Wal-Mart to strongarm Chinese producers

Into making products safer

The Communist Manifesto

I have read it today, for the first time. I am passingly familiar with some of the theories of communism, having debated quite a bit with a number of leftist anarchists, and had a lecture on Marxism crammed down my throat at high school (thanks Mr. Whipple!)

I am somewhat unimpressed. The argument depends on the existence of conflict between the proletariat and the capitalists, and that industrial economies will erode all distinctions in society until we get to the point where only these two classes exist. The reason these classes exist is because they are the two inputs into production (labor and capital). As anyone can tell you, this is a bit simplistic: there are many different types of labor and capital, which leads to many different classes, all fighting each other for a piece of the pie.

On Regulation in the Financial Markets

Some people have suggested to me that regulation is not neccessarily a good solution just because the private market is failing, like in the mortgage crisis. Regulations can be poory applied, or even gamed, thus meaning more wealth for the financial industry (which is what we are trying to avoid).

Well, don't need to listen to me on whether there was regulation that could improve outcomes. Now the Maestro is saying we should have some more regulation, too.

Greenspan softened his longstanding opposition to many forms of financial market regulation, acknowledging in an exchange with Waxman that he was "partially" wrong in his belief that some trading instruments, specifically credit default swaps, did not need oversight.

Economists are still supporting the buying of preferred shares over the mortgage buy-back, though. Guess you can't win 'em all.

Econ Panel Discussion

Panel Discussion on the Current Financial Crisis, Thursday, October23, 2008, 2:00 pm, Lecture Center A-1. Concerned about the currentstate of the US Economy? The Department of Economics invites all toattend an open panel discussion with UIC faculty including: Lawrence Officer, Houston Stokes, Joe Persky, Paul Pieper, George Karras,Nathan Anderson, Robert Chirinko and others. Moderated by JohnMcDonald, Head of Economics. Sponsored by the Economics Club and the Department of Economics.

Rememinder to Real Estate 371 Students (and possibly other Econ Students): Attendance and a short 1 page paper means extra credit! That oughta spruce up your marginal benefit a bit.


I have had Officer as a Professor and studied income inequality a bit with Persky: Both are very intelligent and quite capable of turning complex ideas into simple ideas.



Lawrence Officer's CSPAN appearance can be found here

Is Europe really looking smart?

Well, some people seem to think so


Problem being, as you can see when you read later in the article, is that Europe is still having many of the same problems that we have.

An Excellent Line of Thought on HealthCare

See Ezra


The basic idea is that the placebo effect is extremely powerful.

Does that mean we should give everyone placebos?

No...one of the commenters hits the nail on the head here:

if this is any example of how the left thinks we are really screwed. No one is suggesting we give people placebos. There is no way to ovecome the liability issue. What it proves is when people are not responsible for the cost and spending smeone elses money even faux treatments will garner positive results.

A patient paying for these drugs would make more accurate and informed decisions. It's detaching consumption from responsibility that is killing our system.

Now, other commenters point out that the "placebo effect" doesn't hold for anything besides pain and low-level depression. One wonders, though, how much health care we get that provides little additional value to the person's quality of life because the marginal cost is very low (since insurance covers it, whatever "it" is).

Hence, the rationale behind high deductible health care plans. People have to actually pay for the less costly treatments they need, but, if something REALLY goes wrong, they'll be covered.

Update: Now guest blogging

On Pulp is taken
The blog will be moving to a separate website, but it's pretty darn interesting. Good insight into the mind of a Chicago-area art lover

Pledging Process...

We're now two weeks into the pledge process here at the Eta Rho chapter of Alpha Kappa Psi. We're on a bit of an accelerated pace...6 weeks instead of the normal 7, since the designated first week meeting became a party for the pledges to get to know the Brothers.

What do our pledges have to do? Well, I'm glad you asked...

They are required to attend two professional, two social, and two philanthropy events. Gotta give back to the community, gotta get to know the Brothers, and gotta learn how to be a good business person. They are responsible for putting on their events...each pledge has been put onto a committee so that the workload can be divvied up.

They also are required to fill out signature books. Hopefully I can get a picture of one...basically, they are little pamphlets that the Pledges have to decorate, and then acquire two signatures from all 40 Brothers in the fraternity. The process is designed to get the pledges in contact with the Brothers, so everyone gets to know each other.

Pledges are also responsible for raising $2000 in total, and to get gifts for their Big Brothers.


It's a stressful 6 week practice...but it's worth it.



And we don't haze ;)

Change We Can Believe In!

Mr. Obama is now outadvertising Senator John McCain nationwide by a ratio of at least four to one, according to CMAG, a service that monitors political advertising. That difference is even larger in several closely contested states.

Apparently, "change" means spamming my television set. Truly, a noble campaign.

Effective Risk Management

Recently, this video has been making the rounds, causing quite a stir on various internet message boards.


While I fully appreciate the efforts of the author to explain global Climate Change through the lens of risk management, the problem is that risk management is inherently...well...risky?

Risk management involves assigning probabilities to various outcomes and analyzing the cost of different types of failures, plus factoring the all-important "unforeseen" instances. It's not an easy task: if it were, insurance would be a zero profit business and people wouldn't have to go to college to work for Allstate.

Even expert physicists and mathematicians can fail in managing risk effectively

Paulson ends up channeling the Economists, too

Well, this author has it nailed it down pat

They said a wiser course -- the one the Treasury now seems to have come around to -- was for government to rebuild the badly depleted cash levels on bank balance sheets. That would cushion institutions against future losses, giving them the wherewithal to lend again

That's alright, at least something is getting done.

Channeling the Bulk of Economists...

Alex at MR points out that many noted economists, from both sides of the aisle, do not support the Paulson Plan, which passed after the addition of many sweeteners


But, looking through the links, I see a serious misconception that could kill many ideas, and a fatally flawed assumption that would sink most of the others:

1. Krugman and his ilk appear to be ignoring the significant adverse selection process going on. He suggests that instead of purchasing assets, we should instead focus buy preferred stock. This gives us a permanent equity stake, acts directly on the balance sheet, and should even hurt stockholders. However, it does nothing to actually reveal which banks are exposed to bad debt, and which are solvent. That's the biggest problem we have in the financial sector right now: no one really wants to lend out money to someone who can't pay it back, and you don't know if the other guy can't pay it back if you don't know how many assets he has that are linked to the subprime market.

The Paulson plan, in theory, avoids this by buying up a lot of those assets, and creating a market for others to buy them (follow the leader, so to speak?). We can theoretically make money by paying the "Hold to maturity value." Bankers can't hold these assets to maturity because they have significant problems with upholding certain capital ratios: they will have to sell the bad assets at firesale prices.

That's the misconception

2. Because of that, a lot of economists, like Tyler Cowen, state that we need to figure out which banks are insolvent. The problem is that, even knowing which banks are insolvent won't actually help...hence the need for speed bankruptcy. A bank that goes through "speed bankruptcy" can have a payment plan forced down its throat and can force its creditors to accept it through the force of law, and have it done relatively fast: this means that someone new can take over the business, and market operations can return to normal.

The important bit is the "speed" part. Bankruptcy proceedings usually last a very, very long time, and, with all the complex derivatives, will likely take even longer for a modern bank. If you can't get a speed bankruptcy, we end up totally screwed, like in the LDC debt crisis: people fight for years over who gets what, and, in the meantime, the bank can't get capital. So, operations are hampered, and the economy suffers.

But, even if the "speed" part works, we will still have to wait for the banks to fail...even a failing one can keep itself afloat for a while, since not everyone knows that it is in danger and someone is still going to be lending...how do we solve that?




The Paulson plan, for all it's flaws, addresses those two fundamental concerns. It may not do anything, being a drop in an ocean of debt, but it's a lot better than nothing, and a lot better than most alternatives.

Oil prices do not create inflation

So says a new letter from the Fed Bank of San Francisco

Should make sense. Here's some BLS CPI data:


Any influence total inflation seems to have on core inflation seems small at best. Admittedly, this includes food prices as well, but energy prices have been jumping over the past several years, and the chart, to some extent, should account for that.

And Mark Thoma on why we use Core Inflation:

.... this paper finds that predictions of future inflation based upon core measures are more accurate than predictions based upon total inflation.

Hat-tip to Economist's View.

Update on Mid-terms

The Upcoming:

Western History: October 22nd
Law and Economics: October 21st
Real Estate Finance 2: Monday


And the ones that have been taken:
Real Estate 1: 97%
Managerial Finance: 96%



I've noticed a lot more studying among my peers recently. I am not sure whether to attribute this to taking harder classes, or being scared silly about the financial crisis.

In my case, the effect of the second is considerably stronger than the first.

Is the deficit "too high" to do the bailout?

Summary at bottom


One of the big arguments I see against the bailout package is that it will just kill us in the long-run: not because of the moral hazard problems, not because it doesn't actually solve the credit crunch, but because the government will have to issue $700 billion in additional debt, which is supposed to be "just too high."

Well, admittedly, there could be some problems with crowding out of investments and interplay with foreign exchange rates, but in terms of actual direct impacts on our standard of living? $700 billion isn't likely to break the bank.

The problem with debt spending is that debts have to eventually be repaid. This means, in the long run, either higher taxes or lower government spending: there is no way around it.

But what cuts will we expect?

Let's assume that we will pay for this $700 billion bailout entirely with ten year treasury bonds. Let's also assume that this massive drop of money instantly causes the market to raise interest rates dramatically, so that we have to pay double the current interest rate: that'd be 7.54%.

What would we end up paying over the next 10 years? Using handy-dandy financial calculators, and assuming semiannual compounding, this becomes a cinch: $50.46 billion per year for the next ten years, or about $168 per American.
But we probably won't pay it all in 10 years. Some of that debt will be paid for with NEW debt...meaning that we will end up paying for this over a longer period of time than just 10 years.
So, let's assume we are paying over the next 60 years. What becomes the payment then? $26.7 billion per year, or a paltry $89 per American.

Now contrast that with a recession: What are going to we lose if we wind up in a recession for even one year? Negative 1% growth is a reasonable estimate, meaning, essentially, 4% of the economy is lost (that's because the economy should be growing at 3%)
4% of $13.794 trillion is approximately $551.8 billion.
But...we're not done. If that GDP growth had occurred in the first place, then we would be growing from THAT level: IE, we would be growing 3% on that $551.8 billion, so we lose another

Over the course of, say, 60 years, how much growth will be losing?
Let's assume 3% growth. Hell, let's assume things go bad and we grow only 2%. How much growth is lost? The answer is a cool $1.77 trillion.



"But," I hear people complain, "the increase in increase rates will hurt the private sector and drive down growth!"
The argument is that by printing more debt, the government crowds out private investment. And perhaps it does...in theory.
Looking at the past 50 years, though, we'd be hardpressed to see the story.

Here's a look at real interest rates on US 10 year bonds since 1953. I made this one myself from:
Misery Index
Federal Reserve Documents



And now let's look at the per-person deficit (not a perfect measure, I know, but better than nothing, right?):



Real Interest Rates did indeed increase with the massive increase of the deficit...in the first year of Reagan. They then fell, and continued to fall. Even today, with the Bush deficits, treasury rates don't seem to be moving anywhere in a northerly direction. Rather, rates remain relatively low (3.77% for a 10 year bond)

So, government deficits...don't really drive up interest rates. Or at least, I don't see evidence that it's doing so right now, or has in the past. Theoretically, it is possible: the government may just not be putting enough T-bonds on the market yet




Summary:
-Cost of bailout: $89 per person over the 60 years (that's a high estimate)
-Cost of depression: $2.2 trillion (that's a low estimate_
-Real interest rates don't seem to be driven by government deficits







Addendum:
-Discount rates aren't used in this. Discount rates mean that a dollar in the future isn't worth as much to you as a dollar now. That's not adjusting for inflation, it just means you'd rather have a corvette NOW than 10 years from now. People prefer consuming in the present. If discount rates are used, then bailout looks a lot less attractive, since the $700 billion has to be paid out NOW.
-I am also ignoring that we will probably recoup a large amount of the $700 billion outlay
-I am also ignoring the direct effect on public finances, and looking only at social costs. In the short-term, taking on this debt will mean a lot less flexibility, and it means public finances will be in worse position until the debt is fully paid off (or, rather, the tax revenues from increased production pay off). That means that the "break-even" point for the government is later on than it is for society as a whole

What I am learning about war

From the book "What do we know about war?"

1. Territorial disputes are far more likely to lead to war than other disputes. This is probably because such disputes are highly visible, don't give much room for policy maneuveuring, and lend themselves to military fights (since armies are designed to capture ground)

2. Alliances have generally led to increased war, but there are fundamentally different kind of alliances. An alliance between Peru and Ecuador to take over Europe doesn't really matter. Similarly, a non-aggression pact between France and Germany because they just settled an old dispute generally does not lead to increased violence. On the other hand, an alliance between two unhappy states, or states that have a big difference in power, lead to war. The first because neither country likes the status quo, and the second because states generally do not ally with other states that have more power or less power than them...a new alliance would imply war soon.

3. Democracies behave differently. They make alliances for non-strategic reasons, ally with other democracies, have longer alliances, and escalate more when facing non-democracies.

4. Military buildup increases the chances of conflict, especially when the international order is in flux and when the defense budget is high.

This is getting ridiculous

Absolutely ridiculous.

CNN just had breaking news about some key breakthroughs on the bailout...highlights were mostly about executive compensation.

A LOT of anger has been coming out lately about executives getting untold amounts of money. I can't say I blame them: executive compensation is getting wildly out of control, and a lot of it seems based on...nothing at all. They even get massive aid packages when their companies fail and let the CEOs go due to bad results: the so-called "golden parachute" that many worry about.

However...this really is not the time to be addressing those issues. This discussion about the bailout package should largely be focused on the economic ramifications of dishing out $700 billion to the private sector: will the program even work? What happens if it doesn't? How will we finance it? What is being given up to fund it? Who should manage the assets and how should we value them?

Instead of that, we hear loud cries against bailouts, saying let the whole system collapse and force CEOs to live in cardboard boxes forever.

Looks like "proof beyond a reasonable doubt" doesn't apply if you are rich. And rational discussion can't get done if even a spot of cash gets sent to "the rich."

Funny how many people support tax cuts, though...

Career Fair

Last Thursday, the University of Illinois at Chicago hosted the Fall Diversity Career Fair at the new Forum building.

It was a pretty nice get-up, all in all. Entrance was speedy, as usual, despite the fact that the actual fair floor was literally wall to wall people (especially around the bigger name companies, like Allstate). However, most all of the representatives there were genuinely nice, despite the heat and the noise. A good experience.

To would-be job-seekers, though, I would offer the following advice:

1. Actually dress up. I saw a number of people (though a small minority) that came in nothing but a t-shirt and jeans. Seriously, folks, that's not the kind of image you want to be sending to potential employers!

2. Follow-up, follow-up, follow-up. If you have a business card, send a thank-you email immediately. Get on your computer and log onto the company website RIGHT NOW. Go down to the career center and sign up for one of their seminars if you haven't already. The biggest problem people have is keeping up the momentmum after they feel pumped up: don't let this happen to you!

3. Calm down, folks. Relax, have a little bit of fun. It's a job fair, but you're also in college, and everyone (including employers) likes someone sociable. If you're standing in a long line for an employer, talk to the people around you. Crack a few jokes.



Hope that helps.



P.S. For younger readers: Start the career process now. Go find an internship, talk to companies, etc etc. It helps a lot later on.

Government vs. Private Culpability

A lot of crap has been flung around over the past couple months among people trying to assign blame to different actors in this crisis. Is it the loan officers? The homebuyers? Wall Street? Fannie Mae? There's a bit of blame for everyone to share here.

One of the biggies, though, is a large group of people blaming government in general and the Federal Reserve in specific for this crisis. According to them, if they had not acted so capriciously and created such easy credit, this crisis never would have been able to get off the ground. Hence, according to these people, the Federal Reserve should be eliminated...or at least have its power restricted.

So, is government culpable for this disaster?

The argument rests upon the creation of easy credit. By decreasing interest rates too much, companies and consumers start loading themselves up with debt. Interest payments are low, expected growth is high, so why the heck not? However, the "easy credit" also implies "irrational exuberance." The government is creating artificially strong business conditions, above where we could produce with a full employment economy. So, once the economy starts cooling down, a lot of the debt that looked good at the time...really isn't. Mr. Time Machine producer who took on a $1 million home equity loan is screwed because he has no market and all these interest payments to service.

In this example, government is the primary villain. By lowering interest rates and making the economy seem better than it actually was, they encourage the entire private sector to over-leverage, thus setting the economy up for a painful readjustment.



But, wait! There's a scenario where private actors make the mistake, and government acts perfectly rational. In this example, the private sector makes the mistake because they take the credit and do stupid things with it.

Consider the example where the government perfectly manages interest rates. The Federal Reserve has just the right Fed Funds rate and just the right amount of T-Bonds on the market, and the economy is producing exactly at full employment. All is well...right?
Well, Mr. Time Machine Producer still ends up getting a $1 million home equity loan, because some bank thought it was a good idea. That still doesn't change the fact that, objectively, his business plan doesn't work because his product cannot possibly exist. So he's going to default.
The point is that markets can still misjudge business ventures and the credit quality of borrowers, even if the economy is functioning perfectly smoothly and government has set interest rates perfectly. No matter if credit was tight, loose, or just right, the private sector would STILL be misallocating resources. And that means painful readjustment.
The questions here are two fold. The first is what size the bubble can possibly be. Many would assume that the bubble can't get very big. This, however, depends entirely on the private sector and its own interpretations. If it reads the market VERY wrong, it's going to misallocate resources VERY wrong.
The second question is one of adjustment. If markets have allocated resources badly, shouldn't they reallocate them very quickly, thus averting recession? That's a question of sticky prices, particularly ones involving the labor market, and therefore tough to answer.

But if the private sector reads the market wrong and the market is slow to adjust, we can be stuck in a long recession, even if the government did everything right.




What about the current crisis?

Well, in my opinion, we probably were overproducing. Unemployment was below 5% and inflation was higher than normal. That suggests an expansionary economy (IE, overproducing), meaning too easy credit, meaning the potential for an overall bubble.

But we've had expansionary economies before. This crisis, though, is the worst since the Great Depression. What gives?

It should be obvious: private failure. The failures have largely concentrated in the mortgage market, especially in the subprime market, which is in turn affecting credit. That means sectors of the economy related to finance and home building are hurting, but the rest of the economy is still chugging along pretty well. That suggest MASSIVE misallocation of resources by severely underpricing risk: a private sector failing by definition.

Less Focus on SATs?

That's what one commission is suggesting
In my experience, standardized, heavily regulated tests are the only reliable measures to go by. Cheating and work-sharing are rampant, and grade inflation is practically an institution in the American education system at all levels.

If I were an admissions officer, I would consider your 4.0 GPA to be hogwash if you can't get higher than a 26 on the ACT

Central Bank Independence

Some people seem to think that Bernanke and his band of Merry Economists have overstepped their bounds in their bridge loan to AIG.

Well, they certainly might have...but one wonders why Congressmen whine about the lack of oversight of the Fed when they themselves aren't subject to too much "oversight." I mean, they get a heavy hand in drawing their own districts, right?

Anyways, people seem to increasingly demand the reigning of the Federal Reserve Bank. Problem being that this isn't entirely logical. While the Fed has expanded its powers somewhat, central bank independence is an important pillar of any modern economy. It ensures that the financial system isn't subject to the whims of politics, and instead is a rational process based on the needs of the nation.

It is also important to ensure that policy is prompt. Since the Federal Reserve is subject to less "oversight" it can respond to crises faster. While cutting interest rates in order to stimulate demand is still slow, and only a bit faster than government spending by a bit, the Fed has demonstrated remarakble speed and innovation in moving to avert disaster. For instance, quickly extending a bridge loan to AIG, opening the discount window to Investment Banks, etc etc.

The alternative is to rely on government. Government, at the best of times, is relatively slow-moving, and when it is fast moving it is generally in response to national security issues (like the PATRIOT Act). At the worst of times, IE, right before an election, IE, right now, it is ponderous and incapable of the nimble movement required to navigage modern finance.


Hence, central bank independence=good

Updates

I am now an Econ-Finance Major. The double major petition was accepted by my university. Hurrah for me.


In related news, campus recruiting kicks off this week as well. Hopefully this double major gets me something better than Burger King!

Thoughts on Finance Classes

What is most striking to me about the majority of my finance classes is that theory is not really emphasized, while formulas are of the utmost importance.

I don't want to knock math, per se. However, a lot of what we learn ends up feeling a bit disjointed. Attend a class day after day, where one formula gets listed after another, and it's very easy to lose sight of the bigger picture and get lost in variables.

The formulas largely consist of valuations. Bond valuations, stock valuations, etc. They are immensely important to understand the cost of the capital structure, which is in turn important to understanding how the firm makes expansion decisions.

HOWEVER, our finance classes generally fail to highlight the bigger picture. They also generally fail to move a quick pace, meaning that we don't look at weighted average capital costs until late in the semester, when bad grades and the daily grind have generally sapped all interest. This is exacerbated when we don't look at the psychology of firm decision making and look exclusively at finances.

An improvement I would make? What variables would change the factors involved in the equation? What would change the discount rate, the capitalization rate, the stock growth rate, etc etc.

In my opinion, it would go a long way to making the course seem more "real" and generating interest in introductory finance courses.

GSEs and failures

One the big arguments I see coming out against the Fannie Mae bailout among the more "fringe" group of people (IE, the libertarians) is that the Fannie Mae bailout largely wouldn't affect normal people. Since it wouldn't affect normal people, we shouldn't even worry about Fannie...especially because bailing out Fannie requires taxing the normal people!

Leaving aside how the tax burden actually falls on the population by income bracket, let's look at how Fannie interacts with the "real economy."

Fannie's primary purpose is purcahse mortgages from banks, pacakge them into mortgage-backed securities, and sell them to big-time investors. The function is pretty important in the modern economy. Big investors being able to buy simple securities instead of a hodgepodge of loans means capital infusions into residential real estate, meaning basic people can afford to buy loans...especially in an era when Americans themselves don't save much money anymore.

So, eliminating Fannie=making a lot tougher for normal people to get loans, just based on sheer capital available.

But what about liquidity? Fannie provides liquidity to local banks. Rather than having 30 year assets on their balance sheets, banks can instead have money to make more loans, either to other home buyers or to local businesses. This means a greater amount of money being invested back into the community. That means more local barber shops, more local restaraunts, and more local 7-11s. And it's being enabled, in part, by Fannie Mae.

Those are two very real effects that Fannie Mae has on the "real economy."

Hence, yes, Fannie Mae matters to everyone.



But what about the cost?

But who's actually paying, and who's actually benefiting?

For one, common stockholders aren't, and have been entirely wiped out. The people benefiting are China, big investors, and other big banks that bought preferred stock and mortgage-backed securities. Also benefiting is everyone who is buying a home, or possibly thinking of buying a home, or even renters (since more homeowners should mean less competition for rent). IE, everyone kind of benefits. This might be a bias against wealth, since the least wealthy are the ones most likely to be unable to afford higher interest rates. The least wealthy also are hurt the most when the economy slows down.

Who actually pays the tax burden?
Welly, by and large, two thirds is derived from corporations and income taxes. Taxes on corporations largely hurt corporations and those that own stock/bonds most directly. So that's a bias against wealth, on average

Let's look at income taxes.
Look at Page 22
As we can see, the wealthiest, obviously, shoulder most of the tax burden. The lowest 20% pay almost nothing, and the next 40% pay less than $10,000 annually. And that's just in taxes. Using slightly rounded numbers, the bottom 60% shoulder 28.8% of the tax burden, or $58 billion in this plan. Assuming 100 million households, that's a bit shy of $1 grand per household.

I think a one time payment of $1,000 is well worth lower interest rates. ;)

My own policy positions

In order of importance:
-Health care reform, based on market principles and changing incentives to reduce the amount of unnecessary health care Americans use. Means limiting doctors to fee-for-service, tax credit for health care, and taxation of employee health benefits.
-Education reform, based on stronger federalism principles. National standards on a national test, an individual tax deduction/voucher that can be used at a licensed school system of the parent's choice, and no federal funding for states that don't sign on to the program
-A harder line stance on Iran that includes the application of hard military power
-A sensible withdrawal of the majority of combat troops from Iraq, with the permanent presence in the nation being minimal
-An extension and regularization of the tax credits for solar and wind energy, plus a renewed effort to completely revamp the nation's power grid
-A hard push to add Ukraine and Georgia to NATO
-A reconciliation with Syria
-A broader and more defined economic policy with China, to include obvious rules for improvements with clear punishments defined, in addition to assistance to help China develop its local administration so it can more effectively police its rogue local governments
-A carbon tax on all power and commercial polluters, coupled with increased CAFE standards (over the increase that is already planned)
-A simplified FAFSA form, and simplified financial aid system at the college level to a single form of loan capped at $10,000 annum, indexed at inflation. Simultaneously, the addition of two years of general education to the normal "high school" system.
-GAAP only. No friggin' International accounting standards, regardless of what the SEC suggests
-A raising of income taxes...50% increase at the upper tax bracket, 15% increase for the lower tax brackets. Implementation of a sales tax at the 10% level nationwide. Similarly, the AMT will be abolished.
-No more public housing
-Adjustment of the tax code to eliminate the mortgage tax deduction, instead only allowing only property taxes to be deducted at a to-be-determined percentage rate (not sure if the government already allows deduction of property taxes)


Missing from the list that may be important:
-Increased/decreased military spending
-Social Security Reform


More in-depth thought later, but for a brief moment, let me explain the rationale:
The idea of this reform system to simultaneously address the long-run issues of a globally competitive environment, sustainable public finances, and preventing the erosion of American health.

Hence, the concentration, by and large, is on education and health care reform, both of which are eating away at the incomes of American families. In addition, the tax burden would likely increase significantly under this particular plan (basically everything raises taxes to some extent), but the tax burden is allocated in such a way that it should address other issues too: issues like low savings rates, overinvestment in real estate, externalities of pollution, and malinvestment in the health care sector.


I think it's a bearable plan. ;)

Experience: Palin and Obama

Before you get riled up, this isn't about whether either candidate is "experienced enough" to sit as President of the United States. That's a long argument that I personally don't want to get into on this blog at the moment. Suffice to say that I do in fact believe that Obama does not yet have the experience necessary to be the leader of the free world, and neither does Palin.

What I am concerned about, though, are Republicans and other McCain-supporters suggesting that Palin's "executive experience" should count for more than Obama's time in Congress. The idea is that executive decision-making is ultimately completely different from legislative decision making, and therefore Palin's experience is more relevant than Obama's.

But is this neccessarily the case?

Don't get me wrong: I would prefer a President to have experience as an executive. That's part of the reason why I supported Mitt Romney in the Republican primaries (though Republicans seemed to prefer McCain instead for some reason!)

Sarah Palin's executive experience, though, is very limited. Her only relevant experience is the governorship of Alaska, but how relevant is that to the United States as a whole?

Let's consider the economy:

The oil and gas industry dominates the Alaskan economy, with more than 80% of the state's revenues derived from petroleum extraction.

Now, let's stop right there. 80% of revenues derived from oil? Alaska's economy more closely resembles a Middle Eastern nation than the United States of America. The lack of diversification makes me wonder how much experience Palin actually has in resolving the various disputes and economic difficulties that the President is going to face.

So, on a major issue (economics) her experience might not be all that relevant.



And what about her foreign policy experience?
Well...uhh...we have no idea if she even has any.



Now contrast this with Barack Obama. While true that he hasn't been directly responsible for the well-being of the entire nation, he has been working in Washington, meaning he has spent the last four years looking at the problems America as a whole is facing directly in the face. So, in fact, he does have some experience with national issues.

Also difficult to gauge is how much wheeling-and-dealing he is doing behind the scenes. Politics is a give-and-take game, relying on compromise, motivating others, and even threatening dissident politicians. In that sense, he also has some experience in negotiating a bureaucracy.

That's two bits of experience that do...sort of qualify Obama to be President. Governor Palin, on the other hand, only has experience with a specialized economy on the fringes of the nation, with no experience in foreign affairs at all.


It's pretty clear who's the winner there, "executive experience" or not.

Make Work, Save the Economy?

One of the ideas that is getting thrown around a lot at the Democratic Convention is the idea that government can automatically provide "high-paying jobs" to our nation's workers through "rebuilding the national infrastructure" and this is a good thing.

The rationale is that many people are out of work, and that the nation needs infrastructure improvements...put the two and two together, and the answer seems perfectly rational! Woo-hoo! Soon we'll be rolling in the dough!

However, by only looking at "save the environment" and "improved roads" and "higher wages," the Democrats are actually missing a big chunk of the picture, namely the fundamentals of economic growth and productivity, hence preventing them from seeing the fact that, in material terms, we will necessarily have to be poorer to carry out their ambitions.

Let's consider the "save the environment" approach. The Democrat approach can be summed up in the Al Gore approach, which aspires to carbon-free electricity within 10 years. The problem here? Massive retooling of the energy industry must be done in order to accomplish this, which requires untold billions of dollars and tearing down a lot of existing infrastructure that's still useful. Hence, retooling the entire energy industry means we are actually destroying wealth rather than creating, and sacrificing other goods in order to pay for the new "green stuff." While it's true we may be better off in the long-run and even in the short run, as we may avert highly damaging global warming and we greatly value clean air, in the direct material sense, we'll be worse off. That means these workers aren't actually producing anything of direct value to the economy. Since the Democrats are touting this as the solution to our economic problems, I am left scratching my head.

The same logic applies, for the most part, to the reconstruction of the nation's roads as well. It isn't actually adding any value to the economy, since it is only maintaining what we already have as opposed to the construction of new roads and railroads to tie the nation together. It's rather hard to justify an economic policy that is based on merely keeping up with where we are right now.


It IS true that government spending can be helpful during a recession (or near recession). Reimbursements can help alleviate some of the pain of economic adjustments, or specific groups in general. Government spending can also be used to manage demand (IE, kick start it) so the economy starts humming again. Government spending is also helpful if it invests projects that provide the essentials for economic growth, like a strong national defense or a power grid.

However, the Democrats are apparently looking at things from a supply-side perspective: they see the falling wages as endemic to the Bush administration era, which encompasses a rather long economic expansion as well as two "recessions." Hence, they don't view their investment program as a simple means to readjust the economy in the aftermath of the credit crunch. Rather, they see this infrastructure investment as a viable solution to an endemic problem (growing economic inequality).

But how much sense does that really make?

Sorry! I've been gone for a while

I haven't posted in a while as Cybernations, a game I play rather extensively, is currently in the midst of a major war. While the war continues, the role I play has shrunken appreciably, and I'll be able to start writing again.

Oprah: Worth 1,000,000 Votes

See here

Our results suggest that Winfrey’s endorsement was responsible forapproximately 1,000,000 additional votes for Obama.

Hat-tip to:
Mankiw
Marginal Revolution


My personal thoughts:
Opinion leadership is very important, but I'm hesitant to think that people are forming opinions just because Oprah is making one. A big factor, as I see it, is the increase in voter participation and voter awareness: getting people to recognize think that the election is important is probably more important than the direct endorsement.


Caution, though: I haven't actually, ya know, READ the paper.

The Death of Doha

The question is, where do we go from here?

Some have suggested that the obvious alternative is bilateral free trade agreements with more nations (even though Congress seems to be putting up stiff resistance to any new deals).

The problem is that this is a bad solution to the problem of global trade reform AND globalization in general.


First, global trade reform. The idea that bilateral trade agreements by the United States are a prescription for global growth problems is a flawed one, because it ignores a lot of the actual and potential trade that plays a big factor in making us all wealthier. The presence of trade barriers between nations in the Third World means that those nations aren't going to be able to realize their full growth potential. The same problem will exist as long as trade barriers exist between Europe and Africa, Russia and China, or any other two individual nations in the world. Eventually, this negative wealth effect acts on us in a perverse trickle down mechanism, sapping our economic potential as well.

Worldwide agreements and organizations like the WTO lower trade barriers globally: it's why the trade talks are so important.

Another important factor: globalized trade talks allows smaller nations to pool their collective demands, much in the same way that unions allow workers to pool their bargaining power. Bilateral agreements allow larger nations to exploit their advantages over poorer nations: it's not surprise, then, that poorer nations aren't so happy about the Doha Round failing.

The effects of trade barriers between other nations and the exploitation of superior bargaining power becomes a LOT more important when you consider the fact that the fastest growing economies are developing ones, and not developed ones.




Holding down the growth of the developing world matters. A lot.



Second, globalization encompasses more issues than simple trade. Also included are questions regarding technological implantation, like what standards we should use on the Internet and how to apply child pornography laws. It includes pollution, global financing laws, and weaponization of space as well. Another overlooked issue of globalization? Flows of labor, which presently don't have much of any global regulation whatsoever.

Doha, of course, didn't really address any of these issues. However, what Doha represents is a failure of nations to work together, even when their interests should be, theoretically, mostly aligned (everyone gains from free trade). Such hard-headedness signals bad times for the coming century on the many issues that affect everyone on this planet.

Court defends "Exorcism"

This is just too insane to be true

Basic background: A 17 year old girl (now 29) was abducted and subjected to a 2-day exorcism, where she was pinned to the ground and "pummeled."

So, she did what any sensible person would do: take her assaulters to court. Lowers court ruled in favor of the girl and awarded her $188,000 in damages. Big ol' Daddy Texas Supreme Court comes along and overturns the ruling, arguing that this is a First Amendment case...therefore it would be unconstitutional for the court to make a ruling on a religious environment. It's not a blank check, mind you: churches can't sexually abuse children. But the trauma caused by this particular religious experience was not considered within the jurisdiction of the court.


She's taking her case to the US Supreme Court.

I definitely think the Texas Court is in the wrong here. While I respect the rights of religions to hold their own spiritual practices and am willing to grant them some leeway on "child abuse" (for example, a child fussing about having to wake up at 7 AM on a Sunday would not be an adequate excuse for government intervention), this exorcism ritual crossed the line. Physical abuse and forceful pinning for days is an obvious abuse: what 17 year old wouldn't be afraid of being constrained by multiple others for an extended period of time?

And if it's obvious abuse, it isn't permissible under the law, just like sexual abuse.

No, Virginia, High Oil Prices are BAD!

Or at least not anywhere near as good as people are implying.

A lot of talk in the media recently has been about the "good side" of high oil prices. For example, a list that a friend recently sent me in an email includes the following "goods" about high gas prices:

1. Globalized Jobs Return Home
2. Sprawl Stalls - 'Across the country, real estate agents are reporting that many home buyers are looking to move closer to cities. Gas prices are shaping their decisions.' -- Did you not call for an increase in population density at one point?
3. Four-Day Workweeks
4. Less pollution -- heart of the matter
5. More Frugality – 'We're all wasting less.' – Also advocated by WFan.
6. Fewer Traffic Deaths
7. Cheaper Insurance
8. Less Traffic
9. More Cops on the Beat
10. Less Obesity

And the most recent Businessweek?
http://www.businessweek.com/magazine/content/08_31/b4094000658012.htm?chan=magazine+channel_top+stories

The Real Question: Should Oil Be Cheap?
Expensive oil hurts, but there's a business case to be made for a floor under the price of crude

The basic idea is pretty simple: low oil prices in the past cause all sorts of bad things that we don't like, such as childhood obesity, reliance on foreign oil, outsourcing of jobs, etc. Since oil prices are now high, people can exercise more, cut back on "frivolous consumption," develop alternatives to oil, and develop public transportation networks.

Don't get me wrong. Oil prices in the 1990s were probably too low. Hell, they are probably too low NOW: the price of gasoline still doesn't include the environmental damage it causes. But that's due to the externalities of oil prices...and, like I just said, the externalities still existed. Other than that, everything represented fundamentals.

When it comes to a good with a price determined exclusively by fundamentals and where the private cost is the total cost of the good (IE, a perfectly competitive market with no externalities), more is ALWAYS better. We call those "supply-side shifts." And as any econ 101 student can tell you, supply side shifts mean more goods at lower prices. People don't care so much about being obese, having awesome public transit, or supplying foreign nations with dollars: they are far, far more concerned about having cheap gasoline. They WANT cheap gasoline.

Or, just take a look at those most hurt by the high gasoline prices: the poor. They cannot afford new hybrid cars, they are not located near public transit, and they can't cut back much on their own driving. It's precisely the reason why economists say that energy taxes need to be paired with lump sum rebates especially targeted towards those with low income: people with low income are hurt worse when gas prices rise.

So, what do we really want? We want cheap oil. What would be REALLY awesome if we had cheap oil that didn't negatively affect the environment. And doesn't that make sense? More of good stuff=good.

So, ARE boys better than girls at math?

Sometimes, I really don't have to write a thing!

The answer: that's not the question you should be asking.

Rather, you should be asking how the skill level of boys and girls varies by person. If there is a difference in variance, then it means one group will be producing more geniuses (and idiots) than the other. Since certain jobs require a LOT of intelligence, it means that one gender will be over-represented in that field.

Career Education in the United States

Full Report Here

Here's an interesting bit: we know that more women than men are going to college these days.

Did you know they also are more likely to get additional education when out in the work force?

Higher rates of participation in work-related coursetaking were also observed for (female) than for male adult labor force members in 2004–05 (44 vs. 31 percent)

Scariest sentence this morning

The White House, citing an urgent need to restore market confidence in the two mortgage giants, Fannie Mae and Freddie Mac, said President Bush would sign the measure despite his opposition to the inclusion of nearly $4 billion in grants for local governments to buy and refurbish foreclosed properties.

Why in the world could you oppose that?

Taken from the NY Times article on the Housing Bill

Echo Chambers and the Modern World

You know what an echo chamber is? It's where you say something, and all the room does reverbate the sound of your own voice back to you. It's pretty kickass if, like myself, you like the sound of your own voice. Most people seem not to (and I didn't before I got a radio show in high school). But that's another story for another a day.


A lot of us live in a certain kind of echo chamber in our everyday lives, though. The CEO who surrounds himself with nothing but "yes men" only hears his/her ideas echoed back to him. Teachers who conduct anti-drug or pro-abstinence seminars often have the same phenomena with their students...5 minutes before the alpha dog slaps on a condom to have sex with the rebel "slutty" girl while sparking up a Marlboro (and he's 14!).

And a lot of us have similar information echo chambers. If you're a right-wing conservative and you tune in to Fox News, chances are you are only hearing your own ideas back bounce at you. A very similar thing occurs if you're a liberal who relies on DailyKOS for all of your information.

The problem with an echo chamber is that people who discuss their ideas tend to start out a bit moderate with a slight leaning in one direction or another. Since they only encounter arguments from their own side, they tend to get very confident in their beliefs, and grow more extreme. If you're a conservative and turn on Rush Limbaugh thinking that welfare is a bad idea, you'll probably turn off the radio thinking that welfare is the WORST IDEA EVAH and that anyone who supports it is an obvious dummy at best, and pandering for the black vote at worst.

A curious effect might be that the most politically active of us become the most polarized of us, at least if we are more likely to look to sources that share our beliefs. The politically active among us talk about the issues, go to their respective echo chambers, and come away bloodthirsty radicals that want change and want it NOW. What can possibly moderate this?!

Well, it ain't the real estate market, that's for sure. See here:

Americans are increasingly forming like-minded clusters. Conservatives are choosing to live near other conservatives, and liberals near liberals.


A good way to measure this is to look at the country's changing electoral geography. In 1976 Jimmy Carter won the presidency with 50.1% of the popular vote. Though the race was close, some 26.8% of Americans were in “landslide counties” that year, where Mr Carter either won or lost by 20 percentage points or more.

Americans, with higher incomes and more mobility, can increasingly choose where to live, and they can make a lot more choices than they used to be able to. Since people like living around like-mindeds, they create clusters of red and blue zones. And the effect magnifies the echo chambers...especially among those who care most about politics.

Heck, politics even seems to matter when we choose who we marry, though I can't find a link for it at the moment.


Echo chambers. So very cool.


But so very dangerous.





This post borrows heavily from the writings of Cass Sunstein, particularly Infotopia. A very good read. :)

Why Poor Nations are Poor

Why? What we all agree upon

It's one of the biggest questions of the modern world: why are Western Europe, the United States, Japan, and certain British dominions so wealthy, while the rest of the world is so damn poor?

The answer largely depends on who you ask. If you ask a die-hard libertarian, its because the poor world did not embrace markets, whereas the wealthy Europeans have had a more...sophisticated respect for capitalism. A die-hard liberal might point to oppression and exploitation by the West, while more moderates might suggest that institutions (financial markets, democracy, allowing interest payments, etc) allowed the West to gain incredible amounts of wealth.

But we can all point to one point in history where the West started to take off: the industrial revolution. Starting in England and slowly migrating to other parts of Europe, the Industrial Revolution created incredible wealth, while most of the world has only recently begun industrializing.

So, we have our opinions colored by this industrial revolution. Economy policy prescriptions seem largely based on what we think allowed said industrial revolution occurred, which has largely been a rigorous treatment of markets, political reform, and the establishment of new economic institutions.

But, what exactly defined the Industrial Revolution?

A lot of people suggest that it is the development of new technologies, which allowed factories to be built as production was more advanced. Hence, we tend to think of the Industrial Revolution as being relatively capital-intensive: heck, just listen to the communists rant about capital and the means of production. Hence, we consider the development of industry and manufacture to be an essential part of economic development. Because of this, we tend to look at things like tariffs as being an essential part of early development, because it allows domestic industry to develop.




Gentlemen (and whatever ladies we have), this is poppycosh. It is true that capital stores have been enhanced somewhat since the beginning of the industrial revolution. It is not, however, true that the industrial revolution was primarily about industry, and that nations that developed heavy industry were the ones that ended up being the wealthiest by some inevitable process.

Why we buy capital

Capital reserves are based on two things: the real interest rate and the returns to capital. Much like supply and demand must equal each other, so must the interest rate equal the return to capital. If you are going to spend $1,000,000 on building a giant new factory, and earn $50,000 over the life of the factory (or 5%), you'll only build the factory if the interest rate during the same period of time is equal to or less than 5%. Otherwise, you'd invest your money instead of building a factory.

Real interest rates in England at the time of the Industrial Revolution were already relatively low, relative to those of the rest of Europe and of Asia. Declines in real interest rates are not the primary factor driving the industrial revolution. Therefore, we have to point to returns...

But why did returns suddenly increase? Is it, as some people suggest, England levied protective tariffs? Perhaps this is A factor, but probably not the primary one. The textile industry (which produced roughly half the gains England experienced in the early Industrial Revolution) was a highly competitive industry within England, since the optimum size of a textile plant was very small. Hence, returns to capital were low, as profits were very low.

Technology? Definitely the case, along with other innovations. Efficiency gains make the production possibilities increase, and also increase the returns to capital. Hence, there's a rush to buy MORE capital after a new technology comes out that makes spinning threads easier.

You might be thinking that I have just disproved my point. Au Contraire. Keep reading

Globalization in the Late Industrial Age
At first, England tried very hard to protect its markets, as well as keep technology within its own borders. This proved impossible, and technology slowly leaked to other nations around the world. Similarly, England steadily lowered its tariffs (in contrast to, say, France, where tariffs were low throughout to the 19th century).

Great Britain also committed itself to a policy of free markets and free® trade, and other European nations were also committed to building essential railroads within its colonies in order to safeguard gains. Hence, by the time the late 1800s rolled around, the world was surprisingly well-integrated. The globalization of the 1870-1914 era is hard to understate. This is largely the result of the two World Wars: if the economy was so well-integrated, why would the nations of the world fight each other? This is another question for another time, but suffice to say that trade compromised a large part of most European economies at the time. Exports and imports accounted for something like half of the French economy in 1914, compared to 54% of the French economy today. And Germany was the biggest trade partner in 1914, just as it is today.

The developing world was also well-integrated, at least for global capital markets. We can see this in the interest rate between nations at this time, which have absolutely nothing to do with income: India's interest rates were actually lower than those of the United States. India had access to all the capital she would ever need, and all the technology that her European peers had. Because of this, Indian railroads (which were subsidized by the Indian government) were actually better constructed than American railroads.

Yet, India did not develop. Nor did Africa, nor did the Ottoman Empire. In contrast, the United States, plagued by monopolies, corruption, and relatively BAD capital markets, did develop. What gives?

Efficiency: Not Just Technology
As previously stated, efficiency gains explain why countries would purchase more capital. What I did not mention is that efficiency gains also explain a large portion of economic growth in and of themselves (75% or more).

Efficiency, however, is not merely new production technology. I could give a group of three year olds access to a nuclear reactor, and they would be unable to produce even a watt of electricity. Technology means nothing if you can't utilize it properly, and that was the difficulty that less developed nations had. For instance, a textile mill in India would have 1 worker per loom. In contrast, a British or American loom would typically have 1 worker service 8 looms at once. Hence, productivity per worker was far higher in the developed world, and wages/income were higher as a result.

Intangible are things we undervalue greatly today. In part, this is the fault of economists, who concentrate largely on maximization and equilibrium rather than the spread of ideas. Yet, these intangibles are largely the reason why the West is developed today, while the rest of the world has not developed.

Hence, the American South, which had very little industrialization at all, would've rated as the world's 4th richest nation in 1860. Nations can make a fine dollar by exporting something that is not considered an industrial staple, as the general increase of wealth increases demand, and the nation can increase its own supply side through alternative means.

What intangibles are important
Of this, I am less than certain. "A Farewell to Alms," which this post is heavily based off of, suggests that labor quality in the undeveloped world was far inferior to that of the developed world. The example used, though, is hardly conclusive, and might be construed as inept management.

Labor quality probably was, however, inferior, just as it remains inferior today. Similarly, the undeveloped world did not have a core of entrepreneurs and experienced managers, unlike the developed world. This is highly important, as importing management is not as easy as it seems (the soft skills of a manager matter greatly). The lack of entrepreneurs might in turn be the result of lower literacy levels and the low social status of merchants in such times, whereas business became the playground of literate Samurai in Japan. (Indeed, literacy levels in India remain relatively low, barely higher than levels in 1700s England).

Prescription
So, if we want to increase wealth in the developing world, what should we do?

First off, stop dumping aid on them. It doesn't actually increase their living standards. If anything, it actually REDUCES living standards, because parts of the world remain in a Malthusian trap. Any increase in resources(particularly medicine) actually reduces living standards.

Rather, we should focus on the intangibles of growth. That means discipline in the workplace. It means a strong respect for entrepreneurship, and higher literacy and experience in managing businesses. It also means more focus on how different societies operate, so that managers can make most effective use of their work face.

What am I not prescribing? I am not talking about democracy. I am not talking about free trade or free flow of capital. I am not suggesting high tariffs. Certainly, to some extent, these things are actually helpful (in fact, the reintroduction of globalization in the 1970s and 1980s probably set the stage for growth in India and China after they had experienced large growth in literacy and bureaucratization from their statist governments. Ironically, their socialist governments might have done an absolutely remarkable job in preparing them for the capitalist world). They are not, however, sufficient conditions.

DIFFERING VIEWPOINTS #1: Fannie Mae and Freddie Mac

Unless you've been living under a rock, you probably know that Freddie Mac and Fannie Mae are probably going to join the long list of companies that have had government bailouts. You know, along with the S&Ls, the airline industry, etc. etc...

The problem, many believe, is that private companies should not have government bailouts....ever. Firstly, it's immoral: private corporations shouldn't be getting money from the government. The logic behind this is obvious. People who invest in corporations are naturally taking an obvious risky option, and the people who own major corporations are (presumably) the wealthy. Why pay off a bunch of rich people because they screwed up?

The second argument is a more practical argument. When Freddie and Fannie do well, the stockholders reap all the profits. When Freddie and Fannie do bad, the taxpayer is left holding the bag. Socialized costs and private benefits, it is argued, tend to lead to excesses. If I lose little of my own money, and but get all the rewards if I win, I'm going to be taking a lot of risky actions.

So, bailouts are bad.

The second bit is the logic one of my friends uses in his argument, in one of the companion pieces to this post. You can see the whole thing here


However, I disagree with both of the above points...at least to some degree.

In the first: Increasingly,, regular people are owners of equity. It's not just Warren Buffet who gets hurt when the Dow Jones tumbles 2,000 points. It's also your neighbors and the California teachers. This doesn't necessarily mean that it's right to bail out companies in order to buoy stock prices. After all, we could still help those people out through other means (liberals would argue, perhaps, by increasing social security benefits). But it's something to consider...at least if only to recognize that, when the financial market gets hit, everyone else hurts too.

In the second, as Krugman points out, Freddie and Fannie weren't the ones innovating in high-risk securities. That's those "other" companies, like Bear Stearns, Countrywide, etc etc. You know...those other guys that are getting bought out.
That's because Freddie and Fannie were highly regulated in addition to having an assurance of a government bailout. So, they only were investing in relatively safe loans. It looked like a bad bet when everyone was making money in the 90s and the early millennium...doesn't seem too stupid now.

However, even Freddie and Fannie are getting hurt...but that's because the whole system is hurting:

In Los Angeles, Miami and other places, anyone who borrowed to buy a house at the peak of the market probably has negative equity at this point, even if he or she originally put 20 percent down. The result is a rising rate of delinquency even on loans that meet Fannie-Freddie guidelines.

That, in addition to the fact that Freddie and Fannie were pressured to start making near-subprime loans after the private sector started failing, meant that they weren't in all too great a shape. And that's because everyone else screwed up, not Freddie and Fannie. It's a great example of how everyone is connected.

But, there are SOME inherent problems with the two giant mortgage companies. The companies generally have too little capital on hand. Part of the point of having them be semi-private companies is that they could raise capital buy selling stock, hence being somewhat independent of the government.

Still, though, the government bailout isn't showing how Freddie and Fannie have failed. It's showing how regulation in the financial industry has failed.

Union of the Mediterranean

While the focus of this article is on France bringing Syria out of diplomatic isolation and back to reengagement with the West.


What I'm surprised by....


Why didn't Libya attend the meeting? A nation can't possibly reintegrate into the world if it refuses to talk to its neighbors about issues as simple as students visas and pollution management.

Should we all be learning second languages?

Senator Obama seems to think so, apparently

My question to those who say we should be learning foreign languages, since everyone else is taking the trouble to learn ours...


Okay, which ones?

German? We still trade plenty with Germany, and even import weapons
Spanish? Got a lot of immigrants coming in from all over Latin America
Japan? That's where we get our high tech stuff right?
Vietnamese and Korean? I mean...we get video games from there...right?
Thai?
Mandarin?


English has been chosen as a global language. Really, us learning foreign languages simply isn't as essential as foreigners learning English. Even if we wanted to be global wine/book/whatever connoisseurs, we couldn't possibly succeed: There are too many languages to learn!

The Anarchist Misconception

There are a LOT of young anarchists. A LOT. Like, if you wander around an internet forum or a college campus with the big red “A,” you’re almost guaranteed to have some random weirdo walk up to you and deliver a sweaty high five right into your palm…and if you’re lucky, he might even offer you a joint!

These people are generally classified under one of two belief systems:

1. For any given society, they are better off without a government than with a government

2. By changing cultural norms, they can eliminate most of the needs for governments


They promise that things will be better with no government, and point to all the terrible things that governments have done since the beginning of human history. They have supported slavery, extorted massive amounts of wealth from citizens, protected negligent and polluting companies, started pointless wars, etc etc.

Governments, in their view, are mostly bad things that people use to oppress others. We’d be better off without them.

Unfortunately, I find this to be an argument that really doesn’t appreciate how much government has changed since the industrial revolution (and, indeed, just the past 50 years!)

Liberal democracies generally do not assault their citizens, or even citizens of foreign nations. Indeed, they are highly dedicated to international institutions, foreign aid, and providing healthcare and education to their citizens. Obviously, this might piss off a libertarian (who sees government as slowly encroaching on all areas of life), but it should demonstrate to most other people that government is NOT intent on screwing people over anymore.

It might be incompetent.
It might be mean sometimes.
It might overstep boundaries occasionally (see waterboarding).

But the government is NOT evil. At least not by intent.

The typical retort is that government, even if it isn’t bad NOW, will probably revert back to a horde of evil, barbaric Roman conquistadors. It is, after all, the way of government!

However, this really ignores how much history has changed. Back before the industrial age, the only way to make a quick buck was to steal it in some fashion. In this era, looting is not profitable, nor is it easy to do in an era where guns are so prevalent and liberal democracies don’t permit doing bad things to foreign countries anymore.


So, I really don’t see the return of “evil government.”

But, they say, doesn’t that mean that people are already good, and that government is superfluous? After all, good people don’t need government, and bad people wouldn’t be capable of making good government…


Perhaps. But we’ve turned a new leaf in how we rule ourselves, and a lot of anarchists don’t seem to accept that. That’s the main problem I have with them.

They're all a bunch of whiners!

Or, at least we are according to Phil Graham.

Now, I don't know too much about Senator Graham, so I am going to have to guess a bit. I'm guessing that, since he's the economic adviser to John McCain, he's REALLY keen on the market, and really keen on trying to show the recent economic performance as pretty strong (since a Republican is in office after implementing sizable tax cuts, which is the bedrock of the McCain energy campaign).

So, much like the extremists on Iraq or global warming or anything else, he HAS to argue that his policies work...pretty much no matter what. Never mind that all market economies have recessions: failure is unacceptable.


So, what does an extremist do when almost everyone disagrees with him? In revolutionary France, he would behead everyone. In America, he calls us whiners instead.


Extremists, extremists...

Militants now heading to Pakistan

Apparently, Iraq is no longer the "hot spot" for ticked off Sunnis that want to kill Westerners

The number of foreign fighters entering Iraq has dropped to fewer than 40 a month from as many as 110 a month a year ago, a military spokesman in Baghdad said Wednesday. “The sanctuary situation in Pakistan’s tribal areas and North-West Frontier Province is more, rather than less, troublesome than before,” Gen. David D. McKiernan, the new NATO commander in Afghanistan, said in a telephone interview. “The porous border has allowed insurgent militant groups a greater freedom of movement across that border, as well as a greater freedom to resupply, to allow leadership to sustain stronger sanctuaries, and to provide fighters across that border.”

Looks like the "America is now winning in Iraq" story is a bit too good to be true. What seems to be the turning point, at least according to this article, is Pakistan's negotiations with tribal leaders (which began in March). Pakistan, unable to actually dislodge the militants and having to deal with possible rebellions in other provinces, backed out of the area and tried to convince tribal leaders to take on Al Qaeda themselves. This isn't necessarily a bad plan: the United States is using it with great success in Iraq right now.

Unfortunately, it isn't going over so well in Pakistan. Al Qaeda and Taliban have instead of dug in even more, and have solidified their operational relationship. Al Qaeda is training Taliban and financing cross border attacks, which are proving fierce (though they cannot hold any ground and withdraw quickly).

Options by the US are, of course, limited at the present time. Going into Pakistan is unlikely to happen (even if Senator Obama wants to pretend to a cowboy to get votes, any attack in Pakistan may be political suicide and bring down the Musharraf government). CIA planes in the area are small in number, and increasing special operations is currently an option dying a slow, bureaucratic death.

However, militants going to Pakistan is a far better situation than militants going to Iraq. In Iraq, the insurgents can blend in with the population in densely populated areas, and strike American/Iraqi forces at will. In contrast, the terrorists in Pakistan are holed up in the tribal area. We know EXACTLY where they are, and, if we need to, we can pound them into salt much like we did in Afghanistan (though it'll be more difficult without the equivalent of a Northern Alliance to help out). In addition, the Pakistani government is far more stable than the Iraqi government. Until relatively recently, the latter didn't even have a functioning army. So, the chance of Iraq tumbling was far higher than Pakistan toppling.

And, finally: We can actually create a pluralist government in Iraq. It's more vital to our long-term interests, especially since it means fewer dead American soldiers (which means more energy for future missions).


Still a good move for us, all in all.

The Size of the Late Han Dynasty Harem

6,000 women.

Unfortunately, when imperial rulers pay too much attention to the pleasures of the forbidden garden, they tend to ignore the needs of their empire, and let bureaucrats take over. Not always a healthy career move (often resulting in serious power struggles).

That from War in Human Civilization by Azar Gat. I highly recommend it, and probably will be writing on it more extensively. Warning, though: the author writes more extensively on the impact of the horse than the impact of harems.

What I read in the Tribune today:

A Dad discovers religion and wants his daughters to attend his church. The mother, on the other hand, wants the children to attend the traditional Catholic Church on Sundays.


The big surprise:

The father is a Satanist!



That definitely gave me a "WTF!" moment

Integration in Asia, and how it applies to the US

Number of Asian Free Trade Agreements in 2001: 7

Number of Asian Free Trade Agreements in 2008: 100+


Asia is increasingly integrating itself, much like North America and Europe already have. The problem is that Asian integration is a lot more haphazard and a lot less comprehensive: these agreements only apply to specific sectors. It's hardly the type of wide-scale trade freedom that exists in American trade deals (or at least that's what the people on C-SPAN tell me! God I love it when the House takes off...they never do anything important anyways). Hence, I suppose, the need for so many deals.

However, without widescale integration, I would imagine it would be tough to get true consensus on a lot of critical economic issues. For instance, if we can't even agree on whether or not Japanese beef should be allowed in Vietnam, how in the world can they agree on management of capital flows? And then what's to prevent another financial crisis from starting?



Haphazard integration like this needs to stop. The world needs wide-scale integration in order to deal with serious trasnational issues, like pollution, refugees, and arms control.

Unfortunately, there is massive resistance to this within the United States even today. Instead of creating large institutions designed to help countries work together better, the Bush Administration has pursued foreign policy unilaterally, and our trade policy largely consists of creating bilateral trade agreements and jawboning China about currency appreciation.

Haphazard policy: not just for nations with a history of protectionism

Having a Good Marketing Campaign Reaps Good Dividends

Percentage of laptop-buying college students that wanted a Mac in 2003: 8%



That same percentage in 2007: 42%



I like my Mac computer. I really don't think this Mac computer is much different from an XP-driven laptop, nor do I think this particular Mac is much more advanced the old Macs that I used to use...

Though this desktop looks a LOT more high-tech, and the IPod has had several years to build brand value for Apple (and ITunes has had a lot of time to extract monopoly advantage by encouraging people to buy Mac software!).


I gotta chalk this up to the value of a successful marketing campaign. Seize an under-utilized market (the MP3 player), build up good feelings about the brand (awesome product, fighting evil Microsoft!), get a reputation as a secure system (in an era of extreme anxiety post-9/11), and price yourself higher than your competitors (we're the luxury brand!), and get some normal-looking fanboys...

You got yourself a juggernaut!

Why do some people reach their creative potential in business while other equally talented peers don’t?

Answer:

After three decades of painstaking research, the Stanford psychologist Carol Dweck believes that the answer to the puzzle lies in how people think about intelligence and talent. Those who believe they were born with all the smarts and gifts they’re ever going to have approach life with what she calls a “fixed mind-set.” Those who believe that their own abilities can expand over time, however, live with a “growth mind-set.”
Guess which ones prove to be most innovative over time.

Talent? Overrated. Open mind, hard work ethic, and a desire to grow? That’s where you want to be.

Illegal Immigration and Big Business

http://www.nytimes.com/2008/07/06/us/06employer.html?pagewanted=1&_r=1&th&emc=th&adxnnlx=1215360712-6kaHS%20Bb8i5lywEjCeBCig

Three years ago, the United States had a massive immigration reform debate on a bill (sponsored by Presidential Candidate John McCain) that ultimately failed. Since then, there have been a large number of local and state laws made to try to discourage illegal immigration,, and a lot of pressure on the federal government to enforce laws already on the book.

One of the big grievances? Employers who give illegal immigrants work. They’re made out to be the bad guys in this story, as they provide iillegal immigrants with their livelihood by giving them low-wage jobs out of single-minded greediness.


But it ain’t that simple…

A human resources manager who worked for the company a decade ago hired a number of workers without conducting an extra check of their documents with the Social Security Administration, the executive said. Now she has received notices from the agency of mismatches in the identity documents of 20 workers who were hired 10 years ago, out of 90 workers on the assembly floor today.
Because of the antidiscrimination rules, the executive cannot check to be certain that the 20 workers, mainly Hispanic women, are illegal. Moreover, they have advanced through training, she said, and excel at their jobs, which require the repetitive assembly of tiny parts by hand, often under microscopes

The legal infrastructure in place isn’t that conducive to making sure that your workers are legal. Apparently, a large number of companies can hire illegal immigrants purely by accident, and won’t be able to check up to see if documentation checks out because it is illegal to question an immigrant;’s legal status after already being hired.

Conundrum? Yes indeed.

"Clean Coal"

Here you can see John McCain supporting clean coal technology in order to wean us off our foreign oil addiction and satisfy our clean energy needs over the next century:
http://youtube.com/watch?v=-oNp93aBXLE

Other major politicians, including President Bush, Barrack Obama, and Hillary Clinton, have supported clean coal as well.

The idea is pretty simple: coal is a very dirty substance, but it is also very cheap to use. And we have a LOT of it, especially in the United States. If we can find someway to reduce the pollution coal generates, we have ourselves an energy resource that will take care of us for centuries without damaging the environment.

Problem: Clean Coal prolly ain't so clean. 

First, thinking that we can eliminate all the negative environmental consequences just by focusing on the "burning" part is ill-founded. Coal mining itself is considered to be highly damaging to the environment. It leaves massive scars on the earth where the mining took place, and can lead to dangerous run-offs in local ground water. Yikes! Even burning coal in some super ultra-clean fashion will not eliminate THOSE effects, and damaging the ground like that might not be such a great idea in the long-run (we might want to live in Wyoming one day, after all).

Also, even with all of our advanced technologies we have these days (including advanced scrubbing technology and burning low sulfur coal), most urban areas are STILL in violation of the Clean Air standards. I don't know what kind of technologies we can produce in the next 5 years that we hacen't already developed in the last 30 that is going to magically make coal a super-awesome source of energy. 

Finally, the biggest issue facing coal plants now is carbon dioxide emissions, which are a leading cause of climate change in the world. There are currently no means for dealing with the carbon emissions from coal plants, and the most likely method (turning CO2 into liquid and shoving it back into the ground) could cost a LOT a money to implement. If it even works, that is: we're still in the experimental stage on that.

That's not to say clean coal has absolutely no role to play in our electricity policy. It's just that it is unlikely to become a bedrock for any policy that addresses environmental concerns. Many areas of the nation will still use coal energy, such as cities that require intensive amounts or areas of the country that are resource-poor in renewables.

And hence, I don't see what the fuss regarding clean coal is all about.

Economic Outlook for the US: 2008

Well, first quarter growth, while weak, was a little bit better than expected. The economy grew at a .9% pace, as opposed to the .6% pace of previous months. If the 2001 economic slowdown is any indication, the US should avoid a recession. Even the Fed has apparently decided to stop its aggressive interest rate cuts, opting for a “wait and see” approach to see how the economy handles the various stimulants that have been injected into it over the past half a year.

Unfortunately, we are FAR from out of the woods. GDP growth was largely carried by inventory build-up by businesses, rather than actual consumption growth. In fact, personal consumption grew barely, and mostly on non-durable goods (which people would buy up if they were confident their incomes were growing). So, demand isn’t holding up that well. And we shouldn’t expect it to, either, as incomes lag, people start saving more, and gas prices continue rising.

What happens when demand starts falling? That means that US companies, two-thirds of which are considered are junk debt now, are going to be struggling to pay bills. That means a lot of fold-ups, and a lot less business investment (especially since bigger companies are going to prefer to buy these cash-strapped smaller companies and their assets, as opposed to new investment). Lower returns for them also means problems for the banks that are relying on those payments. And that means more trouble in the financial sector, which is in turn going to keep a clamp on lending for the foreseeable future.

Is the Back of a Cocktail Napkin the Best Place to Solve the World's Problems?

Well, some people seem to think so:

The back of the Napkin: Solving Problems and Selling Ideas with Pictures

Guesstimation: Solving the World’s Problems on the Back of a Cocktail Napkin


I admit, there’s something very intriguing about simple explanations that can be summed up on something that’s about six square inches. Unfortunately, the back of a cocktail napkin can be a bit too simplistic and unrefined sometimes (see Laffer Curve)

Are You a 2?

Jimmy John’s is an interesting restaurant. I’m not such a big fan of their sandwiches, but the place is very “alive.” Everywhere you look, you can see posters, quotes, interesting historic pictures, etc etc.

At the UIC-area location, a poster of famous quotes from Dave Berry lays on the right-side wall. One of them I find particularly humorous and truthful. It goes something like “Regardless of race, religion, age, or sex, we are all unified by the same confidence that we are above average drivers.”

People, and I guess Americans in particular, are very over-confident in there ability (especially their driving abilities). Unfortunately, these unrealistically high expectations typically lead to a lot of disappointment as we realize our limits. Thankfully, we don’t all realize those limits in public, and, thankfully, most of us are “good enough” drivers.

I like to think I keep a realistic view of my abilities. So, at the beginning of this semester, when our finance teacher handed out a survey, I marked myself down as a “2” on a scale of 1-5 when asked about my driving ability.

I wonder how many other people answered that way?

At the end of the semester, the finance teacher went over the survey results. Of all the guys, half said they were 5s. Another half said they were 4s.

And then the teacher picked up his head up, looked calmly at the class, and slowly said “and some boy said he was a 2.”

Interesting, ey?

Taking "Clubs" a Little Far?

Across America's top universities, career-minded undergraduates, feeling pinched by increasing competition for a limited number of jobs and internships, are forming new clubs to give themselves a head-start in their chosen professions.

Sounds innocent, right? Just take a look at this article.

These students are obviously smart, and obviously committed. The question is...how committed?

Some interesting tidbits from Businessweek on the matter:

-40% of the members are freshmen

-At least one member describes themselves as "followers of Warren Buffett"

-It can be difficult to juggle classwork and a club that amounts to a full-time job

Understanding a company takes a lot more than just understanding financial metrics. Unfortunately, I can't comment on how this group operates and whether its students are getting a full, diverse education. What I can say is that concentrating on nothing but financing is a sure-fire way to kill a company.

Now, if these students never aspire to become Chief Executive Officers, they are obviously doing alright. If they do have higher dreams, though...they may just be following the wrong path.

Diversity in Education

From the Chicago Tribune this morning:

College recruiters trying to reach the most promising applicants can purchase customized mailing lists based on where students live, their grades and test scores, even their ethnicity and religion.

One category, however, has been off-limits since the early 1980s: family income...But now, as some of the nation's most elite colleges are trying to bring more economic diversity to their overwhelmingly affluent student bodies, admissions officers who want to lure low-income students to campus are pushing to get that data

My gut reaction to this was something along the lines of:

"Goddam incompetent government. They are deliberately targeting people who can't pay?! I wonder how much money this is going to cost..."

I was a libertarian for the last few years. So the institutions are mostly private. Sue me, I like to blame government for everything.

Despite my and possibly your knee-jerk opposition to hand-outs (even if they aren't always government hand-outs), there's sound reason to make sure your student body has a good number of low-income students...or, rather, diverse in general.

Any college education worth its salt teaches students how to problem-solve and think for themselves. One of the major issues humans have, though, is the proliferation of heuristics and blind-spots we have. The mind operates a bit like an old accountant that runs the same equations over and over again. There might be new, better ways to do things out there, but he is loathe to adopt new techniques: He likes to do things the traditional way.

Heuristics are the rules of thumb that we use to problem-solve. For instance, when someone asks me if something enhances social welfare, the first thing I do is consider supply and demand, and it makes it proxy a perfectly competitive market better, then it improves social welfare. Some guys think that any woman with a tattoo on the lower back is a bit "easier" than the average woman. Same basic principle.

What diversity at an institution does is present different viewpoints and new sets of information. The danger of just having a bunch of white, rich, suburban children in the same institution is that they all tend to face similar problems. Oh, sure, they might have differing political views. I doubt, though, that they will understand the jealousy a young african-american woman may experience when she looks at the extravagant hair of a Caucasian woman. I highly doubt many of those students will understand the obsession that small Japanese retail shops have with new products. 

Without a different viewpoint and a different set of cultural experiences to draw upon, a student's understanding of different market-places is impaired. More to the point, a student may miss out on different methods of problem-solving that other cultures may posses. 

Hence, diversity is a benefit to any institution.

By the way, the University of Illinois at Chicago is considered the 5th most ethnically diverse campus in the country.