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    Good and Bad Capitalism

    Feb 22 • Demand, Supply, and Markets, Developing Economies, Innovation, International Trade and Finance, Macroeconomic Measurement • 454 Views

    If you are trying to figure out the economics of the Middle East, I recommend starting with Good Capitalism, Bad Capitalism. One of the book’s 4 different kinds of capitalism, oligarchic capitalism, provides a good “slot” for grouping most Arab nations. (You can actually download the whole book here.  It is excellent.)

    Oligarchic capitalism is characterized by government policies that perpetuate the wealth and power of a few. As you probably guessed, the authors say that most nations in the Arabic Middle East practice oligarchic capitalism. The results? Inequality, corruption, sluggish growth, little concern about economic growth. The World Bank’s ease of “Doing Business” index confirms the complexity of starting and expanding businesses in most economies with oligarchic capitalism. Interesting–Saudi Arabia appears to be an exception.

    Thinking about oligarchic capitalism, it is much easier to understand the facts that John Cassidy presents in his New Yorker article, “Prophet Motive.” After looking at the economic impact of a Muslim past, the article concludes that even with new leadership, the institutions necessary for a vibrant economy, one that we might call entrepreneurial capitalism, could take years to develop.

    The Economic Lesson

    In Good Capitalism, Bad Capitalism, capitalism is defined as recognizing private ownership of property. Then, though, the authors point out that so broad a definition necessitates dividing capitalistic countries into 4 categories: 1) state-guided, 2) oligarchic, 3) big-firm, 4) entrepreneurial or 5) a blend. From there, they tell us that entrepreneurial capitalism is the premier growth engine. 

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    Paying Less For a House

    Feb 21 • Demand, Supply, and Markets, Economic Debates, Government, Households, Money and Monetary Policy • 420 Views

    In an interesting Politico opinion column, journalist Michael Kinsley wonders why everyone seems to assume that climbing home prices are good. He points out that most people are happy when the prices of essentials like gas go down. So why the opposite for homes? 

    After all, the young couple first buying a home wants a low price. The family that is trading up might not want their new home to be priced higher. Only, he says, the retiring couple that intends to downsize or leave the market entirely clearly benefits from higher prices.

    Yes, he admits he is oversimplifying. Still, he asks why the media uses pejorative terms for declining prices and affirming adjectives and verbs for rising prices.

    Your opinion?

    The Economic Lesson

    Certain economists might say that the market is the solution and that prices have to fall until the demand side of the market has enough to buy. Other economists, worried about foreclosures, diminished perceptions of wealth, and higher home prices fueling economic recovery believe that government should subsidize the housing market and/or keep mortgage rates low.

    You can go to an excellent S&P/Case-Shiller graph here to see where home prices have gone between 1988 and 2010.

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    A Debt Tour

    Feb 20 • Economic History, Financial Markets, Government, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy • 456 Views

    Calling it “financial disaster travel journalism,” author Michael Lewis (The Blind Side and The Big Short) takes us to Iceland, Ireland, and Greece in 3 Vanity Fair articles that are wonderful.

    Comparing Iceland to Ireland, he tells us, “But while Icelandic males used foreign money to conquer foreign places–trophy companies in Britain, chunks of Scandinavia–the Irish male used foreign money to conquer Ireland.” Meanwhile, the Greek government was just spending, hiring, paying salaries and borrowing.

    His Iceland stories include a fisherman who says, “I think it is easier to take someone in the fishing industry and teach him about currency trading than to take someone from the banking industry and teach them how to fish.”

    For Ireland Lewis asks why, “For the first time in history, people and money longed to get into Ireland rather than out of it.”

    And for Greece, the debt story took him to a monastery.

    Summarizing it all in a Planet Money podcast, Lewis says that in Greece, “the country sunk the banks” while in Iceland and Ireland, the banks “sunk” the country.

    The next stop for his financial disaster journey is California.

    The Economic Lesson

    Sovereign debt is the money owed or guaranteed by a country to investors who purchase its bonds. It is just another name for government debt. 

    Alexander Hamilton believed that sovereign debt, as long as it was manageable, was beneficial. Reading about his plan to fund and refinance the United States’ revolutionary war debt reveals his commitment to establishing our good credit. His approach was varied, including issuing new bonds to pay for those outstanding and servicing the interest promptly on the foreign debt. It worked. Even those in Holland, then the financial capital of the world, displayed confidence in our public credit. Adhering to the Hamiltonian philosophy, the United States has never defaulted on its debt.

    For Portugal, Ireland, Italy, and Greece, investor worries about default lead to the creation of a euro zone emergency fund.


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  • Prices convey information.

    Giving Life a Price

    Feb 19 • Demand, Supply, and Markets, Regulation, Thinking Economically • 432 Views

    The people at OSHA (Occupational Safety and Health Administration) have been watching “Spider-Man.” Because of actors’ injuries during performances, the federal agency that monitors workplace safety went to Broadway.

    Should they?

    It is all about benefit and cost. Frequently, though, benefit and cost are tough to measure. For “Spider-Man,” on the benefit side, actors and audiences will be safer. Maybe the spillover is more attention to safety at other performances. Maybe an actor’s mother will not worry. Perhaps future medical expenses will be less. And perhaps they will be saving a life. On the cost side, there is the expense of running OSHA. For “Spider-Man’s” producers, compliance could involve the dollars spent to revise procedures. Also, the cost takes us to the intangibles like a less entertaining performance.

    You might want to look here for comments from Conan O’Brien and Steve Martin about “Spider-Man’s” problems.

    The Economic Lesson

    Because many regulations are supposed to save lives, we have to compare the cost of implementing them to the good they will do. We have to place a money value on both sides of the equation even if one side is a life. Then, by knowing the value of statistical life (VSL), we can assess the opportunity cost of saving a life.

    What is a life is worth? One expert says $7 to $12 million.

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  • Uncertainty can slow economic growth.

    Watson Wins

    Feb 18 • Innovation, Macroeconomic Measurement • 387 Views

    Playing against Jeopardy champs Ken Jennings and Brad Rutter, Watson, the IBM computer won.

    Imagine three podiums. One is labeled Ken, the middle one Watson, and the third one, Brad. IBM assured everyone that Watson had no internet access and all three players had to use their mechanical buzzers. Host Alex Trebek ran the game as he always had. Categories? For this round the contestants could choose from: Literary Character APB, Beatles Names, Olympic Oddities, Name the Decade, Final Frontiers, Alternate Meanings.

    The game soon revealed Watson’s strengths:

    Memory: Having “gobbled” up information from books, movie scripts, encyclopedias, dictionaries, countless sources, Watson knew it all and won’t forget anything.

    Reaction time: Watson was fast. (And he was programmed to buzz only when he had the answer while the humans sometimes buzzed just before they thought of it.)

    Decision-making: With wagering a part of the game, Watson had to decide what to bet. He had sufficient information about the facts and past games to know how much would be appropriate.

    You might enjoy this TED talk about Watson.

    The Economic Lesson

    With countless business, medical, and consumer applications where Watson’s skills are valuable, “he” can affect all of us.  Physicians, for example, could consult Watson for speedy medical diagnoses that could include a “confidence” number indicating whether the statistics are convincing.

    As economists, Watson takes us to spillovers and positive externalities.  Originally involving 2 entities, Watson’s impact will ripple outward to benefit many.

    So really, everyone, not just Watson, has won.


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