Tuesday, November 30, 2010

Luke's Link

Normally I like writing a full column about something that catches my eye, but I just finished a barn burner on Mill and individualism. Brooks gives an insightful, if more conservative take on Julian Assange, and I'm inclined to agree with him.

http://www.nytimes.com/2010/11/30/opinion/30brooks.html?scp=1&sq=david%20brooks%20wikileaks&st=cse

Mazi's Link O' the Day

I don't think this author is being fair by claiming economists "don't understand." However, he's right when he describes the ever-changing dynamic of the discipline:

http://www.csmonitor.com/Commentary/David-R.-Francis/2010/1129/Don-t-understand-the-economy-It-s-not-your-fault

Monday, November 29, 2010

Sunday, November 28, 2010

The Fed's New Tool, Part 1

Perhaps the Federal Reserve has not run out of tools just yet. Many have warned that the use of "quantitative easing" is the harbinger of an empty box of tricks. While the use of QE does mean that the Fed has resorted to other methods besides its tried and true ones, it does not mean the jig is up, so to speak. However, there may be one idea the Fed has not really considered.

I have a thought, and I'm going to go out on a limb and say it. Perhaps the Feds Open Market Operations report could be used as a policy tool. Voxeu.org just had an interesting report on the use of "pessimistic" language in central banks' "financial stability reports." Not surprisingly, there has been an increase in such language as the 2000s have progressed, what with the financial crisis and all. The Fed, naturally, takes into account many, many macroeconomic fundamentals (unemployment, inflation, etc...), along with certain economic "indicators" (Consumer confidence index, even stock market fluctuations) before making its decision on monetary policy. Firms, households, and investors read these reports and make inferences about where the economy is going. In a sense, then, the Fed's report is acting like ANOTHER economic indicator. I'm pressed to say, therefore, that perhaps if the Fed used more "optimistic" language, we wouldn't end up with appears to be self-perpetuating prophesies. I'm not supporting lying by any means. What I am saying is that the Fed should raise the interest rate just a little bit. That's right, I said raise. But won't that deter consumption and increase savings? I say, not in this environment. The signal a slight raise of the interest rate would send, would be that the Fed is feeling better about the economy. Firms and households then respond accordingly. There's more to this idea, but that's for next week...

Mazi's Link O' the Day

If the flood of commercials interrupting football games this week wasn't enough of a hint for you, retailers are doing pretty well right now:

http://www.smartmoney.com/investing/stocks/retail-stocks-with-sales-momentum/

Saturday, November 27, 2010

Tuesday, November 23, 2010

Knowledge is Useless

We have education all wrong. Politicians, educators, and number-crunchers alike all decry the current state of American education, claiming that we can't possibly compete in a world in which our children are under-educated and continually beaten on tests by foreign students. They are right to criticize our system of education, but they do so for the worst reasons imaginable. I say, let the Asians and Europeans pass us on those math and reading standardized tests. They don't mean squat.

For those readers out there advanced in the professional world (excluding professors), how much of your K-Bachelor's knowledge do you use? By that, I mean, can you recall any of the immense amount of data you stored in your mind for short periods of time, namely until the next test? I bet you can't take the derivative of x. What the vast majority of adults get out of their undergraduate education is formation of their character that makes them who they are today. Their ability to cope with adversity, cooperate with others, innovate, expand, they built on all of these during your time at school. Then, they either picked up a profession or went to grad school, at which point they learned the actual knowledge they needed to succeed at their given job. What didn't they need to know? How to take the derivative of x.

I could care less that the average Japanese kid is better than the average American at math. I'll admit that standardized tests do measure the important ability to synthesize and recall data, but they accomplish little more than that. Before the rise of meritocracy, education was all about building character, a moral compass, and the skills and traits requisite to succeed in any given circumstance. That world had immense faults: it was an old boy's club that only allowed the most privileged a spot at the table, but it was right to emphasize building the student, not filling the student's head with useless data.

So, stop worrying about test scores, how many AP classes a kid is taking, or how many extracurriculars they excel in. That won't matter nearly as much in the long run as how much they grow as a person when in those tasks. If kids continue on their trajectory of accepting authority and just chewing up numbers and facts thrown at them in class, we will lose the emphasis on individuality and innovation that has made our nation so dynamic. We need to fundamentally change our system of education back to the time when it fostered these qualities, not the ability to take a derivative.

What's the Deal with QE?

It would appear that the air is heavy with negative sentiments about the Federal Reserve's second round of quantitative easing, or QE2, as it is affectionately nicknamed. Congress likes to get hot-headed about economics (especially economics they don't understand), however now it seems they've gone past merely hot, all the way to boiling. There have been the occasional, acrid remarks about dissolving the Fed's independence, and there have been slightly less extreme accusations that the Fed's double mandate has failed. That mandate dictates that the Fed must strive for full employment and price stability. Of course, there is also the, now infamous, Youtube video of the fuzzy animals hashing out the details of QE. I'm not going to get into any of these attacks, or their validity, but I am going to give a few reasons why QE may not be the greatest invention since sliced bread.

Firstly, let's look at the markets. No, the stock market does not perfectly describe the state of the economy, but it is usually a fairly good barometer of how people FEEL about the economy, justifiably or not. FAS, a financials ETF, peaked on November 4 at $26.81. Since then it has tumbled around 20%. The S&P 500 went from a November 4 peak of 1226.26 down to 1180 today. Market jitters galore. When people are already worried about the effects of QE, we'll probably end up, as usual, with a self-fulfilling prophecy.

Secondly, QE is, quite simply, untested. This is, obviously, the second time it has been used, and there is not enough literature on the subject to really understand the effects. In classical lore, printing money (which is in essence what the Fed is doing to buy up long-term assets), is associated with rampant inflation. Of course, inflation is around 0.9% right now, so maybe we SHOULD hope for that number to rise. But then again, maybe it won't. Maybe it'll rise TOO much. We just don't know.

The last point I want to make is that other countries (notably emerging markets) are unhappy with us. The story's a bit complicated, so I'll simplify. The Fed, and U.S. government, have criticized China for artificially devaluing the renminbi. Fair claim, this is true. The emerging economies (and others, for that matter) look at the U.S. and say, "Hey, well, QE effectively works as currency manipulation, too. Don't be hypocrites America! You're (now weakened) dollar is hurting our exports!." This is, also, a fair argument. China, now, turns to us and says, "We hold a great deal of your debt. When you manipulate your currency like this, the value of our holdings declines, so stop it!" The Fed does not intend to play with the value of the dollar, but QE does change that value. Nobody's wrong in the arguments above, which, I suppose, is the real issue.

I won't come all out and completely lambast the Fed for QE. Economic policy takes time. Maybe the beginning is the rough part. So far though, I can't say I'm all too pleased.

Mazi's Link O' the Day

Some research on effective debt reductions in the EU's past:


http://www.voxeu.org/index.php?q=node/5831

Friday, November 19, 2010

Mazi's Link O' the Day

A video!!! I don't really agree with all that's said in it (sounds like some right-wing conspiracy to me), but it's funny, so:

http://www.youtube.com/watch?v=PTUY16CkS-k

Thursday, November 18, 2010

Mazi's Link O' the Day

For those of you who know something about Japan's economy over the last decade, this should be a little disconcerting:

http://www.economist.com/blogs/freeexchange/2010/11/inflation_1

Tuesday, November 16, 2010

Mazi's Link O' the Day

So, I've been looking for a way to voice my opinion on why we should stop blindly feeling sorry for all the people who got foreclosed on after/during the crisis, but I've been afraid of sounding like a raging asshole. The New York Post, on the other hand, has done a fantastic job of saying what I wanted to, so maybe now I know how to write it. But that's for another time. For now, here's the Post's article:

http://www.nypost.com/p/news/opinion/opedcolumnists/show_us_the_victims_IKAoxjhIzWCtrvXRBVsVIN

Monday, November 15, 2010

In Defense of Pain (Part 2)

I feel a bit out of my league following a bona-fide economist warning about the danger of overstating the problem a deficit poses, but I'll try to keep my points as matter-of-fact as possible. Earlier this week, the NYTimes came out with a "balance the budget" calculator, in which one can go through current proposals and cut spending and raise taxes in an effort to reduce the deficit. Here's my attempt.

As you can see, my solutions are based more off of spending cuts than tax increases. In keeping with part one of this series, I made cuts based off of what I think the positive powers of a government should be, not to balance the budget. Like Mazi, I'm actually not that worried about the deficit, what worries me is that it is projected to get ridiculously out of control as a function of rampant growth in entitlements.

Speaking of entitlements, if you look back at my budget calculator, I chose to cap Medicare growth starting in 2013. This measure would save the government over $500 billion over the next twenty years, and I realize that with such savings necessarily comes pain in the form of reduced coverage. However, I believe that by capping the growth of this out-of-control program, we can start the ball rolling towards more comprehensive medical reform. Obama's health care bill didn't do nearly enough to address fundamental problems in our health-care system, as revealed by the projections of wild growth in medical costs for Americans going forward. If we capped Medicare growth, we could necessitate further, comprehensive reform to ensure we are getting the most for our tax dollars.

As presciently pointed out by Mazi, Social Security really isn't that big a deal. Look at Peter Orszag's piece today in the Times concerning Social Security. The proposals put forward in Simpson-Bowles are both reasonable and politically feasable, and they would essentially make paying for Social Security for the next 75 years and beyond a non-issue.

Finally, taxes. If you refer to the budget calculator, you can see that I favor extending the lower Bush tax rates, with the tradeoff of eliminating loopholes for corporations and individuals. The USA currently has higher tax rates for corporations than most of the Western world, but the immense amount of loopholes in our tax code mean that much of the taxes are avoidable. If we simplify the code, we can actually reduce rates and increase revenue. Of course, the rates would effectively increase for all those who exploit the system, but all in all the transparency in government would do everyone a favor in the long run.

Of course, the budget calculator provides rough estimates for massive dollar amounts. However, you can see that a relatively modest amount of spending cuts, coupled by smart tax revenue increases, would actually close the deficit gap over the next twenty years. None of the cuts or tax increases that I proposed would hurt employment in a meaningful way, so they wouldn't hurt our national recovery, which of course is a pressing issue. In part one of this series, I defended my theory of limited government. In this part, I have shown how it is possible for us to start scaling back the scope of government.

Don't Be Fooled

Don't be fooled by politicians. They will tell you opinions like they are facts, and they will make you feel like they know something you don't. As the country gets ready for the Republicans, and perhaps more importantly, for the Tea Party to come to power, it is important to remember these lessons.

September 2008 seems far away right now. The effects of the recession still linger, but the immediate panic and danger of that fall is now in the realm of history. Our crisis-du-jour is the budget deficit and our debt. Actually, it would be better to call it "self-made-crisis-du-jour." My point is, no one REALLY knows the dangers of a large deficit. They could be awful, but on the other hand, and this is a BIG other hand, the fallout from all the spending cuts and tax increases necessary to combat the deficit could be dire. For example, in the event of another recession, without Social Security payments, the elderly of this country would lose almost 100% of their savings. Despite the fact that Social Security is bloated, and in a few years, we're going to be paying in more than we get out, the complete, immediate removal of Social Security could be hugely detrimental to the economy.

Politicians who tell you that we MUST battle the budget deficit need to be reminded of our 9.6% unemployment rate. There are fundamental measures of the strength of our economy: employment, GDP, inflation, etc... Before you get caught up in the deficit, "unfairness" of the tax rate, or any other hot topic, look around, and check the REAL measures of our economy.

Mazi's Link O' the Day

Use the link in this article to try and tackle our budget yourself. My friend showed me the Sunday Times with the game, and I gave it my own go last night:

http://www.petergordonsblog.com/2010/11/mountain-to-climb.html

Friday, November 12, 2010

In Defense of Pain

This column is part one of a two part column on my thoughts on the role of government, and how they pertain to the USA today. Part one deals more with theory.

Our nation is moving ever more quickly towards financial disaster. We cannot sustain the current amount of government spending. Already, we are looking at paying $1 trillion in interest on our loans by 2020, a sum which will keep on growing. So, there need to be cuts. Dramatic cuts. We are here because citizens have come to expect too much out of government. We keep demanding more and more, and to be elected politicians have to promise more. This model of governance is simply unsustainable.

People need to get serious fast about the role government can play in their lives. First and foremost, I would like to clarify to progressives everywhere that government is not there to solve every individual's problems. It is not there for equality of lifestyle, it is not there to make sure everyone has a rosy life filled with cupcakes and puppies. Every time a people has risen up against a ruling class to try to make a completely egalitarian society, the experiment has failed on epic proportions. Rosseau's writings fueled the French Revolution, and look what happened there. Hundreds of thousands of lives were lost in the name of some abstract "liberty", and France was back to monarchy in the 19th century. Pointing to the USSR as an example of the shortcomings of socialism may be cliched, but it underlines my point.

Government is there to help you live your life. It is there to make sure no one holds you back in an egregious manner, and is there to take care of those things that you can't take care of yourself. One of the most cherished principles of our colonial era was the Subsidiarity Principle. Simply put, the smallest and most local unit of government that can handle an issue can do so to the best effect, and should do so. The state legislatures of our colonial period concerned themselves with defense against indians and facilitating commerce between towns, and let all other matters fall to the individual townships. Our country was settled by fiercely independent and precocious religious outcasts to the North and commercial visionaries to the South. We must continue in the footsteps in our ancestors and demand not that the government takes care of life for us, but just that it ensures that we have the power to take care of our own lives.

Mazi's Link O' the Day

We should get over political ideologies, and take a good look at the Deficit Reduction Committee's proposals:

http://economistmom.com/2010/11/so-if-we-can-scorn-the-scorn-we-might-get-somewhere/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+economistmom+(EconomistMom.com)

Thursday, November 11, 2010

Mazi's Link O' the Day

In defense of Robert Zoellick's support of gold to be used as a reference point for inflation and currency values:

http://www.forbes.com/2010/11/10/currency-monetary-policy-china-opinions-contributors-charles-kadlec.html

Wednesday, November 10, 2010

Mazi's Link O' the Day

I didn't read the whole article (43 pages), but I couldn't pass up the opportunity for a paper like this:

http://www.nber.org/papers/w16517.pdf

Sunday, November 7, 2010

Selling to the Masses

Oh how we love to think we're smarter than the companies selling us our goods! Whether we do this out of some deep-seated iconoclastic beliefs or simply because we feel intellectually superior is not the point. We simply don't like to believe that we're falling for the advertising. Sadly (or happily, depending on your views), this may not be all that true. As I was reading an article on motherjones.com, I was led to another article on wired.com about the same subject.

To summarize, there was a taste test held by two researchers, Samuel McClure and Read Montague. The results of their tests showed that when Pepsi and Coke were drunk from unmarked bottles, brain patterns showed no distinction between the two. When the bottles were labeled, people almost always chose the soda in the Coke bottle, regardless of what soda ACTUALLY was in the bottle. Draw whatever conclusions you want from this test, but the one that is most startlingly clear to me is that Coke has done a very, very good job advertising. It is after all "the most widely recognized consumer product in the world," as the wired.com article claims.

A personal favorite example of mine involved Pabst Blue Ribbon beer. PBR has become the emblematic beer for our hipster generation. It's cheap, kind of shitty tasting (but not too much so!), and has been praised by the likes of Dennis Hopper (Heineken! Fuck that shit! Pabst Blue Ribbon!). But there's more to the story than meets the eye. In the early 2000's PBR rose from the dead on the taste-buds of 20 year olds. Why? They cut back on advertising, put their beer in cult movies, and they have user submitted photography on their website mostly featuring hipsters and their beer. None of this is on accident. So, the next time your good buddy goes around wearing a crushed PBR can around his neck, declaring his rebelliousness to the world, remind him that it took a very clever marketing guru to get him to do that.

Mazi's Link O' the Day

Here's an interesting banking system proposal:

http://www.coordinationproblem.org/2010/11/another-banking-proposal-from-toby-baxendale.html

Saturday, November 6, 2010

Mazi's Link O' the Day

Obama wrote an article for the New York Times. He wants to make sure the U.S. doesn't lose its place as a leading exporter. After $600bn of QE we shouldn't have too much trouble selling our goods abroad:

http://www.nytimes.com/2010/11/06/opinion/06obama.html?_r=1

The Value of Dissent

On Tuesday, Bob Hebert of the NYTimes claimed that Americans who made $50 million or more saw their incomes quintuple from 2008-2009. He corrected today:

"My column on Tuesday incorrectly described the situation of the small group of Americans earning $50 million or more annually. Their incomes declined by 7.7 percent between 2008 and 2009; they did not quintuple. The incorrect information came from a report based on flawed Social Security Administration data. An inspector general is investigating after two individuals filed false W-2 forms that led to the skewed data."

The sensationalism we see in the media today has to stop. Every issue has a compromise, every conflict has a thousand different viewpoints. When people solely seek out comments made by people who support their own agenda, we get nowhere. When Fox news and MSNBC provide outlets for those who willingly only listen to what they want to hear, we further divide our society into a screaming match of two opinions that have to meet in the center.

Our political system was set up for slow, gradual change that is nearly impossible to implement. Dissent, and more importantly, informed dissent, is possibly the most important part of the government which our founders set up. Consider this: our planet has been alive for 4.5 billion years. Most scientists expect it to last at least another 5 billion, and current research is only lengthening this estimate. Intelligent human life has more than half of our planet's life span to improve. Informed change, fueled by conflict, is how we must move forward.

When we demonize others, we devalue EVERY single point they make. If liberals brush off Republicans as irresponsible, war-crazy cronies of the rich, they destroy 50% of the human capital in one of the greatest nations on earth. Similarly, if conservatives consider Democrats wussy, soft fools who will never get anything done, they destroy the other 50% of the United States of America.

It is time to start considering the value in the thoughts of every person on this planet. No superficial characteristic makes any one person's opinion less than that of another's. Fighting without recognizing the enemy as human is pointless. Conflict while respecting the opinions of those that oppose you is the crux of society.

Wednesday, November 3, 2010

Monday, November 1, 2010

Mazi's Link O' the Day

Tuesday is a huge day for the country, not just because of the midterms, but also because the Fed will be meeting to discuss its next move:

http://www.washingtonpost.com/wp-dyn/content/article/2010/10/31/AR2010103103818.html?hpid=topnews&sid=ST2010103103824