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    China’s Drivers

    Jul 20 • Demand, Supply, and Markets, Developing Economies, International Trade and Finance • 356 Views

    Peter Hessler’s Country Driving A Journey Through China From Farm To Factory takes the reader to China’s roads, villages, and factories. Having just completed the first half of the book, I wanted to share random fascinating facts that relate to their transportation infrastructure. 

    1. Many provincial roads in China do not have a name. When Hessler asked how you know where you are, he was told that sometimes there are signs naming a nearby town. Otherwise, you just ask.
    2. “Chaff crops” such as millet, wheat, and sorghum are placed in the middle of roads for drivers to “thresh” them. He called it a “drive-through harvest”.
    3. With considerable road building and a growing number of drivers, national law mandates every Chinese driver to takes 58 hours of driving practice through a state approved course.
    4. Until 1945 when they switched (because of a US Army suggestion) the Chinese drove on the left side of the road.
    5. Although the legal driving age is 18, most people do not drive until their 30s because they cannot afford it.
    6. Price controls keep gas cheap. In 2002, across China, the price was the equivalent of $1.20 a gallon.
    7. “Gas station girls,” in their teens, who left small villages, were the attendants who pumped gas in western China.
    8. In Beijing, people can sell their cars in huge lots where they paid 25 cents an hour in exchange for being able to solicit buyers. A typical sign might have read “2003 model, one owner. All registration legal.” One women was observed saying, “December, 1998″ when asked about her car’s age.
    9. Xiali is a popular Chinese carmaker.

    The Economic Lesson

    Within China and between China and its neighbors, China’s transportation infrastructure is expanding geometrically. Comparable in some ways to the U.S. during the 19th century, China’s new roads will facilitate specialization, urbanization, and efficiency.

    Margaret Thatcher once said, “You and I travel by rail and road. Economists travel by infrastructure.



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    Economic Growth

    Jul 19 • Economic Debates, Economic Thinkers, Government, Macroeconomic Measurement • 452 Views

    Did someone once say, where you look determines what you see? For evaluating the impact of federal spending, perhaps that is the problem.

    Some economists emphasize the connection between federal spending and the change in GDP (national production). Mathematically, they say, “Look, we spend one dollar and then national production increases by $2. The reason is the new spending that was created.” Government could build a road, then workers are paid, they buy computers and cars, still more workers receive additional wages, which they spend, and so on. The result would be the multiplied impact of the first dollar spent by government–the goal of the 2009 stimulus package. One economist, during Senate testimony, said that the type of spending or tax cut determines the change in GDP. Citing his “Bang For the Buck Chart,” he said that the ripple of spending during one year is especially magnified when government extends unemployment benefits.

    A trio of Harvard researchers looked at spending through a totally different lens. They focused on the connection between congressional spending and business investment. Looking at congressional districts to which powerful members of congress directed federal dollars, they found that businesses responded by doing less. Why? They hypothesized that government took over what business would have done, government created uncertainty, and government attracted employees.

    As you might have predicted, the first economist recommended more government spending while the second group had the opposite conclusion.

    The Economic Lesson

    Explained by economist John Maynard Keynes during the 1930s, the government spending multiplier is a controversial concept. Believed by some and condemned by others, it contends that government spending can “prime the pump” and stimulate the private sector when a nation is experiencing an economic contraction.

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    Figuring Out Financial Regulation

    Jul 18 • Businesses, Economic Debates, Economic History, Financial Markets, Regulation • 328 Views

    Words cannot describe the 2300 pages of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In a way, because it says so much, it tells us very little. Still though, after looking at the bill and several news summaries, I wanted to share some main ideas.

    At first, “risk” and “protection” were the two words that came to mind. Risk: Lawmakers want to manage the impact of the risks taken by financial institutions. Protection: Lawmakers hope to protect consumers from making unwise financial decisions.  

    Then, I discovered a second approach that made sense to me at WSJ.com where they described the basics of the bill through four categories: 

    1) Government: Its powers will grow in order to preserve financial stability. Starting with the Federal Reserve, countless government regulatory agencies will be transformed.

    2) Banks: Financial firms will experience new restrictions on trading different types of complex securities.

    3) Consumers: A new bureau to protect consumers will be established. Its responsibilities will impact a plethora of financial activities. 

    4) Investors: Different investing groups such as hedge funds, people who give investment advice, insurance companies, and those who create securities packages will have new constraints.

    Essentially then we have four groups responding to a Congress that hopes to control financial risk and expand financial protection. With 2300 pages of text, mathematically, the ways in which the four groups can respond and then interact create countless permutations. 

    The Economic Lesson

    Passed in 1932 and 1933, the Glass-Steagall Act separated investment and commercial banking, changed the structure of the Federal Reserve, and created the FDIC. Although it was formally repealed in 1999, regulators permitted financial institutions to violate its spirit beforehand. When I read the act, I was surprised to see language that was as tough to follow as the current financial reform bill. However, as 34 pages of legislation, it had fewer variables and appeared to cover many of the necessary regulatory details.  


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    Blowing Bubbles

    Jul 17 • Economic History, Financial Markets • 368 Views

    In The Big Short, Michael Lewis explains the subprime bubble mentality through a quote about CNBC media coverage. “…they weren’t in touch with reality anymore. If something negative happened, they’d spin it positive. If something positive happened, they’d blow it out of proportion..” A page turner that clearly and capitvatingly describes the subprime believers and doubters on Wall Street, The Big Short is a perfect story of a bubble.

    In addition to the subprime bubble and the tech bubble, there once was a bowling bubble. In 1936, Gottfried Schmidt invented the first automatic pinsetter. With machines replacing pin boys, after World War II, bowling boomed and Wall Street responded. As a young Charles Schwab said, “Compute it out–180 million people times two hours per week, for 52 weeks. That’s a lot of bowling.” The result was soaring stock prices in firms such as AMF and Brunswick and the bowling bubble. By 1963, though, following the path of all bubbles, the market reversed and prices plunged to 20% of their all time highs.

    In The Wisdom of Crowds, New Yorker columnist James Surowiecki says that crowds can usually make decisions that are more accurate than individuals. In markets, crowds accurately price sodas and broccoli and tennis lessons. Studies demonstrate that crowds’ guesses cluster around the true number of jelly beans in those huge glass jugs. Similarly, bubbles are an example of crowd behavior. Here though, we have “collective decision-making gone wrong”.

    The Economic Lesson

    Usually investors have “long” positions. They buy a stock (ownership in a company), wait for its price to rise (hopefully), and then sell it.

    Selling before they buy, short sellers want prices to decline. How can you sell something you do not own?  Short sellers borrow a stock or some other type of security and then they sell it. Weeks, months, or years later, they buy the security and return it to the owner from whom they borrowed it. For example, assume you borrow something and sell it for $10; then, weeks later you buy something identical for $5 and return it to the lender. You have made $5.

    In The Big Short, a very small number of people, rather like the boy in “The Emperor’s New Clothes”, realized the folly of buying subprime related securities and instead shorted them.


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    Post Hoc Ergo Propter Hoc?

    Jul 16 • Economic Debates, Government, Macroeconomic Measurement • 288 Views

    Ed Koch, former mayor of NYC used to ask, “How am I doing?” We can ask the same question about economic stimulus spending. By going to recovery.gov, you will see that there were 682,370 new recipient reported jobs between January 1 and March 31, 2010. Correspondingly, the July 14 Council of Economic Advisors’ Report (CEA) estimates that stimulus spending created, to date, somewhere between 2.5 and 3.6 million additional jobs. 

    Yes? Maybe. I wonder whether we can be sure that stimulus money created jobs. Perhaps they would have been there anyhow.

    In a recent blog post, economist N. Gregory Mankiw questions the CEA’s conclusions. Sympathizing with their assigned task, he says it is very difficult to ascertain the impact of the stimulus program through their model:

    1) He describes their Keynesian model as assuming that “no matter how bad the economy got, the inference is that it would have been even worse without the stimulus.” Consequently, whether the numbers go up or down, stimulus spending has to have had a positive impact.

    2) He points out that the CEA presents data confirming that the economy improved after the stimulus passed. How he asks, though, can we know if the stimulus was the reason the economy improved with so many other variables also having an impact. His basic point? “Post hoc ergo propter hoc.”

    All of this started me thinking about Paul the psychic octopus. As you probably recall, Paul accurately predicted 2010 World Cup Soccer results by the food receptacles he selected. Not quite “post hoc ergo propter hoc, ” but close.

    The Economic Lesson

    Most of us know whether we support more government or less as the thrust of macroeconomic policy. None of us though can statistically prove that we are right.

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