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    Who Do You Trust?

    Aug 5 • Businesses, Economic Debates, Economic History, Economic Thinkers, Government, Macroeconomic Measurement, Thinking Economically • 199 Views

    Moderated by late show host Johnny Carson, there once was a TV show called “Who Do You Trust?” Initially aired during 1957, the quiz show had husbands (interesting–1950s version would have only husbands making the decision) deciding whether they or their wives would answer questions.

    With the current debate about the impact of stimulus spending, I thought of the show’s title. Based on “who” we trust, many of us select who we want to answer, “Is the stimulus working?”

    For those who trust the Keynesian outlook, Moody’s Mark Zandi and Princeton economist Alan Blinder provide the right answers. In a recent paper, Zandi and Blinder conclude that the financial bailout had the greatest impact. Saying that the Fed’s asset purchases and bank stress tests were critical for the current economic improvement, they point out that stimulus spending alone would not have sufficed. However, they say that the complementary character of both sets of policies tended “to reinforce each other.”

    By contrast, those who question the impact of government spending will gravitate toward Stanford economist John Taylor and Harvard’s H. Gregory Mankiw. Commenting on the Blinder/Zandi paper, Dr. Taylor says that they use an old Keynesian model for hypothetical data input. Never, he says, do they use current data on what actually happened–just what was supposed to have occurred.

    There is lots more to read on both sides. For the Keynesians’ view, you might want to look at what the Councll of Economic Advisors and Paul Krugman have said. To read more of the market dominated perspective, Arnold Kling, Tyler Cowen, and Russell Roberts have noted their opinions. 

    The Economic Lesson

    To simplify our market economy, economists like to draw a circular flow model with 2 concentric circles. As shown here, essentially, resources and goods and services move around the outer circle while dollars occupy the inner circle.

    The key, though, is that the Keynesians believe that during a recession we have to draw a huge government rectangle to help the other two. By contrast, those who believe the market should function with little outside help will depict the circular flow model with minimal governmental influence.

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    Social Insecurity: Part 2

    Aug 4 • Government, Macroeconomic Measurement • 224 Views

    The average social security check received by a retired grandma is $1169. Multiply that by 35 million recipients, add to it other social security obligations, and this year, you have more money leaving than entering the social security “bank account”.

    Next year everything should be okay but not for long. The crisis starts in 2016 when the system will be swamped by baby boomers. What should be done? The Congressional Budget Office has suggested 5 categories of solutions: 1) Change taxes. 2) Change benefits. 3) Pay more to low income earners. 4) Raise the retirement age further. 5) Reduce cost-of-living adjustments.

    The Economic Lesson

    Hoping to give “ownership” to all of us, the creators of Social Security designed a universal pay-as-you-go program in 1935. When we “pay-as-you-go”, we are giving today’s workers payroll tax dollars to today’s social security recipients.

    Looking at the potential problems, should social security remain a universal program with common “ownership?”

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    Success

    Aug 3 • Innovation, Labor, Thinking Economically • 254 Views

    In a  wonderful NYC Radio Lab podcast about success, Malcolm Gladwell also explains why genius is closely related to love.

    Recorded at the  92nd Street Y in NYC, writer Malcolm Gladwell and Radio Lab host Robert Shulwich preceded their conclusions about genius with reasons that people are successful. Gladwell began with a list of birth dates for Canadian hockey players. Pointing out that 17 of a group of 25 were born between January and April, he said the reason was the cut off date for children’s hockey leagues. With a January 1st cut off date, the boys who just missed the deadline were the biggest and oldest in the next class. The result? They were the best, got reinforced as the best, and excelled at hockey.

    Similarly fortuitous, Microsoft co-founder Bill Gates attended a private school whose students were given the opportunity to use a computer long before before PCs and Apples existed. As a result, he knew when mainframe computer time was available in the middle of the night at a university and, as a teenager, regularly snuck out of his home to use it.

    And this takes us to love. Not only did Bill Gates have an opportunity but he loved what he was doing. According to Malcolm Gladwell, most of us are successful and even rise to the genius level because of more than brains. It often is a combination of luck, talent, and love.

    Malcolm Gladwell also looked at success in a 2008 New Yorker Magazine article. Commenting on football players, teachers, and financial advisors, he discusses how tough it is to predict success. People can earn the right degrees, function well during interviews, and perform optimally in similar situations. Still, selecting the person who will be truly successful in a job happens less frequently than we might expect.

    The Economic Lesson

    In our mixed economy, with the market and government both affecting production and distribution, success is nurtured through a variety of incentives. Starting with demand and supply, many of the the market’s incentives focus on self-interest. Through taxes, spending, and regulatory policy, government can target incentives more specifically to shape our behavior. Consequently, aren’t the market and government providing a definition of success?

    And then, we can return to Malcolm Gladwell with his recipe for achieving success and his observation that success is tough to predict.

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    Wind Farms

    Aug 2 • Businesses, Environment, Thinking Economically • 261 Views

    What if peak wind for your wind farm equals peak demand? Good? Not necessarily. The key is timing.

    According to a NY Times article, certain wind installations have to “dump energy late at night…” because there is no demand for power at that hour. How to avoid wasting energy? Batteries are one solution. 

    Hearing about batteries for wind installations reminded me of ethanol and locovores.  Ethanol fuel can sound ideal. However a closer look at the entire ethanol production process in an MIT study reveals a close call for diminishing GHG (greenhouse gases). Similarly, buying local produce will lower transport emissions. However, what if the type of food we eat has a significantly greater impact on GHG?

    You see where this is going. It takes us to cost and benefit. Are wind farm batteries a cost or a benefit? 

    The Economic Lesson

    As economists, we can assess the success of wind farms (or ethanol or buying local produce) by thinking at the margin. For each extra kilowatt hour of electricity generated by wind turbines, we should look at cost and benefit. Then, when cost equals and moves onward to exceed benefit, we should stop production.

    The problem, though, is how to define cost and benefit. In Eastern Oregon, residents are complaining about wind farm noise. Does cost include that noise? Turbine transport? Battery production? Are new jobs a benefit? Do we want to learn more about wind energy by using it? A cost/benefit list could be endless. The bottom line, though, remains cost/benefit analysis. Let’s evaluate green projects at the margin so that we know they are truly effective. 

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  • Government Rules

    Aug 1 • Businesses, Economic Debates, Households, International Trade and Finance, Money and Monetary Policy, Regulation, Thinking Economically • 295 Views

    What is a “systemically important” financial institution? 2300 pages of financial regulation do not specifically tell us. Instead,regulatory agencies will have to decide. One study indicated that implementing new Dodd-Frank financial legislation will require details for more than 243 new financial rules.

    Already, firms have begun responding. Legions of lobbyists are trying to influence agency decisions. Concerned about liability for an inaccurate credit rating, Moody’s and other ratings agencies have asked financial firms not to use their data when filing with the SEC even if a mortgage related security, for example, is required by law to have a rating. Jamie Dimon, Chairman and CEO of JPMorgan Chase responded to regulatory changes with, “If you’re a restaurant and you can’t charge for the soda, you’re going to charge more for the burger.” Email has also been affected with Goldman Sachs prohibiting all profanities.

    The Economic Lesson

    In a wonderful Teaching Company course of 36 half hour lectures, “Thinking About Capitalism”, from Professor Jerry Z. Muller, the never ending debate about the validity of profit seeking self-interested behavior consistently resurfaces. As I heard a chronological sequence of economic thought, starting with early Christianity and continuing with such thinkers as Edmund Burke, Voltaire, Henri Rousseau, Alexander Hamilton, and Karl Marx, back and forth the argument went between the costs and benefits of the market. With new financial regulation, isn’t the pendulum swinging toward constraining the market’s self-interest?

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