers and drinkers changing behavior in response to taxes and the ability to quit, or people choosing more oral sex as other forms of sex become more risky. I have taken his general theme and extended it to cover our recession and the bubble that caused it.
One example that Harford uses that I wish he spent more time on was voting. He tries to show how choosing not to vote is a rational decision. His logic, strictly applied to what I just wrote, is hard to deny when looking at someone who wants their vote to make a difference. If someone will vote only if there is a chance their vote will make a difference, then it is rational not to vote since it is extremely rare that an election is decided by one vote.
Unfortunately, Harford spends almost no time discussing why voting might be rational. He gives a few reasons, but moves on quickly. In doing so, he gives the impression that not only can choosing not to vote be rational, but that voting is irrational. I don't think that is his intention, but that is how it comes off. I think that if Harford used his incredible logic skills, and his command of statistics, he could point out many reasons that voting is rational.
I finished the book a few weeks ago, so I don't remember all of the examples and data he used. In general though it is a pretty convincing book. And the topics covered in the book (money in politics, crime, social issues, segregation) made it far more useful than Freakonomics and Super Freakonomics (more on that in another post). And it is written to be just as accessible as those books are. In other words, it is poppy, but pretty useful.
Monday, September 07, 2009
The Problem with Macroecon
The state of macroeconomics seems to be a major topic of discussion these days - mostly focusing on how macroeconomics had been unable to predict the economic meltdown and has been unable to adequately respond to it. The Freakonomics blog has had a number of posts about it. Their overall take on the situation is that there are too few economists focusing on macro issues (and too many working in finance) which has left the field under-explored as of late.
Paul Krugman has a long article in the Times Sunday Magazine on this issue. He attributes problems in macroeconomics to a shift to the right - that too many economists have forgotten about the lessons of the Great Depression because of the lack of a truly serious recession since then. For at least the last few decades, liberal and conservative economists mostly supported the rational actor underpinning to economics and believed that the lack of a serious recession supported this. Krugman also feels that macro-economists have not correctly understood the recessions that did happen and were overconfident in our ability to control them.
The article is great - it isn't nearly as wonkish as his blog posts on this issue. Be aware though that it comes from a very liberal place. That being said, I do agree with most of it. Here is the key quote:
Paul Krugman has a long article in the Times Sunday Magazine on this issue. He attributes problems in macroeconomics to a shift to the right - that too many economists have forgotten about the lessons of the Great Depression because of the lack of a truly serious recession since then. For at least the last few decades, liberal and conservative economists mostly supported the rational actor underpinning to economics and believed that the lack of a serious recession supported this. Krugman also feels that macro-economists have not correctly understood the recessions that did happen and were overconfident in our ability to control them.
The article is great - it isn't nearly as wonkish as his blog posts on this issue. Be aware though that it comes from a very liberal place. That being said, I do agree with most of it. Here is the key quote:
First, many real-world investors bear little resemblance to the cool calculators of efficient-market theory: they’re all too subject to herd behavior, to bouts of irrational exuberance and unwarranted panic. Second, even those who try to base their decisions on cool calculation often find that they can’t, that problems of trust, credibility and limited collateral force them to run with the herd.There is a lot more to the article, like discussions about unemployment and the influence of capital on the recession, so I highly advise anyone to read all of it. Overall though, I hope that Krugam is right, that economists will spend more time understanding where economic actors actually deviate from the rational actor that we study in theory. Too much of our political debate is a back and forth about whether markets work or do not work. It would be much better if we talked about when they work and when they do not.
Saturday, January 31, 2009
Obamanomics: Stimuli
As the new stimulus package is debated, you will hear each side talk with certainty about how tax cuts or government spending are better fiscal policies to stimulate the economy. In fact, each side will claim that the research shows that one is better than the other.
In introductory macroeconomics classes you are taught simple supply and demand equations, with tax cuts or government spending affecting overall economic activity. Depending on whether your teacher is conservative (like my high school econ teacher) or liberal (like my college econ professors), you will see multiplier affects that show tax cuts or government spending having a greater impact (respectively). In those classes, the multiplier effect is given to you by the teacher. This is why for a couple short years after high school, I believed that supply-side was the better policy.
The truth however is that what research there is shows wide variation in results. Some research does show a greater multiplier effect for tax cuts than government spending, while others show the reverse. (This Freakonomics article talks about one reason why the research is so unclear - that not as much fiscal policy research is done as monetary policy research.) In fact, a quote from an essay Christina Romer (Obama's selection to head his Council of Economic Advisors) wrote (taken from a David Brooks column) suggests that in surveys of past recessions, fiscal policy seemed to have little effect in ending the recessions.
So what are we to make of all this uncertainty? One, fiscal stimuli are more of a political tool than an economic one. They show that the government is working to make things better (even if it is somewhat cosmetic). Obama, by including tax cuts and government spending, is hoping to please people on both sides without proclaiming that one works better than the other. Two, the stimuli should at least go to things that we need. And this is the best part about Obama's stimulus package. If it is used to improve our electricity grid - a necessity if we are to actually try to change our energy supply - to improve our roads and public transportation, and to rehab our schools and public housing, it will be money spent that can both create some temporary jobs until the recession is over but also accomplish tasks that have for too long been put off.
It may not help end the recession, but it should make the transition easier while making us stronger for when it ends.
In introductory macroeconomics classes you are taught simple supply and demand equations, with tax cuts or government spending affecting overall economic activity. Depending on whether your teacher is conservative (like my high school econ teacher) or liberal (like my college econ professors), you will see multiplier affects that show tax cuts or government spending having a greater impact (respectively). In those classes, the multiplier effect is given to you by the teacher. This is why for a couple short years after high school, I believed that supply-side was the better policy.
The truth however is that what research there is shows wide variation in results. Some research does show a greater multiplier effect for tax cuts than government spending, while others show the reverse. (This Freakonomics article talks about one reason why the research is so unclear - that not as much fiscal policy research is done as monetary policy research.) In fact, a quote from an essay Christina Romer (Obama's selection to head his Council of Economic Advisors) wrote (taken from a David Brooks column) suggests that in surveys of past recessions, fiscal policy seemed to have little effect in ending the recessions.
So what are we to make of all this uncertainty? One, fiscal stimuli are more of a political tool than an economic one. They show that the government is working to make things better (even if it is somewhat cosmetic). Obama, by including tax cuts and government spending, is hoping to please people on both sides without proclaiming that one works better than the other. Two, the stimuli should at least go to things that we need. And this is the best part about Obama's stimulus package. If it is used to improve our electricity grid - a necessity if we are to actually try to change our energy supply - to improve our roads and public transportation, and to rehab our schools and public housing, it will be money spent that can both create some temporary jobs until the recession is over but also accomplish tasks that have for too long been put off.
It may not help end the recession, but it should make the transition easier while making us stronger for when it ends.
Saturday, November 15, 2008
Auto Bailout? *Sigh*
I must say, I am surprised that one of Obama's first proposals is a bailout of the American auto industry. Not only did it seem to come out of nowhere, it also feels ill-advised. I guess I can see that the Democrats want to show that they can provide bailouts for blue collar workers - not just the white collar jobs in the financial sector. At the same time, it really seems like we have been bailing out the American auto industry for far too long. They have a history of building cars that don't last, they seem incapable of staying ahead of trends, and worse of all resist calls to improve fuel efficiency and move towards alternate fuel technologies and only do so after other firms (mostly Honda and Toyota) have beat them to the punch.
Instead, I really think we need to let these companies fail. In their place we could see American car manufacturers that put innovation - and greener technology - first. Now, if the Democrats want to allow for a soft landing of the car companies, and provide support for those who will be laid off, I can get behind that. In fact, maybe they could provide tax breaks for new American auto start-ups that will buy the old manufacturing plants and hire the former workers (this idea is definitely off the cuff - so it might prove unrealistic for new companies to start because of high fixed costs).
I really think this is where Democrats get a bad name. We want to help those of moderate or lower incomes, but we tend to choose policies that are more populist and less economic - policies that might help in the short run, but really hurt in the long run. This makes little sense from an efficiency standpoint and furthermore, it isn't the only option - or necessarily the best option - from a fairness standpoint. I know I won't agree with the Obama administration on everything, but I thought I would make it farther than this.
Note: Although I definitely have my favorite columnists, sometimes I feel like a hack by only printing their opinions instead of mine. It's hard though when they make the point so much better. Anyway, here is David Brooks' take on the auto bailout:
Instead, I really think we need to let these companies fail. In their place we could see American car manufacturers that put innovation - and greener technology - first. Now, if the Democrats want to allow for a soft landing of the car companies, and provide support for those who will be laid off, I can get behind that. In fact, maybe they could provide tax breaks for new American auto start-ups that will buy the old manufacturing plants and hire the former workers (this idea is definitely off the cuff - so it might prove unrealistic for new companies to start because of high fixed costs).
I really think this is where Democrats get a bad name. We want to help those of moderate or lower incomes, but we tend to choose policies that are more populist and less economic - policies that might help in the short run, but really hurt in the long run. This makes little sense from an efficiency standpoint and furthermore, it isn't the only option - or necessarily the best option - from a fairness standpoint. I know I won't agree with the Obama administration on everything, but I thought I would make it farther than this.
Note: Although I definitely have my favorite columnists, sometimes I feel like a hack by only printing their opinions instead of mine. It's hard though when they make the point so much better. Anyway, here is David Brooks' take on the auto bailout:
But the larger principle is over the nature of America’s political system. Is this country going to slide into progressive corporatism, a merger of corporate and federal power that will inevitably stifle competition, empower corporate and federal bureaucrats and protect entrenched interests? Or is the U.S. going to stick with its historic model: Helping workers weather the storms of a dynamic economy, but preserving the dynamism that is the core of the country’s success.
Wednesday, August 27, 2008
Obamanomics Explained
I just finished reading this piece from the Times Magazine about Obama's economic positions. It's really enlightening if you have the time to read it.
What is comforting about the article is that it shows Obama has a firm grasp of economics. He seems to understand that markets are on the whole efficient, but often not fair, and that there exist obvious market failures. The key is in balancing all of this. Here are some of his plans:
- Obama is for tax cuts for middle- and low-income wage earners,
And it seems on the surface at least that recent history supports at least some redistribution. As the article points out, the negative effects of Clinton's tax increases never materialized and the trickle-down effects of the Reagan and Bush tax cuts also never seemed to occur. Granted, showing a direct causal relationship between a president's policies and economic outcomes is imperfect to say the least, but I would be willing to increase taxes on the rich and risk losing some efficiency in the market for at least some increase in fairness.
- Obama favors an increase in government spending on infrastructure. This I think has the most promise, if done wisely. While we don't need new highways as much as we did after World War II (which by the way, I hadn't realized was a result of witnessing how easily Germans could move good during the war), we have serious unmet needs relating to energy and the environment. With significant government funding, we could increase sustainable energy and the infrastructure that supports it (ie power lines, which are unfit to meet probable changes in our production according to this article). What makes this so attractive is that it could provide jobs for the part of the workforce that is suffering from the loss of manufacturing and related industries overseas. I don't believe in protectionism and I realize that re-educating workers isn't the solution many pretend it is.
To the extent that he sticks with these policies, and manages to move on them, it seems that Obama by far represents our best hope in managing our economy.
What is comforting about the article is that it shows Obama has a firm grasp of economics. He seems to understand that markets are on the whole efficient, but often not fair, and that there exist obvious market failures. The key is in balancing all of this. Here are some of his plans:
- Obama is for tax cuts for middle- and low-income wage earners,
The Tax Policy Center, a research group run by the Brookings Institution and the Urban Institute, has done the most detailed analysis of the Obama and McCain tax plans, and it has published a series of fascinating tables. For the bottom 80 percent of the population — those households making $118,000 or less — McCain’s various tax cuts would mean a net savings of about $200 a year on average. Obama’s proposals would bring $900 a year in savings. So for most people, Obama is the tax cutter in this campaign.and tax increases for the highest earners (partly reversing the Bush tax cuts, and then increasing the taxes further). For those of you who are concerned the increases would stifle innovation and investment, consider that the proposed increases wouldn't come close to reversing the gains upper income earners have seen over the past few decades. Also realize that, "Most families [low- and middle-income] are still making less, after accounting for inflation, than they were in 2000." This might sound like pandering, but the reality of stagnant wages for middle- and low-income earners can't be ignored and isn't good for the country.
And it seems on the surface at least that recent history supports at least some redistribution. As the article points out, the negative effects of Clinton's tax increases never materialized and the trickle-down effects of the Reagan and Bush tax cuts also never seemed to occur. Granted, showing a direct causal relationship between a president's policies and economic outcomes is imperfect to say the least, but I would be willing to increase taxes on the rich and risk losing some efficiency in the market for at least some increase in fairness.
- Obama favors an increase in government spending on infrastructure. This I think has the most promise, if done wisely. While we don't need new highways as much as we did after World War II (which by the way, I hadn't realized was a result of witnessing how easily Germans could move good during the war), we have serious unmet needs relating to energy and the environment. With significant government funding, we could increase sustainable energy and the infrastructure that supports it (ie power lines, which are unfit to meet probable changes in our production according to this article). What makes this so attractive is that it could provide jobs for the part of the workforce that is suffering from the loss of manufacturing and related industries overseas. I don't believe in protectionism and I realize that re-educating workers isn't the solution many pretend it is.
To the extent that he sticks with these policies, and manages to move on them, it seems that Obama by far represents our best hope in managing our economy.
Wednesday, August 15, 2007
Red Scared
Summary:
Communism v. Capitalism is really equality (fairness) v. efficiency. In gov't, want more fairness. In business you want more efficiency so you can have a higher overall standard of living. But market failures lead to necessity of gov't intervention to fix some inequities.
A coworker and good friend of mine likes to make a show of her support for communism around me. I think in part she plays it up because it gets me all agitated - apparently people get a kick out of seeing me in an excited state. Each time she brings it up I make it clear that I think communism is unrealistic - that the theory obviously doesn't understand human nature. The point being that communism can never work without being propped up by authoritarian government.
What I really should point out though is that even if communism was implemented democratically, it would still be bad policy. In my mind, free market and communism represent opposite extremes of efficiency versus equity / fairness. I believe that government should be much closer to the extreme of equity and fairness, which is why I firmly believe in a government of collective decision-making (democracy).
In the business world though, I lean more towards efficiency because with more efficiency, you can have a higher overall standard of living. Communism has never been able to achieve the level of comfort and average wealth that free markets have. This is the case in part because in a free market you have a select group of people managing the assets and making decisions. The basic idea of communism is the opposite - collective ownership of the means of production. In this scenario, all workers make all decisions collectively and share the risk and reward. While collectives and co-ops can be successful, on the whole I think they are far less efficient. On a bigger scale where profit motives disappear, efficiency decreases.
I will acknowledge that I am oversimplifying economic theory significantly in places, but I think the overall point still stands. And I know I am not breaking any new ground necessarily, but if I were I would likely be in a Econ PhD program.
Now, one more point before I conclude. While I clearly celebrate the virtues of free market capitalism, we must also acknowledge what a lot of the strict free marketeers won't: Markets aren't perfect. There exist glaring market failures that government has a role in correcting. One obvious example of this is the environment. While our economy puts a price on land, it doesn't put a price on air. Without government intervention, businesses would not have worked to decrease their environmental impact in the 80s and 90s (we still have a long way to go). And without further intervention, businesses will not decrease their green house gas emissions.
Another example of a market failure is unemployment. While a certain amount of employment is necessary for a stable and efficient economy (theory holds that "Natural Unemployment" protects against wage inflation), any decent sense of fairness requires that government intervene to take of those that are left out. This is why social welfare programs are necessary.
There will always be a trade-off between fairness and efficiency. And like a good moderate, I believe that the only way to be successful is to keep both in mind. An efficient system allows us all to have the best life we can - to enjoy both comforts and necessities. And a fair system helps us take care of people and problems that the market doesn't value.
Communism v. Capitalism is really equality (fairness) v. efficiency. In gov't, want more fairness. In business you want more efficiency so you can have a higher overall standard of living. But market failures lead to necessity of gov't intervention to fix some inequities.
A coworker and good friend of mine likes to make a show of her support for communism around me. I think in part she plays it up because it gets me all agitated - apparently people get a kick out of seeing me in an excited state. Each time she brings it up I make it clear that I think communism is unrealistic - that the theory obviously doesn't understand human nature. The point being that communism can never work without being propped up by authoritarian government.
What I really should point out though is that even if communism was implemented democratically, it would still be bad policy. In my mind, free market and communism represent opposite extremes of efficiency versus equity / fairness. I believe that government should be much closer to the extreme of equity and fairness, which is why I firmly believe in a government of collective decision-making (democracy).
In the business world though, I lean more towards efficiency because with more efficiency, you can have a higher overall standard of living. Communism has never been able to achieve the level of comfort and average wealth that free markets have. This is the case in part because in a free market you have a select group of people managing the assets and making decisions. The basic idea of communism is the opposite - collective ownership of the means of production. In this scenario, all workers make all decisions collectively and share the risk and reward. While collectives and co-ops can be successful, on the whole I think they are far less efficient. On a bigger scale where profit motives disappear, efficiency decreases.
I will acknowledge that I am oversimplifying economic theory significantly in places, but I think the overall point still stands. And I know I am not breaking any new ground necessarily, but if I were I would likely be in a Econ PhD program.
Now, one more point before I conclude. While I clearly celebrate the virtues of free market capitalism, we must also acknowledge what a lot of the strict free marketeers won't: Markets aren't perfect. There exist glaring market failures that government has a role in correcting. One obvious example of this is the environment. While our economy puts a price on land, it doesn't put a price on air. Without government intervention, businesses would not have worked to decrease their environmental impact in the 80s and 90s (we still have a long way to go). And without further intervention, businesses will not decrease their green house gas emissions.
Another example of a market failure is unemployment. While a certain amount of employment is necessary for a stable and efficient economy (theory holds that "Natural Unemployment" protects against wage inflation), any decent sense of fairness requires that government intervene to take of those that are left out. This is why social welfare programs are necessary.
There will always be a trade-off between fairness and efficiency. And like a good moderate, I believe that the only way to be successful is to keep both in mind. An efficient system allows us all to have the best life we can - to enjoy both comforts and necessities. And a fair system helps us take care of people and problems that the market doesn't value.
Friday, January 05, 2007
Always a Reason for Tax Cuts
There is a very convincing editorial in the NY Times regarding Republican efforts to link a minimum wage increase to small business tax cuts. Apparently the cost of the tax cuts is far greater than the increased wages that would go out to employees. Basically, that means the government would be better off paying the difference between current minimum wage and the new minimum wage to all workers.
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