Category Archives: Economics

Day One Wrap Up

Wow, this first and last full day of the conference has been absolutely amazing, in many ways. I’ll blog specifics about each session tomorrow when I’ve had time to soak everything in and review my notes, so let’s call this a short man-on-the-street account of the day. I’m writing this as I upload pictures but the open wireless access point I’m on has a very weak signal so it’s making it a little hard to work. I took about thirty pictures, and many of them came out well so I’m happy with that. They are up now but as of yet uncaptioned. So how was the day?

It got started with me waking up naturally, which was good because I had accidentally set my alarm for PM instead of AM, and if I had been late I never would have lived it down. I walked to the bank, which was close enough to be comfortable but farther than I thought. A walk is a good way to start the morning. There was a “breakfast” with various fruits and light food available, and though I was hungry for something a little more substantial it held me. I found Scott and Iram at a good seat right in the middle of the conference room.

The first session consisteted of Bob McTeer, Rose and Milton Friedman, and Alan Greenspan who joined in over a video link. Greenspan gave a glowing introduction to Milton and it was one of the most sincere speeches I’ve ever heard him give, very conversational and comfortable. (Contrast his reports to congress.) Greenspan stayed in on the conversation that followed for a bit before signing off.

The first session on education dealt with choice in schools and vouchers. I thought it was one of the more productive sessions of the day. After that was lunch where I ended up at a table with Iram, Scott, Steven Landsburg, another fine gentleman from Rochester whose name escapes me, and Tyler Cowen. Our conversations sort of fragmented till I heard the word “blog” from across the table and tried to get their attention for a minute asking if any of them had one. Finally I ended up calling out one of their names and I discovered Tyler blogs at Marginal Revolution, whose name I love, and at The Volokh Conspiracy (less frequently). The conversation that followed was very interesting and ranged from how blogs are changing the way people interact with writing to controlling spam, two topics I find myself coming back to again and again.

The second session is one I’m going to have to think about a lot more. The presenters from PERC (I have no idea what that acronym stands for) basically argued for free market enviromentalism, or that the best way to solve economic problems is by exposing the elements to the open market and letting those forces work things out. The idea was pushed several times that the ideas of socialism and command economies took the better part of a century to defeat, and millions died as a result of that debate not being resolved to the extent that it was clear what choice was the best way to run a country. It follows that the socialist ideas being pushed by many enviromentalists could have a similar effect today. They seemed very serious about what they spoke of, and I respect that. It’s easy to forget that these economic decisions have profound effects on the world.

The third session was, to me, mostly not terribly interesting so I won’t write about it here. After it was done though I did a picture with Milton Friedman.

In the fourth session the topics didn’t seem to mesh like they had in previous sessions but they were all interesting. It got started off with Tyler who I had met earlier (picture) who discussed economics and art, which I’ll write more about later, followed by a paper comparing Capitalism and Freedom and Free to Choose and finally a presentation by Gregory Chow that quite frankly I’m still not sure what to think of but I’ll talk more about all that tomorrow.

After it was all said and done I enjoyed it all but part of me wished there had been more debate or confrontation on the ideas that had been presented. I was reminded of Joi’s complaints of traditional conferences and how the paper presentation model isn’t really that great for taking advantage of the great minds gathered in one spot for this occasion. Dinner, however, proved interesting.

I sat with Scott at the table with Tyler Cowen, Pete Boettke, Greg Chow, and one or two others I couldn’t name. Just a few feet away at the next table were Rose and Milton Friedman sitting with Bob McTeer, Harvery Rosenblum, Ben Benanke, and another Nobel prize winner Gary Becker. At the end of his speech Becker posed a question to Milton Friedman concerning competitive supplies of currency, to which Friedman responded he had no good answer at the moment. However at some point Gregory Chow jumped in (and got a microphone) and it turned into a minature debate between the three which I found quite enjoyable. It went for a bit and it was obvious that some people were getting quite annoyed, though whether it was with Chow himself or Chow’s views (China isn’t as bad as it seems, state run enterprises can work if there’s competition) I don’t quite know. Personally I could have watched them go all night, as it was extremely entertaining and informative, but President McTeer cut things off and the night finished up. Please excuse any typos, I’ll edit this entry and post more about the indvidual sessions tomorrow.

Blogging the Milt Friedman Conference

I knew I kept the economics category around for a good reason. Tonight through Friday I’m going to be in Dallas because I was invited to the “Legacy of Milton and Rose Friedman’s Free to Choose” conference here at the Dallas Federal Reserve Bank. Internet access during the conference is probably not going to happen, as it’s unlikely I’ll be able catch anything wireless or just plug into the wall somewhere, so I can’t promise live-blogging of the sessions, but I can pick up a few access points here where I’m staying so I’ll try to catch up every night. I’m very excited about the oppurtunity to meet Milton Friedman, who was very influential in my early studies. His influence is undeniable, and I’m honored to be here.

The drive was long but in good company with my old friend Iram in the passenger seat. We discussed a lot of current issues, Plato’s Republic which she is also studying, and how our economic viewpoints have changed in the two years since we won the Houston and district-level Fed Challenge competition. I dropped her and her mother at their relative’s house, and made my way back by the Bank where Scott Roman, my former teacher/coach and now head of education for the Dallas Fed, lives and also where I’m crashing. It was a little tricky getting here, but now that I am the exhastion from the drive is starting to catch up with me and I think it’s time for some sleep. Breakfast at 9 tomorrow. Planning to take lots of pictures.

Reason for War

While browsing around I stumbled on this post which I think makes some very interesting points in terms of the implications for the dollar. Check it out and my response is below. If it wasn’t on LiveJournal I would trackback, but lacking that:

That’s very thorough. I think you have some excellent points, but I think you dismiss fiat money too quickly. It isn’t backed by nothing, it’s backed by all of the goods and services produced in the US. Those goods and services are currently about a quarter of the world’s total, which is far ahead from the second best, Japan.

People put money in America for the very reasons you stated, and it will stay there for those reasons. Without major changes the euro’s future is not bright because (a) they’re trying to take what was a very smart economic union and turn it into some sort of political union, which anyone familiar with European politics will tell you won’t work and (b) they are currently having problems with their unified monetary policy being an ill fit for all involved. The EU does not have the market transparency and labor flexibility that the US has, and probably never will because of deeply ingrained cultural and language issues.

Interesting

It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to fit facts.
— Sherlock Holmes

Crowding Out

This is a response to a message from a forum I frequent. I’m glad with the way a couple of the points came out, so I thought it would warrent reposting in the economic category here.

Republican – greed, Democratic – opportunity for ALL economic levels

I strongly disagree with incredibly broad misinterpretation of our nation’s political landscape. Unfortunately though, I’m going to respond with another generalization. As a party, the ideological trend is for Democrats to prefer larger government and social (socialist) programs to redistribute wealth taken in through taxes. People complain that Republicans are greedy, or heartless and cut spending for this and that, but what they’re really doing is trying to decrease our nations massive debt and lower taxes, which means less of a burden on your pocket and on future generations. Miasdad made the great point that no country has succeeded with the government trying to control the economic factors of production or distribution. When they (Republicans) cut subsidies for, say, green clay pottery makers, they do two very important things (really two parts of the same thing). Lower spending can mean lower taxes, and paying down of some of the debt; the interest on the debt alone takes a significant portion of every dollar you give to the government. Much more importantly is the effect it will have on the bond market, through crowding out.

Explained very simply, if you’re Joe Bank and have a big wad of money to lend to someone, you can either give it to to a company or the government. The government has never defaulted on a debt, so you know you’re going to get your money back. To attract capital corporations are forced to offer bonds at lower prices/higher yields, because a component of interest rates is risk. So in effect the government is crowding out private investment. Entrepreneurship is what drives this country, and personally I would rather have the free market deciding where the money should go, rather than some politician. Because the borrowed money is costing the corporations more that’s less money they have less to invest, create jobs, and give money to workers who just may go out and buy green clay pottery. Republicans believe that the ultimate economic cost of the crowding out effect negates (to varying degrees, depending on who you ask) whatever benefits you may have gotten from the government spending.

Now you may ask why people like George W. Bush and Ronald Reagan spend money out the wazoo, and so do I, but the reason is that strong defense is a prerequisite for sustained economic growth. People will not invest and the economy itself cannot function when there is not security. That’s why, though I cringe when I see the numbers, I recognize the need for recent increases in defense spending.

People also say that Republicans only want tax cuts for the rich, and that every measure they propose is biased towards covering their rich butts. Well, the wealthiest 15% of our country pays 90% of all taxes, so any broad tax cut is going to seem biased towards the rich simply by definition. Furthermore, many would argue that, paradoxically, lowering taxes is actually the best way to get rid of our debt. How? Because less money being wasted by the government and more money in the private markets means higher productivity and growth, and when that’s combined with fiscal responsibility, that means we could grow out our debt with low taxes, the same programs we have now, and higher GDP for the country. Everybody wins.

Short Marx Notes

If you read a biography of Karl Marx you have to wonder if he didn’t like capitalism simply because he was terrible at it—he lived his entire life in debt. Marx was descended from eminent lines of rabbis, but harsh anti-semitic laws convinced his father to convert, and all of Marx’s life his venomous tongue was quick to utter some horrifying maxims about Judaism.

Marx looked at history, discarded philosophy, religion, ethics, nationalism, and said to look at the people. Each of society’s movements from slavery to feudalism to capitalism can be traced to a ruling class extracting wealth from the people, be it a slave, serf, or factory worker. Even though all the ‘wealth’ was coming from the workers, they were still at the mercy of hte ruling class because they didn’t control any of the means of production. In Marx’s view religion (“opium of the people” ), patriotism, laws, culture, and morality all are merely means of keeping the worker in his place and support the production process. This superstructure ties everyone to material thinking and desires, therefore perpetuating the cycle of exploitation of the working class. Revolutions happen as a result of new technology, and a conflict of the classes occurs whenever society switches to new means of production, but the workers always end up at the bottom of the totem pole because they are in, by definition, a class society. Marx postulated that because capitalism rested on a class system, revolution and victory by the workers was inevitable, because only in a classless society could said revolution be avoided. Because capitalism produces so much, it is a necessary precursor for socialism to occur. Marx did not consider Russia or Germany for his revolution, because they didn’t have sufficient industrial resources, he thought Communism would take place in England and France first. Here’s what has to happen for the revolution to take place:

  1. Falling profit rates and accumulation of capital
  2. Increasing concentration of economic power
  3. deepening crises and depressions
  4. High unemployment (“industrial reserve army” )
  5. Increasing misery of the proletariat

(from Todd Buchholz). Marx’s biggest flaw comes from the assumption that all value comes from the worker, or labor. He ignores entrepreneurship, land, capitol. Profits that Marx dubbed exploitation are actually crucial in insuring future investment and growth. The revolution never came because, however bad this economic slowdown is or how slow gigs come in the summer, workers are orders of magnitude better off than they were before. The rich get richer and the poor get richer; productivity enables total output to rise and benefit everyone. Also the worker is no longer completely separated from th emeans of production, and through things like stocks and bonds can indirectly own means of production.

No Man Is an Island

Contrary to About a Boy, and despite the quite fine gadgets that were in that movie, the conclusion that everyone comes to that no man is an island also rings true in an economic sense. I just read a clever passage in a book by P.J. O’Rourke, which I’ll post more about later:

A pencil is a simple object, but there’s not a single person in the world who can make one. That person would need to be a miner to get the graphite, a chemical engineer to turn graphite into pencil lead, a lumberjacj to cut the cedar trees, and a carpenter to shape the pencil casing. He’d need to know how to make yellow paint, how to spray it on, and how to make a paint sprayer. He’d have to go back to the mines to get the ore to make the metal for the thingy that holds the eraser, then build a smelter, a rolling plant, and a michine-tool factory to produce equipment to crimp the thingy in place. And he’d have to grow a rubber tree in his backyard. All this would take a lot of money. Yet a pencil sells for nine cents

Obviously he becomes more frivilous as it goes on, but I thought it was a nice take on Milton Friedman’s pencil example in illustrating the importance of division of labor. Now I need to go get back to something I’m good at.

Hurricanes are great!

A common misconception of students of economics is that events that normally would be viewed as economic detractors actually stimulated. I’ve heard this called the ‘window’ argument before: if someone walks down the street and throws rocks at all the windows, then all of a sudden the window man has work! He will use that money to eat at restaurants, buy clothes, send his child to college, and the world will be a better place. From the beginning this argument sounds a little off, and in this context, the flaws of the argument are especially obvious.

The money that was used for repairing existing facilities could have been better redirected towards capital investment, or any other sort of monetary allocation that increases long-term growth prospects. Anything that promotes inefficient allocation of resources (regulations, quotas, mandates, tariffs, etc.) ultimately hurts the country in the long run. It would take someone pretty heartless to bring this up in the context of the Trade Center, but in situations such as hurricanes where there is usually high property damage but only minimal loss in life the argument still seems to rear its ugly head. Perhaps it’s a simply a misinterpretation of creative destruction :).

Stock options and Congress

There is a huge argument on Wall Street and Capital hill right about what’s the proper way to account for stock options, and the whole thing is muddied further by the fact that neither side understands the whole thing. The Republicans actually have a very nice argument, but none of them can seem to articulate it.

On one side of the fence you have Greenspan and, surprisingly, the democrats. Greenspan has said that all the serious analysts have already factored in the dilution of stock options into their analysis, so releasing the data publicly should have no real effect on the markets. This is a very potent argument because if it’s not going to make a difference, what do you have to hide? Basically this falls in line with Greenspan�s drift towards transparency. The democrats are suggesting that stock options be shown in the bottom line. Republicans argue that it’s hard to accurately value stock options, but the dems are quick to counter that if it’s not worth anything, employees wouldn’t accept it as a form of compensation and if it is worth something than it should be reflected in the company’s books when they give it out. Wall Street, whose opinions are influenced more from the frenzy following Enron than anything else, also follows this line.

On the other side of the aisle, there is incredulity that people are suggesting that the books are tainted with something that cannot, as things stand, be accurately valued. There is a duality in options in that they are both income and remuneration. What it all really comes down to though is that options don’t cost the company money. The FASB almost mandated subtracting options from the bottom line but after an uproar from Silicon Valley and the Senate banking committee (most notable Phil Gramm) the proposal was reduced to a footnote, and with good reason. If my company has 5 million in profits from selling widgets, and I’ve given employees a million dollars worth of options, the company has still made 5 million dollars from widgets, there’s no reason that I should subtract a million dollars from my reported profits when it doesn’t accurately reflect my business.
There are a number of ways to account for options out there, most notable the Black-Schoals model that the most common, however not because it is good, but it’s simply the best out there. There are also guidelines for reporting options in taxes, and many have suggested that these should simply be applied to accounting. There are several problems with this, but the most serious is that tax laws are written to encourage and discourage businesses from doing certain things, and by definition accounting should be neutral, so if these suggested methods are introduced as accounting standards then suddenly there are very persuasive elements in the books that are going to change the way companies do business, and not necessarily for the better. Also, the minute that congress starts telling accountants what to do; accounting will become the only federally regulated profession out there. Doctors, lawyers, brokers, all exercise the right of self-regulation. You don’t see anyone suggesting that congress go create mandates for lawyers after Enron, even though arguably their law firm (whose name escapes me at the moment) is just as responsible for the situation as their creative accountants.

While I’m on this tangent I would like to suggest that the long term solution to the problems in the accounting business is to introduce competition into the field. Among large corporations there is a monopoly among the “Big Four” that now dominate the field, and there is really no incentive for them to rock the boat too much. If meaningful competition exists for the big accounts, such as GE and Fannie Mae, I think we’ll start to see the market forces drive accounting like they drive nearly every other profession.

Anyway, reporting stock options in the manner that the democrats and the more liberal media are suggesting will ultimately stifle the way business is done and hinder productivity, and therefore growth, in the long-term. Options give firms the oppurtunity to attract talent to the company that they could otherwise not afford, and give the employees’s of a stake in the company and interest in seeing that the company does well. A conversation earlier today Wayne Abernathi really clarified many of the things I’d been reading on the subject, and offered many of the insights here. He’s a really great staffer on the Senate Banking committee who deserves more recognition. He was one of the driving forces behind the Gramm-Leach-Bliley bill that revolutionize, amoung other things, banking regulation