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    Austerity and Harry Truman

    Dec 31 • Behavioral Economics, Businesses, Economic Debates, Economic History, Economic Thinkers, Government, Households, International Trade and Finance, Labor, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 447 Views

    What are people saying about austerity, the 2010 word of the year?

    According to Dr. Econ at the San Francisco Federal Reserve, households are demonstrating austerity by saving more and borrowing less. On the one hand, living within our means is good. But on the other, called the paradox of thrift, when everyone spends less, the economy tends to contract.

    Characterized by small businesses borrowing less, banks lending less, and multinationals hiring abroad rather than at home, austerity helped businesses buoy profits. On the other hand, though, we need the Keynesian “animal spirits”  that are starting to surface for economic growth and less joblessness.

    Finally, just mention government borrowing and the word austerity pops up. Greece needs to cut back. Ireland needs to cut back. German austerity should be copied. As for the U.S., though, austerity was synonymous with debate. On the one hand, continuing to increase the deficit can mean unmanageable debt and future inflation. But on the other hand, cutting back too much, too soon, could reverse our economic recovery.

    The Economic Lesson

    Our last economic lesson of 2010 returns us to Harry Truman saying, “Give me a one-handed economist. All my economists say, “On the one hand…on the other…”

     

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    Women and Competition

    Dec 30 • Developing Economies, Economic Debates, Gender Issues, Labor, Thinking Economically • 426 Views

    Just a comment today on a study about females and competition. Comparing a matrilineal society in India to a patriarchal society in Tanzania, a 2007 study revealed a huge difference in how much women compete.

    These quotes are wonderfully representative:

    From a Khasi man in India where women dominate:

    “We are sick of playing the roles of breeding bulls and baby-sitters.”

    From a Maasai woman in Tanzania where men dominate:

    “Men treat us like donkeys.”

    Empirically, the study concluded that Maasai men and Khasi women were more likely to compete.

    The Economic Lesson

    Other studies we have cited focus on the conflict between the workplace and the family as a primary source of the gender gap in salary and promotion. Similarly, this 2010 paper for OECD nations sums up gender gap data in traditional categories. Now, we should add the culturally nurtured disinclination to compete as another factor that determines a woman’s success at work.  


     

     

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    Different Kinds of Capitalism

    Dec 29 • Developing Economies, Economic Debates, Economic History, Economic Thinkers, International Trade and Finance, Regulation • 484 Views

    How much does Chinese capitalism resemble U.S. capitalism?

    In a New Yorker article, journalist John Cassidy suggests that China’s combination of authoritarianism and capitalism is somewhat similar to our own history. Reminding us of our government’s economic intervention during the past several centuries, Cassidy cites free trade, Pentagon spending, and the bailout. In 1791, for example, Alexander Hamilton’s “Report on the Subject of Manufactures” recommended protective tariffs and subsidies to encourage domestic industry. As for the bailout, you know about the 2009 Recovery Act and TARP. Cassidy even suggests that “market authoritarianism” might be a transitional state for the Chinese and Russian economies, with democracy not that far behind. There is a good New Yorker podcast on this article.

    I have difficulty agreeing with John Cassidy. Yes, we might mislead ourselves if we claim the past was entirely laissez-faire. However, the Heritage Foundation/WSJ’s Index of Economic Freedom and the World Bank’s Doing Business index reveal a huge divide between contemporary China and where a past U.S would have ranked. 

    Your opinion?

    The Economic Lesson

    Ever since Hamilton and Jefferson, we have been debating more or less central government. Always though, the decision has not been one or the other. We have had to decide how much. You might look back on this post about David Brooks and Paul Krugman for a perfect recent example of the debate. Also, this Hayek/Keynes rap is excellent.

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    Regulatory “Pay-Go”

    Dec 28 • Behavioral Economics, Regulation, Thinking Economically • 436 Views

    Too much regulation? Senator Mark Warner’s proposed legislation is an interesting approach.

    Concerned that regulation is “stifling fresh investment and discouraging innovation,” Senator Mark Warner says the incentives have to change. Currently, when federal agencies create new rules, their power expands, their budget grows, and their work force balloons. Burgeoning regulation, he says, pushed us down from #4 to #5 on the World Bank’s “Ease of Doing Business” rankings.

    Instead, Warner suggests that agencies create “a credible, quantifiable estimate of the economic impact” for every regulation. Calling it “regulatory pay-go,” his proposed legislation would require eliminating old rules when new ones are added. The net result? The regulatory impact remains constant.

    It sounds good to me. Your opinion?

    The Economic Lesson

    Pay-go refers to pay-as-you-go, a legislative approach that involves budgetary neutrality. New legislation is characterized as pay-as-you-go when it replaces existing spending instead of adding to the federal budget. Social Security is called a pay-as-you-go program because the money collected from current workers is paid to current Social Security recipients.

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    Grade Bubbles

    Dec 27 • Economic Debates, Economic History, Macroeconomic Measurement, Thinking Economically • 488 Views

    At the University of North Carolina (UNC), the average G.P.A. was 2.49 in 1967 and 3.21 in 2008. Are we 25% smarter?

    In a 2003 Washington Post article, one of the nation’s grade inflation experts, Stuart Rojstaczer, then a Duke professor, explained his grading considerations. Realizing if he gave “the C’s some students deserve, my class will suffer from declining enrollments…low enrollments are taken as a sign of poor-quality instruction. I don’t have any interest in being known as a failure.” Consequently, his grades ranged from A to B-. They reflected the trend toward everyone getting A’s “except for the occasional self-destructive student who doesn’t hand in assignments or take exams–if exams are given.”

    At UNC, concern has developed about recognizing outstanding scholarship. If everyone gets an A, then who is outstanding? The UNC solution, currently being considered by a committee, is to publish additional information such as median grades in specific courses. A controversial policy at Princeton has been to limit A’s to 35% of the student population.

    At certain law schools, though, the opposite is unfolding. At Loyola Law School in L.A., all averages have moved up by .333. Starting with their fall, 2008 classes, NYU implemented a new (higher) grading curve that included an A+. “We believe that the new curve will more accurately represent the achievements of our students to the outside world.”

    The Economic Lesson

    As economists, the price system first comes to mind. Prices are signals that convey information. If we compare grade inflation to price inflation, we can say that high grades, when given to everyone, convey increasingly less information about student achievement. When prices convey no information, as in Zimbabwe, people turn to alternative currencies.

    And yet, again, as economists, if we think of incentives, a teacher does not want to be the only one giving lower grades because of diminished enrollment. A school does not want to be the only institution giving lower grades because it might harm students’ employment opportunities.

    So, as was true during pre Sherman Anti-trust Act era for corporations, should schools together agree to lower grades? But then, will we see the results of corporate collusion collapsing when firms deviate from the “rules’ that cartels try to establish?

    Your opinion?

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