Wednesday, November 18, 2009
Tuesday, November 17, 2009
What is left by the way-side are the unintended consequences of minimum wage. A surplus of workers applying for the higher-priced jobs, depriving certain workers of jobs they would gladly have taken at a lower wage, etc. I need not lecture on this as I'm sure you've all been thoroughly indoctrinated in your 100 level Econ class.
Similarly with the economy, the President is expected to contribute to a healthy economy. And he only gets four years to do this. Eight if he does well the first four. Twelve if he is a crippled war-time president who "saves" the nation from a great depression. The problem is that, as Roberts points out, growth in the economy takes time. And there's very little one man can do (even the President) to help it. The economy is a massive entity, involving the decisions and actions of millions of individuals and government intervention tends to have negative effects.
But to please the ignorant masses the President must show that he is actively seeking to "fix" the economy and "make it" grow. If he doesn't, or if the economy falters under his auspices, his opponents will leap on the fact like a pack of ravenous English school-children upon their crumpets and tea. And so we get Presidents who tinker with, and "adjust" and "stimulate" and "repair" the economy destroying investors' certainty and creating see-saw cycles in the economy.
How is this ever going to change? The only way I can see is by mass-education of the populace. Unfortunately, most adults tend to be set in their ways and thinking. People don't like thought re-education once their world-view has set. Therefore we must start with the Youth.....
I liked Robert's analogy of the little boy with a bucket tiring to make the shallow end of the pool deeper. He then points out how little control politicians hold in the realms of long term economic growth, by changing short term policies. I would be in quasi agreement here if Roberts did his part to be a tad more specific.
For example the new breed of American celebrity politicians like Obama and Palin seem to have little control over our long term overall economy as individuals (perhaps Sarah's book sales will measurably increase GDP...however an increase in GNH is undetermined). I think this is a different case when you look back in history at different political situations. Some of Stalin's short term policies impacted Russian economy drastically to this day(though not in positive manner). Like Josh displayed with his brakes, gas petal and no steering wheel example is politicians are given tools to impact the economy but since this is only part of the system can be controlled how can we possibly get it to go where we want it to, at the "correct speed", with the headlights on and everything.
It's funny to think that often it's believed that these figures have the power to fix or destroy some thing as complex as an economy....
Alas though if there is a group that I don't feel bad about blaming economic problems on it's politicians (because there "interesting") but I suppose when it comes down to it at least there out there doing their thing....ramble mania post...ek....I'll stop now.
His talk was entitled "Dorks with Bow Ties", just kidding, it was "Interest Rate, Caffeine and Fuzzy Signals: Making sense of the Recession."
Dr. Wenzel began by reminding us that the recession didn't start out as a recession. It didn't even start out as a financial crisis. The recession actually started as a booming economy! Well, what looked like a booming economy was actually the beginning of a housing bubble. A housing bubble that turned into a financial crisis. And a financial crisis that blew up into a full grown recession.
Dr. Wenzel mentioned that the causes of the recession were probably counter-intuitive, and most likely contrary to most of the proposed causes that we've heard. He said that basically if you want to understand the macro, you have to understand the micro. That was because the recession had macro consequences from micro causes.
At this point he broke off into a rosy-cheeked ode to the famous autobiography, "I Pencil" As a personal side note: We get it! We understand "I pencil"! I'm not convinced that its particularly useful as an analogy anyway, but I digress.
Basically, Dr. Wenzel went on, one of the main reasons we are in this whole recession mess is because the Price System broke down. Specifically the price of money, as signaled by the interest rate set by the Federal Reserve. For those of you playing at home, the Price System is a mechanism used by the market to allocate scarce resources. Dr. Wenzel explained it like this: Demand Curves slope downward. Decrease the price of something, and the quantity demanded of it goes up. This is just a basic fact of economics. There was also one other basic micro cause Dr. Wenzel mentioned: Incentives Matter. (Even if you don't believe in them.) The final piece of the puzzle was the concept of a Moral Hazard. It goes like this: If you're protected from the consequences of your risk, you WILL engage in riskier behavior. It's basically a really simple thing. If the following things happen, you will eventually get an economic problem on your hands.
- Price System Breaks Down (Or sends false signals)
- People are inappropriately protected from risk
In Dr. Wenzel's presentation, the monetary policy of the Federal Reserve was discussed in detail. Basically, if I understand it correctly, the Fed lowered the price of money artifically, and kept the price artifically low for a period of YEARS! I believe the Fed did this to try and avoid a reduction in economic growth in the early 2000's. This sent a false signal to the economy about the actual cost of money. (That cost determines how much money would be borrowed and loaned, and remember cheaper money equals more demand for loans.)
As a result of all this 'free money' flooding the market, people were looking for a place to put it all. That's where the Moral Hazard came into play. As a result of deliberate sustained government policy, banks were encouraged to make home loans available to high risk individuals. The regulatory environment set up over a period of years really went a long way toward turning a surplus of 'free money' directly into a housing bubble. Specific examples Dr. Wenzel gave were: FHA reducing down payment requirements, Freddie Mac, and Fannie Mae greatly expanding federal insurance on housing loans, and the Community Reinvestment Act targeting the highest risk potential home owners and pushing money their way. The Community Reinvestment Act actually forced banks to make sub-prime loans to risky prospective home owners.
Dr. Wenzel then explained a little bit about Ludwig Von Mises' concept of the Dynamics of Intervention. It basically states that once a government starts intervening in the free market, it can't help itself. It starts intervening more and more in various different areas of the free market. It's like Pringles: once you pop, you can't stop.
As I'm looking back over my notes, I have a question highlighted on my last page: Where was Dr. Wenzel 5 years ago!!!! Couldn't he have done something to prevent this crisis from happening? Well, that's where this week's Russell Roberts' article comes into play. If the president can't really effect the economy, deliberately one way or the other, what hope does Dr. Wenzel have?
Think of what would have happened if George Bush got on the phone to Greenspan in the early 2000's and said he would send him to gitmo if he didn't raise the interest rate! Are you crazy? Greenspan would have replied. I have to keep this rate low to prevent a future economic crisis! Don't you understand our economy was just attacked by terrorists last September? The best Fed policy would be one that let's the interest rate signal the actual price of money in the economy... If we let the rate be adjusted by the invisible hand of the market, then what good is having the Fed at all? (Dr. Wenzel probably knows, but I don't.) We've given our government control of the economy in a way that gives them breaks and a gas pedal, but no steering wheel! YIKES.
Consider what would have happened to poor Dr. Wenzel if he tried to get the Community Reinvestment Act dialed back or even repealed. He'd be called a racist to start, and it would get worse from there. We want people to own their risk. That would theoretically make them act more carefully, but if we were to do anything to dial back the home ownership moral hazard created by government policy, we'd be committing political suicide.
It seems to me, that it's more likely that any government attempts to fix the economy will most likely end up hurting it. Maybe if we started trying to calculate our GNH instead...
Look at the wonders the stimulus did, I mean unemployment sure has gone down as well as creating a vast amount of jobs. Ohh wait I think I missed something. Besides the stimulus making every single drive I took longer via construction, they wasted so much money on signs saying that it was a stimulus job. To me that money could have been spent on something more useful but hey it’s the government.
Robert’s mentions in his article that policies geared towards a more efficient government can encourage growth down the road. Now that is something every candidate should strive for. Our governments for the most part are so inefficient it is truly mind boggling. Just look at the post office, although I personally like their services their operation is unacceptable. I have conditioned myself to not expect much out of the elected officials because either they can’t do anything about a given issue or they simply won’t do anything.
I guess I better learn how to be patient.
Wednesday, November 11, 2009
Tuesday, November 10, 2009
Take for example all of those crazy laws that get pasted without being read. In my high school gov. class one of are projects was to write legislation and vote on it. Two of my friends (One girl was very right wing the other one was very left...so it's bipartisan) wrote a bill that was a parity of the "Patriot Act" it was called something like the "Patriot Education Act" a piece of legislation that would, if passed have measures to make sure the general public knew what was in the "Patriot Act". What happened was utterly amazing I was one of only 2 or 3 people (out of a class of 30) to vote against this thing (The girls who wrote the legislation also didn't vote for it). After it passed I asked for the floor and stated "I'm unsure that you read the bill as it states on page 5 those individuals who fail to learn about the act will be punished by being hit over the head with the 15,982 page manual (except it was even more awesome as the language in which it was written mimicked the unclear strange language that legislation is written in.) In this case the very same thing happened as the actual Patriot Act no one read it.
I think that it comes down to economics when explaining how politicians will paste "Save the Babies" names on legislation and hope that their fellow politicians will pass these things with out reading them. They taking advantage of "Adverse Selection" and know more about the transaction (of knowledge ) than the other party via asymmetric information because those who write the legislation have the upper hand in knowledge to what's in it than those who vote on it.
So vote for my post as it has a really great title, and I'm unsure that you will have the time to read it all.
I voted in the last election but have kind of come to a realization about the political scene. As I have heard many times this semester I gladly accept the rational ignorance name tag. I do feel like that politicians could do a lot of good, they just usually don’t. It is Robert’s points he makes why I have decided to be rationally ignorant, I will just continue to think that they are good honest men and women. But in all honesty I think that most do the best that they can and do try to help their constituents. But when we read of Tobacco companies and former political friends making it big it is a little discouraging but of no surprise.
One last thing. Congressman Foster how about you or one of your aids respond to email, isn’t that somebody’s job? I mean you had two or three goofy looking interns when you came into our store, put them to work. I really don’t want to make a stop on your grocery store tour to ask you a simple question. I heard he was an avid reader of this blog, but that was probably just a rumor.
Roberts points out that people often act in their own self interest, after weighing the costs and benefits of their options. When doing what's best for yourself can be considered rude, or outright selfish, like Roberts' example of someone ditching a funeral, then a person will try to put a spin on their decision. In the example, Roberts implies that attending the funeral would be a hassle so the person who decides not to go explains that they aren't going because that's what the deceased would want them to do. Fair enough.
I'll except that provisionally, although I really don't think Roberts has any insight into the thought processes of the person who made the decision to ditch the funeral. Roberts comes right out and says that if attending the funeral was less costly then the person would have attended. He is in effect calling the funeral dodger a liar. Not cool Roberts, but I'll accept your psychic judgment.
The part where I'm in agreement with Roberts is the issue of spin. People will do something for a greedy or self-interested reason, and then tell people they did it for some other reason. I've seen it happen almost every day. On a personal note, I try to be open about my selfishness and greed. Let me give you an example:
I was in the Wood Center eating some tortilla wrapped mystery protein that I bought from a place I'll call "Burrito Ding". I had my iPod earbuds in, but I wasn't listening to anything. (I just didn't feel like having a surprise conversation.) I have a standing lunch invitation extended to Zack, and I'd hoped that maybe that would be the lunch he'd finally climb down from his Ivory tower and hang out with me. It didn't happen that day, but I'm keeping my fingers crossed. Anyway, an annoying woman who's in my speech class comes up to me and taps me on the shoulder and starts asking me what I'm listening to.
"I'm not listening to anything", I tell her, "I just keep these ear buds in so people won't try and talk to me while I'm eating."
"Oh that's nice." She said. "Is that seat taken?"
She points at the seat next to me and starts to sit down.
"Sadly, no." I say "I'm not going to ask you not to sit there, but hopefully you'll do the right thing."
She just smiled at me obliviously and sat down. I sighed loudly in a way that I'm sure would make my drama teacher proud. My lunch went down hill from there...
Anyway that's an example of the honesty policy I've developed over the years. It doesn't always keep me spin free, but I try really hard.
Back to Roberts. He says:
A final lesson for policy advocates and concerned citizens is to be careful what you wish for. What is best for the general interest is unlikely to survive the sausage factory of the legislative process. What results is imperfect.
So when you hear the politicians talk about how much they care about the people or the children or the environment or health, keep your hand on your wallet and keep a lookout for the bootleggers lurking nearby. They are always there.
This guy has a pretty prestigious degree from some pretty amazing university, I'm told. But the best he can do is warn us that politicians lie to us. My Father's Father barely graduated high school, and spent his whole life pounding nails in to wood and fathering children. His advice is at least as good as Roberts.
Roberts, you are an economist! I expect more from you. Instead of telling us that politicians lie, why don't you whip up some suggestions for how to keep em honest. They don't even have to be good suggestions, but I promise, I'll take my earbuds out and listen to them.
"The politician holds up one hand to heaven and talk about his devotion to morality. With the other hand, he collects campaign contributions (or bribes) from the bootleggers."
What we see is a mother (or parent, for that matter). What we get is some person responding to monetary incentives. Usually a lying, cheating, *insert whole host of random, not so nice adjectives here* politicians doing whatever they can to stay in office.
Of course, now I have just accused all politicians of being dirt bags, which isn't the case, I'm sure there's at least one good one out there, there's at least one who will actually care for the people they are supposed to be representing and caring for (in a way). If there wasn't, all legislation would be absolutely awful and help no one.
Wednesday, November 4, 2009
Perhaps I’m missing his point.
Tuesday, November 3, 2009
Ode to Belle the Cow (the Free Riding Queen)
To prance as swift and eat the grass which is not yours
Is the activity that a cow named Belle adores
She eats all that she can,
then along comes another cow named Ben
Ben invites all of his friends,
He says “Come and eat as the grass in the Commons never ends!”
The cows all keep eating until they get thunder thighs,
and that’s the story of the Commons demise.
The Commons is now barren and brown
Hence is the lesson which comes “when the tragedy comes to town”
You see public goods cannot last.
as long as cows are there to prance past.
"As weird as it seems, car owners can actually be better off, at least in the long run, in a world where car stereo theft is ignored by the law. That produces a profit opportunity for manufacturers to create technologies that are cheaper for car owners to use to protect their stereos compared to the resource costs and higher taxes of using police and the courts."
I have a hard time believing this statement. Upon doing further research auto manufactures were installing high quality factory radios that they could make more profit on. People don't steal factory radios because they don't fit in other cars. I do realize my last statement could be twisted to the point that auto manufactures used this to deter radio theft but I am apt to think the bottom line was the ultimate reason.
I guess you could argue his hypothesis could be have been right. But if I made the statement that we would be better off by eliminating coal power plants, would that be correct? What if I said that we are actually better off keeping the coal power plants, would that be correct? Depending on what facts or how we look at it both statements could be correct. My point is making a predictions that cant be tested or on vague ideas is easy. For example I think that the Montreal Expos would have won the world series this year, they may have but we can't know (they no longer exist for you non MLB fans) so I guess I am neither wrong nor right. But I could find facts out there that would support my view.
I can't disagree or agree with Roberts statements especially since my Delorean is back in Illinois.
Sunday, November 1, 2009
Bizarro World – With Professor Russell Roberts.
The article for this week’s reading is entitled “Napsternomics: What’s the
Roberts fired up the engine on his 1972 VW Microbus by giving us a definition of Napster, the software program where without much effort one would download virtually any song onto their computer and move it to an MP3 player or burn it to a CD. He tells us that the critics of Napster argue that this method of obtaining music was essentially theft. Roberts points out that if Napster was legal and widespread, sales of recorded music would essentially go to zero, destroying the incentive to be a musician. The critics thought that Napster would mean the end of the professional music community.
In his article, Roberts disagrees with the critics of Napster. He does accept the view that Napster was a form of theft, and theft would have been good for the music industry in the long run. To quote Roberts,
“…the decision to shut down Napster via the courts may ultimately harm music lovers, even those like myself who never used Napster. In other words, I will argue that allowing the theft of music via Napster could have actually increased revenue for the music industry benefiting music lovers and the creators of music.”
Roberts’ article was written in June of 2002, so it’s possible to see if Robert’s prediction came true. Roberts states:
” If Napster had been allowed to flourish, it's possible that new technologies would have been created to allow music producers to charge for their work at the same time that listeners would have benefited from the access opportunities provided by Napster.”
I’m going to argue that the file sharing technology that Napster popularized never actually went away. While Napster itself lasted only from June 1999 to July 2001 as a free file sharing service, other peer to peer file sharing software programs such as Kazaa, and bittorrent, stepped in to fill the ‘Napster niche”. Kazaa and FastTrack, (another file sharing software program) were created by Niklas Zennström, Janus Friis, and Priit Kasesalu. It was introduced by their Dutch company Consumer Empowerment in March 2001. The shutdown of Napster allowed Kazaa to rapidly facilitate the free sharing and copying of music in a peer to peer environment. In my opinion Kazaa was just Napster by another name that actually allowed you to download more music faster. (I’m leaving aside the costs of Kazaa, such as increased introduction of malware, viruses and other malicious code. If you want to research that tradeoff, jump on wikipedia and bring some caffeine and Kleenex.
BitTorrent is another of a long line of file sharing software programs that were able to quickly and easily take Napster’s place. According to Wikipedia: (I know not the most reliable source…) “The first client, known as BitTorrent, was created by Bram Cohen, in October 2002. A BitTorrent client is a computer program that manages downloads and uploads using the BitTorrent protocol.”
Ok, let’s go back to Roberts’ contention that, “If Napster had been allowed to flourish, it's possible that new technologies would have been created to allow music producers to charge for their work at the same time that listeners would have benefited from the access opportunities provided by Napster” Napster was allowed to flourish! Just not under the name Napster. In Roberts’ article he likens Napster style peer to peer file sharing to people in
Roberts feels that shutting down Napster would have been the equivalent of
Arrrgh… this post is too long.
Two more points, the music industry was already licensing music for downloads before Napster was shut down, its market was already responding to the theft! It was already providing consumers with what they wanted! Enter iTunes: iTunes is a proprietary digital media player application, used for playing and organizing digital music and video files. The program is also an interface to manage the contents on Apple's popular iPod digital media players as well as the iPhone. Additionally, iTunes can connect to the iTunes Store via the Internet to purchase and download music, music videos, television shows, applications, iPod games, audiobooks, podcasts, feature length films and movie rentals (not available in all countries), and ringtones (available only in the USA). It is also used to download applications for the iPhone and iPod touch running iPhone OS 2.0 or later.
iTunes was introduced by Apple Inc. on
Ok my final two points:
- In Professor Roberts’ Bizarro World, Napster was shut down, effectively barring the theft of music. In his ideal world, if Napster had been allowed to stick around the “theft of music via Napster could have actually increased revenue for the music industry benefiting music lovers and the creators of music.”
- In the real world, while Napster was shut down, “Napster” wasn’t. There never was a real concerted effort to end file sharing, Napster replacements were active before the actual Napster was shut down, and the amount of freely downloaded music has actually risen from year to year. In this real world, the theft of music hasn’t increased revenue for the music industry. (In 1999 the major labels sold about 13 billion dollars worth of music, in 1998 only 9 billion.) Whether music lovers and the creators of music have benefited is an open question.
Please listen to a recent On the Media with Brooke Gladstone, from Oct 23, for a bird’s eye view of the Napster vs. Record Label incident.