Maybe The Worst Is Over For Zimbabwe (Maybe)

In some of my classes we read about how bad Zimbabwe's economy is doing. But apparently the dictatorial president Robert Mugabe is starting to share power with a man who probably beat him in the election (Tsvangirai). The inflation rate last year was 11 million percent. The unemployment rate is 80%. The national debt as a percentage of GDP is 242%.

Here are some exerpts from the CIA:

"His chaotic land redistribution campaign, which began in 2000, caused an exodus of white farmers, crippled the economy, and ushered in widespread shortages of basic commodities. Ignoring international condemnation, MUGABE rigged the 2002 presidential election to ensure his reelection."

"April 2005, the government embarked on Operation Restore Order, ostensibly an urban rationalization program, which resulted in the destruction of the homes or businesses of 700,000 mostly poor supporters of the opposition. President MUGABE in June 2007 instituted price controls on all basic commodities causing panic buying and leaving store shelves empty for months."

An exerpt from one of the other articles is:

"Tsvangirai has been beaten and jailed by Mugabe's security forces. In 2007, police attacked him after he held an opposition meeting the government had banned. Images shown on news broadcasts around the world of his bruised and bloodied face came to symbolize the challenges his movement faced.

Mugabe, who turns 85 on Feb. 21 and has been in power since independence from Britain in 1980, has in the recent past treated the 56-year-old Tsvangirai as a junior partner at best, often not bothering to hide his contempt.

Tsvangirai won the most votes in the first round of presidential election held almost a year ago, and withdrew from a June runoff only because of attacks on his supporters."

If you want to know more, go to the following links:

CIA World Factbook on Zimbabwe

Morgan Tsvangirai Sworn In as Zimbabwe PM; Pledges Focus on Economy

Mugabe swears in rival as Zimbabwe prime minister

Zimbabwe lifts foreign currency restrictions

What it means Dollarisation formula a sham

There's A New Number 1 In The World: Liechtenstein Passes Luxembourg In Per Capita GDP

To see the complete ranking, go the CIA World Factbook. Here is the top 10:

1 Liechtenstein $118,000
2 Qatar $101,000
3 Luxembourg $85,100
4 Bermuda $69,900
5 Kuwait $60,800
6 Norway $57,500
7 Jersey $57,000
8 Brunei $54,100
9 Singapore $52,900
10 United States $48,000

Here is something the CIA reports about Liechtenstein (which is small with a population 35,000 and is only 160 square kilometers in area):

"Despite its small size and limited natural resources, Liechtenstein has developed into a prosperous, highly industrialized, free-enterprise economy with a vital financial service sector and the highest per capita income in the world. The Liechtenstein economy is widely diversified with a large number of small businesses. Low business taxes - the maximum tax rate is 20% - and easy incorporation rules have induced many holding companies to establish nominal offices in Liechtenstein, providing 30% of state revenues. The country participates in a customs union with Switzerland and uses the Swiss franc as its national currency. It imports more than 90% of its energy requirements. Liechtenstein has been a member of the European Economic Area (an organization serving as a bridge between the European Free Trade Association (EFTA) and the EU) since May 1995. The government is working to harmonize its economic policies with those of an integrated Europe. In 2008 Liechtenstein came under renewed international pressure - particularly from Germany - to improve transparency in its banking and tax systems."

In last place was Zimbabwe at $200. With 118,000/200 = 590, it means that the standard of living is 590 times higher in Liechtenstein than in Zimbabwe.

The country of Guinea-Bissau has a population of 1.5 million. But their GDP was only about $900 million. That is less money than the movie "The Darknight" has made, even if you take into account its production costs. Click here for details.

Economy Got You Down? Buy An $8 Chocolate Bar For A Little "Compensatory Consumption"

Doing this can help you regain status after getting laid off. Go to The Sweet Payoff. Don't confuse this with "Conspicuous Consumption" (consumption undertaken to make a statement to others about one's class or accomplishments)

Here are is an exerpt:

"Derek Rucker and Adam Galinsky of the Kellogg School of Management at Northwestern University have lately been exploring the relationship between feelings of powerlessness and what they term “compensatory consumption.”

In one experiment, subjects were divided into two groups and told to reflect on an incident in which they felt powerful or on one in which they felt powerless. Each group was then given a supposedly unrelated task that involved gauging how much each participant would be willing to pay for a variety of products. For items that carry little association with status — a ballpoint pen, a sofa, etc. — there wasn’t much difference between what the two groups would pay. But subjects who had put themselves in a powerless frame of mind were willing to pay measurably more than the other group for high-status items — an executive pen, a fur coat, a silk tie. In a more recent study, Rucker and Galinsky found that individuals who felt less powerful showed a preference for clothing with larger and more conspicuous luxury logos.

Their thinking is that the little boost of, say, pricey chocolate, might not be solely about mood but about responding to threats to status or competence, Rucker told me. Ideally you would respond to such challenges directly: standing up to a boss who is pushing you around, demonstrating skill to silence skeptics and so on. But often the sources of undermined confidence are more abstract. “What’s happened in modern society under capitalism is that people have found consumer products as an outlet, a safety valve for addressing these threats in a very indirect fashion,” Rucker contends."

Students Use Drugs To Get Better Grades (and guess when they go up in price)

College students are using Adderall and Ritalin to boost "cognitive function and enables [which] them to study for hours with full concentration without getting fatigued" according to this NPR report. The report also says

"Students say Adderall and its cousin Ritalin are easy to get — bought and sold in the library, the cafeteria, the dorm, pretty much anywhere on campus. The going rate, they say, is typically $5 a pill. Unless it's exam week. Then, supply and demand kicks in and the price can shoot up to $25 a pill."

I guess the demand goes up then when students need an extra boost! But maybe the students just learned this from their professors. Read about that at Some Professors Pop Pills for an Intellectual Edge: Scientists say drugs help concentration. That article reports

"In an online survey of 1,400 readers published this month, the journal Nature found that 20 percent had taken pharmaceuticals for the nonmedical purpose of improving their concentration, focus, and memory. Most of the people who responded to the survey work in science, engineering, or education."

How Special Interests Hurt The Economy

The Sunday New York Times magazine had a very good article about the problems facing the economy right now and how they might be solved called The Big Fix . It is very long, with several parts. Although it is all interesting, one part stands out, part II called "THE UPSIDE OF A DOWNTURN."

Rahm Emanuel, Obama’s chief of staff, has said “You never want a serious crisis to go to waste...it’s an opportunity to do things you could not do before.”

Then the article mentions a very important economist.

"In the early 1980s, an economist named Mancur Olson developed a theory that could fairly be called the academic version of Rahm’s Doctrine. Olson, a University of Maryland professor who died in 1998, is one of those academics little known to the public but famous among his peers. His seminal work, “The Rise and Decline of Nations,” published in 1982, helped explain how stable, affluent societies tend to get in trouble. The book turns out to be a surprisingly useful guide to the current crisis.

In Olson’s telling, successful countries give rise to interest groups that accumulate more and more influence over time. Eventually, the groups become powerful enough to win government favors, in the form of new laws or friendly regulators. These favors allow the groups to benefit at the expense of everyone else; not only do they end up with a larger piece of the economy’s pie, but they do so in a way that keeps the pie from growing as much as it otherwise would. Trade barriers and tariffs are the classic example. They help the domestic manufacturer of a product at the expense of millions of consumers, who must pay high prices and choose from a limited selection of goods."

The big question now is are the special interest groups going to stop the economy from recovering or is this crisis a chance to take some power away from special interests. The article mentions how the banking and finance industries are the special interest groups that are the major cause of the current crisis (which is a debatable point). But this issue illustrates an important sub-field of economics.

The sub-field of economics that studies politics and how special interest groups is called "public choice." For my students that want to know more about this, if you are in ECON 1301, see pages 343-346 in the main book by Tucker. If you are in 2301, see pages 307-312 in the main book by Tucker. If you are in ECON 2302, read pages 122-124 in the main book by Miller.

There Is No Such Thing As Free Salt (Or Sand)

Go to Buckland Ends Free Salt & Sand Service. The town has been letting residents take salt and sand at no charge. They expected people to just take a bucket or two, but

""We had some instances where contractors, non residents were coming across, filling up their sand trucks and taking them back to whatever towns," says Town Selectman Stefan Racz. "They're salting driveways and charging people for it with our salt.""

A good is scarce if there is not enough of it if it were given away free of charge. This is what happened with the salt and sand.

More Details And Analysis On The Stimulus Bill

It passed in the House of Representatives yesterday. It is 647 pages long. This New York Times article, Components of Stimulus Vary in Speed and Efficiency, has what seems like a good over view in terms of facts and analysis. But when the whole thing is 647 pages, who knows.

But the same concerns apply that I mentioned last week. Getting the policies to work at the right time due to policy lags. There is also the issue of who will fill the jobs that the government creates, people currently unemployed or those currently unemployed. The economist Gary Becker has pointed out

"Some of this infrastructure spending may be very worthwhile-I return to this issue a bit later- but however merited, it is difficult to believe that they would provide much of a stimulus to the economy. Expansion of the health sector, for example, will add jobs to this sector, but it will do this mainly by drawing people into the health care sector who are presently employed in jobs outside this sector. This is because unemployment rates among health care workers are quite low, and most of the unemployed who had worked in construction, finance, or manufacturing are unlikely to qualify as health care workers without considerable additional training. This same conclusion applies to spending on expanding broadband, to make the energy used greener, to encourage new technologies and more research, and to improve teaching."

As some of my students know, different resources are better suited to different productive activities (which explains why the law of increasing opportunity cost is true). Alot of the workers who have lost their jobs are construction workers and only some of the stimulus can use their skills.

Any Questions?

Some Basics On The Proposed Stimulus

There is an article called Stimulus 101: What's in the Bills. Its give a summary of what has been proposed plus the pros and cons.

Worker Tax Cut: Maybe Not so Immediate

To find out why, go to Worker Tax Cut: Maybe Not so Immediate. This is really just another version of the post I had a few days ago on the policy lag problem. The government might want to help the economy, but it takes time for the policies to be put in place and have an effect.

Job losses hitting men harder than women

To read about this go to Job losses hitting men harder than women. Here are some key exerpts:

"The economic crisis is hitting men much harder than women in the workplace, largely because male-dominated industries like construction and transportation are bearing the brunt of job losses, figures show.

Women, meanwhile, dominate sectors that are still growing, like government and healthcare, experts said.

Four-fifths of the 2.74 million people who lost their jobs between November 2007 and November 2008 were men, Sum said.

The biggest losses came in construction, where men comprise 87 percent of the work force, he said. Large losses also came in manufacturing and wholesale trade, where men make up more than two-thirds of the work force, he said.

"Males were dominant in sectors that were taking a bad hit," he said. "It's men and the blue-collar jobs. It's overwhelming."

According to the U.S. Bureau of Labor Statistics, men's employment as a ratio of the population dropped by 2.7 percent, while the ratio among women's dropped 0.8 percent from December 2007 to December 2008. The unemployment rate among men rose to 7.9 percent from 5.0, while among women, it rose to 6.4 percent from 4.8 percent, the agency said."

I am curious if any of my students have gotten laid off and whether you are male or female. Also, what about friends, relatives, co-workers, etc? Does it seem like more men or women are getting laid off? Of course, San Antonio has not been doing as badly as the rest of the country. In November, the national unemployment rate was 6.8% while it was 5.4% in San Antonio. The national rate went up to 7.2% in January.

Some Of Obama's Economic Policies Might Take Too Long To Help

You probably know that we are in a recession. Unemployment is at 7.2%, the highest in 15 years. As my macro students will learn later this semester, increasing aggregate demand (AD) through government spending can help the economy in recessions. But only if that spending hits the economy at the right time.

To read about the problems that Obama's policies might have, go to Much in Obama stimulus bill won't hit economy soon. Here are some key exerpts:

"It will take years before an infrastructure spending program proposed by President-elect Barack Obama will boost the economy, according to congressional economists.

Less than half of the $30 billion in highway construction funds detailed by House Democrats would be released into the economy over the next four years, concludes the analysis by the Congressional Budget Office. Less than $4 billion in highway construction money would reach the economy by September 2010.

The economy has been in recession for more than a year, but many economists believe a recovery may begin by the end of 2009. That would mean that most of the infrastructure money wouldn't hit the economy until it's already on the mend.

Overall, only $26 billion out of $274 billion in infrastructure spending would be delivered into the economy by the Sept. 30 end of the budget year, just 7 percent. Just one in seven dollars of a huge $18.5 billion investment in energy efficiency and renewable energy programs would be spent within a year and a half.

And other pieces, such as efforts to bring broadband Internet service to rural and underserved areas won't get started in earnest for years, while just one-fourth of clean drinking water projects can be completed by October of next year."

The parts that will hit the economy quickly are the tax cuts and aid to states, who are facing budget problems due to lower tax revenue, which always happens in recessions. Later in the semester, we will also learn about something called the "policy lag problem."

A group of economists called the Monetarists believe that when a recession occurs, it takes too long for the government to recognize it and take action to end it. The action will probably cause AD to increase when the economy is already back to the full-employment GDP. This is called the Policy Lag Problem. Here is how it works:

A recession begins (the economy produces less and workers are laid off) and at least 6 months later, the government finally recognizes that we are in a recession, so there is a Recognition Lag.

A few months later (maybe more), the government finally decides to do something about the recession (it can take time for Congress to pass a spending bill), so there is a Decision Making Lag.

A few months later (maybe more), the government implements the spending plan (maybe Congress passed a spending bill for highways and companies have to be found, bids taken and so on), so there is an Implementation Lag.

A few months later (maybe more), the government spending finally has an effect on the economy (AD increases), so there is a Effectiveness Lag. By this time, the economy is normal or back to full-employment. Then alot of spending hits the economy. This could cause inflation. Inflation is too many dollars chasing too few goods. If there is too much money in the economy, prices rise.

The Top Budget Vacation Spot Is...Austin, Texas!?

To read about this go to Top Budget Travel Destinations for 2009: The best value hot spots for the New Year. But if people really believe this and many of them go to Austin for fun or a vacation, things won't be very fun due to the crowds (which reminds me of something that Yogi Berra said about a restaurant: "nobody goes there anymore, it's too crowded").

This also illustrates what economist Steven Landsburg calls the "Indifference Principle." "Except when people have unusual tastes or unusual talents, all activities must be equally desirable." This applies to Austin or any of the other cities on the list in the article. Once everyone sees Austin as a good deal, they start going there. Only people with unusual tastes will really enjoy it. That is, you will have to like what Austin has to offer alot more than the average person or the crowds will erode your enjoyment. Austin won't be any better than anywhere else for a vacation. Other places will be just as desirable.

Touching A Product Makes You More Likely To Buy It

That is the finding of an interesting study. Click on Study: You Touch It, You Buy It to read about it. This exerpt gives the basic idea:

"Participants in the study were shown an inexpensive coffee mug, and were allowed to hold it either for 10 seconds or 30 seconds. They were then allowed to bid for the mug in either a closed (where bids could not be seen) or open (where they could be seen) auction. The participants were told the retail value of the mug before bidding began ($3.95 in the closed auction; $4.95 in the open auction). The study, detailed in the August 2008 issue of the journal Judgment and Decision Making, found that on average, people who held the mug for longer bid more for it - $3.91 to $2.44 in the case of the open auction and $3.07 to $2.24 in the closed. In fact, people who held the mug for 30 seconds bid more than the retail price four out of seven times."

I am curious if any of my students have had experiences like this. Have you noticed buying something because you touched it? If so, why? Anybody work in a store where you encourage customers to touch the merchandise?

End Of Semester

This will be finals week at San Antonio College, so I will not post very much in the next month or so. Once the next semester start, I will go back to 3 posts a week.

Is An Electronic "Helicopter Drop" Feasible? (Part 2)

I first posted on this last January. Here is the link Is An Electronic "Helicopter Drop" Feasible?. Basically, people have debit cards with a zero balance. If the FED wants consumer spending to increase, then it puts money in everyone's accounts. I initially stated that there could be a time limit, so it gets spent quickly, tyring to avoid the policy lag problem. (some people have called Ben Bernanke "helicopter Ben"-this may not be fair, but "helicopter drop" is an old term that I recall from grad school in the 80s).

Here are some additional thoughts on this:

People could have two accounts. In one, they would have to spend the money by the end of the month. In the other the money could build up so you could buy a durable like an appliance. As before, you can't convert these accounts to cash. But the stores can.

We could prohibit them from being spent in grocery stores, so people just don't save money from their own paychecks and then use these accounts to buy necessities.

Some economists say that we need to create inflationary expectations to get AD increasing again (or at least reduce deflationary expectations so things don't get worse). Getting this kind of spending going so quickly might help.

Some articles that I am reading say the FED can basicially create as much money as it wants. It has added over $1 trillion to its balance sheet in the last year. So this would just be another way to do it.

This is consistent with the FED's interest in helping consumers which we see in its buying of credit card debt.

Bank's excess reserves are very high ($600 billion). But not enough is being loaned and spent. So we may need other ways to stimulate AD. Paul Krugman said the other day that it might take awhile to get the fiscal stimulus plans in place. Maybe something like this would work faster.

State sales tax collections might rise. States need money now, so this might help.

If businesses know that consumers will be spending, then they might be more willing to invest and not layoff workers.

The debit cards could be activated like other debit and credit cards. You call the FED and tell them your SS# and you can start spending.

We might have to give people more money each month than the fall in consumer spending to make sure they just don't save their own money and then use the debit cards to buy their normal goods.

The government gives out money anyway, like in unemployment insurance and welfare and food stamps.

It is possible that when economiy start to slide into recessions people might anticipate that the FED will put money in their accounts, so they will delay purchases. But knowing that consumer spending is going to rise might also affect expectations in positively, too. Also, some research suggest that unemployment insurance keeps people unemployed longer but no one calls for ending that program.

Maybe this could only be done if there are 3 straight months of falling consumer spending and it would have to be unanimous or close to it on the FOMC.

Why We Are In A Recession And Why Fiscal Policy (increasing government spending) Might Not Help

Normally I don't like to just put in links to other blogs since you can read that stuff by clicking on my links to those blogs. But since the economy is in the news so much and since alot of that is on what caused the crisis and what needs to be done, these two links are important in giving a different perspective.

The first one is What Really Happened? by Larry White of the University of Missouri. He blames the FED keeping interest rates too low for too long and there being too many "sub prime" loans, that is, loans with lower standards for incomes of the borrowers and downpayments. The government encouraged these home loans. Adjustable rate mortgages play a role, too.

Then there is Fiscal Policy Puzzles where Harvard professor Greg Mankiw disucsses the fact that fiscal policy might not work the way we want it to. That is, increasing government spending might not help very much (although he says " I am not sure what model I should use to explain" this). He also says "At the very least, these puzzles should give us reason to pause when using the Keynesian framework for policy analysis. There is still a lot about macroeconomics that remains deeply puzzling."

Another post by Mankiw is The Bils-Klenow Stimulus Plan. This suggests that cutting payroll taxes (social security taxes) is the best stimulus.

Another One For The Law Of Unintended Consequences File: Problems Plague U.S. Flex-Fuel Fleet

But first, a funny cartoon by Steve Breen of the San Diego Union-Tribune.



The cartoon has nothing to do with the topic. It comes from this Washington Post article Problems Plague U.S. Flex-Fuel Fleet. It seems the idea was to have government vehicles use alternative fuels to save gas. But the opposite has happened. Here are the key exerpts:

"But the costly effort to put more workers into vehicles powered by ethanol and other fuel alternatives has been fraught with problems, many of them caused by buying vehicles before fuel stations were in place to support them"

"Often, the vehicles come only with larger engines than the ones they replaced in the fleet. Consequently, the federal program -- known as EPAct -- has sometimes increased gasoline consumption and emission rates, the opposite of what was intended."

"The Postal Service illustrates the problem. It estimates that its 37,000 newer alternative-fuel delivery vans, which can run on high-grade ethanol, consumed 1.5 million additional gallons of gasoline last fiscal year because of the larger engines."

"The vehicles that would allow the agency to meet federal mandates were available in six- and eight-cylinder models"

"Alternative fuel was used less than 1 percent of the time in 2007-2008."

"Agencies were required to buy alternative-fuel vehicles but did not have to run them on alternative fuel."

This illustrates The Law Of Unintended Consequences. We may have well-meaning laws that should benefit society but people react to those laws and change their behavior sometimes in unexpected and undesirable ways. We see this here in this article. Another example would be rent controls. If you legally keep down the price of rent, landlords have less incentive to keep their buildings or construct new apartments. So the rental market (and renters) suffer even though that was not the intended result.

We Already Have a CEA And An NEC, So Do We Need An ERAB?

I guess we should all be thankful for having so many teams of ecnomists. Must be nothing to worry about.

Obama has created a new President‘s "Economic Recovery Advisory Board" or ERAB. You can read about it here and here and here. Here is the general idea:

"President-elect Barack Obama announced Wednesday that he is creating a new economic recovery board to provide a "fresh perspective" for his administration. The board will advise Obama on how to revive the ailing economy, offering independent, nonpartisan information, analysis and advice to the president as he formulates and implements his plans for economic recovery, Obama's transition office said."

But we alreay have a Council of Economic Advisers. Here is what the CEA is all about:

"From the "Employment Act of 1946":

"There is hereby created in the Executive Office of the President a Council of Economic Advisers (hereinafter called the "Council"). The Council shall be composed of three members who shall be appointed by the President, by and with the advice and consent of the Senate, and each of whom shall be a person who, as a result of his training, experience, and attainments, is exceptionally qualified to analyze and interpret economic developments, to appraise programs and activities of the Government in the light of the policy declared in section 2, and to formulate and recommend national economic policy to promote employment, production, and purchasing power under free competitive enterprise. The President shall designate one of the members of the Council as Chairman.

It shall be the duty and function of the Council--

to assist and advise the President in the preparation of the Economic Report;

to gather timely and authoritative information concerning economic developments and economic trends, both current and prospective, to analyze and interpret such information in the light of the policy declared in section 2 for the purpose of determining whether such developments and trends are interfering, or are likely to interfere, with the achievement of such policy, and to compile and submit to the President studies relating to such developments and trends;

to appraise the various programs and activities of the Federal Government in the light of the policy declared in section 2 for the purpose of determining the extent to which such programs and activities are contributing, and the extent to which they are not contributing, to the achievement of such policy, and to make recommendations to the President with respect thereto;

to develop and recommend to the President national economic policies to foster and promote free competitive enterprise, to avoid economic fluctuations or to diminish the effects thereof, and to maintain employment, production, and purchasing power;

to make and furnish such studies, reports thereon, and recommendations with respect to matters of Federal economic policy and legislation as the President may request."

Now, what about the NEC or National Economic Council? It sure sounds like the ERAB and the CEA:

"Keith Hennessey is Assistant to the President for Economic Policy and Director of the National Economic Council (NEC). The NEC was established in 1993 within the Office of Policy Development and is part of the Executive Office of the President. It was created for the purpose of advising the President on matters related to U.S. and global economic policy. By Executive Order, the NEC has four principal functions: to coordinate policy-making for domestic and international economic issues, to coordinate economic policy advice for the President, to ensure that policy decisions and programs are consistent with the President's economic goals, and to monitor implementation of the President's economic policy agenda.

The purview of the NEC extends to policy matters affecting the various sectors of the nation's economy as well as the overall strength of the U.S. and global macro-economies. Therefore, the membership of the NEC comprises numerous department and agency heads within the administration, whose policy jurisdictions impact the nation's economy. Director Hennessey works in conjunction with these officials to coordinate and implement the President's economic policy objectives. He is also supported in his capacity as an adviser to President Bush by a staff of policy specialists whose expertise pertains to the council's specific areas of decision-making.

Included on this staff are a Deputy Assistant to the President and several Special Assistants to the President who report on a variety of economic policy issues including: agriculture, commerce, energy, financial markets, fiscal policy, healthcare, labor, and Social Security."

Don't forget that we also have The Domestic Policy Council. Here is what they do:

"The Domestic Policy Council coordinates the domestic policy-making process in the White House and offers policy advice to the President. The DPC also works to ensure that domestic policy initiatives are coordinated and consistent throughout federal agencies. Finally, the DPC monitors the implementation of domestic policy, and represents the President's priorities to other branches of government."

Also

"Under President Bush, the Domestic Policy Council oversees major domestic policy areas such as education, health, housing, welfare, justice, federalism, transportation, environment, labor and veteran's affairs. The Office of National AIDS Policy (ONAP), the Office of National Drug Control Policy (ONDCP), USA Freedom Corps (USAFC), the Council on Environmental Quality (CEQ) and the Office of Faith-Based and Community Initiatives (OFBCI) are also affiliated with the Domestic Policy Council. The Domestic Policy Council’s formal membership includes the cabinet Secretaries and Administrators of federal agencies that affect the issues addressed by the DPC."

The New Chair Of The Council Of Economic Advisors Is Christina Romer

You can read about her at this New York Times article Christina D. Romer. She is a highly regarded scholar, being an expert on the Great Depression and business cycles. It looks like a good choice by Obama. In addition to publishing many articles in technical journals, she wrote a very good overview of the Depression for Britannica. Click on Great Depression to read it. Maybe her ability to communicate clearly to a general audience will be an asset as chief economic advisor.

Economists Offer Conflicting Views Of The Stimulus

The 2008 winner of the Nobel Prize, Paul Krugman is definitely pro-stimulus:

"So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it’s too small. What’s the multiplier? Better, we hope, than on the early-2008 package. But you’d be hard pressed to argue for an overall multiplier as high as 2.

When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion."

From Stimulus math (wonkish).

But Brian Riedl of the Heritage Foundation, writing in the Wall Street Journal, says

"But where does government get this money? Congress doesn't have its own stash. Every dollar it injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It's merely redistributed from one group of people to another.

Of course, advocates of stimulus respond that redistributing money from "savers" to "spenders" will lead to additional spending. That assumes that savers store spare cash in their mattresses, thereby removing it from the economy. In reality, nearly all Americans either invest their savings (where it finances business investment) or deposit it in banks (which quickly lend it to others to spend). The money gets spent whether it is initially consumed or saved.

Governments don't create new purchasing power out of thin air. If Congress funds new spending with taxes, it is redistributing existing income. If the money is borrowed from American investors, those investors will have that much less to invest or to spend in the private economy. If the money is borrowed from foreigners, the balance of payments must still balance. That means reducing net exports through exchange-rate adjustments, thereby leaving net spending on the economy unchanged."

That is from Why Spending Stimulus Plans Fail

A professor at Gettysburg College is very critical of Riedl. They say "No, no, NO! F! John Maynard Keynes demonstrated 75 years ago to the satisfaction of economists everywhere that this logic is fatally flawed. Governments can create purchasing power out of thin air when the economy is in recession and there are unemployed workers and other factors of production."

That is from Brian Riedl fails my Intermediate Macroeconomics class.

But Donald J. Boudreaux, Chairman of the Department of Economics at George Mason University, says "Brian Riedl is correct: economic-stimulus packages are economic snake oil."

That is from Dear WSJ: Economic Snake Oil Not Stimulating

No wonder people are confused.

Corporations Pay A Lower Tax Rate Than The Official Rate

Last week I talked about how Americans in general might not be paying all the taxes they are supposed to. The same might be true about corporations. You can read about it at Tax Data Highlight Corporate Loopholes. Here is an exerpt:

"The Internal Revenue Service found that U.S. companies paid federal income taxes on their reported U.S. profits at far less than the 35% statutory rate, offering a potential revenue source for an incoming presidential administration that faces a yawning budget deficit.

Newly released data from the IRS show companies paid federal and foreign income taxes on their U.S. book income -- the amount reported to shareholders -- at a rate of 25.3% during 2005, the most recent year for which data were made available by the IRS."

Another is:

"Differences between accounting rules and tax laws mean companies keep two sets of books. Tax rules often allow them to take deductions on their tax returns that don't eat into their book profits reported to shareholders.

The IRS requires companies to file a form reconciling the gap between their book and taxable profits, called the Schedule M-3. U.S. companies included in the data reported about $1.35 trillion in pretax U.S. book income to their investors in 2005, but about $1.03 trillion to the IRS -- a difference of about 23%."

Good Career Advice

The article is It May Be a Good Job, but Is It ‘Good Work’? from Sunday's New York Times. It says that a good job is "a calling that combines excellent performance, expresses one’s ethics and offers a pleasing sense of engagement."

Research shows that "people working in very challenging professions or settings who were technically excellent might find their work difficult unless it was also important to their mission in life.”

Also

"An unexpected finding was that joy was a crucial ingredient of good work."

and

"There are three questions people can ask about their jobs to evaluate their good-work level: Does it fit your values? Does it evoke excellence; are you highly competent and effective at what you do? Does it bring you that subjective barometer of engagement, joy?"

If you are looking for a job

“Decide what you really like to do and what you would like to spend your life doing. That’s more important than deciding what particular job to hold, because the employment landscape is changing radically and quickly. Then ask, ‘Where could I carry that out?’ and be very flexible about the milieu and venue — but not about what you get a kick out of and can be good at.

And then, third, if you have any choice over where to work, when you’re considering a job, go there and talk to people. Ask yourself, ‘Is this the kind of place where I can see myself in others?’ You might make five times more money at one place, but does it reflect who you are and who you want to be? Are my colleagues people I’d admire or people I’d prefer to avoid?”

A Megabyte Of Memory Costs 10,000 Times Less Than It Did In 1989

In 1989, I bought a computer and an external hardrive that had 40 megabytes of memory.The drive cost $700 (and that was with the student discount at the Washington State University computer store). The consumer price index has gone up about 75% since then. So raising 700 by 75% gives us about 1226. So if we bought that 40 megabyte hardrive today, it would be $1,226. That works out to $30.67 per megabyte.

My wife recently bought me an 8 gigabyte flash drive for $25. A gigabyte is 1,024 megabytes. So the flash drive has 8,192 megabyters. At $25, that works out to $0.003. That is less than one cent per megabyte. Since $30.67/.003 = 10,051, it means that a megabyte now costs 10,000 times less than it did in 1989.

Of course I am no computer expert, so maybe there are even better deals out there for memory. If anyone has purchased memory for less than 1 cent per megabyte, let me know.

Shocking News: Americans Cheat On Their Taxes!

The link is Report: IRS issued $1B in bad refunds in 2007. Here is the key exerpt:

"The IRS has estimated that the tax gap _ the difference between taxes owed and taxes actually paid _ at about $290 billion a year. Of that, about 57 percent comes from individuals understating incomes or overstating deductions and exemptions."

In both fiscal 2007 and fiscal 2008, the federal government took in about $2.5 trillion. So the amount lost due to cheating is about 11.6% of what is actually collected. It would have more than covered the deficit of $162 billion in fiscal 2007 and it would be about 2/3 of the $450 billion deficit for fiscal 2008.

New York City Tax Payers To Pay $1 Billion To See Baseball

The article is As Stadiums Rise, So Do Costs to Taxpayers from the New York Times. Here is an exerpt:

"Though the teams are indeed paying about $2 billion to erect the two stadiums, the cost to the city for infrastructure — parks, garages and transportation improvements — has jumped to about $458 million, from $281 million in 2005. The state is contributing an additional $201 million.

Those totals do not include an estimated $480 million in city, state and federal tax breaks granted to both teams. In addition, neither team has to pay rent or property taxes, though both are playing on city-owned land."

Adding the $458 million to the $480 million puts it at $938. So that is closing in on $1 billion. I recall reading in a book by Andrew Zimbalist (who is quoted in the above article) that sports economists generally agree that public (tax payer) funded stadiums are not worth it. It looks like New Yorkers will be paying more for baseball whether they like it or not.

Does The Wall Street Journal's Explanation Of The Gas Tax Make Sense?

The article is Obama Builds Ties to 'Chicago School'. Here is the passage that puzzles me:

"Many economists were cheered in April when, amid higher gasoline prices, Mr. Obama opposed a gas-tax holiday -- an idea supported by Sens. John McCain and Hillary Clinton, who was competing with Sen. Obama for the Democratic nomination. Textbook economics said in response to the tax cut, demand would simply raise gas prices to their previous level, and so the benefit of the cut would flow to energy producers rather than consumers."

Here is what I think is going on (see the graph below). A tax on gas is what we call an excise tax. Since the seller must collect the tax, the supply curve shifts upwards by the amount of the tax. In the graph below the S2 line is 60 cents above the S1 line (so the tax is 60 cents a gallon). Now imagine the tax is eliminated, so we move from S2 back to S1. The price falls from $1.40 back to the original $1.00. The demand line does not move and the new equilibrium is at a lower price. The demand line is not going to move to the right (increase) to bring the price back to $1.40. Maybe some other factor will change to make that happen like incomes increasing, but that is not the issue here. It looks like that passage in the WSJ makes no sense.



Update: I exchanged emails with the WSJ reporter. Here is what he had to say:

"Basically said, maybe could have taken more time explaining in the story that with inelastic supply, existing demand will take the price right on up to where it was before the tax holiday. Here's an old Krugman column that does it better:

Reckonings; Gasoline Tax Follies

"The quantity of oil available for U.S. consumption over the near future is pretty much a fixed number: the inventories on hand plus the supplies already en route from the Middle East. Even if OPEC increases its output next month, supplies are likely to be limited for a couple more months. The rising price of gasoline to consumers is in effect the market's way of rationing that limited supply of oil.

"Now suppose that we were to cut gasoline taxes. If the price of gas at the pump were to fall, motorists would buy more gas. But there isn't any more gas, so the price at the pump, inclusive of the lowered tax, would quickly be bid right back up to the pre-tax-cut level. And that means that any cut in taxes would show up not in a lower price at the pump, but in a higher price paid to distributors. In other words, the benefits of the tax cut would flow not to consumers but to other parties, mainly the domestic oil refining industry. (As the textbooks will tell you, reducing the tax rate on an inelastically supplied good benefits the sellers, not the buyers.)""

This could be the case, but I think it would mean that the short-run supply curve is vertical. You can't shift a vertical line straight down. If, however, the line is very steep, but not completely vertical, it still shifts down. In the new graph below, the lower red line is 60 cents below the upper line. The price is lower, but not by much (it falls from $1.20 to 1.00). And again, there is no movement of the demand line.

Did California and Texas Vote Differently?

Of course they did. Obama won California with 61% of the vote while McCain won Texas with 55%. But there are differences in the two states based on incomes. In California, 72.33% of the people with incomes under $30,000 voted for Obama and it was 57.56 for people with incomes over $150,000. In Texas, 63.29% of the people with incomes under $30,000 voted for Obama and it was 28.6% for people with incomes over $150,000.

So the difference between high and low income voters in California is pretty small, just 14.77 percentage points. But in Texas it is 34.69. Why would the differences between rich and poor be so much greater in one state? Maybe this is all affected by cost of living differences, but my guess is that its slight.

There was on an article on a similar issue recently in the Chronicle of Higher Education about the 2004 election. They found something similar. The data I used here comes from exit polls. To get to exit polls, go to CNN Election Center. You can click on a state on the map and then click on the link that takes you to the exit polls.

It's The Law: No Free Products For Voters, Not Even Coffee Or Donuts

To read about this click on Authorities Eye Voter Perks. You might get a registration page for the Washington Post. If you do, come back and click it again. You might have to do it a couple of times. Here is the intro:

"Businesses that hope to reward voters today for exercising their patriotic right might be committing a felony. A number of companies, including Starbucks, Ben & Jerry's and California Tortilla, said they would give out free food and sweets today to customers displaying an "I Voted" sticker. But such freebies might be a violation of election laws -- they could be viewed as bribes even after a vote has been cast."

But this is nothing compared to the corruption of the 1800s. I had a blog post about this two years ago called Should People Be Rewarded For Voting? Here is that post again:

A couple of weeks ago, Cynthia Crossen had a good column in The Wall Street Journal about why voter turnout has fallen in the USA. Basically, we don't vote as much as we used to because there is not as much in it for us. That certainly makes sense from an economic perspective, where we assume people act based on incentives. Here are some exerpts:

"Your forebears would be ashamed. In late-19th-century midterm elections, turnout ranged from 65% to 78%. For presidential elections, almost 80% of the nation's eligible Then, in the early 20th century, turnout began falling precipitously. By 1920, less than half of the voting-age population made it to the polls on Election Day.

A 19th-century man (in most states, women weren't enfranchised until 1920) could decide to vote on the spur of the moment, pick up a simple ballot from party headquarters and drop it at the poll on Election Day, where his like-minded neighbors would give him a cheer and perhaps a beer. No preregistration was required, no taxes, no proof of residency, literacy or even citizenship. If, like most people then, he was a party man, his vote might earn him a reward -- a small cash gift or even better, a job with the post office.

Election day was rowdy and festive, a thrilling climax to a political campaign that featured bonfires, barbecues, parades, torchlight rallies and passionate oratory. Politics were social and recreational at a time when there wasn't much other public entertainment.

But many people thought the political parties, which basically ran the elections, were too powerful and corrupt -- that the government should administer elections, and ballots should be secret so party leaders couldn't monitor their flocks' choices. Party symbols, like the elephant and donkey, would no longer appear on ballots, creating a de facto literacy test. The practice of rewarding loyal voters with cash on Election Day was widely outlawed. Competitive exams replaced patronage in awarding government jobs.

And citizens would no longer be able to depend on their party officials to vouch for their eligibility. Voters would have to register themselves in person, well ahead of the election, usually during working hours. Some states even required voters to register every year.

Other broad social trends also damped the electoral spirit. Americans were leaving their small towns, where social ties often reinforced their political biases. Candidates for office began using radio, rather than rallies, to spread their messages, making voters more passive. With the proliferation of other recreational activities -- spectator sports, vaudeville, movies -- Americans no longer needed to look to politics for escape."

Why Don't Americans Like to Vote?
Politics Are Only One Reason
October 16, 2006; Page B1

Money makes the political world go around

That is the title of an Associated Press article which you can read by clicking Money makes the political world go around. Here is the intro:

"In a presidential race filled with broken barriers, money has shattered far more than its share. Together, Democrat Barack Obama and Republican John McCain have amassed nearly $1 billion — a stratospheric number. Depending on turnout, that means nearly $8 for every presidential vote, compared with $5.50 in 2004. Using all that cash, the candidates have traveled more miles, employed more workers and advertised more than ever. But it has been Obama, with his $641 million and 3.2 million donors, who has rewritten the rules for financing campaigns."

Does money matter in politics? Steven Levitt, University of Chicago economics professor and co-author of the book Freaknomics found that maybe money is not so important in winning elections. You can read about that study at McCain, the Media, Money, and Montesinos (and Obama Too).

But another University of Chicago economist Austan Goolsbee is an advisor to Obama. He is probably aware of Levitt's research yet Obama is spending record amounts of money. If a candidate spends that much money they must think it matters.

How About A Little Buy-ology

That is the name of a new book that was just reviewed in the Wall Street Journal. You can read that review by clicking on Science Comes to Selling. It seems that marketers are using neuroscience to probe our brains to discover what really excites us and then they design their products accordingly. As always, caveat emptor.

Here are some excerpts:

"Marketers treat commodities as if they were people, with personality traits, and consumers as objects, with attributes that can be technically engineered."

"when an image of a Mini Cooper passed before" the eyes of subjects being scanned, a "back area of the brain that responds to faces came alive." Turns out it wasn't the Mini Cooper's "ultra rigid body" or "1.6L 16-valve alloy engine" that attracted consumers; it was its irresistible face."

"Drinking Coke more significantly increases blood flow in the medial prefrontal cortex because its ad campaigns, over the years, have so effectively associated Coke with sensations of warmth, security and childhood innocence."

"By tracking brain response, it (neuromarketing ) treats consumers themselves as objects: bundles of nerve centers that respond to different kinds of stimulus and form triggerable pathways as a result."

"But when neuromarketers attach personal traits to products, they are not falsely claiming that, say, a Mini Cooper actually is a "gleaming little person." What they are doing is adding a personality of warmth and fuzziness to the car, in the same way that the factory might add ventilated front disc brakes or cruise control. When you drive it, you will genuinely experience the sense of endearment that you might feel when surrounded by adorable children. Sure, it doesn't always work. But the intent is not to deceive."

Professors Donate More Money To Obama 8.33 to 1

This is from an article in the Chronicle of Higher Education called
Donors From Academe Favor Obama by a Wide Margin. You will probably need a subscription to read this but SAC students might be able to read it by going through our library page. Here are some excerpts:

"Through the end of last month, donors from academe had contributed just over $12.2-million to Mr. Obama, compared with just over $1.5-million to Mr. McCain..." (12.2/1.5 = 8.33)

"...studies and polls have shown that faculty members and college presidents are more likely to be registered Democrats."

"In 2000, donors from academe actually gave slightly more to George W. Bush, than they gave to Al Gore. That had changed by 2004, when educators contributed close to four times as much to John Kerry, the Democratic nominee, as to Mr. Bush. And the spread has continued to widen."

"Many donors and political scholars say Mr. Obama has become the heavy favorite among academe for two key reasons. First, many college employees are disenchanted with President Bush and the Republican administration's record on such issues as the war in Iraq, international relations, and government surveillance of private citizens. Their dissatisfaction contributes to a desire among many educators to put a new political party in the White House."

I had a similar post two years ago called Are College Professors Liberal?

A Good Summary Of The Financial Crisis

It was an article in the San Antonio Express-News this past week by financial expert Scott Burns. The title was How History Is Likely To See Our Financial Crisis. Here are the main causes of the crisis which are elaborated on in the article:

1. The institutional reduction of lending standards forced by the Community Reinvestment Act.

2. The Taxpayer Relief Act of 1997, which made homeownership the best tax-free investment in America.

3. The 9/11 terrorist attack, which resulted in artificially low interest rates.

4. "Innovation" in mortgages to comply with the CRA -- innovation that also happened to be immensely profitable to everyone in the home finance food chain.

Study: Half of American Doctors Give Patients Placebos Without Telling Them

That is the name of an article which you can read by clicking here. This is the intro:

"About half of American doctors in a new study regularly give their patients placebo pills without telling them. That contradicts advice from the American Medical Association, which recommends doctors only use treatments to which patients have given their informed consent.

"It seems like doctors are doing things they shouldn't be doing," said Irving Kirsch, a professor of psychology at the University of Hull, who has studied the use of placebos. Kirsch was not linked to the research, published Friday in the British Medical Journal."

Another part of the article says "Studies have shown that patients given a fake treatment can often improve, despite the pill having no known impact on their condition."

This reminds me of some research an economist did on placebos that I blogged about last April. That post was called Placebos: The More You Think They Cost, The Better They Work .

This also reminds me of what economists call "asymmetric information." This is a situation in which the seller knows more about a product than the buyer (sometimes the buyer knows more about something important like how healthy or risky they are as it relates to insurance). These markets do not operate optimally. My student might recall I discussed this after we played the supply and demand game in class. A good example is the used car market. Sellers usually know alot more about the product than the buyers.

Hot, Flat, and Crowded

That is the name of a book by Thomas Friedman, a New York Times columnist. I will get to it below.

But first, if any students are interested, Clemson University has an Institute for the Study the of Capitalism. They have a seminar in the summer for students. For more information click here (Hat tip to Ann Zerkle from the Heroes of Capitalism blog.

Back to Friedman's book. A few weeks ago a student mentioned that she saw him on TV. His new book seems like some sort of sequel to his earlier book The World is Flat. He is concerned about global warming, energy and population and how to keep a disaster from happening. It was well reviewed in the New York Times but it god a bad review in the Wall Street Journal. That is not surprising. So you can click on the links to see the reviews.

Here are the first and last paragraphs from the Times review followed by the last 3 paragraphs from the WSJ review:

"The environmental movement reserves a hallowed place for those books or films that have stirred people from their slumber and awoken them to the fragility of the planet: Rachel Carson’s “Silent Spring,” Bill McKibben’s “End of Nature” and, most recently, Al Gore’s Oscar-winning documentary, “An Inconvenient Truth.” Thomas L. Friedman’s new book, “Hot, Flat, and Crowded” may lack the soaring, elegiac qualities of those others. But it conceivably just might goad America’s wealthiest to face the threat of climate change and do something about it.

But these are minor infelicities when set against a book that will be accessible outside the eco-converted, is grounded in detailed research and repeatedly hits its target. It contains some killer facts — the American pet food industry spends more on research and development than the country’s power companies; Ronald Reagan stripped from the White House the solar panels that Jimmy Carter had installed as a symbolic step toward energy independence. Above all, it is fundamentally right on the biggest question of our age. If Friedman’s profile and verve take his message where it needs to be heard, into the boardrooms of America and beyond, that can only be good — for all our sakes."
Now from the WSJ:

"Toward the end of "Hot, Flat, and Crowded," Mr. Friedman wonders why we can't just implement the sort of policies he prefers. "What is our problem? If the right things to do are so obvious to the people who know the most about the energy business, why can't we put them in place?" Maybe the reason is that most people recognize a bad deal when they see one.

He cynically seems to suggest that it would help "if a few more Hurricane Katrinas hit a few more cities." Incredibly, he even flirts with the need for a dictatorship: "If only America could be China for a day," where we could cut through special interests, bureaucratic obstacles and worries of a voter backlash and simply "order top-down, the sweeping changes" needed.

I'm sure that such longing is testimony to his deep frustration with the debate. But, more important, it points to the failure of his book to make a well-reasoned case for his proposals. While occasionally interesting, "Hot, Flat, and Crowded" remains a one-sided plea for an incorrect analysis."

Want A Car That Gets 64 Miles Per Gallon?

The price of gas is coming down, but it would be foolish to think it will stay low for very long. So who makes this car and when can you get it?

"Next month in Britain, Ford Motor Co. will begin selling a diesel hatchback that gets 64 miles per gallon. Across the channel, Parisians can buy a new gas-powered compact made by General Motors Corp. that gets a nifty 47 mpg.

On these shores, neither carmaker sells anything that thrifty. Yet with Americans clamoring for fuel-efficient cars and Detroit automakers on the ropes thanks to crashing sales of gas-guzzling trucks, the question is, why aren't these vehicles here now?"

To find out why go to U.S. carmakers' renewal means vast retooling.

Japan Has A Banana Shortage And Guess What Happened?

You can read all about it here Japan Goes Bananas For New Diet. It seems that there is a new fad diet where you eat bananas in the morning. Something about increasing your metabolism. So banana imports are up 25%. It is hard to buy bananas after 12 noon since they sell out so fast. But this increase in demand (caused by an increase in tastes) has also lead to a 20% increase in the price (maybe that means that the price elasticity of supply is 25/20 = 1.25, so supply is somewhat flat and then quantity supplied is fairly responsive to changes in price). But why don't the sellers raise the price even more if they are running out so fast? It seems like price might still have room to increase and end up at a higher equilibrium. Maybe the sellers are just always playing catch up and this fad caught them by surpise.

Why Simple Models Work, According To Nobel Prize Winner Paul Krugman

This entry is basically a repeat of one from about 2 years ago but with one excerpt added in. For any of my students, here is a link that talks about why Krugman won the Nobel prize: Krugman. One of his great skills is to take complex issues and break them down to their essence with simple models that add alot to our understanding.

So here is the original post followed by an additional excerpt. Keep in mind that even supply and demand is a model. It is simple, but it can tells us alot about what happens in markets.

"I was at a symposium about a month ago and one thing we talked about was how the abstract thinking in economics can be hard for our students. Then some teachers said they tell stories. I think that a good abstraction will be a good story and vice-versa (maybe not a perfect correlation there but pretty strong). As Steven Landsburg put it one of his books, "there never was a hare and an tortoise who raced, but the story tells an important lesson that slow and steady wins the race." A great example of this is an article Paul Krugman wrote in Slate. I think he presents an abstract idea very well by telling a good story. He shows how increased productivity can reduce employment in one sector of the economy but increase it elsewhere while everyone gains. As Krugman says "A simple story is not the same as a simplistic one." (from 10-29-2006)

Now an additional quote from the Slate article. I think it summarizes how good economic analysis can be done:

"Economic theory is not a collection of dictums laid down by pompous authority figures. Mainly, it is a menagerie of thought experiments--parables, if you like--that are intended to capture the logic of economic processes in a simplified way. In the end, of course, ideas must be tested against the facts. But even to know what facts are relevant, you must play with those ideas in hypothetical settings."

How Did The Financial Bailout Bill Pass? Votes Were Bought

Shocking? Maybe not. Maybe it was appropriate since the bill was all about money to begin with. You can read all about in Tax breaks big and small sweeten financial bailout. The basic idea is that some representatives who voted against the bill since they were taking heat from their constituents were convinced to vote for it the second time if tax breaks were attached to the bill. In many cases, tax breaks or deductions that were set to expire soon were extended. Texans can keep deducting their sales taxes on their federal tax returns (people from states with income taxes can deduct those taxes). Here are the first two paragraphs:

"Millions of taxpayers, thousands of businesses and groups as diverse as solar power developers and natural disaster victims will see tax relief with the House vote Friday to approve and send to the president a $700 billion financial rescue plan.

The tax relief package attached to the rescue bill promotes renewable energy development and extends dozens of tax breaks from the critical research and development tax credit to breaks for such narrowly focused groups as motor sports racetrack owners, film producers and bicycle commuters."

My students might recall something like this that I talk about on the first day of the semester. Congressmen in the early 1790s voted on the "Funding and Assumpton Act" based on how much money they would receive if that bill passed. The bill paid back all of the debts from the Revolutionary War at full value (they were not getting paid back before the Constitution was passed because under the Articles of Confederation all states had to agree to a tax increase-this did not happen much so taxes were never raised to pay back the money the government borrowed to finance the war). But under the Constitution if both the House and the Senate passed a tax increase and the president signed it, it became law.

The debts were securities or bonds. Some congressman owned them. I found how much about half the congressmen owned in these bonds from a book. The ones who voted yes on the bill had an average of about $6,000 while the ones who voted no had about $700. So it is possible that money influenced the vote.

There's No Such Thing As A Free Lunch (Or A Free Concert)

A couple of weeks ago jazz legend Dave Brubeck and his quartet were the headline act for "Jazz Alive" here in San Antonio. It took place in Travis Park. But it was free. So was it worth it to go? My wife and I went and since it was free it was very crowded. So we were not able to sit to close to the stage. Then the speakers were not on very loud, either. So we had to walk around to the side and we did get a good look at Dave Brubeck playing the piano and could hear the speakers better. But lots of people were talking and moving around. For them, the jazz fest was just an excuse to hang out downtown and party. They may not even have been that interested in jazz. So the bottom line is that we did not hear the music that well and the noise and the congestion from the crowd raised the cost of the "free" concert. The benefit of going to the concert was marginal at best.

This also illustrates what economist Steven Landsburg calls the "Indifference Principle." "Except when people have unusual tastes or unusual talents, all activities must be equally desirable."

Going to the concert was no more desirable than staying at home (for most people). I am glad I went since I am a Brubeck fan, so my tastes are unusual. But even so, we did not stay very long. So what sounds like a great deal, a free Brubeck concert, really wasn't.

There Is A Great New Blog Called "Heroes of capitalism"

Here is the link:

Heroes of capitalism

Here is their description of the blog:

"The Heroes: What is a hero of capitalism? Someone who used private property to produce wealth. Everyday there will be a featured hero. Though many of the heroes had far more than one accomplishment, only one will be highlighted at a time. Private property includes the tangible (like land) and intangible (like ideas).

Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned."

I have done some research on entrepreneurs as heroes. Here is one of the interesting thing I came across while writing a paper called "Who Says Entrepreneurs Are Heroes?". (It was presented at the first HERO'S JOURNEY ENTREPRENEURSHIP FESTIVAL, March 31st, 2007 at Pepperdine University).

One thing I mention is work by Candace Allen and Dwight Lee. Their 1996 Journal of Private Enterprise article called “The Entrepreneur as Hero” won the best paper award. Perhaps the main point of their article was: “Just as the society that doesn't venerate winners of races will produce fewer champion runners than the society that does, the society that does not honor entrepreneurial accomplishment will find fewer people of ability engaged in wealth creation than the society that does.” Ms. Allen was also invited to give a speech on this at the Federal Reserve Bank in Dallas. Her speech was published in Economic Insights (from the Dallas FED). It was then reprinted in both the Independent Review and The Freeman.

Can A Product Work Just Because It's Expensive?

"brands can not only reflect who we are but also affect how we behave." That comes from today's "consumed" column in the New York Times titled Subconscious Warm-Up. It discusses whether or not wearing an expensive warmup parka like the one Michael Phelps wears will make you swim faster.

This reminds me of research done by economist Dan Ariely. He recently won an "Ig Nobel" prize for "demonstrating that expensive fake medicine is more effective than cheap fake medicine." That is from 2008 Ig Nobel Prizes honor research on stripper fertility and Coca-Cola as spermicide. Here is more on Ariely's research from "Solved: scientific riddles of flea hops, armadillo digs and lap dancers' tips:

"The Ig Nobel prize for medicine was awarded to Dan Ariely at Duke University in North Carolina for a landmark study proving that costly placebos are more effective than cheap ones. Ariely's team told volunteers they were being given a new kind of painkiller, with some receiving an expensive one and others a much cheaper version.

Even though all of them received the same sugar pills, those who thought their pills were more expensive reported less pain when they were given small electric shocks.

"This is the proudest day of my life," said Ariely. "The Ig Nobels are humorous, but the work often examines things in real life, like why buttered toast is more likely to land face down."

Ariely said his work has serious implications for the medical industry, because many patients are told they can only have cheaper drugs, or have inexpensive-looking medication, which could undermine how effective the drugs are. While the active ingredients of the drug will help treat symptoms, often they work in tandem with the placebo effect, which triggers the body's own healing mechanisms."

The Government Bailout: Are We Replacing Market Failure With Government Failure?

President Bush has signed the bailout bill. So the government will start buying assets from the banks. These assets are hard to value. They include mortgages that may or may not be good (they might not be paid back). How likely they are to be paid back is not clear, so we don't know how risky they are and therefore what price to pay for them. Will the governmnet pay too much for them, costing the taxpayers too much money or will the government pay too little in which case the banks will still be in trouble?

The plan is to get the banks into better financial shape so they can resume lending again, which is very important to the economy. Some say not acting will be worse than what is being done. But how will the government figure out the right price to pay for the assets? That will be the big question.

We could say that we have or are having market failure. That is when the market allocates too many or too few resources to some good, service or activity. Then we get too much or too little of a certain good or service. Pollution (a negative externality in economic jargon) means that too much of some good is produced, like steel. We have too little lending right now. Banks don't want to lend to businesses or other banks because they can't be sure how risky the lenders are or the value of assets they might put up for collateral.

It might be instructive to recall that the lack of this kind of information led Nobel Prize winning economist Milton Friedman to warn us that a government program might simply replace market failure with government failure. So we might be no better off or even worse off as a result of the government program. If lack of information is what caused the problem in the first place, the government can't necessarily find the right solution.

I think an article by Harvard economist Kenneth Rogoff called Significant reasons to doubt wisdom of bail-out expresses this market failure/government failure issue. Here is an exerpt:

"This brings us back to the US treasury’s plan to spend hundreds of billions of dollars to unclog the subprime mortgage market. The idea is that the US government will serve as buyer of last resort for the junk debt that the private sector has not been able to price. Who, exactly, does the treasury plan to employ to figure all this out? Why, unemployed investment bankers, of course!

Let’s ponder this. Investment bankers have been losing their cushy jobs because they could not figure out any convincing way to price distressed mortgage debt. Otherwise, their firms would have been able to tap the trillions of dollars now sitting on the sidelines, held by sovereign wealth funds, private equity groups, hedge funds, and others. Now, working for the taxpayer, these same investment bankers will suddenly come up with the magic pricing formula that has eluded them until now."

Did Economist Hyman Minsky Predict The Financial Crisis?

You can read about it at

Financial meltdown: Hyman Minsky warned us this would happen

Here is a key exerpt:

"At its core, the Minsky view was straightforward: When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they've taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. 'This is likely to lead to a collapse of asset values,' Mr. Minsky wrote.

"When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash. At that point, the Minsky moment has arrived."

According to one expert:

""We are in the midst of a Minsky moment, bordering on a Minsky meltdown," says Paul McCulley, an economist and fund manager at Pacific Investment Management Co., the world's largest bond-fund manager, in an email exchange."

I don't think that the economics profession has taken much interest in this over the years. The book Modern Macroeconomics: Its Origins, Development And Current State does not even mention his name. An earlier edition of the book from 1995 did list three of Minsky's works in the bibliography. But apparently the authors no longer thought he was worth mentioning.

One more thing, I had a post last year about another theory on why we see such great volatility in the market. It reminds me of Minksy's theories. The post was Interesting Theory on Stock Market Fluctuations. Here is the post:

"Nicholas Barberis of the University of Chicago Business School has an interesting article called Search for the Holy Grail: Demystifying the Stock Market. This is clearly written for a general audience. The basic idea seems to be that when the market is up, people feel like they are good investors and that they are playing with the "house's money." So they will keep buying, making the market go up even more. But when things are down, people get pessimistic and want to sell (also because of "loss aversion," the idea that people have a bigger drop in utility from losing a dollar than the gain from finding a dollar). So people sell more quickly since they don't want to lose anything. Then the market goes down even more. So the ups and downs are bigger than you might expect."

Is The Economy A Bathtub? Are The Patient's Arteries Clogged? Welcome To The World Of Economic Metaphors

The Wall Street Journal had an article recently called In Financial Crisis, Metaphors Fly Like Bad Analogies. I guess that when times are uncertain and situations are complex, people turn to methaphors (you know instead of saying someone is fast you say "he's a deer"). Maybe this comforts us. The invisible hand is a metaphor. But if you read this article judge for yourself if these new ones work as well as the one that Adam Smith used.

Here is an exerpt from the article, a quote from the famous investor, Warren Buffett

""Unfortunately, the economy, it's a little like a bathtub," billionaire investor Warren Buffett, the Oracle of Omaha, told CNBC this week, explaining why the average American suffers when investment banks collapse. "You can't have cold water in the front and hot water in the back.""

Other metaphors invoked in the article include meltdowns, hurricanes and even Little Orphan Annie!

Is Barack Obama "Too University Of Chicago?"

That was a question asked on MSNBC’s Hardball by Chris Matthews earlier this year. I guess that since Obama taught law at the University Of Chicago and he liked talking to all the other professors there (including economists), that makes him some kind of egghead. Since I got my BA at U of C, there may be some truth to this.

So the University Of Chicago alumni magazine had an article about this. You can read it at

Elemental Obama

Here are a couple of exerpts:

"One thing is unmistakable, though: the University of Chicago is where he has drawn many crucial members of his political team. Graduate School of Business professor Austan Goolsbee is a key economic strategist."

"Many of Obama’s economic ideas, however, can be traced to Chicago. Cass Sunstein, who’s starting a new job at Harvard University this fall (he’ll maintain a visiting position at Chicago), makes the case: “Though he’s not a dogmatic follower of Milton Friedman, Obama is someone who is fully appreciative of the virtues of markets and how regulation can be counterproductive.” Sunstein points to specific proposals that originated with Chicago thinkers, including resonances from Nudge, the 2008 book on “libertarian paternalism” that Sunstein coauthored with GSB economist Richard Thaler. On health care: “It’s noteworthy,” Sunstein says, “that his approach is not a mandate; he didn’t want to coerce any adult to buy health insurance.” On the housing mortgage crisis: “His policies are oriented toward transparency and disclosure—measures that are market-improving rather than market-eliminating.” Climate change: “His solution is a market system that allows trading in greenhouse-gas emissions rights, and an auction to buy those rights.” Many Chicago economists, however, find more merit in McCain’s economic plan."

More On The Financial Crisis

Normally I would have waited until Thursday or Friday to post, but there is alot going on.

This link at Yahoo Finance has a good basic set of questions and answers about what is going on and is pretty clear.

The Wall Street Bailout Plan, Explained.

There is also more at Freakonomics (links below). The first one is about a letter to Congress signed by over 100 economists, urging Congress to be careful and deliberate on whatever they do. Then Steven Levitt questions how the government can make a profit buying these assets if the private sector does not want them. The only thing I can guess is that by buying these mortgage assets and restoring things to normal and restoring confidence, their prices will go back up and the government will make a profit. The alternative is not doing anything and see the financial system shut down (at least that is what Fed chair Bernanke and Treasury secretary Paulson say). But no one has stated how much doing nothing will cost while we know the cost of the bailout is $700 billion.

Economists on the Bailout

Bargain Prices?

It Pays To Be A Male Chauvinist Pig

Here is a link to the news article

Sexist Men Earn More Money: Study

The full study is at

Click here for the full study.

Below are exerpts from the news story.

"According to a new study, published by the Journal of Applied Psychology, men who hold traditional views of women earn more than men with more egalitarian views — a lot more.

Researchers looked at this data as a predictor of earnings and found that men who said they had more traditional gender role attitudes made on average $11,930 more annually than men in comparable jobs who had less traditional attitudes.

If the data controls for variables such as occupation, location, education, religion and hours worked, how can the gap be explained? The study did not research this specifically, but Judge says one possible explanation is salary negotiation.

"Men who see themselves as the primary wage earner, who tend to identify themselves as the wage earner in the family, they may be particularly aggressive in how they negotiate," said Judge. He added the reverse may be true for women with traditional views on gender."

Moral Hazard, More News Links On The Financial Situation

These are all from the Wall Street Journal and give a good overview of what is happening.

Shock Forced Paulson's Hand

Stopping the Panic

Government Bailouts: A U.S. Tradition Dating to Hamilton

But watch out for Moral Hazard and the Housing Crisis

Moral Hazard might be the culprit in all of this.

Freakonomics Has A Good Explanation Of The Financial Crisis

I usually don't just pass on what I saw at other blogs, especially since I have links to some goods ones. But this is such a big story that I thought it makes sense now. University of Chicago professors Doug Diamond and Anil Kashyap were the guest bloggers. The post was called

Diamond and Kashyap on the Recent Financial Upheavals.

Here some exerptss:

"The Fannie and Freddie situation was a result of their unique roles in the economy. They had been set up to support the housing market. They helped guarantee mortgages (provided they met certain standards), and were able to fund these guarantees by issuing their own debt, which was in turn tacitly backed by the government. The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners, but the Fed and others have argued that this hardly occurred. Instead, they appear to have used the funding advantage to rack up huge profits and squeeze the private sector out of the “conforming” mortgage market. Regardless, many firms and foreign governments considered the debt of Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly.

Fannie and Freddie were weakly supervised and strayed from the core mission. They began using their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards. Over the last year, it became clear that their thin capital was not enough to cover the losses on these subprime mortgages. The massive amount of diffusely held debt would have caused collapses everywhere if it was defaulted upon; so the Treasury announced that it would explicitly guarantee the debt."

Robert Samuelson of Newsweek argues that this is all the result of what he calls
The Homeownership Obsession.

Here is an exerpt from his article:

"The real lessons of the housing crisis have gotten lost. It's routinely portrayed as the financial system run amok; the housing market became a casino. The remedy, we're told, is to enact rules that prevent a repetition. All this is partly true. But it ignores a larger truth: Our infatuation with homeownership, embedded in dozens of government policies, has turned housing -- once a justifiable symbol of the American dream -- into something of a national nightmare.

As a society, we're overinvesting in real estate. We build too many McMansions. They use too much energy, and their carrying costs, including mortgage payments, absorb too much of Americans' incomes. We think everyone should become a homeowner, when many families can't or shouldn't. The result is to encourage lending to weak borrowers who are likely to default. "

Fewer Want To Become U.S. Citizens Due To Higher Price

This may be a good example of the law of demand. Both of my macro (ECON 2301) sections recently read the chapter on immigration in the book The Economics of Macroissues. One of the things that chapter deals with are the costs and benefits immigrants face. My guess is that only one cost or benefit has changed significantly recently, the citizenship fees.

"Following a 69 percent increase last summer in citizenship fees, about 281,000 immigrants have applied to become U.S. citizens in the first half of 2008 — less than half the number of applicants in the same period last year, according to the U.S. Citizenship and Immigration Services."

To read more, go to:

Citizenship filings decline after fee hike

What if we legalized all drugs?

That is the title of an article from MSN. Here is the link: What if we legalized all drugs?. (Hat Tip: Cliff Perez, a student in one of my classes).

The article does a good job of presenting different views. The research of some economists is mentioned. We discussed issues like this in my ECON 1301 class this past week. One objection I do have to the article is that it suggests that if we legalized drugs the tax revenue the government would collect would be a benefit. No, a tax is just a transfer. Citizens have less money and the government has more. Now if the benefits from the programs those taxes fund outweigh the costs, that is good. But that may not be true for everything government does.

I was interviewed last year for the Ranger (the San Antonio College newspaper) on this issue. Here is the link: Legalization needs analysis, economics professor says. Kinky Friedman, a candidate for Governor, had suggested legalizing marijuana. I talked about the issues that needed to be addressed on that. WARNING: when you click on this link, you may see a picture of me!

Government Employees Trade Favors To The Oil Industry For Sex (and they got an ethics award from the government)

"the Interior Department agency that collects oil and gas royalties has been caught up in a wide-ranging ethics scandal - including allegations of financial self-dealing, accepting gifts from energy companies, cocaine use and sexual misconduct.

In three reports delivered to Congress on Wednesday, the department's inspector general, Earl Devaney, found wrongdoing by a dozen current and former employees of the Minerals Management Service, which collects about $10 billion in royalties annually and is one of the government's largest sources of revenue other than taxes."

That is from: Sex, drug use and graft alleged in U.S. Interior Department

(see below for the link about their ethics award)

The article also says:

"The report alleges that eight officials in the royalty program accepted gifts from energy companies whose value exceeded limits set by ethics rules. These included golf and ski outings; meals and drinks; and tickets to a Toby Keith concert, a Houston Texans football game and a Colorado Rockies baseball game.

The investigation also concluded that several of the officials "frequently consumed alcohol at industry functions, had used cocaine and marijuana, and had sexual relationships with oil and gas company representatives.""

Here is another article on this: Federal oil lease employees had sex with industry reps

In my 1301 class, we just read a chapter called "Sex, Booze and Drugs" (from the book The Economics of Public Issues), so this is a timely story!

But this story points out two important economic concepts. One is The capture theory of regulation. The idea is that although the government agencies are supposed to make sure companies follow the rules to benefit society, those companies can influence or control the regulators. They do this by lobbying (and giving perks like in these artilces). Also, the industry has the interest and incentive to influence these agencies while the rest of us are too busy to keep tabs on it. And sometimes the regulators are former industry employees.

The other concept it illustrates is The law of unintended consequences. We may have well-meaning laws that should benefit society but people react to those laws and change their behavior sometimes in unexpected and undesirable ways. We see this here in these articles. Another example would be rent controls. If you legally keep down the price of rent, landlords have less incentive to keep their buildings or construct new apartments. So the rental market (and renters) suffer even though that was not the intended result.

Days Before Scandal, Interior Got Ethics Award

America's Most Affordable Places to Retire

Are they kidding? As soon as more people start moving to these places, costs go up and they won't be so affordable any more. I posted something like this recently and discussed an economic concept called "the indifference principle." That was about affordable housing markets in general. Now these places for retirees might specialize in goods and services that retirees like, so maybe the older folks should move there. But this is like saying that if you like to surf, move to California and then saying "here are the cheapest places for surfers." They won't stay cheap for long.

I was not planning to post today but this came up. My next planned post was tomorrow and it will be something sexy.

America's Most Affordable Places to Retire

Economists Discover That Watching Television Is Not All Bad

This was recently reported in the Wall Street Journal. Here is the link:

A New View On TV

One of the big issues is what you stop doing or what you do less of when you watch TV. If it replaces something "bad," then TV can have benefits. For example:

"The economists found that television was especially positive for children in households where English wasn't the primary language and parents' education level was lower. "We don't exactly know why that is, but a plausible interpretation is that the effect of television on cognitive development depends on what other kinds of activity television is substituting for," says Mr. Shapiro, 28.

Growing up in the 1950s, Sonia Manzano, who plays Maria on "Sesame Street," was part of the first generation of children who watched television. Born in the South Bronx to Spanish-speaking Puerto Rican parents, she says that television "gave me a view of the world -- it gave me sort of a sense of what it was to be an American and what that was about.""

This describes the methods:

"The variation Mr. Gentzkow and Mr. Shapiro exploited was the timing of the introduction of TV into different cities. Television began taking off in the U.S. in 1946, after a wartime ban on TV production was lifted. But the Federal Communications Commission stopped granting new commercial television licenses from September 1948 to April 1952 while it made changes in allocating broadcast spectrum. There was a long lag between when some cities got television and when others did.

The economists then looked at results of a survey of 800 U.S. schools that administered tests to 346,662 sixth-grade, ninth-grade and 12th-grade students in 1965. Their finding: Adjusting for differences in household income, parents' educational background and other factors, children who lived in cities that gave them more exposure to television in early childhood performed better on the tests than those with less exposure."